April 2, 2012
One week's worth of data does not a trend make. We say that because of renewed concern the housing rally is set to peter out because of a burst of sub-par news.
The news on lower existing and new home sales was disappointing, to be sure, but hardly a foreboding omen. The news on pending home sales, which tracks contract signings for existing homes, wasn't all that bad either. The index was down 0.5% in February, but the index has been up for the most part over the past six months. Sometimes a little perspective is needed.
Pessimism was further heightened by the S&P/Case-Shiller home price index, which showed another price decline. Month-over-month, the average price declined 0.5 percent in January. Year-over-year, the average price is down 3.8 percent.
The fear properties in various stages of foreclosure and delinquency will continue to roil the market is on the rise. We are not terribly concern though; the attenuating factor being foreclosed and delinquent properties are a well-vetted, well-understood variable. More important, it's an improving variable. Data from CoreLogic show that faster REO-clearing rates and improving employment and low mortgage lending rates point to a sustained housing-market recovery.
In our opinion, frustratingly low appraisals and and too-stringent lending standards are more pressing issues for many buyers and sellers. Loosening the tethers on both, and particularly the latter, would go a long way toward keeping the recovery on course.
A strong economy would also go a long way toward sustaining the recovery. The good news is the economy continues to grow. The final number on gross domestic product shows that the economy grew 3.0 percent in the fourth quarter of 2011. This latest reported quarter was much stronger than the 1.8 percent growth reported in the third quarter of 2011.
The employment data support the notion the economy is growing. Yes, we are aware that Federal Reserve Chairman Ben Bernanke recently warned that improvements in the labor market may not be sustained, but we think otherwise nonetheless: Job creation has accelerated in recent months. Concurrently, jobless claims have decelerated. In fact, the latest report on weekly jobless claims shows the four-week moving average falling to its lowest level in four years.
Of course, the state of the economy always impacts credit markets. Interest rates dropped this past week when Bernanke stated he thought the economy has yet to reach full-recovery mode. Investors equivocated and money moved from stocks and co mm odities into U.S. Treasury securities. The mortgage market responded in kind, and we saw lending rates drop five to 10 basis points across most offerings.
We can't say for sure how long rates will stay down. We've seen a marked increase in volatility in lending rates in March. We think volatility will remain high going forward, which is why we feel impelled to say that the risk of waiting for lower lending rates outweighs the benefit of substantially lower lending rates materializing.
Economic Indicator, Release Date and Time, Consensus Estimate, Analysis
Mon, April 2,10:00 am , et
Important. Gains in residential real estate construction is driving spending gains.
Wed., April 4,7:00 am , et
Important. The positive trend in purchase applications is a positive sign for home sales.
Fri. April 6,8:30 am , et
Unemployment Rate: 8.2%Payrolls: 235,000 (Increase)
Very Important. Another month of strong job growth will pressure interest rates to move higher.
Fri., April 6,3:00 pm , et
$15 Billion (Increase)
Important. Rising credit use reflects increased confidence and economic growth.
The Most Persuasive Sign its Time to Lock and Load
Economist Hyman Minsky is the author of a persuasive short monograph titled “The Financial Instability Hypothesis.” Minsky basically states that the longer a market appears stable, the less stable it actually is because of excessive speculation and leveraging of that market.
We've been in a 31-year bull market in U.S. Treasury securities. That is, long-term real yields – yields adjusted for inflation – have been trending down since the early 1980s. A recent analysis by Credit Suisse shows that real rates on long-term Treasury securities are down to 50 basis points, or 0.5%.
Such a low rate doesn't compensate for opportunity cost and time value. In fact, the real interest rate is so low today, even the early 1900s can't boast of such low rates.
We've been in a very long bull market in bonds. Long sustained trends tend to lull participants into complacency. In turn, complacency tends to ratchet up the use of leverage. We don't know how much leverage there is behind this lending market, but we suspect more than there was 30 years ago Carry trade – borrowing short term to buy long-term credit instruments – has been a very lucrative, easy-money trade over the past decade.
The point is, 31 years is a long time, record lows don't last forever, and neither does easy money. If Minsky's hypothesis holds, the odds interest rates could rise in the near future is much higher than many borrowers think.
Article courtesy of Patti Wilson, Senior Loan officer, Mutual of Omaha Bank
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