Keeping you updated on the market!
For the week of
September 13, 2010
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MARKET RECAP
Thanks to the Labor Day holiday, little housing news hit the wires this past week. But the dearth of hard data gave bloggers and pundits more time to voice their opinions.
At Housingwire.com, real estate data provider Clear Capital reported that home prices gained 5.7 percent over the three months ending in August. That would appear to be good news, but the analysts at Clear Capital were quick to note that price growth has slowed and will drop next year, possibly dropping below 2009 levels.
It's worth noting that Clear Capital's 5.7 percent gain is a national average. Real estate is local, and becoming even more so. Clear Capital noted that with the various government incentives, residential real estate nationally tended to move in the same proportions in the same direction. That's no longer the case. Today, we are seeing real estate respond more to the vagaries of local markets than to national trends. In other words, prices could weaken nationally, but that doesn't preclude local markets from stabilizing and even appreciating. After all, it takes only one outlier to skew an average. (For example, if Warren Buffett, you, and eight of your closest friends were in a room, the average net worth of each person in that room would exceed $5 billion.)
Meanwhile, over at the New York Times, various bloggers of various reputations were lamenting that markets still aren't clearing at today's prices, which means prices must continue to fall. The logic appears sound: lower prices do stimulate demand and will clear inventory. But that logic is more applicable to trade-value goods – goods that are produced to be sold. Housing is different; it has a use-value component (at least existing homes do). Most of us buy a house as a dwelling, not as good to trade. If we don't like the price when we consider selling, we're more likely to remove our house from the market, thus lowering supply, which, in turn, tends to stabilize and raise prices.
In short, no one knows where housing prices will be this time next year. We think they will correlate negatively with the unemployment rate: if the rate drops, prices will rise and vice versa.
We also think mortgage rates will correlate negatively with the unemployment rate. As the unemployment rate drops, mortgage rates will move higher. Granted, that doesn't seem to be much of a concern today, with the unemployment rate stubbornly holding at 9.6 percent, but things can change in a hurry (on one bullish employment report or one spike in the consumer price index), which is why it's worth remembering that sub-five percent 30-year fixed-rate mortgages are the anomaly, not the norm.
The Perspective from the Great White North
Sometimes it's good to get an outside perspective of things, which is what the Financial Post, a Canadian national newspaper, provided a week ago. While a pile-up of weak US economic data has turned domestic consumer and investor sentiment sour over the past few weeks, the view from north of the border is that things aren't really that bad down here.
Indeed, many money managers in Canada are taking a hard look at our markets and investing more of their money. The smart money managers (it's worth noting that Canada avoided the banking implosion that rocked the United States and Europe ) are taking their time to analyze the news. After weighing some of the disappointing data of recent weeks, including weak jobs and home sales numbers, against more positive indicators such as the latest ISM survey, they have seized the opportunity to buy assets on the cheap.
While there is no question that the US economy has stalled and growth moving forward will be modest, many Canadians are convinced that the recovery is sustainable and the chance of a double dip is low. Perhaps we should heed their business acumen and consider the opportunities that have presented themselves.
Monday, September 13, 2010
Tuesday, September 7, 2010
The Housing Market
Keeping you updated on the market! For the week of
September 6, 2010
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MARKET RECAP
Most people would agree that it's best to maintain an even keel – don't get too up or too down about circumstances. That advice is particularly pertinent when following the weekly housing and mortgage data. The most recent fortnight serves as a perfect example: Last week, the data were mostly down; this week, the data are mostly up.
This week, the S&P Case-Shiller home price index posted a 1 percent rise in June, with 18 of 20 metropolitan areas posting price increases. The Case-Shiller index has been relatively steady over the past few months, and that's encouraging, but we need to keep in mind that the index will be presenting a post-tax-credit market going forward, so we wouldn't be surprised to see some price easing, as long as the mix of homes sold hasn't substantially changed.
This week also gave us news that the number of buyers who signed contracts to purchase existing homes rose in July, with the Pending Home Sales Index rising 5.2 percent to 79.4. The optimist in us believes this could lead to an increase in existing-home sales in September, but the pessimist in us still sees a double-digit months supply for some time.
On the other hand, “some time” might not necessarily be a long time. Economist Karl Case (of the Case-Shiller home price index) provided a useful (if not obvious) perspective on just how affordable houses are these days. In short, Case notes that four years ago, the monthly payment on a $300,000 house with 20 percent down and a mortgage rate of 6.6 percent was $1,533. Today that $300,000 house would sell (on average) for $213,000 and a 30-year fixed-rate mortgage with 20 percent down would carry a rate of about 4.2 percent and a monthly payment of $833. What's more, the 20-percent down payment would be knocked down to $42,600 from $60,000.
Case makes another cogent point in noting that in a given year, the number of completed sales is about 4 percent to 5 percent of the housing stock. Therefore, it doesn’t require a large number of buyers to change the overall direction of the market. That's a point we've been making over the past year. And even though sentiment hasn't turned for the better, it's worth noting that it can turn on a dime.
We've also noted that mortgage rates are apt to turn on a dime. To be sure, rates seem to post new lows each week, but the drops have been marginally incremental in many cases. At this point, we think it's more of a game of chicken – holding out for small return at big risk – than anything else. New data, like Friday's employment report, which showed a better-than-expected net loss of 54,000 jobs (mostly temporary census workers) while the private sector added a better-than-expected 67,000 new jobs, can easily produce dime-turning moments.
. A More Sensible Solution
Franklin Roosevelt famously said in his 1932 inaugural address “the only thing we have to fear is fear itself.” Roosevelt went on to define fear as “nameless, unreasoning, unjustified terror.”
Fear is one emotion holding back the housing market today. In this case, though, it isn't nameless, unreasoning or unjustified. It's really a fear of potential conflicts. The New York Times reported how a maze of government incentives and regulations are working against each other and Fed policy to keep a floor from forming in the market. In short, one incentive for one segment of the market tends to counteract the progress in another segment.
More market participation is one incentive the government could provide that wouldn't hamper any segment. More demand is the best way to soak up excess supply and stabilize prices.
We think more flexible underwriting standards would be the most inclusive and effective way toward achieving that goal. Convincing Freddie Mac, Fannie Mae, and FHA to jettison FICO scores might be a good start. The past couple years have roughed up the FICO scores for many potential borrowers who would be good credit risks today. Focusing on the basics, such as sufficient residual income and adequate reserves to cover loss of job or increase in liabilities, can be just as insightful as FICO scores at vetting lending risk while at the same time expanding demand.
September 6, 2010
--------------------------------------------------------------------------------
MARKET RECAP
Most people would agree that it's best to maintain an even keel – don't get too up or too down about circumstances. That advice is particularly pertinent when following the weekly housing and mortgage data. The most recent fortnight serves as a perfect example: Last week, the data were mostly down; this week, the data are mostly up.
This week, the S&P Case-Shiller home price index posted a 1 percent rise in June, with 18 of 20 metropolitan areas posting price increases. The Case-Shiller index has been relatively steady over the past few months, and that's encouraging, but we need to keep in mind that the index will be presenting a post-tax-credit market going forward, so we wouldn't be surprised to see some price easing, as long as the mix of homes sold hasn't substantially changed.
This week also gave us news that the number of buyers who signed contracts to purchase existing homes rose in July, with the Pending Home Sales Index rising 5.2 percent to 79.4. The optimist in us believes this could lead to an increase in existing-home sales in September, but the pessimist in us still sees a double-digit months supply for some time.
On the other hand, “some time” might not necessarily be a long time. Economist Karl Case (of the Case-Shiller home price index) provided a useful (if not obvious) perspective on just how affordable houses are these days. In short, Case notes that four years ago, the monthly payment on a $300,000 house with 20 percent down and a mortgage rate of 6.6 percent was $1,533. Today that $300,000 house would sell (on average) for $213,000 and a 30-year fixed-rate mortgage with 20 percent down would carry a rate of about 4.2 percent and a monthly payment of $833. What's more, the 20-percent down payment would be knocked down to $42,600 from $60,000.
Case makes another cogent point in noting that in a given year, the number of completed sales is about 4 percent to 5 percent of the housing stock. Therefore, it doesn’t require a large number of buyers to change the overall direction of the market. That's a point we've been making over the past year. And even though sentiment hasn't turned for the better, it's worth noting that it can turn on a dime.
We've also noted that mortgage rates are apt to turn on a dime. To be sure, rates seem to post new lows each week, but the drops have been marginally incremental in many cases. At this point, we think it's more of a game of chicken – holding out for small return at big risk – than anything else. New data, like Friday's employment report, which showed a better-than-expected net loss of 54,000 jobs (mostly temporary census workers) while the private sector added a better-than-expected 67,000 new jobs, can easily produce dime-turning moments.
. A More Sensible Solution
Franklin Roosevelt famously said in his 1932 inaugural address “the only thing we have to fear is fear itself.” Roosevelt went on to define fear as “nameless, unreasoning, unjustified terror.”
Fear is one emotion holding back the housing market today. In this case, though, it isn't nameless, unreasoning or unjustified. It's really a fear of potential conflicts. The New York Times reported how a maze of government incentives and regulations are working against each other and Fed policy to keep a floor from forming in the market. In short, one incentive for one segment of the market tends to counteract the progress in another segment.
More market participation is one incentive the government could provide that wouldn't hamper any segment. More demand is the best way to soak up excess supply and stabilize prices.
We think more flexible underwriting standards would be the most inclusive and effective way toward achieving that goal. Convincing Freddie Mac, Fannie Mae, and FHA to jettison FICO scores might be a good start. The past couple years have roughed up the FICO scores for many potential borrowers who would be good credit risks today. Focusing on the basics, such as sufficient residual income and adequate reserves to cover loss of job or increase in liabilities, can be just as insightful as FICO scores at vetting lending risk while at the same time expanding demand.
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