June 21, 2010
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MARKET RECAP
Some people are just unsure of where they're going. We'll slot homebuilders into this category. After posting steady gains over the past few months, the National Association of Homebuilders/Wells Fargo Housing Market Index tanked five points to 17, which means homebuilders have turned sour once again.
The mood change is understandable, given that housing starts sank to their lowest levels in five months. The numbers are hardly encouraging: starts fell 10 percent in May from April to a seasonally adjusted annual rate of 593,000 units. The good news is that compared to the same time last year, starts are up 7.8 percent.
The drop should have been anticipated. In the previous two months, improvements were driven by federal tax credits, which are now gone. We've noted in past editions that the current activity pattern isn't unprecedented, using the purchasing patterns in automobiles as an example. After the cash-for-clunkers program expired, auto sales plummeted, but then recovered steadily over subsequent months. The fact is, we are transitioning from a government-aided recovery to a more-sustainable market-based one. And while it takes time for the transition to occur, it won't be pain free.
Even though new homes aren't getting the attention from potential buyers that homebuilders desire, more people are buying – at least that appeared to be the case last week. The Mortgage Bankers Association reported that purchase activity rose 7.3 percent, halting a plunge that took the measure the prior week to the lowest level since 1997.
Refinances were also on the upswing last week, thanks to more borrowers believing mortgage rates are about as low as they can go. Our mantra on the subject remains unchanged: rate decreases will be marginal at best. Many borrowers, though, are relentless bargain hunters and want the absolute best rate possible, which leads to the inevitable question: should I lock shortly after applying or wait until the closing date is near?
Sometimes the decision is made for you; some banks require a lock when the application is sent. Many borrowers wish to lock as soon as possible anyway. We suggest that once the rate is locked you stop checking rates; there is no sense stirring up feelings of remorse over a few basis points. Life is too short.
On the other hand, some borrowers are risk accepting (at least that's what they say), and they want those few basis points. To those people we say “go for it,” but only if they are willing to accept the very real risk, and won't be driven to agony, by a rate spike. No one, us included, can know with certainty where rates will be 30 days from now. But if the choice is between noticeably higher or noticeably lower, we'd side with the former.
How Risky is this Market?
The May/June edition of the Financial Analyst Journal featured an article titled “Dimensioning the Housing Crisis” (available for download at CFAinstitute.org). The article is noteworthy for encapsulating the problems of the housing market in a mere 12 pages.
The article is replete with sundry graphs, most of which accentuate just how bad things got over the past two years. One graph features the spike in first-time defaults; another features the seemingly exponential growth in housing overhang; yet another features the precipitous drop in cure rates for 30-day, 60-day, and 90-day delinquencies. The author notes, in pointed prose, that “we have a housing problem that affects 11 million to 12 million units. If nothing is done, more than one homeowner out of every five will face eviction.”
It's a pessimism-inducing article, to be sure, but we remain upbeat nonetheless. Reason being, these problems are well documented today, which means there are few shocks left to rock the market. What's seen isn't what kills, it's what's unseen.
Savvy buyers know that the time to buy isn't when everything is dear but when everything is disdained. Everything in housing isn't disdained, but sentiment remains low. So, we ask ourselves, was it riskier to buy a house in 2006 or is it riskier to buy one today? The sentiment feels riskier today, but the data show that 2006 was overwhelmingly riskier.
Monday, June 21, 2010
Tuesday, June 8, 2010
Keeping you updated on the market!
For the week of
June 7, 2010
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MARKET RECAP
Few housing market participants were surprised when the NAR reported that its pending home sales index increased again, 6 percent in April, to 110.9 (100 is the base set in 2001) thanks to a surge in sales contracts. April, not-so-coincidently, happened to mark the end of the extension of the federal homebuyer’s tax credits. NAR chief economist Lawrence Yun was upbeat on the new business, nonetheless, noting, “The homebuyer tax credit brought close to one million additional buyers into the market, which is now helping the trade-up market and has significantly improved the inventory situation."
We can't say with certainty whether Yun's analysis is correct. We've stated in past editions that tax credits bring buyers forward, but don't increase aggregate demand. Look no further than the automobile tax credits from last year. Once the $4,500 cash-for-clunkers purchase program ceased, sales dropped like a rock. Does that mean we should expect home sales to do the same?
We don't think so. Automobile sales have recovered, and have recovered quite nicely. In May, sales for General Motors increased 16.6 percent from the same year-ago period, while Ford's increased 23 percent. Not to be outdone by its larger competitors, Chrysler posted a 33 percent increase. What's more encouraging, the robust recovery in auto sales had nothing to do with tax credits; it had everything to do with an improving economy and improving consumer confidence.
These same factors will likely work favorably for the housing sector in coming months. In fact, they already are. Home prices climbed 6.8 percent in May 2010 from the same year-ago period, posting the largest yearly increase since July 2006, according to real estate data provider Clear Capital. Meanwhile, the number of REO properties on the market seems to be dropping. Clear Capital reports that the national REO saturation rate dropped to 27.8 percent, down from 41.7 percent last year.
We think this is a near-perfect market for homebuyers: home prices are low but stable, while mortgage rates continue to hug historical lows. In many parts of the country, buying a home is cheaper than renting.
But this scenario won't last indefinitely. More Federal Reserve Bank presidents (of which there are 12) believe the economy is sufficiently stable to begin raising interest rates. Kansas City Federal Reserve Bank President Thomas Hoening said that the US economic recovery has the momentum to sustain itself and called for an increase in the target federal funds rate to 1 percent by the end of summer. It's currently hovering near zero. Other Fed presidents have stated that they are “uncomfortable” with Federal Reserve Chairman Ben Bernanke's use of “extended period” as it is applied to low rates.
The bottom line is, when the Federal Reserve starts raising the federal funds rate – the influential rate at which banks lend to each other – mortgage rates won't be far behind.
Up, Up, But Not Quite Away
We were expecting a little more, but at least it's trending in the right direction. We are speaking of the employment report, which showed payrolls rose by 431,000 last month.
That would be very good news, if not for the fact that 411,000 of the new hires were related to the census. Nevertheless, that still leaves a net positive for the private sector. The increase was enough to push the unemployment rate down to 9.7 percent (though some pundits argue the drop was really due to a lower participation rate).
You never want to read too much into a single month of data, but we remain encouraged: job growth and wages picked up from April to May, while the average workweek lengthened. And although moderate compared to past post-recessions, the recovery is looking more sustainable after consumer spending and business investment rose at a healthy pace in the first quarter.
Overall, we think this latest employment report provides another reason to act now in both the mortgage and housing markets.
For the week of
June 7, 2010
--------------------------------------------------------------------------------
MARKET RECAP
Few housing market participants were surprised when the NAR reported that its pending home sales index increased again, 6 percent in April, to 110.9 (100 is the base set in 2001) thanks to a surge in sales contracts. April, not-so-coincidently, happened to mark the end of the extension of the federal homebuyer’s tax credits. NAR chief economist Lawrence Yun was upbeat on the new business, nonetheless, noting, “The homebuyer tax credit brought close to one million additional buyers into the market, which is now helping the trade-up market and has significantly improved the inventory situation."
We can't say with certainty whether Yun's analysis is correct. We've stated in past editions that tax credits bring buyers forward, but don't increase aggregate demand. Look no further than the automobile tax credits from last year. Once the $4,500 cash-for-clunkers purchase program ceased, sales dropped like a rock. Does that mean we should expect home sales to do the same?
We don't think so. Automobile sales have recovered, and have recovered quite nicely. In May, sales for General Motors increased 16.6 percent from the same year-ago period, while Ford's increased 23 percent. Not to be outdone by its larger competitors, Chrysler posted a 33 percent increase. What's more encouraging, the robust recovery in auto sales had nothing to do with tax credits; it had everything to do with an improving economy and improving consumer confidence.
These same factors will likely work favorably for the housing sector in coming months. In fact, they already are. Home prices climbed 6.8 percent in May 2010 from the same year-ago period, posting the largest yearly increase since July 2006, according to real estate data provider Clear Capital. Meanwhile, the number of REO properties on the market seems to be dropping. Clear Capital reports that the national REO saturation rate dropped to 27.8 percent, down from 41.7 percent last year.
We think this is a near-perfect market for homebuyers: home prices are low but stable, while mortgage rates continue to hug historical lows. In many parts of the country, buying a home is cheaper than renting.
But this scenario won't last indefinitely. More Federal Reserve Bank presidents (of which there are 12) believe the economy is sufficiently stable to begin raising interest rates. Kansas City Federal Reserve Bank President Thomas Hoening said that the US economic recovery has the momentum to sustain itself and called for an increase in the target federal funds rate to 1 percent by the end of summer. It's currently hovering near zero. Other Fed presidents have stated that they are “uncomfortable” with Federal Reserve Chairman Ben Bernanke's use of “extended period” as it is applied to low rates.
The bottom line is, when the Federal Reserve starts raising the federal funds rate – the influential rate at which banks lend to each other – mortgage rates won't be far behind.
Up, Up, But Not Quite Away
We were expecting a little more, but at least it's trending in the right direction. We are speaking of the employment report, which showed payrolls rose by 431,000 last month.
That would be very good news, if not for the fact that 411,000 of the new hires were related to the census. Nevertheless, that still leaves a net positive for the private sector. The increase was enough to push the unemployment rate down to 9.7 percent (though some pundits argue the drop was really due to a lower participation rate).
You never want to read too much into a single month of data, but we remain encouraged: job growth and wages picked up from April to May, while the average workweek lengthened. And although moderate compared to past post-recessions, the recovery is looking more sustainable after consumer spending and business investment rose at a healthy pace in the first quarter.
Overall, we think this latest employment report provides another reason to act now in both the mortgage and housing markets.
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