May 2011 Market Information Archive
May 31, 2011
MARKET RECAP
We dabbled a little in economic theory last week, noting that more inventory produces lower prices and more sales. This week, the opposite occurred: less inventory produced higher prices, but also lead to more sales.
We are speaking of sales of new homes, which jumped 7.3 percent to a higher-than-expected annualized rate of 323,000 units. Strong sales drew down supply to 6.5 months from 7.2 in March. Here's the economics at work: Lower supply is firming prices, with the median price of new homes up 1.6 percent to $217,900. Year-over-year, the median price is up 4.6 percent.
The lesson here is that the laws of supply and demand remain unbreakable. Pricing has been the overarching headache since the beginning of the year, but there are only two ways to ameliorate it: decrease supply or increase demand. We saw the latter, demand, temporarily stimulated with tax credits last year. But that was only a Band-Aid that simply moved existing demand forward instead of increasing overall demand.
It is important to note that supply, demand, and pricing in housing are all heterogeneous, meaning it is not one market. We've noted in the past that real estate differs geographically, but homes and buyers also differ. That point often gets lost in the monthly aggregated data on sales and prices.
Unfortunately, the aggregated number always grabs the headline, but that number is really a fiction and not representative of any particular market. Toll Brothers CEO Douglas Yearley's take on home prices and markets is insightful. Yearley says, “We question the recent media headlines announcing that home prices continue to fall. Many studies quoted in the media combine distressed sales data, including foreclosures and short sales, with new and/or non-distressed existing home sales data. We believe that averaging distressed and non-distressed sales data provides a misleading picture to the public regarding home price direction.”
We agree with Mr. Yearley's assessment: existing homes, new homes and distressed homes are all different markets. To be sure, each doesn't operate in a vacuum; what occurs in one market can affect another. A buyer interested in a new home might be persuaded to consider a newer existing home, but he is unlikely to consider a distressed home. The point is that we are not looking at one big mass of buyers and sellers – each is unique.
Nor are we looking at one big mass of borrowers, which is why we've occasionally criticized FICO-score methodology. Trans Union reports that troubled borrowers who default on their mortgages (during the housing-bust anomaly) are less likely to develop long-term poor credit behavior compared to those who default on other kinds of loans. This suggests to us that risk is being overstated and that overly stringent underwriting standards are crimping the housing recovery.
We still have leeway to work with borrowers, to be sure, which is a good thing when considering rates remain well below 5 percent. We would just like a little more leeway.
Economic |
Release |
Consensus |
Analysis |
S&P/Case-Shiller Home Price Index |
Tues., May 31, |
0.5% |
Moderately Important. Prices will likely have dropped nationally due to higher distressed-property sales. |
Mortgage Applications |
Wed., June 1, |
None |
Important. The up trend in purchase applications should lead to strong May sales figures. |
Construction Spending |
Wed., June 1, |
0.3% |
Important. Residential construction is showing signs of increased activity. |
Productivity & Costs |
Thurs., June 2, |
Productivity: 1.9% (Increase) |
Moderately Important. Productivity gains are peaking, which could lead to more hiring. |
Employment Situation |
Fri., June 3, |
Unemployment Rate: 8.9% |
Very Important. Another month of strong jobs growth could push interest rates higher, as money cycles out of debt and into equities. |
This Time it Really is Different
In past housing recoveries, the first-time buyer was the correcting force. This time it appears investors are. News on residential real estate rental rates has been positive and prices on many rental properties, particularly multifamily properties, have been on the rise.
We suspect single-family home values will rise with the investment market. In fact, more investors are bullish about home prices in the coming year and are beginning to hunt aggressively for residential real estate investments, according to a new survey conducted by Move Inc. The firm's real estate investor survey found 22 percent of investors are bullish about home prices rising in the next six to 12 months. Twenty-two percent might seem low, but it is actually much higher than Move Inc. expected.
If you think home values will generally rise over the next five years (and we do), borrowing and buying instead of buying with cash is the savvier financial option. For one, you get more home for the money. Second, you get the benefit of greater returns that leveraged real estate provides in a rising market. We remained convinced that real estate, especially leveraged real estate, is today's best investment.
May 23, 2011
MARKET RECAP
We suspect that there are a few businesses tougher than the home-building business these days, but we are hard pressed to think of any. The homebuilders likely agree, given the homebuilder index remains at a depressed 16 reading for May.
Homebuilders continue to report lousy conditions. They blame competition from distressed sales, which made up 39 percent of the homes sold in the first quarter, as well as unavailability of construction credit for their woes. What's more, sales of distressed homes also pressure prices of existing homes, which means new home sales have been crimped further by buyers unsure that they will be able to sell their existing home at a favorable price in order to trade up.
Homebuilders are surely frustrated by the sputtering and the false starts that they've had to endure over the past 18 months. Just when it appears a positive trend in starts will take hold it reverses and falls again. Starts rebounded 7.2 percent in March but reversed 10.2 percent in April, dropping to an annualized rate of 523,000 units. The drop was led by a 24.1 percent fall in the volatile multifamily-starts component, but the larger and more significant single-family component was off 5.1 percent. Unfortunately, we doubt that homebuilder fortunes will improve much in the coming months.
Pricing – for everyone – remains the front-burner concern. The NAR reports that the median sales price in the first three months of the year was 4.6 percent lower compared to the first quarter of 2010. Prices have declined in 118 of the 152 metropolitan areas included in the NAR's report. We are quick to note, though, that year-over-year comparisons are irrelevant when one quarter is advantaged by tax credits and another quarter isn't. We will be much more interested in data from the second half of this year compared to the second half of 2010.
The good news is that lower prices have helped rejuvenate sales volume. Total home sales increased 8.3 percent to a seasonally adjusted annual rate of 5.14 million units in the first three months of 2011 compared to the last three months of 2010. Our economic textbooks haven't failed us on this market process: lower prices produce higher demand, and, therefore, help to clear inventory.
Admittedly, our textbooks have been less prescient on mortgage rates. Despite obvious price inflation in consumer, producer, and financial markets; strong job growth; and worries over the United States ' fiscal conundrum; mortgage rates (as well as most U.S. Treasury rates) continue to fall. Indeed, we are now looking at 30-year fixed-rate mortgages near a five-month low, well below 5 percent.
Obviously, other factors are at work here, and it could simply be a supply and demand imbalance and surprisingly strong demand for U.S. Treasury securities that are keeping mortgage rates low. Whatever the cause, we still don't think they will hold. There are simply too many variables favoring higher rates, and none more influential than the Federal Reserve's eventual need to shift to a tighter monetary policy from an expansionary one.
This isn't to say we couldn't be wrong, but if we are, then some of our economics textbooks might need a rewrite.
Economic |
Release |
Consensus |
Analysis |
New Home Sales |
Tues., May 24, |
315,000 |
Important. Sales of distressed properties continue to take sales away from new homes. |
Mortgage Applications |
Wed., May 25, |
None |
Important. Falling rates are stimulating refinance activity. |
FHFA Home Price Index |
Wed., May 25, |
1.5% |
Moderately Important. The index is assured to post a decrease based on more contemporary price information. |
Personal Income & Expenditures |
Fri., May 27, |
Income: 0.4% (Increase) |
Moderately Important. The trends in income and spending reflect a steadily growing economy. |
Pending Home Sales Index |
Fri., May 27, |
94 Index |
Important. Lower prices and better job prospects are stimulating buyer demand. |
Could Home-Priced Insurance be a Contrarian Indicator?
SmartMoney ran an interesting article this past week on insuring against a drop in home prices. In short, the article focused on how underdeveloped the market for hedging and insuring against falling home prices is and how it is starting to develop.
Up until recently, the only way to insure a home against falling prices was to buy futures contracts on home prices in 10 metropolitan areas, including Boston , Miami , and Las Vegas . Of course, if you didn't live in one of the 10 metropolitan areas, you won't be perfectly insured. If you lived in Reno and bought futures contracts based on home sales falling in Las Vegas , you could still lose if Las Vegas home prices rose while Reno home prices fell.
Today, firms are beginning to sprout around the country offering direct insurance for local markets. One, Home Headquarters, a nonprofit, sells insurance at a cost of 1.5 percent of the home's value for homes located in Syracuse , New York . More firms are set to enter the market this year.
This tells us something: new products (and articles about them) tend to proliferate toward the end of a strong trend – either down or up. Perhaps this latest data point on insuring against falling home prices, combined with all the other negative data points on housing, is a sign the end is near in a good way.
May 16, 2011
MARKET RECAP
Zillow.com had many in the media – from the Wall Street Journal, to Bloomberg, to the New York Times – talking this past week, and they were talking mostly about home prices.
Home prices, according to Zillow, posted the largest decline in nearly three years in the first quarter of 2011, with prices falling 3 percent compared to the fourth quarter of 2010. Zillow's data also show that prices have fallen nationally for 57-consecutive months.
The economists tell us that prices are deteriorating because of the glut of foreclosed properties selling at a discount. Mortgage companies Fannie Mae and Freddie Mac have sold more than 94,000 foreclosed homes during the first quarter, a new high that represents a 23-percent increase from the previous quarter. More properties could be on the way: Fannie and Freddie together were holding 218,000 properties at the end of March, a 33-percent increase from a year ago.
This latest dour data on prices prompted many economists to recalibrate their forecasting models, pushing back their estimates on when the housing market will actually bottom. One economist, quoted at Housingwire.com, said, “We aren't even halfway through a 10-year transition in the housing market.” Zillow's in-house economist believes prices won't hit bottom before next year and expects that “they will fall by another 7 percent to 9 percent.”
Distressed properties are an issue, to be sure. The NAR reports that d istressed property sales accounted for 39 percent of all transactions in the first quarter, up from 36 percent a year earlier. While good for sales volume, distressed properties are dragging down prices. In the first quarter, the median existing single-family home price was $158,700, down almost 5 percent from $166,400 one year ago, according to the NAR.
The rise in the number of distressed properties means more lower-priced homes, more home owners with negative equity, and, thus, even more distressed properties. It sounds like a vicious circle, except it isn't. Most sellers have reserve prices. They won't sell their home at just any price, regardless if they're underwater or not. That also goes for REO properties. People are rational; they want to maximize their returns, and maximizing returns often means remaining on the sidelines instead of selling.
We still don't back down from our contention that prices are at or near their lows. Could the price drop a little further after a purchase? Yes, but that can happen with any investment. What's important is where the investment will be seven-to-10 years from now. We believe that residential real estate will be higher, and possibly a lot higher.
We also believe that the housing market would be in much better shape today if more people capable and willing to buy could. We are speaking of overly tight lending standards. The average credit score on loans backed by Fannie Mae stood at 762 in the first quarter, up from an average of 718 for the 2001-2004 period.
Of course, we are interested in speaking with anyone who wants a mortgage who understands the unique opportunity to get a loan at a low rate and to buy a home at a low price. There is a lot we can still do, but there would be more we could do if the tethers were only reasonably lengthened.
Economic |
Release |
Consensus |
Analysis |
Home Builders' Index |
Mon., May 16, |
17 Index |
Important. Sentiment is expected to rise on increased buyer traffic. |
Housing Starts |
Tues., May 17, 8:30 am, et |
570,000 (Annualized) |
Important. Despite the overhang of distressed properties, buyers are expressing more interest in new homes. |
Mortgage Applications |
Wed., May 18, |
None |
Important. The up trend in purchase applications points to an improving home-sales trend. |
Federal Reserve FOMC Minutes |
Wed., May 18, |
None |
Moderately Important. The Fed is expected to continue with its loose-money policy. |
Existing |
Thurs., May 19, |
5.2 Million (Annualized) |
Important. The sales trend remains driven by cash and distressed-property sales. |
Leading Indicators |
Thurs., May 19, |
0.2% (Increase) |
Moderately Important. The indicators suggest moderating but sustained economic growth. |
The Great Protector from Inflation
Inflation is on many people's minds these days, including ours. Investors are expressing the most obvious concern, revealed in their seemingly insatiable demand for gold and silver – two historical antidotes to the ill-effects of inflation. Both metals have nearly doubled in price over the past few years.
Real estate is another great protector. Returns on residential real estate have typically averaged a return that was 1-to-2 percent above the rate of inflation over the past century. That's easy to forget, given the off-putting news on recent price declines. But the message is worth remembering, especially at a time when investors have been piling into richly priced gold and silver. We think real estate is the better value and the better protector from inflation at current prices.
May 9, 2011
This article first appeared in Today's Buyer's Rep Vol XX, January 2011, a publication of the Real Estate Buyer's Agent Council.
Evolution of Buyer Representation
Even though buyer representation is now largely available to home buyers across the country, it wasn’t always so. As an advocate for home buyers, the Real Estate Buyer’s Agent Council (REBAC) has played a key role in creating that change and helping buyers receive the same level of representation in real estate transactions that was previously only enjoyed by sellers.
Prior to the introduction of buyer representation (also called buyer agency), only sellers were represented in real estate transactions and received full fiduciary responsibilities from their agent, including loyalty, obedience, disclosure, confidentiality, reasonable care and diligence, and accounting.
Buyers were brought into a transaction with assistance from licensees who treated buyers as customers, not clients, because they were acting as agents or sub-agents for the seller.
Buyer representation aims to level the playing field by offering full fiduciary responsibilities to buyers, typically by signing a buyer representation agreement. Details vary from state to state regarding how agency relationships are established.
KEY MILESTONES IN THE EVOLUTION OF BUYER REPRESENTATION INCLUDE:
1988: REBAC is founded by Barry Miller, a Denver based REALTOR®. The organization supports buyer representation through advocacy and training, awarding the Accredited Buyer’s Representative (ABR®) designation to agents who pass certain education and experience requirements.
Mid-1990s: Public interest in buyer representation grows. REALTOR® associations lobby for changes to many state’s real estate regulations, away from sub-agency towards direct representation of buyers.
1996: The National Association of REALTORS® acquires REBAC and steps up efforts to advocate for changes in real estate license laws and agency practices.
By effecting substantial changes to the REALTOR® Code of Ethics, the National Association of REALTORS® has helped transform the way real estate brokerage is conducted across the country, ultimately providing better service to real estate home buyers.
REBAC continues to serve home buyers by providing valuable information resources on the buying process and helping connect home buyers with qualified buyer’s representatives. You can learn more about buyer representation by asking your Accredited Buyer’s Representative or visiting REBAC.net.
May 9, 2011
MARKET RECAP
There wasn't much news on housing sales this past week, so markets focused on prices instead. The chatter centered mostly on fear of the dreaded “double dip.” The fear that home prices will continue to fall and will make new lows.
There is some validity to the fear, if we consider only national numbers. Clear Capital reports that national prices fell 5 percent in April compared to the year-ago period. Over the past nine months, national prices are purported to have declined 11.5 percent.
Distressed properties were to blame. Clear Capital says that REO sales accounted for 34.5 percent of overall sales nationwide after declining to nearly 20 percent in the middle of 2010. This same pattern surfaced in 2008, when REO saturation grew from 20 percent to 32 percent by the end of the year.
It's an apples-to-oranges comparison (2008 to 2011) in our opinion. Back in 2008 and early 2009, the entire nation was a mess: markets converged and they all dropped in tandem. Today is different; housing markets and economies are more localized. We think Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association, put it best when he described today's market as a “tale of two cities.” Home prices are stabilizing and rising in economically viable parts of the country, while other areas remain paralyzed by high unemployment and shadow inventories.
Every region of the country has shadow inventory, but it is proportionally high in parts of California , Michigan , Nevada , Florida , and Arizona . These states still have a lot of work to do to rid themselves of distressed properties. The difference between 2008 and today is that what happens in Vegas really does stay in Vegas. In other words, don't let national price trends keep you awake, particularly if the comparisons are year-over-year.
It remains a buyer's market, though, and we'd like to see buyers take advantage of a stable lending environment. In fact, rates actually eased lower this past week. Some credit-market commentators pointed to the death of Osama bin Laden for the lower rates, the rationale being that investors were fearful of a market-churning retaliation, so they flocked to U.S. Treasury securities.
It's difficult to say for sure why rates dropped; there are simply too many factors that move markets over the short term to say which one is most influential. We prefer to keep our eye on the long term, which is being driven by soaring consumer prices, rising gold prices, and falling value of the dollar. To us, they add up to rising mortgage rates. And we're not alone in that assessment: the MBA forecasts a 30-year, fixed-rate mortgage rate of 6.2 percent next year.
Economic |
Release |
Consensus |
Analysis |
Import Prices |
Tues., May |
2.1% |
Important. Rising energy prices continue to drive inflation. |
Mortgage Applications |
Wed., May 11, |
None |
Important. The trend in purchase applications points to improving sales for April. |
International Trade |
Wed., May 11, |
$46.4 Billion (Deficit) |
Moderately Important. A falling dollar and rising energy costs are pushing the deficit higher. |
Producer Price Index |
Thurs., May 12, |
All Goods: 0.8% (Increase) |
Important. The rise in the core number is forcing more producers to push costs onto their customers. |
Retail Sales |
Thurs., May 12, |
0.6% (Increase) |
Important. The increase in sales is being driven mostly by inflation. |
Consumer Price Index |
Fri., May 13, |
All Goods: 0.4% (Increase) |
Very Important. Should U.S. Treasuries lose their haven status, the rising CPI will pressure interest rates to rise. |
Hot versus Cold Markets
It's an age-old dichotomy: some people prefer to buy into the latest trend; some people prefer to go against the crowd and buy what few people appear to want.
In the past couple issues, we've noted that the residential rental real estate market is turning, which means more people are buying rental properties. Does that mean that the rental market is now a hot market? We don't think so. We think it is more of a developing market. That is, it is garnering more interest among more people, but it is still not hot. A hot market to us is the commodities market, gold in particular, and the stock market. Both have nearly doubled over the past two years.
Residential real estate, if not a cold market is a cool market, and we think these types of markets offer more reward for less risk. We have to look no further then the past two hot markets – the stock market of 1999 and the real estate market of 2006 – to realize how dangerous it can be to buy into the hot market.
Of course, it is impossible to accurately predict how hot or cold markets can get, but if we were to bet on which would be the hot market two or three years from now, our money would be on the real estate market.
May 2, 2011
MARKET RECAP
Based on several leading indicators, and on our own anecdotal evidence, we thought March real estate numbers would be noticeably better than January and February. That's indeed turning out to be the case.
Sales of new homes jumped more than expected in March. A look at March's numbers shows a 300,000 unit annual sales rate versus 270,000 in February. Supply at the current sales rate fell to 7.3 months from 8.2 in February, while the median price rose 2.9 percent to $213,800 for a year-over-year contraction of 4.9 percent, less deep than February's contraction of 6.4 percent.
We don't give too much currency to year-over-year price comparisons because of the distorting effect of last year's tax credits. We also tend to discount the S&P/Case-Shiller home price index, which it is too far behind the curve. That said, the index shows that prices in February for its 10- and 20-city composites are lower than a year ago, but still slightly above their April 2009 bottom.
Contemporary data are more encouraging. Data from Housingtracker.net for the 10 cities in Case-Shiller’s 10-city index suggest a developing uptrend. As of this past week, the unweighted month-to-month change was up 1.1 percent, which is on top of March's 3.1 percent gain. Even more encouraging, the three-month change is up 4.4 percent.
We are not surprised. Prices only go so low before buyers no longer ignore them. Consider Miami , one of the more distressed housing markets in the country. Three out of five homes sold there are foreclosures or short sales. At the same time, the supply of Miami-area homes for sale has dropped nearly 24 percent. Today it would take seven months to clear Miami 's market at the current sales pace; six-months ago it would have taken 17 months. If we were to wager on where median and average home prices in Miami will be this time next year, we would take the higher-priced side in a New York second.
It's not only Miami, though. The latest NAR data show interest picking up around the country. The March index of pending home sales rose 5.1 percent to 94.1 from a downwardly revised 89.5 in February. The NAR has upped its sales estimates, with existing-home sales rising 5 to 10 percent this year.
Mortgage rates continue to hold steady and keep the affordability index low. Rates have held their lows longer than we had anticipated, but that's good news for qualified buyers. Unfortunately, many qualified buyers are attracted to trends, but once a trend is established, the best deals have been taken. We've always favored mustering the courage to get in at the base of a perceived new trend – a contrarian move – instead of waiting to hitch a wagon to an established trend. For buyers who can muster the courage or financial wherewithal, the market is very favorable.
Economic |
Release |
Consensus |
Analysis |
Construction Spending |
Mon., May 2, |
0.4% |
Important. Residential spending continues to lag, but spending on private commercial projects is improving. |
Factory Orders |
Tues., May 3, |
1.6% |
Moderately Important. Orders reflect continued business-sector growth. |
Mortgage Applications |
Wed., May 4, |
None |
Important. Purchase activity should resume after the surge to get lower-cost FHA loans. |
Productivity |
Thurs., May 5, |
Productivity: 0.5% (Increase) |
Important. Productivity gains appear to have momentarily peaked, which means a possible pick up in employee hires. |
Employment Situation |
Fri., May 6, |
Unemployment Rate: 8.8% |
Very Important. Continued job growth will increase the pressure on the Federal Reserve to raise interest rates. |
Continued Demand and the Rise of Rentals
The Census Bureau reports that the home-ownership rate dropped to 66.4 percent in the first quarter of 2011, its lowest posting since 1998. This is good news, because demand remains strong. A recent Pew Research survey showed that 81 percent of adults still believe that owning a home is the best long-term investment, which is down only 3 percent from 1991. This tells us that few people have been scared off by all the negativity on home ownership and housing that's been reported over the past couple years.
Many of these people might be unable to afford a house today, but in the future, they will. In the meantime, they and many others need a place to live. It shouldn't be a surprise, then, that the rental market has helped stabilize the housing market. We think today's residential real estate market is particularly appealing to investors. Rents are on the rise, which means values will soon follow. Buy a house today, collect cash flows, sell an appreciated asset to an owner-occupier a few years down the road. That's the very essence of successful investing.