Light at the End of the Tunnel

There are a lot of tunnels in the vicinity of my East Tennessee home town, and often we romanticize the phrase light at the end of the tunnel. Today I want to talk about the reality of tunnels and what the other end looks like for the housing market.

First, long tunnels take us from one place to another and the landscape is often different at each end. The housing landscape parallels this. We left the realm of easily financed McMansions and are going to the land of optimized housing decisions – from Crazytown to Rationality. Those who expect to see the same housing market on the exit end of the tunnel will be surprised.

Secondly, even the climate can be different from one end of a long tunnel to the other; sunny going in and cloudy on the other side of the mountain. The financial climate fits this description. On the exit end, the financial climate is overshadowed by weakened asset values, greater banking restrictions, tightened lending standards and a hurricane of sovereign debt on the distant radar. I even hear rumblings of eliminating the interest deduction for housing. Not exactly fair weather.

But on the positive side, we do generally exit tunnels. (Anyone who has not, raise your hand. Oh, you're not here!) We begin to see light and glimpses of the landscape. In the last ten days , the Wall Street Journal cited three encouraging glimpses:
• Home sales in the $50,000 to $100,000 range actually rose! While this is somewhat propelled by foreclosures falling into this price range, I believe it also foreshadows a trend to smaller, more rational housing decisions. (See the previous blog about Europe.)
• Lewis Ranieri, the "godfather" of mortgage finance for his role in pioneering securitization and mortgage-backed securities, is exploring the creation of funds to provide higher interest rate mortgages to less qualified applicants – which may be darn near all of us. This is a great sign that the financial market sees an opportunity in housing and may step in, albeit slowly, to fill the current void of mortgage availability.
• An article appeared stating that lack of availability of mortgages was hurting the housing market – duh! While this is not a revelation, the magnitude of the problem is. An example given was an applicant with an 800 credit score and 50% downpayment being denied. Makes Ranieri seem even more prescient, eh?

So are these lights at the end of the tunnel? Highly likely. They show a changing landscape (home prices), a responding financial market and pent-up demand. I can’t help but like it. We just have to keep moving forward.