September 2011 Market Information Archive
September 19, 2011
MARKET RECAP
The major mortgage servicers are getting their house in order, as foreclosures have accelerated in the past month. RealtyTrac reports that mortgage servicers started foreclosure on more than 78,800 properties in August, a 33-percent increase from July levels.
Most of us were aware that the foreclosure lull was only a temporary reprieve. That said, the growing rate of foreclosures has revived concerns over excessive inventory. The Cato Institute, an economic think thank, estimates an oversupply of three million houses, about a million more than actually demanded.
With so much inventory on the market and more to come, pricing becomes an issue: More supply means lower prices, which, in turn, means more negative equity. Concerning the latter, CoreLogic estimates that nearly 11 million properties, roughly 22.5 percent of all U.S. homes, were worth less than the underlying mortgage in the second quarter of 2011.
The prospect of more price depreciation and more negative equity has increased calls for more government action. Problem is, efforts to date have had only marginal benefits or have had negative unintended consequences: Cato reports that government efforts to revive housing have helped the most expensive markets while actually depressing prices in the cheapest markets.
At this point, it might be best to let the market run its course. We’ve noted in past editions that when prices fall, demand increases, then prices increase. We've seen this economic truism at work to encouraging effect in a few hard-hit markets. The Orlando Regional Realtor Association reports that the median price for homes in its area has increased 15.1 percent year-over-year.
We've also often noted that real estate is local. The national numbers on foreclosures and negative equity can be big and scary, but they also carry no relevance to any one particular market.
Mortgage rates are another matter; they tend to adhere closely to a national average. Rates at the national level dropped a few basis points this past week on most mortgage products.
There are many reasons for the drop in mortgage rates. One of the more interesting is a rumor that the Federal Reserve is contemplating purchasing longer-term Treasury securities (such as the 10-year note) to drive down long-term interest rates, which would help keep mortgage rates low. Because markets are forward looking, it is possible that the market is getting a jump on the Federal Reserve.
We've been in the minority in questioning the economic benefits of ultra-low mortgage rates. Our rationale is that low rates, and the anticipation of even lower rates, are delaying buying and refinancing decisions today. Our rationale isn't unfounded. Richard Fisher, president of the Federal Reserve Bank of Dallas , believes low rates are limiting economic growth because businesses have an incentive to delay borrowing for expansion. They see no reason to act today if interest rates are expected to stay low tomorrow. We see the same effect in housing.
Economic |
Release |
Consensus |
Analysis |
Home Builders Index| |
Mon., Sept. 19, |
16 Index |
Important. A slowdown in existing-home sales is causing more cancellations of new-home contracts. |
Housing Starts |
Tues., Sept. 20, |
590,000 (Annualized) |
Important. Starts remain anemic with mild strength in the multifamily component. |
Mortgage Applications |
Wed., Sept. 21, |
None |
Important. A pick up in purchase applications suggests improving sales for September. |
Existing |
Wed., Sept. 21, |
4.75 Million (Annualized) |
Important. Economic uncertainty is slowing sales volume. |
Federal Reserve FOMC Meeting Announcement |
Wed., Sept. 21, |
Federal Funds Rate: 0.0% to 0.25% |
Important. Markets will be parsing the Fed's transcripts for directions on long-term rates. |
FHFA Home Price Index |
Thurs., Sept. 22, |
0.5% |
Important. Despite sluggish summer home sales, prices should continue to improve. |
A Novel Solution, But Can It Work?
We like it when people think outside the box. Radar Logic, a data and analytic firm, has sent a proposal to Washington on a loan-restructuring plan we find intriguing.
Mortgage News Daily offers an example of Radar logic's plan in practice: A loan with an original balance of $190,000 has been paid down to $186,000, then goes into default. A foreclosure occurs and a subsequent sale of the REO property nets $99,000. The loss suffered by the lender would be $87,000. Under Radar Logic's plan, a restructuring occurs based on borrower information and the appraised value of the home to produce a new loan of $125,000. The restructuring would result in a loss of $61,000 for the lender, but a 26-percent larger recovery.
So what's the incentive for the lender? The restructured loan would also include an equity participation certificate (EPC). While the homeowner would be granted a portion of the appreciation rights, the lender would hold an equity position through the EPC in anticipation of appreciation of the underlying collateral.
There are a couple obvious risks: 1) Radar Logic's contention that its plan will reduce the perception of over-supply and prices rise fails to materialize; and 2) the borrower defaults on the restructured loan. That said, at least Risk Logic is thinking, and we like that.
September 12, 2011
MARKET RECAP
Many pundits are talking about pricing these days, with most of the talk centered on an impending drop in national home prices. The odd thing is, most data releases show home-price improvement. Clear Capital's data being the most recent, showing that home prices nationally gained 4 percent in the second quarter of 2011 compared to the first quarter. What's more, all four of Clear Capital's regions posted gains.
Any enthusiasm that readers could infer from Clear Capital's data was tempered, as is often the case these days. Clear Capital's lead analyst noted that “with summer coming to a close and the price gains clearly starting to level off, the market is at a critical juncture as to whether it can avoid another significant downturn into the slower buying seasons of fall and winter."
That's true. Home prices have leveled off, but we question how critical the juncture is. The fact is the Federal Reserve reported economic growth in all 12 of its districts. Nevertheless, more than a few economists, politicians, and pundits are pressuring the White House to “do something” to keep the economy moving forward. Whether that something comes or not, we think the economy will move forward anyway based on the positive trends we see in retail sales and industrial production.
How fast the economy will move forward is debatable. According to William Emmons, assistant vice president and economist at the Federal Reserve Bank of St. Louis , the “new normal” is economic growth of 2 to 3 percent annually, punctuated with more-frequent recessions.
Emmons caught our attention for comments he made about the economy bottoming, which he doesn't expect until 2015. Emmons said that the bottom will be recognizable when housing becomes a hated asset class and when home-ownership is denounced by former housing advocates as a lousy investment.
If that's the case, then it's very possible the bottom has already occurred: Housing as a pariah is nothing new. We've read numerous articles over the past year on how we are turning into a nation of renters instead of buyers and how suburban living is a relic of yesterday. This incessant nay saying suggests to us that the bottom has come, and possibly passed.
But when will mortgage rates bottom? Yields on 10-year Treasury notes, a benchmark for longer-term mortgage loans, are at a record low 2 percent. The 10-year note is scraping bottom because of euro-region debt woes, perceived sluggish domestic growth, and the perception the Fed will start buying more long-term securities to keep long-term mortgage rates low.
The bottom line is we think higher mortgage rates are in our future, but short term, lower rates will prevail. The problem, as we see it, is people have become so accustomed to falling mortgage rates, they are resistant to act today. So we are in a catch-22: lower financing rates are great, but expectations of still lower rates are actually tamping down consumer demand.
Economic |
Release |
Consensus |
Analysis |
Import Prices |
Tues., Sept. 13, |
0.3% |
Moderately Important. Falling energy and agriculture prices are tempering import-price inflation. |
Mortgage Applications |
Wed., Sept. 14, |
None |
Important. Slow purchase activity in recent weeks points to disappointing August home sales. |
Producer Price Index |
Wed., Sept. 14, |
All Goods: 0.1% (Increase) |
Important. Producer prices will have little impact on price inflation and interest rates. |
Retail Sales |
Wed., Sept. 14, |
0.3% |
Moderately Important. The consumer is still spending, which reflects continued economic growth. |
Consumer |
Thurs., Sept. 15, |
All Goods: 0.2% (Increase) |
Important. Consumer prices are running above 3 percent annually, but most interest rates continue to hold their lows. |
Industrial Production |
Thurs., Sept. 15, |
0.2% |
Important. Industry is driving the economy, which bodes well for future consumption. |
The 15-Year Solution
Since the great recession of 2008-2009, Americans have been de-leveraging: that is, paying down debt and saving more. One worthwhile strategy for paying down debt and saving more is to switch to a 15-year fixed-rate loan, which is one significant reason we have seen more interest in the 15-year loan in the past year.
If a borrower can swing a few hundred bucks more a month toward paying a 15-year loan, he can save a heck of a lot of money. A 15-year fixed-rate mortgage priced at 3.75 percent would produce a P&I payment of $1,454 on a $200,000 loan. The 30-year fixed-rate loan at 4.5 percent would produce a P&I payment of $1,013 on the same loan amount.
The big difference is interest paid over the life of the loan: The 30-year loan costs $164,800 in interest while the 15-year loan costs only $61,800.
It's all obvious, to be sure, but sometimes the obvious offers a very good opportunity, especially at today's interest rates – and especially for someone pursuing a lower-debt lifestyle.
September 5, 2011
MARKET RECAP
One of the more curious opening sentences in housing news this past week was, “Home prices pulled, at least temporarily, out of their downward spiral....” We say curious because most of the data over the past two months has shown steady month-over-month improvement in national median and average home prices.
The writer of that dour opening sentence was referring to the S&P/Case-Shiller home price index, which posted a 3.6-percent increase in the second quarter of 2011 compared to the first quarter. Year-over-year, the Case-Shiller index was mostly flat to slightly negative for the 20 metropolitan areas it covers. Then again, most market measures of home prices have been slightly down year-over-year, though most have posted month-over-month gains.
CoreLogic, for one, continues to show steady improvement in home prices. Its data show they ticked up 0.8 percent nationally in July compared to June. July was the fourth-consecutive month where home prices have increased in CoreLogic's survey. In short, to say that home prices are being “pulled out of their downward spiral” is a bit melodramatic, if not disingenuous.
We don't want to discount the notion that there is pricing pressure in the market. Slowing sales could persuade some sellers to discount. On that front, pending home sales declined 1.3 percent in July after a 2.4 percent jump the prior month. What's more, expectations for closings for existing home sales are likely to be down in August, given the fact that a shrinking share of signings has made it to closing.
However, it's worth noting that a prominent analyst at UBS, David Goldberg, upgraded several home builders, believing that the market for new homes has likely bottomed. We take that to mean new-home prices, which have also strung together a series of monthly gains, will at least continue to hold their own.
Of course, any predictions on prices and the housing outlook are predicated on the outlook for the economy. Minutes from the latest Federal Reserve Federal Open Market Committee (FOMC) meeting show heightened concern over lagging economic growth. While the meeting participants did not anticipate an economic downturn, several of them noted that with the recent slowdown in economic growth, the economy was more vulnerable to adverse shocks.
There is a lot of tentativeness and cautiousness in the financial markets, evinced in the US Treasury security market, where the 10-year Treasury note is yielding 2.2 percent. This security serves as a base for pricing mortgage-backed bonds and mortgage rates. In fact, the 30-year fixed-rate mortgage is being priced a little more than two percentage points above the 10-year note these days. Mortgages continue to post multi-decade lows, albeit in small increments.
Economic |
Release |
Consensus |
Analysis |
Mortgage Applications |
Wed., Sept. 7, |
None |
Important. The surge in refinances has slowed, but purchases have shown some improvement. |
Federal Reserve Beige Book |
Wed., Sept. 7, |
None |
Moderately Important. The Fed is likely to reveal a greater willingness to provide additional monetary stimulus. |
International Trade |
Thurs., Sept. 8, |
$50.9 Billion (Deficit) |
Moderately Important. Slowing global growth and a recent rise in the value of the dollar are crimping US exports. |
Consumer Credit |
Thurs., Sept. 8, |
$9 Billion (Increase) |
Important. The upward trend in consumer credit reflects a greater willingness for banks to lend. |
Wholesale Trade |
Fri., Sept. 9, |
0.5% |
Moderately Important. Inventories have been increasing on lower consumer demand. |
Inflationary Embers
Last week we touched briefly on how expanding bank credit could ignite inflation. In short, increased lending increases the money supply, which can be inflationary. Recent data show that bank lending increased 8.2 percent in August, a visible sign that banks are more willing to extend credit. (Not extending credit has been one of the more vocal criticisms of banks over the past year.)
This means that the large amount of money, around $2 trillion, the Federal Reserved pumped into the banking system following the financial crisis in 2008 is beginning to funnel into the economy. This tells us a couple things: one, economic activity isn't as slow as many people think, and, two, that we could see a rise in producer and consumer prices in coming months.
We've been fooled before into thinking the Fed's monetary stimulus, which is basically adding money to bank reserves, would prove inflationary and thus move interest rates higher. We were, quite frankly, off the mark.
This time, it is a little different, because banks didn't lend on that money. Now, they are at least showing a willingness to lend more. So does this mean that we think mortgage rates are destined to move higher? The short answer is yes, but it must be qualified with we don't know when. Predicting the direction of rates is one thing, predicting the time frame is another. We just think that the good value in mortgage rates today isn't worth the risk of waiting for the possibility of more value tomorrow.