November 2011 Market Information Archive
November 28, 2011
MARKET RECAP
News was relatively scarce this past week due to the Thanksgiving Day holiday, but what news was released was, for the most part, encouraging.
The news on existing home sales was particularly encouraging. Sales rose to an annual rate of 4.97 million units in October, which easily beat the consensus estimate for 4.8 million units. The bump up in sales helped drop inventory to an eight-month supply compared to September's 8.3-month supply. Year-over-year, inventory levels have dropped nearly three months.
Existing home sale prices were a little softer than we had expected, with the national median home price easing 2 percent month-over-month to $162,000. Discounting was prevalent in condo sales, but much less so in the single-family detached segment.
Shadow inventory has weighed heavily on prices for the past three years, but this market is also improving. Standard & Poor's, citing improvements in third-quarter default and liquidation rates, lowered its estimate of the time it will take to reduce excess stock to 45 months from 47 months. That's still a lot of inventory, but the goods news is that we are making headway.
Federal Deposit Insurance Corp. data also point to an improving distressed-property market. The FDIC reports that inventory held by private banks dropped for the fourth-straight quarter to $50.4 billion worth of properties at the end of September, a 1.5-percent decline compared to the previous quarter and a 5-percent decline from a year ago.
There was some negative news on the economy, but it wasn't as negative as many news outlets led us to believe. Gross Domestic Product was downgraded to 2.0-percent annualized growth from a previously stated 2.5 percent. When we dug into the numbers, we found that the downgrade was much ado about little; the revision was mostly attributable to a $13-billion decrease in inventory investment.
Last week, we mentioned the good news that fixed-asset investment is trending higher. This week, we are glad to note that consumer spending continues to trend higher. Personal consumption grew 0.1 percent for October, which might seem insignificant, but October's consumption follows a very strong 0.7 percent increase in September.
We haven't seen much improvement in mortgage rates over the past two weeks, which has resulted in a slowdown in refinance activity. That could be about to change. The recently revamped Home Affordable Refinance Program (HARP), with higher loan-to-value ratios and appraisal waivers for qualified buyers, is sure to spur refinance demand. In fact, more than 1 million borrowers are expected to benefit from the new HARP.
This means a change in the demand/supply paradigm. When demand for borrowing increases, mortgage rates tend to rise, not fall. We advise our clients (especially clients who already qualify for a refinance under the current rules) not to wait for the new HARP rules to kick into gear.
Economic |
Release |
Consensus |
Analysis |
New Home Sales |
Mon., Nov. 28, |
325,000 Units (Annualized) |
Important. Homebuilders have had to discount to stimulate demand, but recent confidence readings suggest discounting is abating. |
S&P Case/Shiller Home Price Index |
Tues., Nov. 29, |
0.2% (Decrease) |
Moderately Important. Lower home prices have already been documented in more recent home-price data. |
Consumer Confidence |
Tues., Nov. 29, |
45.5 Index |
Moderately Important. Growing confidence points to more home sales. |
Mortgage Applications |
Wed., Nov. 30, |
None |
Important. Purchase activity continues to expand, which bodes well for upcoming home sales data. |
Pending Home Sales Index |
Wed., Nov. 30, |
3.0% |
Important. The index is expected to rebound thanks to increased buyer interest. |
Employment Situation |
Fri., Dec. 2, |
Unemployment Rate: 9.0% |
Very Important. Payroll gains above 100,000 point to a sustained economic recovery. |
Households on the Rise
One significant mistake people often make when gauging the future is to view the future as a simple extension of today. In other words, they view the economy as static – especially after a period of turmoil – and they forget that economies, populations, and wealth continue to grow.
We broach this topic because of something famed-investor Warren Buffett recently said on CNBC. In short, Mr. Buffett said that he didn't think the housing market needed more stimulus; it needed more households to be created.
That's exactly what has occurred every decade since 1950. What's more, households have actually grown at a faster clip than population. Over the past decade, the U.S. population grew 9.5 percent, while households grew 12.5 percent (for a variety of reasons: growing population, divorce, single living, smaller families). Household growth is expected to continue to outpace population growth into the relevant future.
The point is not to focus on static numbers and to factor on future growth. More housing demand is created each year, which, in turn, helps absorb supply, which has been increasing (at least new homes) at a snail's pace over the past few years.
The trend in household growth is just one more reason we look forward to an improved housing market in 2012.
November 21, 2011
MARKET RECAP
Say it is so. The new home sector is finally showing signs of a sustained rebound, and that is being reflected in renewed homebuilder optimism. For the second-consecutive month, the National Association of Home Builders monthly sentiment index jumped three points, pushing the index up to 20 for November – the strongest reading since the government's tax-credit stimulus ended in April 2010.
We understand why there is renewed builder optimism after parsing data on housing starts. Starts eased 0.3 percent in October to an annualized rate of 628,000 units. Most analysts were actually expecting starts to ease further than they did: the consensus estimate was for starts to post at an annual rate of 605,000 units.
Though overall starts eased in October, the contraction was focused on the smaller multi-unit segment. Single-family starts climbed 3.9 percent for the month to a seasonally adjusted rate of 430,000 units, up from a revised 414,000 units in September.
More good news was found in the permits data, which jumped 10.9 percent in October. The encouraging take-away is that permits are up 17.7 percent year over year, which points to increased building activity heading into 2012.
Enthusiasm for a sustained housing recovery is usually tempered by concerns over slow economic growth. We are a little more upbeat on the economy than most, because we look at the production side of the equation as well as the consumption side.
We remain optimistic from what we see on the production side. Recent positive data on wholesale trade, factory orders, business inventories, and industrial production point to more economic activity.
We also look at private fixed investment. The reason being, more investment today means more employment and more future consumption.
We like what we see in private fixed investment, which was up 13.7 percent for the third quarter after posting a 9.2-percent gain in the second quarter. We are especially encouraged by what we see in single-family home investment, which posted a 5.3-percent increase for the quarter. That's the highest quarterly increase since the tax-credit stimulus expired.
We see more economic activity, and yet interest rates (mortgage rates in particular) remain low. They remain low for a couple of reasons. One is that price inflation remains subdued on both the producer and consumer fronts. The other is the debt debacle in Europe . The concern is that the European debt contagion could spread to U.S. financial institutions that are exposed to European debt. In short, more money has flowed away from riskier investments and into U.S. Treasury securities in recent weeks, thus holding both Treasury yields and mortgage rates low.
Today's low mortgage rates means that the after-tax cost of financing a residential home remains at or below 3 percent for many borrowers. That's as low as it has been in the past 45 years, and possibly as low as it will get for another 45 years.
Economic |
Release |
Consensus |
Analysis |
Existing Home Sales |
Mon., Nov. 21, |
4.8 Million (Annualized) |
Important. Sales appear to be building a base after August's strong sales surge. |
Gross Domestic Product |
Tues., Nov. 22, |
No Change |
Important. After slowing in the second quarter, economic growth is picking up pace heading into 2012. |
Mortgage Applications |
Wed., Nov. 23, |
None |
Important. Purchase activity eased slightly, but the positive four-week trend bodes well for upcoming sales news. |
Durable Goods Orders |
Wed., Nov. 23, |
2.0% (Decrease) |
Moderately Important. Outside of transportation, big-ticket purchases continue to post gains. |
Personal Income & Outlays |
Wed., Nov. 23, |
Income: 0.1% (Increase) |
Moderately Important. A string of monthly income and spending increases point to a sustained economic recovery. |
Why Leverage Real Estate?
Over the past few months, we've frequently noted that we think residential real estate will prove to be a good investment for the long-term. We hold to that claim because we think it is better to buy when prices are near a low than when they are near a high. We think that's the case today.
We've also noted that leveraging real estate, purchasing with a mortgage, is the better option for many people in this low-priced market. Home prices have dropped sufficiently low to where many people can afford to pay all cash, but there are opportunity costs associated with all-cash transactions.
First, there is the lost return from leveraging the transaction. If you bought a $100,000 home for cash and sold it 10 years later for $125,000, you'd have earned a 2.3-percent average annual rate of return. The some property bought with 20 percent down and 80 percent financed with a mortgage would produce a return after financing and amortization of roughly 10 to 12 percent annually.
Second, there is the opportunity cost of foregoing other investments. I noted above that the after-tax mortgage-financing rate is around 3 percent for many people. There are many other investments – high-quality dividend-paying stocks, high-quality exchange-traded notes, real estate investment trusts – that offer long-term after-tax returns far better than an after-tax cost of 3 percent.
Low prices combined with record-low financing rates are a tough combination to beat for real estate owners and investors in it for the long haul.
November 7, 2011
MARKET RECAP
Popular financial media can be a good contrarian indicator. When headlines scream one thing, the opposite is more likely to follow.
We see the phenomenon repeatedly. After an extended stock-market rally, a slew of business stories arise to explain why the stock market has likely hit a permanent high. After the stock market has undergone an extended decline, multitudes of stories arise to question the sustainability of capitalism.
But as predictably as day follows night, the trends these articles ride soon reach an apex, and markets move in the opposite direction.
Over the past two years, a slew of articles have lambasted homeownership. Many of these articles centered on why we would become a renter society or why homeownership was a relic of the twentieth century.
These anti-ownership writers were emboldened by the drop in homeownership rates, which had been pushed up to 70 percent during the height of the boom. The percentage rate had recently dropped to 66. Now it appears to be reversing. The Census Bureau reports that the nation's seasonally adjusted homeownership rate rose to 66.1 percent, suggesting the decline has abated, if not reversed.
A drop in the homeowner percentage was to be expected: Homeownership has hovered around the mid-60s for decades, so the decline was a matter of returning to the mean. That said, it was unlikely to go down any further. Most of us overwhelmingly prefer to own than to rent, and most of us (especially those with children) prefer the suburbs to the city.
We suspect more people will want to own when they are convinced price declines are over. On that front, Clear Capital reports that home prices increased again at a 0.6 percent rate in October. Year-over-year, though, Clear Capital reports a 2.8 percent decline.
We are always quick to point out that all real estate is local, and many local markets are showing significant improvement. Home prices in Cleveland increased 6.2 percent in September; Texas (which technically isn't local, but the news is encouraging nonetheless) saw housing starts jump 24.2 percent in September; Miami saw existing home sales hit a five-year high, surging 15.1 percent in September.
In other words, markets continue to clear, and we find it encouraging not only that lower prices have promoted more home buying in many markets, but also that firming prices suggest the worst of the discounting is over. This process should stimulate even more buyers to step forward.
If it does, buyers are hitting the mortgage market at the right time. The European Union's continued travails with Greek debt have created a surge in U.S. Treasury security buying, which has helped lower mortgage rates over the past week.
However, this, too, could easily pass. Payrolls have been firming over the past couple months, which points to a strengthening economy. What's more, financial crises, like the one in Europe , that seem intractable often turn out to be quite ephemeral instead.
herefore, we still think it's risky to wait and hope for much lower mortgage rates.
Economic |
Release |
Consensus |
Analysis |
Consumer Credit |
Mon., Nov. 7, |
$5 Billion (Increase) |
Important. Credit use has steadily risen and appears sustainable at a higher rate based on lower debt-to-income ratios. |
Mortgage Applications |
Wed., Nov. 9, |
None |
Important. Purchase activity continues to rise and points to improving home sales |
Wholesale Trade |
Wed., Nov. 9, |
0.3% (Increase) |
Moderately Important. Big-ticket items (autos and electronics) continue to pace business activity. |
International Trade |
Thurs., Nov 10, |
$46 Billion (Deficit) |
Moderately Important. Higher petroleum prices and a stronger dollar have marginally raised the trade deficit. |
Import Prices |
Thurs., Nov. 10, |
0.1% (Decrease) |
Moderately Important. Import prices point to moderating consumer-price inflation. |
Consumer Sentiment |
Fri., Nov. 11, |
62 Index |
Moderately Important. Sentiment is improving, but the low reading suggests consumers are pessimistic on the immediate future. |
Housing Stocks and the Housing Market
When trying to gain insight into a market, it is important to parse what people do as much as what they say. The stock market is often a good starting point to parse what people are doing as opposed to what they are saying.
We think three particular stock investments offer insight into what investors are doing with their money regarding housing: the iShares FTSE NARIET Residential Plus Capped Index (REZ), the iShares Dow Jones U.S. Home Construction ETF (ITB), and the SPDR S&P Home builders ETF (XHB). These investments cover homebuilders, home improvement stores, construction material, furnishings, and other ancillary businesses attached to the housing market.
For most of the year, these investments have been mostly flat to slightly down, but have been rallying over the past month. What we find most telling, though, is the short interest – a measure of the number of investors who bet these shares will fall. Short interest is extremely low, and has been falling. This tidbit of information suggests to us that fewer investors are bearish on housing in general, and that many more investors (compared to last year) believe the worst is behind us.