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.
Monday, March 21, 2011
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.
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