Keeping you updated on the market! For the week of June 24, 2013

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MARKET RECAP Are Happy Days Here Again? For homebuilders that appears the case. The NAHB/Wells Fargo Homebuilder Sentiment Index surged eight points to post a 52 reading for June. This is the largest gain since 2002 and pushed the index above 50, where it hasn't been since 2006. (Fifty is the demarcation between general optimism and general pessimism, which means overall homebuilder sentiment now lists toward optimism.) One hardly need be a genius to understand why homebuilders are eagerly anticipating the future: New-home inventory remains at multi-decade lows, while prices for this inventory are rising at a brisk pace. According to homebuilder feedback, average selling prices have risen 11% this year. Few situations will boost a seller's spirits more than to see strong pricing combined with limited inventory. That's the definition of a sellers' market. What's more, homebuilders still have room to expand supply at a robust pace. Over the past 50 years, homebuilders have averaged 1.5 million starts (single and multifamily). This year, they are expected to start one million units; next year, they are expected to start 1.3 million units. New-home demand has also spurred pricing gains in many markets. Prices nationally have clawed back to 2003 levels, but they still remain 28% below the July 2006 peak. Strong price gains have conjured thoughts of another housing bubble. Double-digit price increases can't go on indefinitely. What's more, the higher an asset price rises, the harder it tends to fall. That said, affordability is a mitigating factor, at least according to Standard & Poor's, which estimates that housing is still 8% undervalued based on the price-to-income ratio. Historically, the typical median home costs four times as much as the median annual income. It's now at a 3.7 multiple. At the same time, the household debt service ratio remains near a 30-year low, while the homeowner mortgage obligation is at a 15-year low at 8.25% of disposable income. During the bubble years, the mortgage obligation averaged 11% of disposable income. It's worth remembering that rising prices stimulate more supply to come to market. More supply, in turn, will slow price appreciation. That's a good thing, because double-digit price gains are unsustainable. Next year, we wouldn't be surprised to see price growth moderate to mid- to low-single digit rates, which are sustainable rates. But what about the elephant in the room – mortgage rates? To be sure, lending rates are up significantly over the past six weeks, but are still cheap from a historic perspective. As we noted last week, rising rates have spurred more buying and refinances. If you believe the best rates are behind us (and we do), you don't want to wait in a rising-rate environment.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
S&P Case-Shiller Home Price Index (April)	Tues., June 25, 9:00 am, ET	0.8% (Increase)	Moderately Important. The data point to doubled-digit year-over-year price increases for 2013. .
New Home Sales (May)	Tues., June 25, 10:00 am, ET	463,000 (Annualized)	Important. More demand and increased supply are lifting sales.
Mortgage Applications	Wed., June 26, 7:00 am, ET	None	Important. Rising homes sales are reflected in rising purchase applications.
Gross Domestic Product (1st Quarter 2013)	Wed., June 26, 8:30 am, ET	2.4% (Annualized Growth)	Important. GDP looks decent but still shows soft demand, so it's unlikely to move interest rates.
Pending Home Sales Index (May)	Thurs., June 27, 10:00 am, ET	1.5% (Increase)	Important. New inventory is stimulating additional sales.

 

The Law of Diminishing Marginal Returns One reason we believe ultra-low mortgage rates are history is that the Federal Reserve is doing more, but it's getting less results. Here's what we mean: Back when the housing bubble burst and the stock market crashed, all the Fed had to initially do was to assure markets that it would intervene with more money and low interest rates. Words alone were enough to placate. Since then, the Fed has had to ramp up both rhetoric and action. In 2008, the Fed implemented QE1, which centered on buying $600 worth of mortgage-backed securities. In 2010, the Fed followed up with QE2, buying $600 worth of U.S. Treasury securities. QE1 and QE2 were followed by QE3 in late 2012. QE3 featured the Fed committing to buy $85-billion worth of MBS and Treasury securities each month for an indefinite period of time. Each successive action has had less impact on the margin, which is why we say the Fed is having to do more just to stand pat. This should be expected, because diminishing marginal returns are the norm. Here's a drinking analogy: Each successive glass of water has less impact quenching thirst, and then a point is reached where the next glass does more harm than good. Now we hear chatter that the Fed is pulling back from QE3 – known as “tapering” in media circles. Should that occur, interest rates will rise. The odds of that occurring sooner than later is higher today than it was a year ago. After all, the Fed will reach a point where the next purchase of a mortgage-backed security will produce more harm than good.

Article Courtesy of Patti Wilson, Senior Loan Officer Sanibel-Captiva Community Bank

Property Prices Continue to Rise

MARKET RECAP The Trend Remains Our Friend Of course, the trend we speak of is home prices, which continue to move higher. Not only that, they continue to move higher at a rate few commentators would have proffered when gauging the market this time last year. To wit, CoreLogic's latest report shows home prices nationwide, which includes distress properties, increased 10.5% year over year in March. This was the highest year-over-year increase since March 2006. It doesn't appear the trend is likely to reverse in the near future. CoreLogic's Pending Home Price Index indicates that prices are expected to post a 9.6% year-over-year gain for April, with prices rising 1.3% for the month. To be sure, housing markets are local markets, and prices in many local markets are not accelerating at the national rate, but it's quite extraordinary to be experiencing price gains that were prevalent during the height of the housing boom. Now, this doesn't mean another bubble is set to burst; many markets are rising from a considerably lower base than what prevailed in the early 2000s. That said, these price gains – especially in regions that far exceed the national average – should prompt us to view the market with a more discerning eye; value and price tend to move in opposite direction. We've mentioned in the past that rising home prices will lift more owners into positive equity, thus prompting more of them to list their home. It's an economic maxim that higher prices lead to more supply, and that appears the case today. Calculatedriskblog.com reports that for-sale inventory is up 12.2% for the year, a notable improvement over 2011 and 2012, when the peak increase was only 5%. More inventory should lead to more sales activity. The trend in mortgage delinquencies and foreclosures also portends better days ahead. The Mortgage Bankers Association reports home loans that were at least one month late or in the foreclosure process dropped to 10.3% of mortgages in the first quarter, down from 11.25% in the fourth quarter and 11.33% from the first quarter of 2012. This trend demonstrates a more robust and more resilient lending environment. At the same time, mortgage rates continue to hold multi-decade lows. For this, we can again thank the Federal Reserve, which continues to purchase $40 billion in agency mortgage-backed securities each month, thus creating a demand that has helped keep rates low. Though our record at predicting mortgage rates has been spotty, to say the least, it's worth noting that it appears more likely the Fed will cease purchasing mortgage-backed securities sometime in 2014. When the purchases stop, mortgage rates are sure to rise. In short, this might be the perfect time to buy a home: prices are rising from a low basis, and buyers can finance their purchase with a low-cost loan. How long the perfect time lasts is anyone's guess, but we wouldn't be surprised to see something give – perhaps the price trend or low mortgage rates – by early 2014.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., May 15, 7:00 am, ET	None	Important. Purchase activity points to rising interest from owner-occupied buyers.
Home Builders' Index (May)	Wed., May 15, 10:00 am, ET	43 Index	Important. Sentiment has plateaued due to credit and inventory concerns.
Consumer Price Index (April)	Thurs., May 16, 8:30 am, ET	All Goods: 0.2% (Decrease) Core: 0.2% (Increase)	Important. Basic goods are exhibiting elevated price inflation, though it's still within the Federal Reserve's target range.
Housing Starts (April)	Thurs., May 16, 8:30 am, ET	990,000 (Annualized)	Important. Momentum in starts has slowed on a shortage of material and labor and tight credit standards.

 

A Favorable Composition   It's no secret that investors (rental-housing buyers) are responsible for much of the housing-market gains we've experienced over the past couple years. This has prompted many pundits and commentators to opine that we are turning into a nation of renters. We don't believe it because many polls (from Freddie Mac and others) show people overwhelming prefer to buy than to rent, so we are encouraged to see the rise in purchase-application activity, which recently hit a three-year high. We also like the beneficial social aspect of owner-occupied buyers. Neighborhoods composed principally of buyers tend to be more stable, because a neighborhood of owners instills a sense of community. If there are problems, neighbors are more willing to band together to seek a solution. Renters, in contrast, tend to be more transitory, and more prone to leave, so problems are more prone to fester. Property upkeep is another benefit. Neighborhoods of renters have less tendency to maintain their home and the surroundings. After all, it's not their property. In addition, because the landlord is frequently absent, there is no one around to pick up the slack should renters become negligent in upkeep. This isn't to bash renters or landlords, but we think it's beneficial to property values and to community cohesiveness to see a pick up in owner-occupied activity. Article courtesy of Patti Wilson, Sanibel -Captiva Community Bank

Spring Home Improvements: Repair, Replace, Enjoy!

Spring Home Improvements: Repair, Replace, Enjoy!

Another good reason to quit smoking!

Study: A smoker’s home can lower value up to 29%

KIRKLAND, Quebec, Canada – April 18, 2013 – A recent survey of Ontario real estate agents and brokers, sponsored by Pfizer Canada, found that smoking in the home could lower the value of property up to 29 percent.

“Smoking has a profound impact on how appealing a home is to a prospective buyer,” says David Visentin “It stains walls and carpets, and leaves a smell that can be hard to eliminate. Many prospective buyers are really put off by homes that have been smoked in, and they can be very challenging to sell.”

Visentin hosts “Love it or List it” on Canadian televisions’ W Network,  which also features "The Property Brothers," who will appear at the Florida Realtors Convention & Trade Expo Aug. 14-18, 2013.

Impact of smoking in the home: Beyond cosmetic
Almost half (44 percent) of the real estate agents and brokers surveyed said smoking in the home affects resale value. Of these, one-in-three (32 percent) said smoking in the home may lower the value by 10-19 percent and a further one-in-three (32 percent) said it may lower the value by 20-29 percent.

An overwhelming majority of Ontario real estate agents and brokers (88 percent) said it’s more difficult to sell a home where owners have smoked. More than half (56 percent) said most buyers are less likely to buy a home where people have smoked, and 27 percent went further and said most buyers are actually unwilling to buy a home where people have smoked.

© 2013 Florida Realtors®

Pending home sales slip on constrained inventory.

                   

WASHINGTON – March 27, 2013 – February pending home sales flattened with limited buyer choices, but remained at the second highest level in nearly three years, according to the National Association of Realtors^® (NAR). 

The Pending Home Sales Index, a forward-looking indicator based on contract signings, slipped 0.4 percent to 104.8 in February from a downwardly revised 105.2 in January, but is 8.4 percent higher than February 2012 when it was 96.6. Contract activity has been above year-ago levels for the past 22 months; the data reflect contracts but not closings.

Before January, the last time the index showed a higher reading was in April 2010 when it was 110.9, shortly before the deadline for the homebuyer tax credit. 

NAR Chief Economist Lawrence Yun said limited inventory is holding back the market in many areas.

“Only new home construction can genuinely help relieve the inventory shortage and housing starts need to rise at least 50 percent from current levels,” he said. “Most local home builders are small businesses and simply don’t have access to capital on Wall Street. Clearer regulatory rules, applied to construction loans for smaller community banks and credit unions, could bring many small-sized builders back into the market.”

The PHSI in the Northeast declined 2.5 percent to 82.8 in February but is 6.8 percent above February 2012. In the Midwest the index rose 0.4 percent to 103.6 in February and is 13.2 percent higher than a year ago. Pending home sales in the South slipped 0.3 percent to an index of 118.8 in February but are 12.1 percent above February 2012. In the West the index increased 0.1 percent in February to 101.4 but is 0.8 percent below a year ago.

Yun projects existing-home sales to rise about 7 percent in 2013 to approximately 5 million sales, which is near the current level of activity.

“The volume of home sales appears to be leveling off with the constrained inventory conditions, and the leveling of the index means little change is likely in the pace of sales over the next couple months,” he said.

The national median existing-home price is forecast to rise nearly 7 percent this year, while mortgage interest rates should remain historically low but trend up slowly and reach 4 percent in the fourth quarter. 

© 2013 Florida Realtors®

Move up Buyers Shouldn't wait!

                       

SEATTLE – March 22, 2013 – Although waiting a few years to sell a home will likely mean a higher sales price, the cost of a bigger new home will increase as well, according to an analysis by Redfin. Financially, it makes more sense to capture today’s relatively low prices on the more expensive home.

Additionally, interest rates are still near record lows, but they’ll almost certainly rise over time, which means a higher monthly mortgage payment. In the next 12 months, the Mortgage Bankers Association expects rates to rise to 4.4 percent. Over a longer period, they are likely to be even higher, considering a 20-year U.S. average mortgage rate of about 6.5 percent.

The rationale for moving up now is fairly simple. A $100,000 home that appreciates 10 percent in one year would net a home seller an additional $10,000. But if that owner hopes to move into a home worth $200,000, the increased cost of the home one year from now, at the same 10 percent, would be $20,000 more.

© 2013 Florida Realtors®

Keeping you updated on the Market. For the week of March 25, 2013.

MARKET RECAP Home Builders Take a Holiday The holiday we refer to is from optimism. Over the past 18 months, builder optimism has moved meaningfully higher to a recent high of 47 from a low of 9, according to the NAHB's sentiment index. This month, though, sentiment dropped to 44. Demand for new homes remains robust, but supply issues – in labor and building-material – are hampering construction. Home builders are equally frustrated by restrictive appraisals and tight lending standards. As for lending standards, we concur. Underwriting standards remain too restrictive. For this, we can blame uncertainty and tighter regulations. We were encouraged to hear Federal Reserve Chairman Ben Bernanke agree with our assessment. In a press conference earlier this week, Bernanke told reporters the Fed is seeing "much higher credit-quality requirements" from potential borrowers. Bernanke cited the rule where mortgages could be put back to banks as being particularly detrimental to risk taking. There are no free lunches. When the uncertainty and cost of doing business rise, businesses – including mortgage lenders – take action to mitigate uncertainty and to recover costs. Yes, the Fed gives on the one hand by continuing to buy mortgage-backed securities at the rate of $40 billion a month. On the other hand, the pool of potential borrowers is reduced by higher lender costs and the increased risk of doing business. So we can understand why home builders might feel down from time to time. But we did say the builders were taking a “holiday” from optimism. Given strong demand for new homes and rising construction, we don't expect them to remain down for long. The good news is that home builders continue to break new ground at an expanding rate. Housing starts increased 0.8% in February, pushing starts up to an annualized rate of 917,000 units. The trend in permits portend increased activity heading into spring. Permits rose 4.6% to an annual pace of 946,000 units in February. When viewed from a longer-term perspective, you can see home builders have made significant progress and have room to accommodate more progress this year. Rising prices will continue to move the housing recovery along. Zillow reports that home values rose for a 16th-consecutive month in February. Zillow's home price index shows the average home value at $158,100. Of course, within the context of an entire country that doesn't mean much. What's meaningful is that monthly and annual price appreciation was recorded in 30 of the largest markets Zillow follows. Rising prices, in turn, reduce negative equity. CoreLogic's research shows that 200,000 homes were lifted into positive equity during the fourth quarter of 2012. This brings the total number of homes that moved to positive from negative to 1.7 million in 2012. Time plays a role as well: amortization and rising prices are working together to hurry the process along. In other words, time really does heal all wounds, though it hardly feels that way at the beginning of the process.   Economic Indicator Release Date and Time Consensus Estimate Analysis New Home Sales (February) Tues., March 26, 10:00 am, ET 435,000 Units (Annualized) Important. Low inventory and tight credit is hampering sales growth. Mortgage Applications Wed., March 27, 7:00 am, ET None Important. Higher lending rates have slowed applications, but the recent rate drop should rekindle activity. Pending Home Sales Index (February) Wed., March 27, 10:00 am, ET 2% (Increase) Important. Existing-home inventory is showing signs of expanding, which bodes well for sales growth. Gross Domestic Product (4th Quarter 2012) Thurs., March 28, 8:30 am, ET 0.6% (Annualized) Important. This revised version of GDP points to an uptick in economic activity, which could lead to an uptick in interest rates.   It Really is a Small World After All Mortgage rates were down significantly this past week. In some instances, they were down over 10 basis points. For this, we can thank (blame?) the tiny country of Cyprus. It seems odd that a tiny Mediterranean-sea country of 1.1 million inhabitants would influence interest rates in a country – the United States – with a population of 313 million. So what's going? Today's financial institutions are closely intertwined – though lending, borrowing, trading, and market-making relationships. This raises the contagion risk, where something bad in one country can quickly spread. We saw that occur in 2008 when many of the world's largest financial institutions were at risk of collapse. In Cyprus' case, a banking panic was initiated when the European Union insisted Cyprus implement a 6.75% tax on bank deposits less than 100,000 euros and a 9.9% tax on larger deposits. In exchange, Cyprus banks would receive a ten-billion euro bailout. The fear is that other European countries ( Italy in particular) could be forced to impose the same tax, thus resulting in a mass run on those banks. In short, fear and uncertainty again sent investors to the haven investments of U.S. Treasury and U.S. mortgage-backed securities; hence the lower mortgage lending rates, which we don't expect to last. Fear passes quickly these days, so we suggest borrowers act quickly.