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.
Monday, February 21, 2011
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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