Monday, October 6, 2014

An Important Prognostication Comes to Fruition

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October 6, 2014

An Important Prognostication Comes to Fruition
Predicting the direction of interest rates over the past two years has been an exercise in futility. One would have had better success predicting the flight path of a butterfly than the direction of interest rates. History has certainly proved to be an unreliable guide.
We've been considerably more sapient on housing prices. At the beginning of the year, we expected the rate of price appreciation to slow in many, if not most, markets. Our rationale was predicated on the fact trees don't grow to the sky. Double-digit year-over-year price gains are simply unsustainable. Given sufficient time, momentum peters out. Four years appears sufficient enough.
As we head into the waning months of 2014, price appreciation in many markets has indeed throttled back palpably. The widely followed S&P/Case-Shiller Home Price Index again shows slowing price growth in the 20 metropolitan regions it follows. H ome prices were down 0.5% month over month in July. This marks the third-consecutive monthly decline, and is the steepest monthly decline since November 2011. Year over year, prices are still up 6.7%, but the rate of appreciation has been falling through most of 2014.
We expect the rate of decline to continue, because we are seeing stagnating prices, and even price declines, in more markets. Case-Shiller's data show that prices in 14 of its 20 metropolitan regions declined in July. As for the remaining six markets, three showed no gain, and three showed modest gains, with Las Vegas leading the field at 0.3%.

Zillow has taken to predicting future Case-Shiller index releases, and, like us, Zillow sees the rate of price appreciation further abating. Zillow sees modest month-over-month growth of 0.1% for August, which will drag the year-over-year tally down 5.7%.
Of course, all real estate markets are local markets, and a national average very likely has no direct correlation to our neck of the woods. That said, the national number is composed of local numbers. When more local numbers trend in the same direction, the national number will follow.
Slowing home-price appreciation will slow the rate that negative equity turns to positive equity. On the other side of the coin, slowing price appreciation should help home sales, which have still yet to establish momentum. Unfortunately, momentum is unlikely to be established in the immediate future. The Pending Home Sales Index fell 1.0% to 104.7 in August from 105.8 in July, and is now 2.2% below August 2013.
New lower mortgage rates could provide relief. Rates have been trending down for the past two weeks, which corresponds with the recent stock-market sell-off. The S&P 500 Index is down roughly 4% since hitting an all-time high on Sept. 19. Much of the money flowing out of stocks has flowed into bonds, which is lifting bond prices, and lowering interest rates – including mortgage rates. We would not be surprised to see this trend continue over the next couple weeks.


Date and Time
Consumer Credit
Tues., Oct. 7,
3:00 pm, ET
$19 Billion (Increase)
Moderately Important. Credit use has been rising in recent months, which reflects rising consumer confidence.
Mortgage Applications
Wed., Oct. 8,
7:00 am, ET
Important. Purchase activity has remained steady, but a move up is needed to offset fewer cash buyers.
Federal Reserve FOMC Meeting Minutes
Wed., Oct. 8,
2:00 pm, ET
Important. The economy is improving and inflation remains dormant, but sluggish wage growth will enable the Fed to hold interest rates low.
Import Prices
Fri., Oct. 10,
8:30 am, ET
0.5% (Decrease)
Moderately Important. Falling oil prices and European price deflation will keep domestic inflation in check.


Millennials to the Rescue?
A few weeks ago, we noted the uplifting news that millennials are still very much interested in homeownership. Since then, we've run across a plethora of articles focused on millennials and housing. (Though when you search for a certain subject, you are sure to find it.)
Many of these articles position millennials as saviors. Without millennials, there is little upside left in housing, so the reasoning goes. We don't see it that way. Though we'd love to see more millennials enter the housing market as owners, they are still only a subset of the overall ownership market. What's more, their support is mostly concentrated in lower-priced homes.
More important than millennials, baby boomers, gen-x, or any particular demographic is the overall health of the economy. On that front, the data we've seen on the overall economy is encouraging. The latest gross domestic product (GDP) data show growth at a robust 4.6% annualized rate. This is good news for everyone, and should serve as tight backstop to housing, which is why we see no backsliding.
To be sure, we welcome millennials, but we don't need to be rescued by them. Rising economic growth will lift all demographic groups.
Article Courtesy of Patti Wilson, American Momentum Bank.

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