Market Recap

A funny thing happened on the way to the depression: A recovery occurred. Over the past two weeks, the two major stock-market barometers – the Dow Jones Industrial Average and the S&P 500 Index – have surged nearly 20%. The good news embedded in the surge is that the stock market is one of the more reliable indicators on the likely direction of the economy.

There are a number of reasons investors are feeling more upbeat these days, none more important than the improving housing market. Last week, the National Association of Realtors reported that sales unexpectedly increased 5.1% to an annual rate of 4.72 million in February, as foreclosures pushed down prices and lured first-time buyers into the market.

Lower prices are also driving new-home sales, which rose 4.7% last month to a 337,000 annual rate. Homebuilders have been aggressively discounting, with the median sales price for a new home falling to $200,900 from $251,000 in February 2008. But it's worth noting that the median price for a new home is still high compared with the median sales price of $165,400 for an existing home.

Lower mortgage rates are an important factor in the nascent housing-market recovery. In fact, rates aren't just lower they are the lowest they've been since Dwight D. Eisenhower was president. According to the National Bureau of Economic Research, the average rate on a 30-year, fixed-rate FHA-insured mortgage was 5.15% in December 1956. That's about where we are today, and depending on credit scores, income levels, and debt ratios, many borrowers are getting mortgage rates below 5%.

The return of the mortgage-asset market is another sign sunny days might be just over the horizon. It didn't receive much press coverage last week, but both Citigroup and Bank of America have been aggressively buying AAA-rated mortgage-backed securities, including some that use alt-A and option adjustable-rate mortgages as collateral. Citigroup and Bank of America obviously believe these assets are a good investment, which means many other investors are likely thinking the same thing, and that could be very good news for the credit markets. Rising mortgage asset prices will further bolster banks' balance sheets, enabling them to turn up the lending spigot.

The Tide Is Turning

It's a homebuyer's market and a refinancing market – a keen observation of the obvious. But let's remember that rates can only go so low, and by historical levels they are darn low.

These low rates are actually frustrating at times, because we constantly hear from people who say they won't buy a home or refinance a mortgage until rates fall to 4%, or even lower. It's an irrational extrapolation. There's no evidence that rates will hit 4% anytime soon. To the contrary, the Federal Reserve has been furiously pumping dollars into the U.S. economy, raising the probability of higher interest rates down the road. But if rates do continue to slide, refinancing is always an option. In the meantime, why not take advantage of today's already historically low rates?

Let's also remember that buyers' markets don't last forever. The inventory of unsold homes still remains high, at least on a national level. The NAR reports that the number of unsold homes on the market represents 9.7 months' worth at the current sales pace. But change can occur remarkably fast. To wit: The California Association of Realtors said existing-home sales in the state were up 83% in February from the previous year, helping to shrink inventories to a six months' supply from 15 months. When the sales pace dips below five months, the tide starts to turn, favoring sellers over buyers.

We all want the best price, and it's tempting to hold out for that price, but trying to time a market bottom is a Quixotic endeavor – one that often costs much more than it saves.