Between (and Behind) the Numbers . . .

Today was the first day in quite a while that the news media actually reported some positive news on the economy, and the real estate market in particular.

There were three main positive points made in the mainstream media:

1. Existing home sales are up from the previous month, exceeding analyst expectations.
2. Members of the Federal Home Loan Banking System have been allowed to purchase mortgage backed securities from Fannie Mae and Freddi Mac.
3. A new, private venture, Private National Mortgage (aka PennyMac) was formed to invest in and restructure failing mortgages.

That all sounds positive, which is good, as anything that turns folks in a positive direction is good for everyone these days. I actually heard several analysts on CNBC talking about this news signifying we've hit "bottom" and "it won't get any worse than it has". I'm not quite that optimistic . . .

The tag-along news of the rise in existing home sales is that the prices dropped. More homes sold, but for less money. At least the glass is now half-full, according to these analysts. The fact that homes are beginning to sell at a higher pace is certainly good news, but in my estimation, the key benefit is the effect it will have on the psychology of buyers and sellers. It's a little spark in the midst of an otherwise passive market that may inspire buyers and sellers to be more "in-action". My anecdotal experience has been that buyers and sellers are essentially On Strike, waiting for the other side to blink. Perhaps this news will motivate.

The other two news items are slightly more noteworthy to me. What we're seeing a lot of lately that is significant, but not as sexy, are the funds being made available to get the current mortgage debt off the books of the lenders holding the vast majority of troubled, active loans.

There are loads of banks holding bad loans on their books. These are loans that were made too generously on homes that are declining in value. Bad, if you're a bank. Investors who have bought these loans from banks on margin, are now demanding their money back. That has caused serious fear and anxiety in the banking world because it means the banks have to have enough cash on-hand to pay the investors back at a moment's notice. (See Thornburg as a recent example). So, the banks are holding their bad loans AND holding all of their cash out of fear. When banks hold all of their cash, they don't have as much to lend. When the don't have as much to lend, they raise the rates on the loans they do make. They are in the business of making a profit, after all.

And that is the conundrum we've fallen into lately. It's moved from a credit crunch, which started last summer to what we currently face . . . a liquidity crunch. The cash is there, but nobody wants to make it "liquid".

So . . .the Fed has jumped in to buy some of these bad debts (mortgages) and also started making these debts available to other investors as a way of cleaning out the books of the major lending institutions, in the hopes of freeing them up from their fear of lending on new, solid loans.

The fed moves, as well as the new venture, PennyMac, signal to me at least that there are some good buying opportunities for the institutional investors. That certainly has not been the case for the past 9 months and again, to me, is a positive sign that money may be becoming more accessible/liquid.

In this market, things change daily (almost hourly) so it will be interesting to see how the news continues to develop on the underlying/fundamental side. Once investors start buying, as opposed to just sitting on the sidelines waiting it out, as they have been, it's a positive indicator for the markets.