Monday, August 19, 2013

Mortgage Matters -Update for the week of August 19, 2013

Keeping you updated on the market!
For the week of

August 19, 2013

Optimism Reigns, Tread Cautiously
 Homebuilders haven't felt this upbeat since the waning days of 2005. We know this because the NAHB/Wells Fargo Homebuilder Sentiment Index hit 59 this month, a number last seen nearly eight years ago.
Moreover, it appears unlikely optimism will fade anytime soon: Many homebuilders are reporting higher current sales and stronger pricing. Spirits are always buttressed when buyers are willing to enter the market when prices are rising.
On the existing-home side, the logjam of tight supply appears to be loosening. Nationally, the number of existing homes for sale remains 5% lower than the number that existed this time last year. Inventory, though, was up 1.4% in June. In many local markets inventory is being drawn in by persistent price appreciation. This is no surprise: rising prices always draw more supply to market.
Rising prices have also drawn more housing scrutiny. This, too, is no surprise. The closely followed S&P/Case-Shiller Home Price Index is up 12.1% year over year. Of course, real estate markets are local markets, and in many local markets gains far exceed the national numbers ( Las Vegas and Phoenix come ready to mind).
Double-digit average annual price increases are unsustainable over the long term. Price growth within the 2%-to-5% range is the norm. Therefore, we're not surprised to see growing speculation on the prospects of another housing bubble.
On that front, we're not terribly concerned. We don't think housing is even close to approaching the bubble that developed seven years ago. Much of the strong price gains we're seeing are off a severely depressed base (again Las Vegas and Phoenix come to mind).
When the bigger picture is brought into focus, prices nationally remain reasonable.
Since the housing bubble burst in 2007, people continually question whether housing is a safe investment? This is understandable: The perception before the bubble burst was that houses were always a safe investment.
It's important to keep in mind that safety, reward, and risk aren't imbedded in an asset class – houses, stocks, bond, etc. – they're embedded in time and price. A house purchased in 2000 was safe and offered a lot of reward with little risk. By 2007, the paradigm had reversed – houses were unsafe and risk was high. As a general rule, the longer the uptrend is sustained, the more risky an asset class becomes.
We liken today's housing market to the middle innings of a baseball: There is still more action (price gains) ahead. But there is also plenty of action already behind us, which is why when housing was skimming along the bottom (at the beginning of the game), we continually pounded the table to get in the game.


Date and Time
Mortgage Applications
Wed., Aug. 21,
7:00 am, ET
Important. Rising rates could stimulate higher purchase-loan activity.
Existing Home Sales
Wed., Aug. 21,
7:00 am, ET
5.12 Million (Annualized)
Important. Rising inventory is helping to lift sales volume.
Federal Reserve FOMC Minutes
Wed., Aug. 21,
2:00 pm, ET
Important. Hawkish commentary on low rates and bond purchases will push interest rates higher.
New Home Sales
Fri., Aug. 23,
10:00 am, ET
485,000 (Annualized)
Important. Sales are expected to ease in July, but the long-term trend remains on an up-sloping trajectory.


Pressure is Mounting
For the past six weeks, mortgage rates have been placid – trending in a very tight band. Next week, they could break out of the upper band. We say that because the 10-year U.S. Treasury note – a benchmark lending rate – has broken out to the upside. As the 10-year note goes, so, too, usually goes the 30-year fixed-rate mortgage.
Over the past few months, we've frequently opined that the days of the 3.5% 30-year loan that prevailed earlier this year were gone and were unlikely to return anytime soon. At the same time, we've opined that rates are primed to rise. We continue to hold these opinions to this day.
That said, we don't see mortgage rates moving materially higher in the short term. Economic growth remains anemic, and job growth continues to lag behind the Federal Reserve's target rate. Therefore, the institutional imperative supports keeping rates low.
Our assessment of the mortgage-rate environment points to mildly rising rates (perhaps five to 10 basis points). Longer-term – over the next year – the probabilities overwhelming point to rates moving higher, which is why we continue to say that the risk in this market resides in procrastination.

Article courtesy of Patti Wilson W.J. Bradley.

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