Monday, March 31, 2014

What to expect from here on out.

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

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.


Date and Time
Construction Spending
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
Important. Purchase applications have picked up pace. Now we want to see a trend develop.
Factory Orders
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
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 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.

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