June 21, 2010
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MARKET RECAP
Some people are just unsure of where they're going. We'll slot homebuilders into this category. After posting steady gains over the past few months, the National Association of Homebuilders/Wells Fargo Housing Market Index tanked five points to 17, which means homebuilders have turned sour once again.
The mood change is understandable, given that housing starts sank to their lowest levels in five months. The numbers are hardly encouraging: starts fell 10 percent in May from April to a seasonally adjusted annual rate of 593,000 units. The good news is that compared to the same time last year, starts are up 7.8 percent.
The drop should have been anticipated. In the previous two months, improvements were driven by federal tax credits, which are now gone. We've noted in past editions that the current activity pattern isn't unprecedented, using the purchasing patterns in automobiles as an example. After the cash-for-clunkers program expired, auto sales plummeted, but then recovered steadily over subsequent months. The fact is, we are transitioning from a government-aided recovery to a more-sustainable market-based one. And while it takes time for the transition to occur, it won't be pain free.
Even though new homes aren't getting the attention from potential buyers that homebuilders desire, more people are buying – at least that appeared to be the case last week. The Mortgage Bankers Association reported that purchase activity rose 7.3 percent, halting a plunge that took the measure the prior week to the lowest level since 1997.
Refinances were also on the upswing last week, thanks to more borrowers believing mortgage rates are about as low as they can go. Our mantra on the subject remains unchanged: rate decreases will be marginal at best. Many borrowers, though, are relentless bargain hunters and want the absolute best rate possible, which leads to the inevitable question: should I lock shortly after applying or wait until the closing date is near?
Sometimes the decision is made for you; some banks require a lock when the application is sent. Many borrowers wish to lock as soon as possible anyway. We suggest that once the rate is locked you stop checking rates; there is no sense stirring up feelings of remorse over a few basis points. Life is too short.
On the other hand, some borrowers are risk accepting (at least that's what they say), and they want those few basis points. To those people we say “go for it,” but only if they are willing to accept the very real risk, and won't be driven to agony, by a rate spike. No one, us included, can know with certainty where rates will be 30 days from now. But if the choice is between noticeably higher or noticeably lower, we'd side with the former.
How Risky is this Market?
The May/June edition of the Financial Analyst Journal featured an article titled “Dimensioning the Housing Crisis” (available for download at CFAinstitute.org). The article is noteworthy for encapsulating the problems of the housing market in a mere 12 pages.
The article is replete with sundry graphs, most of which accentuate just how bad things got over the past two years. One graph features the spike in first-time defaults; another features the seemingly exponential growth in housing overhang; yet another features the precipitous drop in cure rates for 30-day, 60-day, and 90-day delinquencies. The author notes, in pointed prose, that “we have a housing problem that affects 11 million to 12 million units. If nothing is done, more than one homeowner out of every five will face eviction.”
It's a pessimism-inducing article, to be sure, but we remain upbeat nonetheless. Reason being, these problems are well documented today, which means there are few shocks left to rock the market. What's seen isn't what kills, it's what's unseen.
Savvy buyers know that the time to buy isn't when everything is dear but when everything is disdained. Everything in housing isn't disdained, but sentiment remains low. So, we ask ourselves, was it riskier to buy a house in 2006 or is it riskier to buy one today? The sentiment feels riskier today, but the data show that 2006 was overwhelmingly riskier.
Monday, June 21, 2010
Tuesday, June 8, 2010
Keeping you updated on the market!
For the week of
June 7, 2010
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MARKET RECAP
Few housing market participants were surprised when the NAR reported that its pending home sales index increased again, 6 percent in April, to 110.9 (100 is the base set in 2001) thanks to a surge in sales contracts. April, not-so-coincidently, happened to mark the end of the extension of the federal homebuyer’s tax credits. NAR chief economist Lawrence Yun was upbeat on the new business, nonetheless, noting, “The homebuyer tax credit brought close to one million additional buyers into the market, which is now helping the trade-up market and has significantly improved the inventory situation."
We can't say with certainty whether Yun's analysis is correct. We've stated in past editions that tax credits bring buyers forward, but don't increase aggregate demand. Look no further than the automobile tax credits from last year. Once the $4,500 cash-for-clunkers purchase program ceased, sales dropped like a rock. Does that mean we should expect home sales to do the same?
We don't think so. Automobile sales have recovered, and have recovered quite nicely. In May, sales for General Motors increased 16.6 percent from the same year-ago period, while Ford's increased 23 percent. Not to be outdone by its larger competitors, Chrysler posted a 33 percent increase. What's more encouraging, the robust recovery in auto sales had nothing to do with tax credits; it had everything to do with an improving economy and improving consumer confidence.
These same factors will likely work favorably for the housing sector in coming months. In fact, they already are. Home prices climbed 6.8 percent in May 2010 from the same year-ago period, posting the largest yearly increase since July 2006, according to real estate data provider Clear Capital. Meanwhile, the number of REO properties on the market seems to be dropping. Clear Capital reports that the national REO saturation rate dropped to 27.8 percent, down from 41.7 percent last year.
We think this is a near-perfect market for homebuyers: home prices are low but stable, while mortgage rates continue to hug historical lows. In many parts of the country, buying a home is cheaper than renting.
But this scenario won't last indefinitely. More Federal Reserve Bank presidents (of which there are 12) believe the economy is sufficiently stable to begin raising interest rates. Kansas City Federal Reserve Bank President Thomas Hoening said that the US economic recovery has the momentum to sustain itself and called for an increase in the target federal funds rate to 1 percent by the end of summer. It's currently hovering near zero. Other Fed presidents have stated that they are “uncomfortable” with Federal Reserve Chairman Ben Bernanke's use of “extended period” as it is applied to low rates.
The bottom line is, when the Federal Reserve starts raising the federal funds rate – the influential rate at which banks lend to each other – mortgage rates won't be far behind.
Up, Up, But Not Quite Away
We were expecting a little more, but at least it's trending in the right direction. We are speaking of the employment report, which showed payrolls rose by 431,000 last month.
That would be very good news, if not for the fact that 411,000 of the new hires were related to the census. Nevertheless, that still leaves a net positive for the private sector. The increase was enough to push the unemployment rate down to 9.7 percent (though some pundits argue the drop was really due to a lower participation rate).
You never want to read too much into a single month of data, but we remain encouraged: job growth and wages picked up from April to May, while the average workweek lengthened. And although moderate compared to past post-recessions, the recovery is looking more sustainable after consumer spending and business investment rose at a healthy pace in the first quarter.
Overall, we think this latest employment report provides another reason to act now in both the mortgage and housing markets.
For the week of
June 7, 2010
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MARKET RECAP
Few housing market participants were surprised when the NAR reported that its pending home sales index increased again, 6 percent in April, to 110.9 (100 is the base set in 2001) thanks to a surge in sales contracts. April, not-so-coincidently, happened to mark the end of the extension of the federal homebuyer’s tax credits. NAR chief economist Lawrence Yun was upbeat on the new business, nonetheless, noting, “The homebuyer tax credit brought close to one million additional buyers into the market, which is now helping the trade-up market and has significantly improved the inventory situation."
We can't say with certainty whether Yun's analysis is correct. We've stated in past editions that tax credits bring buyers forward, but don't increase aggregate demand. Look no further than the automobile tax credits from last year. Once the $4,500 cash-for-clunkers purchase program ceased, sales dropped like a rock. Does that mean we should expect home sales to do the same?
We don't think so. Automobile sales have recovered, and have recovered quite nicely. In May, sales for General Motors increased 16.6 percent from the same year-ago period, while Ford's increased 23 percent. Not to be outdone by its larger competitors, Chrysler posted a 33 percent increase. What's more encouraging, the robust recovery in auto sales had nothing to do with tax credits; it had everything to do with an improving economy and improving consumer confidence.
These same factors will likely work favorably for the housing sector in coming months. In fact, they already are. Home prices climbed 6.8 percent in May 2010 from the same year-ago period, posting the largest yearly increase since July 2006, according to real estate data provider Clear Capital. Meanwhile, the number of REO properties on the market seems to be dropping. Clear Capital reports that the national REO saturation rate dropped to 27.8 percent, down from 41.7 percent last year.
We think this is a near-perfect market for homebuyers: home prices are low but stable, while mortgage rates continue to hug historical lows. In many parts of the country, buying a home is cheaper than renting.
But this scenario won't last indefinitely. More Federal Reserve Bank presidents (of which there are 12) believe the economy is sufficiently stable to begin raising interest rates. Kansas City Federal Reserve Bank President Thomas Hoening said that the US economic recovery has the momentum to sustain itself and called for an increase in the target federal funds rate to 1 percent by the end of summer. It's currently hovering near zero. Other Fed presidents have stated that they are “uncomfortable” with Federal Reserve Chairman Ben Bernanke's use of “extended period” as it is applied to low rates.
The bottom line is, when the Federal Reserve starts raising the federal funds rate – the influential rate at which banks lend to each other – mortgage rates won't be far behind.
Up, Up, But Not Quite Away
We were expecting a little more, but at least it's trending in the right direction. We are speaking of the employment report, which showed payrolls rose by 431,000 last month.
That would be very good news, if not for the fact that 411,000 of the new hires were related to the census. Nevertheless, that still leaves a net positive for the private sector. The increase was enough to push the unemployment rate down to 9.7 percent (though some pundits argue the drop was really due to a lower participation rate).
You never want to read too much into a single month of data, but we remain encouraged: job growth and wages picked up from April to May, while the average workweek lengthened. And although moderate compared to past post-recessions, the recovery is looking more sustainable after consumer spending and business investment rose at a healthy pace in the first quarter.
Overall, we think this latest employment report provides another reason to act now in both the mortgage and housing markets.
Wednesday, May 19, 2010
Keeping you updated on the market!
For the week of
May 17, 2010
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MARKET RECAP
The pig is progressing through the python – the pig being the shadow inventory of foreclosures, the python being the market. According to Barclays Capital, there are currently 2.4 million loans in 90-plus day delinquency and another 2.1 million in foreclosure, totaling 4.5 million in shadow inventory. Barclays says that this inventory should reach the high-point this summer and then fall off, as the market absorbs an estimated 130,000 distressed properties per month.
New foreclosures shouldn't distend the market much further. Foreclosure filings dropped year-over-year for the first time since RealtyTrac began measuring such statistics, in January 2005. Granted, we are dropping from monumental levels, but it is good news nonetheless.
The aggregated numbers remain a little daunting, but it's worth noting how foreclosure activity is measured. RealtyTrac adds notices of default, notices of foreclosure sale, and actual foreclosures (so if a property goes all the way to REO, it will be counted three times) to arrive at activity. REOs are still at record levels, but the initial stages have declined substantially, which bodes well for the shadow inventory; hence, Barclays' optimistic prediction that the worst, if not yet over, is close to being over.
All these bits and pieces of housing data eventually work their way into home prices, which continue to stabilize, as demand for higher-priced homes (driven by improving job prospects) picks up and the sale of distressed properties cease changing hands at deeply discounted prices. On that front, the number of metropolitan areas where median prices are rising grew for the fourth consecutive time. In the latest quarter, prices gained in 91 of the 152 metropolitan areas tracked by the NAR compared to 67 in the fourth quarter of 2009 and 30 in the third quarter of 2009. In short, we're on the right path.
But the farther we go down that path, the fewer deals we'll encounter. A year ago, buyers were keeping to the sidelines because they were concerned with catching a falling knife – buying a home at $250,000 only to see a comparable property fetch $230,000 three months later. We believe those days are over, which is one reason we continue to implore those on the sidelines to get in the game.
Mortgage rates are the other reason. Yes, the 30-year fixed-rate loan continues to bob around 5 percent while the 15-year fixed-rate loan continues to bob around 4.5 percent, but they're not sinking, and they won't. Therefore, we see no reason for someone inclined to refinance or to buy a home not to, especially given the optimistic outlook on jobs and the economy and the continued expectation for higher mortgage rates.
The Post-Credit Era
We've been saying for the past month or so that we're not particularly worried about the end of the federal homebuyers tax credits. We also weren't particularly concerned when the Federal Reserve said it would cease purchasing mortgage-backed securities. After all, the only way to discover if a market is truly healthy and viable is to stop subsidizing it.
It's still early to render a verdict, but so far so good. People recognize that the combination of low rates and lower home prices represent a great opportunity, while many shoppers who failed to find a home to qualify for the tax credit remain undeterred and, just as important, rational – understanding the go-go days of the early 2000s are over. And that's a good thing. The market of that era was driven more by speculation and less by fundamentals. And though it was highly remunerative for many of us, we see how it turned out.
In housing, slow and steady wins the race, which is why we continue to advise our clients that today's market offers good fundamentally sound deals that can be financed at good economically advantageous interest rates. Sounds like a win-win deal to us.
For the week of
May 17, 2010
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MARKET RECAP
The pig is progressing through the python – the pig being the shadow inventory of foreclosures, the python being the market. According to Barclays Capital, there are currently 2.4 million loans in 90-plus day delinquency and another 2.1 million in foreclosure, totaling 4.5 million in shadow inventory. Barclays says that this inventory should reach the high-point this summer and then fall off, as the market absorbs an estimated 130,000 distressed properties per month.
New foreclosures shouldn't distend the market much further. Foreclosure filings dropped year-over-year for the first time since RealtyTrac began measuring such statistics, in January 2005. Granted, we are dropping from monumental levels, but it is good news nonetheless.
The aggregated numbers remain a little daunting, but it's worth noting how foreclosure activity is measured. RealtyTrac adds notices of default, notices of foreclosure sale, and actual foreclosures (so if a property goes all the way to REO, it will be counted three times) to arrive at activity. REOs are still at record levels, but the initial stages have declined substantially, which bodes well for the shadow inventory; hence, Barclays' optimistic prediction that the worst, if not yet over, is close to being over.
All these bits and pieces of housing data eventually work their way into home prices, which continue to stabilize, as demand for higher-priced homes (driven by improving job prospects) picks up and the sale of distressed properties cease changing hands at deeply discounted prices. On that front, the number of metropolitan areas where median prices are rising grew for the fourth consecutive time. In the latest quarter, prices gained in 91 of the 152 metropolitan areas tracked by the NAR compared to 67 in the fourth quarter of 2009 and 30 in the third quarter of 2009. In short, we're on the right path.
But the farther we go down that path, the fewer deals we'll encounter. A year ago, buyers were keeping to the sidelines because they were concerned with catching a falling knife – buying a home at $250,000 only to see a comparable property fetch $230,000 three months later. We believe those days are over, which is one reason we continue to implore those on the sidelines to get in the game.
Mortgage rates are the other reason. Yes, the 30-year fixed-rate loan continues to bob around 5 percent while the 15-year fixed-rate loan continues to bob around 4.5 percent, but they're not sinking, and they won't. Therefore, we see no reason for someone inclined to refinance or to buy a home not to, especially given the optimistic outlook on jobs and the economy and the continued expectation for higher mortgage rates.
The Post-Credit Era
We've been saying for the past month or so that we're not particularly worried about the end of the federal homebuyers tax credits. We also weren't particularly concerned when the Federal Reserve said it would cease purchasing mortgage-backed securities. After all, the only way to discover if a market is truly healthy and viable is to stop subsidizing it.
It's still early to render a verdict, but so far so good. People recognize that the combination of low rates and lower home prices represent a great opportunity, while many shoppers who failed to find a home to qualify for the tax credit remain undeterred and, just as important, rational – understanding the go-go days of the early 2000s are over. And that's a good thing. The market of that era was driven more by speculation and less by fundamentals. And though it was highly remunerative for many of us, we see how it turned out.
In housing, slow and steady wins the race, which is why we continue to advise our clients that today's market offers good fundamentally sound deals that can be financed at good economically advantageous interest rates. Sounds like a win-win deal to us.
Monday, May 10, 2010
Mortgage Market Update
May 10, 2010
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MARKET RECAP
In news that surprised no one, the pending home sales index surged to 102.9 in March. We all expected the months heading into April would produce more home sales, and that's the way it's playing out. What's more, it's likely to continue to play out over the next couple months, given closings usually occur a month or two after the contract has been signed.
Of course, the expiring federal tax credits are the impetus for the spring rush. Most market watchers are expecting a drop once they've worked their way through the system, so we shouldn't be terribly disappointed if sales growth stalls after being artificially stimulated.
That said, we remain optimistic. We think the housing market is sufficiently stable to stand on its own, particularly when considering the latest pricing data released by PMI Mortgage Insurance, which shows the risk of continued price declines is shrinking. Its latest report finds that 93% of the 384 metropolitan statistical areas it follows posted declining risk scores in the fourth quarter of 2009.
In addition to finding a less risky pricing environment, buyers are also finding a more welcoming lending environment. According to the Federal Reserve's latest survey, most banks didn't tighten lending standards during the first quarter of 2010. The survey also showed more banks expressing a greater willingness to lend. We've stated in previous newsletters that an improving economy goes hand-in-hand with less stringent underwriting, because lending is perceived as less risky in a growing economy. We expect further easing as the economy continues to grow, enticing more marginal borrowers into the market.
Consumer spending is another important measure of an economy's health. On that front, personal consumption posted a 0.6 percent gain in March, following a 0.5 percent jump the month before. Economists have been saying for months that the economic recovery would be anemic until the consumer sector became healthier. It appears healthier today.
So, we have a growing economy, stabilizing home prices, and possibly easing underwriting standards. That sounds like a recipe for higher mortgage rates, but that wasn't the case last week. In fact, rates dropped across the board and held near all-time lows. Is it possible we've cried “wolf” once too often and that low rates are now a permanent fixture of the economy?
We don't think so, because the factors that most influence interest rates still point to higher rates. The financial calamity in Greece was given as the primary reason for last week's rate decrease. Money moved out of riskier European investments into safer US Treasury and government-insured mortgage-backed securities, In short, more money was available for mortgage lending; hence the lower rates. But this too shall pass, and likely sooner than most market watchers expect.
Good News on the Job Front
Employment, it's the reason we're hanging our hat on a sustained economic recovery. The numbers are, thankfully, improving. Payrolls jumped 290,000 last month, more than the median estimate after posting a revised 230,000 increase in March that was larger than initially estimated. The April gain included 66,000 temporary workers hired by the government to help conduct the 2010 census and, more importantly, a 231,000 rise in private payrolls. Yes, the unemployment rate rose to 9.9 percent, but mainly due to formerly discouraged workers becoming less discouraged and seeking work again.
The improving employment situation presages good news for the economy, but it also presages higher interest rates. The latest employment news could be the catalyst for the next move in long-term interest rates. Over the past two weeks, investors have gravitated toward the haven of US-dollar denominated investments, most notably long-term Treasury securities, and that's helped lower rates. But with a heating economy, the very real prospect of inflation igniting rises, which raises the very prospect of higher mortgage rates in the near future.
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MARKET RECAP
In news that surprised no one, the pending home sales index surged to 102.9 in March. We all expected the months heading into April would produce more home sales, and that's the way it's playing out. What's more, it's likely to continue to play out over the next couple months, given closings usually occur a month or two after the contract has been signed.
Of course, the expiring federal tax credits are the impetus for the spring rush. Most market watchers are expecting a drop once they've worked their way through the system, so we shouldn't be terribly disappointed if sales growth stalls after being artificially stimulated.
That said, we remain optimistic. We think the housing market is sufficiently stable to stand on its own, particularly when considering the latest pricing data released by PMI Mortgage Insurance, which shows the risk of continued price declines is shrinking. Its latest report finds that 93% of the 384 metropolitan statistical areas it follows posted declining risk scores in the fourth quarter of 2009.
In addition to finding a less risky pricing environment, buyers are also finding a more welcoming lending environment. According to the Federal Reserve's latest survey, most banks didn't tighten lending standards during the first quarter of 2010. The survey also showed more banks expressing a greater willingness to lend. We've stated in previous newsletters that an improving economy goes hand-in-hand with less stringent underwriting, because lending is perceived as less risky in a growing economy. We expect further easing as the economy continues to grow, enticing more marginal borrowers into the market.
Consumer spending is another important measure of an economy's health. On that front, personal consumption posted a 0.6 percent gain in March, following a 0.5 percent jump the month before. Economists have been saying for months that the economic recovery would be anemic until the consumer sector became healthier. It appears healthier today.
So, we have a growing economy, stabilizing home prices, and possibly easing underwriting standards. That sounds like a recipe for higher mortgage rates, but that wasn't the case last week. In fact, rates dropped across the board and held near all-time lows. Is it possible we've cried “wolf” once too often and that low rates are now a permanent fixture of the economy?
We don't think so, because the factors that most influence interest rates still point to higher rates. The financial calamity in Greece was given as the primary reason for last week's rate decrease. Money moved out of riskier European investments into safer US Treasury and government-insured mortgage-backed securities, In short, more money was available for mortgage lending; hence the lower rates. But this too shall pass, and likely sooner than most market watchers expect.
Good News on the Job Front
Employment, it's the reason we're hanging our hat on a sustained economic recovery. The numbers are, thankfully, improving. Payrolls jumped 290,000 last month, more than the median estimate after posting a revised 230,000 increase in March that was larger than initially estimated. The April gain included 66,000 temporary workers hired by the government to help conduct the 2010 census and, more importantly, a 231,000 rise in private payrolls. Yes, the unemployment rate rose to 9.9 percent, but mainly due to formerly discouraged workers becoming less discouraged and seeking work again.
The improving employment situation presages good news for the economy, but it also presages higher interest rates. The latest employment news could be the catalyst for the next move in long-term interest rates. Over the past two weeks, investors have gravitated toward the haven of US-dollar denominated investments, most notably long-term Treasury securities, and that's helped lower rates. But with a heating economy, the very real prospect of inflation igniting rises, which raises the very prospect of higher mortgage rates in the near future.
Monday, May 3, 2010
Mortgage Matters
Keeping you updated on the market!
For the week of
May 3, 2010
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MARKET RECAP
The S&P/Case-Shiller home-price index is promoted as the leading indicator of the national trend in home prices, but we wonder if its worth is overstated – given that it tends to obfuscate as much as enlighten. For example, the index showed that home prices in 20 cities increased 0.6 percent in February. On a non-seasonally adjusted basis though, the 20-city home price index fell 0.9 percent to 144.03 while the 10-city home price index declined 0.6 percent to 156.8.
So what does it mean? Whether the 20-city or 10-city measure, changes to home prices have been so small nationally over the past few months that the Case-Shiller index has morphed into modern art – journalists and economists make of it what they want, which suggests they impart little value for handicapping the future. And let's not overlook the fact the data are already two months old when released – a lifetime in financial circles.
Things can change in a hurry. Consider the dynamics in the new home market over just one month. In March, sales surged 26.9 percent to 411,000 units, exceeding the consensus expectation by over 80,000 units. Meanwhile, inventory dropped to 6.7 months from 8.6 months, as did mean and median prices, suggesting a shift toward lower-priced homes.
Consumer confidence shifted just as suddenly, with consumers displaying much more optimism in April compared to March. The sentiment numbers suggest to us the labor market is improving, and consumers are much more willing to spend. In February, the mood was the polar opposite.
The one constant has been the Federal Reserve's willingness to hold the federal funds rate near zero, which it did once again after Wednesday's Federal Open Market Committee meeting. The Fed has held the rate near zero since December 2008 and said conditions are likely to justify leaving it at "exceptionally low" levels for "an extended period." The Fed also said that "economic activity has continued to strengthen” and "the labor market is beginning to improve,” which suggests that an “extended period” might not be as extended as many people think.
In short, mortgage rates are as low as they're going to go, and the Fed has proven over the past few months that there is little that can be done to move them lower.
What Now?
It's an important question, since it appears the homebuyers tax credits won't be extended. But it's a question not to be feared. We think it's time the housing market stood on its own feet anyway. After all, we can't gauge the health of a market if it's still supported with taxpayer stanchions.
But that's okay; we think the housing and mortgage markets are sufficiently healthy to stand alone. Pessimism is the intellectual position, but the fact is the economy is getting better: Despite worries that American consumers might hunker down for years — spooked by debt, lost savings, and unemployment — austerity has given way to shadows of a new shopping spree: households are replacing cars, upgrading home furnishings, and amassing gadgets. What's more, wealth – at least wealth measured by equity holdings – is booming.
On the mortgage side, private investors are returning. A California firm recently completed the first private-sector sale of a security backed by mortgages in nearly two years, potentially reopening a market slammed shut by the housing crisis. The $238-million deal was of the highest quality, to be sure, with borrowers making an average down payment of 45 percent and mortgage payments comprising less than 30 percent of income. But as the economy continues to improve and investors become less risk adverse, less restrictive mortgages will be securitized.
Bottom line: we see a growing economy, improving employment, stable home prices, and less restrictive (though higher rate) mortgages in our future. In other words, we see a market for buying and refinancing today.
For the week of
May 3, 2010
--------------------------------------------------------------------------------
MARKET RECAP
The S&P/Case-Shiller home-price index is promoted as the leading indicator of the national trend in home prices, but we wonder if its worth is overstated – given that it tends to obfuscate as much as enlighten. For example, the index showed that home prices in 20 cities increased 0.6 percent in February. On a non-seasonally adjusted basis though, the 20-city home price index fell 0.9 percent to 144.03 while the 10-city home price index declined 0.6 percent to 156.8.
So what does it mean? Whether the 20-city or 10-city measure, changes to home prices have been so small nationally over the past few months that the Case-Shiller index has morphed into modern art – journalists and economists make of it what they want, which suggests they impart little value for handicapping the future. And let's not overlook the fact the data are already two months old when released – a lifetime in financial circles.
Things can change in a hurry. Consider the dynamics in the new home market over just one month. In March, sales surged 26.9 percent to 411,000 units, exceeding the consensus expectation by over 80,000 units. Meanwhile, inventory dropped to 6.7 months from 8.6 months, as did mean and median prices, suggesting a shift toward lower-priced homes.
Consumer confidence shifted just as suddenly, with consumers displaying much more optimism in April compared to March. The sentiment numbers suggest to us the labor market is improving, and consumers are much more willing to spend. In February, the mood was the polar opposite.
The one constant has been the Federal Reserve's willingness to hold the federal funds rate near zero, which it did once again after Wednesday's Federal Open Market Committee meeting. The Fed has held the rate near zero since December 2008 and said conditions are likely to justify leaving it at "exceptionally low" levels for "an extended period." The Fed also said that "economic activity has continued to strengthen” and "the labor market is beginning to improve,” which suggests that an “extended period” might not be as extended as many people think.
In short, mortgage rates are as low as they're going to go, and the Fed has proven over the past few months that there is little that can be done to move them lower.
What Now?
It's an important question, since it appears the homebuyers tax credits won't be extended. But it's a question not to be feared. We think it's time the housing market stood on its own feet anyway. After all, we can't gauge the health of a market if it's still supported with taxpayer stanchions.
But that's okay; we think the housing and mortgage markets are sufficiently healthy to stand alone. Pessimism is the intellectual position, but the fact is the economy is getting better: Despite worries that American consumers might hunker down for years — spooked by debt, lost savings, and unemployment — austerity has given way to shadows of a new shopping spree: households are replacing cars, upgrading home furnishings, and amassing gadgets. What's more, wealth – at least wealth measured by equity holdings – is booming.
On the mortgage side, private investors are returning. A California firm recently completed the first private-sector sale of a security backed by mortgages in nearly two years, potentially reopening a market slammed shut by the housing crisis. The $238-million deal was of the highest quality, to be sure, with borrowers making an average down payment of 45 percent and mortgage payments comprising less than 30 percent of income. But as the economy continues to improve and investors become less risk adverse, less restrictive mortgages will be securitized.
Bottom line: we see a growing economy, improving employment, stable home prices, and less restrictive (though higher rate) mortgages in our future. In other words, we see a market for buying and refinancing today.
Monday, April 26, 2010
Keeping you updated on the market!
For the week of
April 26, 2010
--------------------------------------------------------------------------------
MARKET RECAP
In another sign home prices are stabilizing, Trulia.com reports that the rate of home listings where the seller made at least one reduction in asking price declined 26% in April 2010 compared to the same year-ago period. Trulia noted that 20% of asking prices were reduced at least once compared to 27% in April 2009. We weren't surprised to see the reduction. In fact, we were a little surprised a greater reduction wasn't forthcoming. We've noted in the past that sellers are much more grounded in the new-market reality of lower prices than they were a year ago.
The good news is the reality should become somewhat more bearable in coming months. Fannie Mae projects the median price for existing homes to rise from $167,200 in the first quarter of 2010 to $168,300 by year's end. Meanwhile, it expects the median price for new homes to climb from $207,200 to $214,500. Granted, it's not the pace of appreciation we were accustomed to in the past, but after enduring nearly two years of traumatizing price depreciation, we'll take whatever price appreciation the market will give.
The specter of rising prices should attract more buyers, and more buyers are needed to reduce inventory levels that still tilt toward the high side. Total housing inventory rose 1.5% to 3.58 million existing homes for sale in March, giving us an 8-month supply. The good news is that's an improvement from the 8.5-month supply at the end of February. We expect inventory levels to improve further on the March and April push to take advantage of the expiring federal homebuyers tax credits.
These credits were the most noted reason for the surge in existing-home sales, which were up more than expected, climbing 6.8% to a 5.35 million annual rate in March, according to the NAR. We expect to see a continued uptrend in May and June - perhaps to 2007 levels. We're unsure if it will occur, but we'd like to see this final tax-credit push generate enough momentum to maintain the trajectory through the summer selling season.
Of course, whatever is sold will likely need financing. On that front, mortgage rates continue to maintain their holding pattern: We're still looking at 30-year fixed-rate mortgages near 5% and 15-year fixed-rate mortgages roughly 50-basis points lower. We've been warning, and we'll continue to warn, that rates are unlikely to move much lower. We think it makes little sense to hold out for a few basis points on the downside when many basis points loom on the upside.
It's Still All About Employment
The blogosphere has been alive with ominous chatter on the “next wave of foreclosures.” Much of the discourse has centered on homeowners who continue to make payments but have seen the value of their homes plummet, thus preventing them from saving money through refinancing. A few of the bloggers have speculated that rising frustration levels could produce a surge in strategic defaults.
It's a salient, legitimate point, to be sure, but it's also worth noting that people just don't walk away because they're underwater on a loan. The most obvious example is an auto loan: Once a new car is driven off the lot, it depreciates considerably – often to the point where an immediate sale would produce insufficient cash to retire the outstanding loan. In other words, just because someone is underwater and frustrated doesn't mean he or she is walking away. Moreover, he or she is even less likely to walk away if gainfully employed.
That's why we continue to look to the employment numbers for answers. The good news is that the numbers are generally improving, which, not so coincidently, is why housing numbers are generally improving. The bottom line is, if we continue to see improvement in employment, we'll continue to see improvement in housing.
For the week of
April 26, 2010
--------------------------------------------------------------------------------
MARKET RECAP
In another sign home prices are stabilizing, Trulia.com reports that the rate of home listings where the seller made at least one reduction in asking price declined 26% in April 2010 compared to the same year-ago period. Trulia noted that 20% of asking prices were reduced at least once compared to 27% in April 2009. We weren't surprised to see the reduction. In fact, we were a little surprised a greater reduction wasn't forthcoming. We've noted in the past that sellers are much more grounded in the new-market reality of lower prices than they were a year ago.
The good news is the reality should become somewhat more bearable in coming months. Fannie Mae projects the median price for existing homes to rise from $167,200 in the first quarter of 2010 to $168,300 by year's end. Meanwhile, it expects the median price for new homes to climb from $207,200 to $214,500. Granted, it's not the pace of appreciation we were accustomed to in the past, but after enduring nearly two years of traumatizing price depreciation, we'll take whatever price appreciation the market will give.
The specter of rising prices should attract more buyers, and more buyers are needed to reduce inventory levels that still tilt toward the high side. Total housing inventory rose 1.5% to 3.58 million existing homes for sale in March, giving us an 8-month supply. The good news is that's an improvement from the 8.5-month supply at the end of February. We expect inventory levels to improve further on the March and April push to take advantage of the expiring federal homebuyers tax credits.
These credits were the most noted reason for the surge in existing-home sales, which were up more than expected, climbing 6.8% to a 5.35 million annual rate in March, according to the NAR. We expect to see a continued uptrend in May and June - perhaps to 2007 levels. We're unsure if it will occur, but we'd like to see this final tax-credit push generate enough momentum to maintain the trajectory through the summer selling season.
Of course, whatever is sold will likely need financing. On that front, mortgage rates continue to maintain their holding pattern: We're still looking at 30-year fixed-rate mortgages near 5% and 15-year fixed-rate mortgages roughly 50-basis points lower. We've been warning, and we'll continue to warn, that rates are unlikely to move much lower. We think it makes little sense to hold out for a few basis points on the downside when many basis points loom on the upside.
It's Still All About Employment
The blogosphere has been alive with ominous chatter on the “next wave of foreclosures.” Much of the discourse has centered on homeowners who continue to make payments but have seen the value of their homes plummet, thus preventing them from saving money through refinancing. A few of the bloggers have speculated that rising frustration levels could produce a surge in strategic defaults.
It's a salient, legitimate point, to be sure, but it's also worth noting that people just don't walk away because they're underwater on a loan. The most obvious example is an auto loan: Once a new car is driven off the lot, it depreciates considerably – often to the point where an immediate sale would produce insufficient cash to retire the outstanding loan. In other words, just because someone is underwater and frustrated doesn't mean he or she is walking away. Moreover, he or she is even less likely to walk away if gainfully employed.
That's why we continue to look to the employment numbers for answers. The good news is that the numbers are generally improving, which, not so coincidently, is why housing numbers are generally improving. The bottom line is, if we continue to see improvement in employment, we'll continue to see improvement in housing.
Monday, December 28, 2009
It's been a newsworthy year for the mortgage business. The tax credit is extended through at least the 1st quarter of 2010, and this has given many first time homebuyers the opportunity to own a home. One of the biggest changes from my side of the industry is the new Good Faith Estimate which will be required as of January 1, 2010. This refurbished disclosure will take "some getting used to" for lenders, Realtors, and buyers. The good news for the buyer is that once a Good Faith has been issued to a buyer for a specific transaction, the lender fees cannot change and many of the other fees (title, survey, recording fees, etc.) have only a 10% tolerance in regard to amount. A buyer will also have as a part of the Good Faith a way to compare one Good Faith with another from another lender.
For those buyers or refinance clients who are in a pre-approval process or just want an idea of what a loan may cost, I will be able to furnish them a Closing Cost Analysis form.
These are needed changes and with all change, there is the need to adjust. Hopefully, this is another step toward protection of buyers from predatory lending and those who would "bait and switch."
For those buyers or refinance clients who are in a pre-approval process or just want an idea of what a loan may cost, I will be able to furnish them a Closing Cost Analysis form.
These are needed changes and with all change, there is the need to adjust. Hopefully, this is another step toward protection of buyers from predatory lending and those who would "bait and switch."
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