A Very Positive Sign on the Housing Front

Keeping you updated on the market! For the week of May 25, 2015

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MARKET RECAP 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.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
New Home Sales (April)	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	None	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 (April)	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.

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.  

Study: Owners still overestimate their home’s value

 

DETROIT – April 14, 2015 – Appraiser opinions of values were higher than homeowner estimates in 17 of the 27 metro areas (63 percent) measured by Detroit-based Quicken Loans.
Even though a majority of metros have higher appraisals than homeowners' estimates, however, the overall average finds owners continue to think their property is worth a bit more than an appraiser's estimate.
Home Price Perception Index (HPPI)
Nationally, appraiser opinions were lower than homeowner estimates by 0.40 percent in March. In February, appraiser opinions were only 0.13 percent lower than homeowner estimates.
This slight change in the national HPPI was consistent with most metro areas examined, nearly all of which saw little perception change from the month prior. Seventeen of the 27 metro areas analyzed are still seeing appraiser opinions higher than homeowner estimates.
Although the difference is minor, Tampa, Florida's HPPI value turned negative in March, meaning, on average, appraiser opinions are now greater than homeowner estimates.
"While the national HPPI shows appraiser opinions trailing those of homeowners, it is encouraging to see the gap at such a narrow margin," says Quicken Loans Chief Economist Bob Walters.However, "homeowners in a majority of the nation's largest markets can take solace in the fact that their home may have more equity than they realize."
For charts and background information on the HPPI, visit Quicken's website.
© 2015 Florida Realtors®  

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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.

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