It’s Not All Doom and Gloom in Housing

04/15/2008 12:00 am EST

Focus: MARKETS

John Dessauer

President, John Dessauer Investments, Inc.

John Dessauer, editor of John Dessauer's Investors' World, says there are actually some positive signs in the decimated housing market, contrary to the prevailing despair.

Last month, we learned that the foreclosure rate in the fourth quarter of last year rose to 0.83%, or an annual rate of 3.32%. If that continues in 2008, we could see 1.66 million homes foreclosed, more than the 1.5 million last year. Some say the rate will go still higher before peaking. Other indicators suggest that housing is stabilizing and that we are at the worst point for foreclosures.

We are a good way through the adjustable-rate subprime mortgage resets. Foreclosure rates have risen, but are still within acceptable limits. The pessimists are shifting theories now because it looks more and more like they will be wrong on subprime resets. Now, their claim is that deep-in-debt homeowners will walk away from their homes, sending the keys to the bank in the mail.

Some speculators have already done that. When the value of a house falls below the mortgage balance, a speculator will walk away rather than keep making payments. However, that has not been the case with owner-occupied homes. In past downturns, they stay and keep making payments because they like the house and believe that it will rise in value in the long run. And, as with all of us, they need a place to live.

The key element is their ability to keep making monthly payments. In other words, housing is mostly about jobs. Shantytowns and pessimistic fantasies can only happen if the unemployment rate soars and millions lose their jobs. That could happen. But it isn't happening now, and it isn't likely to happen.

Meanwhile, many banks are still suffering over fear of what might happen. Banks have to "mark to market," even if the market is wild and subject to distortions. However, even with that accounting burden, 99% of US banks now exceed their regulatory capital requirements, even after the massive write-downs. Including the write-downs, total US banking assets increased $332 billion, and domestic deposits rose $171 billion last quarter, the largest quarterly increase in history.

The Mortgage Bankers Association said that applications for mortgages in the week ending March 21st were 48.1% above those of the prior week. Even more significant, they were 41.1% higher than a year ago. The biggest jump was in applications to refinance existing mortgages.

That is very good news for adjustable rate mortgages coming due for a reset. Refinancing ahead of a reset means fewer delinquencies, fewer foreclosures, and fewer homes being sold by banks.

Whenever the Freddie Mac 30-year mortgage rate falls below 6%, as it did in late March, we see a surge in mortgage applications. As inflation expectations abate, we should see even lower rates. Credit markets are behind the curve. This time, it will be the ordinary American who leads the way and saves the day for professional traders.

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