August 2011 Market Information Archive
August 29, 2011
MARKET RECAP
The woes of homebuilders and anyone dependent on home building continue. The July report on new home sales shows that the annual sales rate has fallen to 298,000 units, hitting a five-month low. The good news is that supply isn't expanding. In fact, only 165,000 homes are in inventory. This is a record low and a 6.6-month supply at the going sales pace.
Homebuilders face a cluster of problems: bargain-priced foreclosures; higher lending standards; and skittish buyers, many of whom have been further put off by the recent stock market sell-off. Mounting concerns of a double-dip recession and rising cancellation rates have only exacerbated homebuilder worries. The chief concern now is that builders could be forced to cut prices, something they've been fighting tooth-and-nail.
Despite the recent spat of bad news, home prices continue to hold their own, and in many instances are moving higher – at least month-over-month. The FHFA home price index for June increased 0.9 percent after posting 0.4 percent and 0.3 percent increases in May and April respectively.
However, does the slump in new and existing home sales portend falling home prices? We remain optimistic that prices will hold. People are understandably wary about big-ticket purchases, like a home, because of slow job growth and stagnating economic activity. But all have a reservation price (a price they will not sell below). Houses (that is, habitable houses) won't be given away, they'll be taken off market if the sales price doesn't exceed the reservation price.
Reservation prices could fall and the monthly price trend could reverse, of course. That said, we think most of the bad news is baked into the system, so we don't think there will be any heavy discounting. In short, we still think a home is a worthwhile investment in today's market.
Mortgages have also been holding a price trend. Bankrate reported that its weekly survey on rates posted another all-time low. It's worth noting, though, that after the survey was released, yields on the 10-year Treasury note spiked 10 basis points, which points to higher mortgage rates in the next survey.
A surfeit of negative news has kept mortgage rates low. This has lead many analysts to opine that ultra-low mortgage rates are the new norm. We think this is a dangerous way of thinking (which we'll explain below) and that it is still best to take advantage of rates unseen in over 50 years.
Economic |
Release |
Consensus |
Analysis |
Personal Income & Outlays |
Mon., Aug. 29, |
Income: 0.3% (Increase) |
Moderately Important. Income and outlay growth are sluggish, but both categories continue to post gains. |
Pending Home Sales Index |
Mon., Aug. 29, |
90 Index |
Important. July should hold gains posted in June, but recent data suggest some regression in August. |
S&P Case-Shiller Home Price Index |
Tues., Aug. 30, |
1.0% |
Moderately Important. Early summer sales prices have shown modest improvement. |
Mortgage Applications |
Wed., Aug. 31, |
None |
Important. Purchase activity hit a 15-year low, which points to lower near-term home sales. |
Factory Orders |
Wed., Aug. 31, |
0.8% |
Moderately Important. The yearlong trend in orders still suggests overall economic growth. |
Productivity & Costs |
Thurs., Sept. 1, |
Productivity: 0.7% (Decrease) |
Important. Falling productivity and rising costs are indicative of a sluggish labor market. |
Construction Spending |
Thurs., Sept. 1, |
0.2% |
Important. Government and commercial spending are pacing any growth. |
Employment Situation |
Fri., Sept. 2, |
Unemployment Rate: 9.1% |
Very Important. Unexpected job strength (like in July) could move interest rates higher. |
Is This the New Norm?
We've gone down the higher-inflation, higher-interest rate road many times in the past, only to find ourselves doubling back. There is an interesting trend occurring with banks, though, that could persuade us to go down it once again.
One of the more vocal criticisms of banks is that they haven't been lending as much as they should. There is some validity to the criticism; banks have been squirreling away a higher amount of reserves with the Federal Reserve, which has attenuated loan supply and, therefore, money supply, thus keeping inflation in check.
Data released by the Federal Reserve show this period of containment appears to be ending. In other words, excess bank reserves are leaking into the economy and money supply is growing. Because we operate in a fraction-reserve banking system, which means one dollar can be sufficiently leveraged to produce nine more, more reserves put to work can quickly raise inflation pressure.
This all might seem abstruse to the layperson unfamiliar with the intricacies of the Federal Reserve and fractional-reserving banking. All we are saying is that it is folly to write off price inflation and the possibility of higher mortgage rates, because there is no “normal” when it comes to financial markets.
August 22, 2011
MARKET RECAP
Perseverance is a virtue, and the nation's homebuilders are displaying plenty of perseverance, even if they are not necessarily displaying it happily. The homebuilders' housing index remained unchanged in August, at a depressed level of 15. Components for present sales and buyer traffic inched higher, but homebuilders still aren't expecting any noticeable improvement in sales over the next six months.
The market for new-home sales might not be improving, but it doesn't appear to be worsening either. Housing starts dipped slightly in July, but continue to hover around 600,000 units per year, which is actually a higher level than what was seen six months ago. Unfortunately, the new-home market will likely remain anemic until we see a significant uptick in employment numbers.
Weak job growth is also taking a toll on existing home sales. July sales failed to live up to expectations, falling 3.5 percent to a 4.67-million annual rate. The good news is that prices remain stable nationally, with the median price holding near $174,000 and the average price holding at $224,000. Month-over-month, the price trend has been positive, though it is still slightly down year-over-year.
Price trends in producer and consumer goods, on the other hand, have been decidedly up. Consumer prices, in particular, have been moving perceptively higher. Consumer prices were up 0.5 percent in July and are up 3.6 percent year-over-year. This exceeds the Federal Reserve's 2 percent annual price-inflation target.
Many economists have raised concerns of a growing inflation threat. Credit markets, on the other hand, are showing no concerns. In fact, over the past week, the 10-year Treasury note – the baseline investment for 30-year fixed-rate mortgage loans – is down over 25 basis points and is yielding below 2.10 percent, an all-time low.
Prime 30-year fixed-rate mortgages are usually priced 2.25 to 2.5 percentage points above the 10-year Treasury yield. Not surprisingly, interest rates on these loans are also approaching an all-time low. This tells us that the state of the economy, not inflation, is the overriding concern of credit investors.
Can mortgage rates go lower still? Yes, they can, but will they do so is another matter. Timing markets is impossible, which is why we advise borrowers to lock if they are happy with their rate and payment schedule. We then advise them to cease following mortgage rates. After all, there is no sense in self-inflicting frustration when you are perfectly happy with the deal you received.
Economic |
Release |
Consensus |
Analysis |
New Home Sales |
Tues., Aug. 23, |
315,000 (Annualized) |
Important. Sales remain sluggish, but the trend remains steady. |
Mortgage Applications |
Wed., Aug. 24, |
None |
Important. A 9-percent drop in purchase applications does not bode well for August sales. |
Durable Goods Orders |
Wed., Aug. 24, |
1.5% |
Moderately Important. Outside of transportation and machinery, growth remains strong. |
FHFA Home Price Index |
Wed., Aug. 24, |
0.2% |
Moderately Important. Previously released data already show early summer price appreciation. |
Gross Domestic Product |
Fri., Aug. 26, |
0.9% (Annualized Growth) |
Important. Recent lowering of GDP growth expectations will keep mortgage rates low. |
Consumer Sentiment |
Fri., Aug. 26, |
54 Index |
Important. Sentiment is low and is at levels unseen since the 2008 recession. |
Yet Another Argument for Housing
Over the past couple months, we've been arguing favorably for leveraged residential real estate. Much of our logic has been based on value and comparative advantage. On the latter, we recently noted how real estate is becoming attractive compared to the stomach-churning volatility of the stock market.
This week, we offer a value argument. The Wall Street Journal reports that many hard-hit real estate markets have fallen far below pre-bubble levels. Relying on data provided by Zillow, the Journal states that “property prices in one-third of nearly 130 housing markets across the nation were undervalued, when compared with residents' current income and the pre-bubble trend.”
How does the Journal and Zillow know? From 1985 to 2000, home prices averaged 2.9 times income. During the housing boom, this price-to-income ratio peaked at around 5.1 in 2005. Today, the national average is around 3.3 times income. Still a little high, to be sure, but less so when factoring in the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI). The HOI indicates that 72.6 percent of all new and existing homes sold in the second quarter of the year were affordable to families earning the national median income of $64,200.
Then again, real estate is local, and Zillow's data suggest that many markets – a third – offer enticing value on owner-occupied and investment properties. Couple that with after-tax financing costs below 3.5 percent, and it becomes increasing difficult to argue against buying real estate and leveraging it at a cost unseen in 50 years.
August 15, 2011
MARKET RECAP
“It's déjá vu all over again,” or so goes one of Yogi Berra's more famous malapropisms. There is a whiff of appropriateness to it, because home prices and foreclosures are reoccurring themes.
This week, the news on home prices was mixed, but encouraging. Zillow reported that home values were up 0.4 percent for the second quarter of 2011 compared to the first, but down 6.2 percent year-over-year, with the average home valued at $171,600.
The National Association of Realtors also reported a year-over-year decline. According to the NAR, the median sales price of existing homes fell 2.8 percent to $171,900 in the second quarter compared to the same year-ago quarter. The good news is that the NAR's data show prices trending modestly higher in recent months.
The question is, will the price trend continue? Foreclosures are the elephants in the room. RealtyTrac reported that foreclosures fell 35 percent, hitting a 44-month low, in July compared to the same year-ago period. In most markets that would be good news, but not necessarily in this one; the drop is attributed to banks still working through last year's servicing fiasco. Many market watchers are expecting a surge in foreclosures that could plague housing through 2012.
If there is a foreclosure surge, it will likely be regional. RealtyTrac also reported that 73 percent of foreclosure activity has been concentrated in a few states: California, Florida, Georgia, Michigan, Illinois, Nevada, Arizona, Ohio, and Wisconsin. The aggregated numbers might appear dire, but that doesn't mean that any one market is necessarily weakening.
Speaking of one market (actually, a number of smaller markets), overbuilt Florida is showing observable improvement. Existing home sales in the Sunshine State are up year-over-year. The median sales price has improved 17.3 percent, to $94,000, from the first quarter to the second. Florida has suffered home-price depreciation as much as any state, but lower prices spur demand, which helps stabilize prices. It's simple economics, and it's working.
The economics of mortgage rates are anything but simple. A few of our colleagues have been lamenting Standard & Poor's downgrade of U.S. Treasury debt, believing higher rates are on the horizon. We're not so sure. Mortgage rates are tightly tethered to 10-year Treasury-note yields. The current yield on these notes has dropped below 2.2 percent, lower than the yields in early 2009, and for the past 50 years. Investors obviously aren't concerned.
Much hoopla was made of the news that the Federal Reserve plans to hold short-term rates close to zero until 2013. But the Fed doesn't control the longer end of the market, which is influenced by the general level of economic uncertainty, credit worthiness of borrowers, time preference, and risk aversion. Sentiment and perceptions of these variables can change, and they can change on a dime, as the recent collapse of stock prices shows.
In short, we don't think mortgage rates are rising soon, but we'd be hesitant to play the rate game just to save a few extra basis points.
Economic |
Release |
Consensus |
Analysis |
Home Builder Index |
Mon., Aug. 15, 10:00 am, et |
16 Index |
Important. Home builders expect sales to accelerate through the end of the summer season. |
Housing Starts |
Tues., Aug. 16, |
600,000 (Annualized) |
Important. Starts continue to move higher off a rock-bottom base. |
Import Prices |
Tues., Aug. 16, |
0.1% |
Moderately Important. Falling import prices will help hold consumer-price inflation in check. |
Mortgage Applications |
Wed., Aug. 17, |
None |
Important. Refinances soar, but purchases remain frustratingly low. |
Producer Price Index |
Wed., Aug. 17, |
All Goods: 0.1% (Increase) |
Moderately Important. Falling energy prices are easing producer-price pressure. |
Consumer Price Index |
Thurs., Aug. 18, |
All Goods: 0.4% (Increase) |
Important. Consumer prices are non-inflationary and are helping to keep interest rates low. |
Existing Home Sales |
Thurs., Aug. 18, |
4.98 Million (Annualized) |
Important. Prices are rising on stable inventory levels and sales volume. |
Is it Déjá Vu All Over Again?
We've reworded Yogi Berra's quote into a question because of the volatility and hard sell-off in stocks. Could we possibly be setting ourselves up for a repeat of a decade ago? If you'll remember, many investors sold stocks in late 2000 and early 2001. A lot of that money was then funneled into real estate.
Admittedly, many people were subsequently burned by poor decisions – namely paying and borrowing too much. But as the sting of these losses subsides and stock losses accumulate, it's not outside the realm of possibility for money to cycle back into value-priced real estate. One of the overlooked benefits of real estate is that prices aren't continuously updated, so investors aren't whipsawed emotionally with real estate like they are with stocks.
This isn't to say that we expect a cascade of dollars to flow into real estate, but it's worth noting that investments compete with each. Given recent action in the stock market, the real estate market is looking quite a bit better in comparison.
August 1, 2011
MARKET RECAP
We were encouraged by the housing news and data this past week. First, there was more good news on pricing. S&P/Case-Shiller's 10- and 20-city composites were up 1.1 percent and 1.0 percent, respectively, in May compared to April. Case-Shiller also reports that more recent data collected show single-family home prices will likely post a gain in its June report.
We were hardly surprised that Case-Shiller reported another month of better national pricing. Last week's data on existing-home prices was unexpectedly strong, as was this week's data on new-home prices. The median price of new homes rose 5.8 percent to $235,200 in June, while the average price rose 1.8 percent to $269,000. Year-over-year, the median price is up 7.2 percent and the average price is up 4.8 percent.
New home sales continue to struggle, though. June sales posted at an annualized rate of 312,000 units. The good news is that the five-month trend suggests the current sales pace is as low as it is going to get. The June supply of new homes is down to 6.3 months at the going sales pace; a half-year's supply is considered the norm. We would not be surprised to see new home sales trend higher in coming months.
We would also not be surprised to see an uptick in existing home sales. We base our optimism on the pending home sales index, which rose 2.4 percent in June to 90.9 from May's 88.8. To get an idea how far the market has improved, the pending home sales index is up 19.8 percent from the 75.9 index reading posted a year ago.
Shadow inventory remains an overarching concern. Price discounts on distressed properties have been the major impediment to price stabilization. Fortunately, inventories are decreasing. CoreLogic reports that new auction filings are “down significantly” since October 2010, while the residential shadow inventory has declined to 1.7 million units from 1.9 million units a year ago. Perhaps the fact that this inventory is becoming more manageable is one significant reason we are seeing continued improvement in home prices.
But could rising mortgage rates crimp any increases in housing prices and sales volume? Rates have risen slightly over the past two weeks, but remain near their lows for the year. Many people are concerned with the U.S. debt ceiling, because of the technical default possibility if the debt ceiling isn't raised this Tuesday. We think the two political parties will reach a compromise, and that debt markets will continue to function normally. So, in the near-term we don't see rising rates on default risk as a big concern.
We are obviously not alone in our sentiment. A two-year U.S. Treasury note is yielding 0.41 percent; a two-year note issued by Greece 's government is yielding 30 percent in comparison. In Greece , credit markets are concerned about default; in the United States, credit markets aren't concerned.
We think that excess liquidity (money in the economy) combined with economic growth is the greater impetus to higher mortgage rates than the specter of default.
Economic |
Release |
Consensus |
Analysis |
Construction Spending |
Mon., Aug. 1, |
0.1% |
Important. Residential construction spending continues to weigh on overall spending, but signs point to increased spending in coming months. |
Personal Income & Outlays |
Tues., Aug. 2, |
Income: 0.2% (Increase) |
Moderately Important. Weak auto sales are weighing on overall outlays. |
Mortgage Applications |
Wed., Aug. 3, |
None |
Important. Recent declines in purchase activity point to some weakness in July sales. |
Factory Orders |
Wed., Aug. 3, |
0.6% |
Moderately Important. The trend in orders points to moderate, but persistent economic growth. |
Employment Situation |
Fri., Aug. 5, |
Unemployment Rate: 9.2% |
Very Important. Any deviation from the consensus estimate will move interest rates. |
Consumer Credit |
Fri., Aug. 5, |
$5.0 Billion (Increase) |
Important. Revolving credit use is finally rebounding after declining for the past 12 months. |
The Final Hurdle?
With home prices firming around the country, negative equity appears to be the final hurdle to clear before selling, buying, and financing increase. CoreLogic notes that home-price depreciation over the past four years increased negative equity by more than $6.1 trillion. CoreLogic also reports that nearly 11 million, or 23 percent, of all residential properties with mortgages were in negative equity at the end of the first quarter of 2011.
There are two obvious problems with negative equity: (1) sellers are reluctant to sell if they have to go to the closing table with money and (2) home owners with negative equity are more difficult to refinance. The good news is that, despite the large numbers, the negative equity share of the market has stabilized over the past year and is relatively concentrated in a few states: Arizona , Florida , Michigan , and California .
We expect negative equity to become less negative going forward through a decline in foreclosures, increased amortization, and continued price appreciation. It will take time, to be sure, but improvements will and are occurring, which is why we continue to be bullish on the outlook for housing and mortgage lending.