fixed-rate

       Here’s a contrarian view for you.  Credit Suisse says the fears about housing are well overdone.  In their analysis they cite 6 different bullish factors that should help to bolster house prices in the USA:

• The government now owns or guarantees about 70% of US mortgage debt ($11.5trn), thus any knock-on impact from a fall in house prices should be much lower than in 2007-2008 and the flow of foreclosure onto the market can be managed well (recall that since April 2009, 3.1 million trial loan modifications have been made).
• Valuation is extremely cheap on all measures (price to income, price to rent, affordability index, rental yields).
• Delinquency ratios, charge-off and foreclosure rates seem to have peaked.
• Housing starts are about 1m below trend demand of housing units – based on household formation and replacement demand. The question is: What is the level of excess inventory? The number of unsold new and existing homes have fallen by 63% and 14% from the peak, respectively; if we then assume half the foreclosed property becomes vacant (i.e. half of the 2.3m homes currently foreclosed), this amounts to 2.7m homes, which should take 2 ½ to 3 years to absorb.
• Distressed sales (short-sales, foreclosures and REO sales) are less than a third of the total, after peaking at almost half in 2009.
• Housing as a proportion of GDP is now just 2.2%, compared with a long-run average of 4.5%.

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Enough with the doom and gloom about homeownership.

      Sure, maybe there's more pain to come in the housing market. But when Time magazine starts running covers that declare "Owning a home may no longer make economic sense," it's time to say: Enough is enough. This is what "capitulation" looks like. Everyone has given up.

       After all, at the peak of the bubble five years ago, Time had a different take. "Home Sweet Home," declared its cover then, as it celebrated the boom and asked: "Will your house make you rich?"

But it's not enough just to be contrarian. So here are 10 reasons why it's good to buy a home.

1. 1. You can get a good deal. Especially if you play hardball. This is a buyer's market. Most of the other buyers have now vanished, as the tax credits on purchases have just expired. We're four to five years into the biggest housing bust in modern history. And prices have come down a long way– about 30% from their peak, according to Standard & Poor's Case-Shiller Index, which tracks home prices in 20 big cities. Yes, it's mixed. New York is only down 20%. Arizona has halved. Will prices fall further? Sure, they could. You'll never catch the bottom. It doesn't really matter so much in the long haul.
2. Where is fair value? Fund manager Jeremy Grantham at GMO, who predicted the bust with remarkable accuracy, said two years ago that home prices needed to fall another 17% to reach fair value in relation to household incomes. Case-Shiller since then: Down 18%.
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4. 2. Mortgages are cheap. You can get a 30-year loan for around 4.3%. What's not to like? These are the lowest rates on record. As recently as two years ago they were about 6.3%. That drop slashes your monthly repayment by a fifth. If inflation picks up, you won't see these mortgage rates again in your lifetime. And if we get deflation, and rates fall further, you can refi.
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6. 3. You'll save on taxes. You can deduct the mortgage interest from your income taxes. You can deduct your real estate taxes. And you'll get a tax break on capital gains–if any–when you sell. Sure, you'll need to do your math. You'll only get the income tax break if you itemize your deductions, and many people may be better off taking the standard deduction instead. The breaks are more valuable the more you earn, and the bigger your mortgage. But many people will find that these tax breaks mean owning costs them less, often a lot less, than renting.
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8. 4. It'll be yours. You can have the kitchen and bathrooms you want. You can move the walls, build an extension–zoning permitted–or paint everything bright orange. Few landlords are so indulgent; for renters, these types of changes are often impossible. You'll feel better about your own place if you own it than if you rent. Many years ago, when I was working for a political campaign in England, I toured a working-class northern town. Mrs. Thatcher had just begun selling off public housing to the tenants. "You can tell the ones that have been bought," said my local guide. "They've painted the front door. It's the first thing people do when they buy." It was a small sign that said something big.
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10. 5. You'll get a better home. In many parts of the country it can be really hard to find a good rental. All the best places are sold as condos. Money talks. Once again, this is a case by case issue: In Miami right now there are so many vacant luxury condos that owners will rent them out for a fraction of the cost of owning. But few places are so favored. Generally speaking, if you want the best home in the best neighborhood, you're better off buying.
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12. 6. It offers some inflation protection. No, it's not perfect. But studies by Professor Karl "Chip" Case (of Case-Shiller), and others, suggest that over the long-term housing has tended to beat inflation by a couple of percentage points a year. That's valuable inflation insurance, especially if you're young and raising a family and thinking about the next 30 or 40 years. In the recent past, inflation-protected government bonds, or TIPS, offered an easier form of inflation insurance. But yields there have plummeted of late. That also makes homeownership look a little better by contrast.
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14. 7. It's risk capital. No, your home isn't the stock market and you shouldn't view it as the way to get rich. But if the economy does surprise us all and start booming, sooner or later real estate prices will head up again, too. One lesson from the last few years is that stocks are incredibly hard for most normal people to own in large quantities–for practical as well as psychological reasons. Equity in a home is another way of linking part of your portfolio to the long-term growth of the economy–if it happens–and still managing to sleep at night.
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16. 8. It's forced savings. If you can rent an apartment for $2,000 month instead of buying one for $2,400 a month, renting may make sense. But will you save that $400 for your future? A lot of people won't. Most, I dare say. Once again, you have to do your math, but the part of your mortgage payment that goes to principal repayment isn't a cost. You're just paying yourself by building equity. As a forced monthly saving, it's a good discipline.
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18. 9. There is a lot to choose from. There is a glut of homes in most of the country. The National Association of Realtors puts the current inventory at around 4 million homes. That's below last year's peak, but well above typical levels, and enough for about a year's worth of sales. More keeping coming onto the market, too, as the banks slowly unload their inventory of unsold properties. That means great choice, as well as great prices.
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20. 10. Sooner or later, the market will clear. Demand and supply will meet. The population is forecast to grow by more than 100 million people over the next 40 years. That means maybe 40 million new households looking for homes. Meanwhile, this housing glut will work itself out. Many of the homes will be bought. But many more will simply be destroyed–either deliberately, or by inaction. This is already happening. Even two years ago, when I toured the housing slump in western Florida, I saw bankrupt condo developments that were fast becoming derelict. And, finally, a lot of the "glut" simply won't matter: It's concentrated in a few areas, like Florida and Nevada. Unless you live there, the glut won't have any long-term impact on housing supply in your town.

       As Congress begins to debate how to reform government-sponsored enterprises (GSEs) Fannie Mae, Freddie Mac and the Federal Home Loan Bank System, NAHB on April 14 called on lawmakers to ensure that the federal government continues to provide a backstop for the housing finance system to ensure a reliable and adequate flow of affordable housing credit.

       Testifying before the House Financial Services Committee, NAHB Third Vice Chairman Rick Judson, a builder and developer from Charlotte, N.C., said the need for this support is underscored by the current state of affairs — with the GSEs, Federal Housing Administration and Ginnie Mae acting as the primary conduits for residential mortgage credit.

       “NAHB feels the federal backstop must be a permanent fixture in order to ensure a consistent supply of mortgage liquidity as well as to allow rapid and effective responses to market dislocations and crises,” said Judson.

       Related to the future of Fannie Mae and Freddie Mac, NAHB recommended policy changes to restore and improve the secondary mortgage market and housing finance system:

• Degree and structure of government support. While government support is needed to ensure that mortgage credit is available and affordable in all areas of the country under all economic circumstances, support for the conforming conventional mortgage market should not be provided directly to private companies. Instead, the federal government should explicitly guarantee the timely payment of principal and interest on securities backed by conforming conventional mortgages, in the same way that Ginnie Mae now provides guarantees for investors in its securities.
  
• Operation of the conforming conventional mortgage market. NAHB envisions private companies — conforming mortgage conduits (CMCs) — being chartered to purchase conforming conventional loans originated by approved mortgage lending institutions such as banks, savings and loan associations, mortgage banking companies and credit unions and then issuing securities backed by those mortgages.

      CMCs would guarantee the timely payment on the mortgages that are pooled in the government-guaranteed securities and would be required to be well-capitalized and to maintain reserves at levels appropriate for their risk exposure. However, CMCs and the mortgages backing their securities would not have implicit or explicit support from the federal government. A fund would be established by the government to provide a guarantee of timely payment of principal and interest to investors in the securities. The CMCs would pay a fee to capitalize the fund, which would be designed to mitigate the federal government’s risk so that it would only be exposed in the case of a “catastrophic” occurrence.

• Conforming conventional mortgages. Mortgages eligible for inclusion in securities receiving an explicit federal guarantee should have well-understood risk characteristics. This would include fixed-rate and standard adjustable-rate mortgages and selected multifamily mortgage loans.

       NAHB is in the process of updating its policy on the future of the Federal Home Loan Bank System and believes that policymakers must take into account its significant structural and operational differences from Fannie Mae and Freddie Mac when considering the future make-up of the housing finance system.

       With Fannie Mae and Freddie Mac now operating under conservatorship and experiencing severe financial pressures, NAHB urged Congress to proceed with caution as lawmakers take steps to transition to a new housing finance system.

“Any changes should be undertaken with extreme care and with sufficient time to ensure that U.S. home buyers and renters are not placed in harm’s way and that the mortgage funding and delivery system operates efficiently and effectively as the old system is abandoned and a new system is put in place,” said Judson.

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