Keeping you updated on the market. For the week of March 19, 21012

MARKET RECAP
So what's up with home prices? That is, are home prices up? Over the past two months we've reported on a slew of data that show prices are down, but the data have been somewhat stale: much of them focused on the last quarter of 2011.

Where prices are going, not where they've been, matters. More contemporary data – the data most likely to portend the future – show prices on the rise.

RE/ MAX reports that home prices increased year-over-year in February for the first time in 18 months. RE/ MAX opines that the turnaround signifies “a very active selling season.”
We agree, because the price increases were much steeper in many local markets than we had anticipated. Miami posted a 20.5% year-over-year gain; Phoenix, a 12.5% gain; and Detroit, a 8.9% gain. Not so long ago, these three burgs were in full free-fall mode. (When Las Vegas shows a double-digit year-over-year percentage price increase, you can be sure the recovery has spread nationwide.)

The outlook is also looking rosier for new home sales. The home builder sentiment index has been rising for the past five months, and the rising optimism appears justified. Barclays Capital reports that initial data for the year are encouraging, noting that “the spring selling season has arrived strongly enough to kick-start a positive feedback loop in housing for the first time since 2005.” Barclays raised its rating on a number of home builder stocks.

Signs of a sustained rebound are also reflected in mortgage purchase applications, which have been rising over the past month. The MBA reports that purchase applications are nearly 12% higher than where they were just a month ago and are approaching the level when the federal home-buyer tax credit fueled the market two years ago.

More purchase activity is understandable: Affordability remains high and mortgage loan rates remain low. The prime 30-year fixed-rate loan still hovers around 4% (and when we say “around” we mean mostly above lately).
Rates have been on the rise, though, and this isn't a surprise. Over the past two weeks, the yield on the 10-year U.S. Treasury note is up 30 basis points. Long-term mortgage lending rates take their queue from the 10-year U.S. Treasury note, which guides the rates on long-term mortgage-backed securities. Where the yield on the 10-year Treasury goes, mortgage lending rates generally follow.

We've been saying since the beginning of the year that we couldn't see rates dropping materially lower. The corollary is the risk of rates moving higher is likely rising. The scuttlebutt we're hearing is that some lenders are already looking to 4.5% to 4.75% by June.
Rates are rising for a number of reasons. The economy is improving and investor confidence is rising, which means investors are becoming less risk averse. Money is flowing out of the bond market and into the stock market, thus pushing yields on bond investments higher and yields on stock investments lower.

It's impossible to know with certainty where mortgage lending rates will be in three months, but if the choice were between 3.5% and 4.5%, we'd give you dollars-to-donuts odds on the latter.

Economic Indicator, Release Date and Time, Consensus Estimate, Analysis:

Home Builders Index(March)
Mon, March 19,10:00 am , et
30 Index
Important. Rising optimism points to a rising new-home sales through the summer.
Housing Starts(February)
Tues, March 20,8:30 am , et
702,000 (Annualized)
Important. Starts continue to expand toward a more normalized rate.
Mortgage Applications
Wed., March 21,7:00 am , et
None
Important. Gains in purchase applications point to monthly strength in home sales.
Existing Home Sales(February)
Wed., March 21,10:00 am , et
460,000 (Annualized)
Important. Rising sales on firming prices reflect a strengthening housing market.
New Home Sales(February)
Fri., March 23,10:00 am , et
330,000 (Annualized)
Important. Sales finally appear to have developed a sustainable uptrend.

Time's a Wastin'
The economy continues to improve at an accelerating pace: Jobs are now being added at a minimum rate of 200,000 a month and unemployment has fallen in 45 states and the District of Columbia .

More people working and more economic growth means the overhang of REO and distressed properties will be be picked over sooner rather than later. It also means more pressure on interest rates to rise.

Yes, the Federal Reserve is doing everything in its power to hold interest rates low. It continues to reinvest principal payments from its holdings of Treasury notes and bonds and mortgage-backed securities into more mortgage-backed securities. The Fed's demand for these securities helps hold lending rates low. Problem is, the Fed lacks the power to stem market forces in perpetuity. If the market demands higher mortgage rates, it will eventually get it.

Given the surge in demand that will occur with HARP 2.0 and a continued rise in purchase applications, we think it is riskier than it has been in years to wait to refinance or purchase a home. In other words, we think the market will get its wish for higher lending rates sooner than many home buyers or refinancers think.

Article courtesy of Patti Wilson, Senior Loan Officer, Mutual of Omaha Bank.