January 2012 Market Information Archive
January 23, 2012
MARKET RECAP
If you meet a homebuilder, don't be surprised if his gait is imbued with a little more pep and his voice tinctured with a little more enthusiasm, for his mood has likely been lifted by optimism these days.
The latest homebuilder sentiment index shows that builders are expecting more construction, more sales, and better pricing for 2012. The index moved up an impressive four points to 25 in January. This is the best reading since mid-2007 and marks four-consecutive months of sentiment improvement.
A cynic might counter that homebuilders are getting ahead of themselves. After all, housing starts did fall 4.1 percent, to an annualized rate of 657,000 units, in December. That said, a few details are worth exploring. November was an unexpectedly strong month for starts, and the fact remains that December's starts still adhere to an established uptrend. If you look back to February 2010, you'll see month-over-month improvements revealed in higher lows and higher highs.
Permits suggest more of the same going forward. Permits in December inched up 0.1 percent to an annualized rate of 679,000 units, which is a 7.8-percent improvement over December 2010. The gains aren't spectacular, to be sure, but we're not looking for spectacular, we're looking for sustainable. We think the gains are sustainable.
The trend in mortgage purchase applications has been encouraging to both homebuilders and existing-home sellers. Purchase applications jumped 10.3 percent in the January 13 week, the best posting in a month. Removing the holiday hiatus, the trend in purchase applications has been mostly up over the past few months.
The trend in refinance applications has also been up, and to a much greater degree than purchase applications. Refinance soared 26.4 percent in the latest reported week, hitting an activity level unseen since August 2011.
Mortgage rates inching lower to another multi-decade low was one factor in the surge in mortgage activity. But the increase in fees for loans purchased by Fannie Mae and Freddie Mac starting April 1 is the more influential factor. This increase translates to a 0.125 percent-to-0.25 percent increase in mortgage cost (though some pundits argue that longer-term these are low-end estimates). The fees are already being implemented, but they've been offset by the mortgage-rate drop that has occurred over the past month.
We think the days of record-low mortgage financing are numbered. Fannie's and Freddie's fee increase will obviously raise costs. The revamped version of the Home Affordable Refinance Program, HARP 2.0, will also pressure mortgage rates higher due to a surge in mortgage demand: rising demand usually means rising costs.
Bottom line: we think it's advisable to act now on a refinance or a purchase to avoid the possibility of getting tangled in a refinance boom that many industry watchers are expecting to emerge in the next month or two.
Economic |
Release |
Consensus |
Analysis |
Mortgage Applications |
Wed., Jan. 25, |
None |
Important. The jump in purchase applications points to sustained higher sales volume. |
FHFA House Price Index |
Wed., Jan. 25, |
0.2% (Decrease) |
Moderately Important. The index will reflect the known decrease in national prices that occurred in the fourth quarter of 2011. |
Pending Home Sales Index |
Wed., Jan. 25, |
100.1 Index |
Important. Low mortgage rates, high housing affordability, and job growth are driving sales higher. |
Federal Reserve |
Wed., Jan. 25, |
Federal Funds Rate: 0.25% |
Important. Improving job growth could lessen the Fed's resolve to hold short-term rates low through 2012. |
New Home Sales |
Thurs., Jan. 26, |
328,000 Units (Annualized) |
Important. Sale volume is up 11% over the past five months. |
Gross Domestic Product |
Fri., Jan. 27, |
3.0% (Annualized Growth) |
Important. Accelerating GDP growth will eventually lead to an end of today's low-interest-rate environment. |
More Normalcy in Store for the Future
Last week we reasoned that it would be years before housing activity would return to levels seen in the mid-2000s. That's not such a bad thing; the mid-2000s proved to be an unsustainable bubble market.
We also said markets are on the mend, which is why we expect 2012 to be a more active and a more remunerative year for those of us in the real estate and mortgage businesses. Even CoreLogic, which has a history of focusing on negative data, recently reported that improved employment, more liquid households, and record home affordability levels could ignite a minor housing recovery in 2012.
Not to pat ourselves on the back, but we've been beating the drum for a sustained housing recovery (not a minor one) since the beginning of the fourth quarter of 2011. We didn't embrace this position because of any special prescience; it was just a matter of understanding basic economics. Markets drop only so far and then they rebound. The data last year suggested the bottom was near and markets were set to turn. That's proving to be the case, and we expect that to continue being the case for this year and years to come.
January 16, 2012
MARKET RECAP
It's really all about the economy at this point. Fortunately, the economy is moving forward, albeit at what too-often seems a plodding pace.
But moving forward we are. The Federal Reserve noted as much in its latest rendering of its Beige Book, a report of anecdotal evidence of economic progress in the dozen Fed districts. The Beige Book states, "Compared with prior summaries, the reports on balance suggest ongoing improvement in economic conditions in recent months, with most districts highlighting more favorable conditions than identified in reports from the late spring through early fall.”
Now, that attempt to say something without saying too much doesn't really enlighten, but it does affirm what we've known all along – the economic recovery is progressing.
Home prices might also be progressing better than the national numbers suggest. Zillow Inc. reports home prices were flat in November, with the average national home price at $147,800. But the housing market is a local market, and local markets appear to be improving better than the national numbers report (which can be skewed by outliers, e.g. Las Vegas ).
Of the 165 housing markets tracked by Zillow, 60 percent reported stable or appreciating home values in November. Notable winning locales include Los Angeles, Washington D.C, Miami, San Francisc , and Detroit .
The flow of private money into housing is also encouraging. We've noted over the past month that hedge funds, investing platforms for the wealthy, are directing more funds into housing stocks. In addition, Robert Shiller, co-inventor of the S&P/Case-Shiller Real Estate Index, noted at a recent American Economic Association function that the futures market for real estate (basically bets on the direction of home prices) is pointing to rising prices.
We expect interest in residential real estate to further bloom in 2012. Homes are enticingly affordable these days. U.S. Department of Housing and U.S. Treasury Department data show that home affordability is at a level unseen since 1971. In fact, median-income families today have double the funds needed to cover the cost of owning a home than they did 40 years ago.
Historically low mortgage rates also contribute to the affordability quotient, and rates continue to skim along the bottom, as they have done for the past two months.
But rates aren't the only consideration in the cost of a loan. Fees come into play. Unfortunately, borrowers face higher fees in the near future. The guarantee fee on loans sold to Freddie Mac and Fannie Mae is set to increase a minimum of 10 basis points effective April 1. Many industry watchers, though, expect the actual cost to fall within the 20-to-80 basis-point range.
Today, affordability is at a multi-decade high, and mortgage rates are at a multi-decade low. We see few economic reasons for anyone in the market for a mortgage and house not to take the plunge.
Economic |
Release |
Consensus |
Analysis |
Mortgage Applications |
Wed., Jan. 18, |
None |
Important. A pick up in purchase applications points to a stronger home-sales trend to start 2012. |
Producer Price Index |
Wed., Jan. 18, |
All Goods: 0.3% (Increase) |
Important. Prices continue to run higher than the Federal Reserve would like. |
Capacity Utilization |
Wed., Jan. 18, |
78.1% Utilization |
Important. Rising utilization rates point to expanding economic activity and rising business demand. |
Home Builder Index |
Wed., Jan. 18, |
22 Index |
Important. Optimism is growing on increased demand and more residential construction. |
Consumer Price Index |
Thurs., Jan. 19, |
All Goods: 0.1% (Increase) |
Important. Decelerating consumer-price inflation will allow the Fed to maintain its low-interest-rate policy. |
Housing Starts |
Thurs., Jan. 19, |
685,000 (Annualized) |
Important. Economists expect starts to gain pace throughout 2012. |
Existing Home Sales |
Fri., Jan. 20, |
4.7 Million (Annualized) |
Important. Sales are rebounding strongly after the post-NAR downward adjustment. |
Patience: The Most Important Virtue
We are always keen to accentuate the positive; we are also keen to accentuate reality. The reality is that a return to 2006-era home prices and transaction activity likely resides in the distant future.
We looked at other bubbles that have burst – the stock market in 1929, the gold market in 1980, the tech market in 2000 – and found that it can take years, if not decades, for the market to return to pre-bubble levels. As we all know, the housing bubble burst in full in late 2007/early 2008 and prices tumbled hard over the subsequent three years.
The good news is that the hard sell-off that marks a bursting bubble is an acute not a chronic event. That means once the sell-off is complete, the healing process begins and markets move forward, thought at a relatively slower pace compared to the pre-bubble pace.
The frustrating aspect of the recovery is that little can be done to accelerate it. To be sure, the housing market is recovering, but it's going to be awhile before it reaches the level of activity we were accustomed to a few years ago. Keeping that fact in mind not only helps mitigate frustration but also helps us stick to our guns as we focus on the long-term trend, which, fortunately, will be up.
January 9, 2012
MARKET RECAP
We've said that strong job growth will be key to a successful 2012. Early signs are encouraging. Automatic Data Processing (ADP) reports that private payroll numbers surged 325,000 in December – more than double expectations for a 160,000 increase.
The news on jobs is definitely good, but it's important to keep expectations tempered. This time last year, ADP reported that private employment jobs increased by 297,000. That bullish number got more than a few economists and pundits thumping for a full-bore recovery. Unfortunately, job growth abated and practically stagnated through the summer months of 2011.
That said, we remain encouraged. The Bureau of Labor Statistics (BLS) reports that unemployment is, for the most part, dropping across the nation. The BLS's data show that 58 metropolitan areas reported jobless rates above 10 percent, but that's down from 112 a year earlier. Another 129 areas reported jobless rates below 7 percent, nearly double the 65 areas reported in November 2010.
So it appears employment is on the rise, which bodes well for improved home sales in 2012. Prices are another reason we should see more sales. Standard & Poor's data show current home prices when adjusted for inflation are at 2001 levels. In other words, homes are very affordable. When homes are very affordable, more homes will be sold and more markets will clear.
We've provided many examples of markets clearing over the past few months. Beleaguered Las Vegas is the latest example. DataQuick reports that home sales increased 11.2 percent year-over-year in November, with sales being driven by below-$200,000 homes. Prices are low in Las Vegas , to be sure, but the days of free-fall depreciation appear to have ended, with the median home price holding at $115,000 for three consecutive months.
Mortgage rates contribute to the affordability quotient. On that front, mortgages remain very affordable. In fact, over the past week the 30-year fixed-rate loan again touched a new low. This should come as no surprise when you see that the 10-year U.S. Treasury note also touched a new low, with its yield dipping below 1.9 percent.
Rates remain low thanks to the ongoing debt crisis in Europe , which continues to draw money to U.S. Treasury securities even though these securities don't yield enough to compensate for inflation. That's good news for borrowers, especially borrowers on the longer end of the spectrum – such as those seeking 30- or 15-year fixed-rate loans.
Is it worth waiting for even lower rates? We didn't expect to see sub 4-percent loans in 2011, so anything is possible. But you have to consider what's probable. With job growth accelerating and consumer confidence rising, it appears the economy is growing sufficiently to suggest any further rate drops will be measured in a few basis points.
At this point, it's really all about risk and reward. Today, the reward is very high, but we think the risk will likely rise with more evidence of improving economic growth.
Economic |
Release |
Consensus |
Analysis |
Consumer Credit |
Mon., Jan. 9, |
$7 Billion (Increase) |
Important. Increased use of non-revolving credit reflects increased strength in sales of big-ticket items. |
Wholesale Inventories |
Tues., Jan. 10, |
1% |
Moderately Important. Increasing sales and inventory levels point to stronger economic growth. |
Mortgage Applications |
Wed., Jan. 11, |
None |
Important. Overall mortgage activity continues to trend higher. |
Retail Sales |
Thurs., Jan. 12, |
0.2% |
Important. Most components continue to advance, which reflects a pick up in economic growth. |
Import Prices |
Fri., Jan. 13, |
0.5% |
Important. The rise in import prices is indicative of rising consumer-price inflation. |
Consumer Sentiment |
Fri., Jan. 13, |
71 Index |
Important. Job growth continues to drive consumer sentiment higher. |
The One Fly in the Ointment
Housing is still dealing with some difficult issues – namely shadow inventory and negative equity. The former has shown much improvement based on data released during the last quarter of 2011; the latter will be helped by HARP 2.0, which is expected to be fully engaged by March.
The good news is economic and job growth will continue to remove rot from the system; that is, if buyers and borrowers are sufficiently motivated to act. Unfortunately, we see too few buyers and borrowers sufficiently motivated. The one question we field most often these days is, “Are mortgage rates going lower?” Embedded in the question is the belief that rates are going lower, which keeps too many people on the sidelines.
Our wish list for this year includes a stronger economy, more jobs, and more confident consumers. We'd also like to see a ratcheting up of interest rates. That way, borrowers prone to procrastination will be less prone to procrastinate when they realize that any uptick in rates won't be followed by two downticks.
What's more, rising rates will be indicative of the sustained economic growth we all want.