About Bristol County, RI

Keeping you updated on the market!
For the week of

February 27, 2012

MARKET RECAP

So are things getting better or worse? We ask because the latest data on existing-home sales fail to provide a definitive answer. Sale were up once again, increasing 4.3 percent to a 4.57 million annualized rate in January, which, in turn, dropped supply to 6.1 months, the lowest inventory level in three years.

The fact that existing-home sales are rising is good news. The not-so-good news is that sales appear to be driven by discounting. The national median price fell 4.6 percent to $154,700, while the national average price dropped 4.0 percent to $201,200.

In short, existing-home sales are trending higher, but the trend is being fueled in part by price discounting – at least at the national level.

We're always quick to point out that all real estate is local. National numbers – averages in particular – strip local data of their individuality and meaning. That's why we are always more interested in locally produced data, which nearly always differs from what the national numbers say.

For example, data from Pro Teck Valuation Services and Collateral Analytics show significant improvement in South Florida, which a few years ago was one of the leading bubble markets. On the flip side, their data show significant weakness in a few Connecticut burgs, which mostly endured the post-2007 sell-off unscathed.

The bottom line is markets aren't homogenous: The country has experienced varying degrees of price corrections and sales volumes since the market peaks of 2006 and 2007. These degrees are often smoothed away in aggregated national numbers, thus limiting their usefulness.

The mortgage market, on the other hand, has seen few degrees of variability of late. Mortgage rates have held a bottom achieved a couple months ago. The consensus among mortgage pundits is that this bottom will hold for 2012.

It's difficult to argue with the consensus when you consider the Federal Reserve has openly stated it intends to hold the fed funds rate – the influential short-term rate – at zero through 2014. On the long-end of the interest-rate spectrum, the Fed has stated it will continue to purchase longer-term Treasury securities and mortgage-backed assets to keep mortgage rates low.

This doesn't mean that mortgage rates can't get more expensive, though. The FHA recently announced it was raising premium fees on its forward mortgages by 10 basis points on conforming loans and 25 basis points on jumbo loans. These costs must be recouped from the borrower.

It's also worth keeping in mind that the Federal Reserve isn't omniscient. Market forces – such an unexpected spike in inflation or economic growth – will move rates higher, regardless of what the Fed does. So take the consensus for what it is – an opinion and not a guarantee.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Pending Home Sales Index
(January)

Mon., Feb. 27,
10:00 am , et

96 Index

Important. The trend in the index points to continuing improvement in existing-home sales.

S&P Case-Shiller Home Price Index
(December)

Tues., Feb. 28,
9:00 am , et

0.5% (Decrease)

Important. Home prices eroded in the 4 th quarter of 2011, though more contemporary data show signs of a turnaround.

Mortgage Applications

Wed., Feb. 29,
7:00 am , et

None

Important. The continuing decline in purchase applications points to lower sales, though the rise in cash purchases is an off-setting factor.

Gross Domestic Product
(4th Quarter 2011)

Wed., Feb. 29,
8:30 am , et

2.7% (Annualized Growth)

Moderately Important. Growth remains moderate and non-inflationary.

Personal Income & Outlays
(January)

Thurs., March 1,
8:30 am , et

Income: 0.3% (Increase)
Outlays: 0.5% (Increase)

Moderately Important. Recent income gains point to favorable future gains in consumer spending.

Construction Spending
(January)

Thurs., March 1,
10:00 am , et

0.4% (Increase)

Important. The rebound in residential spending reflects an improving new-home outlook.

Beware of the Incomplete and the Obscure

We came across a couple articles that piqued our interest this past week. One was on CNBC .com, where the writer laid out an interesting hypothesis on how fewer foreclosure sales could actually drive prices lower. The writer reasoned that foreclosures are in high demand and that distressed property buyers and sellers rule the market; therefore, if demand for foreclosed properties wanes, prices will wane as well.

A separate article appeared in The Wall Street Journal lamenting that mortgage rates aren't as low as they should be. The writer points to the spread between mortgage-backed securities (MBS) and posted mortgage rates, which is wider than historical norms. The writer deduces mortgage rates should be lower.

Both articles were interesting, but hardly conclusive. As for high foreclosure demand propping up overall prices, prices of non-distressed properties have held firm. If prices aren't firming in the new-home market, the surge in home builder optimism doesn't appear warranted. It seems to us that home builders are experiencing better pricing.

As for the spread between MBS and mortgage rates, many influential variables are at work besides MBS demand: time preferences, risk aversion, supply and demand, liquidity preferences are just a few. The spread between MBS prices and mortgage rates alone is a very incomplete picture of the mortgage market.

The point is, markets are dynamic and complex, so it's impossible to narrow price determination to only one or two variables. The variables can be insightful, to be sure, but they are hardly conclusive, much less predictive.

Keeping you updated on the market!
For the week of

February 6 , 2012

MARKET RECAP

Some weeks we feel like Sisyphus: We push the boulder up the hill only to have it roll back down again.

This is one of those weeks. Home prices, which were pushed higher through the first nine months of 2011, began rolling back in the fourth quarter of 2011. Unfortunately, it appears they are not finished rolling.

The latest price data from CoreLogic certainly isn't encouraging on that front. CoreLogic's home price index shows that home prices fell 4.7 percent in 2011, thus marking the fifth-consecutive yearly drop. The positive takeaway is that when distressed properties are excluded, home prices only dropped 0.9 percent. The unfortunate takeaway is that CoreLogic sees distressed properties exerting their negative influence through 2012.

S&P/Case-Shiller's home price data was equally frustrating. According to Case-Shiller, home prices were down 3.7 percent year-over-year in November, with 18 of the 20 markets its follows posting loses. We can take some solace in knowing that the aggregate data were skewed by an 11.8 percent drop in Atlanta and a 9.1 percent drop in Las Vegas. Remove Atlanta and Las Vegas, and the data suggest a more price-stable market.

It's easy to get discouraged when you think markets have turned for the better, only to discover they continue to back track. We refused to get discouraged, though, because there is always good news to found.

Consider homebuilders. Their sentiment and activity have improved palpably over the past few months. Residential construction spending, in particular, has been on the mend. In fact, the latest data from the Census Bureau show spending increased a robust 3.8 percent month-over-month in December, which helped lift the year-over-year rate into positive territory at 0.7 percent.

Another bit of good news for housing, and for all businesses for that matter, is that the economy continues to produce jobs. Automated Data Processing estimates that 170,000 new jobs were created in January. Over the past few months, payrolls have been growing at a monthly six-digit clip. More people earning a paycheck means more people spending and investing.

More people earning a paycheck also means more people who can qualify for a mortgage. And mortgages have never been cheaper. Rates fell again this past week after the Federal Reserve announced it will hold interest rates low through 2014. If you consider rates on an after-tax basis, you're looking at effective rates as low as 2.75% on a 30-year, fixed-rate loan. That's less than the rate of inflation.

We would argue that for most people it's more remunerative to finance a home at these low rates and then invest the money elsewhere than it is to use the cash to buy a home outright. Even though home prices have eased in the past couple months, we still think leveraging real estate is a smart move for buyers and investors with a long-term outlook.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Consumer Credit
(December)

Tues., Feb. 7,
3:00 pm , et

$10 Billion (Increase)

Important. Consumer willingness to take on more debt points to improved confidence and greater spending.

Mortgage Applications

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

None

Important. Extended HARP will likely produce a surge in refinance activity in coming months.

Wholesale Trade
(December)

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

No Change

Moderately Important. A rising sales-to-inventory ratio points to improving 1 st-quarter economic growth.

International Trade
(December)

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

$48.7 Billion (Deficit)

Moderately Important. The deficit has been rising on a stronger dollar.

Time for a New Game Plan

The latest news on falling home prices is frustrating because it appears to be a self-fulling prophesy that is difficult to escape: Falling prices generally spur demand, unless more potential buyers expect that prices will continue to fall, then prices keep falling. Unfortunately, more people believe home prices will continue to fall these days.

Falling mortgage prices, specifically rates, are also a negative, in our opinion. First, the prospect of even lower rates impedes potential borrowers and buyers from acting. If there is a good prospect of getting a better rate tomorrow, why act today? Rising rates, or at least the prospect of rising rates, as we've often argued, would get people moving again.

Ultra-low mortgage rates have also homologated the market, meaning everything fits a specific template because most everything is sold to Fannie Mae and Freddie Mac. Private investors simply can't compete with the government-subsidized loans that dominate the market today. This limits the amount of tailoring that can be done to make each mortgage product best fit the borrower's need.

We understand that mortgage rates are an important variable in home affordability, but affordability isn't as important as clarity on the outlook of the economy. If you are secure in you outlook, half a percentage point won't make much of a difference in your buying or financing decision.

Keeping you updated on the market!
For the week of

January 30 , 2012

MARKET RECAP

The data on housing were mixed this past week, but we would say that, for the most part, they listed more positively than negatively.

Last Friday, the NAR reported sales of existing homes rose 5 percent to an annual rate of 4.61 units in December. This marked the third-consecutive month of sales growth. This latest increase helped reduce inventory to 2.38 million units, the equivalent of a 6.2-month supply at December's sales pace.

Pricing was the one bugaboo in the NAR's data. The median price for an existing home was $166,100 for 2011, a 2.5 percent drop from 2010 and the lowest median price since 2002. This is a disappointment, but hardly a disaster. We’ve said many times that national numbers usually lack a meaningful connection to local markets.

The news on distressed properties was a little more encouraging. RealtyTrac reports that homes in some stage of foreclosure dropped 11 percent in the third quarter of 2011 compared to the previous quarter. Of course, part of the improvement is due to the ongoing matter of banks working through last year's auto-signing imbroglio. That said, our own anecdotal evidence suggests an improving distressed-property market.

The new-home market is also improving, just not so obviously. New home sales eased 2.2 percent to an annual rate of 307,000 units in December, which pushed inventory up to a 6.1-month supply. Like existing-home prices, new-home prices were also pressured for the month, with the national median price dropping to $210,300.

Recent new-home data suggest that December's numbers might just be a hiccup: Homebuilder sentiment has improved markedly in recent months, as has the longer-term sales trend.

Speaking of trends, the trend in mortgage rates is expected to hold for the long term. On Wednesday, the Federal Reserve stated that interest rates will remain low until at least through 2014, pushing back a previous date of mid-2013. According to Federal Reserve data, the economy simply isn't growing at the pace it had expected.

The impact of the Fed's revised policy was both immediate and palpable. Before the announcement, the 10-year Treasury note yield had been creeping higher and was yielding 2.06 percent just before Fed Chairman Ben Bernanke stepped up to the mike. After he had stepped down, the yield had dropped to 1.96 percent.

So it appears low base mortgage rates are with us for the long term, but that doesn't mean low-cost mortgages are. A r ecent increase in fees Fannie Mae and Freddie Mac charge lenders will push costs higher. Expect the fee increase to raise borrowing costs a quarter percentage point.

It's worth pointing out that we said “appears” in connection with low mortgage rates. Nothing is certain where the economy and investor behavior is concerned. To be sure, if we were forced to place a bet, we’d likely bet on January 2013 mortgage rates matching January 2012 rates. We suspect most everyone else would place that same bet. That fact, in and of itself, is a contrarian indicator that rates aren't necessarily destined to stay at today's levels.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

S&P Case/Shiller Home Price Index
(November)

Tues., Jan. 31,
9:00 am, et

0.1% (Increase)

Moderately Important. Prices weakened in the fourth quarter, but are showing signs of stabilizing in January.

Consumer Confidence
(January)

Tues., Jan. 31,
10:00 am, et

68 Index

Important. Improving confidence will help home sales heading into the spring-buying season.

Mortgage Applications

Wed., Feb.1,
7 :00 am, et

None

Important. Activity dropped in the past week, but the four-week trend remains positive.

Construction Spending
(December)

Wed., Feb. 1,
10:00 am, et

0.2% (Increase)

Important. Spending on residential real estate construction continues to build momentum.

Productivity & Costs
(4th Quarter 2011)

Thurs., Feb. 2,
8:30 am , et

Productivity: 0.2% (Decrease)
Costs: 0.1% (Decrease)

Moderately Important. The drop in productivity and costs reflects slower fourth-quarter economic growth.

Employment Situation
(January)

Fri., Feb. 3,
8:30 am , et

Unemployment Rate: 8.5%
Payrolls: 105,000 (Increase)

Very Important. Falling job growth will further anchor low interest rates.

Buy Low, Be Happy

HomeGain.com, an online real estate marketing firm, recently released a study on homeowner satisfaction. HomeGain found that homeowners with the lowest cost basis were the happiest. Specifically, HomeGain found homeowners who acquired their properties for less than $75,000 were the most satisfied.

Now, HomeGain's survey might seem like an exercise in belaboring the obvious, but it's proof that price really does matter. Despite what has occurred in housing over the past four years, if you purchased a $75,000 home a few years ago, you're likely ahead on your purchase (which is why you're satisfied).

Though it might be obvious, HomeGain's point is, nevertheless, worth driving home to our clients. Price matters, and it matters a lot. Buying at a sufficiently low price can offset many sins.

Low prices are found mostly in depressed markets, which is the housing market today. Depressed markets are ephemeral, so if we want to maximize our clients' happiness in 2020, it behooves us to impress upon them the importance of buying today.

Keeping you updated on the market!
For the week of

January 23 , 2012

MARKET RECAP

If you meet a homebuilder, don't be surprised if his gait is imbued with a little more pep and his voice tinctured with a little more enthusiasm, for his mood has likely been lifted by optimism these days.

The latest homebuilder sentiment index shows that builders are expecting more construction, more sales, and better pricing for 2012. The index moved up an impressive four points to 25 in January. This is the best reading since mid-2007 and marks four-consecutive months of sentiment improvement.

A cynic might counter that homebuilders are getting ahead of themselves. After all, housing starts did fall 4.1 percent, to an annualized rate of 657,000 units, in December. That said, a few details are worth exploring. November was an unexpectedly strong month for starts, and the fact remains that December's starts still adhere to an established uptrend. If you look back to February 2010, you'll see month-over-month improvements revealed in higher lows and higher highs.

Permits suggest more of the same going forward. Permits in December inched up 0.1 percent to an annualized rate of 679,000 units, which is a 7.8-percent improvement over December 2010. The gains aren't spectacular, to be sure, but we're not looking for spectacular, we're looking for sustainable. We think the gains are sustainable.

The trend in mortgage purchase applications has been encouraging to both homebuilders and existing-home sellers. Purchase applications jumped 10.3 percent in the January 13 week, the best posting in a month. Removing the holiday hiatus, the trend in purchase applications has been mostly up over the past few months.

The trend in refinance applications has also been up, and to a much greater degree than purchase applications. Refinance soared 26.4 percent in the latest reported week, hitting an activity level unseen since August 2011.

Mortgage rates inching lower to another multi-decade low was one factor in the surge in mortgage activity. But the increase in fees for loans purchased by Fannie Mae and Freddie Mac starting April 1 is the more influential factor. This increase translates to a 0.125 percent-to-0.25 percent increase in mortgage cost (though some pundits argue that longer-term these are low-end estimates). The fees are already being implemented, but they've been offset by the mortgage-rate drop that has occurred over the past month.

We think the days of record-low mortgage financing are numbered. Fannie's and Freddie's fee increase will obviously raise costs. The revamped version of the Home Affordable Refinance Program, HARP 2.0, will also pressure mortgage rates higher due to a surge in mortgage demand: rising demand usually means rising costs.

Bottom line: we think it's advisable to act now on a refinance or a purchase to avoid the possibility of getting tangled in a refinance boom that many industry watchers are expecting to emerge in the next month or two.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Mortgage Applications

Wed., Jan. 25,
7:00 am , et

None

Important. The jump in purchase applications points to sustained higher sales volume.

FHFA House Price Index
(November)

Wed., Jan. 25,
10:00 am , et

0.2% (Decrease)

Moderately Important. The index will reflect the known decrease in national prices that occurred in the fourth quarter of 2011.

Pending Home Sales Index
(December)

Wed., Jan. 25,
10:00 am , et

100.1 Index

Important. Low mortgage rates, high housing affordability, and job growth are driving sales higher.

Federal Reserve
FOMC Announcement

Wed., Jan. 25,
12:15 pm , et

Federal Funds Rate: 0.25%

Important. Improving job growth could lessen the Fed's resolve to hold short-term rates low through 2012.

New Home Sales
(December)

Thurs., Jan. 26,
10:00 am , et

328,000 Units (Annualized)

Important. Sale volume is up 11% over the past five months.

Gross Domestic Product
(4th Quarter 2011)

Fri., Jan. 27,
8:30 am , et

3.0% (Annualized Growth)

Important. Accelerating GDP growth will eventually lead to an end of today's low-interest-rate environment.

More Normalcy in Store for the Future

Last week we reasoned that it would be years before housing activity would return to levels seen in the mid-2000s. That's not such a bad thing; the mid-2000s proved to be an unsustainable bubble market.

We also said markets are on the mend, which is why we expect 2012 to be a more active and a more remunerative year for those of us in the real estate and mortgage businesses. Even CoreLogic, which has a history of focusing on negative data, recently reported that improved employment, more liquid households, and record home affordability levels could ignite a minor housing recovery in 2012.

Not to pat ourselves on the back, but we've been beating the drum for a sustained housing recovery (not a minor one) since the beginning of the fourth quarter of 2011. We didn't embrace this position because of any special prescience; it was just a matter of understanding basic economics. Markets drop only so far and then they rebound. The data last year suggested the bottom was near and markets were set to turn. That's proving to be the case, and we expect that to continue being the case for this year and years to come.

Keeping you updated on the market!
For the week of

January 16 , 2012

MARKET RECAP

It's really all about the economy at this point. Fortunately, the economy is moving forward, albeit at what too-often seems a plodding pace.

But moving forward we are. The Federal Reserve noted as much in its latest rendering of its Beige Book, a report of anecdotal evidence of economic progress in the dozen Fed districts. The Beige Book states, "Compared with prior summaries, the reports on balance suggest ongoing improvement in economic conditions in recent months, with most districts highlighting more favorable conditions than identified in reports from the late spring through early fall.”

Now, that attempt to say something without saying too much doesn't really enlighten, but it does affirm what we've known all along – the economic recovery is progressing.

Home prices might also be progressing better than the national numbers suggest. Zillow Inc. reports home prices were flat in November, with the average national home price at $147,800. But the housing market is a local market, and local markets appear to be improving better than the national numbers report (which can be skewed by outliers, e.g. Las Vegas ).

Of the 165 housing markets tracked by Zillow, 60 percent reported stable or appreciating home values in November. Notable winning locales include Los Angeles , Washington D.C, Miami , San Francisco , and Detroit .

The flow of private money into housing is also encouraging. We've noted over the past month that hedge funds, investing platforms for the wealthy, are directing more funds into housing stocks. In addition, Robert Shiller, co-inventor of the S&P/Case-Shiller Real Estate Index, noted at a recent American Economic Association function that the futures market for real estate (basically bets on the direction of home prices) is pointing to rising prices.

We expect interest in residential real estate to further bloom in 2012. Homes are enticingly affordable these days. U.S. Department of Housing and U.S. Treasury Department data show that home affordability is at a level unseen since 1971. In fact, median-income families today have double the funds needed to cover the cost of owning a home than they did 40 years ago.

Historically low mortgage rates also contribute to the affordability quotient, and rates continue to skim along the bottom, as they have done for the past two months.

But rates aren't the only consideration in the cost of a loan. Fees come into play. Unfortunately, borrowers face higher fees in the near future. The guarantee fee on loans sold to Freddie Mac and Fannie Mae is set to increase a minimum of 10 basis points effective April 1. Many industry watchers, though, expect the actual cost to fall within the 20-to-80 basis-point range.

Today, affordability is at a multi-decade high, and mortgage rates are at a multi-decade low. We see few economic reasons for anyone in the market for a mortgage and house not to take the plunge.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Mortgage Applications

Wed., Jan. 18,
7:00 am, et

None

Important. A pick up in purchase applications points to a stronger home-sales trend to start 2012.

Producer Price Index
(December)

Wed., Jan. 18,
8:30 am , et

All Goods: 0.3% (Increase)
Core: 0.1% (Increase)

Important. Prices continue to run higher than the Federal Reserve would like.

Capacity Utilization
(December)

Wed., Jan. 18,
9:15 am , et

78.1% Utilization

Important. Rising utilization rates point to expanding economic activity and rising business demand.

Home Builder Index
(January)

Wed., Jan. 18,
10:00 am, et

22 Index

Important. Optimism is growing on increased demand and more residential construction.

Consumer Price Index
(December)

Thurs., Jan. 19,
8:30 am , et

All Goods: 0.1% (Increase)
Core: 0.2% (Increase)

Important. Decelerating consumer-price inflation will allow the Fed to maintain its low-interest-rate policy.

Housing Starts
(December)

Thurs., Jan. 19,
10:00 am, et

685,000 (Annualized)

Important. Economists expect starts to gain pace throughout 2012.

Existing Home Sales
(December)

Fri., Jan. 20,
10:00 am, et

4.7 Million (Annualized)

Important. Sales are rebounding strongly after the post-NAR downward adjustment.

Patience: The Most Important Virtue

We are always keen to accentuate the positive; we are also keen to accentuate reality. The reality is that a return to 2006-era home prices and transaction activity likely resides in the distant future.

We looked at other bubbles that have burst – the stock market in 1929, the gold market in 1980, the tech market in 2000 – and found that it can take years, if not decades, for the market to return to pre-bubble levels. As we all know, the housing bubble burst in full in late 2007/early 2008 and prices tumbled hard over the subsequent three years.

The good news is that the hard sell-off that marks a bursting bubble is an acute not a chronic event. That means once the sell-off is complete, the healing process begins and markets move forward, thought at a relatively slower pace compared to the pre-bubble pace.

The frustrating aspect of the recovery is that little can be done to accelerate it. To be sure, the housing market is recovering, but it's going to be awhile before it reaches the level of activity we were accustomed to a few years ago. Keeping that fact in mind not only helps mitigate frustration but also helps us stick to our guns as we focus on the long-term trend, which, fortunately, will be up.