What to expect from here on out.

Keeping you updated on the market for the week of March 31, 2014.

MARKET RECAP What to Expect from Here on Out One of our prognostications for 2014 was that there would be a considerable slowdown in home-price appreciation in more markets. Our rationale is predicated on the fact that double-digit annual price gains are simply unsustainable in perpetuity. Perhaps our prognostication is coming to fruition. The closely followed S&P/Case-Shiller Home Price Index showed prices were up in January in the 20 metropolitan regions it follows. On a seasonally adjusted basis, sales were up an impressive 0.8% for the month. But when we look at the unadjusted index we find prices were down 0.01%, posting a third-consecutive monthly drop. Both measures have merit: The unadjusted numbers better captured the market drama that occurred a few years ago. With the market becoming more normalized, the seasonally adjusted numbers probably better reflect reality. It's worth noting, though, that both the adjusted and unadjusted numbers were down year over year in January. This suggests that price gains are slowing in more markets across the country. This isn't a bad thing. Since the housing-market meltdown of 2008 and 2009, we've anticipated returning to historical norms of 2%-to-4% annual price gains. Detractors might posit that prices are still significantly below the 2005-2006 market peaks, so we should continue to welcome more double-digit annual price increases. To be sure, they've got a point, but that era hardly reflected the norm. What's more, few of us would want to risk another bubble. Slow and steady usually wins the race. Recent monthly home-sales data have surely been slow, and not very steady. New-home sales for February come in at 440,000 units on an annualized rate, which lagged the consensus estimate by 10,000. The positive takeaway is that inventory increased to a 5.2-months supply at the current sales pace, a 0.2% increase from January. Prices also held steady, with the median national price posting at $261,800. Of course, new-home sales are a small part of the overall market. Our bread is buttered selling and financing existing homes. On that front, the pending home sales index took another hit – its eighth consecutive one – falling 10.2% year over year. Nevertheless, we remain optimistic. Most of the data we report tells us where we've been, not where we're going. It's common knowledge that atypically cold, snowy weather has kept many buyers and sellers on the sideline over the past few months. We're encouraged that the overall economy grew, nonetheless. Final real gross domestic product (GDP ) growth for the fourth quarter was revised up slightly to an annualized 2.6% rate from the second estimate of 2.4%. If we get another strong jobs report for March (which will be reported April 4) like in February, which we expect, home sales in more local markets should rise noticeably into the spring and summer selling seasons.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Construction Spending (February)	Tues., April 1, 10:00 am, ET	No Change	Moderately Important. Adverse weather will have weighed on overall spending.
Mortgage Applications	Wed., April 2, 7:00 am, ET	None	Important. Purchase applications have picked up pace. Now we want to see a trend develop.
Factory Orders (February)	Wed., April 2, 10:00 am, ET	0.5% (Increase)	Moderately Important. Spending on factory investment has picked up, which is a positive for the economic outlook.
Employment Situation (March)	Fri., April 4, 8:30 am, ET	Unemployment Rate: 6.6% Payrolls: 192,000 (Increase)	Very Important. Market watchers are expecting stronger job growth, which will pressure interest rates to move higher.

 

The Under-Appreciated Way the Mortgage Market Benefits the Housing Market Last week, we reported that the national averages on mortgage rates would likely move higher after the Federal Reserve's pronouncements on quantitative easing and interest rates. That's exactly what happened: Rates across the board were up on most mortgage products in most markets, according to the latest surveys from Bankrate.com and Freddie Mac . Rates, though, have actually eased somewhat over the past day or two. Recent action suggests that rates could remain sedate into the immediate future. This lack of volatility would be welcomed, because more borrowers would lose interest in interest-rate speculation. In turn, we would like to see more borrowers take advantage of today's placid mortgage-rate environment. Cash has been king in recent years, but we don't view that as a positive. In our opinion, mortgage financing leads to a more stable housing market. We say that because mortgage financing has historically been tied (leaving the early 2000s aside) to consumer fundamentals: income, debt-to-equity ratios, credit ratings, and realistic appraisals all help to perpetuate a fundamentally sound market. What's more, when a high majority of homes are purchased with sound mortgage loans, it's virtually impossible for home prices to wildly detach from end-user fundamentals. In other words, home prices don't rocket toward the stratosphere, nor do they plummet into the abyss. Prices tend to move predictably, which, in turn, encourages more buyer and seller participation. We are obviously somewhat biased in our affinity for mortgage lending, but our argument has merit, and it's one few market commentators have considered. Perhaps they should.

The Fed Giveth - will itTaketh Away???

Keeping you updated on the Market for the week of March 24, 2014

MARKET RECAP The Fed Giveth; Will It Taketh Away? More than 200 years ago, Mayer Rothschild, founder of the Rothschild banking dynasty, uttered one of the more profound observations on finance and power. “Permit me to issue and control the money of a nation,” said Rothschild, “and I care not who makes its laws.” Rothschild recognized that money matters, and it matters a lot. Money is, after all, 50% of every transaction. The importance of how much money is in an economy and the interest to be charged on that money cannot be understated. Because the quantity of money and the interest charged are so important, much time and attention are extended to the Federal Reserve. The Fed is, after all, our central bank and manages our money supply and the interest to be charged on that supply. When Fed officials speak, markets always listen. Fed Chair Janet Yellen spoke to Congress this past Wednesday, and markets listened, and for good reason: Ms Yellen offered more insight on quantitative easing (QE) – the Fed's purchases of Treasury notes and bonds and mortgage-backed securities (MBS) – and the direction of interest rates. In short, QE is going down and interest rates are going up. As for QE, it's likely to end by December. The Fed has already reduced its monthly purchases of Treasury notes and bonds and MBS to $55 billion per month effective in April. Should the Fed continue to reduce its purchases at the rate of $10 billion per month, as it has for the past three months, there will be no QE by January 2015. As for interest rates, Ms Yellen hinted that they could commence rising within six months after QE ends. This means the fed funds rate, in particular, would likely begin to ratcheted up sometime in July 2015. The fed funds rate is currently near zero, and many market participants doubt it will stay there. Futures markets are now pricing a 0.50% fed funds rate by August 2015. In short, we should expect meaningfully higher mortgage rates this time next year. As for the here and now, Bankrate.com's and Freddic Mac's most recent weekly surveys actually showed the rate on the 30-year fixed-rate mortgage down week over week. But we need to note that these surveys were winding down just as Ms Yellen was winding up. On Wednesday, rates on most mortgage products moved higher, though not disconcertingly so. We're even more convinced that we'll likely see 5% on the 30-year fixed-rate loan by this time next year. Note that we say “likely,” not “guaranteed.” Ms Yellen offered her projections with many caveats and hedges based on growth prospects. As it now stands, though, the Fed expects economic growth could run as high as 3.5% annually in 2015, with the unemployment rate falling to as low as 5.4%. If the Feds more bullish forecasts come to fruition, rising mortgage rates shouldn't be feared. But that means it becomes more urgent to act sooner on locking in a loan rate. The window on the rates that prevail today will close sooner than many borrowers anticipate.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
S&P Case/Shiller Home Price Index (January)	Tues., March 25, 9:00 am, ET	13.0% (Year-Over-Year Increase)	Important. Slippage in price gains will likely be seen in more local regions.
New Home Sales (February)	Tues., March 25, 10:00 am, ET	450,000 (Annualized)	Important. Weather will have slowed sales for the month.
Mortgage Applications	Wed., March 26, 7:00 am, ET	None	Important. Low purchase activity suggests owner-occupied buyers remain sidelined.
Gross Domestic Product (4th Quarter 2013)	Thurs., March 27, 8:30 am, ET	2.5% (Annualized Growth)	Important. GDP growth has slowed due in part to atypically bad weather.
Pending Home Sales (February)	Thurs., March 27, 10:00 am, ET	0.1% (Increase)	Important. The sales freeze in recent month is showing signs of thawing.

 

Bring on the Warm Weather We'll venture to guess that nearly everyone is eager for spring and summer. Winter has been lousy in many regions of the country. Lousy weather, in turn, has been reflected in lousy home sales and construction data. Weather was surely an influential variable in February, where existing home sales again disappointed. Indeed, sales slipped for the sixth time in seven months, with annualized sales posting at 4.6 million units. Year over year, sales are down 7.1%, the steepest decline in nearly three years. Fortunately, there are signs that existing home sales will improve in coming months: Prices remain firm, with the median price rising to $189,00. As we've noted many times in the past, rising prices call forth more supply. Indeed, more homes are coming to market, with two million homes for sale in February compared to 1.88 million in January, according to the NAR's data . This bodes well for future sales. On the construction front, housing starts slipped 0.2% to a 907,000-annualized rate in February. The good news is permits jumped 7.7% to a 1.018-million-unit pace after decreasing 4.6% in January. Once the weather warms, the bulldozers should return in force, as should the buyers. Article courtesy of Patti Wilson, American Momentum Bank.

Market Recap for the week of March 17, 2014.

MARKET RECAP How the Unexpected Leads to the Expected Lending rates were up this past week, though not discerningly so. When we parse the national averages, we see the 30-year fixed-rate mortgage was up five basis points to 4.5%, according to Bankrate.com . Freddie Mac's data show a slightly frothier gain, with the 30-year loan up nine basis points to 4.37%. A rate increase was inevitable after the February employment report, which showed an unexpected lift in payrolls. Specifically, the Bureau of Labor Statistics (BLS) reported the economy added 175,000 jobs last month – 26,000 more than the consensus estimate. In addition, net revisions for the prior two months show 25,000 more jobs than initially reported. The natural reaction (or the expected reaction) in the mortgage market was for rates to rise. We say that because the expected isn't what moves markets; it's the unexpected. What's expected is already baked into current market prices. When something unexpected occurs – such as the robust payroll numbers last week – markets move. In the case of interest rates, they moved up. We expect job growth to pick up pace. Recent growth has been hampered by atypically inclement weather. People simply weren't getting out and about. More telling, though, is the number of job openings, which is trending higher. The BLS reports that the number of job openings rose to 3.974 million in January compared to 3.914 million in December. Year over year, openings are up 7.6% and are at 2005 levels. The trend in job openings isn't a surprise when you look at the trend in capacity utilization rates , which reflects the extend to which factories, mines, and utilities are being used. The utilization rate is above 79%, the highest it has been in years. What's more, it has been trending higher since the second half of 2013. More employees are needed to support higher utilization rates. In addition, the rise in utilization rates points to more robust growth all around. After all, factories, mines, and utilities support other businesses. Our best estimate is for payroll growth to ratchet up to 200,000 by summer. Should that happen, and as it becomes apparent, higher payroll growth will get priced into interest rates. In short, we stick to our prediction that the 30-year fixed-rate loan will approach 5% by December. In the meantime, borrowers can capture a 30-year loan with a rate in the mid-fours, which is still darn good from a long-term historical perspective.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Home Builders' Index (March)	Mon., March 17, 10:00 am, ET	49 Index	Important. Sentiment will rebound on more construction activity.
Housing Starts (February)	Tues., March 18, 8:30 am, ET	905,000 (Annualized)	Important. Weather has hurt starts, but the pace will pick up heading into spring.
Mortgage Applications	Wed., March 19, 7:00 am, ET	None	Important. Activity eased in the recent reported week, but the outlook for purchases remains upbeat.
Federal Reserve FOMC Minutes	Wed., March 19, 2:00 pm, ET	Federal Funds Rate: 0.0% to 0.25%	Important. Expect the Fed to reiterate its commitment to “taper.”
Existing Home Sales (February)	Thurs., March 20, 10:00 am, ET	4.58 Million (Annualized)	Important. Lack of inventory and weather will have held sales growth in check.

 

Still the Cheaper Option Ownership is the way to go in many local markets. Trulia's Winter 2014 Rent vs. Buy Report shows that home ownership is 38% cheaper than renting on a national basis. The advantage also holds in most local markets. In the 100 largest metro markets, ownership trumps renting, according to Trulia. We don't believe the 38% advantage will persist into 2015. The advantage will have been whittled away by higher lending rates and higher home prices. Both will be spurred along by job growth, which, in turn, will lead to more household formation – specifically formation in home ownership. In other words, we see more demand. We've discussed in the past how the home-rental market has changed, with large institutional money pouring into to purchase single-family homes to rent. We've been somewhat skeptical of the business model. Single-family homes don't offer the economy of scale that a building of rentals does. Fixing a plumbing problem in two homes 10 miles apart is different from fixing a plumbing problem in two units 10 yards apart. In other words, we see a move to more occupied ownership. This is a good thing and a virtuous circle: As more people own a home more people will be inspired to own one too. After all, most of us prefer to live in a neighborhood of owners. We prefer to own. This is a point worth emphasizing to our clients, as is the point that they can become a part of the virtuous circle at a 38% discount to renting. Article Courtesy of Patti Wilson, American Momentum Bank>

Florida Cities Tops in nation for Home Price Increases.

Fla. cities tops in nation for home price increases

JACKSONVILLE, Fla. – Feb. 26, 2014 – A report from Black Knight Financial Services (formerly Lender Processing Services) finds that December home values in the U.S. are within 13.9 percent of the peak reached in 2006.

Black Knight’s Home Price Index (HPI) found nationally that home values rose 0.1 percent month-to-month (compared to November 2012 numbers) and 8.4 percent year-to-year. The high point for U.S. home prices was $270,000 in June 2006. In December, the HPI found a median of $232,000.

From Black Knight’s analysis, it appears most U.S. cities saw their biggest price spike last year, and their dramatic price increases have begun to slow to a more balanced level.

Florida, however, seems to buck that trend a bit, with home prices still climbing faster in comparison to other U.S. states and cities.

According to Black Knight, Florida prices rose 0.6 percent month-to-month in December, coming in second to top-ranking New York with a 0.7 percent rise.

However, Florida cities logged eight of the top 10 spots for “Biggest Movers” when comparing metro areas. Only two other U.S. cities even made the list.

Biggest metro area movers month-to-month

1. Miami: 1.2% month-to-month December price increase
2. Sarasota: 0.9%
3. Key West: 0.7%
4. Fort Walton Beach: 0.6%
5. Poughkeepsie, NY: 0.6%
6. Lakeland: 0.6%
7. Port St. Lucie: 0.6%
8. Tulsa, OK: 0.5%
9. Naples: 0.5%
10. Palm Bay: 0.5%

To calculate its HPI, Black Knight says it looks at repeat sales prices and its loan-level databases. It claims the numbers take REO and short-sale price discounts into consideration.

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