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Keeping you updated on the market!
For the week of
February 18, 2013
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MARKET RECAP
Is the End Upon Us? We hope so, and the evidence suggests that it is.
This is a good thing, because we are referring to the national foreclosure crisis, which has weighed on the housing recovery (at least it did through mid-2012). RealtyTrac reports that the number of homes in various stages of foreclosure is down to the lowest level since the housing bubble burst.
For most of 2012, we said that the overhang of foreclosures and distressed properties would dissipate. Our rationale was that the issues were well-known and understood. Market participants would actively address the issues, and thus, would rectify them.
That's exactly what's occurred (and is occurring). RealtyTrac also reports foreclosure starts fell to a 79-month low, reaching levels not seen since June 2006.
We expect foreclosures to continue to trend lower. TransUnion finds that the rate of borrowers 60 days or more past due on a mortgage dropped 14%, the largest reduction since the recession ended in mid-2009. Just as encouraging, many of the delinquencies are a result of older vintage loans – borrowers who haven't made payments for an extended time – and are inflating the overall delinquency rate.
We expect housing construction to continue along its trend as well. For-sale inventory – both existing and new – is at a decade low (and possibly a multi-decade low). This points to a rise in construction activity. In fact, Goldman Sachs expects real residential investment to grow at a 10%-to-15% annual rate through 2014. This means we'll also likely see a surge in housing-related employment. Goldman's economic models point to 25,000 new housing-related jobs being formed each month for the next two years.
So the stage is set for an uptick in economic growth. This means mortgage lending rates will be pressured to move higher, thus continuing a trend started last fall.
We look for higher rates because as the economy improves more money will flow out of fixed-income investments – Treasury and mortgage-backed securities – and into riskier investments. We've already seen a surge in stock-market investments. Both the Dow Jones Industrial Average and the S&P 500 are up strongly over the past three months.
The counter argument states that mortgage rates will remain subdued because of the current battle in Congress over sequestration and spending cuts. In other words, market uncertainty is rising, which means investors will be motivated to seek shelter in Treasury and mortgage-backed securities.
This might happen, but its impact would be ephemeral. This big-picture view points to economic growth. Economic growth and continued strength in housing will also force the Federal Reserve to exit its open-ended policy of quantitative easing sooner than expected.
The bottom line is that anyone who can benefit from a refinance or a purchase loan should take advantage of today's rates. The risk/reward paradigm strongly lists toward taking action; it makes little sense to procrastinate at this point.
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Economic
Indicator
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Release
Date and Time
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Consensus
Estimate
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Analysis
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Home Builders' Index
(February)
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Tues. Feb. 19,
10:00 am, ET
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48 Index
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Important. Rising sentiment is reflective of strong pricing and rising consumer demand. |
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Mortgage Applications
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Wed., Feb. 20,
7:00 am, ET
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None
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Important. Record-low inventory is limiting purchase-application activity. |
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Housing Starts
(January)
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Wed., Feb. 20,
8:30 am, ET
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918,000 (Annualized)
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Important. The rate of starts is expected to accelerate through 2013. |
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Consumer Price Index
(January)
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Thurs., Feb. 21,
8:30 am, ET
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All Goods: 0.1% (Increase)
Core: 0.2% (Increase)
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Important. The current trend in consumer-price inflation is a non-factor to interest rates. |
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Existing Home Sales
(January)
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Thurs., Feb. 21,
10:00 am, ET
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4.85 Million (Annualized)
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Important. Low inventory continues to retard sales growth. |
Money and Consequences
Over the past four years, the Federal Reserve has pumped an unprecedented amount of money into the banking system, which is one reason interest rates have remained so low for so long.
This new money has also found its way into many investment assets: Today, the S&P 500 and Dow Jones Industrial Average are at multi-year highs; oil continually hovers near $100/barrel; many metal commodities are near all-time highs, as are many food commodities; gold remains near its all-time high and continues to adhere to its decade-long price trend.
More money has also been funneled into housing, especially from institutional investors. Hedge funds are large buyers of single-family houses, which is a new phenomenon. Interest among these institutions appears to be growing. American Homes 4 Rent , a California-based firm specializing in single-family rentals, recently purchased 10,000 homes, making it the second-biggest owner of single-family rentals in the institutional space.
The point we need to emphasis is that more money flowing into housing from institutional investors means there will be fewer values available to individual owner-occupied buyers. We've been warning over the past year that the pool of good deals is evaporating. It's important to let clients know that the rate of evaporation is accelerating.
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EQUAL HOUSING OPPORTUNITY
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This Newsletter is for informational purposes only. The information contained herein may not be applicable to every situation or jurisdiction and we urge you to consult your professional advisor prior to acting on information contained herein. The content, accuracy and opinions expressed herein are not verified or endorsed by the sponsor hereof. |
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ame in at 746,000 annualized units in July, which is down 1.1 percent from June. It's important, though, to keep an eye on the big picture. In that context, starts are up 21.5 percent year-over-year. It appears starts will continue to gain momentum, considering permits rose 6.8 percent to 812,000 annualized units in July.
Increased new-home inventory won't materially change today's low inventory levels. In other words, home prices – new and existing – should continue to gain traction across the country. (Of course, all markets are local and the degree of traction will vary among markets.)
As for the overhang of shadow inventory, the longer it remains in the shadows, the less likely it will be inventory. Houses, we often forget, are depreciating assets if they are insufficiently maintained. Houses can, and do, go away. We actually lose over 300,000 housing units annually through neglect, fire, or natural disasters.
In short, we still see persistent price gains for much of the country.
Speaking of prices, the price of most mortgages rose this past week. This actually marks the third-consecutive week where mortgage lending rates rose. Granted, we are talking about a couple basis points in some instances, but it's still a trend.
An improving economic outlook (which raises loan demand) was the most repeated explanation for rising lending rates. Retail sales are trending higher, and increased sales reflect rising consumer confidence. Increased home-building activity is also bolstering the outlook for the economy.
So where are rates going? The 10-year U.S. Treasury note is a useful proxy for gauging mortgage lending rates, and it's been trending higher over the past month. So we don't expect a pull-back in rates this week. In fact, we wouldn't be surprised to see a fourth-consecutive week of rate increases.
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Economic
Indicator
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Release
Date and Time
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Consensus
Estimate
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Analysis
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Mortgage Applications
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Wed., Aug. 22,
7:00 am, et
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None
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Important. Recent purchase activity points to a reduction in sales growth heading into fall. |
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Existing Home Sales
(July)
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Wed., Aug. 22,
10:00 am, et
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4.5 Million (Annualized)
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Important. Sales have flattened in recent months over economic-growth concerns. |
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New Home Sales
(July)
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Thurs., Aug 23,
10:00 am, et
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370,000 (Annualized)
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Important. Rising new home sales and construction spending should help lift the economic outlook. |
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FHFA Home Price Index
(June)
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Thurs., Aug 23,
10:00 am, et
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0.5%
(Increase)
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Moderately Important. The index will further confirm the upward trend in home prices. |
The Last Hold Out
One of our frequent laments over the past year has been the lack of diversity in the mortgage lending market. Fannie Mae, Freddie Mac, and the FHA back more than 90 percent of all new loans today, up from a third five years ago.
Unfortunately, the level of diversity might not be rising soon. Housingwire.com reports that regulators are pushing for lenders who offer high-risk mortgages to hire certified, licensed appraisers to conduct interior property inspections. (A high-risk mortgage is defined as one secured by a home with an interest rate above a certain threshold.) What's more, if a seller acquires this high-risk property for a lower price within six-months, an additional appraisal must be supplied at no cost to the consumer.
Basically, the regulators' proposal would raise the cost of higher-risk loans, which means there will be fewer of these loans. In turn, higher costs could make lenders even more risk averse, which would further shrink the pool of potential home buyers.
At this point, we think it makes financial and economic sense for lenders to venture further out on the risk scale. We understand the concerns, given the number of loans that went sour a few years ago. But today, there are simply too many potential borrowers relegated to the sidelines because of excessive risk aversion and its accompanying regulatory costs.
Prudent and thoughtful lending doesn't mean eschewing risky lending, it means approaching risky lending with intelligent underwriting procedures.
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If you do not wish to receive this valuable email, please let me know.
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EQUAL HOUSING OPPORTUNITY
|
|
This Newsletter is for informational purposes only. The information contained herein may not be applicable to every situation or jurisdiction and we urge you to consult your professional advisor prior to acting on information contained herein. The content, accuracy and opinions expressed herein are not verified or endorsed by the sponsor hereof. |
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