Glass 1/2 Full or 1/2 Empty?

The pending home sales index, which measures homes under contract (but which have not yet closed), remained steady from December to January, which is a sign of market stabilization. This latest piece of data supports the notion that the market may see the beginning of a gradual recovery as early as the middle of this year. However, limiting the amount of foreclosures dragging down home prices is a key component to a recovery. (Source: WSJ, NAR, MSNBC)

Federal Reserve Chairman Ben Bernanke had a simplistic, bold and somewhat innovative suggestion a few days ago when he advised that institutions holding mortgages should consider lowering the principle of such loans. (Source: WSJ, MSNBC)

While at first glance this seems to be an insane suggestion, it may actually make sense. People are more apt to make their mortgage payments if they have equity in their homes. Conversely, no matter how low mortgage rates go, many people will default if they owe more on their homes than their homes are actually worth. Depending on the amount of any reduction in principle, this option is likely more profitable than the foreclosure process. Moreover, foreclosures will ultimately feed the current cycle of home devaluation. Devaluation of collateral is an investor's worst nightmare!

A caveat to the above is that any such program needs to be administered on an equitable and voluntary basis so as to maintain stability and foster faith in the real estate/mortgage market. Speaking of which, how much faith will investors have if bankruptcy courts are given the power to unilaterally rewrite mortgage terms, as some are suggesting, as a solution to the current mortgage problem? (Source: WSJ)

As an aside and in keeping with my recent entries, if you are in a position to buy, do so now. Most often analogized to the stock market and apropos to the housing market, predicting the absolute bottom is like trying to catch a falling knife. Further, the cuts in the prime rate made by the FED recently have not had the desired effect on fixed mortgage rates over the last few weeks. In fact, mortgage rates are on the rise. With that said, I am hopeful that the FED will drop prime another 1/2 point at its next meeting in approximately two weeks. Perhaps such a drop will convince lenders to be a little more free with their money in the not so distant future.