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.