Market Recap

“The reports of my death have been greatly exaggerated,” said Mark Twain upon hearing his obituary had been published in the New York Journal. Our beleaguered banking sector should be forgiven if it were to pinch Mr. Twain's famous quote, for Well Fargo reported that it expects first-quarter earnings of $3 billion. (Yes, that's billion with a “B”.) Banks are far from being dead.
Bank stocks have been sluggish for most of 2009, to be sure, following fretful forecasts from key analysts about the bad loans they carried on their balance sheets and other long-term woes. Today, investors believe the woes were overdone, which is why Wells Fargo barreled ahead nearly 32% this past Thursday, while taking many of its competitors along for the ride.
The fact that mortgage lending is pacing the banking recovery is encouraging. It demonstrates funds are readily available to a wide swath of the borrowing public. In addition, more funds should be available to an even wider swath of borrowers once President Obama's $275 billion plan to stabilize the housing market takes hold. One key component of the plan is to allow as many as five million homeowners to refinance their mortgages. The program is open to borrowers who are current on their payments, have loans owned or guaranteed by Fannie Mae or Freddie Mac, and owe between 80% and 105% of their home's current value.
The recent recovery in banks, along with the overall stock market, has economists rethinking this whole recession thing. Earlier in the year, many of the more vociferous opinion makers were saying the economy was unlikely to recover until well into 2010. Now, many economists presage a recovery as soon as September.
Mortgage rates, on the other hand, are one segment of the lending paradigm where a recovering could be ending. We've been warning for the past few weeks that additional rate drops are going to be difficult to come by. Indeed, rates actually reversed course and moved slightly higher across most durations and types last week. We're not so presumptuous as to assume rates can't go lower, but we wouldn't bet the house on it. That's something to consider for anyone shopping for a refinance or purchase loan.


Next Up, a Housing Recovery
Politicians of all stripes have lamented that the bursting of the housing bubble has been a national tragedy. But is it really that bad? According to George Mason law professor Todd Zywicki, the answer is “no.” In a recent Forbes article, Zywicki reasons that there are three types of housing markets, and only one of the three shows real signs of distress.
Zywicki states that the first type of market behaves the way markets are supposed to behave, with smooth adjustments between supply and demand. When prices rose, builders constructed new houses. When prices softened, builders stopped. Charlotte and Dallas represent such markets. The second type of market demonstrates a long history of price volatility, such in San Francisco and Seattle . Zywicki notes that people who live in these markets expect big price swings and adjust their behavior accordingly. These two markets, says Zywicki, are basically sound.
The third type of market displays both the ability to expand the supply of houses that characterizes the first type of market and the price swings that characterize the second type. This is the market where the real bubble developed, and not surprisingly, it is concentrated in the Sun Belt: namely, Las Vegas , Tampa , and Phoenix . Investors seem to have calculated that a lot of people would either retire or buy second homes in these places. And when prices went up, speculators moved in and a bubble formed.
Zywicki might be on to something: If you vet the news carefully enough, you'll find more stories highlighting rebounds in many of the type one and two housing markets. Yes, troubles in the Sun Belt remain frustratingly intractable, but given current mortgage rates and the plethora of buyers' incentives, we suspect that market will recover sooner than many pundits think.