The End of Rising Home Prices? September 2, 2013

Keeping you updated on the market! For the week of September 2, 2013

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MARKET RECAP The End of Rising Home Prices? When recent data is vetted, the answer appears “no.” Home prices will continue to rise. The latest data from S&P/Case-Shiller show prices increased 0.9% month over month in its 20-city index in June. Year over year, Case-Shiller shows prices are up 12%. Meanwhile, data from Lender Processing Services show home prices were up 1.2% for June, which translates to an 8.4% year-over-year gain. We frequently refer to price data from a number of providers, and you might have noticed that the numbers are never the same. We'll use Phoenix as an example. The latest data from the major data sources show year-over-year home-price gains for Phoenix, but the numbers differ. S&P/Case-Shiller FHFA CoreLogic LPS FNC Zillow 19.8% 21.2% 17.1% 16.6% 27.5% 22.0% Time frame, geography measures, and data-gathering methodology are responsible for the differences: CoreLogic uses a three-month moving average. Case-Shiller's definition of a metropolitan is generally broader than the other data service providers' definition. Zillow excludes foreclosure resales, whereas LPS “reflects” price discounts for REO and short sales. FNC attempts to capture the “characteristics” of a home sale in its home price index. The good news is that prices are up all the way around, no matter how they're measured. That said, Case-Shiller's latest release did reveal incidences of slowing price appreciation. We're not terribly surprised; we've been saying double-digit annual price increases are unsustainable for the long haul. We wouldn't be surprised to see year-over-year home-price growth dip into the single digits by the end of the year. That said, we don't believe home-price appreciation will be hindered by rising mortgage rates – as long as the economy improves. On that front, gross domestic product (GDP) growth was revised upward to a 2.5% annual rate for the second quarter. This is good news that points to stronger-than-expected growth for the third quarter. Strong GDP growth, in turn, frequently leads to stronger job growth. Strong GDP growth will also lead to rising mortgage rates, which actually retreated this past week. Last week, we mentioned that the Federal Reserve is the primary driver of interest rates these day. This isn't to say that other factors don't matter. This past week, talk of a U.S. military strike against Syria was ramped up. In response, many investors scurried for the havens of Treasuries and mortgage-backed securities, thus sending their yield lower. We don't believe concerns over Syria will be long lasting. Therefore, the reduction in lending rates is likely a temporary reprieve that potential borrowers should exploit.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Construction Spending (July)	Tues., Sept. 3, 10:00 am, ET	0.2% (Increase)	Important. Surging residential construction continues to drive overall construction spending.
Mortgage Applications	Wed., Sept. 4, 7:00 am, ET	None	Important. The respite in rising interest rates has helped lift purchase-application activity.
Federal Reserve Beige Book	Wed., Sept. 4, 2:00 pm, ET	None	Important. Credit markets will look for more signs of the timing and extent of Fed tapering.
Employment Situation (August)	Fri., Sept. 6, 8:30 am, ET	Unemployment Rate: 7.4% Payrolls: 165,000 (Increase)	Very Important. Job growth is a key variable in the Federal Reserve's decision to raise interest rates.

 

The Two-Percentage Point Spread The word “taper” seems to be on everyone's lips these day. As we note above, the Federal Reserve holds the key to higher interest rates. Most market watchers are simply waiting for the Fed to cut back (or “taper”) its purchases of Treasury notes and bonds and mortgage-backed securities. The consensus belief is that when tapering begins, rates will rise. That could be true. But then again, market's are anticipating entities. It's also possible that any interest-rate increases won't be very pronounced, because once tapering begins, its effects will already be built into lending rates. The same market watchers are also speculating on how the Fed will tape: will it taper purchases of both Treasuries and mortgage-backed securities, or only taper Treasuries? If it tapers only Treasuries, it's possible that mortgage rates won't be effected, at least that's the prognosis we've heard. We're not so sure that how tampering materializes matters, because Treasuries are benchmark instruments. The 10-year Treasury note, in particular, is very influential on the 30-year fixed-rate mortgage. As one goes, the other follows in lock-step. The point we want to emphasis is that regardless of how the Fed tapers it will impact the mortgage market. Unfortunately, we simply don't know the magnitude of the impact. Article courtesy of Patti Wilson W. J. B.