Cornerstone Group Realty - Riverton and Lander, Wyoming in Fremont County - Real Estate, Houses for Sale, Homes for Sale

June 27, 2011

MARKET RECAP

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.

June 20, 2011

MARKET RECAP

It was announced this week that the homebuilders' sentiment index unexpectedly tumbled to 13 in May from 16 in April, posting the biggest drop in a year. This time around, homebuilders weren't feeling dour for the usual reasons – distressed properties and falling prices. They were feeling dour because of soaring material costs. The National Association of Home Builders reports that copper prices are up 23 percent from a year ago, insulation is up 6.25 percent, while asphalt paving and blocks are up 4.5 percent. Rising input costs coupled with increased pricing pressure isn't the most favorable paradigm for operating a profitable business.

However, there are a few positive fissures forming in the homebuilders' wall of worry. Housing construction showed signs of life in May, with starts rebounding 3.5 percent to 560,000 annualized units, topping most analysts' expectations. Moreover, permits are pointing to more optimism heading into summer. Permits jumped 8.7 percent for the month to post a 5.2-percent year-over-year gain. This suggests that the prices of new homes are stabilizing, if not improving, and that home builders feel somewhat confident that they can pass some of their increased costs onto buyers.

An improved pricing environment could also be forming in the existing-home market. RE/MAX reports that the national median sales price rose 3.7 percent, to $183,815, in May. RE/MAX also reports that 42 of the 53 metropolitan markets it surveyed experienced a monthly rise in transaction volume, with 15 markets seeing double-digit increases. What's more, these homes aren't sitting around as long: the average number of days a home spent on the market declined to 94 days, and has been consistently declining since the beginning of the year.

Inflation is a growing concern that extends beyond home building. On the consumer front, overall price inflation worsened to an annualized rate of 3.4 percent in May from 3.1 percent in April, while the core rate – inflation less food and energy – bumped up to 1.5 percent from 1.3 percent. This latest inflation news lowers the odds that the Federal Reserve will inject more money into the economy, an act that is stimulative but also inflationary.

Heightened inflation concern was the primary reason mortgage rates rose (albeit less than 10-basis points) last week. Yes, rates are still very low, and we don't expect them to spike in the near term, but if inflation expectations spread to more sectors of the economy, all interest rates – including mortgage rates – will be pressured to move higher.

We Are All for More Employment, But.....

Employment matters, and matters a lot to a lot of economists. The logic is as follows: A reduction in the number of unemployed means more people can afford to boost their expenditures. As a result, activity will increase and the economy will grow.

Understandably, more than a few economists were disappointed with May's employment report, which showed only 54,000 jobs created for the month after 232,000 jobs were created in April. However, one month does not a trend make, so we are not overly concerned. There were extenuating circumstances. The Labor Department indicated that severe weather played a notable role in the weak employment data.

Still, it's understandable that some economists were fretting. The economic trajectory/expansion hasn't been as vigorous as most of us would like. However, we think there would be less fretting if more economists were willing to look behind the scenes. Consumers matter, but producers matter as much, and producers have been vigorously investing in capital equipment and inventories over the past year. Business investment today often fails to produce an immediate rise in employment, but it does set the stage for greater production and more employment down the road.

That said, we remain convinced the recovery is on track and that residential real estate, leveraged real estate in particular, is one of the more appealing investment opportunities in today's market.

June 13, 2011

MARKET RECAP

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.

June 6, 2011

MARKET RECAP

Have we really regressed to 2002? That's what we are being told by the S&P/Case-Shiller home price index, which claims national home prices have fallen to 2002 levels. According to Case-Shiller’s monthly index for March (it’s actually an average of three months), national prices have double-dipped, declining 4.2 percent in the first quarter, thus, returning us to 2002 price levels.

However, have we really gone back to the future? A day after the Case-Shiller home price index was released, CoreLogic released its own home price index for April (also a three-month average). CoreLogic's index shows that home prices increased 0.7 percent between March and April – the first increase in the index since the homebuyer tax credit expired in mid-2010.

So why the discrepancy? Case-Shiller seasonally adjusts its data while CoreLogic does not. More important, CoreLogic's index is timelier, covering three months ending in April versus Case-Shiller’s March number.

It's also worth noting that CoreLogic produces another index. It excludes distressed sales from the equation, which makes this index just a bit more interesting: Y ear-over-year home prices including distressed properties were down 7.5 percent in April. Excluding distressed properties, CoreLogic’s index shows prices are up 0.5 percent.

We instinctively look for silver linings, but are things really as lost as the most pessimistic pundits contend? Our answer remains “no.” Housing is more affordable than it has been at any time in the past decade, and it may begin to look even more affordable as rental rates continue to rise. While foreclosures remain near their high, mortgage delinquencies are falling.

Credit remains a concern, though. Transactions that could be completed in normal circumstances aren't, because the circumstances today aren't normal. Mortgage rates are low. In fact, they are the lowest they've been in three years, namely due to circumstances few (including us) expected: slowing economic growth and a surfeit of negative economic and world news that has many investors rushing to the haven of U.S. Treasury securities. (The 10-year Treasury note now yields under 3 percent.)

In our opinion, too many people are too risk adverse these days: Insurance premiums on loans backed by the Federal Housing Administration have risen twice in the past year, and banks are scrutinizing borrowers’ incomes and tax returns with an unforgiving eye. Borrowers are either paying higher rates or being turned away who wouldn't be under analysis that is more subjective.

There is a lot we can do for borrowers, to be sure, but we know, given our expertise and experience, there is a lot more we could be doing.

Fighting Cognitive Dissonance

We do not allow ourselves to become overwhelmed by “expert” opinion, if for no other reason than to maintain our mental stability. If we were to let our emotions ride with every new opinion from every putative expert, we'd find ourselves paralyzed into complacency.

Besides, “experts” aren't as expert as we might think. University of California , Berkeley, Professor Philip Tetlock tested 284 “experts” in political science, economics, history and journalism in a staggering 82,000 predictions. Tetlock concluded that their predictions were no more accurate than uninformed guesses. Tetlock hypothesizes that being deeply knowledgeable on one subject narrows focus and increases confidence but also blurs the value of dissenting views and transforms data collection into belief confirmation.

Now, we probably consider ourselves experts in our particular field of housing and finance. However, does that mean we should give up predicting the outlook of the housing or mortgage markets? Actually, no, as long as we are willing to take a balanced approach. Tetlock also notes that “thinkers who know many small things (tricks of their trade), are skeptical of grand schemes, see explanation and prediction not as deductive exercises but rather as exercises in flexible ‘ad hocery’ that require stitching together diverse sources of information” are actually more accurate forecasters.

For this reason, we focus on data most media outlets tend to downplay. We like to add differing information to the debate to present a more balanced view of the market, and, hopefully, more accurate forecasts of what may lie ahead.