ECB Embraces QE: Why We Should Care

Keeping you updated on the market! For the week of January 26, 2015

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MARKET RECAP ECB Embraces QE: Why We Should Care It's probably best to begin by defining acronyms. The ECB is the European Central Bank, the European Union's (EU) equivalent to our Federal Reserve. QE refers to quantitative easing. QE is something our Fed commenced in 2008 and ended late last year. QE, of course, refers to a central bank buying bonds and other assets, which it pays for with new money, thus injecting new money into the economy. The end result of QE, as we know from experience, is lower interest rates, including lower mortgage rates. From 2008 to 2013, the rate on the 30-year loan dropped three percentage points to 3.5%. The 30-year loan isn't quite that low today, but it's close: Bankrate.com has the 30-year loan averaging 3.81%; Freddie Mac has it averaging 3.63%. Will mortgage rates hold current levels? Many economists believe the Fed will begin to raise the federal funds rate in the second half of 2015. Raising the fed funds rate raises lending costs to banks. Interest rates, therefore, are prone to rise. In the past, this is how it all played out. But today isn't like the past. QE is a relatively new phenomenon. It was new when the Fed undertook it in 2008. It is new when the ECB undertakes it this March. European QE is expected to run through September 2016. By then, the ECB is expected to have injected another 1.1 trillion euros into Eurozone economies. How far European interest rates will fall is anyone's guess. As it is now, interest rates in Germany, Europe's economic powerhouse, are already very low. A 10-year German bond yields roughly 45 basis points. The U.S. Treasury equivalent yields roughly 1.8% – more than four times the German bond. So what does this mean to us? We think that we'll see continued strong demand for U.S. Treasury and mortgage agency debt. Relative to European government debt, U.S. Treasury debt looks attractive. We're already seeing strong demand for U.S. dollars. A year ago, it took $1.36 to buy one euro. Today, it takes $1.14. We expect that many of these dollars will flow into U.S. financial assets, including long-term U.S. debt. The ECB's QE should help hold U.S. interest rates down, all things constant. But we have to offer a caveat: all things aren't constant. Mortgage demand is again on the rise. The MBA reports that applications increased 14.2% last week. The MBA's refinance index was up was up 22%, the purchase index was up 3%. Over the past year, we've seen underwriting standards on conventional loans ease. As for government loans, HUD's 50-basis-point reduction of PMI premiums on FHA loans have helped lift demand. If demand continues to rise, it's possible mortgage rates could rise to take advantage of rising demand. That said, we expect today's low interest rates to hold through the first quarter of 2015. But as it is with interest rates, there are no guarantees. So we see little upside to procrastinating.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
New Home Sales (December)	Tues., Jan. 27, 10:00 am, ET	448,000 (Annualized)	Important. Sales should trend higher on rising construction and strong job growth.
Mortgage Applications	Wed., Jan. 28, 7:00 am, ET	None	Important. Sustained low rates should raise demand for mortgage financing.
Pending Home Sales Index (December)	Thurs., Jan. 29, 10:00 am, ET	0.5% (Increase)	Important. Sales look poised to move higher on rising home-purchase affordability.
Gross Domestic Product (4th Quarter 2014)	Fri., Jan. 30, 8:30 am, ET	3% (Annualized Increase)	Important. The U.S. will continue to have the strongest economic growth among Western developed countries.

 

Still Up for New Housing Home builders were slightly less optimistic in January compared to the previous month. The NAHB/Wells Fargo Housing Index dipped to 57 from 58 in December. Fifty is key, though. A reading above 50 means builders view the outlook favorably. The good news is sentiment has consistently held above 50 for the past 12 months. We're not surprised confidence remains elevated. Housing starts increased 4.4% to 1.089 million units on an annualized basis in December. Single-family housing starts were particularly strong, rising 7.2% to 728,000 units on an annualized basis. History leads us to believe that starts should continue to trend higher. Housing starts and completions had an outlier surge after the bursting of the tech bubble in 2000. The surge continued to 2007. As we know, single-family starts and completions then fell off a cliff and bottomed in 2011. Activity remains below the historical annual average of around one million single-family starts. In other words, we have plenty of room to run. Factor in basic economics, and there is even more reason to be optimistic. A dearth of new supply coupled with increased demand and inexpensive financing options points to a very good year for new home sales. Article Courtesy of Patti Wilson, American Momentum Bank.

Is Sub-4% the New Norm?

Keeping you updated on the market! For the week of January 12, 2015

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MARKET RECAP Is Sub-4% the New Norm? Nearly everyone believes the Federal Reserve will raise the influential federal funds rates this year. The fed funds rate has been held near zero for the past five years. This rate matters because it influences other lending rates. With so much chatter about the Fed raising interest rates this year, you would think rates would begin to rise in anticipation of the event. That's hardly been the case. The yield on the 10-year U.S. Treasury note has steady declined over the past year, and was recently quoted below 2%. As the 10-year note goes, so frequently goes the 30-year fixed-rate mortgage (and other fixed-rate term loans). Sub-4% on the 30-year loan has been the norm in recent months. Bankrate.com's national survey, which tends to be higher than many local quotes, shows the 30-year loan averaged 3.85% this past week. That's the lowest it has been in 20 months. Though the Fed might want to see rates rise, that simply hasn't been the case, at least for longer-term loans. This is extraordinary when you consider the U.S. economy has produced new jobs at a monthly rate of 200,000+ through 2014. Consumer-price inflation just might keep all rates low through 2015. Falling oil prices have kept inflation risk at bay. Consumer-price inflation remains below 2% in the United States, and will likely remain below 2% through the first half of 2015. Meanwhile in Europe, deflation, not inflation, is the overarching worry. The European Central Bank (ECB) recently admitted that inflation will likely spend a large part of 2015 in negative territory. Eurozone inflation, 2% at the beginning of 2013, has drift lower since. Consumer-price inflation was below 1% for all of 2014. Today, you can find European bonds that actually pay a negative rate of interest. The two-year German bond is quoted at a negative 0.12%. The price on the five-year German bond has risen to drive the yield down to zero. If the choice is between a negative interest rate, like in Germany, or a nominally positive rate, like in the United States, many investors will choose the latter. This means more foreign money will likely flow into U.S. Treasury notes and bonds. This flow of money, in turn, will raise prices on U.S. notes and bonds and lower their yield. We do offer a caveat on our outlook: Interest rates are akin to predicting the flight path of a butterfly. It's impossible to know where it is going at all times. But given recent events, we would not be surprised to see mortgage rates flutter at today's lows through the first quarter of 2015.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Jan. 14, 7:00 am, ET	None	Important. Activity remains subdued, but the plunge in interest rates should spur demand.
Retail Sales (December)	Wed., Jan. 14, 8:30 am, ET	0.1% (Increase)	Moderately Important. Overall sales growth has moderated because of fewer dollars spent on gasoline.
Import Prices (December)	Wed., Jan. 14, 8:30 am, ET	2.5% (Decrease)	Important. Falling oil prices will keep inflation risk muted.
Consumer Price Index (December)	Fri., Jan. 16, 8:30 am, ET	All Goods: 0.3% (Decrease) Core: 0.2% (Increase)	Important: When food and fuel are stripped out, overall consumer prices are rising, though remain within the Fed's goals.

 

Housing's Comparative Advantage Ultra-low mortgage rates are making homes more affordable. At the same time, the lending market is becoming more accommodating. Insurance premiums are being reduced on FHA loans. This means even cheaper financing will be available to a wider swath of potential home buyers. Home-price appreciation is also moderating, and homes are appreciating at a more reasonable rate. Rent-price increases, on the other hand, are making it more expensive for people to rent. Data from Zillow show that rents have grown at twice the pace of income over the past 14 years. Zillow expects rents to outpace home-price appreciation over the next year. This means homeownership will become even more appealing in 2015. We've always believed most people prefer to own than rent. There is something about owning a home than can't be replicated by renting. Peace of mind is found in being able to paint the walls and drive a nail wherever you want without worrying about a security deposit. Pride of ownership really does have value. But more than anything, ownership gets people off the price escalator. Rent never ceases to rise. When a home is bought and financed with a fixed-rate loan, what was paid last year will be paid this year, and years after that (property taxes and insurance aside). When low lending rates are combined with the comparative advantages of ownership, there is no reason to not like the outlook for housing in 2015.

Article Courtesy of Patti Wilson, American Momentum Bank

Easing into 2015

Keeping you updated on the market! For the week of January 5, 2015

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MARKET RECAP Easing Into 2015 We like where home price are headed. That is, they are easing. They have assumed a more steady and sustainable rate of growth. Recent price data from Black Knight supports our contention. Black Knight follows completed transactions in more than 18,500 U.S. ZIP codes. For October, prices were up 0.1%, on average. Year over year, they were up 4.5%. This is much closer to historical growth rates. Mortgage lending rates are also easing into 2015. The 30-year fixed-rate loan is still regularly quoted below 4%, which is no surprise. The yield on the benchmark 10-year U.S. Treasury note hovers around 2.2%. This is nearly 100 basis points less than where it was a year ago. The 10-year note is showing no inclination to move higher. Mortgage rates are also showing no inclination to move higher. Unfortunately, homes sales are easing into 2015 at too languid a pace. In November, existing homes sales sank 6.1% to 4.93 million units at an annualized rate. The number of units sold on a monthly basis has yet to pick up pace. We are still at the same annualized rate we were at this time last year. As for new home sales, they too, are easing into 2015. November new home sales were down 1.6% in November, to an annualized rate of 428,000 units. As with existing home sales, the sales pace is on par with where we were a year ago. Home sales had been showing some life going into the fourth quarter, but the readings on November have been a disappointment. We were expecting better. That said, we still like the longer-term outlook on both housing and mortgage financing. Yes, sales are flat, but the continued gains in economic growth and employment will prove salutary. (This is a theme we've pounded on frequently over the past six months.) Gears will eventually mesh and sales will move higher. Financing available to a wider swath of the population will help. Lending – mortgage and consumer – is heading in the right direction. Lenders are more willing to make loans, and consumers are more willing to take them. That's a sign of growing confidence in the economy. We were one of the few voices promoting housing and mortgage lending in the dire days of 2009. We were proven correct: Housing indeed recovered. These aren't dire days by any stretch of the imagination, though sometimes they are frustrating days. The good news is that housing is as poised as it has been in years to lead the economy forward. The funk will be broken.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Jan. 7, 7:00 am, ET	None	Important. Activity remains low, which points to slow sales growth in early 2015.
Federal Reserve FOMC Meeting Minutes	Wed., Jan. 7, 2:00 pm, ET	None	Important. Expect more Fed governors to express an interest in tightening monetary policy.
Consumer Credit (November)	Thurs., Jan. 8, 3:00 pm, ET	$13.5 Billion (Increase)	Moderately Important. Rising credit use is reflective of easing credit standards.
Employment Situation (December)	Fri., Jan. 9, 8:30 am, ET	Unemployment Rate: 5.8% Payrolls: 228,000 (Increase)	Very Important: Continued strong job growth increases the likelihood of the Federal Reserve altering its interest-rate policies.

 

The Stock Market and Housing Nothing exists in a vacuum. All markets are interconnected to some degree. Last week, we discussed stocks and housing. Which is the preferable asset? The reality is that the two are not mutually exclusive. It's not an “either/or” scenario. What's more, one can influence the other, and frequently does. Stock market losses can lead to decreased housing demand, or to increased housing demand. Housing can have the same impact on stock prices. We saw falling home prices lead to falling stock prices in 2008. When housing values plummeted, so did stock prices. Through late 2007 to early 2009, the S&P 500 stock market index lost more than half its value. Interestingly, though, when stock values sank after the bursting of the Internet bubble in 2000, home prices, on average, rose. Stocks have been on a strong run since early 2009. The S&P 500 has nearly tripled in price. This has no doubt produced a “wealth effect” that has helped the housing recovery. When people feel wealthier – as they do when they see the value of their investments rise – they are more willing to spend. This includes spending on housing. That said, the stock market is on a six-year bull run. That's long as bull runs are concerned. Therefore, we would not be surprised to see a retreat in stock prices in 2015. If stock prices retreat, could this lead to falling home prices? Or could it lead to rising home prices? If stock prices were to retreat, we think the latter scenario – continued rising housing prices – is more likely. We say that because homes are much more reasonably priced today compared to 10 years ago. That said, it will be worthwhile to keep an eye on the stock and housing markets in 2015. Article courtesy of Patti Wilson, American Momentum Bank

The Year That Was; The Year That Will Be

Keeping you updated on the market! For the week of December 29, 2014

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MARKET RECAP The Year That Was; The Year That Will Be Our 2014 outlook for the housing and mortgage markets wasn't perfect, but it was close. At the beginning of the year, we thought we would see a slowdown in home-price appreciation. That's been the case when you look at the national numbers. The rate of appreciation today compared to a year ago has slowed appreciably. The market has returned to single-digit year-over-year gains. This is good news, because we're returning to historical – and sustainable – appreciation rates. Twelve months ago we also thought we'd see a pick up in the labor market and in economic growth. That, too, has occurred. The economy continues to generate 200,000-or-more new jobs each month. This is no surprise when you consider that the economy itself has picked up pace and is growing at a rate unseen for nearly eight years. Lest we puff out our chest too much, mortgage rates were our big miss. That lending rates are this low given current job growth and economic activity seems implausible. Surely, strong growth would lead to rising rates, but it hasn't. Mortgage rates are lower today than they were a year ago. We were calling for 5% on the 30-year fixed-rate loan heading into the waning days of 2014. We are nowhere near that; sub-4% on the 30-year loan is the going rate. As for the future, we like what we see. We think price appreciation will continue to moderate in more markets, though we think price appreciation will prevail. Overall, the market will continue to push ahead. We are confident housing prices will continue to move forward because the economy will continue to move forward. Reasonable estimates have U.S. gross domestic product (GDP) growing just above 3% in 2015. Based on these estimates, we think job creation will continue at a robust pace – at least at a pace of 200,000+ new jobs per month through the first half of next year. Whether rising economic activity will lead to more sales activity is tougher to discern. We think it will... if we see more interest in the lower-price market segment. There is still a dearth of activity among the younger demographics. If younger buyers return, then 2015 could turn out to be the best year in sales volume since before the 2009 recession. But could rising mortgage rates spoil the party? They could, though given recent statements , the Federal Reserve is in no hurry to see rates rise. Therefore, we think rates will remain muted through at least the first quarter of 2015. Then again, we offer a caveat: Markets are anticipatory entities. Rates will start moving higher long before the Fed officially begins to raise rates. Scuttlebutt moves markets. A year ago, we were bullish on housing, and we were right to be so. Our stance hasn't change, and we don't expect it will for some time. Bottom line: we like this market, and we remain bullish.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
S&P/Case-Shiller Home Price Index (October)	Tues., Dec. 30, 9:00 am, ET	4.5% (Year-Over-Year Increase)	Important. Price growth is trending lower, and it should continue to do so into 2015.
Consumer Confidence Index (December)	Tues., Dec. 30, 10:00 am, ET	94 Index	Important. Rising confidence points to sustainable economic growth.
Mortgage Applications	Wed., Dec. 31, 7:00 am, ET	None	Important. Purchase activity remains muted, but new government initiatives could spur demand.
Pending Home Sales (November)	Wed., Dec. 31, 10:00 am, ET	103.5 Index	Important. Sales remain flat, and will likely remain flat into early 2015.

 

Real Estate or Stocks? The question of real estate or stocks was recently presented by CNBC. Unfortunately, they didn't get the answer right because they didn't get the question right. They compared residential owner-occupied real estate with publicly traded stocks. The two are not alike: one is an investment and one isn't. Though frequently referred to as an investment, residential owner-occupied real estate is really an asset. There is a distinction. An investment is expected to generate cash flow. An asset that is not an investment doesn't generate cash flow. Nevertheless, both can appreciate. That said, residential real estate can be an investment, and frequently is. If it is bought as rental property, it will generate periodic cash flow. It will also generate terminal cash flow, at the end of the holding period, such as when bought to flip. Returning to CNBC, they compared home prices to an S&P composite stock index dating back to 1890. Stock prices have increased 2.03% on average annually since then. Home prices have increased 33 basis point annually. It appears stocks win. The comparison is misleading. If the comparison were residential real estate investments – rentals and flips – real estate would compare much more favorably. When treated properly as an investment, residential real estate bought to rent holds up well compared to stocks. So residential real estate or stocks? It depends. If you need a home in which to live, the long-term return won't be as good as a broad-based index of stocks. Then again, we all need a place to live. The good news is that maintained owner-occupied real estate appreciates over time. The same can't be said for most other assets – cars, clothes, furniture, and jewelry. As for rent, it always goes up. The right answer is that it can be worthwhile to own residential real estate as an abode and as an investment. And, yes, it can also be worthwhile to own stocks.

Article courtesy of Patti Wilson, American Momentum Bank