When transactions are your livelihood, it can be difficult to muster a smile when there are fewer of them. There were fewer transactions in existing-home sales, which fell 3.8 percent to a 4.8 million annualized rate in May. Supply on the market, at 3.72 million units, is falling, but not enough relative to the sales pace, as inventory rose to 9.3 months versus April's 9.0 months.
Price stabilization was the positive takeaway, with the median sales price rising to $166,500. Another plus is that sales of single-family homes, the central component in the report, fell at a slower rate at 3.2 percent. Floods and tornado-ravaging storms in the Midwest were mitigating factors. Blaming the weather is often the easy way out, but this time it appears valid.
Sales of new houses also fell for the first time in three months, by 2.1 percent to a 319,000-unit annualized pace in May, showing that the industry continues to struggle to gain momentum. The good news is that prices continue to rise, with the median price inching up to $222,600 from $217,000 in April, while inventory continues to fall, with supply dipping to 6.2 months from 6.3 months.
Sales are down, but prices are up, which suggests to us that the days of simply giving away homes are over (even with the putative 1.8 million homes in shadow inventory). MacroMarkets, an economic data compiler, surveyed real estate experts on home-price trends. The consensus estimate was for an average annual growth rate of 2 percent, which MacroMarkets co-founder Robert Shiller opined “will not inspire a lot of consumer confidence.”
We disagree, because price growth isn't price contraction. Two percent average-annual growth on a $200,000 home means the home is worth more than $220,000 after five years. What's more, home equity will grow as the mortgage is amortized. Five years is a long time, and no one can know with certainty what the average annual rate of appreciation will be. Given the low price of homes today, though, we would not be surprised to see homes appreciate at a rate greater than 2 percent annually.
Now, we would like to see mortgage rates start to rise. Without artificial support from the Federal Reserve, interest rates would naturally move higher. That's not bad; the market needs to get back to equilibrium – with more private mortgage money and private mortgage-backed securities, so we can have more choices and more lending alternatives. A rising-rate environment also implies that there are other positive things happening in the economy.
Mortgage rates continue to hold historical lows. Low rates coupled with stable-to-rising prices in many parts of the country point to a near-perfect storm of a market for buying residential or investment real estate.
A Market for Leveraged Real Estate
When the National Association of Realtors released its existing home sales report on Tuesday, it reported cash sales, which accounted for 30 percent of all transactions, up from 25 percent last year. Prior to 2010, the NAR did not routinely report all cash purchases, since they were an insignificant part of the market.
Many of the all-cash purchases were from vulture investors – investors seeking a bargain-basement deal. Vulture investors aren't bad; to the contrary, they help clear the market of excess inventory. Our issue is that there should be more leveraged buyers, because most of us can't afford to pay all cash, unless it is for a fixer-upper in the sorriest section of town.
That aside, we think leveraging real estate from a low cost basis is the more savvy financial option anyway. Mortgaging real estate in what we expect to be a rising housing market enhances return. It also enables the purchaser to buy more house for the money.
Not surprisingly, our soapbox issue is lending diversity. Yes, we have leeway to help many borrowers, but we have the knowledge and expertise to help a lot more. If the tethers were loosened on mortgage lending, we think the housing market would be opened to a far wider array of potential buyers, and that would help the market recovery immensely.
Wednesday, June 29, 2011
Monday, June 13, 2011
Negative equity pushed aside home price trends as the hot topic this past week. CoreLogic, which had a lot to say the previous week on prices, also had a lot to say about negative equity.
CoreLogic reports that 22.7 percent of all U.S. homeowners owed more than what they owned at the end of the first quarter of 2011 (which is actually an improvement from the 23.1 percent posted in the first quarter of 2010). CoreLogic states that 10.9 million borrowers are underwater and another 2.5 million borrowers are in a near-negative equity position, defined as having less than 5-percent positive equity.
We are obviously on the inflated end of the negative-equity scale, considering that CoreLogic was reporting 7.5 million borrowers were in a negative-equity position in 2008. However, do elevated negative-equity levels mean we are looking at another surge in foreclosures? Not according to the Federal Reserve Bank of Boston , which studied the relationship between the two. Based on data from the 1990s, the Boston Fed found that fewer than 10 percent of homeowners underwater lost their homes to foreclosure.
Self-interest, not surprisingly, was the deciding factor. Fed economists found that borrowers with negative equity who had ample liquid wealth would usually find it in their economic interest to stay in their homes. Economic interest is usually tied to the job market and regional economic growth. The good news is that job and economic growth for the country as a whole continue to trend higher. The bad news is that they haven't been trending quite as high in the past month.
As for mortgage rates, they continue to trend lower. Rates dropped again this past week to hit their lows for the year. We've obviously been on the wrong side of this bet over the past couple months. Given the Federal Reserve's massive injection of money into the banking system, the rising costs of many consumer staples, and the expectations for economic growth, we thought we would be looking at rates a quarter to a half percentage point higher than what we had at the start of the year.
The economic variables noted above have been overpowered by debt worries in Europe and the various crises in the Middle East , which have many investors flocking to the haven of U.S. government debt. The influx of money into U.S. debt markets coupled with slack aggregate mortgage demand has pushed mortgage rates lower. That said, high money levels, rising prices, and economic growth remain, which is to say that they are capable of moving to the foreground and pressuring interest rates higher in coming months.
STILL SOLD ON REAL ESTATE
Over the past six months, we've proselytized frequently on why we think real estate is today's best investment. The Wall Street Journal, in an article titled “Why It's Time To Buy,” encapsulates and expounds many of the reasons we've previously stated on why we think real estate is such a wonderful opportunity.
For one, the ratio of home prices to income is now 20-percent lower than the 15-year average through 2010, and 12-percent lower than the 1989-2004 average, according to Moody's Analytics. Moody's data also show that household formation increased to nearly 950,000 last year, and should average 1.2 million over the next decade. Greater demand leads to higher prices, and, eventually, to greater new-home supply.
The short-term outlook looks discouraging, though: job growth has slowed and foreclosures and inventory still weigh on pricing. However, longer-term – three-to-five years out – job growth won't be sluggish and inventory will have returned to more normal levels. In other words, buyers today will likely be looking at positive equity in the not-to-distant future. This is an important message to convey to our buy-side clients, many of whom remain hesitant to make what will likely be a very profitable investment.
CoreLogic reports that 22.7 percent of all U.S. homeowners owed more than what they owned at the end of the first quarter of 2011 (which is actually an improvement from the 23.1 percent posted in the first quarter of 2010). CoreLogic states that 10.9 million borrowers are underwater and another 2.5 million borrowers are in a near-negative equity position, defined as having less than 5-percent positive equity.
We are obviously on the inflated end of the negative-equity scale, considering that CoreLogic was reporting 7.5 million borrowers were in a negative-equity position in 2008. However, do elevated negative-equity levels mean we are looking at another surge in foreclosures? Not according to the Federal Reserve Bank of Boston , which studied the relationship between the two. Based on data from the 1990s, the Boston Fed found that fewer than 10 percent of homeowners underwater lost their homes to foreclosure.
Self-interest, not surprisingly, was the deciding factor. Fed economists found that borrowers with negative equity who had ample liquid wealth would usually find it in their economic interest to stay in their homes. Economic interest is usually tied to the job market and regional economic growth. The good news is that job and economic growth for the country as a whole continue to trend higher. The bad news is that they haven't been trending quite as high in the past month.
As for mortgage rates, they continue to trend lower. Rates dropped again this past week to hit their lows for the year. We've obviously been on the wrong side of this bet over the past couple months. Given the Federal Reserve's massive injection of money into the banking system, the rising costs of many consumer staples, and the expectations for economic growth, we thought we would be looking at rates a quarter to a half percentage point higher than what we had at the start of the year.
The economic variables noted above have been overpowered by debt worries in Europe and the various crises in the Middle East , which have many investors flocking to the haven of U.S. government debt. The influx of money into U.S. debt markets coupled with slack aggregate mortgage demand has pushed mortgage rates lower. That said, high money levels, rising prices, and economic growth remain, which is to say that they are capable of moving to the foreground and pressuring interest rates higher in coming months.
STILL SOLD ON REAL ESTATE
Over the past six months, we've proselytized frequently on why we think real estate is today's best investment. The Wall Street Journal, in an article titled “Why It's Time To Buy,” encapsulates and expounds many of the reasons we've previously stated on why we think real estate is such a wonderful opportunity.
For one, the ratio of home prices to income is now 20-percent lower than the 15-year average through 2010, and 12-percent lower than the 1989-2004 average, according to Moody's Analytics. Moody's data also show that household formation increased to nearly 950,000 last year, and should average 1.2 million over the next decade. Greater demand leads to higher prices, and, eventually, to greater new-home supply.
The short-term outlook looks discouraging, though: job growth has slowed and foreclosures and inventory still weigh on pricing. However, longer-term – three-to-five years out – job growth won't be sluggish and inventory will have returned to more normal levels. In other words, buyers today will likely be looking at positive equity in the not-to-distant future. This is an important message to convey to our buy-side clients, many of whom remain hesitant to make what will likely be a very profitable investment.
Monday, April 18, 2011
Buying Rental Properties...Is Now The Time?
Though it might not always feel like it, the economy is recovering. That's what the Federal Reserve tells us anyway (and we agree). The Fed’s recent reading of regional economies for the February and March period suggest continued economic growth, albeit at a moderate pace.
As for housing, the Fed says it continues to lag other sectors, but housing is showing signs of improvement. Realtor.com reports that inventory currently sits 9.8 percent above March 2010 levels. At the same time, the number of households searching for homes is growing, suggesting that demand may be strengthening in relationship to overall supply.
Freddie Mac also thinks demand is picking up heading into the spring home-buying season. Its data show that the rate of inventory growth is slowing: the median age of housing inventory in March sits at 160 days, down 2.4 percent from February.
We don't expect a miraculous turnaround in housing, just a steady, plodding improvement that is drawn along, hand-in-hand, with the overall economy.
Small business is always a reliable compass on the direction of the economy. On that front, the Federal Reserve reports that small businesses are more optimistic about their sales prospects and their ability to secure financing on more favorable terms. More sales, in turn, mean more investment in plants and inventory and more employee hires. As we are quick to say: as the economy goes, so will go housing.
A big concern remains, though. Will rising interest rates be the monkey wrench that grinds the recovery gears to a screeching halt? We don't think so, because as long as the economy continues to grow and more people continued to be hired, interest in housing will grow.
That said, rising mortgage rates are in our future, because more inflation is in our future. In fact, inflation is already here. Producer price inflation is running at a 5.7-percent annual clip. We expect the rate at which producers will pass their higher costs onto consumers will accelerate in coming months, and we are not alone in that sentiment: Wal-Mart CEO Bill Simon recently stated, “Inflation is going to be serious. We are seeing cost increases starting to come through at a pretty rapid rate.”
For now, mortgage rates remain subdued; namely due to economic and political uncertainties in other parts of the world. Events in the foreign debt markets, the disaster in Japan and the upheaval in the Middle East have helped keep rates low over the past few weeks. However, today's upheaval will be short lived and pressure for higher rates will continue to rise.
Is Rental Real Estate the Next Big Opportunity?
It could very well be. Residential r ental vacancy rates are below the 10-percent mark, where they had been lodged for most of the past three years. Peggy Alford, president of Rent.com, predicts that by 2012 the vacancy rate will hover at a mere 5 percent.
Since 2002, rental rates have been flat, and down of late (inflation-adjusted). If Rent.com projections are anywhere close to expectations, we could see a rise in rents of 15 percent over the next two years. That would be a significant reversal of fortune: rent hikes have averaged less than 1 percent annually over the past decade, according to Commerce Department statistics.
Pent up demand appears real: More than 1.2 million young adults moved back with their parents from 2005 to 2010, according to John Burns Real Estate Consulting. Many others doubled up together. Now that the recession is over, many of these young people are ready to find new living quarters, mostly as renters. Where there are renters, there must be property owners (even if they are not occupants). As rental rates increase, the capitalized market value of property increases too – that means rising real estate prices.
We've frequently noted that opportunities always abound, regardless of the perceived direness of current circumstances. The outlook in the rentals is another reason we think they abound in the residential real estate market.
As for housing, the Fed says it continues to lag other sectors, but housing is showing signs of improvement. Realtor.com reports that inventory currently sits 9.8 percent above March 2010 levels. At the same time, the number of households searching for homes is growing, suggesting that demand may be strengthening in relationship to overall supply.
Freddie Mac also thinks demand is picking up heading into the spring home-buying season. Its data show that the rate of inventory growth is slowing: the median age of housing inventory in March sits at 160 days, down 2.4 percent from February.
We don't expect a miraculous turnaround in housing, just a steady, plodding improvement that is drawn along, hand-in-hand, with the overall economy.
Small business is always a reliable compass on the direction of the economy. On that front, the Federal Reserve reports that small businesses are more optimistic about their sales prospects and their ability to secure financing on more favorable terms. More sales, in turn, mean more investment in plants and inventory and more employee hires. As we are quick to say: as the economy goes, so will go housing.
A big concern remains, though. Will rising interest rates be the monkey wrench that grinds the recovery gears to a screeching halt? We don't think so, because as long as the economy continues to grow and more people continued to be hired, interest in housing will grow.
That said, rising mortgage rates are in our future, because more inflation is in our future. In fact, inflation is already here. Producer price inflation is running at a 5.7-percent annual clip. We expect the rate at which producers will pass their higher costs onto consumers will accelerate in coming months, and we are not alone in that sentiment: Wal-Mart CEO Bill Simon recently stated, “Inflation is going to be serious. We are seeing cost increases starting to come through at a pretty rapid rate.”
For now, mortgage rates remain subdued; namely due to economic and political uncertainties in other parts of the world. Events in the foreign debt markets, the disaster in Japan and the upheaval in the Middle East have helped keep rates low over the past few weeks. However, today's upheaval will be short lived and pressure for higher rates will continue to rise.
Is Rental Real Estate the Next Big Opportunity?
It could very well be. Residential r ental vacancy rates are below the 10-percent mark, where they had been lodged for most of the past three years. Peggy Alford, president of Rent.com, predicts that by 2012 the vacancy rate will hover at a mere 5 percent.
Since 2002, rental rates have been flat, and down of late (inflation-adjusted). If Rent.com projections are anywhere close to expectations, we could see a rise in rents of 15 percent over the next two years. That would be a significant reversal of fortune: rent hikes have averaged less than 1 percent annually over the past decade, according to Commerce Department statistics.
Pent up demand appears real: More than 1.2 million young adults moved back with their parents from 2005 to 2010, according to John Burns Real Estate Consulting. Many others doubled up together. Now that the recession is over, many of these young people are ready to find new living quarters, mostly as renters. Where there are renters, there must be property owners (even if they are not occupants). As rental rates increase, the capitalized market value of property increases too – that means rising real estate prices.
We've frequently noted that opportunities always abound, regardless of the perceived direness of current circumstances. The outlook in the rentals is another reason we think they abound in the residential real estate market.
Sunday, April 3, 2011
Keeping you updated on the market!
For the week of
April 4, 2011
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MARKET RECAP
The monthly S&P/Case-Shiller home-price index always attracts a good deal of media attention. This month's edition was no different. In fact, because of a strong pessimistic bias, it probably drew more attention than it should have.
Once again, falling home prices elevated fears of a double-dip recession in the home-buying market and a longer slog toward recovery than once anticipated. According to Case-Shiller, the average sale price of single-family homes in 20 major metropolitan areas fell 1 percent from December and 3.1 percent from a year ago. Only two areas – San Diego and Washington – recorded price increases year-over-year.
We offer our usual caveats with the Case-Shiller index: For one, it's two months in arrears. Recent data on home prices have been less dour. In addition, 20 metropolitan areas is hardly a complete picture. Real estate is much more localized than it was during the recession. Even within major metropolitan areas, we see differences in pricing trends. So, yes, on a national level prices have fallen, and have fallen 31 percent since the 2006 highs. However, prices, like mortgage rates, can go only so low, and there isn't much room on the downside, as many local markets have already shown.
It's also worth noting that the pending home sales index rose 2.1 percent in February, which is encouraging when considering how miserable the weather was in February. What's more, the pending home sales index has trended higher since bottoming in June, with contract activity 20 percent above the low point. More activity isn't a price panacea, but it helps.
Shadow inventory has been the counterclaim, because it continues to apply downward pricing pressure. The good news is that shadow inventory is improving. CoreLogic reports that 1.8 million properties make up the shadow inventory of foreclosures, but that's down 11 percent from a year ago. We expect this inventory to dissipate further, thanks to robust economic growth and a pickup in job creation and wage growth.
Low financing rates will also help the liquidation process. A quote below 5 percent on a 30-year fixed-rate mortgage remains the norm. To be honest, the norm has held longer than we had expected. That's a good thing, to be sure, but it does tend to induce complacency and procrastination at times.
Buyers these days have to balance high inventory levels against the likelihood of higher mortgage rates. Excess supply is a persuasive argument to house shop at a leisurely pace. However, just because rising prices aren't an immediate concern doesn't mean rising mortgage rates aren't. We noted in last week's commentary that buyers have the best of both worlds – low mortgage rates and low home prices. We doubt we will be saying that this time next year.
Although rates have headed higher, but not as high as many, including us, would have thought. Granted, we were right in saying that rates holding under 4 percent were unlikely, but that was an easy call. Four percent simply isn't sustainable when inflation is the norm.
Inflation is the reason we still think rates are headed higher. Many market watchers have been lulled into a false sense of security because consumer and producer prices – though rising in the past two months – haven't spiked out of control.
There are many variables that go into prices – productivity gains, technology, consumer demand – all of which can offset the increase in money supply that has occurred over the past two years. It can't last forever. If we peruse any long-term chart of consumer and producer prices, we see that prices rise persistently higher. As a corollary, when we peruse a chart of the US dollar, we see a persistent drop in value.
Eventually, all the new money in circulation will begin chasing consumer goods, and then we will see an increase in price inflation. We expect the bond market to anticipate this event, which is why we think mortgage rates will head higher before price inflation becomes more of a front-burner issue.
For the week of
April 4, 2011
--------------------------------------------------------------------------------
MARKET RECAP
The monthly S&P/Case-Shiller home-price index always attracts a good deal of media attention. This month's edition was no different. In fact, because of a strong pessimistic bias, it probably drew more attention than it should have.
Once again, falling home prices elevated fears of a double-dip recession in the home-buying market and a longer slog toward recovery than once anticipated. According to Case-Shiller, the average sale price of single-family homes in 20 major metropolitan areas fell 1 percent from December and 3.1 percent from a year ago. Only two areas – San Diego and Washington – recorded price increases year-over-year.
We offer our usual caveats with the Case-Shiller index: For one, it's two months in arrears. Recent data on home prices have been less dour. In addition, 20 metropolitan areas is hardly a complete picture. Real estate is much more localized than it was during the recession. Even within major metropolitan areas, we see differences in pricing trends. So, yes, on a national level prices have fallen, and have fallen 31 percent since the 2006 highs. However, prices, like mortgage rates, can go only so low, and there isn't much room on the downside, as many local markets have already shown.
It's also worth noting that the pending home sales index rose 2.1 percent in February, which is encouraging when considering how miserable the weather was in February. What's more, the pending home sales index has trended higher since bottoming in June, with contract activity 20 percent above the low point. More activity isn't a price panacea, but it helps.
Shadow inventory has been the counterclaim, because it continues to apply downward pricing pressure. The good news is that shadow inventory is improving. CoreLogic reports that 1.8 million properties make up the shadow inventory of foreclosures, but that's down 11 percent from a year ago. We expect this inventory to dissipate further, thanks to robust economic growth and a pickup in job creation and wage growth.
Low financing rates will also help the liquidation process. A quote below 5 percent on a 30-year fixed-rate mortgage remains the norm. To be honest, the norm has held longer than we had expected. That's a good thing, to be sure, but it does tend to induce complacency and procrastination at times.
Buyers these days have to balance high inventory levels against the likelihood of higher mortgage rates. Excess supply is a persuasive argument to house shop at a leisurely pace. However, just because rising prices aren't an immediate concern doesn't mean rising mortgage rates aren't. We noted in last week's commentary that buyers have the best of both worlds – low mortgage rates and low home prices. We doubt we will be saying that this time next year.
Although rates have headed higher, but not as high as many, including us, would have thought. Granted, we were right in saying that rates holding under 4 percent were unlikely, but that was an easy call. Four percent simply isn't sustainable when inflation is the norm.
Inflation is the reason we still think rates are headed higher. Many market watchers have been lulled into a false sense of security because consumer and producer prices – though rising in the past two months – haven't spiked out of control.
There are many variables that go into prices – productivity gains, technology, consumer demand – all of which can offset the increase in money supply that has occurred over the past two years. It can't last forever. If we peruse any long-term chart of consumer and producer prices, we see that prices rise persistently higher. As a corollary, when we peruse a chart of the US dollar, we see a persistent drop in value.
Eventually, all the new money in circulation will begin chasing consumer goods, and then we will see an increase in price inflation. We expect the bond market to anticipate this event, which is why we think mortgage rates will head higher before price inflation becomes more of a front-burner issue.
Monday, March 21, 2011
Owning a home is still a great place to invest!
MARKET RECAP
The headline was ominous: “Housing starts drop 22.5 percent in February.” And for that matter, so were the numbers: the annualized pace of starts tumbled to 479,000 units – a 101,000 shortfall compared to the consensus forecast for 580,000 units.
However, when we delve into the facts, we find that things aren't necessarily bad. For one, January's spike in starts was way above the trend, so some reversal should have been expected. Second, winter months are notoriously volatile, and starts were hampered by severe weather in many parts of the country.
Homebuilders are still struggling, to be sure, but they might not be struggling as badly as the headlines suggest. In fact, homebuilders are actually feeling more upbeat these days. The March housing market index posted at 17, the best posting since the buyer-stimulus tax credits expired last April.
It is also worth noting that the housing market index is skewed by the small builder makeup of the National Association of Home Builders. With smaller builders feeling the heat more acutely than their larger brethren, and with their heavy inclusion in this index, the housing market index has a natural bias to accentuate the negative. Over recent months, many executives of the larger, publicly traded builders have offered news of better ordering trends than is reflected by the housing market index.
The recent trend in mortgage rates could further lift homebuilder sentiment. Investors have been pouring money into Treasury securities and mortgage-backed bonds in recent weeks because of Middle-East unrest and the Japan disaster. That means yields on Treasuries and mortgage-backed bonds have dropped, and so too have mortgage rates. Quotes below 5 percent for the 30-year fixed-rate loan were the norm across the nation this past week.
We don't expect it to last, though. Events in the Middle East will pass and fears over Japan 's ability to extract itself from its predicament will abate. The bigger issue, at least for mortgage rates, is price inflation. On that front, the embers are not only stoked but also starting to flame. Producer price inflation is red hot, posting a 1.6 percent increase in February. Year-over-year producer prices have jumped to a worrisome rate of 5.8 percent. On the consumer side, prices jumped 0.5 percent in February, following a 0.4 percent boost in January. Year-over-year, overall consumer-price inflation has increased 2.2 percent.
Energy costs have been the main driver of price increases, and they can be volatile. Nevertheless, a recovering economy tends to increase sustained-energy demand, so we doubt we will see much improvement in energy prices through the summer months. Bottom line: now is a very good time to take advantage of the lull in mortgage rates.
Warren Revisited
A couple weeks ago, we mentioned Warren Buffett and his investments in housing. We think it is worthwhile to revisit Mr. Buffett, because many of his views on housing and the mortgage market are in line with what we've been saying for the past year.
On the issues of FICO scores and employment, Mr. Buffett writes, “Your banker will tell you that people with such scores are generally regarded as questionable credits. Nevertheless, our [mortgage] portfolio has performed well during conditions of stress. Our borrowers get in trouble when they lose their jobs, have health problems, get divorced, etc.”
On home ownership, Mr. Buffett offers the following, “Home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates. All things considered, the third best investment I ever made was the purchase of my home...For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come.”
Admittedly, it might be self serving for us to selectively pick quotes that affirm our convictions, though there are at least two tangential insights worth pondering: First, mortgage markets would be more efficient and more borrower-friendly if they relied less on mechanical scoring and more on broker and banker acumen (which is why we look forward to more private-investor participation). Second, home ownership is far from dead like so many pundits were saying last year. In fact, we would be surprised not to see a home-buying Renaissance emerge in the near future.
The headline was ominous: “Housing starts drop 22.5 percent in February.” And for that matter, so were the numbers: the annualized pace of starts tumbled to 479,000 units – a 101,000 shortfall compared to the consensus forecast for 580,000 units.
However, when we delve into the facts, we find that things aren't necessarily bad. For one, January's spike in starts was way above the trend, so some reversal should have been expected. Second, winter months are notoriously volatile, and starts were hampered by severe weather in many parts of the country.
Homebuilders are still struggling, to be sure, but they might not be struggling as badly as the headlines suggest. In fact, homebuilders are actually feeling more upbeat these days. The March housing market index posted at 17, the best posting since the buyer-stimulus tax credits expired last April.
It is also worth noting that the housing market index is skewed by the small builder makeup of the National Association of Home Builders. With smaller builders feeling the heat more acutely than their larger brethren, and with their heavy inclusion in this index, the housing market index has a natural bias to accentuate the negative. Over recent months, many executives of the larger, publicly traded builders have offered news of better ordering trends than is reflected by the housing market index.
The recent trend in mortgage rates could further lift homebuilder sentiment. Investors have been pouring money into Treasury securities and mortgage-backed bonds in recent weeks because of Middle-East unrest and the Japan disaster. That means yields on Treasuries and mortgage-backed bonds have dropped, and so too have mortgage rates. Quotes below 5 percent for the 30-year fixed-rate loan were the norm across the nation this past week.
We don't expect it to last, though. Events in the Middle East will pass and fears over Japan 's ability to extract itself from its predicament will abate. The bigger issue, at least for mortgage rates, is price inflation. On that front, the embers are not only stoked but also starting to flame. Producer price inflation is red hot, posting a 1.6 percent increase in February. Year-over-year producer prices have jumped to a worrisome rate of 5.8 percent. On the consumer side, prices jumped 0.5 percent in February, following a 0.4 percent boost in January. Year-over-year, overall consumer-price inflation has increased 2.2 percent.
Energy costs have been the main driver of price increases, and they can be volatile. Nevertheless, a recovering economy tends to increase sustained-energy demand, so we doubt we will see much improvement in energy prices through the summer months. Bottom line: now is a very good time to take advantage of the lull in mortgage rates.
Warren Revisited
A couple weeks ago, we mentioned Warren Buffett and his investments in housing. We think it is worthwhile to revisit Mr. Buffett, because many of his views on housing and the mortgage market are in line with what we've been saying for the past year.
On the issues of FICO scores and employment, Mr. Buffett writes, “Your banker will tell you that people with such scores are generally regarded as questionable credits. Nevertheless, our [mortgage] portfolio has performed well during conditions of stress. Our borrowers get in trouble when they lose their jobs, have health problems, get divorced, etc.”
On home ownership, Mr. Buffett offers the following, “Home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates. All things considered, the third best investment I ever made was the purchase of my home...For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come.”
Admittedly, it might be self serving for us to selectively pick quotes that affirm our convictions, though there are at least two tangential insights worth pondering: First, mortgage markets would be more efficient and more borrower-friendly if they relied less on mechanical scoring and more on broker and banker acumen (which is why we look forward to more private-investor participation). Second, home ownership is far from dead like so many pundits were saying last year. In fact, we would be surprised not to see a home-buying Renaissance emerge in the near future.
Monday, March 14, 2011
Where are mortgage rates going?
March 14, 2011
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MARKET RECAP
Some people just can't help themselves; that is, they can't help but see the glass as half empty. RealtyTrac is finding itself slotted into that category more often than not. For instance, RealtyTrac reported that lenders filed foreclosures on or repossessed 27 percent fewer properties in February than in January, the lowest in three years and the biggest yearly decrease since 2005.
This sounds like good news to us. However, the overly pessimistic spin from RealtyTrac was that the slowdown was due mostly to mortgage servicers being disrupted by processing issues. "While a small part of February’s decrease can be attributed to it being a short month and bad weather, the bottom line is that the industry is in the midst of a major overhaul that has severely restricted its capacity to process foreclosures," said RealtyTrac CEO James Saccacio.
We don't want to disparage Mr. Saccacio, because there is some truth to what he says. Yes, the weather was bad in February, and, yes, mortgage servicers are trying to right a listing ship. But real improvement is there nonetheless – both in the overall economy and housing. We mentioned last week the significant improvement in the employment numbers, which is a direct reflection on the state of the economy. As employment improves so will the housing market, despite the intimidating numbers on foreclosures and inventory that worry economists.
These same economists tend to be drawn to repetitive language. “Shadow inventory” is part of that language, and the term was recently invoked by the Director of Research at Radar Logic, who referred to the concern of “severe supply of overhang” and “shadow inventory of homes in default or foreclosure.” We are compelled to ask the obvious: Because we are all aware of the problem, is shadow inventory really in the shadows anymore? What's known is rarely the issue; it's the unknown that's the real issue.
Radar Logic went on to report that its price-per-square-foot index, covering 25 metro areas, is near an eight-year low. At $183.18 a square foot, the index price is 34 percent lower than its peak price of $278.32 a square foot, set in June 2007.
The text in which Radar Logic's data were delivered hinted at pessimism, but it's not pessimistic at all. This is good news; heavy discounting is over and recovery is much more likely than not. Today's market is a buyer's market, to be sure, but markets aren't the Harlem Globetrotters versus the Washington Generals (the hapless team offered as a sacrifice). The market will turn to favor sellers who bought at a low-cost basis. In other words, today's buyers.
In the meantime, today's mortgage rates remain favorable to all. Rates have held steady for the past month, and they are still lower than they were this time last year. This time next year, though, we would be very surprised not to be saying the opposite.
What Bill Says About the Bond Market
Bill Gross isn't as famous as Warren Buffett, though he is just as influential to bond investors. Gross runs the world's largest bond fund, PIMCO, and has been very successful over the years. Therefore, it's worthwhile to mention that his fund has eliminated all government-related debt, because Gross believes domestic interest rates are going higher. He says that yields on Treasury securities are about 150 basis points (1.5 percentage points) too low when viewed from a historical perspective.
This is important insight to borrowers. Mortgage rates, by way of mortgage-bond prices, track the yield on 10-year Treasury notes. The historical spread between the two is roughly two percentage points. The current 10-year Treasury note is yielding around 3.4 percent. Add 150 basis points and the same note would yield 4.9 percent. Add two percentage points to that, and we get 6.9-percent 30-year fixed-rate mortgages.
Over the past year, the 30-year fixed-rate mortgage has been around 160 basis points above 10-year Treasury yields, but that's due mostly to Federal Reserve intervention. However, the Fed isn't going to be intervening into perpetuity. When it stops, the spread will likely return to historical norms. So will mortgage rates.
--------------------------------------------------------------------------------
MARKET RECAP
Some people just can't help themselves; that is, they can't help but see the glass as half empty. RealtyTrac is finding itself slotted into that category more often than not. For instance, RealtyTrac reported that lenders filed foreclosures on or repossessed 27 percent fewer properties in February than in January, the lowest in three years and the biggest yearly decrease since 2005.
This sounds like good news to us. However, the overly pessimistic spin from RealtyTrac was that the slowdown was due mostly to mortgage servicers being disrupted by processing issues. "While a small part of February’s decrease can be attributed to it being a short month and bad weather, the bottom line is that the industry is in the midst of a major overhaul that has severely restricted its capacity to process foreclosures," said RealtyTrac CEO James Saccacio.
We don't want to disparage Mr. Saccacio, because there is some truth to what he says. Yes, the weather was bad in February, and, yes, mortgage servicers are trying to right a listing ship. But real improvement is there nonetheless – both in the overall economy and housing. We mentioned last week the significant improvement in the employment numbers, which is a direct reflection on the state of the economy. As employment improves so will the housing market, despite the intimidating numbers on foreclosures and inventory that worry economists.
These same economists tend to be drawn to repetitive language. “Shadow inventory” is part of that language, and the term was recently invoked by the Director of Research at Radar Logic, who referred to the concern of “severe supply of overhang” and “shadow inventory of homes in default or foreclosure.” We are compelled to ask the obvious: Because we are all aware of the problem, is shadow inventory really in the shadows anymore? What's known is rarely the issue; it's the unknown that's the real issue.
Radar Logic went on to report that its price-per-square-foot index, covering 25 metro areas, is near an eight-year low. At $183.18 a square foot, the index price is 34 percent lower than its peak price of $278.32 a square foot, set in June 2007.
The text in which Radar Logic's data were delivered hinted at pessimism, but it's not pessimistic at all. This is good news; heavy discounting is over and recovery is much more likely than not. Today's market is a buyer's market, to be sure, but markets aren't the Harlem Globetrotters versus the Washington Generals (the hapless team offered as a sacrifice). The market will turn to favor sellers who bought at a low-cost basis. In other words, today's buyers.
In the meantime, today's mortgage rates remain favorable to all. Rates have held steady for the past month, and they are still lower than they were this time last year. This time next year, though, we would be very surprised not to be saying the opposite.
What Bill Says About the Bond Market
Bill Gross isn't as famous as Warren Buffett, though he is just as influential to bond investors. Gross runs the world's largest bond fund, PIMCO, and has been very successful over the years. Therefore, it's worthwhile to mention that his fund has eliminated all government-related debt, because Gross believes domestic interest rates are going higher. He says that yields on Treasury securities are about 150 basis points (1.5 percentage points) too low when viewed from a historical perspective.
This is important insight to borrowers. Mortgage rates, by way of mortgage-bond prices, track the yield on 10-year Treasury notes. The historical spread between the two is roughly two percentage points. The current 10-year Treasury note is yielding around 3.4 percent. Add 150 basis points and the same note would yield 4.9 percent. Add two percentage points to that, and we get 6.9-percent 30-year fixed-rate mortgages.
Over the past year, the 30-year fixed-rate mortgage has been around 160 basis points above 10-year Treasury yields, but that's due mostly to Federal Reserve intervention. However, the Fed isn't going to be intervening into perpetuity. When it stops, the spread will likely return to historical norms. So will mortgage rates.
Monday, March 7, 2011
Should We Buy Now?
MARKET RECAP
There wasn't much new to report on housing this week, which is probably a good thing. Most of the news has been tepid at best lately, making it seem as though we are stuck in some sort of holding pattern.
The pending home sales index is the latest example. The index fell 2.8 percent in January to 88.9, which suggests sluggish existing home sales in February and March. This really isn't news; February was a sluggish month for sales in many parts of the country, but most of us knew that. Weather for the first two months of the year was unusually snowy and cold across the nation. To state the obvious: no one house-hunts in a snow storm.
Inventory and regressing prices continue to be popular laments, but ones we think are overblown. Both are an outgrowth of a sluggish employment market, but that's improving. In fact, based on February employment numbers, the economy and the employment market might be improving better than most economists had forecast. Private-sector employers reported that payrolls rose by 192,000 last month, dropping the official unemployment rate to 8.9 percent, the first time in nearly two years it has been below 9 percent.
For the past five months, the trend in new hires has been volatile, but up. We expect hiring to continue to accelerate in coming months. In the early stages of a recovery, payroll gains tend to surge to 250,000 per month compared to the mature stage, where monthly payrolls gains of 150,000 are the norm.
More people working mean more robust markets all around. Jobs are natural curatives. Many of the problems of bloated housing inventory and foreclosures aren’t about negative equity; they're about paying the bills. Work enables us to do that. Someone might not like the idea of his house being worth less than the balance on the mortgage, but the mortgage will be paid if the job allows it.
The mortgage market will likely feel an immediate impact from rising employment. Economic recoveries tend to be inflationary, especially when interest rates are set as low as they are today. Inflation will likely become a greater concern heading into the prime buying season.
The Treasury Department could also be a factor in the mortgage market. Its initiatives to move the market away from government-sponsored agencies Fannie Mae and Freddie Mac to private markets are gaining support among politicians. We think the initiatives are good for the stability and long-term viability of both the housing and mortgage markets. Just as important, private markets are more flexible and better able to develop products that meet consumer needs. The downside is that private markets are also more expensive.
What Warren Says About Housing
It's that time of the year when über-investor Warren Buffett releases his annual letter to shareholders of Berkshire Hathaway. The letter is, of course, of interest to Berkshire shareholders, but it's also of interest to just about anyone who invests. After all, Warren Buffett is the greatest investor of the past 50 years.
Buffett isn't right all the time, but he's right enough, which is why our interest was piqued by his comments on housing. Says Buffett, "A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some point."
It's an understatement, and one not particularly prescient, but it's one worth noting anyway, because Buffett has been investing in Berkshire 's housing-related properties. Acme Brick acquired the leading manufacturer of brick in Alabama at a cost of $50 million; Johns Manville is building a $55 million roofing membrane plant in Ohio ; Shaw Industries (carpeting) has planned $200 million worth of spending on its U.S.-based plant and equipment. Berkshire is also a big investor in USG Corp., the Sheetrock Company, and it owns Clayton Homes .
It's nice to say a housing recovery is on the way, but it's even nicer to see someone of Warren Buffett's standing backing the recovery with his money.
There wasn't much new to report on housing this week, which is probably a good thing. Most of the news has been tepid at best lately, making it seem as though we are stuck in some sort of holding pattern.
The pending home sales index is the latest example. The index fell 2.8 percent in January to 88.9, which suggests sluggish existing home sales in February and March. This really isn't news; February was a sluggish month for sales in many parts of the country, but most of us knew that. Weather for the first two months of the year was unusually snowy and cold across the nation. To state the obvious: no one house-hunts in a snow storm.
Inventory and regressing prices continue to be popular laments, but ones we think are overblown. Both are an outgrowth of a sluggish employment market, but that's improving. In fact, based on February employment numbers, the economy and the employment market might be improving better than most economists had forecast. Private-sector employers reported that payrolls rose by 192,000 last month, dropping the official unemployment rate to 8.9 percent, the first time in nearly two years it has been below 9 percent.
For the past five months, the trend in new hires has been volatile, but up. We expect hiring to continue to accelerate in coming months. In the early stages of a recovery, payroll gains tend to surge to 250,000 per month compared to the mature stage, where monthly payrolls gains of 150,000 are the norm.
More people working mean more robust markets all around. Jobs are natural curatives. Many of the problems of bloated housing inventory and foreclosures aren’t about negative equity; they're about paying the bills. Work enables us to do that. Someone might not like the idea of his house being worth less than the balance on the mortgage, but the mortgage will be paid if the job allows it.
The mortgage market will likely feel an immediate impact from rising employment. Economic recoveries tend to be inflationary, especially when interest rates are set as low as they are today. Inflation will likely become a greater concern heading into the prime buying season.
The Treasury Department could also be a factor in the mortgage market. Its initiatives to move the market away from government-sponsored agencies Fannie Mae and Freddie Mac to private markets are gaining support among politicians. We think the initiatives are good for the stability and long-term viability of both the housing and mortgage markets. Just as important, private markets are more flexible and better able to develop products that meet consumer needs. The downside is that private markets are also more expensive.
What Warren Says About Housing
It's that time of the year when über-investor Warren Buffett releases his annual letter to shareholders of Berkshire Hathaway. The letter is, of course, of interest to Berkshire shareholders, but it's also of interest to just about anyone who invests. After all, Warren Buffett is the greatest investor of the past 50 years.
Buffett isn't right all the time, but he's right enough, which is why our interest was piqued by his comments on housing. Says Buffett, "A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some point."
It's an understatement, and one not particularly prescient, but it's one worth noting anyway, because Buffett has been investing in Berkshire 's housing-related properties. Acme Brick acquired the leading manufacturer of brick in Alabama at a cost of $50 million; Johns Manville is building a $55 million roofing membrane plant in Ohio ; Shaw Industries (carpeting) has planned $200 million worth of spending on its U.S.-based plant and equipment. Berkshire is also a big investor in USG Corp., the Sheetrock Company, and it owns Clayton Homes .
It's nice to say a housing recovery is on the way, but it's even nicer to see someone of Warren Buffett's standing backing the recovery with his money.
Monday, February 21, 2011
Why Wait to Buy?
MARKET RECAP
We knew it was only a matter of time, and now it appears the time, if not here, is close at hand. We are speaking of inflation, which is more real and tactual these days. Producer prices, which have been climbing over the past seven months, continued their march north. In January, the producer price index spiked 0.8 percent over December. However, the core number, which excludes energy and food prices, was even more disconcerting, posting a 0.5 percent gain – the most since October 2008.
Rising prices on the producer side are eventually felt on the consumer side, so it was no surprise that consumer prices also rose in January, with the consumer price index posting a 0.4 percent increase. Consumer prices still appear subdued, posting a 1.6 percent increase for the past 12 months, but the data include big-ticket and infrequently purchased items, such as automobiles and airline tickets. Most of us are aware that day-to-day purchase prices are increasing at a higher rate.
This latest data on price inflation points to upward pressure on mortgage rates; even though rates held steady this past week. Is there a reasonable estimate to how high rates will go? PMI Mortgage Insurance sees the 30-year fixed-rate mortgage hitting 5.5 percent by the end of this year and then increasing to 6.5 percent by the end of 2012. (For the record, PMI also predicted the 30-year loan would average 5.5 percent at the end of 2010.)
We think 5.5 to 5.75 percent is a reasonable range, with a few caveats, of course, starting with the Federal Reserve. Fed Chairman Ben Bernanke has said that the Fed will keep buying Treasury securities through June to support the economy, but a couple Fed officials have argued that keeping the easy-money policy intact for too long could crimp the Fed's ability to bring inflation under control. The truth is that timing these things is obvious in theory, but very difficult in practice.
However, even if we are wrong on price inflation and about the Fed's ability to optimally manage the money supply, other factors could keep mortgage rates moving higher. Pressure is building to wind down Fannie Mae and Freddie Mac, which have guaranteed more than nine out of every 10 mortgages since the financial meltdown. The White House has proposed increasing Fannie and Freddie's prices, phasing in a 10-percent down-payment requirement, and winding down their investment portfolio. These initiatives would put private capital and government capital on a more equal footing.
We are in favor of more private investment, because it means more diversity in product offerings and more latitude in pricing and qualifying mortgage loans. Of course, the downside will be higher price loans, but that won't be so bad as long as the economy and the job market continue to improve. A 5-percent 30-year fixed-rate loan is nice, but a broader market of qualified applicants in a 5.5-percent loan market would be even nicer.
Bubble Trouble?
We don't think so, but Robert Shiller of the Case-Shiller home price index does. Mr. Shiller recently cautioned that housing prices are likely to “stay in the doldrums for years,” but he added an alternative scenario where a growing speculative component could cause prices to overshoot on the upside.
It is an unlikely scenario; rarely do consecutive bubbles form in the same market. Stocks that burst with the bursting of the tech bubble in 2001 are an obvious example. In addition, the common value matrices – such as median-income to median-home prices and rent to home-price appreciation are where they were around 2002. To be sure, they are still a little high by historical measures, but they are much more reasonable compared to 2006 – the apex of the housing bubble.
The bigger concern is that the number of buyers who could buy won't. The New York Times recently interviewed Dan Cunningham, a 41-year-old renter. Here's what Mr. Cunningham told the Times reporter: “We would love to have a house; I have more than enough for a down payment. I’m pre-approved for a loan. But I have to have confidence it’s not going to lose another 20 percent.” The Times also reported that Cunningham plans to wait until he sees prices rising before making any offers.
And that's the mindset we need to overcome. People like Dan Cunningham more often than not wait too long and find themselves chasing a less favorable, more expensive market. That's an important insight, and it's one the Dan Cunninghams of the world need to know.
We knew it was only a matter of time, and now it appears the time, if not here, is close at hand. We are speaking of inflation, which is more real and tactual these days. Producer prices, which have been climbing over the past seven months, continued their march north. In January, the producer price index spiked 0.8 percent over December. However, the core number, which excludes energy and food prices, was even more disconcerting, posting a 0.5 percent gain – the most since October 2008.
Rising prices on the producer side are eventually felt on the consumer side, so it was no surprise that consumer prices also rose in January, with the consumer price index posting a 0.4 percent increase. Consumer prices still appear subdued, posting a 1.6 percent increase for the past 12 months, but the data include big-ticket and infrequently purchased items, such as automobiles and airline tickets. Most of us are aware that day-to-day purchase prices are increasing at a higher rate.
This latest data on price inflation points to upward pressure on mortgage rates; even though rates held steady this past week. Is there a reasonable estimate to how high rates will go? PMI Mortgage Insurance sees the 30-year fixed-rate mortgage hitting 5.5 percent by the end of this year and then increasing to 6.5 percent by the end of 2012. (For the record, PMI also predicted the 30-year loan would average 5.5 percent at the end of 2010.)
We think 5.5 to 5.75 percent is a reasonable range, with a few caveats, of course, starting with the Federal Reserve. Fed Chairman Ben Bernanke has said that the Fed will keep buying Treasury securities through June to support the economy, but a couple Fed officials have argued that keeping the easy-money policy intact for too long could crimp the Fed's ability to bring inflation under control. The truth is that timing these things is obvious in theory, but very difficult in practice.
However, even if we are wrong on price inflation and about the Fed's ability to optimally manage the money supply, other factors could keep mortgage rates moving higher. Pressure is building to wind down Fannie Mae and Freddie Mac, which have guaranteed more than nine out of every 10 mortgages since the financial meltdown. The White House has proposed increasing Fannie and Freddie's prices, phasing in a 10-percent down-payment requirement, and winding down their investment portfolio. These initiatives would put private capital and government capital on a more equal footing.
We are in favor of more private investment, because it means more diversity in product offerings and more latitude in pricing and qualifying mortgage loans. Of course, the downside will be higher price loans, but that won't be so bad as long as the economy and the job market continue to improve. A 5-percent 30-year fixed-rate loan is nice, but a broader market of qualified applicants in a 5.5-percent loan market would be even nicer.
Bubble Trouble?
We don't think so, but Robert Shiller of the Case-Shiller home price index does. Mr. Shiller recently cautioned that housing prices are likely to “stay in the doldrums for years,” but he added an alternative scenario where a growing speculative component could cause prices to overshoot on the upside.
It is an unlikely scenario; rarely do consecutive bubbles form in the same market. Stocks that burst with the bursting of the tech bubble in 2001 are an obvious example. In addition, the common value matrices – such as median-income to median-home prices and rent to home-price appreciation are where they were around 2002. To be sure, they are still a little high by historical measures, but they are much more reasonable compared to 2006 – the apex of the housing bubble.
The bigger concern is that the number of buyers who could buy won't. The New York Times recently interviewed Dan Cunningham, a 41-year-old renter. Here's what Mr. Cunningham told the Times reporter: “We would love to have a house; I have more than enough for a down payment. I’m pre-approved for a loan. But I have to have confidence it’s not going to lose another 20 percent.” The Times also reported that Cunningham plans to wait until he sees prices rising before making any offers.
And that's the mindset we need to overcome. People like Dan Cunningham more often than not wait too long and find themselves chasing a less favorable, more expensive market. That's an important insight, and it's one the Dan Cunninghams of the world need to know.
Monday, February 14, 2011
Update for Feb. 14, 2011
February 14, 2011
--------------------------------------------------------------------------------
MARKET RECAP
When housing-sector pundits spoke last week, they spoke mostly about foreclosures and pricing. RealtyTrac reported that lenders repossessed over 78,000 properties in January, down 11 percent from a year ago, but up 12 percent from December, thus implying that any improvement was an anomaly due solely to the foreclosure moratorium. Therefore, we should expect more inventory to hit the market, and more inventory means lower prices if demand fails to keep pace.
That wouldn't be good news; Zillow reported that home values posted their largest quarter-over-quarter decline, 2.6 percent, since the beginning of 2009. Zillow's price data corroborates recent data from Case-Shiller and the Federal Housing Finance Agency, which shows prices are backsliding.
That fear is that sliding prices mean an increase in negative equity, which is already a concern. Zillow reports that 27 percent of borrowers were upside down on their loans in the fourth quarter of 2010, up from 23 percent in the third quarter. An increase in negative equity could mean more foreclosures, which means more inventory, which means more pricing pressure. You get the picture; it's a vicious circle.
However, it might not be all that vicious. We are talking about national averages, after all. In the past, we've offered the example of Warren Buffett, Bill Gates and 10 of us ordinary-folk in a room. If you were to average the wealth, it would suggest that everyone in the room is a billionaire, which is why averages can mislead. CoreLogic produced a table of the counties with the most negative equity, and it was heavily concentrated in Nevada , Florida , and the mid-inland regions of California .
The national data might be alarming, but it is likely irrelevant to your neck of the woods. Take Denver , for example: The Denver metropolitan area reported that the median price for single-family homes increased 7.1 percent year-over-year in January, while listings increased 5.7 percent. Denver hardly resembles the national averages, which is the case for most local markets.
The mortgage market is another matter. Lending is homogeneous; there's not much difference between a prime 30-year fixed-rate loan in Texas and one in Pennsylvania . Supply and demand and sources of financing are unique variables, to be sure, but the differences tend to be less than 40 basis points. A lot of what happens nationally (and internationally, for that matter) influences prices locally.
That said, whether someone lives in Texas , Pennsylvania , or anywhere else, rates are moving higher. This past week they hit a 10-month high. We doubt that they will reverse course any time soon, given the outlook for economic improvement and the growing price-inflation threat. Any rate pullback is an invitation to lock.
Life Isn't Linear
People are naturally drawn to trends. We like to think that there is order in the world and that life progresses one step after another. For that reason, we are attracted to graphs that are neat and tidy and move left to right in an upward trajectory.
Unfortunately, life doesn't work that way. Life is two steps forward, one step back, with a step or two to the side. That's why it is important to keep the long term in mind, even though our daily lives are focused on the short term.
In the short term, it appears rates have gotten away from us and that national housing prices are falling. (As we've explained above, that's not as important as the media lead us to believe.) This short-term perception has undoubtedly kept many naive home shoppers out of the market.
However, real estate is a long-term proposition. Over the long term, real estate is a good deal, and never more so than when purchases are made in a temporarily price-depressed environment with very favorable financing rates (and 5-percent 30-year fixed-rate loans are very favorable). We've been repetitive on this sentiment over the past couple months, but only because it's worth repeating.
If you wish to unsubscribe, click on the link below and send the email. If this message was forwarded to you, please reply to the sender. Click Here To Unsubscribe
EQUAL HOUSING LENDER
This Newsletter is for informational purposes only. The information contained herein may not be applicable to every situation or jurisdiction and we urge you to consult your professional advisor prior to acting on information contained herein. The content, accuracy and opinions expressed herein are not verified or endorsed by the sponsor hereof.
--------------------------------------------------------------------------------
MARKET RECAP
When housing-sector pundits spoke last week, they spoke mostly about foreclosures and pricing. RealtyTrac reported that lenders repossessed over 78,000 properties in January, down 11 percent from a year ago, but up 12 percent from December, thus implying that any improvement was an anomaly due solely to the foreclosure moratorium. Therefore, we should expect more inventory to hit the market, and more inventory means lower prices if demand fails to keep pace.
That wouldn't be good news; Zillow reported that home values posted their largest quarter-over-quarter decline, 2.6 percent, since the beginning of 2009. Zillow's price data corroborates recent data from Case-Shiller and the Federal Housing Finance Agency, which shows prices are backsliding.
That fear is that sliding prices mean an increase in negative equity, which is already a concern. Zillow reports that 27 percent of borrowers were upside down on their loans in the fourth quarter of 2010, up from 23 percent in the third quarter. An increase in negative equity could mean more foreclosures, which means more inventory, which means more pricing pressure. You get the picture; it's a vicious circle.
However, it might not be all that vicious. We are talking about national averages, after all. In the past, we've offered the example of Warren Buffett, Bill Gates and 10 of us ordinary-folk in a room. If you were to average the wealth, it would suggest that everyone in the room is a billionaire, which is why averages can mislead. CoreLogic produced a table of the counties with the most negative equity, and it was heavily concentrated in Nevada , Florida , and the mid-inland regions of California .
The national data might be alarming, but it is likely irrelevant to your neck of the woods. Take Denver , for example: The Denver metropolitan area reported that the median price for single-family homes increased 7.1 percent year-over-year in January, while listings increased 5.7 percent. Denver hardly resembles the national averages, which is the case for most local markets.
The mortgage market is another matter. Lending is homogeneous; there's not much difference between a prime 30-year fixed-rate loan in Texas and one in Pennsylvania . Supply and demand and sources of financing are unique variables, to be sure, but the differences tend to be less than 40 basis points. A lot of what happens nationally (and internationally, for that matter) influences prices locally.
That said, whether someone lives in Texas , Pennsylvania , or anywhere else, rates are moving higher. This past week they hit a 10-month high. We doubt that they will reverse course any time soon, given the outlook for economic improvement and the growing price-inflation threat. Any rate pullback is an invitation to lock.
Life Isn't Linear
People are naturally drawn to trends. We like to think that there is order in the world and that life progresses one step after another. For that reason, we are attracted to graphs that are neat and tidy and move left to right in an upward trajectory.
Unfortunately, life doesn't work that way. Life is two steps forward, one step back, with a step or two to the side. That's why it is important to keep the long term in mind, even though our daily lives are focused on the short term.
In the short term, it appears rates have gotten away from us and that national housing prices are falling. (As we've explained above, that's not as important as the media lead us to believe.) This short-term perception has undoubtedly kept many naive home shoppers out of the market.
However, real estate is a long-term proposition. Over the long term, real estate is a good deal, and never more so than when purchases are made in a temporarily price-depressed environment with very favorable financing rates (and 5-percent 30-year fixed-rate loans are very favorable). We've been repetitive on this sentiment over the past couple months, but only because it's worth repeating.
If you wish to unsubscribe, click on the link below and send the email. If this message was forwarded to you, please reply to the sender. Click Here To Unsubscribe
EQUAL HOUSING LENDER
This Newsletter is for informational purposes only. The information contained herein may not be applicable to every situation or jurisdiction and we urge you to consult your professional advisor prior to acting on information contained herein. The content, accuracy and opinions expressed herein are not verified or endorsed by the sponsor hereof.
Sunday, February 6, 2011
Mortgage Market Update For February 7, 2011
MARKET RECAP
After getting off to a rough start in 2011, the data on housing has continued to turn for the better. This past week, Clear Capital's home price index showed that prices stopped declining in early January and increased for the first time since August. The change in prices, especially during a point in the year when sales are slow, is a sign that demand is returning. Even more encouraging, Clear Capital said that the slowing rate of sales of REO properties was the main reason for the price increase.
REO properties remain a market concern. We are all familiar with the distressed property overhang that weighs on prices. Clear Capital reports that in the fourth quarter of 2010, REO saturation increased 1.4 percent, but that is actually a drop from the 3.2 percent increase posted in the previous period. If the deceleration trend continues, Clear Capital says, home prices could be poised for future gains.
Of course, not everyone is on board with a rising-price environment. Fiserv expects home prices to decline another 5.5 percent nationally in 2011, though Fiserv also notes that three-fourths of the 375 metro areas it tracks will see prices stabilize by the end of the year, with all markets stabilizing by the end of 2012.
Our view continues to support more price-stabilization, with rising prices in certain locales. In fact, we expect that the most over built locales – Las Vegas , Phoenix , Central Florida – will see the most pricing improvement. There is no science behind our prognostication, just common sense. The sun-and-sand areas are still desirable, and they've suffered the most price depreciation since the financial crises began in 2007. We expect that they will likely post the best percentage improvement – albeit because they are coming over a very low base.
Mortgage rates moved off a very low base in the waning months of 2010, but they continue to hold steady, in that the prime 30-year fixed rate loan is still hovering in the 5-percent vicinity. Rates are better on some days than others, to be sure, but that's usually due to a surge in Treasury-security activity, which occurs when investors panic over some conflagration in a distant part of the world, most recently in Egypt .
However, conflagrations fade quickly and rates return to domestic influences, with inflation being the strongest influence. Price inflation is readily evident in oil, which has risen to over $100-a-barrel. Meld rising oil prices with growing consumer demand for all goods and services (an outgrowth of an improving economy) and an extraordinarily large money base and we are looking at the potential for wide-spread price inflation (which, by the way, will eventually become evident in housing prices).
The Power of Optimism
Our bias is toward optimism, and not because we like to indulge in wishful thinking. An optimistic outlook focuses the mind on searching for opportunities, which also tends to make obstacles that much easier to clear.
For the past year, we've been saying that opportunities abound: home prices are low, mortgage rates are low, the economy is recovering. That's good and bad news. Good in that the economy is improving, bad in that the best deals are fading away. For those with the courage to buy or invest when the popular financial media are predicting the end of the word (and fewer in the media are doing that these days), the rewards nearly always pan out over time.
And time is a key factor to focus on; real estate isn't about flipping, which is a niche market for sharp-penciled types who are obsessive about time-management, contractor-oversight, and cost control. Most of us aren't obsessive. But real estate still works. The key is to get in at a low-base price and finance at a low interest rate; positive cash flow is easier to generate (for investors) and price appreciation will likely be realized when it comes time to sell.
Deals are still available if you are willing to seek them in negative situations, because the long-run opportunities don't avail themselves when the outlook is the sunniest. Today, pessimistic commentators continue to lament what the foreclosure overhang is doing to the market. The optimistic actor, meanwhile, continues to focus on the opportunities the overhang is creating, because he knows the overhang and the opportunities will not last forever.
After getting off to a rough start in 2011, the data on housing has continued to turn for the better. This past week, Clear Capital's home price index showed that prices stopped declining in early January and increased for the first time since August. The change in prices, especially during a point in the year when sales are slow, is a sign that demand is returning. Even more encouraging, Clear Capital said that the slowing rate of sales of REO properties was the main reason for the price increase.
REO properties remain a market concern. We are all familiar with the distressed property overhang that weighs on prices. Clear Capital reports that in the fourth quarter of 2010, REO saturation increased 1.4 percent, but that is actually a drop from the 3.2 percent increase posted in the previous period. If the deceleration trend continues, Clear Capital says, home prices could be poised for future gains.
Of course, not everyone is on board with a rising-price environment. Fiserv expects home prices to decline another 5.5 percent nationally in 2011, though Fiserv also notes that three-fourths of the 375 metro areas it tracks will see prices stabilize by the end of the year, with all markets stabilizing by the end of 2012.
Our view continues to support more price-stabilization, with rising prices in certain locales. In fact, we expect that the most over built locales – Las Vegas , Phoenix , Central Florida – will see the most pricing improvement. There is no science behind our prognostication, just common sense. The sun-and-sand areas are still desirable, and they've suffered the most price depreciation since the financial crises began in 2007. We expect that they will likely post the best percentage improvement – albeit because they are coming over a very low base.
Mortgage rates moved off a very low base in the waning months of 2010, but they continue to hold steady, in that the prime 30-year fixed rate loan is still hovering in the 5-percent vicinity. Rates are better on some days than others, to be sure, but that's usually due to a surge in Treasury-security activity, which occurs when investors panic over some conflagration in a distant part of the world, most recently in Egypt .
However, conflagrations fade quickly and rates return to domestic influences, with inflation being the strongest influence. Price inflation is readily evident in oil, which has risen to over $100-a-barrel. Meld rising oil prices with growing consumer demand for all goods and services (an outgrowth of an improving economy) and an extraordinarily large money base and we are looking at the potential for wide-spread price inflation (which, by the way, will eventually become evident in housing prices).
The Power of Optimism
Our bias is toward optimism, and not because we like to indulge in wishful thinking. An optimistic outlook focuses the mind on searching for opportunities, which also tends to make obstacles that much easier to clear.
For the past year, we've been saying that opportunities abound: home prices are low, mortgage rates are low, the economy is recovering. That's good and bad news. Good in that the economy is improving, bad in that the best deals are fading away. For those with the courage to buy or invest when the popular financial media are predicting the end of the word (and fewer in the media are doing that these days), the rewards nearly always pan out over time.
And time is a key factor to focus on; real estate isn't about flipping, which is a niche market for sharp-penciled types who are obsessive about time-management, contractor-oversight, and cost control. Most of us aren't obsessive. But real estate still works. The key is to get in at a low-base price and finance at a low interest rate; positive cash flow is easier to generate (for investors) and price appreciation will likely be realized when it comes time to sell.
Deals are still available if you are willing to seek them in negative situations, because the long-run opportunities don't avail themselves when the outlook is the sunniest. Today, pessimistic commentators continue to lament what the foreclosure overhang is doing to the market. The optimistic actor, meanwhile, continues to focus on the opportunities the overhang is creating, because he knows the overhang and the opportunities will not last forever.
Wednesday, February 2, 2011
Mortgage Market for Jan. 31, 2011
Keeping you updated on the market!
For the week of
January 31, 2011
--------------------------------------------------------------------------------
MARKET RECAP
We hope we see marked improvement in the home-builder sentiment index on its next release, because the news on new home sales in December was better than just about anyone expected, jumping 18 percent to an annual unit rate of 329,000. What's more, supply came down and prices jumped. The former fell to 6.9 months, versus 8.4 months in November, and the latter jumped 12 percent to a median $241,500.
We did say “marked” and not “phenomenal.” As encouraging as the news on new-home sales was, it wasn't perfect. The fall off in purchase applications over the past few weeks points to a fall off in new-home sales for January. In addition, much of the improvement was concentrated in the West, not evenly distributed throughout the regions. Then again, it rarely is. Real estate is, after all, local.
Overall, though, we remain encouraged. This and the previous week's existing-home sales report is good news for housing. Now it's a matter of seeing if the winning streak can be strengthened and extended.
Some in the financial media speculated that the buying rush was tied to December's jump in mortgage rates, which encouraged home shoppers to hop off the fence and act. We tend to agree with the speculators. We've been saying over the past half-year that rising rates would be more stimulative than dissuasive. Expecting lower prices and then getting them over an extended period lulled people into an unwarranted sense of certainty and nonchalance. The rate hikes over the past two months have shocked the market back to reality and motivated many people to act.
Another shock could be forthcoming for price-deflation proponents. The S&P/Case-Shiller home price index showed a year-over-year price decline in November, with a 0.4 percent decline for the composite 10 index and an adjusted 1.6 percent decline for the composite 20 index. David Blitzer, chairman of the index committee at S&P, warned that "A double-dip could be confirmed before Spring.” Blitzer defined a double-dip as both the 10- and 20-city composite indexes setting new post-peak lows.
We are not so sure in light of December's data on median home prices. There is also the issue of money supply, which has increased dramatically over the past two years and is set to continue increasing this year. The Federal Reserve is confident it can manage any spike in inflation, but we remain circumspect. Inflation often works like pouring a new bottle of ketchup: You keep smacking the bottom of the bottle repeatedly and nothing comes out. You smack it again and find you have ketchup (and price increases) all over the place.
The prospect of sudden inflation is a primary reason we continually warn borrowers and buyers not to procrastinate. Mortgage rates continue to hold steady, and to us, that's an opportunity to act. However, the 30-year fixed-rate loan continues to parallel movement in the 10-year Treasury note, and the 10-year Treasury yield is itching to move higher.
Correlations between asset classes are always on the move and always changing: when one asset class gets hot, the others tend to cool. In case no one has noticed, the stock market is hot these days. In fact, the two leading stock-market benchmarks – the Dow Jones Industrial Average and the S&P 500 Index – are posting multi-year highs.
We broach this point to note that money invariably moves to the hot asset class, and in today's market, that's stocks. This money also invariable moves at the expense of the former hot asset class, and the former hot asset class is Treasury securities. As money leaves an asset class, the required expected return on that class rises to reflect its diminishing popularity and to entice money to return.
As we noted above, mortgage rates are tethered to Treasury rates. We also noted that inflation would get rates moving higher, but so will money moving away from Treasury securities into other asset classes. We think this notion of asset rotation is one more arrow in the quiver of those of us expecting higher mortgage rates in 2011.
.
For the week of
January 31, 2011
--------------------------------------------------------------------------------
MARKET RECAP
We hope we see marked improvement in the home-builder sentiment index on its next release, because the news on new home sales in December was better than just about anyone expected, jumping 18 percent to an annual unit rate of 329,000. What's more, supply came down and prices jumped. The former fell to 6.9 months, versus 8.4 months in November, and the latter jumped 12 percent to a median $241,500.
We did say “marked” and not “phenomenal.” As encouraging as the news on new-home sales was, it wasn't perfect. The fall off in purchase applications over the past few weeks points to a fall off in new-home sales for January. In addition, much of the improvement was concentrated in the West, not evenly distributed throughout the regions. Then again, it rarely is. Real estate is, after all, local.
Overall, though, we remain encouraged. This and the previous week's existing-home sales report is good news for housing. Now it's a matter of seeing if the winning streak can be strengthened and extended.
Some in the financial media speculated that the buying rush was tied to December's jump in mortgage rates, which encouraged home shoppers to hop off the fence and act. We tend to agree with the speculators. We've been saying over the past half-year that rising rates would be more stimulative than dissuasive. Expecting lower prices and then getting them over an extended period lulled people into an unwarranted sense of certainty and nonchalance. The rate hikes over the past two months have shocked the market back to reality and motivated many people to act.
Another shock could be forthcoming for price-deflation proponents. The S&P/Case-Shiller home price index showed a year-over-year price decline in November, with a 0.4 percent decline for the composite 10 index and an adjusted 1.6 percent decline for the composite 20 index. David Blitzer, chairman of the index committee at S&P, warned that "A double-dip could be confirmed before Spring.” Blitzer defined a double-dip as both the 10- and 20-city composite indexes setting new post-peak lows.
We are not so sure in light of December's data on median home prices. There is also the issue of money supply, which has increased dramatically over the past two years and is set to continue increasing this year. The Federal Reserve is confident it can manage any spike in inflation, but we remain circumspect. Inflation often works like pouring a new bottle of ketchup: You keep smacking the bottom of the bottle repeatedly and nothing comes out. You smack it again and find you have ketchup (and price increases) all over the place.
The prospect of sudden inflation is a primary reason we continually warn borrowers and buyers not to procrastinate. Mortgage rates continue to hold steady, and to us, that's an opportunity to act. However, the 30-year fixed-rate loan continues to parallel movement in the 10-year Treasury note, and the 10-year Treasury yield is itching to move higher.
Correlations between asset classes are always on the move and always changing: when one asset class gets hot, the others tend to cool. In case no one has noticed, the stock market is hot these days. In fact, the two leading stock-market benchmarks – the Dow Jones Industrial Average and the S&P 500 Index – are posting multi-year highs.
We broach this point to note that money invariably moves to the hot asset class, and in today's market, that's stocks. This money also invariable moves at the expense of the former hot asset class, and the former hot asset class is Treasury securities. As money leaves an asset class, the required expected return on that class rises to reflect its diminishing popularity and to entice money to return.
As we noted above, mortgage rates are tethered to Treasury rates. We also noted that inflation would get rates moving higher, but so will money moving away from Treasury securities into other asset classes. We think this notion of asset rotation is one more arrow in the quiver of those of us expecting higher mortgage rates in 2011.
.
Mortgage Market for Jan. 10, 2011
Keeping you updated on the market!
For the week of
January 10, 2011
--------------------------------------------------------------------------------
MARKET RECAP
Home prices are the leading concern as we begin the new year. Clear Capital reports that prices dropped 4.1 percent across the nation in 2010, and it was a volatile decline at that. Values declined 5.3 percent over the first 12 weeks of the year, then spiked 9.7 percent through mid-August, only to drop 9.4 percent through year's end. Clear Capital sees prices dropping another 3.9 percent through 2011.
Another analytics firm, Altos Research, also reports less-than-encouraging pricing news. According to Altos, home prices dropped 1.6 percent in December, with new listings actually hitting the market lower than that. The good news from Altos is that prices will “likely” increase modestly as we head into the spring season. Shadow inventory remains a concern, but Altos reports that inventories were cut nearly 6 percent in the 10 largest markets in December.
The latest spat of negative data doesn't mean we should throw in the towel on price stability, or that buyers should wait for lower prices before taking the dive into the housing pool. The heavy across-the-board discounting is over. Changes in prices going forward will be incremental and specific to local markets – some markets will see additional discounting, some won't.
What's more, markets are dynamic: money saved from any additional discounting could easily be offset by mortgage-rate increases. Goldman Sachs expects that the Federal Reserve will end its second round of quantitative easing in June, and that 10-year Treasury yields (a benchmark for 30-year mortgage rates) will climb to 3.75 percent by year-end, and then advance to 4.25 percent by the close of 2012. The historical average spread between a prime 30-year fixed-rate mortgage and the 10-year Treasury note is around two percentage points, which means if Goldman Sachs proves accurate on its prediction, we could be looking at 5.75 percent 30-year loans this year and 6.25 percent loans in 2012.
Of course, a forecast is no sure thing. In fact, forecasts are often wrong, but there are mitigating circumstances to consider. A majority of top decision-makers at the Federal Reserve believe that concerns over falling prices have eased and that inflation will gradually rise. Recent data support that belief: employment is improving – ADP Employer Services reports that 297,000 new private-sector jobs were created in December, triple the consensus estimate; manufacturing has expanded for 17-consecutive months; stocks continue to trend up; and rising food, energy, and commodity prices are stoking inflation fears.
Our advice remains the same as it has for the past two months: get the mortgage application in, and, unless you have a strong gambler's constitution, lock instead of playing the floating-rate game. We don't think borrowers will be giving up much. Let’s remember that we are still within 50-basis points of a 50-year low.
Let's Not Forget the Other Half
Actually, it's much more than half. Most media accounts are peppered with sad stories of people who are under water or who are facing foreclosure because of job loss or because they simply took on too much house and too much financing. The fact is that the vast majority of mortgagors have a job and are current on their payments.
Many of these folks are underwater, to be sure, but most are not, so there is still plenty of opportunity for plenty of people to buy, invest, or sell. While there is currently some slack in demand, reduced prices and low interest rates should keep home purchases attractive. The market is now simply waiting on a robust recovery – most likely lead by job growth – to spur consumers into taking advantage of very affordable conditions.
A strong recovery appears to be at least a year, or possibly two, away. But as we've stated, if we wait for a strong recovery to be in full force, the bargains (and the low financing rates) will be gone. That's a lesson worth imparting to the half that is still fearful of the recent past or needs a consensus backing it before it will act.
For the week of
January 10, 2011
--------------------------------------------------------------------------------
MARKET RECAP
Home prices are the leading concern as we begin the new year. Clear Capital reports that prices dropped 4.1 percent across the nation in 2010, and it was a volatile decline at that. Values declined 5.3 percent over the first 12 weeks of the year, then spiked 9.7 percent through mid-August, only to drop 9.4 percent through year's end. Clear Capital sees prices dropping another 3.9 percent through 2011.
Another analytics firm, Altos Research, also reports less-than-encouraging pricing news. According to Altos, home prices dropped 1.6 percent in December, with new listings actually hitting the market lower than that. The good news from Altos is that prices will “likely” increase modestly as we head into the spring season. Shadow inventory remains a concern, but Altos reports that inventories were cut nearly 6 percent in the 10 largest markets in December.
The latest spat of negative data doesn't mean we should throw in the towel on price stability, or that buyers should wait for lower prices before taking the dive into the housing pool. The heavy across-the-board discounting is over. Changes in prices going forward will be incremental and specific to local markets – some markets will see additional discounting, some won't.
What's more, markets are dynamic: money saved from any additional discounting could easily be offset by mortgage-rate increases. Goldman Sachs expects that the Federal Reserve will end its second round of quantitative easing in June, and that 10-year Treasury yields (a benchmark for 30-year mortgage rates) will climb to 3.75 percent by year-end, and then advance to 4.25 percent by the close of 2012. The historical average spread between a prime 30-year fixed-rate mortgage and the 10-year Treasury note is around two percentage points, which means if Goldman Sachs proves accurate on its prediction, we could be looking at 5.75 percent 30-year loans this year and 6.25 percent loans in 2012.
Of course, a forecast is no sure thing. In fact, forecasts are often wrong, but there are mitigating circumstances to consider. A majority of top decision-makers at the Federal Reserve believe that concerns over falling prices have eased and that inflation will gradually rise. Recent data support that belief: employment is improving – ADP Employer Services reports that 297,000 new private-sector jobs were created in December, triple the consensus estimate; manufacturing has expanded for 17-consecutive months; stocks continue to trend up; and rising food, energy, and commodity prices are stoking inflation fears.
Our advice remains the same as it has for the past two months: get the mortgage application in, and, unless you have a strong gambler's constitution, lock instead of playing the floating-rate game. We don't think borrowers will be giving up much. Let’s remember that we are still within 50-basis points of a 50-year low.
Let's Not Forget the Other Half
Actually, it's much more than half. Most media accounts are peppered with sad stories of people who are under water or who are facing foreclosure because of job loss or because they simply took on too much house and too much financing. The fact is that the vast majority of mortgagors have a job and are current on their payments.
Many of these folks are underwater, to be sure, but most are not, so there is still plenty of opportunity for plenty of people to buy, invest, or sell. While there is currently some slack in demand, reduced prices and low interest rates should keep home purchases attractive. The market is now simply waiting on a robust recovery – most likely lead by job growth – to spur consumers into taking advantage of very affordable conditions.
A strong recovery appears to be at least a year, or possibly two, away. But as we've stated, if we wait for a strong recovery to be in full force, the bargains (and the low financing rates) will be gone. That's a lesson worth imparting to the half that is still fearful of the recent past or needs a consensus backing it before it will act.
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