March 6, 2010

Home Trends Price Stability

Prevailing Head Winds

The MBAA reports that the trend of mortgage failures is slowing and those in the foreclosure process also slowed in the fourth quarter. More and more, we are hearing people call this a bottom.

We are likely seeing the beginning of the end of the unprecedented wave of mortgage delinquencies and foreclosures that started with the subprime defaults in early 2007," said Jay Brinkmann, chief economist of the Mortgage Bankers Association.(Via He adds, there are fewer problem loans actually entering delinquency. >>>> link to mbaa report

NARs economist, Lawrence Yun notes: Regardless of whether they read the story of the largest sales decline in 40 years or the fourth highest home sales in two years (whichever the media report), consumers are "smarting up" to the fundamentals in the housing market. They are seeing consistent declines in inventory and prices beginning to stabilize in many parts of the country. Indeed, median home prices (on a national basis) recorded their first 12-month gain in over two years in December. Other price data - such as that from Case-Shiller and the government's Federal Housing Finance Agency have also shown price stability in recent months

FHA monthly reports growth. U.S. house prices rose 0.7 percent on a seasonally adjusted basis from October to November, according to the Federal Housing Finance Agency’s monthly House Price Index. October’s previously reported 0.6 percent increase was revised downward to a 0.4 percent increase. For the 12 months ending in November, U.S. house prices rose 0.5 percent

Price to rent Ratio
Economists use the home price/rent ratio as one way to gauge whether or not home prices are inflated or undervalued. A price/rent ratio is similar to the price/earnings ratio for stocks. If a stock isw priced at $10.00 per share and has $1 of earnings per share, then you are effectively paying $10 for a dollars worth of earnings.

When the price of a stock is high, and its earnings per share relatively low, the P/E is high. At what point one is paying too much for a dollars worth of earnings or rent is what investing is all about. There is a buyer for every seller and when there isnt, you crash.The Moodys data suggests that the balance of buyers and sellers is retuning to something more normal. There is data that shows the ratio down to about 20, which is closer to its long term average of 16.

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