Rhode Island

Keeping you updated on the market!
For the week of

September 6, 2010

MARKET RECAP

Most people would agree that it's best to maintain an even keel – don't get too up or too down about circumstances. That advice is particularly pertinent when following the weekly housing and mortgage data. The most recent fortnight serves as a perfect example: Last week, the data were mostly down; this week, the data are mostly up.

This week, the S&P Case-Shiller home price index posted a 1 percent rise in June, with 18 of 20 metropolitan areas posting price increases. The Case-Shiller index has been relatively steady over the past few months, and that's encouraging, but we need to keep in mind that the index will be presenting a post-tax-credit market going forward, so we wouldn't be surprised to see some price easing, as long as the mix of homes sold hasn't substantially changed.

This week also gave us news that the number of buyers who signed contracts to purchase existing homes rose in July, with the Pending Home Sales Index rising 5.2 percent to 79.4. The optimist in us believes this could lead to an increase in existing-home sales in September, but the pessimist in us still sees a double-digit months supply for some time.

On the other hand, “some time” might not necessarily be a long time. Economist Karl Case (of the Case-Shiller home price index) provided a useful (if not obvious) perspective on just how affordable houses are these days. In short, Case notes that four years ago, the monthly payment on a $300,000 house with 20 percent down and a mortgage rate of 6.6 percent was $1,533. Today that $300,000 house would sell (on average) for $213,000 and a 30-year fixed-rate mortgage with 20 percent down would carry a rate of about 4.2 percent and a monthly payment of $833. What's more, the 20-percent down payment would be knocked down to $42,600 from $60,000.

Case makes another cogent point in noting that in a given year, the number of completed sales is about 4 percent to 5 percent of the housing stock. Therefore, it doesn’t require a large number of buyers to change the overall direction of the market. That's a point we've been making over the past year. And even though sentiment hasn't turned for the better, it's worth noting that it can turn on a dime.

We've also noted that mortgage rates are apt to turn on a dime. To be sure, rates seem to post new lows each week, but the drops have been marginally incremental in many cases. At this point, we think it's more of a game of chicken – holding out for small return at big risk – than anything else. New data, like Friday's employment report, which showed a better-than-expected net loss of 54,000 jobs (mostly temporary census workers) while the private sector added a better-than-expected 67,000 new jobs, can easily produce dime-turning moments.

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Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Mortgage Applications

Wed, Sept. 8,
7:00 am, et

None

Important. A new wave of refinances is powering activity.

Beige Book

Wed, Sept. 8,
2:00 pm, et

None

Moderately Important. The book will likely reflect the Fed's desire to keep interest rates low.

Consumer Credit
(July)

Wed, Sept. 8,
3:00 pm, et

$2.5 Billion (Decrease)

Important. The level of credit contraction continues to moderate.

International Trade
(July)

Thurs, Sept. 9,
8:30 am, et

$47 Billion (Deficit)

Important. An expanding trade deficit suggests greater economic activity.

Wholesale Trade
(July)

Fri, Sept. 10,
8:30 am, et

0.2%
(Increase)

Moderately Important. The recent trend shows business investment moderating.

A More Sensible Solution

Franklin Roosevelt famously said in his 1932 inaugural address “the only thing we have to fear is fear itself.” Roosevelt went on to define fear as “nameless, unreasoning, unjustified terror.”

Fear is one emotion holding back the housing market today. In this case, though, it isn't nameless, unreasoning or unjustified. It's really a fear of potential conflicts. The New York Times reported how a maze of government incentives and regulations are working against each other and Fed policy to keep a floor from forming in the market. In short, one incentive for one segment of the market tends to counteract the progress in another segment.

More market participation is one incentive the government could provide that wouldn't hamper any segment. More demand is the best way to soak up excess supply and stabilize prices.

We think more flexible underwriting standards would be the most inclusive and effective way toward achieving that goal. Convincing Freddie Mac, Fannie Mae, and FHA to jettison FICO scores might be a good start. The past couple years have roughed up the FICO scores for many potential borrowers who would be good credit risks today. Focusing on the basics, such as sufficient residual income and adequate reserves to cover loss of job or increase in liabilities, can be just as insightful as FICO scores at vetting lending risk while at the same time expanding demand.