Home Builders Take Flight; Mortages Remain Grounded

MARKET RECAP Home Builders Take Flight; Mortgages Remain Grounded Home builders are feeling as chipper as they have all year. The National Association of Home Builders (NAHB) reports that its sentiment index hit 55 this month. In other words, sentiment is more optimistic than pessimistic. The NAHB also reports a “noticeable” rise in serious buyers. Noticeable is a vague word, but what we see in the hard numbers of housing starts makes it appear true. Starts surged to an annualized pace of 1.093 million units in July, a 15.7% increase from the 945,000 units in June. Even more encouraging, single-family starts picked up pace to 656,000 in July, an 8.3% increase over June. What's more, single-family starts are expected to hold at these higher levels. This is good news because single-family starts pack the most punch economically. They produce the most spillover effect – to lumber, construction materials, furniture stores, home-improvement stores, and on and on. The impact can be felt throughout the economy. Our bread might be mostly buttered through the sale and financing of existing homes – because there are many more of them – but in terms of contributing to economic growth, new-home activity is where it's at. Now, what we would like to see are more homes – new and existing – financed with a mortgage. Unfortunately, we still see insufficient mortgage activity. The latest interest rate down-draft has pushed mortgage rates down to their lowest level of the year. The rate on the 30-year fixed-rate loan hovers just above 4% in many markets. This has helped lift refinances. Data from the Mortgage Bankers Association show refinance applications were up 3% last week. Unfortunately, purchase applications were down 0.4%, and are at a six-month low. Purchase applications are up for new homes, which is no surprise; new single-family homes are rarely investment properties. The existing-home market for purchase applications continues to lag, though, and points to stagnating sales growth. We understand that conforming mortgage standards remain too strict for many people's liking, but we've noted frequently throughout 2014 that credit availability is on the rise. What's more, data from the Federal Reserve show more lenders are willing to lend to more people. Potential home buyers are a bit too conservative in our opinion. To be sure, memories of the housing boom and subsequent bust still linger. But this market is much healthier than it was five years ago, and that's a message that can't be over-emphasized.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
New Home Sales (July)	Mon., Aug. 25, 10:00 am, ET	435,000 (Annualized)	Important. The monthly rate of sales should continue to improve based on recent home-builder data.
S&P/Case-Shiller Home Price Index (June)	Tues., Aug. 26, 9:00 am, ET	9% (Year-Over-Year Increase)	Moderately Important. The rate of price appreciation continues to slow in more markets.
Mortgage Applications	Wed., Aug. 27, 7:00 am, ET	None	Important. Purchase activity still shows no sign of picking up.
Pending Home Sales Index (July)	Thurs., Aug. 28, 10:00 am, ET	1.0% (Increase)	Important. Existing home sales continue to flounder on low inventory.

 

Renting v. Owning Over the past couple years, we've read a plethora of articles like this recent one at Business Insider that extol the virtues of renting. Most of the articles focus on expenses, liquidity, and mobility. On these metrics, renting appears to have the advantage. But when we read these articles, it frequently becomes apparent the writer isn't observing the complete picture. Full expenses can be tricky to capture. Buying a home includes closing costs, moving expenses, utilities, and maintenance. With renting, you have moving expenses and utilities. Maintenance is generally covered by the landlord. But the big picture must be considered: Renters move more frequently than buyers. They incur more moving expenses and frequently forfeit a good chunk of their damage deposit with each move. Liquidity is also a considered a drawback of owning. You can't sell your home as efficiently as you can sell a share of stock. True enough, It does take time and additional cost to sell a home at the market price. This lack of liquidity is an issue, but it isn't as onerous as we are lead to believe. A properly priced home, which reflects market price, will move in short time. Liquidity, in turn, impacts mobility. The time it takes to buy and sell a home impedes your ability to move as freely as you want. But pro-renters frequently fail to mention that as soon as they sign that one-year lease, their mobility is seriously impeded unless they are willing to incur considerable costs. But if we look at two homebodies, we really see the advantage in buying: A buyer and a renter move into a home with no intention of moving. P&I for the buyer is $1,000 per month with a 30-year fixed-rate mortgage; the renter pays $1,000 in rent and signs one-year leases. Let's say rent increases an average of 3% annually Thirty years from now, the buyer pays his final year of $1,000 in P&I; the renter pays $2,427 in monthly rent. In the 31 st year, the buyer owes no P&I, but the renter now pays $2,500 in monthly rent. When the big picture is considered, owning comes out ahead more often than people are lead to believe. Article courtesy of Patti Wilson, American Momentum Bank.

Is This the New Normal in Mortgage Lending?

MARKET RECAP Is This the New Normal in Mortgage Lending? At the beginning of the year, nearly every mortgage commentator (us included) projected mortgage rates would adhere to a northeasterly trajectory by this time. The rate on the 30-year fixed-rate loan would be above 4.5% (likely well above) as we headed into the waning days of 2014. So much for predictions. Here we are, with nearly two-thirds of the year in the rear-view mirror, and mortgage rates continue to hover near 2014 lows. Indeed, Bankrate.com's latest survey has the 30-year fixed-rate loan averaging 4.27% for the past week; Freddie Mac's survey shows it at 4.12%. Our prediction on job growth has turned out closer to what we expected, with the economy now averaging 200,000+ new jobs a month – a feat the economy has performed for the past six months. Historically, when economic growth kicks into gear (as evinced by stronger job growth) interest rates kick into gear to trend higher. This time around, they've trended lower. There are a few mitigating factors this time around. The most prominent factor is that this simply doesn't feel like an economic recovery. After past recessions (2001 and 1991), there was a sense of heightened activity and optimism. Here we are, nearly five years past the 2009 recession, and a sense of uncertainty and pessimism lingers. Therefore, low interest rates linger. That interest rates have remained so low for so long has unintended consequences. They perpetuate the belief all is not well. When we look to Europe, we see the rate on German bonds lower than our own. A 10-year German government bond yields 1%. The same bond in the United States yields 2.4%. At the lower maturity range, we actually find negative interest rates: The 2-year German note yields a negative 0.01%. You actually lose money buying a 2-year German note. We see similar rates throughout Western Europe and Japan. This tells us that most develop economies continue to stagnate. If we look to Japan, we see that an economic recovery shouldn't be taken as a given. Japan's economy over the past 20 years has averaged roughly 1% annual GDP growth . For the past 16 years, the rate on Japan's 10-year government note has been below 2%. Over the past year, it has trended down to a mere 50 basis points. Japan, in short, is in a prolonged funk. To be sure, the U.S. economy posted strong gross domestic product (GDP) growth of 4% in the second quarter of 2014, but this was after a 2.1% contraction in the first quarter. Many of our colleagues argue that we need low interest rates to support housing, but low interest rates are also indicative of a sluggish economy. At this point, we would be willing to trade higher interest rates for more economic growth. That's why we are not keen on perennially low interest rates becoming the new normal.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Home Builders' Sentiment Index (August)	Mon., Aug. 18, 10:00 am, ET	54 Index	Important. Improving builder sentiment points to improving new-home sales.
Housing Starts (July)	Tues., Aug. 19, 10:00 am, ET	979,000 (Annualized)	Important. The rate of starts is picking up pace and points to increased housing activity.
Mortgage Applications	Wed., Aug. 20, 7:00 am, ET	None	Important. Purchase activity needs to increase to maintain a healthy market.
Existing Home Sales (July)	Thurs., Aug. 21, 10:00 am, ET	5.02 Million (Annualized)	Important. Sales continue to languish on low inventory and rising prices.

 

If a Tree Falls and No One Hears It, Does It Make a Sound? The above question is philosophical, but also pertinent: If a 4% interest rate is available on a 30-year fixed-rate loan and no one takes out a loan, does it matter? Mortgage rates cross the board remain low, and yet few people are taking advantage of them. Demand for refinances remains weak, though this is no surprise. Most borrowers who want to refinance already have. The fact mortgage rates remain low and move within a tight range also crimps refinance demand. More discouraging is the fact purchase applications have yet to pick up the slack. Purchase-application demand remained flat in the August 8 week, down 1.0% for the second straight week. Year over year, purchase applications are down 10%. At this point, we had counted on purchase activity, driven by owner-occupiers, to be leading mortgage activity. This hasn't been the case nationwide, and this is frustrating. It's a sign that the sense of uncertainty and pessimism we note above is warranted. Fortunately, housing markets are local markets. What occurs at the national level often has little relation to what occurs at the local level. Hot and cold markets can be no farther than a mile apart. That said, we'd feel a lot better if more people entered the housing market and made some noise by financing their purchase with a low-rate mortgage loan. Article Courtesy of Patti Wilson, American Momentum Bank.

More Good News on the Employment Front August 6, 2014

MARKET RECAP More Good News on the Employment Front Six in a row, which is the number of months payrolls have increased 200,000-or-more per month. The latest employment data show 209,000 jobs were created in July. At the same time, the unemployment rate inched up to 6.2% from 6.1%. More jobs and more unemployment? This phenomenon is the result of a higher labor participation rate. As more jobs become available, more people are compelled to enter the labor force. At the beginning of the year, we mentioned that job creation running at 200,000+ per month was key to sustaining the economy and housing. The good news is the economy is meeting our expectations for job growth. In time, we expect to see a spillover effect: Housing sales, construction, and investment will rise as people become more settled in their new jobs. Interestingly, strong job growth is holding little sway over interest rates. When job growth picks up, interest rates usually pick up with it. That hasn't been the case. Mortgage rates continue to hold near 2014 lows. Bankrate.com's latest survey has the national average on the 30-year, fixed-rate loan at 4.29%; Freddie Mac's survey has it at 4.14% To understand why mortgage rates remain low look no further than the yield on the 10-year U.S. Treasury note. Its yield is down to 2.4%. This bellwether security yields 60 fewer basis points than it did at the beginning of the year. Interest rates remain low because consumer-price inflation remains low. A rush to quality is another factor. Quality interest-paying investments (like bonds and notes) have gained additional support in recent months due to turmoil surrounding the Ukraine and Russia, and, separately, the Middle East. Investors have flocked to haven investments – like the 10-year Treasury note – to wait out the turmoil. Their demand, in turn, has helped keep interest rates in general, and mortgage rates in particular, low. Low rates are certainly good news for anyone seeking a mortgage these days. The fact that lending standards continue to ease is more good news. A recent survey of lenders by the Federal Reserve shows that lenders have indeed made credit available to more people. Then again, we've known this for some time. The MBA's Mortgage Credit Availability Index (MCAI) has risen substantially over the past nine months, and has trended higher over the past two years. Expect this important trend to continue because of falling mortgage delinquencies. The delinquency rate has dropped five-consecutive quarters and is at the lowest level since the fourth quarter of 2007, according to the MBA's National Delinquency Survey . An expanding economy, job growth, low interest rates, and available credit: This is the perfect storm for anyone considering a housing change. We suggest anyone interested in a home to take advantage of today's opportunities before the storm passes – and it will pass one day.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Aug. 13, 7:00 am, ET	None	Important. Purchase activity remains frustratingly low, which means the housing market has yet to normalize.
Retail Sales (July)	Wed., Aug. 13, 8:30 am, ET	0.2% (Increase)	Moderately Important. Rising sales are reflective of an improving economy.
Import Prices (July)	Thurs., Aug. 14, 8:30 am, ET	0.1% (Increase)	Moderately Important. Import prices remain subdued and non-inflationary.
Producer Price Index (July)	Fri., Aug. 15, 8:30 am, ET	0.3% (Increase)	Moderately Important. Producer prices have increased in recent months, but the increase is due largely to volatile energy prices.

 

Why We Long for Normalization The Phoenix housing market provides an insightful, if not cautionary, tale. If you enjoy roller-coaster rides, then Phoenix is your kind of housing market. Over the past 10 years, Phoenix has seen a bubble followed by a bust followed by a strong upswing. According to data from Case-Shiller, Phoenix house prices bottomed in August 2011, traded flat for the remainder of the year, and then increased 23% in 2012 and 15% in 2013. Now it appears Phoenix has crested and could be headed down again. Overall housing sales dropped 17% year over year in July, according to the Arizona Regional Multiple Listing Service . Investors, who have driven Phoenix's market over the past couple years, appear to be loosing interest: Cash sales dropped to 25% of total sales in July compared to 43% a year ago. We imagine most people don't like roller-coaster rides in real estate. The whipsawing is much more painful when your wallet is involved. Volatility also tends to repel both buyers and sellers on the margin. Volatility raises uncertainty, and people don't want to feel uncertain when contemplating a big purchase like a house. Of course, we wish the best for Phoenix. But the key to Phoenix, and every other volatile housing market, is a return to single-digit annual price appreciation and a market driven by mortgage-financed owner-occupiers. Slow and steady always wins the race over the long haul, and always will in housing. Article Courtesy of Patti Wilson, American Momentum Bank.