Home Builders Take Flight; Mortages Remain Grounded

MARKET RECAP Home Builders Take Flight; Mortgages Remain Grounded Home builders are feeling as chipper as they have all year. The National Association of Home Builders (NAHB) reports that its sentiment index hit 55 this month. In other words, sentiment is more optimistic than pessimistic. The NAHB also reports a “noticeable” rise in serious buyers. Noticeable is a vague word, but what we see in the hard numbers of housing starts makes it appear true. Starts surged to an annualized pace of 1.093 million units in July, a 15.7% increase from the 945,000 units in June. Even more encouraging, single-family starts picked up pace to 656,000 in July, an 8.3% increase over June. What's more, single-family starts are expected to hold at these higher levels. This is good news because single-family starts pack the most punch economically. They produce the most spillover effect – to lumber, construction materials, furniture stores, home-improvement stores, and on and on. The impact can be felt throughout the economy. Our bread might be mostly buttered through the sale and financing of existing homes – because there are many more of them – but in terms of contributing to economic growth, new-home activity is where it's at. Now, what we would like to see are more homes – new and existing – financed with a mortgage. Unfortunately, we still see insufficient mortgage activity. The latest interest rate down-draft has pushed mortgage rates down to their lowest level of the year. The rate on the 30-year fixed-rate loan hovers just above 4% in many markets. This has helped lift refinances. Data from the Mortgage Bankers Association show refinance applications were up 3% last week. Unfortunately, purchase applications were down 0.4%, and are at a six-month low. Purchase applications are up for new homes, which is no surprise; new single-family homes are rarely investment properties. The existing-home market for purchase applications continues to lag, though, and points to stagnating sales growth. We understand that conforming mortgage standards remain too strict for many people's liking, but we've noted frequently throughout 2014 that credit availability is on the rise. What's more, data from the Federal Reserve show more lenders are willing to lend to more people. Potential home buyers are a bit too conservative in our opinion. To be sure, memories of the housing boom and subsequent bust still linger. But this market is much healthier than it was five years ago, and that's a message that can't be over-emphasized.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
New Home Sales (July)	Mon., Aug. 25, 10:00 am, ET	435,000 (Annualized)	Important. The monthly rate of sales should continue to improve based on recent home-builder data.
S&P/Case-Shiller Home Price Index (June)	Tues., Aug. 26, 9:00 am, ET	9% (Year-Over-Year Increase)	Moderately Important. The rate of price appreciation continues to slow in more markets.
Mortgage Applications	Wed., Aug. 27, 7:00 am, ET	None	Important. Purchase activity still shows no sign of picking up.
Pending Home Sales Index (July)	Thurs., Aug. 28, 10:00 am, ET	1.0% (Increase)	Important. Existing home sales continue to flounder on low inventory.

 

Renting v. Owning Over the past couple years, we've read a plethora of articles like this recent one at Business Insider that extol the virtues of renting. Most of the articles focus on expenses, liquidity, and mobility. On these metrics, renting appears to have the advantage. But when we read these articles, it frequently becomes apparent the writer isn't observing the complete picture. Full expenses can be tricky to capture. Buying a home includes closing costs, moving expenses, utilities, and maintenance. With renting, you have moving expenses and utilities. Maintenance is generally covered by the landlord. But the big picture must be considered: Renters move more frequently than buyers. They incur more moving expenses and frequently forfeit a good chunk of their damage deposit with each move. Liquidity is also a considered a drawback of owning. You can't sell your home as efficiently as you can sell a share of stock. True enough, It does take time and additional cost to sell a home at the market price. This lack of liquidity is an issue, but it isn't as onerous as we are lead to believe. A properly priced home, which reflects market price, will move in short time. Liquidity, in turn, impacts mobility. The time it takes to buy and sell a home impedes your ability to move as freely as you want. But pro-renters frequently fail to mention that as soon as they sign that one-year lease, their mobility is seriously impeded unless they are willing to incur considerable costs. But if we look at two homebodies, we really see the advantage in buying: A buyer and a renter move into a home with no intention of moving. P&I for the buyer is $1,000 per month with a 30-year fixed-rate mortgage; the renter pays $1,000 in rent and signs one-year leases. Let's say rent increases an average of 3% annually Thirty years from now, the buyer pays his final year of $1,000 in P&I; the renter pays $2,427 in monthly rent. In the 31 st year, the buyer owes no P&I, but the renter now pays $2,500 in monthly rent. When the big picture is considered, owning comes out ahead more often than people are lead to believe. Article courtesy of Patti Wilson, American Momentum Bank.

Is This the New Normal in Mortgage Lending?

MARKET RECAP Is This the New Normal in Mortgage Lending? At the beginning of the year, nearly every mortgage commentator (us included) projected mortgage rates would adhere to a northeasterly trajectory by this time. The rate on the 30-year fixed-rate loan would be above 4.5% (likely well above) as we headed into the waning days of 2014. So much for predictions. Here we are, with nearly two-thirds of the year in the rear-view mirror, and mortgage rates continue to hover near 2014 lows. Indeed, Bankrate.com's latest survey has the 30-year fixed-rate loan averaging 4.27% for the past week; Freddie Mac's survey shows it at 4.12%. Our prediction on job growth has turned out closer to what we expected, with the economy now averaging 200,000+ new jobs a month – a feat the economy has performed for the past six months. Historically, when economic growth kicks into gear (as evinced by stronger job growth) interest rates kick into gear to trend higher. This time around, they've trended lower. There are a few mitigating factors this time around. The most prominent factor is that this simply doesn't feel like an economic recovery. After past recessions (2001 and 1991), there was a sense of heightened activity and optimism. Here we are, nearly five years past the 2009 recession, and a sense of uncertainty and pessimism lingers. Therefore, low interest rates linger. That interest rates have remained so low for so long has unintended consequences. They perpetuate the belief all is not well. When we look to Europe, we see the rate on German bonds lower than our own. A 10-year German government bond yields 1%. The same bond in the United States yields 2.4%. At the lower maturity range, we actually find negative interest rates: The 2-year German note yields a negative 0.01%. You actually lose money buying a 2-year German note. We see similar rates throughout Western Europe and Japan. This tells us that most develop economies continue to stagnate. If we look to Japan, we see that an economic recovery shouldn't be taken as a given. Japan's economy over the past 20 years has averaged roughly 1% annual GDP growth . For the past 16 years, the rate on Japan's 10-year government note has been below 2%. Over the past year, it has trended down to a mere 50 basis points. Japan, in short, is in a prolonged funk. To be sure, the U.S. economy posted strong gross domestic product (GDP) growth of 4% in the second quarter of 2014, but this was after a 2.1% contraction in the first quarter. Many of our colleagues argue that we need low interest rates to support housing, but low interest rates are also indicative of a sluggish economy. At this point, we would be willing to trade higher interest rates for more economic growth. That's why we are not keen on perennially low interest rates becoming the new normal.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Home Builders' Sentiment Index (August)	Mon., Aug. 18, 10:00 am, ET	54 Index	Important. Improving builder sentiment points to improving new-home sales.
Housing Starts (July)	Tues., Aug. 19, 10:00 am, ET	979,000 (Annualized)	Important. The rate of starts is picking up pace and points to increased housing activity.
Mortgage Applications	Wed., Aug. 20, 7:00 am, ET	None	Important. Purchase activity needs to increase to maintain a healthy market.
Existing Home Sales (July)	Thurs., Aug. 21, 10:00 am, ET	5.02 Million (Annualized)	Important. Sales continue to languish on low inventory and rising prices.

 

If a Tree Falls and No One Hears It, Does It Make a Sound? The above question is philosophical, but also pertinent: If a 4% interest rate is available on a 30-year fixed-rate loan and no one takes out a loan, does it matter? Mortgage rates cross the board remain low, and yet few people are taking advantage of them. Demand for refinances remains weak, though this is no surprise. Most borrowers who want to refinance already have. The fact mortgage rates remain low and move within a tight range also crimps refinance demand. More discouraging is the fact purchase applications have yet to pick up the slack. Purchase-application demand remained flat in the August 8 week, down 1.0% for the second straight week. Year over year, purchase applications are down 10%. At this point, we had counted on purchase activity, driven by owner-occupiers, to be leading mortgage activity. This hasn't been the case nationwide, and this is frustrating. It's a sign that the sense of uncertainty and pessimism we note above is warranted. Fortunately, housing markets are local markets. What occurs at the national level often has little relation to what occurs at the local level. Hot and cold markets can be no farther than a mile apart. That said, we'd feel a lot better if more people entered the housing market and made some noise by financing their purchase with a low-rate mortgage loan. Article Courtesy of Patti Wilson, American Momentum Bank.

More Good News on the Employment Front August 6, 2014

MARKET RECAP More Good News on the Employment Front Six in a row, which is the number of months payrolls have increased 200,000-or-more per month. The latest employment data show 209,000 jobs were created in July. At the same time, the unemployment rate inched up to 6.2% from 6.1%. More jobs and more unemployment? This phenomenon is the result of a higher labor participation rate. As more jobs become available, more people are compelled to enter the labor force. At the beginning of the year, we mentioned that job creation running at 200,000+ per month was key to sustaining the economy and housing. The good news is the economy is meeting our expectations for job growth. In time, we expect to see a spillover effect: Housing sales, construction, and investment will rise as people become more settled in their new jobs. Interestingly, strong job growth is holding little sway over interest rates. When job growth picks up, interest rates usually pick up with it. That hasn't been the case. Mortgage rates continue to hold near 2014 lows. Bankrate.com's latest survey has the national average on the 30-year, fixed-rate loan at 4.29%; Freddie Mac's survey has it at 4.14% To understand why mortgage rates remain low look no further than the yield on the 10-year U.S. Treasury note. Its yield is down to 2.4%. This bellwether security yields 60 fewer basis points than it did at the beginning of the year. Interest rates remain low because consumer-price inflation remains low. A rush to quality is another factor. Quality interest-paying investments (like bonds and notes) have gained additional support in recent months due to turmoil surrounding the Ukraine and Russia, and, separately, the Middle East. Investors have flocked to haven investments – like the 10-year Treasury note – to wait out the turmoil. Their demand, in turn, has helped keep interest rates in general, and mortgage rates in particular, low. Low rates are certainly good news for anyone seeking a mortgage these days. The fact that lending standards continue to ease is more good news. A recent survey of lenders by the Federal Reserve shows that lenders have indeed made credit available to more people. Then again, we've known this for some time. The MBA's Mortgage Credit Availability Index (MCAI) has risen substantially over the past nine months, and has trended higher over the past two years. Expect this important trend to continue because of falling mortgage delinquencies. The delinquency rate has dropped five-consecutive quarters and is at the lowest level since the fourth quarter of 2007, according to the MBA's National Delinquency Survey . An expanding economy, job growth, low interest rates, and available credit: This is the perfect storm for anyone considering a housing change. We suggest anyone interested in a home to take advantage of today's opportunities before the storm passes – and it will pass one day.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Aug. 13, 7:00 am, ET	None	Important. Purchase activity remains frustratingly low, which means the housing market has yet to normalize.
Retail Sales (July)	Wed., Aug. 13, 8:30 am, ET	0.2% (Increase)	Moderately Important. Rising sales are reflective of an improving economy.
Import Prices (July)	Thurs., Aug. 14, 8:30 am, ET	0.1% (Increase)	Moderately Important. Import prices remain subdued and non-inflationary.
Producer Price Index (July)	Fri., Aug. 15, 8:30 am, ET	0.3% (Increase)	Moderately Important. Producer prices have increased in recent months, but the increase is due largely to volatile energy prices.

 

Why We Long for Normalization The Phoenix housing market provides an insightful, if not cautionary, tale. If you enjoy roller-coaster rides, then Phoenix is your kind of housing market. Over the past 10 years, Phoenix has seen a bubble followed by a bust followed by a strong upswing. According to data from Case-Shiller, Phoenix house prices bottomed in August 2011, traded flat for the remainder of the year, and then increased 23% in 2012 and 15% in 2013. Now it appears Phoenix has crested and could be headed down again. Overall housing sales dropped 17% year over year in July, according to the Arizona Regional Multiple Listing Service . Investors, who have driven Phoenix's market over the past couple years, appear to be loosing interest: Cash sales dropped to 25% of total sales in July compared to 43% a year ago. We imagine most people don't like roller-coaster rides in real estate. The whipsawing is much more painful when your wallet is involved. Volatility also tends to repel both buyers and sellers on the margin. Volatility raises uncertainty, and people don't want to feel uncertain when contemplating a big purchase like a house. Of course, we wish the best for Phoenix. But the key to Phoenix, and every other volatile housing market, is a return to single-digit annual price appreciation and a market driven by mortgage-financed owner-occupiers. Slow and steady always wins the race over the long haul, and always will in housing. Article Courtesy of Patti Wilson, American Momentum Bank.

Housing Takes a Medium Step Forward and a Big Step Back _ Market update for July 28, 2014

MARKET RECAP Housing Takes a Medium Step Forward and a Big Step Back It has taken nearly a year, but existing-home sales are finally moving in the right direction. Sales were up once again, climbing 2.6% to a seasonally adjusted annual rate of 5.04 million homes in June. This marks the third-consecutive month of national gains. The existing-home market appears as healthy as it has been for some time. Sales were up, and so were prices. The median price of an existing home increased a stout 5.3% month over month to $223,300. What's more, total existing-home inventory rose to a 5.5-month supply at the current sales pace. So we have rising inventory and rising sales, which point to a lower rate of price appreciation. As more supply comes to market, price growth will naturally ease (though the rate of easing will be tempered by additional demand). Slower price growth coupled with a consistent level of inventory and demand point to a healthier overall market. Many market participants were encouraged by double-digit annual price increases after the bubble burst in 2008, but double-digit annual increases aren't the norm. They can lead to another bubble if they continue for an extended period. This is why we welcome annual price appreciation in the low-to-mid single digits at the national level. Of course, local markets are impacted by variables unique to the area – demography, supply, demand, job growth, composition of jobs, etc. – but over the long-haul the rate of price appreciation and the rate of sales will tend to moderate to a lower-single-digit mean. The good news is the existing-home market is progressing at the national level. The bad news is the new-home market is regressing. This is somewhat surprising, given the strong gains in home-builder optimism in recent months. New-home sales were actually quite pitiful in June, plunging 8.1% month over month to 406,000 units on an annualized rate. The drop in sales raised supply to 5.8 months vs May's 5.2 months. Total new homes for sale increased to 197,000 vs 191,000. What's more, discounting couldn't even move inventory. The median price of a new home declined 3.2% month over month to $273,500. Year over year, the median price of a new home is up 5.3%, but sales are down 11.5%. If demand falls to pick up, either more discounting is in store or fewer homes will be constructed. If either scenario materializes, you can be sure builder sentiment will dive.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Pending Home Sales Index (June)	Mon., July 28, 10:00 am, ET	4% (Increase)	Important. Based on recent job-market strength, sales should continue to trend higher.
Mortgage Applications	Wed., July 30, 7:00 am, ET	None	Important. Purchase activity needs to trend higher to maintain existing-home-sales gains.
Gross Domestic Product (2nd Quarter 2014)	Wed., July 30, 8:30 am, ET	3.2% (Annualized Growth)	Important. After a poor first quarter, growth is expected to pick up pace for the remainder of 2014.
Employment Situation (July)	Fri., Aug. 1, 8:30 am, ET	Unemployment Rate: 6.1% Payrolls: 240,000 (Increase)	Very Important. Monthly job growth at the current rate will increase pressure for interest rates to rise.
Construction Spending (June)	Fri., Aug. 1, 10:00 am, ET	0.4% (Increase)	Important. Residential real estate spending will likely post lower based on the recent drop in permit applications.

 

State of the Mortgage Market The housing market is a mixed-bag nationally. The mortgage market, on the other hand, is trending higher. To be sure, we are still plagued by a dearth of purchase activity (though purchase applications increased 0.3% for the latest reported week). We'd love to see purchases trend materially higher; for no other reason that it will signal a more normalized housing market – one driven by owner-occupied buyers. We mentioned a couple weeks ago that lending standards have eased considerably over the past two years based on the MBA's Mortgage Credit Availability Index . We don't expect that trend to reverse. We see further easing in the future. For one, the state of the mortgage market looks pretty darn good. Black Knight (formerly LDS) reports loan delinquencies are down 15% year over year. Overall, foreclosure inventory is now at its lowest since May 2008. Fewer loan delinquencies and lower foreclosure inventory are by-products of improved job growth and higher home prices. On job growth, the economy has been adding 200,000+ new jobs a month for the past five months. An improving employment outlook makes lenders more willing to lend – more jobs, more risk tolerance. At the same time, mortgage loans are still cheap. Bankrate.com shows the national average on the 30-year fixed-rate loan below 4.3%. Freddie Mac shows it below 4.15%. These are 2014 lows. Today, the mortgage market is as favorable to lender and borrower alike as it has been in the past six or seven years. Therefore, we highly recommend borrowers take advantage of the opportunity, because it's impossible to know how long it will last.

A Tale of Two Markets???

MARKET RECAP A Tale of Two Markets Actually, we refer to one market – the new-home market. But we say two, because we refer to the new-home market now and the new-home market in the future. As for the here and now, the market appears somewhat languid. New-home starts come in at 893,000 units on an annualized rate in June. This is 9.3% lower than the revised 985,000 units posted in May. As for the important single-family segment, starts come in at 575,000 units on an annualized rate, which is 9% lower than the number of units in May. The good news is that the future new-home market appears more robust – at least that's our take from the latest Home Builder Sentiment Index . Builder confidence for new single-family homes surpassed an important milestone in July, rising four points to a reading of 53. Anything above 50 indicates that builders are more positive than negative on the outlook for new-home activity. This is the first time since January that the index has crested above 50. This suggests we should look forward to more new-home construction and more new-home sales in coming months. Let's hope that's the case. We say “hope” because we'd be more optimistic on a pick up in both new- and existing-home activity if we saw a pick up in purchase-mortgage activity. Unfortunately, weekly activity across the country is down, and not by an insignificant percentage. The Mortgage Bankers Association reports its purchase index fell 8% for the July 11 week, more than reversing a 4% gain in the prior week. Of course, we offer our usual caveat: all markets are local. So, what occurs in any local market doesn't necessarily jibe with a national number. (For instance, a large slice of fewer housing starts in June was centered on the South.) Still, we would like to see more purchase activity, especially purchase activity driven by the owner-occupied buyer. Fortunately, rates are still very favorable for anyone seeking financing. Bankrate.com's national survey has the 30-year fixed-rate conforming loan pegged at 4.3%, about where it has been for the past month. Freddie Mac's survey has the 30-year loan at 4.13%. To be sure, mortgage rates have shown little inclination to go anywhere, but another month or two of 200,000+ monthly job gains could easily (and quickly) set rates on a path to higher ground.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Price Index (June)	Tues., July 22, 8:30 am, ET	All Goods: 0.3% (Increase) Core: 0.2% (Increase)	Important. Consumer-price inflation has been rising in recent months. Another unanticipated increase could move mortgage rates higher.
Existing Home Sales (June)	Tues., July 22, 10:00 am, ET	4.97 Million (Annualized)	Important. More inventory and moderating prices point to rising sales.
Mortgage Applications	Wed., July 23, 7:00 am, ET	None	Important. Purchase applications continue to frustrate by failing to establish a rising trend.
New Home Sales (June)	Thurs., July 24, 10:00 am, ET	478,000 (Annualized)	Important. Sales are expected to abate after a very strong May, but the long-term trend remains up.

 

Young and Apparently More Restless A couple weeks ago, we lamented the dearth of young adults venturing out on their own. Indeed, Pew Research , a think tank, reports that nearly one in four young adults (age 25-to-34) still live with their parents, more than double the 11% who lived with their parents in 1980. We reasoned that many of these young adults have either poor job prospects or are weighted down by onerous student-loan debt. Perhaps we over-reacted a bit. Now, it appears more of these young adults are willing to become actual adults by moving out on their own. What's more, many of them are buying a home. Trulia reports that the number of young adults age 18-to-34 who became homeowners rose 0.9% in 2013. Trulia's data contrast with Census Bureau data that show ownership fell by 0.1%. More millennials entering the market would be the start of an important housing trend. Better yet, it would be the start of a trend with considerable staying power. A large percentage of young adults out of the housing market is a source of large pent-up demand, which could lift overall demand for years to come. As more millennials enter the market, they will have a ripple effect that will lead to more demand for more expansive homes. As millennials become more established in their jobs, they'll naturally seek to trade up. Living with mom and dad is comfortable, but unhealthy as an adult. Eventually everyone has to make a break. This basic fact of life bodes well for housing over the long term.

Bill Gross Just Bought $60-Million Worth of Bonds: Why That's a Big Deal

Keeping you updated on the Market - For the week of July 14, 2014

MARKET RECAP Bill Gross Just Bought $60-Million Worth of Bonds: Why That's a Big Deal The name Bill Gross is meaningless to most Americans. For those in finance, it's different. The name is universally known, because Bill Gross is the preeminent bond investor in the country. Specifically, Gross manages the $270-billion PIMCO Total Return Fund Institutional closed-end fund, which is the largest bond fund in the United States. Gross' actions attract attention. This past week, he attracted considerable attention when it was revealed he had poured $60 million of his personal wealth into bond funds he manages. This $60 million is on top of the $140 million he already has invested in these funds. In short, Gross in betting in a big way that low interest rates will remain low for quite a while longer. When you look at the yield performance on the 10-year U.S. Treasury note over the past six months, it's difficult to disagree with Gross' bet. Yields have actually shown more of an inclination to go lower than higher. The 10-year Treasury note is a good proxy for mortgage rates, particularly the 30-year fixed-rate loan. If you lack access to immediate mortgage information, a quick glance at the yield on the 10-year note (readily accessible at Yahoo! Finance) will give you a good idea to the direction of rates. As for the actual 30-year fixed-rate loan, it remains subdued. Bankrate.com had the 30-year loan averaging 4.31% for the past week, a slight increase over the previous week. Freddie Mac had it at 4.15%. Over the past day or so, the rate has actually drifted a little lower. Last week, we cautioned that another strong jobs report – which we got – would pressure rates to rise. Rates rose, but only by a few basis points. That interest rates remain low in the face of improving job prospects (which is indicative of an improving economy) suggests there is little impetuous for interest rates, in general, and mortgage rates, in particular, to rise. As for our prediction of 5% on the 30-year fixed-rate loan by the end of the year? Anything can happen, but it's a more distant target than it was at the beginning of the year. That said, we still have nearly six month until Dec. 31. By October, the Federal Reserve is expected to have ceased buying Treasury notes and mortgage-backed securities (MBS). What's more, the Fed will likely cease or cut back reinvesting interest and principal from maturing notes and MBS into more notes and MBS. Basically, this means that the Fed – a key factor to low mortgage rates for the past six years – will be a much smaller player as we progress through the fourth quarter. What this means to the direction of interest rates is anyone's guess. At least we know what Bill Gross' guess is – rates will remain low. But, of course, that's subject to change.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Retail Sales (June)	Tues., July 15, 8:30 am, ET	0.6% (Increase)	Moderately Important. Sales momentum points to a pick up in consumer confidence.
Mortgage Applications	Wed., July 16, 7:00 am, ET	None	Important. Purchase applications inched higher last week, but a sustained trend is still in the waiting.
Home Builder Sentiment Index (July)	Wed., July 16, 10:00 am, ET	50 Index	Important. Rising sentiment points to rising building activity in coming months.
Housing Starts (June)	Thurs., July 17, 8:30 am, ET	1 Million (Annualized)	Important. Starts remain muted, but builder sentiment suggests more activity is forthcoming.

 

Yes, Credit Is Becoming More Widely Available Tight credit is frequent lament. In a Redfin survey , 16% of respondents stated that difficulty in obtaining financing was a challenge in the second quarter of 2014 compared to 8% in the first quarter. This might be the perception, but the reality is that credit is gradually becoming easier to obtain, and that's been the case for the past two years. The Mortgage Bankers Association Mortgage Credit Availability Index continues to creep higher. In June, the index posted at 115.8 compared to 115.1 in May, which was better than the 113.8 in April. The index was set at 100 in March 2012. To be sure, the younger crowd still has some difficulty with financing. As we noted a couple weeks ago, high student- loan debt is an issue. Obviously, that drives up the debt-to-income ratio. That aside, the issues aren't materially different for younger people today compared to younger people of previous generations. When starting off in life, most of us lack assets and have to scrimp to get head. That hasn't change. The good news is housing continues to change for the better for all age groups. Price appreciation is falling back in line with historical norms. The prospect of slower price growth will bring more homes to market; there will be less incentive to hold out for a higher price. This, in turn, will further slow price growth. The bottom Line: More people will be able to afford a home, and more funding will be available to those who want to buy a home. That's good news for everyone .

Market Update for the week of July 7, 2014. "Trends We Want to See (Mostly)

MARKET RECAP Trends We Want to See (Mostly) Trends are frequently like starting a roll of new tape: Sometimes they are tough to get started, but once started, they tend to flow easily. For the past year, it's been tough getting a trend started in existing home sales. Just maybe one could be starting now. Existing home sales showed gains in April and May. The trend should extend into June. The Pending Home Sales Index rose a strong 6.1 percentage points in May. This is the largest gain since the housing-stimulus days of April 2010. Best of all, all regions posted gains. This points to stronger existing home sales in June, which seems likely based on our observations. More important, it appears sales momentum will extend into July. So, home sales are on the rise. Unfortunately, the rise isn't reflected in mortgage demand. Mortgage rates have remained low over the past couple weeks, but buyers haven't taken advantage of them. The Mortgage Bankers Association's application data show purchase activity fell 1% last week. For most of the past month, activity has been either down or flat. Obviously, we'd like to see more mortgage activity; not only for our own self interest, but for the good of the overall housing market. We've mentioned that a solid housing market is driven by owner-occupied buyers. Most of these buyers use a mortgage to finance their purchase. Young people – those without significant wealth – are most likely to use a mortgage. There's been a dearth of new, young buyers in the housing market. Slow economic growth and difficult job prospects are certainly culprits. There is another, perhaps more insidious, culprit – excessive student-loan debt. A recent article in The Hill reports that average student-loan debt for 71% of graduates who took out loans is $30,000. The NAR has found that 49% of Americans state that student loan debt is an obstacle to homeownership. Because they are not forming their own households, many young adults still live with their parents. A study produced by Deutsche Bank found that a third of 18-34 year olds live with mom and dad. Poor job prospects and student debt no doubt have contributed to the trend of so many people extending their adolescence. The upside is there is a lot of pent up demand. Deutsche Bank estimates that if households were to return to levels that prevailed in the early 2000s, more than four million new households could be formed. We are all aware there is plenty of slack in the system – low housing sales, low housing starts, low household formation, low mortgage usage – by historical standards. It's frustrating, to be sure, but the slack points to a low likelihood housing will backslide anytime soon. To the contrary, the slack points to sustainable all-around future growth.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Credit (May)	Tues., July 8, 3:00 pm, ET	$15 Billion (Increase)	Important. Rising revolving credit use points to rising consumer confidence and rising economic growth.
Mortgage Applications	Wed., July 9, 7:00 am, ET	None	Important. Growth in purchase activity would provide more evidence that recent sales trends are sustainable.
Federal Reserve FOMC Meeting Minutes	Wed., July 9, 2:00 pm, ET	None	Moderately Important. The Fed will state what most of us know: the economy is improving, but not enough to alter the Fed's low-rate policies.

 

This is Exactly What We Want to See 288,000 new jobs were created in June, which dropped the unemployment rate to 6.1%. What's more, job gains in April and May were revised higher, with April jobs ratcheted up to 304,000 and May jobs increased to 224,000. Our economy has now benefited from five-consecutive months of 200,000+ new jobs. This is a trend we can all support. To maintain economic prosperity, 200,000-or-more new jobs need to be created each month. Given the strong gains we've seen in recent months, we expect the trend will continue, possibly through the end of the year. More jobs should lead to more household formation, and more housing and mortgage activity. As we note above, excessive student-loan debt remains a problem, but with more jobs available to young people, more of them should be able to service their debt and leave their parents' basements at the same time. One final note: Keep an eye on mortgage rates, with job growth picking up steam, the pressure for rates to trend higher will rise.