Keeping you updated on the market for the week of June 16, 2014

MARKET RECAP Finally, The Trend We've Been Waiting For We've been keeping a close on employment numbers since the 2009 recession. Many times in these pages we've noted that as job growth goes, so goes the economy... and, of course, so goes housing. Job growth is finally going the way we want. The economy added 217,000 new jobs in May, with the private sector by far leading the increase, adding 216,000 new jobs. The gains in May come on top the 282,000 new jobs in April and the 203,000 in March. This is good news, because we haven't seen monthly job growth continually exceed 200,000 each month until recently. To sustain a recovery, the economy needs to add 200,000-or-more jobs each month. With the recent gains, total employment is now 98,000 above the pre-recession peak and at an all-time high. (Though it's worth noting that the population continues to grow as well: 10 years ago there 290 million of us; today there are 317 million). Interestedly, another month of strong job growth hasn't had much impact on mortgage rates. Rates moved up this past week, but only slightly. Looking at the national averages, Bankrate.com's survey shows the 30-year fixed-rate mortgage averaged 4.34%, which is two basis points higher than the previous week. Freddie Mac's survey shows the 30-year loan averaged 4.20%, a six-basis-point increase. Rates are still very reasonable. More borrowers took advantage of low mortgages last week. The Mortgage Bankers Association (MBA) reports that application activity for the week ending June 6 was up strongly. Week over week, refinances were up 11%, while purchase applications were up 9%. This is one of the strongest weekly gains in months. Our enthusiasm is somewhat tempered, though. Too many times we've seen purchase applications string together two or three weeks of gains only to reverse course. But with institutional buyers (the cash buyers) pulling back, we are cautiously optimistic the individual buyer – using mortgage financing – will pick up the slack. Recent job growth is behind our optimism. Given recent job data, we wouldn't be surprised to see mortgage-purchase activity trend higher. More people working is obviously a plus. At the same time, mortgage credit continues to avail itself to more people. The MBA, which produces the Mortgage Credit Availability Index (MCAI), reports that the MCAI rose in May to 115.1, from 113.8 in April. So, yes, underwriting standards are easing, and actually have been easing over the past two years when you consider the MCAI base was 100 when it was introduced in March 2012. This isn't a surprised. As the economy improves (which it has), lenders become more willing to extend loans, and to extend loans to lower-rated borrowers. This is another positive trend we've seen developing in the past two years, as evinced by the MCAI. The trends we see in job growth and mortgage lending bode well for housing, which is why we remain bullish on housing.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Home Builder Index (June)	Mon., June 16, 10:00 am, ET	47 Index	Important. Sentiment has been stuck in neutral in recent months. But given recent strong economic data, we could see an upside surprise.
Consumer Price Index (May)	Tues., June 17, 8:30 am, ET	All Goods: 0.2% (Increase) Core: 0.2% (Increase)	Moderately Important. Low consumer-price inflation points to low future interest rates.
Housing Starts (May)	Tues., June 17, 8:30 am, ET	1.03 Million (Annualized Rate)	Important. Starts are now averaging above one million annually, but they are still well below the 1.5-million historical average.
Mortgage Applications	Wed., June 18, 7:00 am, ET	None	Important. Another strong rise in purchase activity could raise the outlook on housing.

 

A Lot of Room for Improvement, and That's Good News Investment is just as important as consumption in driving growth. Indeed, investment sets the stage for consumption. You invest to produce, and what is produced is consumed. This brings us to residential real estate investment, which has been on the upswing since mid-2010, but it still has a long way to go. In 1999, the housing sector was investing over $600 billion annually. Today, that figure is less than $500 billion. This suggests that there is plenty of room for more growth and overall housing improvement. The peak that was achieved in late 2005 has been offset by a decade of low investment. We think housing is well-positioned to increase investment, which will increase housing supply, housing consumption, and overall housing activity. We say that because we think demand will pick up in the second half of 2014 and continue into 2015. As we note, job growth is on the upswing, which points to an upswing in the overall economy. In other words, the positive trend in the labor market, and even that in the mortgage market, will eventually set housing on its own positive trend.

Keeping you updated on the market. For the week of June 9, 2014

MARKET RECAP Should We Worry About These Recent Trends? We confess that we don't spend much time worrying. When you think about it pragmatically, what does worrying actually accomplish? Little, really, outside of promoting dyspepsia and sleeplessness. That said, you do need to pause and contemplate what the facts tell you, even if they're not particularly pleasant to contemplate. The facts concerning purchase-mortgage applications aren't worrisome, per se, but they do give us pause. We simply aren't seeing the uptrend in application activity we had hoped to see at this point in the year. Despite the palpable decline in mortgage rates that has occurred in the past six weeks – which has pushed the 30-year fixed-rate loan below our 4.25% floor in many markets – purchase applications still refuse to gain traction. Indeed, the latest data from the Mortgage Bankers Association show applications fell 4% in the May 30 week, which has pushed the year-over-year decline to 15%. With institutional purchases (the large cash market) on the decline, we had expected the individual buyer to pick up the slack. Because the individual is much more likely to finance his purchase with a mortgage, purchase activity should have risen. This has us wondering what new-home and existing-home sales data (at the national level) will show in the coming month. We suspect they won't be especially encouraging. A couple developing trends could lift activity, though. The first is the developing trend in home prices. CoreLogic reports that prices continue to rise, but at a decelerating pace. Excluding distressed sales, prices nationally were up 2.1% month over month in April. Yearly, they're up 10.5%. Excluding distressed sales, the month-over-month change is 1.1%; the year-over-year change is 8.3%. These price gains appear robust, but the rate of appreciation for April is actually the slowest in 14 months. We're not surprised. We've said repeatedly that double-digit year-over-year price appreciation is unsustainable at the national level. After all, over the past three years, home prices have been appreciating at five times the rate of gross domestic product (GDP). What's more, the data have been skewed by strong institutional demand for distressed homes, which have experienced the greatest price gains after the 2009 market crash. The good news is that we're seeing a positive trend in supply. The NAR reports that inventory is up 10.5% year over year in 2014. We expect inventory to continue to increase at the national level. This trend, in turn, should promote sales activity. At the same time, it should further limit home-price appreciation. Of course, all real estate markets are local, but the aggregated local numbers produce a national number. Therefore, some information can be gleaned from glancing at a national number. Slower price growth coupled with rising inventory should lead to more sales in more local markets, which will produce a higher national number. So, no, were not worried. “Frustrated” is the more-accurate state of mind.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Wholesale Trade (April)	Tues., June 10, 10:00 am, ET	0.5% (Increase)	Moderately Important. Inventories are lean, but growing, which points to rising consumer activity and confidence.
Mortgage Applications	Wed., June 11, 7:00 am, ET	None	Important. Purchase activity will need to pick up to support higher home sales.
Retail Sales (May)	Thurs., June 12, 8:30 am, ET	0.5% (Increase)	Moderately Important. Rising building-material sales is an encouraging trend for housing
Producer Price Index (May)	Fri., June 13, 8:30 am, ET	0.3% (Increase)	Moderately Important. Producer prices have increased in recent months, but remain non-inflationary.

 

We're Still Not Sold on This Popular Perception The perception is that renting is becoming the option of choice in housing. We were reminded of this perception in a recent MortgageNewsDaily.com article that focused on the findings of a survey conducted by the McArthur Foundation. Our attention was piqued by the finding that renting is becoming more appealing compared to buying. We obviously can't argue with the survey results. But keep in mind that respondents can be lead by how questions are asked and when they are asked. For example, if someone were to ask if you were negative about owning a home right after being laid off, your mood and the question’s negative slant will likely elicit a negative response. Affordability, job security, and the economy are all important variables, to be sure. But fear of loss mobility is possibly the overriding variable. Memories of 2008 and 2009 are still sharp in many people's minds. There are no shortage of tales of someone who bought a home, soon found himself underwater, and was essentially anchored to his home. Speaking of anchors, many potential buyers are still anchored to the perception that if they buy a home, they'll be irrevocably moored to it. They believe the crisis is still upon us. If the perception is removed (and should be removed), we venture that the vast majority of people prefer owning to renting. To those who doubt our perception, simply answer the following question: Do you prefer to live in a neighborhood of owners or renters?

Is it really true what they say about home prices??? June 2, 2014

MARKET RECAP Is it Really True What They Say About Home Prices? It might be true; then again, it might not, at least as they pertain to us. First, the big national numbers: Home-price appreciation appears to be gaining pace, according to the S&P/Case-Shiller Home Price Index . Case-Shiller's latest price report, for March, shows home prices were up a stout 1.2% month over month in its 20-city index. This actually reverses a trend of slowing price appreciation that began in late 2013. Is it possible that home prices are set to resume the rate of increase we saw early last year? We don't think so. We need to keep in mind that all real estate markets are local. A person who owns a share of Microsoft stock and lives in San Diego owns the exact same asset as the Microsoft investor who lives in San Antonio. On the other hand, if they both own a home, they most assuredly don't own the same asset. Housing is heterogeneous and local. The point to emphasize is that the data can be skewed by outliers: A big gain in one city – in this case, San Francisco, which posted an improbable 2.4% monthly gain – can skew the national average. (Think of 10 people in a room, and two of them are Bill Gates and Warren Buffett. The average wealth in the room is $7 billion per person. Gates and Buffett step out. Now the average is drastically less.) We still expect price appreciation to slow in more local markets; especially in those markets that have strung together a few years of double-digit year-over-over gains. Such price appreciation is simply unsustainable. New-home prices are proof alone that you can't keep galloping along at a double-digit clip in perpetuity. In April, the median price of a new home dropped 2.1% to $275,800. Year over year, the median price is at a minus 1.3%. This isn't necessarily bad news: Lower prices keep sales activity brisk. New-home sales at the national level are running at 433,000 units on an annualized rate. This is roughly 100,000 units higher compared to the year-ago rate. Lower prices lead to more sales – a universal economic law applicable to every business. As we note, housing markets are local markets. Freddie Mac took a look at 50 metropolitan markets, and its findings were surprisingly weak. Freddie Mac's data – in its new Multi-Indicator Market Index – show that only two of five local markets are improving. This time last year more than 90% of these markets were improving. We are somewhat ambivalent to what this actually means. We suspect we're looking at a bifurcated market: Where price gains have been strong, they'll remain strong; where they've been weak, they'll remain weak. San Francisco will continue to price people out of the market; Atlanta will become more affordable. Combining the trends will produce data meaningless to both markets. Bottom line: We like housing, but we like it more in some markets compared to others.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Construction Spending (April)	Mon., June 2, 10:00 am, ET	0.9% (Increase)	Important. New-home construction continues to gain momentum and drive overall construction spending.
Mortgage Applications	Wed., June 4, 7:00 am, ET	None	Important. Both purchase and refinance activity should pick up on new low rates.
Employment Situation (May)	Fri., June 6, 8:30 am, ET	Unemployment Rate: 6.4% Payroll: 224,000 (Increase)	Very Important. Another upside surprise in payrolls will lift interest rates higher.
Consumer Credit (April)	Fri, June 6, 3:00 pm, ET	$15 Billion (Increase)	Important. Rising student-loan borrowing is becoming a concern for the entry-level housing market.

 

Mortgage Rates Fell, Purchase Applications Fell, Refinances Fell: What's Going On? Mortgage rates continue to fall. Indeed, the rate on the 30-year fixed-rate loan is fast approaching 4%. Though rates have dropped perceptibly, activity has dropped perceptibly as well. The Mortgage Bankers Association reports both purchases and refinances were down 1% last week. Activity likely tapered because many potential borrowers are still bottom fishing. We don't want to cry “wolf” too often, but this is a dangerous game. Yes, rates have dropped in recent weeks, but there hasn't been any major event to account for the drop. This suggests to us that credit markets will be very sensitive to any meaningful data or event that hits the market. Specifically, we're referring to next Friday's employment situation. Unanticipated employment numbers move credit rates. Another surprise to the upside in payrolls could easily end the mortgage-rate rally. Therefore, anyone within 15 days of funding should think long and hard (and quick) about locking. For that matter, the same goes for anyone within 30 days. But even if rates go lower, it's important to remember that a 30-year fixed-rate loan near 4% means the borrower is still sitting in some pretty high cotton.

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.

 

A Prophet on Interest Rates, But What Does This Mean for Housing?

MARKET RECAP A Prophet on Interest Rates, But What Does This Mean for Housing? Interest rates are like the weather: They change frequently. More important, if you can get it right predicting them, you can look like a genius. But if you get it wrong? Well, you look like something else. So far, we've got it right on interest rates. At the beginning of the year, we proffered that the 30-year fixed-rate loan would likely vibrate between 4.25% and 4.5%. Leaving points aside, that's pretty much been the case, at least based on the national average-rate data compiled by Bankrate.com and Freddie Mac . Of course, we want to keep our chest pounding to a mild thump: We also said 5% on the 30-year loan was in the cards by the end of 2014. The 30-year loan hasn't exactly shown signs of bolting north. To the contrary, the rate has been steadily declining over the past month and is about where it was in November. That said, we're sticking with our 5% prediction, even if we are almost half way through 2014. We like how the job numbers are trending, which is higher. We suspect when we get a first glimpse of second-quarter economic data, the numbers will be significantly improved from the first quarter. Job growth, after all, is reflective of economic growth. But what about housing? We like the outlook for housing – a lot. We expect sales and prices to trend higher. What's more, we would not be put off by rising interest rates as long as the economy is grinding forward to support higher job and wage growth. (Wage growth, by the way, is indicative of rising labor productivity, and that, too, has been rising.) To restate the obvious, we are unconcerned with rising interest rates. Indeed, we welcome them when they come accompanied with rising economic activity. The lower rates that have bubbled to the surface in recent weeks are something of an anomaly, in our opinion. When signs of sustained growth become more evident, you can be assured interest rates will rise. But housing will rise too. When we look back to the early 2000s, and a little beyond, we find that mortgage rates were a percentage point or two higher. But it was no big deal. The economy was humming along, and so was housing. In the meantime, we are still struggling a bit. Last week, we were pleasantly surprised to see purchase applications soar 9% and take the lead over refinances in total mortgage activity. Unfortunately, momentum petered out. On Wednesday, the Mortgage Bankers Association reported purchase activity had dipped 1% for the seek of May 9; this despite mortgage rates falling to a six-month low. Then again, one week does not a trend make. We're already looking forward to early June, when the employment situation for May will be released. If we get another month of 200,000-plus gains in payrolls (which we expect), we'll feel much more assured everything will work out fine this year for both the housing and mortgage markets.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., May 21, 7:00 am, ET	None	Important. We expect purchase activity to gain on lower rates and an improving job outlook.
Federal Reserve FOMC Meeting Minutes	Wed., May 21, 2:00 pm, ET	None	Important. The Fed is expected to affirm its commitment to QE tapering and to hold short-term rates low.
Existing Home Sales (April)	Thurs., May 22, 10:00 am, ET	4.7 Million (Annualized)	Important. Sales are finally showing positive momentum on improved inventory and a strengthening economy.
New Home Sales (April)	Fri., May 23, 10:00 am, ET	430,000 (Annualized)	Important. Sales are gaining pace on builder incentives and improving consumer confidence.

 

Pressure Builds for Change We Can Believe In What happens in Washington D.C. frequently confounds more than clarifies. New rules and regulations tend to raise the level of frustration more than ally it. Let's be honest, many people have been frustrated by mortgage underwriting standards. They're viewed as overly stringent. It's difficult to argue with the perception, but the fact is that many private lenders have at least marginally eased underwriting standards this year. Then again, standards can be eased only so far, because they must still adhere to guidelines mandated by Fannie Mae and Freddie Mac. These to government-sponsored organizations guarantee two-thirds of mortgages originated. The good news is that Fannie and Freddie are loosening rules that have forced banks to buy back billions of dollars worth of home loans. These rules have kept lenders cautious about making home loans to borrowers with imperfect credit, because lenders could wind up absorbing losses if the loans default. At the same time, these regulations have raised the cost of originating mortgages. These rules have been particularly tough on the entry-level market – homes priced under $300,000. In other words, the important first-time buyer has been under-served. We need the first-time buyer to grow the market. The good news is that new Fannie and Freddie guidelines will enable us to better serve and grant more credit to all potential borrowers going forward. This can be only a positive for housing.

This is Terrific News.......Sort of. Keeping you updated on the market for the week of May 13, 2014.

MARKET RECAP This is Terrific News... Sort of We've been pounding the table for job growth since, well, it's been quite a while now. The good news is that it appears our demands are being addressed. The economy is finally showing signs of trending higher. We say that because April payrolls increased 288,000 , far exceeding economists' estimates. This 200,000-plus gain comes on top of the 203,000 jobs added in March and the 222,000 added in February. We've noted frequently in the past that the economy needs to continually add 200,000-or-more jobs each month to sustain economic growth. April's payroll report is surely welcomed news. The April job gains were sufficient to drop the unemployment rate to 6.3%. This means the Federal Reserve will very likely continue with its planned tapering of quantitative easing (further removing support for mortgage rates). With the economy improving, QE is less needed. With that said, a few clouds still linger on the horizon – labor participation being the grayest. Ninety-two million people are out of the labor force and 9.8 million are still officially unemployed, according to the Bureau of Labor Statistics . These are high numbers, to be sure, but there is at least one mitigating factor: more baby boomers are retiring, thus leaving the work force for good. Still, the unemployment rate among younger adults remains elevated, and these people are key drivers of the entry-level housing market. Interestingly, mortgage rates across most product offerings eased since the latest job numbers were released last Friday. Usually such bullish economic news pressures rates to rise. That didn't occur. A subsequent speech by Federal Reserve Chair Janet Yellen was key to rates remaining subdued. Basically, Ms Yellen said the Fed will continue to maintain an “accommodating” monetary policy for the foreseeable future. Today, mortgage rates are not only subdued, they're positively languid, residing at levels we haven't seen in six months. These lower rates haven't exactly ignited a refinance flurry, but at least purchase activity is showing some real signs of life. Indeed, purchase applications surged 9% in the May 2 week, lifting the percentage of purchase activity to 51% of all activity. This marks the first time since 2009 that purchases have exceeded refinances. Lest our enthusiasm run too wild, we need to keep in mind that purchase applications are still 16% lower than they were a year ago. Then again, it's also worth keeping in mind that the Mortgage Bankers Association tends to understate purchase activity because small lenders are underrepresented in the MBA's purchase index. The bottom line is that we like the way things are trending, and we're looking forward to more home sales and rising purchase-mortgage activity in coming months.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., May 14, 7:00 am, ET	None	Important. A strong surge in purchase activity bodes will for the housing outlook.
Consumer Price Index (April)	Thurs., May 15, 8:30 am, ET	0.2% (Increase)	Moderately Important. Consumer-price inflation won't move interest rates.
Homebuilder Index (May)	Thurs., May 15, 10:00 am, ET	49 Index	Important. Optimism should continue to rise on improving activity.
Housing Starts (April)	Fri., May 16, 8:30 am, ET	985,000 (Annualized)	Important. The important single-family segment is expected to drive overall growth.

 

Why the Housing Market Is in Better Shape Than We Think We have to confess to being a little dour over the past couple months. Perhaps we were influenced by the surfeit of hand-wringing articles lamenting the problems with housing. Yes, existing home sales are down and inventory is tight, but a chief reason sales are down is the decline in distressed sales – and that's a good thing. Fewer short sales and fewer foreclosures will keep prices moving on an upward trajectory, which, in turn, will lift the number of owners with positive equity. At the same time, we've seen tight credit standards gradually become somewhat less tight. Competition, which is always a good thing, is forcing lenders to rethink underwriting policies. This is good for the market. Credit might still be tight, but it can only go in one direction – toward more accommodation, and that's where we are trending. Demographics also favor more housing and lending activity. The fact is the population continues to grow, so demand for housing will have to rise. At the same time, housing starts – below 1 million annually – continue to trail the historical average of 1.5 million. We mentioned last week that we remain unconvinced that we're destined to become a nation of home renters. In our travels and experiences, we continually find that people want pride of ownership, stable housing payments (rents continually rise), an appreciating asset, and eventual freedom from monthly payments. They also want mobility, which more of them will regain as the housing recovery moves along. In other words, yeah, we like where things are going, and we are eager to get there.

When Bad News is Good....

MARKET RECAP Who to Believe on This One? For the past year, if not more, we've been wishing, hoping, and even cheerleading for an upturn in economic growth. To this day, we have little to show for our emotional investment. Gross domestic product (GDP) grew at an imperceptible 0.1% rate on an annualized basis for the first-quarter of 2014. The advance fell far short of an already low-bar consensus estimate for 1.0% growth. Acceptable annual growth for a big country like ours is 3% or higher. Unless the economy picks up steam soon, we're unlikely to see 3% in 2014. Interestingly, the Federal Reserve's take on the economy doesn't quite jibe with the Bureau of Economic Analysis. (The BEA calculates GDP.) Fed officials see economic activity picking up, with employment improving and consumer spending gaining pace. The Fed is sufficiently convinced the economy is on the right track that it sees no reason to back off tapering. It will continue to reduce its monthly purchases of Treasury notes and bonds and mortgage-backed securities (MBS). Timing might account for the difference in opinion: The Fed is focused more on the latest economic data, while the BEA parses data all the way back to January. That said, the more contemporary data aren't terribly encouraging, particularly on housing investment. Many economists focus on consumer spending when estimating economic growth, but investment is just as important. Investment sets the stage for future consumption. Residential investment matters, because it has a rippling effect on the economy. It doesn't take much imagination to see the different materials and services required to build, sell, maintain, and furnish a home. Unfortunately, residential investment contracted during the first quarter, which marked a second-consecutive quarter of investment contraction. Because housing is such a large economic contributor, residential investment will need to turn positive for the economy to meaningfully grow. Mortgage activity, sluggish in recent months, also needs to pick up pace. We're not surprised that the surge of refinances that occurred in the past four years has been reduced to a trickle. Now that mortgage rates have stabilized within a tight range, there is less incentive to refinance. At this point, we'd like to see more purchase activity , which would obviously be of reflective higher sales volumes. On this front, activity continues to ebb and flow. Over the past two weeks, it has mostly ebbed. Nevertheless, we remain optimistic. The first signs of spring momentum have finally arrived. Pending home sales ended nine-straight months of declines with an encouraging 3.4% uptick in March. In another positive, February sales were revised upward by three-tenths to minus 0.5%. Home-price growth also appears to be moderating, which should help bring inventory and buyers into the market. Therefore, we expect pending home sales to rise over the next few months. If this occurs, we should expect to see a pick up in mortgage-purchase activity.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
International Trade (March)	Tues., May 6, 8:30 am, ET	$40.5 Billion (Deficit)	Moderately Important. International trade remains as subdued as domestic trade.
Mortgage Applications	Wed., May 7, 7:00 am, ET	None	Important. Purchase activity tumbled in the latest MBA report. This points to sluggish immediate sales activity.
Consumer Credit (March)	Wed., May 7, 3:00 pm, ET	$15 Billion (Increase)	Moderately Important. Revolving credit use has stagnated, which points to a moderating consumer-spending trend.
Job Openings (March)	Fri., May 9, 10:00 am, ET	4.2 Million	Important. Openings have trended higher in 2014, but the trend has been lead by lower-paying retail jobs.

 

Keeping you updated on the market for the week of May 5, 2014.

When Bad News is Good  Homeownership has hit a 19-year low, according to the Census Bureau. The share of Americans owning a home is down to 64.9%. Meanwhile, the median monthly asking rent has soared to a record high, hitting $766 as of the first quarter of 2014. Because our bread is buttered by homeownership, it would seem that ownership hitting a 19-year low is reason to lament, especially if we consider that many pundits believe the trend will be sustained. One prominent pundit, Sam Zell, chairman of apartment REIT Equity Residential, believes the homeownership rate will eventually fall to as low as 55%. We don't quite see it that way. For one, continually rising rents is good news for housing, especially if the rate of home-price appreciation continues to ease. This would mean that owning a home will make more sense economically to more people. The simple fact people prefer to own than to rent is also reason to be encouraged. People prefer to live in a neighborhood of owners, because these neighborhoods are usually more stable and better kept. The good news is that if you can satisfy your preference at a comparatively better price, you're more likely to act. We expect to see more people act as the advantages of ownership become more apparent. The U.S. homeownership rate peaked at 69.2% in June 2004. We don't see a return to that level in the near future, but something in the 65%-to-66% range is entirely reasonable and plausible.