Mortgage update for the week of August 26, 2013

Keeping you updated on the market! For the week of August 26, 2013

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MARKET RECAP Expectations Theory Sways Markets Existing-home sales soared to 5.39 million annualized units in July, far surpassing the consensus estimate for 5.12 million units. The NAR cited “panic” over rising interest rates for the surge in buying activity. “ Panic” might be an overstatement. Expectations, more than anything, was the likely motivator. More consumers, shocked by the spike in lending rates that occurred two months ago, expect both interest rates and housing prices to push higher. Therefore, it's understandable that buyers acted as they did. The past – at least the near-term past – is frequently prologue. On the lending front, rates have moved to a higher plateau compared to the plateau they occupied earlier this year. This past week, mortgage rates moved notably higher again, as if they were attempting to reach an even higher plateau. Rates today are about where they were two years ago. Rising rates have jarred memories: Everyone today now realizes rates don't move only down; they also move up. A few years ago, it appeared home prices could move only down. Since then, price action continues to prove that's hardly the case. The median price of an existing home rose to $213,500 in July, a 13.7% increase from July 2012. This marked the 17th-consecutive month where prices have increased year over year. As improbable as this might seem, the national median price is a mere 7.3% below the all-time high of $230,000 that existed seven years ago. It can be dangerous to extrapolate a trend indefinitely; trees don't grow to the sky, submarines don't descend to the depths of the ocean. But trends can hold for a while. We expect both trends – higher mortgage rates and higher housing prices – to prevail into the relevant future. The Federal Reserve assures us that mortgage rates will occupy a higher plateau. (We further explicate this subject below.) Home prices will remain at a higher plateau as well. Inventory remains tight, and buyer interest continues to expand. Just as important, the composition of the housing market is as healthy as it has been in years: Foreclosures and short sales continue to drop as a percentage of overall sales. Concurrently, price appreciation continues to lift more owners above water. Expectations point to less affordable housing in the future, so it's perfectly logical to act (buy) on those expectations today.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
S&P/Case-Shiller Home Price Index (June)	Tues., Aug. 27, 9:00 am, ET	0.5% (Monthly Increase)	Important. Home-price appreciation is a major positive that's lifting consumer confidence.
Mortgage Applications	Wed., Aug. 28, 7:00 am, ET	None	Important. Expectations of higher rates are driving purchase-application volume.
Pending Home Sales Index (July)	Wed., Aug. 28, 10:00 am, ET	0.7% (Increase)	Important. Increased supply and rising prices are spurring more sales activity.
Gross Domestic Product (2nd quarter 2013)	Thurs., Aug. 29, 8:30 am, ET	2.4% (Annualized Growth)	Important. GDP growth is expected to be revised upward, though it remains sluggish .

 

It's All About the Federal Reserve Until the recent past, interest rates were driven by the economy: recession or expansion, job growth, inflation, risk aversion, productivity, etc. These factors would converge to form an interest rate that best reflected consumers and investors expectations. It's different today. The Federal Reserve is the overriding factor in lending markets. Everyone is trying to game the Fed's next move on quantitative easing. Specifically, everyone is attempting to forecast when the Fed will begin tapering its purchases of Treasury notes and bonds and mortgage-backed securities. The Fed's purchases – its demand – for these instruments is largely responsible for the low lending rates we've enjoyed over the past few years. The chief reason mortgage rates moved so high so quickly in past months is that many market watchers expected the Fed to begin tapering next month. Markets, after all, are anticipating entities (they act on expectations), so mortgage rates naturally move higher on the prospect of higher rates. Based on the minutes of the last meeting of Fed governors, the Fed is unlikely to begin tapering as early as September. Inflation remains low and job growth remains sluggish. We don't expect either to pick up soon, which is why we think tapering could be delayed until later in 2013, and possibly into 2014. But as long as market participants are anticipating higher interest rates, there is a good chance rates will continue to rise. (Paradoxically, when the Fed actually begins tapering – when expectations become reality – rates could actually fall.) Needless to say, this is confounding market, but it's still one in which we think it's more prudent to act today than to wait and anticipate tomorrow. Article courtesy of Patti Wilson, W. J. Bradley.

Mortgage Matters -Update for the week of August 19, 2013

Keeping you updated on the market! For the week of August 19, 2013

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MARKET RECAP Optimism Reigns, Tread Cautiously  Homebuilders haven't felt this upbeat since the waning days of 2005. We know this because the NAHB/Wells Fargo Homebuilder Sentiment Index hit 59 this month, a number last seen nearly eight years ago. Moreover, it appears unlikely optimism will fade anytime soon: Many homebuilders are reporting higher current sales and stronger pricing. Spirits are always buttressed when buyers are willing to enter the market when prices are rising. On the existing-home side, the logjam of tight supply appears to be loosening. Nationally, the number of existing homes for sale remains 5% lower than the number that existed this time last year. Inventory, though, was up 1.4% in June. In many local markets inventory is being drawn in by persistent price appreciation. This is no surprise: rising prices always draw more supply to market. Rising prices have also drawn more housing scrutiny. This, too, is no surprise. The closely followed S&P/Case-Shiller Home Price Index is up 12.1% year over year. Of course, real estate markets are local markets, and in many local markets gains far exceed the national numbers ( Las Vegas and Phoenix come ready to mind). Double-digit average annual price increases are unsustainable over the long term. Price growth within the 2%-to-5% range is the norm. Therefore, we're not surprised to see growing speculation on the prospects of another housing bubble. On that front, we're not terribly concerned. We don't think housing is even close to approaching the bubble that developed seven years ago. Much of the strong price gains we're seeing are off a severely depressed base (again Las Vegas and Phoenix come to mind). When the bigger picture is brought into focus, prices nationally remain reasonable. Since the housing bubble burst in 2007, people continually question whether housing is a safe investment? This is understandable: The perception before the bubble burst was that houses were always a safe investment. It's important to keep in mind that safety, reward, and risk aren't imbedded in an asset class – houses, stocks, bond, etc. – they're embedded in time and price. A house purchased in 2000 was safe and offered a lot of reward with little risk. By 2007, the paradigm had reversed – houses were unsafe and risk was high. As a general rule, the longer the uptrend is sustained, the more risky an asset class becomes. We liken today's housing market to the middle innings of a baseball: There is still more action (price gains) ahead. But there is also plenty of action already behind us, which is why when housing was skimming along the bottom (at the beginning of the game), we continually pounded the table to get in the game.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Aug. 21, 7:00 am, ET	None	Important. Rising rates could stimulate higher purchase-loan activity.
Existing Home Sales (July)	Wed., Aug. 21, 7:00 am, ET	5.12 Million (Annualized)	Important. Rising inventory is helping to lift sales volume.
Federal Reserve FOMC Minutes	Wed., Aug. 21, 2:00 pm, ET	None	Important. Hawkish commentary on low rates and bond purchases will push interest rates higher.
New Home Sales (July)	Fri., Aug. 23, 10:00 am, ET	485,000 (Annualized)	Important. Sales are expected to ease in July, but the long-term trend remains on an up-sloping trajectory.

 

Pressure is Mounting For the past six weeks, mortgage rates have been placid – trending in a very tight band. Next week, they could break out of the upper band. We say that because the 10-year U.S. Treasury note – a benchmark lending rate – has broken out to the upside. As the 10-year note goes, so, too, usually goes the 30-year fixed-rate mortgage. Over the past few months, we've frequently opined that the days of the 3.5% 30-year loan that prevailed earlier this year were gone and were unlikely to return anytime soon. At the same time, we've opined that rates are primed to rise. We continue to hold these opinions to this day. That said, we don't see mortgage rates moving materially higher in the short term. Economic growth remains anemic, and job growth continues to lag behind the Federal Reserve's target rate. Therefore, the institutional imperative supports keeping rates low. Our assessment of the mortgage-rate environment points to mildly rising rates (perhaps five to 10 basis points). Longer-term – over the next year – the probabilities overwhelming point to rates moving higher, which is why we continue to say that the risk in this market resides in procrastination.

Article courtesy of Patti Wilson W.J. Bradley.

Mortgage News from Sanibel Florida

Keeping you updated on the market! For the week of August 12, 2013

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MARKET RECAP More of the Same, But for How Long? For now, the cavalcade continues; that is, the cavalcade of home-price increases that began nearly two years ago. CoreLogic's Home Price Index shows prices increased 1.9% in June compared to May, which marks the 16 th consecutive monthly increase. This latest increase lifts the index's year-over-year gain to 11.9%. For 2013, home prices are already up nearly 10%. But not all indicators suggest the trend will continue unabated. Trulia's data show asking prices dropped 0.3% in July compared to June, which marks the first monthly decrease since this past November. A slowdown in home-price gains wouldn't necessarily be bad. We've argued in the recent past, that double-digit yearly price increases are unsustainable. A lower rate of annual increase would be a more sustainable rate, and one more attuned to historical norms. The last thing any of us wants is another bubble market followed by a bubble burst. We've also a seen a slowdown in the rise in the price of mortgage funding over the past month. Rates, though higher than they were six months ago, have stabilized. What's more, it appears consumers are becoming acclimated to the new higher-rate reality. A recent survey by Fannie Mae finds that 60% of respondents believe interest rates will increase over the next 12 months. At the same time, three out of four of these respondents believe now is a good time to buy a home. The prospect of buying an appreciating asset appears to trump the higher cost of financing that asset. But are the respondents expectations properly calibrated? After the latest employment report, we are less sure of interest rates rising. The employment report, issued the past Friday, points to sluggish job growth. In July, businesses increased payrolls by only 162,000, roughly 20,000 below most economists' expectations. To be sure, the unemployment rate dropped to 7.4% from 7.6%, but this was attributed to a lower labor-participation rate, which fell to a 35-year low. The current trend in labor participation runs counter to recent history. After a recession, the labor force usually grows. But this post-recession period has been an anomaly. We are four years into a recovery, yet labor-force growth, as well as job growth, remains stubbornly stagnant. Many economists believe disappointing job numbers won't dissuade the Federal Reserve from throttling back on quantitative easing. In fact, a few economists speculate the Fed could throttle back as soon as next month. At a minimum, that means mortgages won't drop any further. We're not convinced, and we don't think most market participants are either. Mortgage rates have held steady for the past six weeks, as has the yield on the benchmark 10-year U.S. Treasury note. Given stubborn economic weakness, we expect quantitative easing to continue through the remainder of 2013. Moreover, quantitative could even extend deep into 2014, depending on who takes the reigns of the Federal Reserve next year after Chairman Ben Bernanke steps down. Of the frontrunners, one in particular, Janet Yellen, appears keen to keep the Fed's current monetary policies going for a while longer.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Aug. 14, 7:00 am, ET	None	Important. Purchase activity is picking up as consumers become acclimated to higher lending rates.
Consumer Price Index (July)	Thurs., Aug. 15, 8:30 am, ET	All Goods: 0.2% (Increase) Core: 0.2% (Increase)	Important. Consumer-price inflation remains below the Federal Reserve's target rate and will have little impact on interest rates.
Home Builder's Index (August)	Thurs., Aug. 15, 10:00 am, ET	55 Index	Important. Builders remain confident, but optimism appears to be plateauing.
Housing Starts (July)	Fri., Aug. 16, 8:30 am, ET	895,000 Units (Annualized)	Important. Starts are expected to return to their upward trajectory after June's disappointing pullback.

 

The End of the 30-Year Fixed-Rate Loan?  President Obama caused a stir this week when he said he'd like to see the private sector take over as the primary driver behind the mortgage market. The president went as far as to say he'd like to see Fannie Mae and Freddie Mac dismantled. It's a worthwhile idea, but there are a few obstacles. For one, the government, through Fannie Mae, Freddie Mac, the FHA, and the Department of Veterans Affairs, backs 90% of all newly originated mortgages. For the most part, there really is no private mortgage market. At the same time, the president said he'd insist on keeping the 30-year fixed-rate mortgage affordable at today's low rates. Unfortunately, the goal of the prevailing rate on the 30-year fixed-rate mortgage is incongruous with the goal of privatizing the mortgage market. We say that because private money won't lend for 30 years at today's rates without government backing. So does this mean the end of the 30-year fixed-rate mortgage? That's unlikely. At the same time, it's also unlikely we'll see a mortgage market dominated by the private sector. In other words, it looks like business as usual into the relevant future. Article Courtesy of Patti Wilson of W. J. Bradley.

Keeping you updated on the market! For the week of July 29, 2013.

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MARKET RECAP More of the Same With Mortgage Rates For the past couple weeks, we've been speculating that mortgage rates have likely plateaued and were unlikely to push much higher. Our rationale was similar to that of many market participants: The threat of the Federal Reserve tapering from quantitative easing (money pumping and low interest rates) was overstated. A meaningful spike or dip in rates could be in waiting next Friday with the release of the July employment report. Job growth significantly higher than the consensus estimate could lead to a rate spike; disappointing job growth will likely drop rates (though nowhere near to the March lows). Job growth, a benefit of economic growth, means housing will continue to improve, even if interest rates rise. Job growth (and to a lesser extent wage growth) is key: More people working means more people who can afford a home and financing costs. For now, though, housing looks good. We say that even though sales of existing homes came in below expectations for June. The good news is market composition is healthier. Only 15% of sales were related to distressed properties – the lowest reading since the number was tracked in 2008. At the same time, the market is shifting more toward owner-occupied buyers and away from investors, who comprised only 17% of purchases for June. Prices also continue to trend higher. The national median price for an existing home rose a strong 5.5%, lifting the national number to $214,200. Rising prices, in turn, will further lift inventory, which remains tight and is limiting sales in many local markets. As for new homes, they're moving in the opposite direction: sales are up, but prices are down. New home sales, at 497,000 units on an annualized rate, handily beat the consensus estimate for 481,000 units. The pace of new-home sales is on a strong two-year run, and is approaching levels unseen since 2008. We were equally encouraged to see that sales maintained their strength in May and June despite the spike in mortgage rates. It's possible that new home sales maintained their momentum on price discounting. For June, the national median price of a new home was down 5% to $249,700. Year over year, though, the price trend remains up, with year-over-years gains approaching 10%. Given that supply remains tight, at 3.9 months supply at the current sales rate, homebuilders should be able to maintain pricing power into the foreseeable future.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Pending Home Sales Index (June)	Mon., July 29, 10:00 am, ET	5.0% (Increase)	Important. Underlying economic strength should lead to sales gains over the next few months.
Mortgage Applications	Wed., July 31, 7:00 am, ET	None	Important. Purchase applications need to gain momentum to support home-sales and price gains.
Federal Reserve FOMC Meeting Announcement	Wed., July 31, 2:00 pm, ET	None	Important. Dissent on quantitative has risen in recent months. Further dissent will pressure interest rates to rise.
Construction Spending (June)	Thurs., Aug. 1, 10:00 am, ET	6.0% (Increase)	Important. Gains in residential construction spending is a plus for economic growth.
Employment Situation (July)	Fri., Aug. 2, 8:30 am, ET	Unemployment Rate: 7.5% Payrolls:188,000 (Increase)	Very Important. Monthly payroll gains averaging close to 200,000 will push the Federal Reserve to taper quantitative easing.

 

Flexibility is Becoming the New Norm One of the more recurring laments over the past few years has centered on tight, rigid lending. We've all known someone who should have received financing, but didn't because lenders were too risk averse. One upside of an improving market is a willingness to accept more risk, and we are seeing more risk acceptance in the mortgage market. Down payment requirements are easing, while fewer borrowers are being turned down on credit scores alone. Piggyback loans have also resurfaced, as have stated-income loans. On the latter, far too many self-employed people have been excluded from the mortgage market. Fortunately, that's changing, which means more people are added to the pool of home sellers and buyers. More participants lead to more robust and more stable markets. Even subprime loans are coming back to serve a market of borrowers who have healthy incomes but who suffered a short sale or credit hit when the market imploded in 2008 and 2009. To be sure, we all want a more accommodating mortgage-lending market. The good news is we are making progress in that direction. Article courtesy of Patti Wilson, W.J.Bradley.

Update on FLorida Mortgages July 22, 2013.

Keeping you updated on the market! For the week of July 22, 2013

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MARKET RECAP Fed Chairman Settles Mortgage Markets After sprinting a full percentage higher over the past two months, the 30-year fixed-rate mortgage has finally taken a breather. Last week, the bellwether loan was staid, holding near the prior week's rate. This week, the rate actually fell a few basis points. Lending markets have finally settled down, and for this we can thank Federal Reserve Chairman Ben Bernanke, who assured credit-market participants the Fed is unlikely to taper QE3 in the near future. This means the Fed will continue to purchase long-term U.S. Treasuries and mortgage-backed securities. In short, mortgage rates have likely plateaued for the near future, which gives frantic buyers some breathing room. The interesting lesson in the mortgage-rate surge is that it failed to materially impact the purchase market. Indeed, the four-week purchase-application trend held steady. What's more, the latest data from the Mortgage Bankers Association show purchase applications actually rose 1% last week. Purchase applications are obviously related to home sales and building activity. On the latter, there's concern rising rates could translate into falling activity because of falling consumer demand. The latest data on housing starts, released Wednesday, raised a few eyebrows, and a few concerns. Housing starts were down significantly, dropping 9.9% to 836,000 units on an annualized basis in June. After the news was released, we ran across a number of comments forecasting the end of the housing recovery. Upon closer inspection, though, it appears housing's imminent demise was highly exaggerated. We say that because the drop in starts was lead by the smaller and more volatile multifamily component, which declined 26.2% in June after rising 28.2% in May. In contrast, the larger and more stable single-family component slipped a modest 0.8% for the month after rising 0.5% in May. It's informative to consider the longer-term starts trend; by this measure, the residential construction industry looks quite healthy. Over the first   half of 2013, multifamily starts are up nearly 34% from the same year-ago period, while single family starts are up 20%. These are meaningful increases in activity and tell us we've come a long way in a short time. Moreover, there is plenty of room left to run. Starts remain low when viewed from a historical perspective. From 1959 through 2000, roughly 1.5 million housing units were started annually. (And keep in, the population was meaningful smaller back then.) So, yes, we've come a long way on residential construction, but we still have long way to go. This suggests that housing will remain healthy and will remain a key economic driver for at least the next couple years. And even if mortgages continue to climb, we think that's unlikely to change.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Existing Home Sales (June)	Mon., July 22, 10:00 am, ET	5.25 Million (Annualized)	Important. More supply coming to market will lead to higher sales volume in coming months.
FHFA House Price Index (May)	Tues., July 23, 9:00 am, ET	0.5% (Increase)	Moderately Important. Home prices will continue to post gains across most local markets.
Mortgage Applications	Wed., July 24, 7:00 am, ET	None	Important. Purchase activity should show noticeable improvement thanks to stabilizing rates.
Durable Goods Orders (June)	Thurs., July 25, 8:30 am, ET	1.0% (Increase)	Moderately Important. Rising orders are reflective of rising consumer confidence.

 

Don't Look Back, Look Ahead Anchoring can be a difficult psychological trait to overcome. By that, we mean the inclination to believe that the past will either return or be will maintained in the future. Anchoring occurs frequently in the investment world. Investors buy a stock, see it's share price cut in halve, and yet despite poor prospects, they'll continue to hold, believing that it's inevitable their purchase price will again prevail. We see the same phenomenon in the mortgage market. Many potential borrowers believe it's inevitable that mortgage rates will again hit multi-decade lows of a few months ago. Tomorrow will somehow present yesterday's opportunities. This isn't to say yesterday's prices can't return, but yesterday isn't today: the outlook and the variables influencing today's market are decidedly different. Today, we are looking at stronger economic growth and stronger residential construction across most of the United States. Neither variable bodes well for lower lending rates. The point we want to emphasis is to keep focused on the future, and the variables – Federal Reserve tapering, job growth, rising consumer spending, higher housing demand and construction – that will prevail in the future. With the future in mind, it's becoming increasingly difficult to make a case for a lower-rate lending environment.

Article courtesy of Patti Wilson, W.J.Bradley Bonita Beach FL.

Mortgage Matters July 15, 2013

Keeping you updated on the market! For the week of July 15, 2013

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MARKET RECAP Mortgage Rates Hit Two-Year High We know more than a few people who are smacking themselves on the forehead these days, frustrated they didn't take advantage of the mortgage rates that prevailed two months and 75-basis points ago. Frustration stems from holding out for another 25-basis point drop. You may know it by the popular idiom “penny wise, pound foolish:” Hope to save 25-basis points, but loose 75-basis points in the process. Of course, no one knows with certainty where mortgage rates are heading, but whenever a market has been in a sustained trend, and mortgage rates were in a sustained downward trend for years, the probability grows that each successive day will bring a reversal of that trend. (Economists refer to this phenomenon as Minsky's “Financial Instability Hypothesis.”) To be sure, mortgage lending rates are higher, but not unreasonably so. Today's rates still remain attractive from a historical perspective. The good news is that there have been a few positives associated with rising rates. Though they have slowed refinance activity considerably, they have prompted more homebuyers into action, for fear rates could go higher still. We're not surprised; we've noted many times in the past that anticipation rules people's actions. With all the focus on mortgage rates over the past few weeks, it's worth noting that the housing market nationally is as healthy as it has been in years. CoreLogic's latest data on distressed properties reveal just how healthier the market has become. The inventory of properties in a state of foreclosure fell 29% year over year in May, which means fewer than 2.3 million mortgages – or 5.6% of home loans – remain seriously delinquent. This is the lowest level since December 2008. At the same time, Lender Processing Services data show the number of borrowers who remain underwater fell 47% from the first quarter of 2012 to the first quarter of 2013, which means the percentage of underwater borrowers has dropped to 14.7% of all active loans. This, too, is a multi-year low. Rising home prices and rising consumer demand for homes will continue to reduce distressed inventory and lift more homeowners into positive equity. When stronger job growth is factored in, we're looking at a very healthy outlook for both existing- and new-home sales over the next 12 months. With that said, many pundits remain focused on rising mortgage rates, but we believe unduly so. As long as the economy continues to improve and create jobs, the housing market will continue to improve regardless if rates rise. We were in the minority a year ago when we said mortgage rates were no longer the key variable in the recovery. It appears we were right on that account.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Price Index (June)	Tues., July 16, 8:30 am, ET	All Goods: 0.3% (Increase) Core: 0.2% (Increase)	Important. The CPI remains below the Federal Reserve's trigger rate of 2.5% and should not impact interest rates.
Homebuilders' Index (July)	Tues., July 16, 10:00 am, ET	53 Index	Important. Homebuilder sentiment points to stronger starts and higher new-home sales through 2013.
Mortgage Applications	Wed., July 17, 7:00 am, ET	None	Important. Rising rates continue to slow refinances, but the four-week purchase trend remains stable.
Housing Starts (June)	Wed., July 17, 8:30 am, ET	954,000 Units (Annualized)	Important. Housing is once again becoming an important driver of economic growth.

 

Job Growth and Interest Rates Last week, we mentioned that Federal Reserve monetary policy is, in essence, closely tethered to job growth: The Fed won't reign in loose monetary policy and low interest rates until the unemployment rate is around 6.5%. The problem, as we noted, is that the unemployment rate is a moving target. Yes, unexpectedly strong job growth can occur, as what occurred in June, with payroll growth hitting 195,000 for the month, roughly 25,000 higher than most estimates. At the same time, unemployment held steady at 7.6% because more people have entered (or re-entered) the job market. So it would appear the Fed would be firmly committed to holding interest rates low for the foreseeable future until 6.5% unemployment is achieved. It's becoming more likely that's not the case. The minutes from the latest meeting of Federal Reserve policymakers show that half want to wind down quantitative easing (money printing, low interest rates) by the end of the year. Given the unimpeded rise in interest rates over the past two months, it's become obvious many credit-market participants are expecting the Fed to wind down sooner than later. The point we need to emphasize is that waiting for 3.5% 30-year fixed-rate mortgages will likely mean waiting for quite a while. At this point, 5% is the more likely future rate, which makes today's rates, in the mid-4% range, look attractive in comparison. Article courtesy of Patti Wilson of W.J. Bradley.

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