Monday, November 3, 2014

Better Pricing Driving More Sales

Keeping you updated on the market!
For the week of

November 3, 2014

Better Pricing Driving More Sales
We've frequently mentioned that a slowdown in home-price appreciation would help drive sales volume. So far, our thesis has proven correct.
New home sales surged to 467,000 units on an annualized rate in September. This was the best monthly display since July 2008.
Discounting by home builders was a key factor in driving volume. The median price of a new home dropped 9.7% to $259,000 in September. Before the decline, the year-over-year median price was trending higher. But now the median new-home price is actually 4% lower than it was this time last year.
New-home prices should stabilize going forward. Supply remains muted, with 207,000 new homes on the market. This means that supply relative to sales is at a reasonable 5.3 months.
It appears existing-home sales might start trending higher with new-home sales. The pending home sales index was up 0.3% in September. This isn't a monumental increase, but it does point to another monthly gain in existing-home sales for October. The year-over-year trend in the index is another subtle plus. It had spent most of 2014 in the red but is now back in the black with a 1.0% gain.
As for home prices, the S&P/Case-Shiller Home Price Index shows they were down in 12 of the 20 cities the index follows. In aggregate, this translates to a 0.1% index decline. This marks the fourth-consecutive monthly decline, which drives the year-over-year gain down to 5.6% compared to 6.7% in July. The downward trend will likely persist: Zillow projects the year-over-year gain will drop to 4.7% when Case-Shiller reports September numbers.
Continued improvement in gross domestic product (GDP ) growth should keep home sales moving forward through the end of the year. GDP growth decelerated in the third quarter, falling to 3.5% on an annualized rate, compared to the second quarter's 4.6% annualized rate. That said, 3.5% is respectable, and still beat the consensus estimate for 3.1% annualized growth. What's more, GDP growth at the current level should keep monthly job growth above the coveted 200,000 level.
Now, we just want to see an uptick in purchase-mortgage activity. Last week's numbers from the Mortgage Bankers Association weren't terribly encouraging. Purchase volume was down 5.0% for the October 24 week despite the fact rates remain low: sub-4% is still regularly quoted on the 30-year fixed-rate loan. What's more, rates are showing little inclination to move materially higher.
The question is, will mortgage rates remain sedated now that the Federal Reserve has ended quantitative easing?


Date and Time
Construction Spending

Mon., Nov. 3,
10:00 am, ET
0.7% (Increase)
Important. The trend in residential construction spending points to stable housing activity.
Mortgage Applications
Wed., Nov. 5,
7:00 am, ET
Important. Low purchase activity points to muted home-sales growth.
Employment Situation
Fri., Nov. 7, 8:30 am, ET
Unemployment Rate: 5.9%
Payrolls: 235,000 (Increase)
Very Important. Continual strong job growth will pull forward the Fed's schedule for raising interest rates.
Consumer Credit
Fri., Nov. 7,
3:00 pm, ET
$13.1 Billion (Increase)
Moderately Important.Gains in non-revolving credit(auto and home loans) has been anemic and is reflective of pockets of market weakness.


What Does the End of Quantitative Easing (QE) Mean?
This past week, the Federal Reserve announced it would cease using new money to purchase longer-term Treasury securities and mortgage-backed securities (MBS). This has lead many market watchers to believe interest rates will start to rise. After all, reduced Fed demand will lead to higher yields.
It's not quite that simple. For one, the Fed will continue to reinvest the proceeds of maturing notes, bonds, and MBS into new notes, bonds, and MBS. The Fed has also said that it won't allow its portfolio of these holdings, which exceeds $4 trillion, to shrink until it starts raising short-term rates. This isn't expected to occur until the second-half of 2015 at the earliest.
In addition, banks are picking up the slack in demand. Recent rules approved by the Fed, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp. leave banks about $100 billion short of the $2.5 trillion in easy-to-sell assets that they need to meet new liquidity standards. Treasury securities and MBS help banks meet the standards.
At the same time, supply of Treasury securities is expected to drop. A falling fiscal deficit will result in less Treasury-debt issuance going forward. According to the CBO , the deficit for 2014 – for the fiscal year that ended on September 30 – was $486 billion, $194 billion less than the $680 billion deficit recorded in 2013. That’s the lowest deficit since 2007.
In short, we don't expect a meaningful increase in mortgage rates for some time, possibly not until the second quarter of 2015.
Article courtesy of Patti Wilson, American Momentum Bank.

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