Tuesday, June 25, 2013

Keeping you updated on the market!
For the week of

June 24, 2013

Are Happy Days Here Again?
For homebuilders that appears the case.
The NAHB/Wells Fargo Homebuilder Sentiment Index surged eight points to post a 52 reading for June. This is the largest gain since 2002 and pushed the index above 50, where it hasn't been since 2006. (Fifty is the demarcation between general optimism and general pessimism, which means overall homebuilder sentiment now lists toward optimism.)
One hardly need be a genius to understand why homebuilders are eagerly anticipating the future: New-home inventory remains at multi-decade lows, while prices for this inventory are rising at a brisk pace. According to homebuilder feedback, average selling prices have risen 11% this year.
Few situations will boost a seller's spirits more than to see strong pricing combined with limited inventory. That's the definition of a sellers' market.
What's more, homebuilders still have room to expand supply at a robust pace. Over the past 50 years, homebuilders have averaged 1.5 million starts (single and multifamily). This year, they are expected to start one million units; next year, they are expected to start 1.3 million units.
New-home demand has also spurred pricing gains in many markets. Prices nationally have clawed back to 2003 levels, but they still remain 28% below the July 2006 peak.
Strong price gains have conjured thoughts of another housing bubble. Double-digit price increases can't go on indefinitely. What's more, the higher an asset price rises, the harder it tends to fall.
That said, affordability is a mitigating factor, at least according to Standard & Poor's, which estimates that housing is still 8% undervalued based on the price-to-income ratio. Historically, the typical median home costs four times as much as the median annual income. It's now at a 3.7 multiple.
At the same time, the household debt service ratio remains near a 30-year low, while the homeowner mortgage obligation is at a 15-year low at 8.25% of disposable income. During the bubble years, the mortgage obligation averaged 11% of disposable income.
It's worth remembering that rising prices stimulate more supply to come to market. More supply, in turn, will slow price appreciation. That's a good thing, because double-digit price gains are unsustainable. Next year, we wouldn't be surprised to see price growth moderate to mid- to low-single digit rates, which are sustainable rates.
But what about the elephant in the room – mortgage rates?
To be sure, lending rates are up significantly over the past six weeks, but are still cheap from a historic perspective. As we noted last week, rising rates have spurred more buying and refinances. If you believe the best rates are behind us (and we do), you don't want to wait in a rising-rate environment.


Date and Time
S&P Case-Shiller Home Price Index
Tues., June 25,
9:00 am, ET
Moderately Important. The data point to doubled-digit year-over-year price increases for 2013. .
New Home Sales
Tues., June 25,
10:00 am, ET
463,000 (Annualized)
Important. More demand and increased supply are lifting sales.
Mortgage Applications
Wed., June 26,
7:00 am, ET
Important. Rising homes sales are reflected in rising purchase applications.
Gross Domestic Product
(1st Quarter 2013)
Wed., June 26,
8:30 am, ET
2.4% (Annualized Growth)
Important. GDP looks decent but still shows soft demand, so it's unlikely to move interest rates.
Pending Home Sales Index
Thurs., June 27,
10:00 am, ET
Important. New inventory is stimulating additional sales.


The Law of Diminishing Marginal Returns
One reason we believe ultra-low mortgage rates are history is that the Federal Reserve is doing more, but it's getting less results.
Here's what we mean: Back when the housing bubble burst and the stock market crashed, all the Fed had to initially do was to assure markets that it would intervene with more money and low interest rates. Words alone were enough to placate.
Since then, the Fed has had to ramp up both rhetoric and action. In 2008, the Fed implemented QE1, which centered on buying $600 worth of mortgage-backed securities. In 2010, the Fed followed up with QE2, buying $600 worth of U.S. Treasury securities.
QE1 and QE2 were followed by QE3 in late 2012. QE3 featured the Fed committing to buy $85-billion worth of MBS and Treasury securities each month for an indefinite period of time.
Each successive action has had less impact on the margin, which is why we say the Fed is having to do more just to stand pat. This should be expected, because diminishing marginal returns are the norm. Here's a drinking analogy: Each successive glass of water has less impact quenching thirst, and then a point is reached where the next glass does more harm than good.
Now we hear chatter that the Fed is pulling back from QE3 – known as “tapering” in media circles. Should that occur, interest rates will rise. The odds of that occurring sooner than later is higher today than it was a year ago. After all, the Fed will reach a point where the next purchase of a mortgage-backed security will produce more harm than good.

Article Courtesy of Patti Wilson, Senior Loan Officer Sanibel-Captiva Community Bank