Keeping you updated on the market!

Keeping you updated on the market!
For the week of

March 18, 2013

MARKET RECAP We've been warning over the past few months that accelerating job growth would lead to higher mortgage rates. That's exactly what's occurred. Last Friday, the Commerce Department released its employment report, which showed 236,000 new jobs were created, topping most economists' estimates. The surge in job creation dropped the unemployment rate to 7.7% from 7.9%. The rate of job growth frequently reflects the rate of economic growth. When economic growth accelerates, so does the demand for loanable funds. Interest rates, in turn, rise. But they rise not only because of increased demand, they rise also because economic growth stimulates inflation – a key component in interest rates. We weren't surprised, then, to see the spike in mortgage rates – particularly in the 30-year fixed-rate loan – that occurred this past week after the release of the employment data. Many lenders are concerned that rising rates will take the steam out of the housing recovery. We are more sanguine. As long as rising interest rates are accompanied by rising job growth, the impact will be minimal. Low rates have done their job, and employment and economic growth are the most important factors to maintaining the housing recovery at this point. Rising rates will slow refinances, but we expect purchase activity to pick up the slack. More people working, and more people working at better-paying jobs, means more people will qualify for a loan. Just as important, they'll qualify for a higher-rate loan that they can still comfortably service. In short, we don't see rising rates as an impending disaster. The robust interest by investors in single-family homes will also help keep the housing market moving on a northeast trajectory. Low purchase prices and the potential for capital gains have pulled many real estate-minded investors into the market. We've mentioned in the past how large institutional investors have acquired large swaths of single-family homes. That said, most people still prefer to own than to rent. Surveys compiled by the National Association of Home Builders (as well as other groups) find that most people overwhelming want to own a home. This shouldn't come as a surprise; neighborhoods of owners tend to be more stable and better-maintained than neighborhoods of renters. We're not disparaging investors (or renters). In fact, they are doing the market a service. But over time, we expect more of these rental properties to transition to owner-occupied properties – and that's a good thing.

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Home Builder Index (March)	Mon., March 18, 10:00 am, ET	47 Index	Important. Improved job prospects should raise builder confidence.
Housing Starts (February)	Tues., March 19, 8:30 am, ET	910,000 Units (Annualized)	Important. Rising starts reflect builder optimism. Rising starts are also a key component in economic growth.
Mortgage Applications	Wed., March 20, 7:00 am, ET	None	Important. Applications fell on rising rates, but rates should level out this week.
Federal Reserve FOMC Meeting	Wed., March 20, 2:00 pm, ET	Federal Funds Rates: 0.0% to 0.25%	Important. There will be no change in the Fed's low-rate bias, but their could be hints of a potential change in bias.
Existing Home Sales (February)	Thurs., March 21, 10:00 am, ET	5 Million Units (Annualized)	Important. Volume is picking up but remains restrained by low inventory.

Focus on Affordability At 2.07 million units, housing inventory is at its sixth-lowest level in 30 years, according to Capital Economics. Low inventory has helped with rising home prices. And even though prices have been rising, affordability remains high. The NAR's Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home based on the most recent monthly price and income data. We've read many predictions that high affordability will persist indefinitely. LPS Applied Analytics, for one, believes home values could rise an additional 35% before affordability becomes an issue. We're a little more circumspect. Bank of America recently revised its expectations for home prices, expecting prices at the national level to rise 8% in 2013. A few months ago, Bank of America was forecasting a 4.7% increase. Given rising interest in single-family homes, we don't think Bank of America's expectations are unreasonable. Home prices could very well rise 8%, but it's highly unlikely personal income will rise at the same rate. At the same time, mortgage rates will also rise with more job creation, which will make mortgages more expensive. The point we want to emphasis is that, yes, homes are still very affordable, but there is no guarantee they will remain so. In fact, it's financially risky to expect the market that exists today – in both houses and mortgages – to exist tomorrow.