Core and Satellite Investing

From The Charleston Mercury, November 15, 2012

Let’s face it. We probably will have at least a few more years of slow growth along with world and investment environment uncertainty. Seems to me you have three choices: sit in cash (and make almost no return while inflation erodes your purchasing power), stay in your current asset allocation of stocks and bonds (and hope your portfolio doesn’t get hit like it did in 2008), or consider a core and satellite portfolio (designed to participate when the market goes up and protect your assets when the market goes down.)

Try to visualize your total portfolio as a car tire, viewed from the side. The rim and everything within is the core; the tire itself is the “satellite” portion. The core is composed of traditional equity and fixed segments seeking to provide higher expected returns with lower risk in a cost-efficient manner. The satellite portion is composed of investments that do not correlate with the traditional markets. The satellite seeks to provide solid returns and provide diversification and downside protection for the overall portfolio.

The core investments are in low-cost, tax efficient passive mutual funds and ETFs. Research, primarily the Efficient Markets Hypothesis, has shown that active management cannot consistently add value through security selection and market timing in efficient (traditional) markets. For the five years ended December 31, 2011, roughly 75% of actively managed mutual funds underperformed their benchmarks. There are three reasons for this: higher fees (operating expense ratios), more transaction costs, and more tax ramifications. Of these, the fees are the biggest culprit. Actively managed funds cost about one percent per year more than passive funds. That one percent shortfall ultimately results in underperformance and costs investors lots of money.

Therefore, a passive strategy in the core portfolio of traditional investments produces, on average, better returns.

On, the other hand, active management, can be more appropriate in inefficient markets. One good example is liquid alternatives. These publicly traded securities are non-correlated to the stock markets, are easily redeemable and may follow hedge-fund like strategies. The liquid alternatives should be considered for the satellite portion of the portfolio. These funds are specially designed to participate in up markets and protect in down markets. They have been shown to be particularly valuable in limiting losses during bear markets.

Consider a core and satellite portfolio, with passive investments in the core and actively managed liquid alternatives in the satellite. You get diversification, lower volatility and a portfolio designed to protect your assets and grow them. Something we all need in these uncertain times.

Les Detterbeck is one of a small number of investment professionals in the country who has attained CPA, CFP®, and CFA designations. His firm, DWM Financial Group, Inc., a fee-only Registered Investment Adviser, has offices in Charleston/Mt.Pleasant and Chicago. Les may be contacted at (843)-577-2463 or

China: World’s Number Two Also Faces Major Issues

fee-only financial planning, world-wide economy

The U.S. is the not the only major power trying to find solutions. China is too.

No, they are not grappling with taxes, budgets and deficits as in the U.S. Rather, China must deal with economic reform, environmental problems and political change. They need to shift from an economy built on exports and heavy internal infrastructure investments towards a more sustainable emphasis on domestic spending. In addition, the hyper growth development model has led to widespread environmental degradation. Lastly, most of the 1.3 billion people in China want political change. The Communist party and its 80 million members control, according to the New York Times, the economy, the courts, the news media, the military, educational institutions, civic life and the day-to-day affairs of citizens. And roughly 400 top party Central Committee leaders control the Communist party. Wealth is concentrated where the power is and corruption is rampant. And, we think we have problems.

The Communist Party Congress has been meeting in Beijing since last Thursday. Current leader Hu Jintao outlined his party’s policies that first day. It was a major event. He has been in office ten years and this was only his second such public address.  He called for broader economic and political reform. China’s economic progress in the last decade has been phenomenal, increasing GDP four fold. Yet, even Mr. Hu admitted that China’s development is “unbalanced, uncoordinated and unsustainable.”

Regarding political change, Mr. Hu said last week that “we will never copy a Western political system.” Four years ago, as the U.S. and Europe dealt with the financial crisis, China boasted of the triumph of its model of authoritarian politics which “produced strong, sustainable economic growth.”

Recently, there have been worldwide concerns that Chinese economic growth has been slowing; from a 14% real increase in 2007 down to 7.5% in 2012. However, September and October were stronger, primarily based on major increases in exports and new infrastructure projects, particularly railways. Barron’s reported Saturday that “the doomsday scenarios of hard landings are far-fetched.” Even so, the days of double digit economic growth for China seem to be over. Mr. Hu indicated that he thought economic growth over the next decade will be roughly 7% per year. This pace would likely put China’s economic machine ahead of the U.S. by 2020.

We’re all connected worldwide these days. The fragile recovery and potential fiscal cliff in the U.S. and the continuing problems in the Eurozone are key issues for China in the future. In March, Xi Jinping will take over from retiring President Hu. We’ll be watching closely as the new government deals with its economic, environmental and political issues. Let’s hope China and the U.S. both solve their major issues successfully.

Election 2012: Some Certainty, Lots of Uncertainty

fee-only financial planner, stress-test financial planningYes, the 18 month, $6 Billion 2012 Election is over. Many of us probably feel like four-year-old Abigael Evans who spoke for millions on youtube when she sobbed, “I’m tired of Bronco Bamma and Mitt Romney.” 

Yes, Abigael, it’s over and we have some certainty.

First, we need election reform. How about replacing the Electoral College with a popular vote? This way, the contest won’t focus on ten swing states. Every one of our votes would count equally. Of course, it was nice in IL and SC to be exempt from most of the brutal campaign ads from both parties. Next, we need to reduce the money in politics. $6 billion was spent on the federal 2012 elections. Did it really make a difference? Considering that almost all of the ads were negative and frankly insulted our intelligence, did this process help in solving the nation’s problems and educating voters or merely add to the polarization between Americans?

Political campaigns have become like a nuclear arms race. Each politician tries to out-raise and outspend his opponent.  As a result, Lawrence Lessig in Republic Lost: How Money Corrupts Congress has calculated that politicians spend ½ to 2/3 of their time raising money. This detracts from their time and focus on their job and obligation to their constituents.  It also clouds their judgment on important issues- adding to Washington gridlock, the lack of attention to and resolution of major issues, and the growth of government. In addition, the system has created a marvelous career path for current and former officeholders who can become lobbyists when they leave office and make the really big bucks. We need to fight the corrupting influence of money in politics. You might look at to see how one organization is doing this. Since incumbents are not likely to change the system, Mr.  Lessig proposes that a constitutional convention may be needed to make the changes necessary.

Finally, regarding election reform, we need a better way to vote. Why do voters have to wait hours seated on school bleachers while poll workers struggle with one computer to verify voters. Or worse yet, stand out in the rain due to long lines. C’mon man!  This is America, the greatest country in the world and home to Apple, Google and Microsoft, among others. Why can’t one of our current day Steve Jobs find a better way for Americans to vote safely and securely using the internet?

Yes, there is certainty to the cast in Washington: President Obama in the White House, the Republicans controlling the House and the Democrats with a small advantage in the Senate. We don’t expect a repeal of Obamacare in January.  Nor, do we expect to see a massive deregulation push coming from the White House. In short, there is unlikely to be a sea change in American economic policy.

However, there is still considerable uncertainty. The fiscal cliff is coming in 53 days. Can Congress and the President make a Grand Bargain or will they kick the can down the road with gimmicks? With our U.S. economy growing but still fragile, can we afford a 5% drop in GDP if the fiscal cliff is not avoided? In addition, of course, we have Europe’s worsening problems, China’s slowdown and world hot spots that could erupt. Lots of uncertainty.

The stock markets showed their initial reaction yesterday, with many equity indices down 2% or more. Expect more volatility. Our clients needn’t worry- they have an investment portfolio that is designed to participate in up markets and protect in down markets.

Now that there is some certainty, let’s hope business leaders start making decisions to increase production and hire more people. And, most importantly, let’s hope the politicians and all of us put aside differences and find the common ground that unites us- to move our great country forward.


Testing Your Financial Plan

investment allocation, financial stress testFrom The Charleston Mercury, October 18:

Investment returns through September 30th have been quite good. Equity indices are up 13-16%, fixed income indices up 4-6% and liquid alternative funds are generally between the two. So, depending on your asset allocation, your portfolios may be up 6-12% or more year-to-date. Good stuff. 

The question, though, is when you’re doing your financial planning should you assume returns for the first nine months of 2012 will continue indefinitely or use some other numbers? Furthermore, when you do your financial planning how do you factor in unknowns that could derail your financial future? How do you develop and stress test your financial plan so you can sleep at night?

Let’s start with investment returns, the real “engine” of your financial plan. Asset allocation, of course, is the primary factor that determines performance. Despite the stock market’s recent results, the world and the investment landscape seem very uncertain these days. Is your asset allocation designed to protect and grow the assets you need for your successful financial plan? You’ll need to develop an estimated return for your allocation. Historical returns cannot predict the future but give you some direction. Should historical returns go back to 1926? The last decade? Last five years? These days it’s impossible to find a perfectly representative period given the worldwide changes in the last decade and the changes that are occurring every day. Even so, you’ll need to develop a realistic value as a starting point.

Calculate your planning by using your key variables, including assets, investment returns, expenses, inflation and eventual age and develop not just one result but a series of results for your plan. It will show how variations in rates of return each year can affect your results. 

This method is called a Monte Carlo simulation and it calculates the results of your plan by running it many times, each time using a different sequence of returns. Some sequences produce better results, some worse.  Ultimately, the simulation will produce a range of possible results with probabilities of success for a given set of variables.

Next, you will want to stress test these results by considering what happens if bad things occur. Some of the key “what ifs” are:

  • Inflation will be higher
  • You outlive your assets
  • Social security benefits are cut
  • Investment returns are less than expected
  • You incur uninsured health care costs

The Monte Carlo simulation is highly valuable in that it will be able to show you the probability of success of your financial plan if one or any combination of these stress test events occurs.

Stress test your financial plan. You’ll sleep better at night.

Lester Detterbeck is one of a small number of investment professionals in the country who has attained CPA, CFP®, and CFA designations. His firm, DWM Financial Group, Inc., a fee-only Registered Investment Adviser, has offices in Charleston/Mt. Pleasant and Chicago. Les may be contacted at (843)577-2463 or

DWM 3Q12 Market Commentary


fiscal cliff, multiple asset allocationWith current readings of anemic economic domestic growth, a recession widening in Europe, and a possible “Fiscal Cliff” on the way, it’s ironic how well the stock market and frankly most markets have done in 3Q12 and year-to-date (YTD) 2012.  It certainly didn’t hurt in mid-September when the Fed announced QE3 which is yet another round of government bond-buying designed to jumpstart the US economy and job market. Just how effective is this prolonged monetary policy? Weak US economic data, political unrest in the Middle East and Africa, even a slowdown in growth in China, are just a few of many things that show the situation really hasn’t gotten much better. At some point, the market will no longer reward this so-called “Quantitative Easing”.

But let’s talk about the good news for a little bit – the 3Q12 results:

The average US diversified stock fund posted a 5.3% return for the third quarter and is now up close to 13% Year-To-Date (“YTD”)! Results were also quite nice outside of the US with diversified international stock funds averaging 6.8% in the 3Q12 and now up almost 11% YTD. DWM equity portfolios enjoyed these run-ups.

Bonds chugged along with the riskier debt securities seeing more inflows and thus better returns. This was evidenced by the Barclays Capt’l US Aggregate Bond Index being only up a respectable 1.6% for the quarter (and almost 4% YTD) yet the Barclays US High Yield Index up 4.5% for the quarter (and 12% YTD). It should be noted that DWM fixed income portfolios have really enjoyed great performance both on the quarter and YTD and as such is reflected in your overall return. 

 Our DWM Liquid Alternatives portfolio showed it participates in bullish quarters like this, up around 3.6% for the qtr and up almost 9% YTD. This alternative part of the portfolio will really be needed when, not if, equities markets (and fixed income markets for that matter) turn bearish. 

Nice results, huh?! Unfortunately, that’s where most of the good news ends. Besides some improving housing data, which simply shows a bounce off a very low bottom, it really isn’t pretty out there. Now is not the time to “get out the Dom Perignon” and start dancing in the streets. Now is the time, for those who aren’t DWM clients, to make sure you have reviewed your financial plan, your risk tolerance, and your portfolio asset allocation to make sure it’s ready for the challenging near-term future. DWM clients already have these areas covered. We have many potential big risk events on the horizon: the Presidential Election, a possible replay of the debt ceiling debacle, and then the possible Fiscal Cliff, which is the term referring to the simultaneous spending cuts and tax increases that are slated to take place at the end of 2012 unless Congress takes action and actually comes to agreement on something. 

Frankly, this is a good example to show it’s impossible to time the stock market, as it does not necessarily operate in-line with fundamental data. It’s another reason why a well-diversified, low-cost, multiple asset allocation approach like ours is so prudent in times like these. Rather than trying to “time it”, we use disciplined strategies and vehicles to produce stable and steady returns over time, thereby helping you achieve your long-term financial goals. 

Hope to see you at one of our Fall seminars in either Charleston or Palatine where we will discuss these important items in more detail.  

Brett M. Detterbeck, CFA, CFP®


Business: The Mobile Wave is Coming to South Carolina (and the World)

No, this isn’t another Hurricane Hugo. Yet it is disruptive and transformational. It’s the mobile wave. And, it’s bringing radical changes.

The Agricultural Revolution took place over thousands of years. The Industrial Revolution took centuries. Now the Information Revolution is expected to achieve huge changes in our lives and businesses in a matter of decades.

Michael Saylor’s recent book, The Mobile Wave: How Mobile Intelligence will Change Everything presents an excellent overview of the evolution of mobile computing and what the future may hold. Main frames, minicomputers, personal computers, the Internet PC have led to the fifth wave, mobile computing which features:

  • Multi-touch with an interface that is fun and easy and the use of shapes not symbols
  • Widely affordable
  • Longer battery life
  • Instant-on to for immediate information and communication
  • Apps that inexpensively perform a range of tasks easily and quickly
  • Sensing the world around us through GPS, voice commands, scanning and cameras
  • Easy to carry and available anywhere, anytime.

Is it any surprise that as a result of the mobile wave traditional bricks-and-mortar businesses are being upended, and a huge global digital economy is being created? Paper, credit cards, cash, doctor’s office visits and perhaps classrooms may be obsolete soon.

Two weeks ago, the Charleston area Chamber of Commerce hosted an event featuring ten start-ups focused on “riding the mobile wave.” They were the winners of a competition sponsored by Greenville’s Iron Yard, an organization dedicated to providing innovation, education, mentoring and capital to create a thriving start-up community and develop young entrepreneurs. There were 321 applicants this year from 19 countries.   

Companies included web or mobile products for targeting grocery ads, safe ride-sharing, highlighting athletic accomplishments for non-professional athletes, and others. These energetic, bright (many have Masters or Doctorates in computer science) entrepreneurs have plans to be part of the huge, growing mobile wave. It was exciting to meet these young leaders and to hear their plans and enthusiasm. They get it.

We’ve already seen this year the impact that mobile devices and social networks have had on politics in Europe, The United States, the Middle East and around the world. Mr. Saylor believes that the combined forces of mobile and social software may transform 50% of the world’s GDP in the coming decade. This would remake businesses, industries and economies. By 2025, we may see an almost universal use of mobile computers as our primary means of navigating through modern society.

The Mobile Wave is happening, bringing radical change. We’re right in the midst of this third major revolution, undoubtedly one of the most exciting periods in history.

Bonus Blog: My Love Affair with My Laptop is Over

fee-only financial planners, good postureI remember the first time I met a laptop. It just about took my breath away. Instead of the huge tower and monitor, here were all the charms of a computer in one nice, neat package. What a bombshell:  computer, keyboard and monitor all in one.  And, since it was so light, we could travel together all the time and be together endlessly. It was love at first sight.

It wasn’t a monogamous relationship at first. I continued primarily with my tower and monitor at the office. I used the laptop at home. Loved every minute of it. Over time, my tower grew old and clunky. The appearance of the monitor wasn’t what it used to be. I found myself using my laptop more and more.

Ultimately, about five years ago, I started using a laptop exclusively. The two of us were inseparable. Little did I know that this relationship was harmful to my health the more we were together.

It all became clear about a month ago. I was working on some large projects and was with my laptop for 10-12 hours per day for a few weeks. I started feeling back pains. My right shoulder ached. There was numbness in my right arm. Friends suggested I had developed a pinched nerve or herniated or bulging disk

A visit to my doctor confirmed this. Our vertebrae are cushioned by small, spongy discs. When healthy, the discs act as shock absorbers. When a disc is damaged, it may bulge. The bulging disc presses on nerve roots and can cause pain, numbness and weakness in the area of the body where the nerve travels. As you age, the discs dry out and aren’t as flexible. Further, discs can be injured in a number of ways, particularly poor posture over time. Fortunately, my injury wasn’t too severe. I’m on injured reserve now, but rehabbing and hope to better than ever physically in a few months.

I found that the basic reason this occurred was that I was a victim of “laptop-itis.” Don’t laugh. Researchers at UNC-Chapel Hill School of Medicine first coined the term two years ago. After much research they determined that “high use of laptops can lead to a new ailment called laptop-itis:  neck, back and arm issues that can develop from the use of a portable computer”. The health center there says that laptop-itis had become an “epidemic”.  And, remember, these students didn’t have aged, inflexible discs when they came to campus.

Many students use their laptops regularly, for online classes, homework, research and entertainment. For them and us, the laptop often results in the user hunched over the screen in a “scrunched” position. Posture is bad and the body positions are not ergonomically correct. Prolonged use of a laptop is causing headaches, neck aches, carpal tunnel, tendonitis, and back pain in young and old.

So, my love affair with my laptop is over. I have a new adjustable-height desk at which I work standing up half the time. I have my monitor attached to a movable arm that positions it for the perfect eye-level distance. I have a rubber keyboard and an “evoluent” wireless mouse, which operates while my hand is in a vertical position (like shaking hands) not a horizontal position. It’s basically an ergonomic showcase.

I’m sharing this sad story of love, damage and separation, because many of you may be using your laptop too much as well. Here are some pointers for the future if you are using a laptop:

  1. Take a break every 20 minutes. Stand up, walk around and stretch.
  2. If you’re going to use a laptop, don’t cradle it in your lap.
  3. Tilt the screen so you don’t need to bend your neck. 
  4. If you can, use a desktop computer for long durations at the computer.
  5. Switch out your laptop for a desktop or use a docking station.
  6. If you have pain, see a doctor.

Remember, don’t let your laptop seduce you. It may cause you pain in the long run.

Lessons from Iceland’s Meltdown into Materialism

fee-only financial planners

From The Charleston Mercury, Thursday, September 20

Remember Iceland’s collapse in 2008?  It’s an amazing story.

Iceland is a tiny country with only 320,000 people. Yet, starting in 1994, this nation of fishermen and farmers became an international financial center. Its three major banks increased their assets by the end of 2007 to an astounding 923% of Iceland’s GDP. Personal income soared. GDP per capita was one of the highest in the world (39% more than the U.S.). However, the widespread affluence of the entire country was, in fact, a mirage. Households had debt of 250% of their annual income. When the world financial crisis came, Iceland’s banks and economy collapsed. A country built on materialism and consumer spending had gone bust.

Before the collapse, two professors, Ragna Garoarsdottir and Helga Dittmar, started a study to compare materialism, debt and financial well-being. Iceland was their lab. Recently, the Journal of Economic Psychology published their results. The conclusion was that “people who endorse materialistic values have more financial worries, worse money-management skills and a greater tendency towards compulsive buying and debt.”

Their study pointed out that in consumer societies, materialism has long been considered a national goal. Hard work produces higher income which results in more consumption and therefore higher living standards. GDP has long been considered a proxy for a nation’s level of well-being. If so, then one might suggest that for households, greater consumption, or materialism, would produce greater financial well-being. That just isn’t the case.

Garoarsdottir and Helga Dittmar’s study focused on five variables; materialism, money-management skills, tendency to spend, compulsive buying, and financial worry.  Respondents were asked  to measure how much they agree or disagree with statements such as “The things I own say a lot about how well I’m doing in life”, “I always know how much money I owe”, “I spend extra money quickly”, “I sometimes feel that something inside pushes me to go shopping”, and “I worry about my financial situation.” They summarized the results and compared the variables for correlation.

Materialism has been defined as the “importance ascribed to the ownership and acquisition of material goods in achieving major life goals.”  This Icelandic study concluded that the level of materialism is related to “higher levels of financial worry, a greater risk of compulsive buying, and higher debt.”

Their conclusions don’t surprise me. Financial well-being doesn’t result from materialism. On the other hand, a realistic financial plan can help promote and provide financial well-being. Such a plan identifies goals in three categories; Needs, Wants and Wishes in that respective priority and requires tough choices based on income. Materialism puts Wishes as top priority and tries to find ways to fund them. That’s a bad strategy.

Les Detterbeck is one of a small number of investment professionals in the country who has attained CPA, CFP®, and CFA designations. His firm, DWM Financial Group, Inc., a fee-only Registered Investment Adviser, has offices in Charleston/Mt.Pleasant and Chicago. Les may be contacted at (843)-577-2463 or


Middle East: Muslim Rage Likely to Continue

muslim rageThe attacks on the U.S. Embassy in Benghazi and elsewhere were deplorable. American foreign policy in the Middle East must be clear and firm. Yet, a balance must be struck between supporting democracy and guarding our national interests. It won’t be easy. And Muslim rage is expected to continue.

The violence in Libya, Egypt, and across Arab countries may have looked spontaneous. It wasn’t. Many believe we can expect a new phase of Muslim rage. The Arab Spring replaced hated dictators. These dictators were all about control, including blocking internet access to prevent their people seeing inflammatory material and using their strong security forces to prevent or limit protests. That’s all changed.

Most new governments have fragile mandates, ever changing loyalties and weak security forces. They aren’t quite sure what to do or how to do it. According to the September 24th issue of TIME, “the tendency has been to look the other way and hope the demonstrators run out of steam.”

To be sure, the attacks are more than a reaction to an anti-Islam video. And, the rage isn’t directed only at America. Seven days prior to the killing of Ambassador Stevens in Benghazi, scores of people were killed in Iraq, the defense minister of Yemen survived an assassination attempt, and Syria’s civil war continued, with over 25,000 already dead. Salafists, the second leading vote getters in Egypt, attacked Sufi shrines in Tripoli and other Libyan cities. Small groups of hate mongers are taking advantage of the current situation to promote their religion and their politics, often to a suspicious and ignorant population.

Most Americans know little about the Arabs. And, they know little about us. Coincidentally, two weeks ago I completed a very interesting book entitled The Arabs: A History written by Eugene Rogen. I found it fascinating and highly recommend it. It details the last five hundred years from the rise of the Ottoman Empire until now. It outlines why the Islamic world seems to bear a grudge against the West. In their minds, Western intervention and imperialism, primarily by Britain and France, made many Arabs slaves within their own countries for centuries. And, even with independence, Britain and France still continued to extract economic benefits and support dictators who stifled individual economic and/or religious freedom.

Of course, Muslims resent slights to their religion. Hence, certain Muslim outbursts of rage play well for political parties. The Salafists are fundamentalists. They would like a fusion of government and religion as exists in Iran. Stirring up religious fervor is exactly what they are about. It’s not too difficult to do. Ignorance of the West facilitates rabble-rousing in Muslim countries. Protestors at the American embassy in Cairo erroneously believed that the offensive film was shown on “American state television”, which seemed very likely to those unaccustomed to independent broadcasting. We Americans know we don’t have a “state-run” television system, but many of the protesting Arabs didn’t know that.

The Middle East matters- big time. It’s the world’s energy’s center, at least currently. It is home to Iran, one of our committed enemies. And, it is the heart of Islam, a religion followed by over 2 billion worldwide. The Arab Spring will likely be good for America. However, now that change has come and the genie is out of the bottle, we can expect to see continued rage from a small minority of the Muslims for some time to come.

Housing: “Full Recovery” or “On the Mend”?

home prices upI loved the cover story for Barron’s on Saturday. Jonathan Laing’s article announced that the “national nightmare is over, home prices are headed up and the recovery is for real.” Wouldn’t it be great if he’s right?  After six years of major declines in home prices wiping out $7 trillion in home values, we’re all ready for a big turnaround. Unfortunately, though housing is certainly on the mend, a full recovery may still be far off.

Mr. Laing, of course, pointed to the Case-Shiller report that showed a jump in home prices of 2.3% in June over May and a 6.9% increase in second quarter 2012 compared to first quarter. He pointed to optimistic reports such as Moody’s Analytics’ Mark Zandi who feels home prices on average will rise 10% by the end of 2014. And, Lawrence Yun, chief economist of the National Association of Realtors, thinks that home prices could increase by as much as 5% in both 2012 and next year, in part due to lower inventory of houses for sale. Lastly, Ingo Winzer, president of Local Market Monitor is forecasting a cumulative increase of 7% over the next three years.

Others are not so optimistic. Nick Timiraos, in the Wall Street Journal on Monday, indicated that the strong sales in early 2012 signal that more U.S. housing markets have hit bottom. However, in his words, the housing market “remains far from normal.” In addition, “hitting a bottom shouldn’t be confused with a recovery, which looks a ways off.”

Here are some reasons that Mr. Timiraos, Barry Ritholtz and others believe that housing has stabilized but we are not in recovery mode:

  1. The economy is still limping along- consider weak job creation, flat wages and low household formation.
  2. The foreclosure process was slowed or halted for almost a year as part of the “robosigning” settlement discussions. Distressed sales fell from 38% to 28% of existing home sales. Now that this issue has been resolved, foreclosures are moving higher, putting more distressed houses on the market. This will likely reduce the average price of houses sold.
  3. Low inventory is not necessarily good. Home equity plunged in the last six years. Many homeowners would like to move on. But, they become buyers after they sell, and if they won’t have enough equity after the sale to buy, then they sit.
  4. Mortgage rates are at historical lows. Buyers get a huge increase in purchasing power with these low rates. What happens to home prices when mortgage rates start to rise?
  5. Results must be seasonally adjusted. Second and third quarters are historically the best months for home sales. Let’s see what the fall and winter bring.

There are good signs in housing. Yet, there are still plenty of headwinds before we see a return to normal. Regardless, it appears that housing has stabilized and hit bottom in parts of the country. That’s good news.