The New-Home Market Leads the Charge

Keeping you updated on the market! For the week of June 22, 2015

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MARKET RECAP The New-Home Market Leads the Charge Many commentators were disappointed in the headline number, but they shouldn't have been. The headline states that housing starts posted at 1.036 million on an annualized rate for May. The consensus was looking for starts to post in the 1.1-million neighborhood. If we compare May with April, we see an 11.1% drop-off in starts. The numbers appear disappointing, until you dig a little deeper. April, which was already a strong month for starts, was revised up to 1.165 million. That's a 22.1% month-over-month increase when compared to March. Seeing starts throttle back in May after such a strong showing is no reason to sulk. Indeed, it should be expected. To expect continual double-digit monthly increases is to expect the impossible. The trend in permits is another reason to embrace the future. Permits were up a very stout 11.8% to 1.275 million potential starts. Permits are a leading indicator, and this leading indicator posted its best number since August 2007. Given the bullish outlook on new-home construction, no one should be surprised that homebuilders are feeling upbeat these days. The NAHB Home Builder Index spiked five points to 59 in June. This is the highest reading since September 2014. To be sure, sentiment can change and markets can turn. But for the past year, home builders have become increasingly upbeat. Sales and construction activity has generally supported rising optimism. We don't expect that to change over the remainder of 2015. Of course, the percentage of new-home sales is relatively small compared to existing-home sales. Our bread is mostly buttered on existing-home sales. On that front, sales have trended higher in recent months. Still, they've had a tough time hanging about the important five-million mark on an annualized rate. The good news is that it appears more likely that sales will hover above five million. A recent report from CoreLogic shows that another 254,000 residential properties regained positive equity in the first quarter. This trend of rising positive equity ensures more supply will come to market, which will lead to a rising sales trend. What's more, the Federal Reserve appears willing to maintain an accommodating stance. We've said repeatedly since the beginning of the year that a Fed interest-rate hike was unlikely for June. In the latest Fed meeting, officials showed no inclination to raise the federal funds rates. What's more, it remains unlikely the fed funds rate will be raised before fall. The Fed is still looking for labor-market improvement (mostly wage growth) and more consumer-price inflation. And when the Fed does move to raise the fed fund rates, it will likely do so in very small increments. That said, let's not take this as a guarantee of low mortgage-lending rates. The market can and has overridden Fed desires. The Fed might not move to raise interest rates; this doesn't mean the market won't.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Existing Home Sales (May)	Mon., June 22, 10:00 am, ET	5.23 Million (Annualized)	Important. Data on equity and housing formations point to rising sales.
New Home Sales (May)	Tues., June 23, 10:00 am, ET	525,000 (Annualized)	Important. Trends in starts and builder optimism will lead to rising sales.
Mortgage Applications	Wed., June 24, 7:00 am, ET	None	Important. Purchase activity should hold the higher levels established in recent months.
Personal Income (May)	Thurs., June 25, 8:30 am, ET	0.4% (Increase)	Important. Wage growth is accelerating and portends strength in home sales.

 

Should We Start Worrying About Bubbles? With home prices exceeding pre-bubble highs in many markets, more people are asking: Should we be concerned about another market bubble? There are no guarantees, but this market looks significantly less frothy than it did in early 2008. For one, mortgage-debt levels remain reasonable. Bank of America reports that mortgage debt as a percentage of real estate owned was at an all-time high of 63% just before the market-bubble burst. Today, it's down at 44%, which is a normalized and sustainable percentage. A more obscure indicator also points to a bubble-free market. When markets get bubbly, they induce a tsunami of new participants. Using California as a proxy for the whole, CalculatedRiskBlog.com data show that the number of real estate agents peaked at the end of 2007. Today, the number of salesperson licenses is off 33.5% of the peak. The number is at March 2004 levels. In other words, people aren't blindly rushing into a perceived gold rush. That's a sign of market health. In short, we don't see a market distorted by bubbles. To the contrary, we see a clearly sustainable market.

Article Courtesy of Patti Wilson, American Momentum Bank.

A Funny Thing Happened to Mortgage Rates

Keeping you updated on the market! For the week of June 8, 2015

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MARKET RECAP A Funny Thing Happened to Mortgage Rates Depending on the survey you review, mortgages remain at year-to-date highs or hit new year-to-date highs over the past week. Freddie Mac's survey shows rates were mostly unchanged from the previous week, with the 30-year fixed-rate mortgage averaging 3.87%. Bankrate.com, in contrast, has the 30-year loan hitting a new high. Its survey shows the 30-year loan averaged 4.03%. Interestingly, we are seeing something of a convergence with the 15-year fixed-rate mortgage and the five-year adjustable-rate mortgage. Bankrate.com's survey shows the 15-year loan averaging 3.26% and the five-year ARM averaging 3.18%. This makes sense when you consider any interest-rate moves by the Federal Reserve will hit the short-end of the yield curve first. But credit-market participants aren't waiting for the Fed. They've taken matters into their own hands. Interest rates across the board are up perceptibly over the past month. The 10-year U.S. Treasury note was recently yielding 2.37%, its highest yield since November. (The 10-year note is a reliable proxy for the direction of mortgage rates.) This seems counter-intuitive when you consider recent news on economic growth. Indeed, the final revision of gross domestic product (GDP) for the first quarter shows the economy actually contracted 0.7%. What's more, GDP growth isn't expected to have picked up much pace in the second quarter. Most estimates we've seen have GDP growing at less than 1% (on an annualized rate) for the second quarter. A sluggish economy surely gives the Fed reason to pause on raising interest rates. Some outside the United States would also like to see the Fed hold off on any rate increase. The International Monetary Fund (IMF) recommends the Fed hold off until the first half of 2016. Not that the IMF necessarily matters. Fed Chair Janet Yellen said she still expects to increase interest rates this year, but only if the economy meets her forecasts. We remain skeptical that it will. This is why we thought a June rate increase – forecast by many at the beginning of the year – was unlikely to occur. We wouldn't be surprised if the Fed made no move on interest rates until 2016 (as the IMF would like). Why, then, are interest rates in general and mortgage rates in particular rising? Markets are anticipatory animals. What's occurring in the moment doesn't influence decisions today. What the future is expected to bring is what gets people to act. Investors appear to be anticipating a pick up in inflation. Recent data show that consumer prices rose in the European Union economies. This was the first sign of European consumer-price inflation in six months. The news has prompted many investors to sell bonds worldwide. (Financial markets are intertwined. What happens in Germany now influences what happens here.) With that said, we see mortgage rates taking a breather. The 30-year fixed-rate mortgage bobbing about 4% seems reasonable to us. We base our outlook on current expectations for GDP growth, U.S. consumer-price inflation, and the unlikelihood the Fed will do anything with the federal funds rate until the end of summer. Then again, you never know for sure. As we frequently mention, the risk is in the waiting.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., June 10, 7:00 am, ET	None	Important. Moderating lending rates should lead to an uptick in mortgage activity.
Retail Sales (May)	Thurs., June 11, 8:30 am, ET	1.0% (Increase)	Moderately Important. Retail sales remain weak across the board, which is indicative of sluggish economic growth.
Import Prices (May)	Thurs., June 11, 8:30 am, ET	0.0%	Moderately Important. Imports continue to support a non-inflationary pricing environment.
Producer Price Index (May)	Fri., June 12, 8:30 am, ET	0.25% (Increase)	Moderately Important. Producer-level inflation remains dormant and will have no impact on interest rates.

 

Don't Fear Higher Mortgage Rates   Rising rates has taken some steam out of mortgage activity. Refinance activity dropped 12% last week. Purchase activity was down 3%. Activity is down over the past few weeks. (The good news is that mortgage credit availability continues to trend higher.) Borrowers are obviously put off by higher rates, but they'll adjust in short enough time. Expectations are key. If borrowers believe that lower rates are unlikely, they'll act today on today's rates. They'll also act if they believe rates are likely to rise. The problem is that many borrowers get anchored to the recent past. They saw 3.75% on the 30-year loan a few weeks ago. That means many think they'll 3.75% again. We might, but at this point we don't think so. Besides, 4% is still a very good rate. Ten years ago, the 30-year fixed-rate loan was being quoted over 6%. What's more, rising rates are frequently indicative of an improving economy. After all, the Fed said it won't move on raising rates until the data support it. Supporting data would include strong economic growth.

Article Courtesy of Patti Wilson, American Momentum Bank.

All Signs Point to a Strong Summer.

Keeping you updated on the market! For the week of June 1, 2015

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MARKET RECAP All Signs Point to a Strong Summer Though a holiday-shortened week, it was a solid week nonetheless. Home prices continue to march to higher ground. The S&P/Case-Shiller Home Price Index posted a very solid and slightly higher-than-expected 1.0 % gain in March. Higher prices were seen in all 20 of the markets Case-Shiller follows. Year over year, the Case-Shiller index is up 5%. New home sales also continue to move higher. Sales were up 6.8% to 517,000 units on an annualized rate in April. Supply rose slightly in the month, to 205,000 new homes, but supply relative to sales fell to 4.8 months from 5.1 month. The upside of low supply is that it will encourage builders to bring more homes to markets. We've seen this in recent months in the increase in starts. Rising prices will also encourage more building. The median price of a new home was up 4.1% to $297,300 for April. Year over year, the median price is up a strong 8.3%. The good news on new home sales was a welcomed balance to the disappointing news on existing home sales last week. That said, we expect existing home sales to gain traction through the summer months. The news on pending home sales supports our optimism. Up four-consecutive months, pending home sales jumped a much higher-than-expected 3.4% in April following an upward revised 1.2% gain in March. Pending home sales are up 14% year over year, and are far ahead of final sales of existing homes, which are up only 6.1%. The Pending Sales Index – at 112.4 – is as high as it has been since May 2006. We should see existing homes trend higher over the next few months. Mortgage rates also continued to move higher, but only by a couple basis points. That said, depending on what part of the country you reside, the highest rates of the year were prevalent this past week. The good news is that mortgage rates appear to have plateaued, and are showing little inclination to move higher.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Personal Income (April)	Mon., June 1, 8:30 am, ET	0.3% (Increase)	Important. Income growth remains anemic and is hurting the starter-home housing market.
Construction Spending (April)	Mon., June 1, 10:00 am ET	0.8% (Increase)	Important. Residential construction continues to drive overall construction spending. This bodes well for the housing outlook.
Mortgage Applications	Wed., June 3, 7:00 am, ET	None	Important. Purchase activity continues to point to sales growth in coming months.
Employment Situation (May)	Fri., June 5, 8:30 am, ET	Unemployment Rate: 5.4% Payrolls: 218,000 (Increase)	Very Important. Low wage growth will push any interest-rate increases further into the future.

 

Is It Time for Prices to Take a Respite? Following price trends has never been easier. A few years ago, there was only one source – Case-Shiller. Today, there are numerous sources you can tap to get an idea of what home prices are doing in your neck of the woods. Trulia, CoreLogic, and Zillow are to name just a few. To be sure, rising prices can be a good thing for homeowners. Once someone becomes a homeowner, he or she generally owns an asset that appreciates over time (with proper maintenance, of course). The homeowner’s net worth increases with home equity. The homeowner can tap the equity for money to invest elsewhere or for current consumption. It's a virtuous circle. That said, you need to get into a home before you can enjoy the benefits of home-ownership. That's becoming a problem in many markets, particularly for first-time buyers. Prices in many markets have exceeded pre-bubble highs. Wage growth, on the other hand, still lags. This obviously makes it difficult for first-time buyers. A healthy housing market needs a continual influx of first-time buyers. Unfortunately, they are in short supply these days. At this point, we'd like to see further moderation in home-price appreciation. In addition, we'd like to see further price moderation coupled with more construction in the starter market. The coupling of these two objectives would help ensure the housing market remains healthy for years to come. Article courtesy of Patti Wilson, American Momentum Bank.

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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