The Independent Market Observer

10/15/12 – Housing Really Is Foundational: Consumer Psychology Continues to Recover

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Oct 15, 2012 11:15:42 AM

and tagged Fiscal Cliff, Market Updates

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Two major banks, J.P. Morgan and Wells Fargo, reported substantially stronger profits over the weekend, largely due to mortgage lending. The weekend Wall Street Journal (WSJ) had “JP Morgan and Wells Fargo: Housing on Mend” on page B1, and the weekend Financial Times had “Dimon bullish on US housing market” on the front page. The weekend New York Times (NYT) had two housing stories on B1: “Mortgage Lending Helps JPMorgan Profit Rise 34%” and “Which House Is Worth More?”

The first point I want to make is that as housing recovers, it helps across the board. Rising home values generate more transactions, which generate multiple business spin-off benefits: realtor fees, mortgage fees, furniture sales, and everything that goes with the transaction and the new property. For existing owners, rising prices make them wealthier. For underwater owners, the power of leverage that made them broke on the downside is now making them whole just as fast. Fewer underwater owners means fewer foreclosures going forward. The fact that the improving housing market is showing up in the financials of the largest banks is a sign of how large and widespread the recovery is becoming. The publicity around it can help build confidence even further.

A Monday story in the WSJ hits this point hard. “Buyers Back After Foreclosure” (p. A3) talks about a rising number of buyers who previously lost their homes. Again, this reflects the improving psychology, as these people would presumably be among the most gun-shy and least likely to buy again.

The second NYT story mentioned above, “Which House Is Worth More?”, is just as interesting, as it talks about the role of appraisers in the housing market. As housing prices recover, appraisers are coming in at values below the transaction price more frequently, causing the deal to be renegotiated, or even killed, to the fury of sellers, brokers, and others with an interest in closing the transaction.

As a former appraiser myself, I can tell you that this is actually a good thing and is a direct result of reforms that were made in response to the financial crisis. The selection of the appraiser has been taken from those who have a vested interest in the transaction closing, which should result in less pressure to inflate values. The process is not perfect yet, as discussed in the article, but it still represents a lower-risk process for the market as a whole than what was in place before. Although the reforms will potentially slow price increases in some markets, they can also help make the rising prices more sustainable by restraining speculation, and they can lower the chance of a repeat of the last crisis.

Finally, the improvement in consumer psychology suggested by the housing market is supported by other data as well. The weekend NYT has “US Consumer Sentiment Jumps to a 5-Year High” (p. B3) and the Monday WSJ has “Consumers Showing Little Fear of ‘Fiscal Cliff’” (p. A2). As consumers comprise approximately two-thirds of the U.S. economy, this matters a lot. Overall, the good news for the U.S. economy continues.

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