Tuesday, May 26, 2015

A Very Positive Sign on the Housing Front

Keeping you updated on the market!
For the week of

May 25, 2015

A Very Positive Sign on the Housing Front
We have a slightly different take on the world than most market commentators. Most commentators focus on consumption as the driving force behind the market. We focus more on production.
To be sure, everything that is produced is produced to be consumed itself or to be used to produce something for final consumption. But consumption is always preceded by production. You have to produce before you can consume. For this reason, we put a little more weight on housing starts – production – than most.
We were encouraged to see that housing starts blew past most economists' estimates in April. Specifically, starts rose to 1.135 million on an annualized rate. This is the highest monthly rate of starts in many years.
More good news is found when you dig deeper into the data. The important single-family segment posted at 733,000 starts, 16.7% higher than in March. Permits, which portend future starts, rose 3.7%. We expect to see starts maintain this elevated level through the summer months.
Granted, the surge in starts was partly attributable to downtime in March due to lousy weather. That said, the surge is more than weather driven. There is legitimate rising demand for new homes. This is reflected in home builder sentiment, which continues to maintain a 50-or-higher reading. The latest survey shows builder sentiment posted at 54 in May. Anything above 50 is positive. This is another reason we expect starts to maintain these elevated levels.
A new home sale precedes an existing home sale. Existing home sales were disappointing, but not egregiously so. Sales were down 3.3% to 5.04 million on an annualized rate in April. Limited supply remains the bugaboo, particularly in the starter market. Young people still find it difficult to grasp the bottom rung. We remain confident, though, that entrepreneurial activity will eventually rectify this problem.


Date and Time
New Home Sales
Tues., May 26,
10:00 am ET
490,000 (Annualized)
Important. The pick up in starts points to stronger new home sales through the summer season.
Mortgage Applications
Wed., May 27,
7:00 am, ET
Important. Rising rates have taken some steam out of purchase activity, but activity should pick up when borrowers realize higher rates are the new normal.
Pending Home Sales Index
Thurs., May 28,
10:00 am, ET
1.0% (Increase)
Important. The uptrend in contracts points to rising sales activity heading into summer.
Gross Domestic Product
(1st Quarter 2015)
Fri., May 29,
8:30 am, ET
1.0% (Annualized Decrease)
Important. Contracting economic activity in the first quarter is one important reason the Fed will not move to raise interest rates.


Why the Fed Doesn't Really Matter at This Point
Here we are in the waning days of May and it appears highly unlikely the Federal Reserve will move to raise the federal funds rate in June. At the beginning of the year, June was the month most everyone pointed to for the first increase in nearly 10 years.
We were skeptical then, and we repeatedly stated our skepticism in subsequent months. Our skepticism was well founded. In the latest policy meeting minutes (from late April) officials said in the most explicit terms yet that they're unlikely to raise the fed funds rate in June. After watching the economy stumble through the winter, many at the meeting were doubtful the criteria for a rate increase would be met.
The fed funds rate is supposed to have a cascade effect. Once it starts to rise, all other rates eventually rise too. But as we know, longer-term interest rates have been rising without prompting from the Fed. The yield on the 10-year U.S. Treasury note frequently posts above 2.25% these days. The rate on the 30-year fixed-rate mortgage loan is frequently quoted above 4%.

We think investor sentiment has changed. Investors are no longer willing to buy bonds – Treasury bonds in particular – that offer a negative real yield (a yield that does not compensate for inflation). Though the yield on all bonds and notes in the U.S. is nominally positive, many fail to maintain purchasing power over time when inflation is factored in. Consider it this way: If you earn 1% on your savings and consumer price inflation is running at 2%. After a year, you're 1% in the hole. You've lost purchasing power.
Investors have been willing to put up with negative real interest rates because the Fed was continually driving interest rates lower through quantitative easing. The Fed stopped quantitative easing in October (though it continues to reinvest the proceeds of maturing bonds into new bond purchases.) Investors know the Fed won't drive yields any lower.
Last month, we warned that markets can change, and change in a hurry. That has certainly happened with the sharp rise in interest rates in general and mortgage rates in particular. Could we see 3.75% on the 30-year fixed-rate loan a month from now? Anything is possible, but what's possible isn't the same as what is probable.

Article courtesy of Patti Wilson, American Momentum Bank.

Tuesday, May 12, 2015

A tough yet honest conversation with a seller

I recently went on a listing appointment where I needed to have a tough conversation with the prospective Seller's.  Their home is fairly new and is in a lovely sub-division.  The area has continued to show positive appreciation and substantial growth.
As I toured their absolutely lovely home and was given a spreadsheet of the many, many upgrades to the home, I knew that a tough conversation was looming.  Although the home was stunning, the amount of upgrades to the home were way more than they could ever hope to recover right now based on the market report for their neighborhood.  It is one of those sick feelings that you dread having.
The price per square foot Sold average in this particular neighborhood is about $100 s.f.  With their upgrade list which exceeded the actual purchase price of the home, they were hoping to see it listed at $135 s.f.  It pained me to see the love and care that they had put into this home but at this time the market could not bear at that price per s.f.
I explained to them that even if we listed the home at their desired price and received an offer, if it didn't appraise then they would be re-visiting the price at some point.  Even if a cash offer came in, most buyers are savvy and would still not desire to pay way over market value in any neighborhood.
I encouraged them to go ahead and have an appraisal done prior to listing the home.  Hopefully they will see the writing on the wall from a third party.
The lessons here are:
  • Unless you plan to stay in your home forever, consider your upgrades before you do them as you may not get back what you put into them if you decide to sell.
  • Know what the current market value is for your home.  If you put in upgrades that you feel bump your value up way over what the neighborhood can bear, understand that you most likely will not see this investment returned.
  • Realize that situations do change in our lives and what we planned on doing may very well have to change quickly.  

Upgrades are a good thing but only if they are consistent with keeping your home valued with the current market rate.  Have a licensed agent who knows your area consult with you prior to putting in some hefty upgrades.  You may decide to re-think some of them.

Having a tough conversation with a Seller is necessary when you are being honest, know the market and don't want to leave them with false hope.  The conversation is necessary and hopefully the homeowners will take the time to get an appraisal and then to re-think if they even desire to sell.