We came across a couple articles that piqued our interest this past week. One was on CNBC .com, where the writer laid out an interesting hypothesis on how fewer foreclosure sales could actually drive prices lower. The writer reasoned that foreclosures are in high demand and that distressed property buyers and sellers rule the market; therefore, if demand for foreclosed properties wanes, prices will wane as well.

A separate article appeared in The Wall Street Journal lamenting that mortgage rates aren't as low as they should be. The writer points to the spread between mortgage-backed securities (MBS) and posted mortgage rates, which is wider than historical norms. The writer deduces mortgage rates should be lower.

Both articles were interesting, but hardly conclusive. As for high foreclosure demand propping up overall prices, prices of non-distressed properties have held firm. If prices aren't firming in the new-home market, the surge in home builder optimism doesn't appear warranted. It seems to us that home builders are experiencing better pricing.

As for the spread between MBS and mortgage rates, many influential variables are at work besides MBS demand: time preferences, risk aversion, supply and demand, liquidity preferences are just a few. The spread between MBS prices and mortgage rates alone is a very incomplete picture of the mortgage market.

The point is, markets are dynamic and complex, so it's impossible to narrow price determination to only one or two variables. The variables can be insightful, to be sure, but they are hardly conclusive, much less predictive.

Courtesy of Jessica Regan.

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