March 12 , 2012
Home prices continue to garner front-page attention. CoreLogic reports that prices declined for the sixth-straight month in January, dipping 1% from December. Year-over-year prices are down 3.1%. In short, CoreLogic says that prices are about where they were 10 years ago.
CoreLogic offers one set of data on home prices, Clear Capital offers another, less ominous set. According to Clear Capital, national home prices declined only 1.9% year-over-year. What's more, its data show short-term prices being more stable, with prices falling only 0.6% from the third quarter to the fourth quarter of 2011.
Everyone is keeping a close eye on distressed properties. Now that last year's “robo-signing” foreclosure imbroglio is behind us does that mean we will see a surge in foreclosed and REO properties? And if so, how will they impact inventory and prices?
Pertinent questions, to be sure, and ones we don't have a ready answer for. We do know that the inventory of existing homes for sale declined 21%, or by 600,000 units, in 2011. At the most recently reported sales pace, that means we are looking at 6.1 months of supply – the lowest inventory level since April 2006. Lower supply supports higher prices.
Today's low inventory is attributed to falling foreclosure volume. But now that banks are free to foreclose, two million more homes are expected to hit the market over the next two years. If that's the case, then distressed inventory will rise sharply. Returning to economics: higher supply leads to lower prices.
There are a few extenuating factors though. The economy is improving, and continues to add jobs at an increasing rate. The private sector added 216,000 jobs last month, according to the latest national employment report from Automatic Data Processing. That's a significant increase over the 173,000 jobs added in January. More people working means more people who can afford a home.
The rise in REO properties could be offset by a decrease in other market segments. For instance, there was a significant increase in short sales in the fourth quarter of 2011, which pushed the number up to nearly 910,000 units nationwide. That said, the long-term trend for short sales is down; fewer short sales could be a counterweight to rising REO units.
Housing formation is another attenuating factor. After 2007, household formation plu mm eted to 300,000 per year from its historical rate of 1.25 million. We see a lot of pent up demand. The population continues to grow, the economy continues to improve, home affordability is at a multi-decade high. The market is ripe for a spike in new household formation.
In short, we don't expect new REO properties to upset the housing recovery like the more dire pundits are predicting.
Economic Indicator, Release Date and Time, Consensus Estimate, Analysis.
Tues, March 13,8:30 am , et
Important. Sales remain robust on improving consumer confidence.
Federal Reserve FOMC Meeting
Tues, March 13,2:15 pm , et
Federal Funds Rate: 0% to 0.25%
Important. The Fed will hold short-term rates low and monitor agency debt in order to hold long-term rates low too.
Wed., March 14,7:00 am , et
Important. The rise in purchase applications points to an encouraging start to the spring buying season.
Producer Price Index(February)
Thurs., March 15,8:30 am , et
All Goods: 0.4% (Increase)Core: 0.2% (Increase)
Moderately Important. Producer prices are heating up, but credit markets remain unfazed.
Consumer Price Index(February)
Fri., March 16,8:30 am , et
All Goods: 0.5% (Increase)Core: 0.2% (Increase)
Important. Deflation is no longer a concern, though rising consumer inflation could cause some Fed members to rethink the Fed's low-rate policies.
Ready, Set, Refinance
We expect to see a surge in mortgage applications in coming months. Couple low rates with HARP 2.0, the federal mortgage program that will enable millions of underwater homeowners to tap the mortgage market, and mortgage loan demand is sure to grow.
The combination of low rates and HARP 2.0 alone is enough to send business through the roof. Now we get word the Obama administration wants to allow more homeowners to refinance by dropping fees on federally insured mortgages. The administration's plan has the FHA dropping upfront insurance premiums on streamline refinances from 1% to 0.01%. The FHA would also drop annual premiums from 1.15% of the loan balance to 0.55%.
There is one catch: the lower fees only apply to borrowers who took out loans before June 1, 2009 . Still, lower-fee FHA loans are expected to help two to three million borrowers refinance.
The prospect of rising mortgage demand is worth keeping in mind as we head into the spring and summer selling season. Lenders will be busy, and sometimes very busy. Our advice, which we've offered in the past, is not to wait. For buyers, home affordability has never been better; for refinancers, rates have never been lower.
Given the present market dynamics, we think the risk of waiting to refinance or to buy a home far outweighs the possible reward of a lower home price or a lower interest rate.
Article courtesy of Patti Wilson, Senior Loan Officer, Mutual of Omaha Bank.