Providence, RI

Keeping you updated on the market!
For the week of

February 8, 2010

MARKET RECAP

To belabor the obvious, all real estate is local, so parsing the national data can be of limited use. That said, homebuyers nationally returned in greater numbers at the end of last year, according to the NAR and its Pending Home Sales Index, which increased one point to 96.6 in December from 95.6 in November.

That number alone means little. What matters are trends in individual markets. On that front, some encouraging, meaningful data can be gleaned. Home sales in hard-hit Phoenix hit the highest level in four years in December, with total home sales increasing a 12 th consecutive month, according to data from MDA DataQuick.

Meanwhile, in even harder-hit Las Vegas , the December home sales volume was at its highest level in five years, though the action is still dominated by foreclosure resales. Of the 5,317 new and resale houses sold in December, 63.3% were foreclosure resales, but that's still an improvement from 64.2% in November.

Does this mean that the national foreclosure numbers will become less alarming? They may, or they may not: Home-loan delinquency reached 10% in December, according to Lender Processing Services. Accounting for foreclosures in the pipeline, the total non-current rate stands at 13.3%. When extrapolated for the entire mortgage industry, 7.2 million mortgage loans are behind on their payments.

The good news is that 2009 vintage loans are performing much better than any of the prior five years, which means we are likely experiencing a pig-through-a-python environment. As the older vintage loans work their way through the system, foreclosure rates should improve.

But nothing – tax credits, low rates, low home prices – will turn fortunes quicker than employment. Fortunately, the latest numbers are improving. The unemployment rate dropped to 9.7% in January, even though employers cut 20,000 jobs. This apparent paradox leads to the common question: how could there be fewer payroll jobs if the unemployment rate declined?

Lower participation in the employment market is the rote answer, but it's a little more complicated than that. Unemployment data are compiled from two separate surveys. The unemployment rate comes from the Current Population Survey, a monthly survey of about 60,000 households, while the jobs number comes from Current Employment Statistics, a sample of approximately 400,000 businesses nationwide.

The good news is that the aggregated data are generally positive: the unemployment rate declined, average hours worked grew, the percentage of part-time workers fell, and the employment-population ratio rose.

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Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Wholesale Trade
(December)

Tues, Feb. 9,
10:00 am, et

1.0%
(Increase)

Moderately Important. Growing sales and inventories portend continued economic growth.

Mortgage Applications

Wed, Feb. 10,
7:00 am, et

None

Important. Refinances continue to set the pace, but purchase activity is improving.

International Trade
(December)

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

$36.5 Billion (Deficit)

Moderately Important. A strengthening dollar is stabilizing the deficit.

Retail Sales
(January)

Thurs, Feb. 11,
8:30 am, et

0.5%
(Increase)

Important. Sales remain volatile, though the recent trend is mostly up.

Consumer Sentiment
(February)

Fri, Feb. 12,
10:00 am, et

74 Index

Moderately Important. Employment gains should be reflected in improved consumer sentiment.

Why Don't We All Just Walk Away?

When economists aren't predicting the future, they spend a good deal of time studying behavior. For instance, they've been studying why individual borrowers don't walk away as frequently from their homes as corporate borrowers walk away from their properties. They point to Tishman Speyer Properties and BlackRock Realty, which recently turned in the keys and defaulted on $4.4 billion in loans on their hopelessly underwater Stuyvesant Town and Peter Cooper Village residential properties in New York City .

The economists believe more of us should be acting as rationally financially as Tishman Spreyer and BlackRock, and when we do, the foreclosure numbers will spike.

There are at least three faults in extrapolating business behavior to individual behavior. First, individuals aren't profit-maximizing firms. We, as individuals, value many things as much as money – happiness, health, continuity, and community comes readily to mind. Second, individuals suffer from the endowment effect: We tend to value things we own more than they would be valued in an arms-length business transaction. We get emotionally attached, in other words, and there are few things we are more emotionally attached to than our home. Third, individuals can't hide behind the anonymity of a corporate aegis. Reputation and fulfilling obligations are ingrained characteristics, which is why we are loath to just up and walk away.

We say all that to say this: Individual motives differ from business motives. That's why we are confident in saying that as long as we continue to see improvement in employment – the final determiner in fulfilling obligations – we will continue to see improvement in not only foreclosures but home prices and sales volume as well. It's simply in our nature.

Keeping you updated on the market!
For the week of

February 1, 2010

MARKET RECAP

Can we hit the reset button? We are being factitious, of course, but 2010 has not exactly gotten off to a rousing start. Last week's data releases only added to the perception that we are stumbling into the new year.

After three months of increases, sales of existing homes fell 16.7% to a seasonally adjusted annual rate of 5.45 million in December. Not only did the decrease in sales surprise most analysts, it was the biggest monthly decrease on records that date to back 1968, according to the NAR.

The subsequent release on new-home sales offered little solace. Sales fell 7.6% in December to a seasonally adjusted annual rate of 342,000, meaning the annual sales pace dropped to levels last seen in the first half of 2009 – an epoch most of us would like to relegate permanently to the past.

However, it might not be as bad as all that. Weather was a significant factor in the sales decline. National Oceanic and Atmospheric Administration data showed that December temperatures were three degrees below normal and that it was the 11th-wettest December on record. Bad weather, it is believed, drove many potential buyers to the sidelines.

Some market commentators fingered the first-time homebuyer’s tax credit as well, noting that it caused a surge in sales in mid-2009, but left the market shaky by year's end. They have a point. As we saw with the cash-for-clunkers program, federal tax credits tend to pull demand into the incentive period without increasing aggregate demand. Credits might be successful in stanching a downward spiral but they often fail to create sustained and growing demand.

The good news is that whether demand is growing or not, prices are stabilizing. In the existing home market, median home prices rose 1.5% to $178,300 in December, while inventories fell more than 6%.

In the new-home market, the median sales price rose 5.2% to $221,300 in December, posting the biggest gain in seven months. Moreover, the news on inventories suggests the increase will likely stick. There were an estimated 231,000 new homes for sale at the end of December, down from 235,000 in November, leaving supply at levels last seen in 1971.

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Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Personal Income & Outlays
(December)

Mon, Feb. 1,
8:30 am, et

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

Moderately Important. Recent increases in both income and outlays underlie improving economic growth.

Construction Spending
(December)

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

0.5% (Decrease)

Important. The data will reflect recent cutbacks in residential construction.

Pending Home Sales
(December)

Tues, Feb. 2,
10:00 am, et

97.1 Index

Important. Sales are expected to stabilize after November's precipitous drop.

Mortgage Applications

Wed, Feb. 3,
7:00 am, et

None

Important. Refinances continue to slow, as lower rates have run their course.

Productivity & Costs
(4th Quarter 2009)

Thurs, Feb. 4,
8:30 am, et

Productivity: 0.5%
(Increase)
Costs: No Change

Important. Increased productivity will keep employee-induced inflation under control.

Factory Orders
(December)

Thurs, Feb. 4,
10:00 am, et

0.8%
(Increase)

Moderately Important. Factories are increasing orders to replenish diminished inventories.

Employment Situation
(January)

Fri, Feb. 5,
8:30 am, et

Unemployment Rate: 10.1%
Wages: 0.2% (Increase)

Very Important. A palpable improvement in the unemployment rate could push interest rates higher.

Consumer Credit
(December)

Fri, Feb. 5,
3:00 pm, et

$8 Billion (Decrease)

Moderately Important. Tighter credit-card standards are lowering overall credit demand.

Rates Revisited

Mortgage rates dropped again (though only marginally) for a fourth-consecutive week, even though we continue to warn they will rise. We, along with many others, have laid out the most obvious reason: The Federal Reserve's stated plan to cease buying mortgage-backed securities by the end of March.

For months, the consensus (and we have been part of it) in the mortgage industry has been that mortgage rates will rise. Now, a minority opinion is forming that believes rates are unlikely to rise when the Fed withdraws from the mortgage-securities market. Their reason: the Fed has been signaling its intentions for months, so why haven't rates risen in anticipation?

There is no easy answer, but a logical one is that mortgage rates are influenced by numerous variables, in addition to the Fed's securities purchases: supply and demand for loanable funds, underwriting standards, monetary policy, time preferences, employment, consumer confidence, and the state of the economy are just a few. In other words, we think rates will rise not only because of changes in Federal Reserve policy but because of changes in the aforementioned ancillary variables as well.

Moreover, speaking of ancillary variables, the economy expanded in the fourth quarter of 2009 at the fastest pace – 5.7% annualized – in six years, far exceeding most economists' expectations. Such growth can only be sustained for so long before employment picks up. As we have stated in the past, employment is the number one variable in sustaining a housing recovery.

Keeping you updated on the market!
For the week of

January 25, 2010

MARKET RECAP

We knew changes in FHA-insured loans were coming. Now it appears they are almost here. Last week, the FHA said it would tighten loan requirements on loans it insures. Specifically, it would raise the MIP to 2.25% – effective this spring – and then seek permission to increase the percentage again.

The FHA also proposed requiring borrowers with credit scores below 580 to put up a 10% down payment. Those with higher credit scores would still qualify for a 3.5% down payment. In addition, the FHA proposed reducing seller concessions to 3% from 6% of the mortgage. Both proposals will require a public comment period before taking effect.

We have been warning for the past month that anyone considering an FHA-insured loan should act now. We stand behind that warning. Fact is, any changes instituted by the FHA will only increase the cost of an FHA-insured loan.

Borrowers might be feeling a little dour over the prospect of paying more for an FHA-insured loan, but they are likely not feeling as dour as homebuilders are. The homebuilders' sentiment index declined again in January to 15, which means that only one in six builders thinks the market is "good.”

We could argue, persuasively, that homebuilders have done everything possible to set the stage for a recovery: they have culled inventories and cut new construction to a virtual standstill. For all of 2009, homebuilders started only 554,000 homes – the lowest since 1945. Back then, there were only 132.5 million Americans. Today, there are 307 million.

Higher prices would certainly help lift homebuilder spirits. On that front, things are improving. Radar Logic's monthly Residential Property Index (RPX) showed year-over-year price increases in eight of the 25 markets surveyed, the most since July 2007, when the RPX price composite peaked. Radar Logic said that increased affordability is helping to boost prices, as well as sales. On the latter, November home-sales volume increased year-over-year and month-over-month in all of the 25 metropolitan markets the RPX covers.

Low mortgage rates were no doubt a contributing factor to the sales rally. They remain low today. In fact, rates dropped (by a few basis points) across the board for the third-consecutive week. Do not expect much more, though; we have been saying that any improvements in mortgage rates will be incremental at best, and that has been the case.

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Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Existing Home Sales
(December)

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

6.06 Million (Annualized)

Important. Sales are expected to pull back after November's brisk pace.

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

Tues, Jan. 26,
9:00 am, et

147 Index

Important. Markets are expecting further evidence of improving prices.

Consumer Confidence
(January)

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

53.5 Index

Moderately Important. Confidence continues to improve despite employment concerns.

Mortgage Applications

Wed, Jan. 27,
7:00 am, et

None

Important. Increased purchase activity is raising market expectations.

New Home Sales
(December)

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

370,000 (Annualized)

Important. A rebound is expected after November's decline.

Federal Reserve
FOMC Meeting

Wed, Jan. 27,
2:15 pm, et

Federal Funds Rate:
0.0% to 0.25%

Important. Short-term rates will hold near zero, but there could be indicators of future increases.

Durable Goods Orders
(December)

Thurs, Jan. 28,
8:30 am, et

1.4%
(Increase)

Moderately Important. Large-ticket items continue to thrive in this low interest-rate environment.

Gross Domestic Product
(4th Quarter 2009)

Fri, Jan. 29,
8:30 am, et

4.4%
(Increase)

Very Important. Proof of a sustained economic recovery could lead to higher interest rates.

Employment Cost Index
(4th Quarter 2009)

Fri, Jan. 29,
8:30 am, et

0.5%
(Increase)

Important. Costs are increasing, foreshadowing possible employee-induced inflation.

The Farther They Fall, The Higher They Could Rise

Richard Carson and Samuel Dastrup, two university professors, recently published an interesting academic paper (a synopsis is posted at Econbrowser.com). Carson and Dastrup examined how the magnitude of housing-price declines correlated with various factors, such as overbuilding, extent of sub-prime lending, and median income. Not surprisingly, these factors were related to price declines. However, the most important factor was the magnitude of the previous price run-up, which accounted for more than half of the observed variance in the size of the price decline.

The takeaway from Carson and Dastrup's research is that the farther prices ran up in a hot market, the farther they tend to run down in the subsequent cooling. Not surprisingly, the hottest markets – Las Vegas , Riverside , Miami and Sacramento – have fallen the farthest and cooled the fastest. Many of these markets are now as cold as an Arctic winter, particularly Las Vegas , where home prices have dropped 50% and more.

However, cold markets often provide the best buying opportunity. Consider Las Vegas : a home that cost $200,000 in 2007 and lost 50% of its value costs $100,000 today. A 50% gain pushes its value up to $150,000. In other words, prices do not have to appreciate back to their peaks for people to book considerable equity or an investment gain. This simple math is worth repeating to homebuyers and residential real estate investors, especially to those residing in or near frigid markets.