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.
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