Keeping you updated on the market! For the week of May 26, 2014

MARKET RECAP Time for the Logjam to Loosen The signs increasingly point to accelerating housing activity. Late last week, the Census Bureau reported that housing starts jumped 13.2%, to a 1.072 million annualized rate, in April. The numbers easily blew past most economists' estimates. Even more encouraging, permits increased 8%, thus pointing to an elevated level of starts for the near future. To be sure, most of the gains were posted in the multi-family segment, but the more important single-family segment also moved higher. Starts inched up 0.8%; permits posted a 0.3% gain. On the existing-home front, sales are still not where we'd like to see them, but they're finally moving forward. Sales for April posted at 4.65 million on an annualized basis – a 1.3% increase over sales in March. This was actually only the second time in the past nine months sales have posted a gain, so we'll take it. The numbers on inventory were particularly encouraging. NAR data show the number of existing homes for sales jumped 16.8%, to 2.29 million homes, in April. The “for sale” surge has lifted overall inventory to a 5.9-months supply. Financing costs shouldn't hinder future sales growth. Mortgage rates are about where they were this time last October. Bankrate.com shows a 4.29% average rate at the national level on the 30-year fixed-rate loan; Freddie Mac shows 4.14%. Combine lower mortgage rates with recent Fannie Mac/Freddie Mac initiations that will make it easier for lenders to extend credit to more people, and we see no reason sales and new construction should not maintain an upward trajectory. But there is no guarantee mortgage rates will continue scratching lower ground. We confess that we are somewhat surprised that rates have trended lower this long and this far over the past two months. Job growth in recent months points to a strengthening, expanding economy. In other words, it's possible today's low rates are an anomaly – and one that could quickly vanish. In two weeks, another employment report is scheduled to be released. If it surprises to the upside, like the last two reports, mortgage rates could easily reverse course and head for higher ground. After a period of meaningful rate declines, the risk of waiting for more declines rises. Markets do have a stopping point; this is a point well worth noting to our clients.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
S&P/Case-Shiller Home Price Index (March)	Tues., May 27, 9:00 am, ET	0.4% (Increase)	Important. Price growth in more local markets will likely slow.
Mortgage Applications	Wed., May 28, 7:00 am, ET	None	Important. Purchase activity has slowed, which suggests home-sale gains will be difficult to maintain.
Gross Domestic Product (1st Quarter 2014)	Wed., May 28, 8:30 am, ET	0.6% (Decrease)	Moderately Important. GDP growth was impeded by bad weather in the first quarter. Fortunately, growth has picked up in the second quarter.
Pending Home Sales (April)	Thurs., May 29, 10:00 am, ET	2.0% (Increase)	Important. Contract activity is expected to build on last month's strong gain, but remains sluggish.

 

How a Contrarian Accentuates the Negative The more we vet the data, the more we like what we see. Other people, though, might see it otherwise. For instance, household formation remains low. Indeed, it's at a multi-decade low. According to recent Census Bureau data , 36.2% of Americans under age 35 owned a home in the first quarter of 2014, compared with 41.3% in the first-quarter of 2008. The latest generation of young adults have been slower than their predecessors to venture out on their own. Many people see this a negative; we see it as a positive. You eventually have to leave home, for no other reason than to maintain the sanity of parent and child alike. Speaking more pragmatically, basement-dwelling young adults are pent up housing demand that will come to market. In other words, we expect to see a continual rise in new household formations, which is obviously a plus for housing. The trend in renting is another example. A bias toward renting remains pervasive. At the same time, the data point to homeownership at levels that prevailed in 1995. Today, 64.8% of American families own their homes compared with 68.9% – the peak of ownership – in 2006. Again, we see good news for housing, especially when factoring in the rent trend. Reis Inc., reports apartment rents have rose steadily over the past 17 quarters. They're now roughly 11% higher than they were compared to the post-crash lows in 2009. This means owning is the preferable economic option for more people. The really good news is that most of us prefer to own; contrary to all the positive chatter on renting. A poll taken by Trulia last year shows 75% of Americans believe it's better to buy than to rent a home. A lot of what is reported is taken as negative, but when considered in a long-term context, it's actually positive.

 

A Prophet on Interest Rates, But What Does This Mean for Housing?

MARKET RECAP A Prophet on Interest Rates, But What Does This Mean for Housing? Interest rates are like the weather: They change frequently. More important, if you can get it right predicting them, you can look like a genius. But if you get it wrong? Well, you look like something else. So far, we've got it right on interest rates. At the beginning of the year, we proffered that the 30-year fixed-rate loan would likely vibrate between 4.25% and 4.5%. Leaving points aside, that's pretty much been the case, at least based on the national average-rate data compiled by Bankrate.com and Freddie Mac . Of course, we want to keep our chest pounding to a mild thump: We also said 5% on the 30-year loan was in the cards by the end of 2014. The 30-year loan hasn't exactly shown signs of bolting north. To the contrary, the rate has been steadily declining over the past month and is about where it was in November. That said, we're sticking with our 5% prediction, even if we are almost half way through 2014. We like how the job numbers are trending, which is higher. We suspect when we get a first glimpse of second-quarter economic data, the numbers will be significantly improved from the first quarter. Job growth, after all, is reflective of economic growth. But what about housing? We like the outlook for housing – a lot. We expect sales and prices to trend higher. What's more, we would not be put off by rising interest rates as long as the economy is grinding forward to support higher job and wage growth. (Wage growth, by the way, is indicative of rising labor productivity, and that, too, has been rising.) To restate the obvious, we are unconcerned with rising interest rates. Indeed, we welcome them when they come accompanied with rising economic activity. The lower rates that have bubbled to the surface in recent weeks are something of an anomaly, in our opinion. When signs of sustained growth become more evident, you can be assured interest rates will rise. But housing will rise too. When we look back to the early 2000s, and a little beyond, we find that mortgage rates were a percentage point or two higher. But it was no big deal. The economy was humming along, and so was housing. In the meantime, we are still struggling a bit. Last week, we were pleasantly surprised to see purchase applications soar 9% and take the lead over refinances in total mortgage activity. Unfortunately, momentum petered out. On Wednesday, the Mortgage Bankers Association reported purchase activity had dipped 1% for the seek of May 9; this despite mortgage rates falling to a six-month low. Then again, one week does not a trend make. We're already looking forward to early June, when the employment situation for May will be released. If we get another month of 200,000-plus gains in payrolls (which we expect), we'll feel much more assured everything will work out fine this year for both the housing and mortgage markets.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., May 21, 7:00 am, ET	None	Important. We expect purchase activity to gain on lower rates and an improving job outlook.
Federal Reserve FOMC Meeting Minutes	Wed., May 21, 2:00 pm, ET	None	Important. The Fed is expected to affirm its commitment to QE tapering and to hold short-term rates low.
Existing Home Sales (April)	Thurs., May 22, 10:00 am, ET	4.7 Million (Annualized)	Important. Sales are finally showing positive momentum on improved inventory and a strengthening economy.
New Home Sales (April)	Fri., May 23, 10:00 am, ET	430,000 (Annualized)	Important. Sales are gaining pace on builder incentives and improving consumer confidence.

 

Pressure Builds for Change We Can Believe In What happens in Washington D.C. frequently confounds more than clarifies. New rules and regulations tend to raise the level of frustration more than ally it. Let's be honest, many people have been frustrated by mortgage underwriting standards. They're viewed as overly stringent. It's difficult to argue with the perception, but the fact is that many private lenders have at least marginally eased underwriting standards this year. Then again, standards can be eased only so far, because they must still adhere to guidelines mandated by Fannie Mae and Freddie Mac. These to government-sponsored organizations guarantee two-thirds of mortgages originated. The good news is that Fannie and Freddie are loosening rules that have forced banks to buy back billions of dollars worth of home loans. These rules have kept lenders cautious about making home loans to borrowers with imperfect credit, because lenders could wind up absorbing losses if the loans default. At the same time, these regulations have raised the cost of originating mortgages. These rules have been particularly tough on the entry-level market – homes priced under $300,000. In other words, the important first-time buyer has been under-served. We need the first-time buyer to grow the market. The good news is that new Fannie and Freddie guidelines will enable us to better serve and grant more credit to all potential borrowers going forward. This can be only a positive for housing.

This is Terrific News.......Sort of. Keeping you updated on the market for the week of May 13, 2014.

MARKET RECAP This is Terrific News... Sort of We've been pounding the table for job growth since, well, it's been quite a while now. The good news is that it appears our demands are being addressed. The economy is finally showing signs of trending higher. We say that because April payrolls increased 288,000 , far exceeding economists' estimates. This 200,000-plus gain comes on top of the 203,000 jobs added in March and the 222,000 added in February. We've noted frequently in the past that the economy needs to continually add 200,000-or-more jobs each month to sustain economic growth. April's payroll report is surely welcomed news. The April job gains were sufficient to drop the unemployment rate to 6.3%. This means the Federal Reserve will very likely continue with its planned tapering of quantitative easing (further removing support for mortgage rates). With the economy improving, QE is less needed. With that said, a few clouds still linger on the horizon – labor participation being the grayest. Ninety-two million people are out of the labor force and 9.8 million are still officially unemployed, according to the Bureau of Labor Statistics . These are high numbers, to be sure, but there is at least one mitigating factor: more baby boomers are retiring, thus leaving the work force for good. Still, the unemployment rate among younger adults remains elevated, and these people are key drivers of the entry-level housing market. Interestingly, mortgage rates across most product offerings eased since the latest job numbers were released last Friday. Usually such bullish economic news pressures rates to rise. That didn't occur. A subsequent speech by Federal Reserve Chair Janet Yellen was key to rates remaining subdued. Basically, Ms Yellen said the Fed will continue to maintain an “accommodating” monetary policy for the foreseeable future. Today, mortgage rates are not only subdued, they're positively languid, residing at levels we haven't seen in six months. These lower rates haven't exactly ignited a refinance flurry, but at least purchase activity is showing some real signs of life. Indeed, purchase applications surged 9% in the May 2 week, lifting the percentage of purchase activity to 51% of all activity. This marks the first time since 2009 that purchases have exceeded refinances. Lest our enthusiasm run too wild, we need to keep in mind that purchase applications are still 16% lower than they were a year ago. Then again, it's also worth keeping in mind that the Mortgage Bankers Association tends to understate purchase activity because small lenders are underrepresented in the MBA's purchase index. The bottom line is that we like the way things are trending, and we're looking forward to more home sales and rising purchase-mortgage activity in coming months.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., May 14, 7:00 am, ET	None	Important. A strong surge in purchase activity bodes will for the housing outlook.
Consumer Price Index (April)	Thurs., May 15, 8:30 am, ET	0.2% (Increase)	Moderately Important. Consumer-price inflation won't move interest rates.
Homebuilder Index (May)	Thurs., May 15, 10:00 am, ET	49 Index	Important. Optimism should continue to rise on improving activity.
Housing Starts (April)	Fri., May 16, 8:30 am, ET	985,000 (Annualized)	Important. The important single-family segment is expected to drive overall growth.

 

Why the Housing Market Is in Better Shape Than We Think We have to confess to being a little dour over the past couple months. Perhaps we were influenced by the surfeit of hand-wringing articles lamenting the problems with housing. Yes, existing home sales are down and inventory is tight, but a chief reason sales are down is the decline in distressed sales – and that's a good thing. Fewer short sales and fewer foreclosures will keep prices moving on an upward trajectory, which, in turn, will lift the number of owners with positive equity. At the same time, we've seen tight credit standards gradually become somewhat less tight. Competition, which is always a good thing, is forcing lenders to rethink underwriting policies. This is good for the market. Credit might still be tight, but it can only go in one direction – toward more accommodation, and that's where we are trending. Demographics also favor more housing and lending activity. The fact is the population continues to grow, so demand for housing will have to rise. At the same time, housing starts – below 1 million annually – continue to trail the historical average of 1.5 million. We mentioned last week that we remain unconvinced that we're destined to become a nation of home renters. In our travels and experiences, we continually find that people want pride of ownership, stable housing payments (rents continually rise), an appreciating asset, and eventual freedom from monthly payments. They also want mobility, which more of them will regain as the housing recovery moves along. In other words, yeah, we like where things are going, and we are eager to get there.

When Bad News is Good....

MARKET RECAP Who to Believe on This One? For the past year, if not more, we've been wishing, hoping, and even cheerleading for an upturn in economic growth. To this day, we have little to show for our emotional investment. Gross domestic product (GDP) grew at an imperceptible 0.1% rate on an annualized basis for the first-quarter of 2014. The advance fell far short of an already low-bar consensus estimate for 1.0% growth. Acceptable annual growth for a big country like ours is 3% or higher. Unless the economy picks up steam soon, we're unlikely to see 3% in 2014. Interestingly, the Federal Reserve's take on the economy doesn't quite jibe with the Bureau of Economic Analysis. (The BEA calculates GDP.) Fed officials see economic activity picking up, with employment improving and consumer spending gaining pace. The Fed is sufficiently convinced the economy is on the right track that it sees no reason to back off tapering. It will continue to reduce its monthly purchases of Treasury notes and bonds and mortgage-backed securities (MBS). Timing might account for the difference in opinion: The Fed is focused more on the latest economic data, while the BEA parses data all the way back to January. That said, the more contemporary data aren't terribly encouraging, particularly on housing investment. Many economists focus on consumer spending when estimating economic growth, but investment is just as important. Investment sets the stage for future consumption. Residential investment matters, because it has a rippling effect on the economy. It doesn't take much imagination to see the different materials and services required to build, sell, maintain, and furnish a home. Unfortunately, residential investment contracted during the first quarter, which marked a second-consecutive quarter of investment contraction. Because housing is such a large economic contributor, residential investment will need to turn positive for the economy to meaningfully grow. Mortgage activity, sluggish in recent months, also needs to pick up pace. We're not surprised that the surge of refinances that occurred in the past four years has been reduced to a trickle. Now that mortgage rates have stabilized within a tight range, there is less incentive to refinance. At this point, we'd like to see more purchase activity , which would obviously be of reflective higher sales volumes. On this front, activity continues to ebb and flow. Over the past two weeks, it has mostly ebbed. Nevertheless, we remain optimistic. The first signs of spring momentum have finally arrived. Pending home sales ended nine-straight months of declines with an encouraging 3.4% uptick in March. In another positive, February sales were revised upward by three-tenths to minus 0.5%. Home-price growth also appears to be moderating, which should help bring inventory and buyers into the market. Therefore, we expect pending home sales to rise over the next few months. If this occurs, we should expect to see a pick up in mortgage-purchase activity.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
International Trade (March)	Tues., May 6, 8:30 am, ET	$40.5 Billion (Deficit)	Moderately Important. International trade remains as subdued as domestic trade.
Mortgage Applications	Wed., May 7, 7:00 am, ET	None	Important. Purchase activity tumbled in the latest MBA report. This points to sluggish immediate sales activity.
Consumer Credit (March)	Wed., May 7, 3:00 pm, ET	$15 Billion (Increase)	Moderately Important. Revolving credit use has stagnated, which points to a moderating consumer-spending trend.
Job Openings (March)	Fri., May 9, 10:00 am, ET	4.2 Million	Important. Openings have trended higher in 2014, but the trend has been lead by lower-paying retail jobs.

 

Keeping you updated on the market for the week of May 5, 2014.

When Bad News is Good  Homeownership has hit a 19-year low, according to the Census Bureau. The share of Americans owning a home is down to 64.9%. Meanwhile, the median monthly asking rent has soared to a record high, hitting $766 as of the first quarter of 2014. Because our bread is buttered by homeownership, it would seem that ownership hitting a 19-year low is reason to lament, especially if we consider that many pundits believe the trend will be sustained. One prominent pundit, Sam Zell, chairman of apartment REIT Equity Residential, believes the homeownership rate will eventually fall to as low as 55%. We don't quite see it that way. For one, continually rising rents is good news for housing, especially if the rate of home-price appreciation continues to ease. This would mean that owning a home will make more sense economically to more people. The simple fact people prefer to own than to rent is also reason to be encouraged. People prefer to live in a neighborhood of owners, because these neighborhoods are usually more stable and better kept. The good news is that if you can satisfy your preference at a comparatively better price, you're more likely to act. We expect to see more people act as the advantages of ownership become more apparent. The U.S. homeownership rate peaked at 69.2% in June 2004. We don't see a return to that level in the near future, but something in the 65%-to-66% range is entirely reasonable and plausible.