Market News
| MARKET RECAP Is news really news if it had already been anticipated? We're referring to April's housing numbers, which everyone anticipated and which surprised few. Existing home sales rose 7.6 percent compared to March's numbers to a seasonally adjusted annual rate of 5.77 million units while sales of new homes soared 14.8 percent to a seasonally adjusted annual rate of 504,000 units. Under more conventional circumstances we'd be tempted to break out the bubbly on such a bullish report, but we all know why sales spiked in April – impending expiration of the federal homebuyer tax credits. The credits were a useful band-aid, to be sure, but they were no panacea. As we've stated in past editions, they simply moved demand forward without aggregately increasing it, and they really moved it forward in April. We're even less tempted to break out the bubbly when vetting the latest pricing data. On that front, the Standard & Poor's/Case-Shiller home price index showed that prices of single-family homes were down 0.5 percent between February and March, the sixth consecutive month-over-month decline. Year-over-year prices are up 2.3 percent nationally. Meanwhile, the median price on existing homes increased 4 percent to $173,100 in April while the median price on new homes tumbled 9.6% to $198,400, as those who took advantage of the tax credits did so with cheaper homes. This isn't to say that we are discouraged. We think the market is simply in a holding pattern at the moment, with inventory levels holding relatively steady at an 8.4-month supply on existing homes and at a 6.2-month supply on new homes. Some reservation is understandable; no one is really sure how the housing market will react to standing on its own heading into the prime buying season. We remain optimistic, because we think the data suggest it will keep moving forward. Meanwhile, the refinance market remains robust, and why shouldn't it with rates on 30-year-fixed rate loans regularly found below 5 percent and rates on 15-year fixed-rate loans regularly found below 4.5 percent? For many borrowers, it's an opportune time to save a lot of money over the long haul by refinancing to a 15-year loan from a 30-year loan. Of course we'll warn once again that good deals don't last forever. The turmoil in Europe has helped push rates down a few basis points, but rumblings for change are emanating from the Federal Reserve. Recent minutes of the latest Fed meeting show a growing number of its banks want to raise the rate charged to banks on emergency loans, which is a sign of confidence in the economic recovery. It's worth remembering that as the economy improves, the opportunity to get a bargain-basement mortgage rate decreases. . |
| Economic | Release | Consensus | Analysis |
| Construction Spending | Tues, June 1, | 0.1% | Important. Improvements are being driven by residential spending. |
| Mortgage Applications | Wed, June 2, | None | Important. Purchase applications tumble on a stimulus-induced hangover. |
| Pending Home Sales | Wed, June 2, | 106.2 Index | Important. Markets are expecting a sustained sales trend after the tax-credit expiration. |
| Productivity | Thurs, June 3, | Productivity: 3.6% (Increase) | Moderately Important. Productivity continues to hold inflation at bay. |
| Factory Orders | Thurs, June 3, | 1.0% | Moderately Important. Orders are reflecting greater capital investment. |
| Employment Situation | Fri, June 4, | Unemployment Rate: 9.8% | Very Important. Employment continues to improve, but markets are expecting additional improvement in the private sector. |
| An Alternative Take on Mortgage Rates Given further easing of mortgage rates over the past two weeks, we obviously think it's an opportune time to refinance. Rates have maintained record lows as investors seek safe-haven assets such as US Treasuries, to which rates on long-term mortgages are closely tied, and securities backed by mortgages that are guaranteed by the government. While low rates are sending refinance applications up, many borrowers who would normally refinance already have. What’s less clear is the impact low rates will have on home purchases going forward. Yes, they’ll allow more borrowers to qualify for loans, and some potential buyers will find they are able to afford slightly larger loans at lower rates, but low interest rates by themselves aren’t a primary demand driver. In fact, we have a contrarian view on low rates, believing they are actually harming sales more than helping them. Rising rates would not only be reflective of greater economic activity, they would spur more people into action. As it is now, too many people remain on the sidelines who shouldn't be there. A nudge from the prospect of higher mortgage rates would spur them into action. We still expect that nudge to occur.
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Market Recap!
| MARKET RECAP In news that surprised no one, the pending home sales index surged to 102.9 in March. We all expected the months heading into April would produce more home sales, and that's the way it's playing out. What's more, it's likely to continue to play out over the next couple months, given closings usually occur a month or two after the contract has been signed. Of course, the expiring federal tax credits are the impetus for the spring rush. Most market watchers are expecting a drop once they've worked their way through the system, so we shouldn't be terribly disappointed if sales growth stalls after being artificially stimulated. That said, we remain optimistic. We think the housing market is sufficiently stable to stand on its own, particularly when considering the latest pricing data released by PMI Mortgage Insurance, which shows the risk of continued price declines is shrinking. Its latest report finds that 93% of the 384 metropolitan statistical areas it follows posted declining risk scores in the fourth quarter of 2009. In addition to finding a less risky pricing environment, buyers are also finding a more welcoming lending environment. According to the Federal Reserve's latest survey, most banks didn't tighten lending standards during the first quarter of 2010. The survey also showed more banks expressing a greater willingness to lend. We've stated in previous newsletters that an improving economy goes hand-in-hand with less stringent underwriting, because lending is perceived as less risky in a growing economy. We expect further easing as the economy continues to grow, enticing more marginal borrowers into the market. Consumer spending is another important measure of an economy's health. On that front, personal consumption posted a 0.6 percent gain in March, following a 0.5 percent jump the month before. Economists have been saying for months that the economic recovery would be anemic until the consumer sector became healthier. It appears healthier today. So, we have a growing economy, stabilizing home prices, and possibly easing underwriting standards. That sounds like a recipe for higher mortgage rates, but that wasn't the case last week. In fact, rates dropped across the board and held near all-time lows. Is it possible we've cried “wolf” once too often and that low rates are now a permanent fixture of the economy? We don't think so, because the factors that most influence interest rates still point to higher rates. The financial calamity in Greece was given as the primary reason for last week's rate decrease. Money moved out of riskier European investments into safer US Treasury and government-insured mortgage-backed securities, In short, more money was available for mortgage lending; hence the lower rates. But this too shall pass, and likely sooner than most market watchers expect. . |
| Economic | Release | Consensus | Analysis |
| Wholesale Trade | Tues, May 11, | 0.5% | Important. Sales are trending higher on greater business demand. |
| Mortgage Applications | Wed, May 12, | None | Important. Purchase activity should remain strong through May. |
| International Trade | Wed, May 12, 8:30 am, et | $40 Billion (Deficit) | Moderately Important. Recent growth in the deficit is due to stronger consumer demand. |
| Import Prices | Thurs, May 13, | 0.8% | Important. The upward trend in prices could be a sign of increasing inflationary pressure. |
| Retail Sales | Fr., May 14, | 0.3% | Important. Growth in retail sales is reflective of growing consumer optimism. |
| Industrial Production | Fri, May 14, | 0.5% | Important. Production continues to rise, but capacity utilization remains far below inflationary levels. |
| Consumer Sentiment | Fri, May 14, | 73.2 Index | Moderately Important. Sentiment is improving, but jobs remain a concern. |
| Good News on the Job Front Employment, it's the reason we're hanging our hat on a sustained economic recovery. The numbers are, thankfully, improving. Payrolls jumped 290,000 last month, more than the median estimate after posting a revised 230,000 increase in March that was larger than initially estimated. The April gain included 66,000 temporary workers hired by the government to help conduct the 2010 census and, more importantly, a 231,000 rise in private payrolls. Yes, the unemployment rate rose to 9.9 percent, but mainly due to formerly discouraged workers becoming less discouraged and seeking work again. The improving employment situation presages good news for the economy, but it also presages higher interest rates. The latest employment news could be the catalyst for the next move in long-term interest rates. Over the past two weeks, investors have gravitated toward the haven of US-dollar denominated investments, most notably long-term Treasury securities, and that's helped lower rates. But with a heating economy, the very real prospect of inflation igniting rises, which raises the very prospect of higher mortgage rates in the near future.
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Windermere Cup!
24th Annual Windermere Cup Regatta
May 1, 2010 10:20 a.m.
Join us on the shores of the Montlake Cut to cheer on the University of Washington crew teams as they compete against national and international crew teams. The races begin at 10:20 a.m. followed by the Opening Day Boat Parade at 12:00 p.m.
This event is free to the public.
Market News!
| MARKET RECAP In another sign home prices are stabilizing, Trulia.com reports that the rate of home listings where the seller made at least one reduction in asking price declined 26% in April 2010 compared to the same year-ago period. Trulia noted that 20% of asking prices were reduced at least once compared to 27% in April 2009. We weren't surprised to see the reduction. In fact, we were a little surprised a greater reduction wasn't forthcoming. We've noted in the past that sellers are much more grounded in the new-market reality of lower prices than they were a year ago. The good news is the reality should become somewhat more bearable in coming months. Fannie Mae projects the median price for existing homes to rise from $167,200 in the first quarter of 2010 to $168,300 by year's end. Meanwhile, it expects the median price for new homes to climb from $207,200 to $214,500. Granted, it's not the pace of appreciation we were accustomed to in the past, but after enduring nearly two years of traumatizing price depreciation, we'll take whatever price appreciation the market will give. The specter of rising prices should attract more buyers, and more buyers are needed to reduce inventory levels that still tilt toward the high side. Total housing inventory rose 1.5% to 3.58 million existing homes for sale in March, giving us an 8-month supply. The good news is that's an improvement from the 8.5-month supply at the end of February. We expect inventory levels to improve further on the March and April push to take advantage of the expiring federal homebuyers tax credits. These credits were the most noted reason for the surge in existing-home sales, which were up more than expected, climbing 6.8% to a 5.35 million annual rate in March, according to the NAR. We expect to see a continued uptrend in May and June - perhaps to 2007 levels. We're unsure if it will occur, but we'd like to see this final tax-credit push generate enough momentum to maintain the trajectory through the summer selling season. Of course, whatever is sold will likely need financing. On that front, mortgage rates continue to maintain their holding pattern: We're still looking at 30-year fixed-rate mortgages near 5% and 15-year fixed-rate mortgages roughly 50-basis points lower. We've been warning, and we'll continue to warn, that rates are unlikely to move much lower. We think it makes little sense to hold out for a few basis points on the downside when many basis points loom on the upside. . |
| Economic | Release | Consensus | Analysis |
| S&P Case/Shiller Home Price Index | Tues, April 27, | None | Important. February's prices should show a modest, innocuous decline. |
| Consumer Confidence | Tues, April 27, | 54.2 Index | Moderately Important. Confidence is improving, though consumers are showing reluctance to make big-ticket purchases. |
| Mortgage Applications | Wed, April 28, | None | Important. Purchase applications will trend significantly higher through month's end. |
| Federal Reserve | Wed, April, 28, 2:15 pm, et | Federal Funds Rate: | Important. Credit markets expect the Fed to show more willingness to raise the fed funds rate. |
| Gross Domestic Product | Fri, April 30, | 3.5% Growth (Annualized) | Important. Growth is expected to post on par with more normal economic conditions. |
| Employment Cost Index | Fri, April 30, | 0.5% | Important. Sluggish first-quarter jobs growth will keep costs contained. |
| It's Still All About Employment The blogosphere has been alive with ominous chatter on the “next wave of foreclosures.” Much of the discourse has centered on homeowners who continue to make payments but have seen the value of their homes plummet, thus preventing them from saving money through refinancing. A few of the bloggers have speculated that rising frustration levels could produce a surge in strategic defaults. It's a salient, legitimate point, to be sure, but it's also worth noting that people just don't walk away because they're underwater on a loan. The most obvious example is an auto loan: Once a new car is driven off the lot, it depreciates considerably – often to the point where an immediate sale would produce insufficient cash to retire the outstanding loan. In other words, just because someone is underwater and frustrated doesn't mean he or she is walking away. Moreover, he or she is even less likely to walk away if gainfully employed. That's why we continue to look to the employment numbers for answers. The good news is that the numbers are generally improving, which, not so coincidently, is why housing numbers are generally improving. The bottom line is, if we continue to see improvement in employment, we'll continue to see improvement in housing.
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Market Recap
| MARKET RECAP Foreclosures remain front-page news. RealtyTrac reports the number of homes taken over by banks jumped 35% in the first-quarter of 2010 compared to the same year-ago quarter. More worrisome, foreclosures grew 7% from the last three months of 2009. It appears we're backsliding again. The foreclosure rate was easing late last year, as banks were pressured to modify home loans. In addition, many states enacted foreclosure moratoriums to give troubled homeowners some breathing room to catch up on their payments. Never mind that banks were struggling with their own survival. Our modus is to accentuate the positive when possible, since the positive is given short shrift by the mainstream media. On that front, the foreclosure problem remains concentrated in 10 states, lead by the usual suspects – Nevada , Arizona , Florida , and California (but not the entire state). We found more positive news in the NAHB/Wells Fargo Housing Market Index, which showed a marked improvement in homebuilder sentiment, rising to 19 from the consensus estimate of 16. Many commentators credited additional business driven by the impending expiration of the federal homebuyer’s tax credits, but that doesn't make sense. We're all aware that a buying surge was likely heading into April, but homebuilders are surely looking beyond April. Perhaps the fact housing starts posted at a better-than-expected 626,000 units for March is a better measure of the renewed optimism. Other variables are at work too; many are positive, including economic activity, which increased in most parts of the country, according to the Federal Reserve. We're not surprised. In past editions, we noted that the stock market is a reliable economic indicator, and the stock market continues to show a strong recovery. Our optimism appears to be rubbing off on more consumers, of whom 72% opine that it's a good time to buy a house, according to a recent Gallup poll. Gallup said the figures were "potentially encouraging,” presenting sellers with an audience of buyers who believe buying a home would be a good investment. We agree with Gallup – buying a home is a good investment. To that, we can add financing is still a good deal: Rates have dropped in the past week and mortgage activity has slowed, increasing the odds that home buyers will get the home they want and the loan they need at the most advantageous prices. . |
| Economic | Release | Consensus | Analysis |
| Leading Indicators | Mon, April 19, | 0.9% | Important. The indicators suggest an accelerating economic recovery. |
| Mortgage Applications | Wed, April 21, | None | Important. Activity will likely increase on lower rates and an improving economy. |
| Producer Price Index | Thurs, April 22, | Finished Goods: 0.3% | Important. Inflation remains under control, but producers are better positioned to pass along costs. |
| Existing Home Sales | Thurs, April 22, | 5.2 Million (Annualized) | Important. Sales should rebound on impending expiration of homebuyer tax credits and better weather. |
| FHFA Home Price Index | Thurs, April 22, | None | Moderately Important. Prices will show some weakening, but mostly due to seasonality. |
| New Home Sales | Fri, April 23, | 320,000 | Important. Sales remain sluggish, but homebuilder sentiment suggests future improvement. |
| We're Past the Graveyard; It's Time to Move on The counter-intuitive – black is white, up is down, north is south – is a popular theme in business books these days. Bad news is good news is another one. In our own world, the bulging problem of foreclosures and delinquencies appears to be bad news. If you dig a little deeper, though, it really isn't. Foreclosures aren't growing alarmingly, nor are they necessarily new for that matter. They existed in abundance last year, but if you'll remember, last year was a time of waning confidence and growing uncertainty. In other words, we didn't have the stomach, and we weren't sure if the banks had the financial wherewithal, to deal with the problem, so we didn't. Fast forward a year later, and much has changed – fortunately for the better: The financial system isn't collapsing, banks aren't hemorrhaging money, and the economy isn't spiraling into the abyss. To the contrary, the financial markets are stabilizing, banks are making money, and the economy is improving. In other words, we are much better positioned today to address yesterday's problems. Call it the strategy of “whistling past the graveyard.” Well, now we are past the graveyard, so expect banks to stop whistling and to start aggressively working to resolve their foreclosure and REO issues. What's more, expect them to resolve these issues rationally and orderly. That's good news, because we don't expect banks to destabilize the market by flooding it with distressed properties. That means it's still a buyer's market, but only in the sense that prices are as low as they're going to go, and that's good news too; buyers who buy today are unlikely to suffer buyer's remorse tomorrow.
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Marketing Recap
| MARKET RECAP As the federal tax credits for home buying near the April 30 expiration, consumers are taking notice. The National Association of Realtors reported that its pending home sales index climbed 8.2% to 97.6 in February. The surge is similar to the one seen in October prior to the November 30 end date for the original homebuyer’s tax credit. Will there be a third surge somewhere down the line? That's difficult to say, but the lobbying is on. NAR lead economist Lawrence Yun commented last week that another surge is needed to stabilize prices and reduce inventory, suggesting that extending the credits again wouldn't be the worst thing the federal government could do for housing. We remain unconvinced. We think the credits have run their course, so any extension would have a marginal benefit at best. That's okay, though, because the market is close to taking over. According to a recent Fannie Mae survey, two out of three Americans think it's a good time to buy a home – a percentage that matches responses in a similar survey in 2003 – while 31% believe it's a very good time to buy. Seventy percent of the respondents said that buying a home continues to be one of the safest investments. To put that in context, 74% ranked a bank account as a safe investment while only 17% viewed the stock market as safe. Real estate remains the investment of choice. Americans might be viewing mortgage rates less favorably than housing opportunities. The era of record-low rates is winding down. The average rate on a 30-year fixed-rate loan has jumped from about 5% to more than 5.3% in the past week. There's a silver lining to the increase: sellers might find a more eager market, because many buyers will want to complete their purchases and lock in still-decent rates before they go higher. This leads us to the most-frequently asked question: are rates really going higher? After all, recent minutes from the Federal Reserve's latest meeting state that it was committed to keeping rates low for an “extended period.” We think the Fed is fighting a losing battle. Even though most economists consider inflation to be of relatively little threat at the moment, they acknowledge things can change quickly. More important, an increasing number of credit-market participants are expecting a quick change. . |
| Economic | Release | Consensus | Analysis |
| International Trade | Tues, April 13, | $38.8 Billion (Deficit) | Moderately Important. The expected increase in the deficit should have little impact on dollar value or interest rates. |
| Import Prices (March) | Tues, April 13, | 0.9% | Important. A strengthening dollar is helping to hold prices in check. |
| Mortgage Applications | Wed, April 14, | None | Important. Purchase activity should rise through month's end. |
| Consumer Price Index | Wed, April 14, | All Goods: 0.1% (Increase) | Important. Consumer-driven inflation remains benign, though more economists expect increasing inflationary pressure. |
| Retail Sales | Wed, April 14, | 0.8% | Important. The upward trend in sales suggests growing consumer confidence. |
| Industrial Production | Thurs, April 15, | 0.5% | Important. Rising industrial production increases the likelihood of producer-induced inflation. |
| Housing Market Index | Thurs, April 15, | 16 Index | Important. Homebuilders continue to struggle with excessive inventory. |
| Housing Starts | Fri, April 16, | 610,000 (Annualized) | Important. Starts are volatile, but recent data suggest a rising trend. |
| A Historical Money Perspective The potential for a burst of money creation is yet another arrow for our higher-rate quiver. The Federal Reserve controls the monetary base – currency and coin and deposits at the Federal Reserve bank. From this base, banks generate loans, which produce new money. In fact, it can be new money produced at a rate many times over the Fed's base amount. (Banks are required to hold only 10% of deposits in reserve). We don't think it's quite that ominous, but we still think inflation is likely nonetheless. We just think it will be inflation at the historical annual rate of around 3%. The return to historical norms means mortgage rates are destined to rise. Thirty-year fixed-rate mortgages have historically been priced 1.75% to 2.0% above the 10-year Treasury note, now yielding 3.85%, which translates into 5.75% loans. We all crave a return to normalcy, to be sure. In the meantime, we think it's worthwhile for borrowers to lock in today's still abnormally low rates.
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