RE Investing: Retirement Life Raft or Sinking Ship?

RE Investing: Retirement Life Raft or Sinking Ship?

Does This Feel Like a Recovery?

Keeping you updated on the market! For the week of February 9, 2015

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MARKET RECAP Does This Feel Like a Recovery? Over the past month, we've spent an inordinate amount of time on the Federal Reserve. We think for good reason. Most everyone in financial circles is openly wondering when the Fed will raise the influential federal funds rate. In other words, all of us are wondering when interest rates will rise. When interest rates rise, financing obviously becomes more expensive. But rising interest rates are also indicative of a stronger economy. The Fed raises rates because it believes businesses can withstand higher financing costs. Yet here we are five years after the nadir of the 2008-2009 recession and interest rates continue to hold post-recession lows. By now, you would think they would have moved higher. After all, the Fed initially pointed to a 6.5% unemployment rate as a guidepost to begin raising rates. We long ago blasted past 6.5%. Unemployment is down to 5.6%. There are a few mitigating factors at work. U.S. interest rates are generally higher than those in Europe and Japan. At the same time, the dollar has appreciated strongly against most currencies. Raising interest rates would further strengthen the dollar. A stronger dollar, in turn, makes U.S. exports more expensive (though imports and foreign travel are cheaper). What's more, It's possible the economy simply isn't as strong as the numbers suggest. Consumer-price inflation remains muted and below the Fed's 2% annual growth target. When the economy heats up, so does consumer spending, and so does consumer-price inflation. That hasn't occurred. Housing, in particular, doesn't feel as strong as we'd expect it to feel this deep into a recovery. Last week, we mentioned that we see a split in the housing market (at least nationally). New homes sales continue to move forward, but existing home sales continue to lag. Unfortunately, it doesn't appear existing homes sales will move meaningfully forward any time soon. The latest reading on pending home sales points to at least another month or two of sluggish sales growth. We've seen a resurgence in mortgage refinancing activity, which is good. That said, we'd like to see more purchase activity. Of course, more purchase activity is indicative of more home sales – both new and existing. The good news is that the reduction in MIP fees on FHA loans is lifting FHA demand. Conventional demand, on the other hand, remains flat, but it's worth mentioning that underwriting standards have become more accommodating over the past 12 months. Don't misunderstand. We're still up for housing (as we'll explain in further detail below), but it just feels like housing should be up more than it is.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Feb. 11, 7:00 am, ET	None	Important. Refinances have taken the lead. Purchases have again backslid, which points to muted near-term sales growth.
Retail Sales (January)	Thurs., Feb. 12, 8:30 am, ET	0.7% (Decrease)	Moderately Important. A fall off in retail sales is a normal consumer reaction to the holiday spending binge.
Import Prices (January)	Fri., Feb. 13, 8:30 am, ET	3.5% (Decrease)	Moderately Important. Falling import prices ensure inflation risk remains nonexistent.
Consumer Sentiment (February)	Fri., Feb. 13, 9:55 am, ET	98 Index	Moderately Important. Consumer sentiment remains high, but has yet to lift demand for big-ticket items.

 

Full Steam Ahead Though it might not feel like a full-blown recovery now, it should feel like one by the end of the year. Heading into this year, we presented our case for why we thought housing would breakout in 2015. A couple high-profile financial institutions have stepped forward this week to support our contention. Goldman Sachs recently reached out to its clients to inform them that housing looks strong. Goldman sited a pick up in housing formation, which has lagged in recent years, for its bullish outlook. With improving job prospects, more millennials will move of their parent's home, so Goldman reasons. At the same time, access to easier credit will enable them to buy their own home. There is still a dearth of first-time buyers in this market and Goldman expects millennials to fill the void. Fannie Mae is also aboard the housing bandwagon. Like Goldman, Fannie points to a millennial uplift. What's more, Fannie is counting on new construction to meet rising demand from millennials and other buyers. Fannie expects starts to average 1.15 millions units on an annualized basis this year. It expects that number to ramp up to 1.5 million to 1.6 million units per year by 2017. From our perspective, the high number of renters in this market is pent up buyer demand. Since the end of 2007, the number of homes occupied by renters is estimated to have increased by four million. We already know that homeownership is at a multi-decade low. We also know renting is frequently the gateway to buying. Once someone has lived on his own, he frequently wants to buy a place of his own. So, yes, we remain up for housing. We just think we'll feel a little more up by year's end. 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

More Good News on the Employment Front August 6, 2014

MARKET RECAP More Good News on the Employment Front Six in a row, which is the number of months payrolls have increased 200,000-or-more per month. The latest employment data show 209,000 jobs were created in July. At the same time, the unemployment rate inched up to 6.2% from 6.1%. More jobs and more unemployment? This phenomenon is the result of a higher labor participation rate. As more jobs become available, more people are compelled to enter the labor force. At the beginning of the year, we mentioned that job creation running at 200,000+ per month was key to sustaining the economy and housing. The good news is the economy is meeting our expectations for job growth. In time, we expect to see a spillover effect: Housing sales, construction, and investment will rise as people become more settled in their new jobs. Interestingly, strong job growth is holding little sway over interest rates. When job growth picks up, interest rates usually pick up with it. That hasn't been the case. Mortgage rates continue to hold near 2014 lows. Bankrate.com's latest survey has the national average on the 30-year, fixed-rate loan at 4.29%; Freddie Mac's survey has it at 4.14% To understand why mortgage rates remain low look no further than the yield on the 10-year U.S. Treasury note. Its yield is down to 2.4%. This bellwether security yields 60 fewer basis points than it did at the beginning of the year. Interest rates remain low because consumer-price inflation remains low. A rush to quality is another factor. Quality interest-paying investments (like bonds and notes) have gained additional support in recent months due to turmoil surrounding the Ukraine and Russia, and, separately, the Middle East. Investors have flocked to haven investments – like the 10-year Treasury note – to wait out the turmoil. Their demand, in turn, has helped keep interest rates in general, and mortgage rates in particular, low. Low rates are certainly good news for anyone seeking a mortgage these days. The fact that lending standards continue to ease is more good news. A recent survey of lenders by the Federal Reserve shows that lenders have indeed made credit available to more people. Then again, we've known this for some time. The MBA's Mortgage Credit Availability Index (MCAI) has risen substantially over the past nine months, and has trended higher over the past two years. Expect this important trend to continue because of falling mortgage delinquencies. The delinquency rate has dropped five-consecutive quarters and is at the lowest level since the fourth quarter of 2007, according to the MBA's National Delinquency Survey . An expanding economy, job growth, low interest rates, and available credit: This is the perfect storm for anyone considering a housing change. We suggest anyone interested in a home to take advantage of today's opportunities before the storm passes – and it will pass one day.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Aug. 13, 7:00 am, ET	None	Important. Purchase activity remains frustratingly low, which means the housing market has yet to normalize.
Retail Sales (July)	Wed., Aug. 13, 8:30 am, ET	0.2% (Increase)	Moderately Important. Rising sales are reflective of an improving economy.
Import Prices (July)	Thurs., Aug. 14, 8:30 am, ET	0.1% (Increase)	Moderately Important. Import prices remain subdued and non-inflationary.
Producer Price Index (July)	Fri., Aug. 15, 8:30 am, ET	0.3% (Increase)	Moderately Important. Producer prices have increased in recent months, but the increase is due largely to volatile energy prices.

 

Why We Long for Normalization The Phoenix housing market provides an insightful, if not cautionary, tale. If you enjoy roller-coaster rides, then Phoenix is your kind of housing market. Over the past 10 years, Phoenix has seen a bubble followed by a bust followed by a strong upswing. According to data from Case-Shiller, Phoenix house prices bottomed in August 2011, traded flat for the remainder of the year, and then increased 23% in 2012 and 15% in 2013. Now it appears Phoenix has crested and could be headed down again. Overall housing sales dropped 17% year over year in July, according to the Arizona Regional Multiple Listing Service . Investors, who have driven Phoenix's market over the past couple years, appear to be loosing interest: Cash sales dropped to 25% of total sales in July compared to 43% a year ago. We imagine most people don't like roller-coaster rides in real estate. The whipsawing is much more painful when your wallet is involved. Volatility also tends to repel both buyers and sellers on the margin. Volatility raises uncertainty, and people don't want to feel uncertain when contemplating a big purchase like a house. Of course, we wish the best for Phoenix. But the key to Phoenix, and every other volatile housing market, is a return to single-digit annual price appreciation and a market driven by mortgage-financed owner-occupiers. Slow and steady always wins the race over the long haul, and always will in housing. Article Courtesy of Patti Wilson, American Momentum Bank.

Housing Takes a Medium Step Forward and a Big Step Back _ Market update for July 28, 2014

MARKET RECAP Housing Takes a Medium Step Forward and a Big Step Back It has taken nearly a year, but existing-home sales are finally moving in the right direction. Sales were up once again, climbing 2.6% to a seasonally adjusted annual rate of 5.04 million homes in June. This marks the third-consecutive month of national gains. The existing-home market appears as healthy as it has been for some time. Sales were up, and so were prices. The median price of an existing home increased a stout 5.3% month over month to $223,300. What's more, total existing-home inventory rose to a 5.5-month supply at the current sales pace. So we have rising inventory and rising sales, which point to a lower rate of price appreciation. As more supply comes to market, price growth will naturally ease (though the rate of easing will be tempered by additional demand). Slower price growth coupled with a consistent level of inventory and demand point to a healthier overall market. Many market participants were encouraged by double-digit annual price increases after the bubble burst in 2008, but double-digit annual increases aren't the norm. They can lead to another bubble if they continue for an extended period. This is why we welcome annual price appreciation in the low-to-mid single digits at the national level. Of course, local markets are impacted by variables unique to the area – demography, supply, demand, job growth, composition of jobs, etc. – but over the long-haul the rate of price appreciation and the rate of sales will tend to moderate to a lower-single-digit mean. The good news is the existing-home market is progressing at the national level. The bad news is the new-home market is regressing. This is somewhat surprising, given the strong gains in home-builder optimism in recent months. New-home sales were actually quite pitiful in June, plunging 8.1% month over month to 406,000 units on an annualized rate. The drop in sales raised supply to 5.8 months vs May's 5.2 months. Total new homes for sale increased to 197,000 vs 191,000. What's more, discounting couldn't even move inventory. The median price of a new home declined 3.2% month over month to $273,500. Year over year, the median price of a new home is up 5.3%, but sales are down 11.5%. If demand falls to pick up, either more discounting is in store or fewer homes will be constructed. If either scenario materializes, you can be sure builder sentiment will dive.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Pending Home Sales Index (June)	Mon., July 28, 10:00 am, ET	4% (Increase)	Important. Based on recent job-market strength, sales should continue to trend higher.
Mortgage Applications	Wed., July 30, 7:00 am, ET	None	Important. Purchase activity needs to trend higher to maintain existing-home-sales gains.
Gross Domestic Product (2nd Quarter 2014)	Wed., July 30, 8:30 am, ET	3.2% (Annualized Growth)	Important. After a poor first quarter, growth is expected to pick up pace for the remainder of 2014.
Employment Situation (July)	Fri., Aug. 1, 8:30 am, ET	Unemployment Rate: 6.1% Payrolls: 240,000 (Increase)	Very Important. Monthly job growth at the current rate will increase pressure for interest rates to rise.
Construction Spending (June)	Fri., Aug. 1, 10:00 am, ET	0.4% (Increase)	Important. Residential real estate spending will likely post lower based on the recent drop in permit applications.

 

State of the Mortgage Market The housing market is a mixed-bag nationally. The mortgage market, on the other hand, is trending higher. To be sure, we are still plagued by a dearth of purchase activity (though purchase applications increased 0.3% for the latest reported week). We'd love to see purchases trend materially higher; for no other reason that it will signal a more normalized housing market – one driven by owner-occupied buyers. We mentioned a couple weeks ago that lending standards have eased considerably over the past two years based on the MBA's Mortgage Credit Availability Index . We don't expect that trend to reverse. We see further easing in the future. For one, the state of the mortgage market looks pretty darn good. Black Knight (formerly LDS) reports loan delinquencies are down 15% year over year. Overall, foreclosure inventory is now at its lowest since May 2008. Fewer loan delinquencies and lower foreclosure inventory are by-products of improved job growth and higher home prices. On job growth, the economy has been adding 200,000+ new jobs a month for the past five months. An improving employment outlook makes lenders more willing to lend – more jobs, more risk tolerance. At the same time, mortgage loans are still cheap. Bankrate.com shows the national average on the 30-year fixed-rate loan below 4.3%. Freddie Mac shows it below 4.15%. These are 2014 lows. Today, the mortgage market is as favorable to lender and borrower alike as it has been in the past six or seven years. Therefore, we highly recommend borrowers take advantage of the opportunity, because it's impossible to know how long it will last.

Market update for the week of June 23, 2104. "These “Twos” Really Aren't So Terrible"

MARKET RECAP These “Twos” Really Aren't So Terrible Bond markets were given a slight jolt this week on unexpectedly high consumer-price inflation. Specifically, the Consumer Price Index (CPI) jumped 0.4% month over month in May. This was the largest monthly increase since February 2013. The latest increase in consumer prices lifted annual CPI to 2.1%. This is within the Federal Reserve's tolerable inflation range, but it still raised a few eyebrows. Eyebrows were raised because inflation influences interest rates. When inflation rises, bond yields rise as well. At the same time, bond prices fall. Investors want to be compensated for lost purchasing power over time (which is the result of inflation). If investors anticipate higher inflation, they will demand a higher interest rate. The CPI was released Tuesday, and mortgage rates rationally rose. But they've actually eased back since. When we look at the national averages we don't see much change week over week: Bankrate.com's survey has the 30-year fixed-rate loan at 4.33%, a basis point lower than the previous week. Freddie Mac's survey pegs the 30-year loan at 4.17%, a three-basis point decrease. To be sure, the national surveys unlikely captured the full impact on rates when the CPI was released. (The 10-year U.S. Treasury note serves as a good proxy for the 30-year fixed-rate mortgage. You can see that the 10-year note's yield spiked higher .) But there is a mitigating factor for rates to remain subdued – low Gross Domestic Product (GDP) growth. We've been cautiously optimistic that growth would accelerate this year. Indeed, we've been encouraged by the trend in job growth, with the economy adding 200,000-plus new jobs each month for the past three months. This seemed like a good omen. Today, we are a little more cautious and a little less optimistic. This past week, the Fed cut its growth prediction to 2.2% from 3% for 2014. That's a sharp reduction and reflects the 1% economic contraction that occurred in the first quarter. The reduction also suggests the Fed is still wary that widespread predictions for an economic growth breakout will not occur. Low growth, in turn, will hold inflation at bay, because loan demand will remain muted. For anyone unfamiliar with how our banking system – which is based on fractional reserves – works, more lending increases the money supply. More money chasing the same amount of goods and services eventually leads to consumer-price inflation. Today, the 30-year fixed rate mortgage is as close to 3.5% as it is to 5% – the year-end prediction we proffered in January. So do we still think we'll hit 5% by the end of December? We have to confess that it's appearing less likely. That said, keep an eye on the monthly employment numbers, which are released the first Friday of every month. Should the economy continue to create jobs at a 200,000-plus rate each month, 5% on the 30-year remains a possibility.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Existing Home Sales (May)	Mon., June 23, 10:00 am, ET	4.7 Million (Annualized)	Important. Sales have yet to gain traction, but recent job numbers could lead to sales growth.
New Home Sales (May)	Tues., June 24, 10:00 am, ET	440,000 (Annualized)	Important. Sales have sputtered in recent months, but could trend higher on better weather.
Mortgage Applications	Wed., June 25, 7:00 am, ET	None	Important. Purchase activity points to sluggish sales activity.
Gross Domestic Product (1st Quarter 2014 Revision)	Wed., June 25, 8:30 am, ET	2.0% (Contraction)	Important. Downward revisions point to low economic growth through 2014.

 

Mixed News on Housing Existing home sales account for the majority of sales and mortgage-finance activity, but new home sales and construction contribute more to overall economic growth. Therefore, we were someone disappointed that housing starts eased in May, with starts falling 6.5% month over month to a 1.001 million annualized rate. Single-family starts dropped 5.9% after a 4.6% rise in April. Permits followed a similar pattern, falling 6.4% month over month. This suggests starts could tread water over the next month or two. That said, we could still see a pick up in starts based on home builder sentiment. The National Association of Home Builders' confidence index rose four points to a seasonally adjusted 49 in June. The future sales component also moved higher, up 3 points, to 59. This is the best reading since January. This is particularly encouraging, because the future matters more than the past. Topping our wish list, though, is rising purchase mortgage activity. Unfortunately, purchase applications – after posting a couple weeks of gains – decreased 5% in the Mortgage Bankers Associations' latest survey. With institutional buyers (cash buyers) pulling back, we want to see the individual owner-occupied buyer – the buyer likely to take on mortgage – move into the lead. We still haven't seen that. Until we do, we don't expect to see continual improvements in the housing numbers.

Keeping you updated on the market! For the week of May 26, 2014

MARKET RECAP Time for the Logjam to Loosen The signs increasingly point to accelerating housing activity. Late last week, the Census Bureau reported that housing starts jumped 13.2%, to a 1.072 million annualized rate, in April. The numbers easily blew past most economists' estimates. Even more encouraging, permits increased 8%, thus pointing to an elevated level of starts for the near future. To be sure, most of the gains were posted in the multi-family segment, but the more important single-family segment also moved higher. Starts inched up 0.8%; permits posted a 0.3% gain. On the existing-home front, sales are still not where we'd like to see them, but they're finally moving forward. Sales for April posted at 4.65 million on an annualized basis – a 1.3% increase over sales in March. This was actually only the second time in the past nine months sales have posted a gain, so we'll take it. The numbers on inventory were particularly encouraging. NAR data show the number of existing homes for sales jumped 16.8%, to 2.29 million homes, in April. The “for sale” surge has lifted overall inventory to a 5.9-months supply. Financing costs shouldn't hinder future sales growth. Mortgage rates are about where they were this time last October. Bankrate.com shows a 4.29% average rate at the national level on the 30-year fixed-rate loan; Freddie Mac shows 4.14%. Combine lower mortgage rates with recent Fannie Mac/Freddie Mac initiations that will make it easier for lenders to extend credit to more people, and we see no reason sales and new construction should not maintain an upward trajectory. But there is no guarantee mortgage rates will continue scratching lower ground. We confess that we are somewhat surprised that rates have trended lower this long and this far over the past two months. Job growth in recent months points to a strengthening, expanding economy. In other words, it's possible today's low rates are an anomaly – and one that could quickly vanish. In two weeks, another employment report is scheduled to be released. If it surprises to the upside, like the last two reports, mortgage rates could easily reverse course and head for higher ground. After a period of meaningful rate declines, the risk of waiting for more declines rises. Markets do have a stopping point; this is a point well worth noting to our clients.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
S&P/Case-Shiller Home Price Index (March)	Tues., May 27, 9:00 am, ET	0.4% (Increase)	Important. Price growth in more local markets will likely slow.
Mortgage Applications	Wed., May 28, 7:00 am, ET	None	Important. Purchase activity has slowed, which suggests home-sale gains will be difficult to maintain.
Gross Domestic Product (1st Quarter 2014)	Wed., May 28, 8:30 am, ET	0.6% (Decrease)	Moderately Important. GDP growth was impeded by bad weather in the first quarter. Fortunately, growth has picked up in the second quarter.
Pending Home Sales (April)	Thurs., May 29, 10:00 am, ET	2.0% (Increase)	Important. Contract activity is expected to build on last month's strong gain, but remains sluggish.

 

How a Contrarian Accentuates the Negative The more we vet the data, the more we like what we see. Other people, though, might see it otherwise. For instance, household formation remains low. Indeed, it's at a multi-decade low. According to recent Census Bureau data , 36.2% of Americans under age 35 owned a home in the first quarter of 2014, compared with 41.3% in the first-quarter of 2008. The latest generation of young adults have been slower than their predecessors to venture out on their own. Many people see this a negative; we see it as a positive. You eventually have to leave home, for no other reason than to maintain the sanity of parent and child alike. Speaking more pragmatically, basement-dwelling young adults are pent up housing demand that will come to market. In other words, we expect to see a continual rise in new household formations, which is obviously a plus for housing. The trend in renting is another example. A bias toward renting remains pervasive. At the same time, the data point to homeownership at levels that prevailed in 1995. Today, 64.8% of American families own their homes compared with 68.9% – the peak of ownership – in 2006. Again, we see good news for housing, especially when factoring in the rent trend. Reis Inc., reports apartment rents have rose steadily over the past 17 quarters. They're now roughly 11% higher than they were compared to the post-crash lows in 2009. This means owning is the preferable economic option for more people. The really good news is that most of us prefer to own; contrary to all the positive chatter on renting. A poll taken by Trulia last year shows 75% of Americans believe it's better to buy than to rent a home. A lot of what is reported is taken as negative, but when considered in a long-term context, it's actually positive.

 

The Fed Giveth - will itTaketh Away???

Keeping you updated on the Market for the week of March 24, 2014

MARKET RECAP The Fed Giveth; Will It Taketh Away? More than 200 years ago, Mayer Rothschild, founder of the Rothschild banking dynasty, uttered one of the more profound observations on finance and power. “Permit me to issue and control the money of a nation,” said Rothschild, “and I care not who makes its laws.” Rothschild recognized that money matters, and it matters a lot. Money is, after all, 50% of every transaction. The importance of how much money is in an economy and the interest to be charged on that money cannot be understated. Because the quantity of money and the interest charged are so important, much time and attention are extended to the Federal Reserve. The Fed is, after all, our central bank and manages our money supply and the interest to be charged on that supply. When Fed officials speak, markets always listen. Fed Chair Janet Yellen spoke to Congress this past Wednesday, and markets listened, and for good reason: Ms Yellen offered more insight on quantitative easing (QE) – the Fed's purchases of Treasury notes and bonds and mortgage-backed securities (MBS) – and the direction of interest rates. In short, QE is going down and interest rates are going up. As for QE, it's likely to end by December. The Fed has already reduced its monthly purchases of Treasury notes and bonds and MBS to $55 billion per month effective in April. Should the Fed continue to reduce its purchases at the rate of $10 billion per month, as it has for the past three months, there will be no QE by January 2015. As for interest rates, Ms Yellen hinted that they could commence rising within six months after QE ends. This means the fed funds rate, in particular, would likely begin to ratcheted up sometime in July 2015. The fed funds rate is currently near zero, and many market participants doubt it will stay there. Futures markets are now pricing a 0.50% fed funds rate by August 2015. In short, we should expect meaningfully higher mortgage rates this time next year. As for the here and now, Bankrate.com's and Freddic Mac's most recent weekly surveys actually showed the rate on the 30-year fixed-rate mortgage down week over week. But we need to note that these surveys were winding down just as Ms Yellen was winding up. On Wednesday, rates on most mortgage products moved higher, though not disconcertingly so. We're even more convinced that we'll likely see 5% on the 30-year fixed-rate loan by this time next year. Note that we say “likely,” not “guaranteed.” Ms Yellen offered her projections with many caveats and hedges based on growth prospects. As it now stands, though, the Fed expects economic growth could run as high as 3.5% annually in 2015, with the unemployment rate falling to as low as 5.4%. If the Feds more bullish forecasts come to fruition, rising mortgage rates shouldn't be feared. But that means it becomes more urgent to act sooner on locking in a loan rate. The window on the rates that prevail today will close sooner than many borrowers anticipate.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
S&P Case/Shiller Home Price Index (January)	Tues., March 25, 9:00 am, ET	13.0% (Year-Over-Year Increase)	Important. Slippage in price gains will likely be seen in more local regions.
New Home Sales (February)	Tues., March 25, 10:00 am, ET	450,000 (Annualized)	Important. Weather will have slowed sales for the month.
Mortgage Applications	Wed., March 26, 7:00 am, ET	None	Important. Low purchase activity suggests owner-occupied buyers remain sidelined.
Gross Domestic Product (4th Quarter 2013)	Thurs., March 27, 8:30 am, ET	2.5% (Annualized Growth)	Important. GDP growth has slowed due in part to atypically bad weather.
Pending Home Sales (February)	Thurs., March 27, 10:00 am, ET	0.1% (Increase)	Important. The sales freeze in recent month is showing signs of thawing.

 

Bring on the Warm Weather We'll venture to guess that nearly everyone is eager for spring and summer. Winter has been lousy in many regions of the country. Lousy weather, in turn, has been reflected in lousy home sales and construction data. Weather was surely an influential variable in February, where existing home sales again disappointed. Indeed, sales slipped for the sixth time in seven months, with annualized sales posting at 4.6 million units. Year over year, sales are down 7.1%, the steepest decline in nearly three years. Fortunately, there are signs that existing home sales will improve in coming months: Prices remain firm, with the median price rising to $189,00. As we've noted many times in the past, rising prices call forth more supply. Indeed, more homes are coming to market, with two million homes for sale in February compared to 1.88 million in January, according to the NAR's data . This bodes well for future sales. On the construction front, housing starts slipped 0.2% to a 907,000-annualized rate in February. The good news is permits jumped 7.7% to a 1.018-million-unit pace after decreasing 4.6% in January. Once the weather warms, the bulldozers should return in force, as should the buyers. Article courtesy of Patti Wilson, American Momentum Bank.