Real Estate Market Recap for December 29th, 2008

Keeping you updated on the market!
For the week of

December 29, 2008

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MARKET RECAP 2008 is winding down, and if recent economic reports are any indication, it's trying to take the economy with it. Gross domestic product – the output of goods and services produced in the United States – decreased at an annual rate of 0.5% in the third quarter of 2008, according to final estimates released by the Bureau of Economic Analysis. The good news is that no one was caught off guard by the expected contraction in output, so the report had little impact on financial markets. The same couldn't be said about the latest housing data, which continues to confound and disappoint. The National Association of Realtors reported that existing home sales fell 8.6 % to an annual rate of 4.49 million in November, from a downwardly revised pace of 4.91 million in October. Meanwhile, the median national existing-home sales price toppled 13.2% in November to $181,300, from $208,000 a year ago – its lowest price since February 2004 and the biggest year-over-year drop on record dating back to 1968. New home sales, like their existing-home counterparts, also hit new lows by slipping 2.9% in November to a 407,000 annual rate, which means on a year-on-year rate new home sales are down 35.3% in 2008. Inventory overload continues to plague homebuilders, despite heavy discounting, posting at 11.5 months, while prices weakened 1.7% to a median sales price of $218,000 – a 7.0% decrease compared to the median price this time last year. (Of course, it's always worth remembering that real estate is local, so the median national price is meaningless to wide swaths of the U.S. market.) The mortgage market continues to remain the one bright spot in an otherwise gloomy housing market. The Mortgage Bankers Association reported that its application index surged 48% the week before last to its highest level since July 2003. Refinance volume grew nearly 63%, but purchase volume grew as well, by nearly 18%, suggesting December's housing data could show considerable improvements over November's.

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Confidence (December)	Tues, Dec. 30, 10:00 am, et	45 Index	Moderately Important. Confidence is expected to hit a new low for 2008, although it is showing signs of improving heading into 2009.
Mortgage Applications	Wed, Dec. 31, 7:00 am, et	None	Important. Application activity remains strong on lower rates and better consumer understanding of the new lending programs.
Chicago Purchasing Managers Barometer (December)	Wed, Dec. 31, 9:45 am, et	33 Index	Moderately Important. Businesses expect the economy will continue to contract in the first few months of 2009.

Instability Creates Stability We've been saying for a while now that the machinations occurring in the housing and mortgage markets will eventually lead to more opportunities; now others are finally catching on. Veteran banking analyst Richard Bove of Ladenburg Thalmann, an investment banking firm, received some media play last week for saying that he “expects housing prices in the United States to stabilize and/or rise after a likely boom in mortgage refinance, as mortgage rates fall and loan applications increase.” We think Bove is right, and we've been saying so for the past few months. Perhaps we were early (or perhaps Bove is late). We also think the current housing market – as unpleasant as it has been – creates opportunity, and, paradoxically, stability. In fact, one can argue that the longer markets remain stable, the more unstable they actually become, at least that's the argument the late economist Hyman Minsky forwarded in an influential monograph titled “Financial Instability Hypothesis.” (Google Minsky's name and you can find the monograph on line.) In short, Minsky argues that too much stability (or good times) creates too much malinvestment, which leads to excesses and eventually instability (or bad times). The opposite is also true: When times are tough, when everyone lacks confidence, when it seems housing prices will never stop declining, when everything seems chaotic, stability returns. We've seen this scenario play out most recently in the stock market: After the bubble burst in tech stocks, when everything seemed a mess, many companies became excellent buys. Everything in housing is messy these days, to say the least, but that mess means the market is more stable than it has been in the past few years. We think Minsky is right in his analysis, which is why we (and apparently Bove) have been chanting that now is as good a time as any to consider either refinancing or purchasing a house.