Tuesday, August 26, 2014

Home Builders Take Flight; Mortages Remain Grounded

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.


Date and Time
New Home Sales
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
Tues., Aug. 26,
9:00 am, ET
(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
Important. Purchase activity still shows no sign of picking up.
Pending Home Sales Index
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.

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