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.