A Mixed Bag, But It's One We'll Take.

Keeping you updated on the market!
For the week of

September 29, 2014

MARKET RECAP A Mixed Bag, But It's One We'll Take Is it two steps forward, one step back; or one step forward, one step back? Sometimes it's difficult to tell. When it comes to existing home sales, one step forward, one-and-a-half steps back might be the better descriptor. Sales of existing homes drifted down 1.8%, to 5.05 million units, on an annualized basis in August. Year over year, sales are down 5.3%. Supply has again been fingered as the culprit for the sales-volume dearth. Supply for the month fell by 40,000 units, which drops total inventory to 2.31 million units. The good news is that pricing continues to reflect reality. Existing-home prices have been relatively flat for the past six months. Year over year, the median price of an existing home is up 4.8% to $219,800. This is no surprise. We've seen price appreciation moderate through most of 2014. We expect that trend to continue into 2015. When we vet new-home sales, the trend is definitely two steps forward, one step back. New home sales surged 18%, to 504,000 units, on an annualized basis in August. Pricing appears to be more favorable to buyers. The median price of a new home dropped 1.6% for the month to $275,600. Year over year, the median price is up 8%, but that rate of increase is slowing and will likely continue to do so. At the current sales pace, inventory has dropped to 4.6 months. This points to home-builder activity picking up through the end of the year. That's good news for the overall economy. There's more good news specific to housing. CoreLogic reports that nearly 950,000 homes were lifted into positive equity in the second quarter of 2014. Nationwide, home equity has increased by $1 trillion year over year. To be sure, we still have more room to improve. CoreLogic estimates that approximately 5.3 million homes, or 10.7% of all residential properties with a mortgage, were still in negative equity as of the second quarter. But that's a significant improvement over the 7.2 million homes in negative equity a year ago. We expect the equity trend to remain positive deep into 2015. We see more positive news in a recent survey conducted by The Demand Institute, a nonprofit think tank. Demand's survey reveals what we've known all along: Millennials might be transforming the workplace, but at home they are very much like their parents and grandparents. They want to get married and have a family, and many of them want to raise that family in the suburbs – the domain of the single-family home. We never bought into the notion that the United States is becoming a nation of renters. Many surveys we've read over the past year have confirmed our bias. The Demand Institute's survey is simply another arrow for our quiver.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Confidence Index (September)	Tues., Sept. 30, 10:00 am, ET	93.8 Index	Moderately Important. Rising confidence bodes well for housing and other big-ticket items.
Mortgage Applications	Wed., Oct. 1, 7:00 am, ET	None	Important. Purchase activity could be hurt by rising rates, but so far economic growth is countering the rise.
Construction Spending (August)	Wed., Oct. 1, 10:00 am, ET	0.1% (Increase)	Important. Residential construction continues to pace gains.
Employment Situation (September)	Fri., Oct. 3, 8:30 am, ET	Unemployment Rate: 6.1% Payrolls: 218,000 (Increase)	Very Important. After a disappointing August, job growth is expected to pick up pace, which could lead to rising interest rates.

 

Making Sense of Interest Rates Interest rates are confounding to predict. Of course, the Federal Reserve is a lead influence, which is why market participants spend so much time parsing its every word. That said, most of the Fed's influence is focused on the short-end of the yield curve. By way of extrapolation, market participants then estimate longer yields. For example, if the current one-year yield is 1% and the market believes the Fed will lift that yield to 2% next year, the 2-year yield today should be 1.5% (1% plus 2% divided by two). If life were only so straightforward. It's not. Money supply, wealth position, and expected inflation also play important roles. If the money supply increases and wealth and inflation expectations remain the same, interest rates should fall. With everything else held constant, more money can be allocated to financial assets, thus raising their prices and lowering their yields. On the flip-side, if money supply decreases and wealth and inflation expectations remain the same, interest rates should rise. With everything else held constant, less money means less money flowing into capital markets. Financial asset prices fall and yields rise. So where does this leave us? We think wealth will at least remain constant. Inflation will likely remain muted. As for the money supply, it will likely decrease beginning next year due to the Fed withdrawing from quantitative easing and raising short-term rates. Based on this outlook, interest rates should rise in 2015. Admittedly, we've been down this road before. We thought this scenario would play out this year. It hasn't, but it has to one day.

Article courtesy of Patti Wilson, American Momentum Bank.

A Case of Cognitive Dissonance?

Keeping you updated on the market for the week of September 22, 2014

MARKET RECAP A Case of Cognitive Dissonance? Home builders are feeling as perky as they have in nearly a decade. Indeed, the National Home Builders Sentiment Index posted at 59 this month. That's a number last seen in 2005 when the housing market was in full-bore mode. Of course, real estate markets are local markets, and some home builders are feeling more perky than others. Home builders in the South, Mid-West, and West are more optimistic than the national 59 reading would lead you to believe, while builders in the Northeast are feeling less optimistic, if not dour. (The Northeast reading posted at 44.) Home builders when aggregated are obviously anticipating a brighter future, even if the immediate past offers scant reason to break out the bubbly. Housing starts drooped 14.4% in August to an annualized rate of 956, 000 units. The consensus estimate was for 1.03 million units. The mitigating takeaway was that most of the droop was seen in the volatile multifamily component, which fell 31.7% month over month. The more important single-family component was down a more modest 2.4%, which follows an 11.1% surge in July. When we step back to view the big picture, we see housing starts are up 8% year over year. And if we step back even further and remove volatility by looking at the five-month moving average, we see a strong uptrend and significant improvement over the past five years. The long-term trend in housing starts is good news for the economy in full. So many ancillary businesses are dependent on starts – home improvement companies, finance providers, commodity producers, retail merchants, and on and on. The uptrend in starts is nothing but a positive that is worth highlighting because of its importance to overall economic health. Now, we'd like to see an uptrend established in mortgage purchase activity. CoreLogic reports that cash sales have dropped to 33% of total home sales, down from 36.3% a year ago. To be sure, a large percentage of the drop is the result of fewer REO sales and short sales – many of which were cash transactions. Prior to the bursting of the housing bubble, 25% of sales were cash transactions. So, we expect a further reduction in cash transactions in the future. Therefore, to keep sales volume growing, mortgage financing will need to play a bigger role. On that front, the Mortgage Bankers Association purchase index rose 5% last week. Could this be the beginning of a positive financing trend? We hope so, but we're not holding our breath. We've been disappointed too many times in the past to do that.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Exiting Home Sales (August)	Mon., Sept. 22, 10:00 am, ET	5.22 Million (Annualized)	Important. Given recent positive pricing and supply trends, an upward trend in sales appears sustainable.
Mortgage Applications	Wed., Sept. 24, 7:00 am, ET	None	Important. Purchase activity is showing some life, but the trend toward more activity remains elusive.
New Home Sales (August)	Wed., Sept. 24, 10:00 am, ET	435,000 (Annualized)	Important. Rising home builder optimism points to rising new-home sales.
Gross Domestic Product (2nd quarter 2014 revised)	Fri., Sept. 26, 8:30 am, ET	4.7% (Annualized Growth)	Important. GDP growth is expected to be revised higher, which points to stronger economic growth through 2014.

 

The Fed Speaks, Everyone Listens On Wednesday, the Federal Reserve released the long-awaited minutes of the latest meeting of the Fed governors. The minutes revealed what we expected they would reveal: The Fed will wrap up quantitative easing next month, so it will cease new purchases of Treasury notes and bonds and mortgage-backed securities (MBS). (The Fed will maintain its existing policy of reinvesting principal payments in MBS and rolling over existing Treasury debt.) The minutes also revealed that the Fed intends to wait "a considerable time" before raising the influential federal funds rate (the rate banks lend to each other). The idea is that the Fed wants interest rates to remain low until “structural” issues related to the job market are rectified. In other words, the Fed would like to see more job growth in better-paying jobs before raising the federal funds rate. If maintaining the low rates that materialized in the past month is what the Fed wanted, that's not what it got. After we learned the federal funds rates (which is at zero) is unlikely to rise until next year, the rate on the influential 10-year Treasury note rose nearly 10 basis points. Mortgage rates, unsurprisingly, also moved higher. In short, rates on the longer end of the yield curve rose. We doubt this is what the Fed was anticipating. We're not predicting a steady rise in long-term interest rates – including mortgage rates. But it's worth keeping in mind that even if the Fed wants something, there is no guarantee it will get it. Markets are powerful and unpredictable forces. Mortgage rates might hang low for another six months, or even another year, but there are no guarantees.

Article Courtesy of Patti Wilson, American Momentum Bank

Calm Before the Storm..

MARKET RECAP Calm Before the Storm Summer isn't officially over, but once Labor Day passes, for all practical purposes it is for most of us. Now that we are back to work with no sight of a respite in the immediate future, we expect market activity to pick up. It's worth noting mortgage market activity (buying and selling of mortgage-backed securities) has picked up, and rates have become a bit bouncy over the past couple days. Trader activity has surely picked up. To wit: Stocks rallied and bonds sold off on speculation that Russia and Ukraine might hash out a ceasefire. The headline was pure manna from heaven for bond and stock traders, who were given a reason to buy stocks and sell bonds. But once the euphoria passed, stocks sold off and bond yields rallied. The fact is that we remain in a fundamentally low-inflation environment, which is why interest rates in general, and mortgage rates in particular, continue to trade at 2014 lows. At the same time, and somewhat paradoxically, the economy appears to be growing at a brisk pace – one that has been creating 200,000-or-more new jobs per month for most of the year. We say “paradoxically” because when economic growth and job growth take flight, so, too, do interest rates. But not this time around. That said, we expect interest-rate volatility to pick up. We say that because the languid days of summer are over, and that means more people are watching the market and offering their opinion – either through spoken or written words or direct buying and selling. Nevertheless, we don't think we'll see a trend toward higher interest rates to materialize this year. Mortgage rates might be more volatile, but they'll likely be more volatile within this low range. Going forward, the Federal Reserve will remain key. We expect rates won't ratchet higher with any fortitude until the Fed decides to raise the influential federal funds rate – the rate banks lend short-term to each other. When that occurs, rates will likely begin to take flight. But we prognosticate with one caveat: Don't discount the ability of a strong jobs report or unexpectedly stout gross domestic product numbers to get mortgage rates moving higher. What has worked in the past may not be working at the present, but that doesn't mean it won't work again in the future.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Credit (July)	Mon., Sept. 8, 3:00 pm, ET	$15 Billion (Increase)	Moderately important. Credit expansion remains brisk and is an indicator of firming consumer confidence.
Mortgage Applications	Wed., Sept. 10, 7:00 am, ET	None	Important. Purchase activity has again eased. Buyers remain stubbornly inured to today's low-rate opportunities.
Retail Sales (August)	Fri., Sept. 12, 8:30 am, ET	0.2% (Increase)	Moderately Important. Sales growth has moderated in recent months, but the longer-term trend remains up.
Import Prices (August)	Fri., Sept. 12,8:30 am, ET	0.2% (Decrease)	Moderately Important. Falling import prices will help keep domestic inflation under control.

 

The Cost of Financing Is Lower (And Higher) Than You Might Think When pundits discuss mortgage financing, they frequently tout the money saved in interest when paying cash. But is that worth touting? Let's say we have two home buyers: each has $100,000 and each buys a $100,000 home. One pays cash; the other puts $10,000 down and finances the remaining $90,000 with a 30-year fixed-rate mortgage at 4.25%. Both stay put, and 30 years later the 30-year mortgage is paid in full. Over the 30 years, the cash buyer obviously incurred no interest charges. The financed buyer, on the other hand, pays over $69,300 in interest over the life of the loan. It appears the cash buyer comes out ahead, but does he? Keep in mind that the cash buyer did not have use of the $90,000 like the financed buyer did. Let's say the financed buyer took his $90,000 and bought 5,000 shares – $18 a share – of a real estate investment trust (REIT) that pays $0.125 in dividends each month. We'll assume there is no dividend increases (which would be unlikely in the real world). Each month, the REIT pays the financed buyer $625 in dividends. In a year, the REIT owner collects $7,500 in dividend income. Over 30 years, the REIT owner will collect $225,000 in dividend income. In other words, opportunity costs must be factored into the equation. By financing his home with a low-rate loan, the intelligent investor/home buyer was able to use his money to buy a cash-generating investment that far exceeded his interest payments. This example shows that opportunities and opportunity costs must always be factored into a financial equation. When this occurs, the cheaper option can frequently be shown to be the less financially profitable option. Article courtesy of Patti Wilson, American Momentum Bank.

The News only gets better for Housing!

MARKET RECAP The News Gets Only Better for Housing Everything is coalescing nicely for a sustainable uptrend. Last week, we reported that new-home starts and home-builder confidence continued to gain momentum. This week, new-home sales gained momentum, though it might not seem so on first blush. New-home sales for July came in at 412,000 units on an annualized rate. This was slightly below expectations, but sales for June and May were revised higher by a total of 28,000 units. The market is still trending in the right direction. Lack of inventory has hampered new-home sales over the past year, but that should be less of an issue moving forward. Starts have ramped up, and that's reflected in more inventory. Supply of new homes increased to 205,000 units compared to 197,000 in June, which pulls up the monthly supply to six months at the current sales rate. Moderating price appreciation will also help sales. The median price of a new home fell 3.7% to $269,800 in July. Year over year, the median price is up only 2.9%. That year-over-year price gains are slowing is no surprise. The S&P/Case-Shiller Home Price Index has been reporting slower year-over-year gains in recent months. For the latest month, June, Case-Shiller shows the year-over-year increase for its 20-city index slowed to 8.1% versus 9.3% for May. Month over month, prices actually decreased in 13 of the cities Case-Shiller follows. Slowing price appreciation will bring both new supply to market and increased buyer interest. The former will be less motivated to hold for a higher price; the latter will be motivated to buy into a more stable pricing market. Existing-home sales are expected to improve in coming months. The Pending Home Sales Index posted a strong 3.3% increase in July. The monthly gain easily exceeded top-end expectation, and points to rising sales through 2014. We see nothing but better days ahead. Next Friday, another monthly jobs report will be issued. So far the economy has racked up six-consecutive months of 200,00+ monthly payroll increases. We expected a seventh month when the report for August is released. The consensus estimate is for 223,000 new jobs for the month. We would not be surprised to see more. Job creation should continue at a brisk pace because the economy is almost certainly on the mend. Gross Domestic Product (GDP) growth was revised this week to 4.2% for the second quarter, up from the original estimate of 4.0%. All signs point to GDP growth maintaining this pace through the third and fourth quarters. Now all we need is purchase-mortgage activity to trend higher. Perhaps a trend is in the works: Purchase activity was up 3% for the Aug. 22 week.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Construction Spending (July)	Tues., Sept. 2, 10:00 am, ET	1.5% (Increase)	Important. Rising residential construction spending is good for both the housing sector and overall economy.
Mortgage Applications	Wed., Sept. 3, 7:00 am, ET	None	Important. Purchase activity has picked up in recent weeks. Still, a trend has been difficult to form.
Productivity (2nd Quarter 2014)	Thurs., Sept 4, 8:30 am, ET	2.4% (Increase)	Important. Increase productivity is another indicator of an improving economy.
Employment Situation (August)	Fri., Sept. 5, 8:30 am, ET	Unemployment Rate: 6.1% Payrolls: 223,000 (Increase)	Very Important. Better-than-expected job growth hasn't moved interest rates this year, but the possibility still exists.

 

How Low Can They Go? This is really quite extraordinary. We have strong job growth, accelerating economic growth, the Federal Reserve withdrawing from the Treasury debt and mortgage-backed security markets, and yet mortgage rates continue to fall. Bankrate.com's latest survey shows that the national average on the 30-year fixed-rate mortgage is as low as it has been in the past year. Freddie Mac's survey shows the 30-year loan at a similar low. We have to confess that we've been wrong on the direction of interest rates this year. But we've been right on the variables that should have lead to higher interest rates: more job growth, more economic growth, less Federal Reserve support. When these variables are factored in, interest rates are supposed to trend higher. Turmoil in Russia and Ukraine could be serving as a counterweight, but these events alone shouldn't keep rates in check. Low consumer-price inflation – here and in most of the developed world – is likely the overriding variable. Here in the States, we have the potential for an inflation surge, but most of the developed world doesn't. Economies are so intertwined these days that low inflation and low growth in less robust economies could very well be holding inflation in check in the United States. As for how low mortgage rates can go? We didn't think we had snowballs chance in summer of discussing 4% on the 30-year loan deep into August. But now sub-4% on the 30-year loan is entirely plausible.

Article courtesy of Patti Wilson, American Momentum Bank.