Keeping you updated on the market!
For the week of
August 23, 2010
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MARKET RECAP
Charles Dickens famously begins A Tale of Two Cities with “It was the best of times, it was the worst of times.” Further into that first sentence, and keeping with the opposing theme, he writes “it was the spring of hope, and the winter of despair.” Dickens obviously wasn't referring to the housing market, but maybe the sentiment applies.
It just might be the best of times for some (discussed below), though the worst of times is more easily grasped. Look no further than homebuilders: a few are feeling like it is the worst of times, at least when gauging sentiment. On that front, the housing market index fell for a third-consecutive month in August, posting at 13. To put current sentiment in perspective, a reading above 50 indicates more builders view sales conditions positively. The index hasn't seen 50 in more than three years.
Not surprisingly, homebuilders are expressing the same concerns that most of us are expressing: they sense that the economy, in general, and the job market, in particular, are losing traction. The trend in job creation is particularly worrisome. Weekly jobless claims continue their upward climb, posting a 2.4 percent increase for the week ended August 14 to hit a nine-month high.
The news wasn't all cold porridge and damp weather, though. Housing starts in July posted a modest comeback, rising 1.7 percent, to an annualized pace of 546,000 units. Granted, the gain was due primarily to a technical rebound in the multifamily component, but it's still good news nonetheless. As for the single-family component, it slipped slightly on both starts and permits.
At least mortgage rates continue to help keep the affordability quotient high. Rates did rise slightly across the board this past week, but they remain near multi-decade lows. That said, we continue to advise –yet again – not to wait on either a refinance or a purchase. We still see too much complacency in the market: borrowers thinking that low rates are going to be around forever. They won't, and they can rise in a hurry.
We understand that frustration is keeping many potential borrowers on the sidelines. On the one hand, they read about federal programs aimed at boosting home sales and refinances, and then on the other hand, they face the reality of Fannie Mae's and Freddie Mac's lending standards. Our advice: Try anyway. Borrowers are often surprised (pleasantly) that solutions really do exist.
More Solutions We'd Like to See
For many mortgage-loan and housing investors, the current market just might be the best of times, particularly for those investors pejoratively known as “vulture” investors – investors who seek value in distressed situations.
In one incarnation, vulture investors acquire mortgage loans at a deep discount and then renegotiate terms with the borrower to repay at a substantial discount. For example, if investors pay $100,000 for a loan with a $200,000 balance due, they might negotiate a $140,000 balance with the borrower.
It's an obvious win-win situation: the investor still makes money on his investment and the homeowner still keeps his home, with lower payments and a reduced balance. What's more, cutting the loan balance might be the most effective way to motivate borrowers to resume payments, because it gives them more hope of eventually owning the home.
Over the past two years, less than $25 billion of delinquent mortgages have been sold to “vulture” investors. This represents only 0.25 percent of US home loans outstanding, according to the Wall Street Journal. But the percentage is likely to grow as banks try to clean up their books before year end.
Let's hope that's the case, because vulture investors aren't as ugly as the name implies. In fact, they might be a real beauty for us, clearing the market much more expediently of unwanted inventory than either the big banks or the federal government.
Wednesday, August 25, 2010
Monday, August 16, 2010
Mortgage Market for Aug. 16, 2010
August 16, 2010
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MARKET RECAP
Since the beginning of the year, we've been saying the housing recovery is predicated on a jobs recovery. And although we've been encouraged that we've been making progress on the jobs front in recent months, the latest weekly unemployment-insurance claims news leaves us a little concerned – with claims growing to a six-month high of 484,000. We'd like to say it's an anomaly, but the four-week average has been moving up as well. Unfortunately, this trend doesn't bode well for the August employment report.
We can take some comfort knowing that foreclosure filings dropped 9.7 percent in July, compared to the same year-ago period, to post a second-consecutive month of year-over-year declines, according to RealtyTrac. Nevertheless, there were over 325,000 properties that received a filing, which marks the 17th-consecutive month that foreclosure activity exceeded the 300,000 level. The good news is that the trend remains mostly down in the top-ten metropolitan-statistical areas RealtyTrac follows and that the usual suspects – Nevada , Arizona , and Florida – continue to skew the data.
Even though job growth is weakening, we still think home prices will remain stable. The NAR reported that the median price for resales of single-family homes increased in 100 of the 155 metropolitan areas it tracks, with the national median price for a single-family home posting at $176,900 in the second quarter of 2010, a 1.5 percent gain compared to the second quarter of 2009.
We'd be remiss not to mention the obvious: the NAR's report included a rush to take advantage of expiring federal tax credits. This artificial stimulus has a few pessimistic market watchers expecting home prices to ease in subsequent months. To be sure, the NAR's third-quarter report could show some price easing, but recent monthly price data from Case-Shiller and the Federal Housing Finance Authority suggest, if not an up trend, at least a stable pricing environment in most metropolitan areas.
Mortgage rates, in contrast, are in an obvious downtrend. We regularly see the 30-year fixed-rate mortgage quoted in the 4.25 percent vicinity (with points and no risk adjustments), and the 15-year fixed-rate loan regularly quoted in the 3.75 percent-to-4.00 percent range.
So why the relentless downtrend in mortgage rates? The most recent decline came courtesy of a rush to buy Treasury 10-year notes, which pushed their yield down to a 16-month low. (Treasury yields influence mortgage rates.) In addition, Federal Reserve officials announced plans to buy $18 billion of Treasury debt and Treasury Inflation Protected Securities through mid-September. These purchases could further constrict Treasury yields; thus, helping keep mortgage rates low – likely through the end of summer.
What Does Warren Think?
We are speaking of Warren Buffett of course, Omaha , Nebraska 's legendary investing sage. In August 2009, Mr. Buffett penned a New York Times op-ed warning that lawmakers will be tempted to let the Federal Reserve print money (an inflationary, usually interest-rate raising strategy) to deal with the growing national debt.
Today, Mr. Buffett is taking no chances. He recently shortened the duration of the portfolio of bonds held by Berkshire Hathaway (investors shorten bond duration when they expect inflation, lengthen it when they expect deflation), the company in which he serves as CEO. In short, Mr. Buffett is expecting inflation, not deflation, to be the overriding economic concern in the not-too-distant future.
Mr. Buffet has been right, in that the Fed has printed more – a lot more – money over the past year, but so far has done so with impunity. But it's worth keeping in mind that within a system as complex and as unwieldy as our national economy, inflation doesn't just pop up when expected; the timing is unpredictable, and it will likely happen faster than the market anticipates. Therefore, we still don't believe procrastinating for lower rates is a worthwhile strategy, nor do we believe it's a worthwhile strategy to bet against someone who has been so often right as Warren Buffett.
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--------------------------------------------------------------------------------
MARKET RECAP
Since the beginning of the year, we've been saying the housing recovery is predicated on a jobs recovery. And although we've been encouraged that we've been making progress on the jobs front in recent months, the latest weekly unemployment-insurance claims news leaves us a little concerned – with claims growing to a six-month high of 484,000. We'd like to say it's an anomaly, but the four-week average has been moving up as well. Unfortunately, this trend doesn't bode well for the August employment report.
We can take some comfort knowing that foreclosure filings dropped 9.7 percent in July, compared to the same year-ago period, to post a second-consecutive month of year-over-year declines, according to RealtyTrac. Nevertheless, there were over 325,000 properties that received a filing, which marks the 17th-consecutive month that foreclosure activity exceeded the 300,000 level. The good news is that the trend remains mostly down in the top-ten metropolitan-statistical areas RealtyTrac follows and that the usual suspects – Nevada , Arizona , and Florida – continue to skew the data.
Even though job growth is weakening, we still think home prices will remain stable. The NAR reported that the median price for resales of single-family homes increased in 100 of the 155 metropolitan areas it tracks, with the national median price for a single-family home posting at $176,900 in the second quarter of 2010, a 1.5 percent gain compared to the second quarter of 2009.
We'd be remiss not to mention the obvious: the NAR's report included a rush to take advantage of expiring federal tax credits. This artificial stimulus has a few pessimistic market watchers expecting home prices to ease in subsequent months. To be sure, the NAR's third-quarter report could show some price easing, but recent monthly price data from Case-Shiller and the Federal Housing Finance Authority suggest, if not an up trend, at least a stable pricing environment in most metropolitan areas.
Mortgage rates, in contrast, are in an obvious downtrend. We regularly see the 30-year fixed-rate mortgage quoted in the 4.25 percent vicinity (with points and no risk adjustments), and the 15-year fixed-rate loan regularly quoted in the 3.75 percent-to-4.00 percent range.
So why the relentless downtrend in mortgage rates? The most recent decline came courtesy of a rush to buy Treasury 10-year notes, which pushed their yield down to a 16-month low. (Treasury yields influence mortgage rates.) In addition, Federal Reserve officials announced plans to buy $18 billion of Treasury debt and Treasury Inflation Protected Securities through mid-September. These purchases could further constrict Treasury yields; thus, helping keep mortgage rates low – likely through the end of summer.
What Does Warren Think?
We are speaking of Warren Buffett of course, Omaha , Nebraska 's legendary investing sage. In August 2009, Mr. Buffett penned a New York Times op-ed warning that lawmakers will be tempted to let the Federal Reserve print money (an inflationary, usually interest-rate raising strategy) to deal with the growing national debt.
Today, Mr. Buffett is taking no chances. He recently shortened the duration of the portfolio of bonds held by Berkshire Hathaway (investors shorten bond duration when they expect inflation, lengthen it when they expect deflation), the company in which he serves as CEO. In short, Mr. Buffett is expecting inflation, not deflation, to be the overriding economic concern in the not-too-distant future.
Mr. Buffet has been right, in that the Fed has printed more – a lot more – money over the past year, but so far has done so with impunity. But it's worth keeping in mind that within a system as complex and as unwieldy as our national economy, inflation doesn't just pop up when expected; the timing is unpredictable, and it will likely happen faster than the market anticipates. Therefore, we still don't believe procrastinating for lower rates is a worthwhile strategy, nor do we believe it's a worthwhile strategy to bet against someone who has been so often right as Warren Buffett.
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