Keeping you updated on the market!
For the week of

April 30, 2012

MARKET RECAP

Prices always make news, as well they should. A price is an important factor in determining loan amount and equity position. Price determines whether someone buys, sells, or holds. You could say that price is everything.

With that thought in mind, home prices have been volatile in 2012, which has lead to volatile sales data. But though prices have been volatile, they have been trending higher. S&P/Case-Shiller’s 20-city composite home price index shows prices increased 0.2 percent in February compared to January.

Though the S&P/Case-Shiller index is the most monitored index, it’s a little stale, being two months in arrears. We were more interested in contemporary price data released by Zillow, which show home values were up 0.5 percent in its 30-market index. Zillow believes 19 of the markets it follows have either hit bottom or are expected to hit bottom by the end of the year. Zillow chief economist Stan Humphries advises, “For people who have been waiting to time their home purchase close to market bottom, it’s time to start shopping.”

Not to pat ourselves too hard on the back, but we’ve been offering similar advice for the past six months. Now, no one can precisely call a bottom, but you can get a “vibe” in your market through experience and information. More of the vibes and much of the information is turning positive in many local markets. To be sure, bad news can still be found, but if you wait for nothing but good news, the bottom will have long been gone.

As for new homes sales, the news was decidedly good. New home sales posted a better-than-expected 328,000 annualized units in March, after being revised strongly upward to 353,000 units in February.  In fact, the supply of unsold new homes fell to just 144,000 in March – the fewest on record dating to 1963.

Mortgage rates, meanwhile, continue to skim along the bottom, though they’re showing no inclination to move meaningfully lower. Again, we can’t stress enough the risk/reward paradigm in the mortgage lending market: Even after a spat of bad economic news in Europe, rates hardly moved. This suggests to us that waiting for still lower rates means incurring a great deal of risk for little reward.

Encouraging News for the Average Contrarian

Since the bursting of the housing bubble in 2008, homeownership has been declining, and the pace of declined appears to have accelerated in the past year. Gallup, the people who provide an array of polls and surveys, finds that only 62 percent of Americans it surveyed owned a home compared to 68 percent in 2011.

This is actually good news, because it points to pent up demand when you consider that the historical homeownership rate ranges between 65 percent and 66 percent.

We’re aware of many media reports that point to a change of culture in the housing market; that is, a change toward a renting culture from a buying one. We don’t buy it, at least not for the long term. Ask anyone if he or she would prefer to live in a neighborhood of renters or owners. Most, we assure you, prefer owners.

Many people were spooked by the dramatic price declines that occurred over the past four years, so it’s likely that many people when questioned on homeownership were speaking more out of fear than knowledge. Now that it appears that prices have stabilized, we expect more of these people to regain their bearings and consider what they really want – and that’s to buy a home and to live in a neighborhood of homeowners.

As we mentioned above, prices matter – and today’s low home prices simply won’t stay this low indefinitely. After a couple more months of favorable pricing data, that fact will resonate with more prospective buyers.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Home Builders Index
(March)

Mon, March 19,
10:00 am , et

30 Index

Housing Starts
(February)

Tues, March 20,
8:30 am , et

702,000 (Annualized)

Mortgage Applications

Wed., March 21,
7:00 am , et

None

Existing Home Sales
(February)

Wed., March 21,
10:00 am , et

460,000 (Annualized)

New Home Sales
(February)

Fri., March 23,
10:00 am , et

330,000 (Annualized)

Time’s a Wastin’

The economy continues to improve at an accelerating pace: Jobs are now being added at a minimum rate of 200,000 a month and unemployment has fallen in 45 states and the District of Columbia .

More people working and more economic growth means the overhang of REO and distressed properties will be be picked over sooner rather than later. It also means more pressure on interest rates to rise.

Yes, the Federal Reserve is doing everything in its power to hold interest rates low. It continues to reinvest principal payments from its holdings of Treasury notes and bonds and mortgage-backed securities into more mortgage-backed securities. The Fed’s demand for these securities helps hold lending rates low. Problem is, the Fed lacks the power to stem market forces in perpetuity. If the market demands higher mortgage rates, it will eventually get it.

Given the surge in demand that will occur with HARP 2.0 and a continued rise in purchase applications, we think it is riskier than it has been in years to wait to refinance or purchase a home. In other words, we think the market will get its wish for higher lending rates sooner than many home buyers or refinancers think.

MARKET RECAP

The news is understandably slow the week between Christmas and New Year’s Day. The most notable release was last Friday’s news on new home sales, which rose to an annualized rate of 315,000 units in November, a 1.6-percent gain over October.

To be sure, we have a long way to go until we reach the normalized construction rate of 1.5-million units per year. Nevertheless, we expect the new-home market to gain pace in 2012. After all, there are only 158,000 units in inventory. Even at the current slow sales pace, this equates to a record low six-month supply

Over the past three years, new-home construction has fallen far below historical norms and also below the level needed to keep pace with population growth. The fact is our country gains roughly 2.7 million people and one million new households annually.

You might not see supply as a problem. We are all familiar with the glut of distressed properties. Indeed, Bank of America expects eight million distressed homes to come to market over the next four years. These homes, we’ve so often heard, will continue to depress new home construction.

We view B-of-A’s outlook with a skeptical eye. There is a likely prospect that many of these distressed properties will simply go away. Destruction is too frequently overlooked in many supply projections. A house is not a permanent structure. Many are destroyed by fire, wind and flood each year. Many more are lost through simple decay and abandonment. Based on U.S. Census data, 300,000 homes are lost annually. That number will surely rise in years to come.

In short, the math – low inventory plus more households minus more home destruction – suggests to us a rebound in new-home construction. We are not alone in this contention, either. Wells Fargo projects that housing starts will continue to rise each year for the next five years before reaching once again the normalized construction rate of 1.5-million units annually by 2017.

Of course, projections are one thing, betting on those projections is another. Here, we see an encouraging trend. Big money is starting to wager on housing. The Wall Street Journal reports that many large hedge funds are investing billions in housing-related investments. Other investors have followed suit. Shares of homebuilders are up 30 percent over the past three months, making them one of the best performing investments in the market.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Construction Spending
(November)

Tues., Jan. 3,
10:00 am, et

No Change

Mortgage Applications

Wed., Jan. 4,
7:00 am, et

None

Factory Orders
(November)

Wed., Jan. 4,
10:00 am, et

2.5% (Increase)

Employment Situation
(December)

Fri., Jan. 6,
8:30 am , et

Unemployment Rate: 8.7%
Payrolls: 150,000 (Increase)

Up For A New Year

As we approach the end of the old year nearly all of us stop to ask, “How will the new year unfold?” Of course, none of us know with any certainty the answer to that question, but it can be insightful (and fun) to ponder. So, how will 2012 unfold, at least as it pertains to the housing and mortgage markets?

Both markets will obviously be influenced by economic growth, which, in turn, will spur job growth. We see a pick up in economic growth and job growth in 2012.

The economy has been growing at a sluggish rate for too long now. The United States is unique in that Americans tire of pessimism quicker than most other cultures, and then we do something about it. In our opinion, rising consumer confidence points to a lot of pent-up demand that is waiting to bust loose, and will bust loose in 2012.

A pick up in demand, in turn, necessitates new hires. In fact, a recent survey by CareerBuilder.com found that nearly one in four employers is keen to add new permanent full-time employees. These employers are simply waiting for a clear sign the coast is clear. We think they will get that sign in the first quarter of 2012.

Greater economic activity will obviously impact the housing market. We see accelerated sales volume in both the new and existing home markets. We also expect to see prices stabilize in the first half of the year, and then appreciate perceptibly in the second half.

As for the mortgage market? This is much more difficult to call. The Federal Reserve has stated it intends to hold rates low through 2012. However, all it takes are a few persuasive signs that the economy is back on track, and the Fed could easily backtrack from its stated goals. All we can say is that we would be much less surprised to see mortgage rates 50 basis points higher six months from today than 50 basis points lower.