Market Recap!
MARKET RECAP
There is something about the calendar flip from December 31 to January 1 that imbues a “clean slate and a new start” mentality. For some ingrained psychological reason, a new year tends to rejuvenate optimism, even though it only represents a completed lap around the sun.
That said, we'll take optimism when we can get it. And no group is more primed for a shot of feel-good than homebuilders. More of them are starting to see the glass as half full, at least according to the NAHB housing market index, which rose two points to 17 this month after scraping bottom in December.
Fortunately, the latest numbers support the growing optimism. Housing starts increased 2.8% in January compared to December, posting at a seasonally adjusted annual rate of 591,000 units. We'll acknowledge that the extension of the federal homebuyers’ tax credit helped, but we'll also acknowledge continued low lending rates, renewed economic growth, and an improving employment outlook did their part.
Better pricing helped as well. Radar Logic's monthly Residential Property Index (RPX), a composite of 25 major US markets, increased 0.2% from November 17 to December 17, marking the first November-to-December increase since 2004. The increase might not sound like much, but it comes on top of a 1.5% increase from the October-to-November period.
We shouldn't see any backsliding either. Looking farther afield, First American CoreLogic projects prices will increase 2.7% by year's end, and if distressed sales are excluded, will increase 3.5%.
Meanwhile, mortgage rates continue to hold near record lows, at least according to surveys taken before the Federal Reserve announced it will raise the discount rate – the rate it lends to member banks – to 0.75%. Does this mean that mortgage rates will start rising? We can't say for sure, but we wouldn't discount it.
Market Update
| MARKET RECAP After the pummeling housing starts took last week, we thought a spillover (at least on a national level) into other areas of the housing market was inevitable. That was hardly the case, especially in the existing-home market, where sales increased a whopping 10.1% to a 6.10 million annual rate in October to post the highest increase since February 2007. What's more, the spike in sales helped drop inventory to a 7.0-month supply compared to an 8.0-month supply in September. Even more surprising, sales of new homes rebounded 6.2% in October to an annual pace of 430,000 units, the highest level since September 2008, helping push the number of unsold new homes to a four-decade low. Many pundits pointed to the federal homebuyer's tax credit (which is quickly becoming the default sales explanation) for the improvement. Yes, the credit helped, but to a lesser extent for new homes. We think more buyers simply felt more confident to undertake a major purchase when the price was right. And the price is still right – for buyers, at least. But that paradigm might be changing. Home prices in 20 major metropolitan areas rose for a fourth-consecutive month in September, according to the S&P/Case-Shiller home-price index, which increased 0.27% after increasing 1.13% in August. For all the talk of unemployment and foreclosure overhang, continued improvement in existing- and new-home sales could be forthcoming. Home sales will continue to receive support from the extension and improvement of the homebuyer's credit. More important, they will also receive support from an improving economy. Perhaps we are already experiencing the effects of both factors. The Mortgage Bankers Association reported purchase applications increased 4.82% last week. The MBA noted there was some slight distortion in the report due to revisions in the prior week's data, but we were encouraged, nonetheless, given the recent decline in purchase activity over the previous few weeks. Another week, another record low for mortgage rates. With a steady job, a good credit rating, a 20% down payment, and varying points and fees, any of the major prime loans can be had for under 4.75% these days. But we think it's worth repeating that rates can only go so low – and with the dollar depreciating against the world's major currencies, the fed funds rate effectively set at zero, and gold trading near $1,200 an ounce, incremental improvements will be slight at best. |
| Economic | Release | Consensus | Analysis |
| Construction Spending | Tues, Dec. 1, | 0.5% (Decrease) | Important. Residential spending should remain positive, but a contraction in commercial spending will weigh on the index. |
| Pending Home Sales | Tues, Dec. 1, | No Change | Important. After September's spike, pending sales are expected to level off. |
| Mortgage Applications | Wed, Dec. 2, | None | Important. Purchase applications are rising on renewed buyer interest. |
| Productivity & Costs | Thurs, Dec. 3, | Productivity: 8.9% | Important. Soaring productivity means employee-induced inflation is under control. |
| Employment Situation | Fri, Dec. 4, | Unemployment Rate: 10.2% | Very Important. The consensus says unemployment will maintain October's levels, though many economists are skeptical. |
| Factory Orders | Fri, Dec. 4, | 0.4% | Moderately Important. Manufacturing continues to be the economic bright spot. |
| FHA Now, Not Latter Last week we mentioned people often need to be nudged into action. The Federal Housing Administration's precarious financial position could be providing that nudge for many fence-sitting borrowers. A recent actuarial study found the FHA's insurance fund reserves are far below the congressionally mandated minimum. FHA officials confirmed they are actively exploring ways to replenish these reserves. This means we're likely facing costlier FHA-insured loans. Raising lending standards is an obvious starting point. We also wouldn't be surprised to see higher minimum down payments: Proposals are being bandied about to increase the minimum to 5% from the current 3.5%. (We've heard some chatter suggesting 10% isn't impossible.) An increase in the up-front mortgage insurance premium to the statutory maximum of 2.25% is another option, as is increasing the monthly installment fee. We can't say for sure what will happen, but we feel confident saying something will happen. So if anyone is contemplating a FHA-insured loan, now is the time to stop contemplating and start acting.
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Homebuyer Tax Credit Approved!
Senate passes Homebuyer Tax Credit
November 4, 2009
Today the US Senate voted 98-0 to pass the Homebuyer Tax Credit [within the Unemployment Bill]. It now goes to the House. We expect the House to pass the bill as well and it could go to the President for signature within the week.
Passage of this bill would be wonderful news for the real estate industry in Washington. In essence, the bill extends the $8,000 first-time homebuyer credit through April 30, 2010 and provides a $6,500 credit to new purchasers who have lived in their current residence for five or more years.
According to Senator Patty Murray, "Extending and expanding the successful homebuyer's tax credit will help families purchase homes and will provide a much needed boost to the local housing market".
Market Update
MARKET RECAP
With the passing of each week it becomes increasingly difficult to argue that housing isn't in full-recovery mode. This week's data makes it nearly impossible, considering that sales of new homes spiked 9.6%, in July, to an annual pace of 433,000 units. The “experts” had expected sales to post at only 390,000 units. The increase was the largest since February 2005, helping to force the inventory of new homes down to a 7.5-month supply, the lowest in 16 years.
Even more encouraging, the most recalcitrant housing bear is starting to turn bullish. Robert Shiller, co-creator of the S&P/Case-Shiller home-price index, told Bloomberg that “we might be seeing a turnaround.” Understated, to be sure, but that's Shiller's style. As for his index, 18 of the 20 cities tracked showed improvement in June, up from eight in May, four in April, and only one in March.
Detractors will counter that the recovery is concentrated in lower-priced homes. True, but that's changing as well. Toll Brothers, a luxury homebuilder, stated that declining cancellations and firming prices has allowed the company to reduce incentives and raise prices in selected communities. To quote Toll Brothers Chairman and CEO Robert Toll, "We believe that customers are recognizing that now is the time to get into the market to take advantage of near-record affordability in what is still, for now, a buyer's market."
More optimism can be gleaned from the fact that housing isn't the only big-ticket sector showing signs of recovery. Orders for durable goods – those meant to last several years – jumped 4.9% in July, posting the biggest increase in two years. Yes, the “cash-for-clunkers” program was a contributing factor, but even without this incentive, other durable goods orders moved ahead 0.8%.
The gross domestic product numbers also suggest that all, if not well, is getting better. On that front, the government says the economy shrank at an annual rate of 1% in the second quarter, a better-than-expected showing. The drop, while representing a record fourth consecutive decline, was far smaller than the previous two quarters. It also was stronger than the 1.4% decline that many economists had expected.
How Technology Helped Avert Disaster
The economy was never going to get as bad as many had thought, and by many we mean the doomsayers predicting a replay of the 1930’s. Reason being, markets are too efficient and too knowledgeable today; many people are following all segments of the economy, thanks in large part to today's information and communications technology.
A stock-market analogy is in order: Back in the 1930’s, Ben Graham, Warren Buffett's mentor, discovered that buying stocks trading at dirt-cheap prices proved highly remunerative. Graham would parse financial statements for companies with a lot of cash and little debt – a tedious and time-consuming endeavor at the time. Graham's modus was to buy companies for their current assets and get everything else – land, plant, and equipment – free. Graham's strategy can't be replicated today because information is so widely and cheaply disseminated that investors pounce before companies reach such levels.
Homes aren't homogeneous like stocks, but there are many more information-savvy buyers vetting housing opportunities today than there were in the 1930’s, so prices – on the national level – are highly unlikely to collapse. (They can collapse in niche, depressed markets – inner-city Detroit, for example – but that's always been the case.) Of course, there is always a risk of buying too soon, but buying too soon is still usually remunerative over the long run. The same can't be said for buying too late.
Market Recap
The missing piece to the housing-market puzzle has been put in place, thanks to the new-home market finally showing signs of sustained recovery. Homebuilders unexpectedly broke ground on more homes in June, as construction of single-family projects jumped by the most since 2004. The 3.6% increase brought starts to an annual rate of 582,000 units, the highest level since November, and followed a 562,000 pace in May. Even more encouraging, building permits, a sign of future construction, rose the most in the past 12 months.
Not surprisingly, home builders are feeling a little more upbeat these days. Sentiment in July jumped to its highest level since September 2008, based on the National Association of Home Builders/Wells Fargo Housing Market Index, which posted a 17 reading, a two-point improvement over June's reading.
Money to Spare
All that talk about TARP recipients withholding their bailout funds appears to be just that – talk. Lending among the top 21 recipients of bailout funds through the Capital Purchase Program within the Treasury Department’s Troubled Asset Relief Program posted growth in May, with mortgage originations rising by 7% over April’s figures.
Furthermore, there is more money available to lend to more people. The HARP affects millions of homeowners currently in Fannie Mae or Freddie Mac loans and permits first-mortgage loan amounts up to 125% of the home's current appraised value, with and without a second mortgage already attached. In addition, closing costs and as many as two payments can be rolled into the loan and up to $2,000 can be taken out of the mortgage.
More funds are available through use of the highly promoted $8,000 first-time home buyer's credit, though confusion among the public remains high, according to a recent RE/MAX survey. A leading confusion is what happens to the full $8,000 if a qualified individual or couple pays less than $8,000 in federal taxes? The answer is straightforward: They get a refund check for the difference. Another confusing aspect to many potential home buyers is the possibility of repayment. An earlier version of the first-time buyer tax credit did have to be repaid, meaning that it functioned like an interest-free loan. The updated version, approved this year, eliminates the need for repayment unless the home is sold within three years.
