Are Things Really That Bad? Market Update for the week of June 30, 2014

MARKET RECAP Are Thing Really That Bad? This was a shocker: Gross Domestic Product (GDP) for the first quarter was revised down to a 2.9% contraction, meaning the economy shrunk 2.9% in the three months of 2014. Sounds rather distressing; a 2.9% contraction is the stuff of a serious recession. Should we be alarmed? Not necessarily, because we are looking in the review mirror. Markets are always forward looking processes. But if we do look to the past, we see a few mitigating factors. The weather was one. An unusually severe winter weighed heavily on consumption, investment, and trade. In other words, snow pretty much smothered the economy the first three months of the year. Looking forward, the second quarter is expected to show significant improvement. The economists at Merrill Lynch picture a rosy scenario. They expect the economy will have grown 4% for the quarter. What's more, they expect the economy to grow 3% for the remainder of the year. If Merrill's prediction holds, we can look forward to a robust second half. (Overall, though, 2014 won't appear so robust in hindsight. Averaging the four quarters will show the economy grew only 1.8% for the year.) Housing appears well positioned to lead a rebound. Existing home sales surged 4.9% higher in May to 4.89 million units on an annualized basis. When we factor in April's 1.5% gain, we get the first back-to-back gain in existing home sales since April and May of 2013. The jump in sales pushed the inventory down to 5.6 months in May from 5.7 months in April (based on the higher sales pace). Pricing remains strong, with the median price of an existing home increasing 5.9% to $213,400 in May (which moves more people into positive equity). A key takeaway is that the rise in the median price is the result of falling distressed sales. In May, only 11% of sales were attributed to distress properties compared to 18% a year ago. This suggests that the market is moving in the right direction. Speaking of the right direction, new-home sales surged 18.6% in May, rising to 504,000 units on an annualized rate. The South and the West lead the charge: The former saw a 14.2% monthly increase; the latter saw a whopping 34% increase. Best of all, home builders weren't discounting to move inventory. The median price of a new home increased 4.6% to $282,000. Though we didn't think the news on first-quarter GDP was distressing, it did impact mortgage rates. Across the country, rates moved lower this week. Bankrate.com's survey has the average rate on the 30-year fixed-rate loan pegged at 4.28%. Freddie Mac's survey has the average rate pegged at 4.14%. Both are roughly 30-basis points lower than where they were this time last year. The mortgage-rate trend has defied nearly all predictions (including our own). If you had asked market watchers on January 1 if the 30-year fixed-rate loan would be closer to 4% or 5% heading into July, the vast majority would have said closer to 5%. Lest we get too comfortable with today's low rates, let's keep an eye on the employment numbers that will be released this coming Thursday. Another month of 200,000-plus job gains could get rates moving higher.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Pending Home Sales (May)	Mon., June 30, 10:00 am, ET	0.8% (Monthly Increase)	Important. The sales trend is expected to improve through the summer and fall months.
Construction Spending (May)	Tues., July 1, 10:00 am, ET	0.5% (Increase)	Important. Builder sentiment and improving home sales point to higher residential construction spending.
Mortgage Applications	Wed., July 2, 7:00 am, ET	None	Important. Purchase activity must improve to sustain long-term sales growth.
Employment Situation (June)	Thurs., July 3, 8:30 am, ET	Unemployment Rate: 6.3% Payrolls: 220,000 (Increase)	Very Important. Continual 200,000-plus payroll gains will eventually pressure interest rates to rise.

 

A Possible Fly in the Ointment Low mortgage-purchase activity is one of our frequent laments. Activity simply refuses to gain traction. The latest data from the Mortgage Bankers Association once again show another weekly decline – 1% – in the purchase index. To return to full normalcy, the residential real estate market must be dominated by owner-occupiers. These buyers by far rely on mortgage financing to secure their purchase. With purchase activity low, the housing market is still relying on cash buyers, which to a large degree comprises institutions and people trading up. High mortgage activity would be indicative of more organic growth.

Market update for the week of June 23, 2104. "These “Twos” Really Aren't So Terrible"

MARKET RECAP These “Twos” Really Aren't So Terrible Bond markets were given a slight jolt this week on unexpectedly high consumer-price inflation. Specifically, the Consumer Price Index (CPI) jumped 0.4% month over month in May. This was the largest monthly increase since February 2013. The latest increase in consumer prices lifted annual CPI to 2.1%. This is within the Federal Reserve's tolerable inflation range, but it still raised a few eyebrows. Eyebrows were raised because inflation influences interest rates. When inflation rises, bond yields rise as well. At the same time, bond prices fall. Investors want to be compensated for lost purchasing power over time (which is the result of inflation). If investors anticipate higher inflation, they will demand a higher interest rate. The CPI was released Tuesday, and mortgage rates rationally rose. But they've actually eased back since. When we look at the national averages we don't see much change week over week: Bankrate.com's survey has the 30-year fixed-rate loan at 4.33%, a basis point lower than the previous week. Freddie Mac's survey pegs the 30-year loan at 4.17%, a three-basis point decrease. To be sure, the national surveys unlikely captured the full impact on rates when the CPI was released. (The 10-year U.S. Treasury note serves as a good proxy for the 30-year fixed-rate mortgage. You can see that the 10-year note's yield spiked higher .) But there is a mitigating factor for rates to remain subdued – low Gross Domestic Product (GDP) growth. We've been cautiously optimistic that growth would accelerate this year. Indeed, we've been encouraged by the trend in job growth, with the economy adding 200,000-plus new jobs each month for the past three months. This seemed like a good omen. Today, we are a little more cautious and a little less optimistic. This past week, the Fed cut its growth prediction to 2.2% from 3% for 2014. That's a sharp reduction and reflects the 1% economic contraction that occurred in the first quarter. The reduction also suggests the Fed is still wary that widespread predictions for an economic growth breakout will not occur. Low growth, in turn, will hold inflation at bay, because loan demand will remain muted. For anyone unfamiliar with how our banking system – which is based on fractional reserves – works, more lending increases the money supply. More money chasing the same amount of goods and services eventually leads to consumer-price inflation. Today, the 30-year fixed rate mortgage is as close to 3.5% as it is to 5% – the year-end prediction we proffered in January. So do we still think we'll hit 5% by the end of December? We have to confess that it's appearing less likely. That said, keep an eye on the monthly employment numbers, which are released the first Friday of every month. Should the economy continue to create jobs at a 200,000-plus rate each month, 5% on the 30-year remains a possibility.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Existing Home Sales (May)	Mon., June 23, 10:00 am, ET	4.7 Million (Annualized)	Important. Sales have yet to gain traction, but recent job numbers could lead to sales growth.
New Home Sales (May)	Tues., June 24, 10:00 am, ET	440,000 (Annualized)	Important. Sales have sputtered in recent months, but could trend higher on better weather.
Mortgage Applications	Wed., June 25, 7:00 am, ET	None	Important. Purchase activity points to sluggish sales activity.
Gross Domestic Product (1st Quarter 2014 Revision)	Wed., June 25, 8:30 am, ET	2.0% (Contraction)	Important. Downward revisions point to low economic growth through 2014.

 

Mixed News on Housing Existing home sales account for the majority of sales and mortgage-finance activity, but new home sales and construction contribute more to overall economic growth. Therefore, we were someone disappointed that housing starts eased in May, with starts falling 6.5% month over month to a 1.001 million annualized rate. Single-family starts dropped 5.9% after a 4.6% rise in April. Permits followed a similar pattern, falling 6.4% month over month. This suggests starts could tread water over the next month or two. That said, we could still see a pick up in starts based on home builder sentiment. The National Association of Home Builders' confidence index rose four points to a seasonally adjusted 49 in June. The future sales component also moved higher, up 3 points, to 59. This is the best reading since January. This is particularly encouraging, because the future matters more than the past. Topping our wish list, though, is rising purchase mortgage activity. Unfortunately, purchase applications – after posting a couple weeks of gains – decreased 5% in the Mortgage Bankers Associations' latest survey. With institutional buyers (cash buyers) pulling back, we want to see the individual owner-occupied buyer – the buyer likely to take on mortgage – move into the lead. We still haven't seen that. Until we do, we don't expect to see continual improvements in the housing numbers.

Keeping you updated on the market for the week of June 16, 2014

MARKET RECAP Finally, The Trend We've Been Waiting For We've been keeping a close on employment numbers since the 2009 recession. Many times in these pages we've noted that as job growth goes, so goes the economy... and, of course, so goes housing. Job growth is finally going the way we want. The economy added 217,000 new jobs in May, with the private sector by far leading the increase, adding 216,000 new jobs. The gains in May come on top the 282,000 new jobs in April and the 203,000 in March. This is good news, because we haven't seen monthly job growth continually exceed 200,000 each month until recently. To sustain a recovery, the economy needs to add 200,000-or-more jobs each month. With the recent gains, total employment is now 98,000 above the pre-recession peak and at an all-time high. (Though it's worth noting that the population continues to grow as well: 10 years ago there 290 million of us; today there are 317 million). Interestedly, another month of strong job growth hasn't had much impact on mortgage rates. Rates moved up this past week, but only slightly. Looking at the national averages, Bankrate.com's survey shows the 30-year fixed-rate mortgage averaged 4.34%, which is two basis points higher than the previous week. Freddie Mac's survey shows the 30-year loan averaged 4.20%, a six-basis-point increase. Rates are still very reasonable. More borrowers took advantage of low mortgages last week. The Mortgage Bankers Association (MBA) reports that application activity for the week ending June 6 was up strongly. Week over week, refinances were up 11%, while purchase applications were up 9%. This is one of the strongest weekly gains in months. Our enthusiasm is somewhat tempered, though. Too many times we've seen purchase applications string together two or three weeks of gains only to reverse course. But with institutional buyers (the cash buyers) pulling back, we are cautiously optimistic the individual buyer – using mortgage financing – will pick up the slack. Recent job growth is behind our optimism. Given recent job data, we wouldn't be surprised to see mortgage-purchase activity trend higher. More people working is obviously a plus. At the same time, mortgage credit continues to avail itself to more people. The MBA, which produces the Mortgage Credit Availability Index (MCAI), reports that the MCAI rose in May to 115.1, from 113.8 in April. So, yes, underwriting standards are easing, and actually have been easing over the past two years when you consider the MCAI base was 100 when it was introduced in March 2012. This isn't a surprised. As the economy improves (which it has), lenders become more willing to extend loans, and to extend loans to lower-rated borrowers. This is another positive trend we've seen developing in the past two years, as evinced by the MCAI. The trends we see in job growth and mortgage lending bode well for housing, which is why we remain bullish on housing.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Home Builder Index (June)	Mon., June 16, 10:00 am, ET	47 Index	Important. Sentiment has been stuck in neutral in recent months. But given recent strong economic data, we could see an upside surprise.
Consumer Price Index (May)	Tues., June 17, 8:30 am, ET	All Goods: 0.2% (Increase) Core: 0.2% (Increase)	Moderately Important. Low consumer-price inflation points to low future interest rates.
Housing Starts (May)	Tues., June 17, 8:30 am, ET	1.03 Million (Annualized Rate)	Important. Starts are now averaging above one million annually, but they are still well below the 1.5-million historical average.
Mortgage Applications	Wed., June 18, 7:00 am, ET	None	Important. Another strong rise in purchase activity could raise the outlook on housing.

 

A Lot of Room for Improvement, and That's Good News Investment is just as important as consumption in driving growth. Indeed, investment sets the stage for consumption. You invest to produce, and what is produced is consumed. This brings us to residential real estate investment, which has been on the upswing since mid-2010, but it still has a long way to go. In 1999, the housing sector was investing over $600 billion annually. Today, that figure is less than $500 billion. This suggests that there is plenty of room for more growth and overall housing improvement. The peak that was achieved in late 2005 has been offset by a decade of low investment. We think housing is well-positioned to increase investment, which will increase housing supply, housing consumption, and overall housing activity. We say that because we think demand will pick up in the second half of 2014 and continue into 2015. As we note, job growth is on the upswing, which points to an upswing in the overall economy. In other words, the positive trend in the labor market, and even that in the mortgage market, will eventually set housing on its own positive trend.

Keeping you updated on the market. For the week of June 9, 2014

MARKET RECAP Should We Worry About These Recent Trends? We confess that we don't spend much time worrying. When you think about it pragmatically, what does worrying actually accomplish? Little, really, outside of promoting dyspepsia and sleeplessness. That said, you do need to pause and contemplate what the facts tell you, even if they're not particularly pleasant to contemplate. The facts concerning purchase-mortgage applications aren't worrisome, per se, but they do give us pause. We simply aren't seeing the uptrend in application activity we had hoped to see at this point in the year. Despite the palpable decline in mortgage rates that has occurred in the past six weeks – which has pushed the 30-year fixed-rate loan below our 4.25% floor in many markets – purchase applications still refuse to gain traction. Indeed, the latest data from the Mortgage Bankers Association show applications fell 4% in the May 30 week, which has pushed the year-over-year decline to 15%. With institutional purchases (the large cash market) on the decline, we had expected the individual buyer to pick up the slack. Because the individual is much more likely to finance his purchase with a mortgage, purchase activity should have risen. This has us wondering what new-home and existing-home sales data (at the national level) will show in the coming month. We suspect they won't be especially encouraging. A couple developing trends could lift activity, though. The first is the developing trend in home prices. CoreLogic reports that prices continue to rise, but at a decelerating pace. Excluding distressed sales, prices nationally were up 2.1% month over month in April. Yearly, they're up 10.5%. Excluding distressed sales, the month-over-month change is 1.1%; the year-over-year change is 8.3%. These price gains appear robust, but the rate of appreciation for April is actually the slowest in 14 months. We're not surprised. We've said repeatedly that double-digit year-over-year price appreciation is unsustainable at the national level. After all, over the past three years, home prices have been appreciating at five times the rate of gross domestic product (GDP). What's more, the data have been skewed by strong institutional demand for distressed homes, which have experienced the greatest price gains after the 2009 market crash. The good news is that we're seeing a positive trend in supply. The NAR reports that inventory is up 10.5% year over year in 2014. We expect inventory to continue to increase at the national level. This trend, in turn, should promote sales activity. At the same time, it should further limit home-price appreciation. Of course, all real estate markets are local, but the aggregated local numbers produce a national number. Therefore, some information can be gleaned from glancing at a national number. Slower price growth coupled with rising inventory should lead to more sales in more local markets, which will produce a higher national number. So, no, were not worried. “Frustrated” is the more-accurate state of mind.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Wholesale Trade (April)	Tues., June 10, 10:00 am, ET	0.5% (Increase)	Moderately Important. Inventories are lean, but growing, which points to rising consumer activity and confidence.
Mortgage Applications	Wed., June 11, 7:00 am, ET	None	Important. Purchase activity will need to pick up to support higher home sales.
Retail Sales (May)	Thurs., June 12, 8:30 am, ET	0.5% (Increase)	Moderately Important. Rising building-material sales is an encouraging trend for housing
Producer Price Index (May)	Fri., June 13, 8:30 am, ET	0.3% (Increase)	Moderately Important. Producer prices have increased in recent months, but remain non-inflationary.

 

We're Still Not Sold on This Popular Perception The perception is that renting is becoming the option of choice in housing. We were reminded of this perception in a recent MortgageNewsDaily.com article that focused on the findings of a survey conducted by the McArthur Foundation. Our attention was piqued by the finding that renting is becoming more appealing compared to buying. We obviously can't argue with the survey results. But keep in mind that respondents can be lead by how questions are asked and when they are asked. For example, if someone were to ask if you were negative about owning a home right after being laid off, your mood and the question’s negative slant will likely elicit a negative response. Affordability, job security, and the economy are all important variables, to be sure. But fear of loss mobility is possibly the overriding variable. Memories of 2008 and 2009 are still sharp in many people's minds. There are no shortage of tales of someone who bought a home, soon found himself underwater, and was essentially anchored to his home. Speaking of anchors, many potential buyers are still anchored to the perception that if they buy a home, they'll be irrevocably moored to it. They believe the crisis is still upon us. If the perception is removed (and should be removed), we venture that the vast majority of people prefer owning to renting. To those who doubt our perception, simply answer the following question: Do you prefer to live in a neighborhood of owners or renters?

Is it really true what they say about home prices??? June 2, 2014

MARKET RECAP Is it Really True What They Say About Home Prices? It might be true; then again, it might not, at least as they pertain to us. First, the big national numbers: Home-price appreciation appears to be gaining pace, according to the S&P/Case-Shiller Home Price Index . Case-Shiller's latest price report, for March, shows home prices were up a stout 1.2% month over month in its 20-city index. This actually reverses a trend of slowing price appreciation that began in late 2013. Is it possible that home prices are set to resume the rate of increase we saw early last year? We don't think so. We need to keep in mind that all real estate markets are local. A person who owns a share of Microsoft stock and lives in San Diego owns the exact same asset as the Microsoft investor who lives in San Antonio. On the other hand, if they both own a home, they most assuredly don't own the same asset. Housing is heterogeneous and local. The point to emphasize is that the data can be skewed by outliers: A big gain in one city – in this case, San Francisco, which posted an improbable 2.4% monthly gain – can skew the national average. (Think of 10 people in a room, and two of them are Bill Gates and Warren Buffett. The average wealth in the room is $7 billion per person. Gates and Buffett step out. Now the average is drastically less.) We still expect price appreciation to slow in more local markets; especially in those markets that have strung together a few years of double-digit year-over-over gains. Such price appreciation is simply unsustainable. New-home prices are proof alone that you can't keep galloping along at a double-digit clip in perpetuity. In April, the median price of a new home dropped 2.1% to $275,800. Year over year, the median price is at a minus 1.3%. This isn't necessarily bad news: Lower prices keep sales activity brisk. New-home sales at the national level are running at 433,000 units on an annualized rate. This is roughly 100,000 units higher compared to the year-ago rate. Lower prices lead to more sales – a universal economic law applicable to every business. As we note, housing markets are local markets. Freddie Mac took a look at 50 metropolitan markets, and its findings were surprisingly weak. Freddie Mac's data – in its new Multi-Indicator Market Index – show that only two of five local markets are improving. This time last year more than 90% of these markets were improving. We are somewhat ambivalent to what this actually means. We suspect we're looking at a bifurcated market: Where price gains have been strong, they'll remain strong; where they've been weak, they'll remain weak. San Francisco will continue to price people out of the market; Atlanta will become more affordable. Combining the trends will produce data meaningless to both markets. Bottom line: We like housing, but we like it more in some markets compared to others.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Construction Spending (April)	Mon., June 2, 10:00 am, ET	0.9% (Increase)	Important. New-home construction continues to gain momentum and drive overall construction spending.
Mortgage Applications	Wed., June 4, 7:00 am, ET	None	Important. Both purchase and refinance activity should pick up on new low rates.
Employment Situation (May)	Fri., June 6, 8:30 am, ET	Unemployment Rate: 6.4% Payroll: 224,000 (Increase)	Very Important. Another upside surprise in payrolls will lift interest rates higher.
Consumer Credit (April)	Fri, June 6, 3:00 pm, ET	$15 Billion (Increase)	Important. Rising student-loan borrowing is becoming a concern for the entry-level housing market.

 

Mortgage Rates Fell, Purchase Applications Fell, Refinances Fell: What's Going On? Mortgage rates continue to fall. Indeed, the rate on the 30-year fixed-rate loan is fast approaching 4%. Though rates have dropped perceptibly, activity has dropped perceptibly as well. The Mortgage Bankers Association reports both purchases and refinances were down 1% last week. Activity likely tapered because many potential borrowers are still bottom fishing. We don't want to cry “wolf” too often, but this is a dangerous game. Yes, rates have dropped in recent weeks, but there hasn't been any major event to account for the drop. This suggests to us that credit markets will be very sensitive to any meaningful data or event that hits the market. Specifically, we're referring to next Friday's employment situation. Unanticipated employment numbers move credit rates. Another surprise to the upside in payrolls could easily end the mortgage-rate rally. Therefore, anyone within 15 days of funding should think long and hard (and quick) about locking. For that matter, the same goes for anyone within 30 days. But even if rates go lower, it's important to remember that a 30-year fixed-rate loan near 4% means the borrower is still sitting in some pretty high cotton.