Signs of Life Within the Housing Market?

by: Markham Lee

Bernanke's various efforts aimed at helping the housing market have been credited with pushing down mortgage rates, causing a "refinancing boom", and even causing February's alleged increase in home sales. I have to say that I'm skeptical about this one because the so called increase in housing sales was noting more than NAR spin doctoring, and the increase in refinancing is probably driven more by people trying to get out of resetting ARM mortgages than anything else.

The thing to remember about an ARM refinancing is that the individual (even with today's low rates) may still wind up paying an amount greater than the teaser rate, or making (at best) a lateral move from the teaser rate. So even if the refinancing keeps the person in their house, it doesn't necessarily mean that it will increase their ability to spend. The numbers may look good from a 20,000 foot level, but the household reality is probably quite a bit different.

Especially when in many cases the household may be behind on other bills, be facing an uncertain employment situation, etc. In all likelihood refinancing in today's economy is a completely different animal than it was back during the housing boom. During the boom it was about the faux wealth effect, using refinancing to get out of trouble on a home you couldn't afford, etc, in today's world it's probably more about survival than anything else.

However let's assume I'm wrong for a second. Didn't a previous refinancing boom inflate our economy, lead people to spending their housing wealth away and contribute to the excesses that created our current crisis? I'm not sure we should be celebrating people returning to the bad habits of the past. I see nothing positive about increased refinancing, unless people are using them to transition from ARMs and other exotic mortgages to conventional fixed rate ones.

At the end of the day it's probably best to await a multi-month positive trend in the housing market prior to celebrating anything, especially when you consider that the housing market isn't going to turn around until the inventory issues I've referenced in the past are resolved. Bernanke can push mortgage rates down to the floor, but housing prices aren't going to bottom out until the inventory levels start to decrease.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.