Still Stuck in the Mud. Keeping you updated on the market for the week of April 28, 2014.

MARKET RECAP Still Stuck in the Mud Existing home sales are like a Jeep with bald tires stuck in a mud bog: The wheels spin furiously, but the Jeep goes nowhere. Not only does the Jeep go nowhere, it backslides. So is the case with existing-home sales. For the seventh time in the past eight months, sales have backslid. Sales for March were 0.2% lower compared to February, posting at 4.59 million on an annualized rate. Year over year, sales are down 7.5%, which is the steepest rate of decline in nearly three years. Prices, on the other hand, continue to rise, with the median price moving up 5.4% to $198,000. Now, new-home sales are adding to the sense of discouragement. New-home sales had been trending mostly up over the past 12 months. That trend ground to a halt in March, with sales plunging 14.5% to a 384,000 annual rate , far below anyone's estimate. Prices are an obvious drag on sales. The median price of a new home surged 11.2% to a record high $290,000. Year over year, prices are up 12.6%. Prices in many markets are a baffling anomaly. They continue to rise, but they're not materially pulling in additional inventory. Admittedly, if you sell one home at a higher price, you'll likely have to buy another at a higher price, but rising prices tend to pull in more people willing to sell. In many markets this isn't occurring. Prices simply continue to rise, and continue to rise at a rate we thought would have abated by now. Tight lending standards and higher mortgage rates are frequently fingered as culprits in stagnating home sales. Yes, lending standards are tighter than they were in 2006, but someone with a work history and a decent FICO score can still readily secure financing. As for rates, 4.5% continues to act as a ceiling on the 30-year fixed-rate loan. To be sure, rates spiked higher last summer, but the market should have adjusted to the new reality by now. In the past, we've blamed a stagnating economy and weak job growth for sales failing to pick up pace. A dearth of new buyers entering the market is also to blame. One concern we have is ballooning student debt . A lot of young adults owe a lot on student-loan debt these days. That's making it tough for them to enter the housing market. We remain positive, nonetheless. All markets are local, and all markets are complicated. There is a myriad of variables that influence value and establish trends. We think economic growth will overcome higher mortgage rates, and even higher home prices. Frustratingly, growth has been slow in coming about, but we still expect it to come sooner than later.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Pending Home Sales Index (March)	Mon., April 28, 10:00 am, ET	0.5% (Decrease)	Important. Sales continue to stagnate on low inventory and rising prices. Both trends are unlikely to end soon.
S&P/Case-Shiller Home Price Index (February)	Tues., April 29, 9.00 am, ET	0.6% (Increase)	Important. Price growth will likely accelerate over the next couple months.
Mortgage Applications	Wed., April 30, 7:00 am, ET	None	Important. Purchase applications have reversed course and point to slow sales growth.
Gross Domestic Product (1st Quarter 2014)	Wed., April 30, 8:30 am, ET	1.0% (Annualized Growth)	Important. Sluggish economic growth explains sluggish job growth so far this year.
Employment Situation (April)	Fri., May 2, 8:30 am, ET	Unemployment Rate: 6.6% Payrolls: 210,000 (Increase)	Very Important. Monthly job growth must exceed 200,000 to sustain the economy.

 

How the Washington Post Got It All Wrong on Home Ownership A recent article in the Washington Post was hardly favorable to housing. Basically, the article dispels the belief that a home is the best investment for most people. Other investments, such as stocks, are better investments over the long run. The article misses the point. The home you own isn't an investment. Properly speaking, a home is an asset. It's an asset that satisfies a very basic need – it provides a place to live. That's not the proper role of an investment, which most people buy for immediate cash flow and to eventually sell at a higher price for a profit. A home frequently satisfies the latter requirement: Over time, a home usually appreciate in value. We aver that a decade from now most homes across the nation could be sold for more than the purchase price today. In this regard, a home is an appreciating asset, but still not an investment. A home is only an investment when it is rented to generate monthly cash flow or to be renovated and flipped for a profit. But in this case, a house is not a home. It's only a home to the family occupying it. We might be parsing semantics here, but words matter, and the Washington Post got the words wrong.

When Will We Pull Out of the Doldrums?

Keeping you Updated on the Market for the week of April 21, 2014

MARKET RECAP When Will We Pull Out of the Doldrums? Last week, we referenced the movie Groundhog Day, because things continually feel the same. We're not moving backward, but we're not moving noticeably forward either. Much of the recent economic data support our contention. The Federal Reserve's “beige book,” a compendium of data and Fed officials' interpretation of the data, points to tepid economic growth. Words like “modest” and “moderate” show up frequently in the text released this past week. Home builders also continue to feel rather “moderate.” The NAHB/Wells Fargo Home Builder Sentiment Index posted at 47 for April. Fifty is considered breakeven, the point where sentiment tilts either positively or negatively. Right now it's tilting negatively. At least housing starts picked up in March. Starts rose 2.8% to a 946,000 annual rate, lead by single-family starts, which jumped 6%. Unfortunately, the increase failed to live up to expectations. The consensus estimate was for starts to increase to 970,000 on an annualized rate. The positive takeaway is that single-family starts are gaining momentum. We expect to see starts ramp up going forward. Weather in the first three months of 2014 had been atypically lousy. Indeed, the Federal Reserve referred to weather no fewer than 103 times in the beige book. With weather a less influential factor, perhaps we'll see a pick up in housing activity. As for interest rates, they continue to be priced for sluggish economic activity. On the mortgage front, rates were down again this past week. Bankrate.com's survey has the 30-year fixed-rate loan priced at 4.43%; Freddie Mac has it priced at 4.27%, which is a six-week low. The upside is that lower rates have reignited activity: The Mortgage Bankers Association reports refinances were up 7% for its most recent reported week. Just as important, purchase applications were up 1%. Purchase activity has been up every week for the past month. Gains in purchase activity have been incremental, to be sure, but it appears a budding trend is taking hold. Ellie Mae's Origination Insight Report states that 40% of mortgage loans closed in March were originated for refinancing, while 60% were for home purchases. In February, the split was 43% for refinances and 57% for purchases. FICO scores were another telling data point. Ellie Mae's numbers point to easing credit standards, a trend we've seen, and one that goes under-reported and under-appreciated. We've mentioned a few times over the past couple months that the perception of getting a mortgage loan differs from the reality. The perception is that it's difficult; the reality is that's not really so. With any luck, the trends we see in the credit market will portend a step-up in economic growth. Credit generally becomes easier to come by when the economy is improving. Let's hope that's the case.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
FHFA Home Price Index (February)	Tues., April 22, 9:00 am, ET	0.5% (Increase)	Moderately Important. Prices will likely show slowing appreciation.
Existing Home Sales (March)	Tues., April 22, 10:00 am, ET	4.5 Million (Annualized)	Important. Sales continue to languish on low inventory and sluggish job growth.
Mortgage Applications	Wed., April 23, 7:00 am, ET	None	Important. Rising purchase activity points to rising home sales.
New Home Sales (March)	Wed., April 23, 10:00 am, ET	460,000 (Annualized)	Important. Sales are expected to climb through spring and early summer.

 

How to Become a World-Class Decision Maker To make good decisions, one must be grounded in reality. Unfortunately, most people aren't grounded in reality. The problem centers on the past. People anchor to sunk costs, which are past costs. We've seen this with home prices and mortgage rates. People will automatically assume that past prices and past rates have to reappear in the future. That's not necessarily true. Just because a home sold for $400,000 in 2006 and sells for $350,000 today doesn't mean $400,000 will reappear. The same goes for the 3.5% 30-year fixed-rate loan. It was here once, but that doesn't mean it will be here again. The focus should be on where things are going from here forward. Making good decisions requires thinking on the margin. For example, if you had a $50 ticket to a football game and lost that ticket, would you still attend the game? Many people wouldn't attend because they view the ticket as now costing $100 instead of $50 – the cost of the lost ticket and the cost of the ticket that would need to be purchased. But that's the irrational way of looking at it. The rational way is to ask, “Am I willing to spend $50 to attend the game?” The first ticket is a gone, so it shouldn't factor in the decision. For most people, it does. Similarly, we see people anchor to home prices or mortgage rates that no longer exist. It's always important to let our clients know that the prices that prevailed in the past shouldn't influence today's decision. What matters is what today's data lead us to believe for the future. This sounds like a simple concept, but it's one few people grasp.

Still Not Gaining Traction After All These Years

Keeping you updated on the market for the week of April 14, 2014.

 

MARKET RECAP Still Not Gaining Traction After All These Years The employment numbers for March were reported this past Friday, and they were “okay” at best. The Bureau of Labor Statistics reports that total payrolls rose 192,000 for the month, which was inline with the consensus estimate. The good news is that gains were realized in the private sector, which created 167,000 new jobs compared to 148,000 in February. The pace of job creation wasn't able to move the unemployment rate, though, which remains stuck at 6.7%. To be sure, payroll growth has improved in recent months, but it needs to improve at a more robust pace. In January 2009, the number of unemployed plus the number of Americans not participating in the labor force was around 96.2 million. Today, that number has risen to over 104 million. As a standalone number, 192,000 new jobs might seem a lot, but it really isn't when placed in context of the bigger picture. Five years into the post-recession recovery, new jobs should be continually added at a 200,000-or-more rate each month. That hasn't been the case. Federal Reserve officials are also of the mind that things remain a little soft. The minutes from the latest Fed meeting points to continued loose monetary policy for years to come. This means the Fed is committed to holding rates low, even if it still plans to back off quantitative easing (buying Treasury notes and bonds and mortgage-backed securities). In short, the economy is at best creeping forward, the taper is still on as scheduled, and easy-money policies will persist longer than many economists had expected. Of course, there is a hedge (there always is), and that is if extraordinary market data appear, the Fed's direction will change. This all feels a bit like the movie Groundhog Day. At least the Fed is making us appear like a prophet on mortgage rates. At the beginning of the year, we thought the rate on the 30-year fixed-rate loan might bob about between 4.25% and 4.5% for a while. Bankrate.com's latest survey has the 30-year fixed-rate loan pegged at 4.47%; Freddie Mac's survey has it pegged at 4.34%. At this point, though, we'd have thought the 30-year loan would have ceased bobbing about and started trending higher. That hasn't been the case, as the economy in general and the labor market in particular continue to spin their wheels. Our primary concern is that if the economy doesn't gain traction soon housing – particularly new home activity – will start loosing traction. Existing home sales at the national level have gone nowhere over the past six months. New-home construction is an even bigger concern, because of its signification contribution to overall economic activity. The last thing we'd want to see is new-home construction backslide. For the past two years, we've anticipated some kitty litter being thrown down so that the economy could gain traction and drive itself out of this rut. So far, that's yet to occur.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Retail Sales (March)	Mon., April 14, 8:30 am, ET	0.7% (Increase)	Moderately Important. Sales will trend higher after weather-induced sluggishness.
Home Builder Sentiment Index (April)	Tues., April 15, 10:00 am, ET	50 Index	Important. Optimism is expected to return with the warmer weather.
Mortgage Applications	Wed., April 16, 7:00 am, ET	None	Important. Increased purchase activity points to rising home sales.
Housing Starts (March)	Wed., April 16, 8:30 am, ET	970,000 (Annualized)	Important. Starts are expected to surge after being impeded by bad weather in recent months.

 

Is Everyone Wrong About This Important Variable? Nearly every economist, every pundit, every commentator has predicted 5% on the 30-year loan by the end of the year. We have to slot ourselves in with the crowd. Though we still have almost eight months to go, rates continue to languish. Lower interest rates are certainly more popular than higher interest rates. But low interest rates alone can't drive the housing market. We simply need more economic growth, and not just to grow the market, but to sustain it. RealtyTrac reports that March marked the 42 nd consecutive month of falling foreclosure activity. But fissures are starting to show: RealtyTrac also reports that foreclosure activity was up in 29 states. We hope that our prediction of 5% on the 30-year loan comes to pass, because a 5% rate will only occur if accompanied by stronger economic growth. We can see no other way that Federal Reserve officials will let it rise.

A Federal Reserve World, And We're All Living in It

Keeping you Updated on the Market
For the week of April 6, 2014

MARKET RECAP A Federal Reserve World, And We're All Living in It When the conversation turns to monetary policy and the Federal Reserve, the natural reaction is for eyes to glaze over. This is understandable. In the past, monetary policy and the Fed were supporting players who impinged little on the day-to-day activity in the housing and mortgage markets. That's hardly the case today. Over the past few years, since the 2009 recession, the Fed has morphed into a leading player. Therefore, we have no choice but to follow the Fed. “You might not be interested in war, but war is interested in you,” is a quote attributed to Russian revolutionary Leon Trosky. We can modify Trosky's quote to say, “We might not be interested in the Federal Reserve, but the Federal Reserve is interested in us.” For this reason, we need to be interested in the Fed, which is why we spend considerable space on Fed commentary. Its policies directly influence home prices and mortgage rates. Now, it appears the Fed is backing off raising interest rates sooner than later. A couple weeks ago, we mentioned that new Fed Chair Janet Yellen had overtly hinted that interest rates would begin rising sometime in 2015. We speculated by mid-July. We were even more confident that 5% on the 30-year fixed rate loan was likely by end of this year. Indeed, mortgage rates rose – in fits and spurts – through most of March. The latest survey from Bankrate.com shows the national average on the 30-year loan at 4.54%. Freddie Mac's survey has the 30-year loan at 4.41%. Both are the highest they've been since late January. That said, we're rethinking our position. This past week, the Fed had what you could call a “wait-a-minute” moment. Fed Chair Yellen hedged her previous commentary, adding we will need stimulus for “some time.” This suggests that the economy has yet to gain sufficient traction, and appears unlikely to do so in the near future. In other words, 5% on the 30-year loan isn't quite the done deal that it seemed a couple weeks back. Since the recession ended, economic growth and job growth have remained stubbornly sluggish. A recent commentary from the Cleveland Branch of the Federal Reserve offers some insight into why this is: insufficient investment. Many economists focus on consumption as the main driver of the economy. Unfortunately, they under-weigh the importance of production. The fact is that we all have to produce in order to consume. We work first (produce), get paid, and then consume (credit not withstanding). Production is predicated on investment: We need tools (or capital) to produce. With the Fed pushing back raising interest rates, lower mortgage rates could prevail longer than we initially expected at the beginning of the year. Of course, the one caveat is that if job growth, investment, and consumption unexpectedly pick up, the Fed could signal a new direction, which would again alter interest-rate expectations.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Credit (February)	Mon., April 7 3:00 pm, ET	$12 Billion (Increase)	Important. Rising student loans outstanding could be a negative for the entry-level home market.
Mortgage Applications	Wed., April 9, 7:00 am, ET	None	Important. Purchase applications continue to inch higher, but no meaningful trend has been established.
Federal Reserve FOMC Meeting Minutes	Wed., April 9, 2:00 pm, ET	None	Moderately Important. The Fed is expected to reiterate its commitment to wrap up tapering by the end of the year.
Producer Price Index (March)	Fri., April 11 8:30 am, ET	All Goods: 0.1% (Increase) Core: 0.1% (Increase)	Moderately Important. Inflation at the producer level remains sedate and won't move interest rates.

 

A More Accommodating Market Than We Think One of the more prevalent complaints since the housing-market bubble burst in 2009 is how difficult it has become to get a mortgage loan. Compared to the early-to-mid-2000s, you could say that's true. The reality is – from a historical perspective – that the mortgage markets is more accommodating than many people think. This point was driven home in a recent Wall Street Journal article, which basically stated that getting a loan really isn't so tough. This is a point worth driving home to our clients. To be sure, the additional paperwork and verification required today compared to the recent past isn't something anyone particularly enjoys, but it's not unreasonable either. Last week, we explicated the upside of a housing market lead by mortgage-financed purchases. The good news is that the reality of obtaining a mortgage is easier than the wide-spread perception, which is why it's important to change the wide-spread perception. We're likely preaching to the choir on these points, but sometimes its worthwhile to do a little preaching to drive home an obvious point that isn't obvious to everyone.