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Market psychology.

When single-digit interest rates, falling home prices and rising rents don't rally buyers, you know something is fundamentally wrong. And a big-part of that something is the economy. But the other part is that home prices are still falling. So most buyers figure this is not the time to buy.

In our cover story this month, David Stiff, chief housing industry economist and vice president of quantitative research for Fiserv Inc., notes that the housing market correction is in its sixth year as we put a wrap on 2011. In his article "Is There a Fairy Tale Ending in Sight?," Stiff writes, "Sales activity is expected to hold steady and prices will drop only 4 percent this year." That word "only" tells you a lot about how bad things have been--and how little they've improved.

Fiserv's Case Shiller U.S Home Price Indexes found that many markets suffered a second wave of home-price declines, driving prices to new lows off their peak (2006) in 302 of 384 metro markets through the second quarter of this year. That kind of thing batters market psychology and keeps buyers on the sidelines.


But prices have fallen so far, it is hard not to see this as a huge buying opportunity. Stiff writes, "Average U.S. home prices have declined 32 percent from their peak in the first quarter of 2006, nearly returning to pre-bubble territory. Meanwhile, mortgage interest rates have dropped to levels last seen in the 1960s." Even with all that, buyers are worried about job security and that trumps everything.

Stiff notes that during 2010 we got a bit of a head fake, with intermittent signs that the economy was healing. But this year unemployment has remained a severe problem and consumer confidence has been further rattled. Mortgage underwriting remains so tight that even some who venture into the buy zone get turned away.

Stiff argues that despite all that, housing market fundamentals quietly improved during 2011. He adds that at some point, all the positive factors will combine to turn consumer psychology around. And when that happens, housing affordability will be a powerful draw especially in former bubble markets. Stiff writes, "The ratio of monthly mortgage payment to family income has dropped from 32 percent (second quarter of 2006) to 12 percent in Las Vegas, from 44 percent (second quarter of 2007) to 19 percent in Miami, and from 59 percent (second quarter of 2007) to 28 percent in Los Angeles." Those are compelling numbers that should help fuel solid demand at some point.

So here's hoping that 2012 is the year that finally brings price stability and more consumer optimism. Six years is long enough--don't you think?

Janet Reilley Hewitt Editor in Chief
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Title Annotation:Portfolio
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Date:Dec 1, 2011
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