Market Recap

No one would blame you if you complained of dyspepsia these days. After all, one day the Dow Jones Industrial Average is up 400 points, the next day it's down 700 points. That's been the modus operandi in the stock market for the past two weeks, as investors react half-cocked and full-bore to the day's financial headlines.

Mortgage rates joined the act last week, moving about like an inebriated butterfly in search of a flower. But unlike the stock market, mortgage rates moved higher – much higher. According to Bankrate's latest national survey, the prime 30-year fixed-rated mortgage averaged 6.74%, the prime 15-year fixed-rate mortgage averaged 6.41%, and the prime 5/1 adjustable-rate mortgage averaged 6.61%. It was the biggest all-around weekly rise in more than 21 years.

What gives? Some pundits are blaming higher mortgage rates on the government's $700 billion bank bailout. Banks remain hesitant to loosen the purse strings because they are uncertain about what to sell or to whom to lend. The Treasury Department responded by stating it would take a $250 billion equity stake in potentially thousands of banks. In fact, it's already taken a $100 billion preferred-stock stake in nine of the country's largest banks. This latest move could be the preferred strategy; the direct investment approach immediately improves banks' capital position, which should, in theory, enable them to increase lending activity immediately. We'll see in coming weeks if this new strategy proves effective.

Mortgage rates approaching 7% might seem a little ominous, but it's not, if you put today's rates in historical perspective. Back in the early 1990s, when the fallout from the savings and loan crisis was gaining traction, the 30-year fixed-rate mortgage moved between 8% and 10%. If you go back even further, to the early 1980s, when the economy was in a deep recession, 15% 30-year fixed-rate mortgages weren't uncommon. The real villain in today's mortgage market isn’t rates, it’s lack of liquidity caused by overly stringent underwriting criteria.

The continued slowdown in housing starts isn't particularly ominous either. Last week, the Commerce Department reported that housing starts fell 6.3% in September to a seasonally adjusted annual rate of 817,000, the lowest since January 1991, sending some professional worrywarts into a conniption. Builders cutting back on production is simply good economics. When a market suffers from an inventory glut, the last thing you want to do is add to that glut.

I'm Buying

That's basically what legendary investor Warren Buffett said this past Friday. After global equities suffered another bruising week, Buffett revealed that he is now buying U.S. stocks with his own money. He predicted that shares would "substantially" outperform cash over the next decade. Writing in the New York Times, Buffett echoed his famous motto – to be fearful when others are greedy, and be greedy when others are fearful.

The word “greedy” is a misnomer. The word “opportunistic” better describes the sentiment. The premise of the message, buying at bargain prices, is worth heeding. What's more, it not only applies to stocks but other forms of investment as well, including real estate, which is something more people will become attuned to in the next 12 months. The only obstacle blocking some opportunistic buyers from applying Buffett's motto to today's real estate market is a sclerotic lending environment.

But that could be changing. Buffett's recent stock purchases include Wells Fargo, Goldman Sachs, US Bank and SunTrust. Banks don't make money unless they lend. Perhaps Buffett sees a freer lending environment in the near future.