About Providence's Elmhurst

Keeping you updated on the market!
For the week of

July 12, 2010

MARKET RECAP

We may have been early, but we still think we are right. We're speaking of the impending recovery in the housing market. It's a contrarian opinion, given all the recent chatter and teeth-gnashing over delinquencies, foreclosures, shadow inventory, vacancies, and what not. But the number of data gatherers jumping aboard the better-times-ahead bandwagon is growing.

John Burns Real Estate Consulting, for one, sees better times, according to Housingwire, which reports that the company sees the housing market approaching its next up cycle. Burns & Co. lays out a persuasive argument for a return to housing prosperity: improving job growth, record-low new construction, record-low mortgage rates, and the best affordability conditions in 30 years. To quote CEO John Burns: “We want to point out that the downside of investing in housing right now is about as low as you will ever see."

We agree, even though price stability remains a concern. We could very well discover that the federal tax credits artificially raised housing prices during their tenure. Using Massachusetts as a proxy, Trulia.com reports that the average price reduction for a single-family home or condominium in June rose to 8 percent, or $38,883 off the original asking price.

That said, we stick by our hypothesis that a temporary dip in sales and prices should be expected, as buyers and sellers recalibrate to the reduced-subsidy environment. Going forward, we still see housing prices stabilizing and moving higher (albeit at a tortoise-like pace) and sales volume increasing.

Of course, our hypothesis is predicated on a continued job recovery, which both loosens purse strings and raises confidence. When people are working, they become less obsessed with predicting the future and with holding out for the rock-bottom price. Yes, 4.5 percent fixed-rate mortgages are better than the 6 percent variety, but only when they are accompanied by lower employment.

As we've noted many times in the past, we'd prefer to see rising mortgage rates accompanied by rising employment (the two tend to move in tandem). The prospect of higher mortgage rates and better employment would get the current fence-sitters to refinance and buy. And as we've also noted in the past (and which John Burns Real Estate Consulting appears to concur), we think the potential for housing appreciation far exceeds the potential for depreciation for anyone looking five years down the road.

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Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

International Trade
(May)

Tues, July 13,
8:30 am, et

$40 Billion (Deficit)

Moderately Important. The deficit is expanding on a strengthening dollar.

Mortgage Applications

Wed, July 14,
7:00 am, et

None

Important. The recent spurt in refinances will likely level off as rates stabilize.

Retail Sales
(June)

Wed, July 14,
8:30 am, et

No Change

Important. Slowing sales is reflective of rising consumer pessimism.

Import Prices
(June)

Wed, July 14,
8:30 am, et

0.1% (Decrease)

Moderately Important. The stronger dollar is keeping import inflation in check.

Producer Price Index
(June)

Thurs, July 15,
8:30 am, et

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

Important. Producer-induced inflation remains non-existent.

Industrial Production
(June)

Thurs, July 15,
9:15 am, et

0.2% (Increase)

Important. Increasing capacity utilization rates reflect growing demand.

Consumer Price Index
(June)

Fri, July 16,
8:30 am, et

All Goods:
No Change
Core: 0.1% (Increase)

Important. Consumers and credit markets continue to benefit from low inflation.

When a House is Not a Home

Last Sunday the Washington Post ran a story titled “Finding Gold in Them Thar Foreclosures” that focused on the rewards and risks of buying residential real estate in one of the country's hardest hit burgs – the metropolitan Phoenix area.

A couple days later, a writer on CalculatedRiskBlog.com followed up with an anecdote of an individual investor who had bought nearly 100 homes (focusing on single-family homes) over the past 18 months in the same area. The writer noted that the average purchase price was under $35,000, with one of the properties being bought for $20,000 after selling for $180,000 in 2006. Most of the homes were of the three-bedroom/two-bath vintage, and most were rented, with some even renting by the room.

There are at least two worthwhile takeaways from this anecdote: One, investors need to seize opportunities. Jittery markets are great for finding bargains if you are a long-term investor. Second, money is available for real estate investing. Though the writer fails to mention it, we doubt the investor paid cash for all those properties.

To be sure, rental properties aren't for everyone – they come larded with work and headaches, but they can prove highly remunerative when gotten at the right price. In today's market, there are definitely more right prices than wrong ones, especially for someone with a good credit history who is working with a creative mortgage professional with a strong knowledgeable of financing options.

Keeping you updated on the market!
For the week of

July 5, 2010

MARKET RECAP

We've always taken pride in going against the crowd (namely, by accentuating the positive), but we must admit that this past week has been difficult, especially after digesting the bleak news on foreclosures. On that front, RealtyTrac reported that homes in the foreclosure process sold at an average 27 percent discount in the first quarter of 2010, as almost a third of all transactions involved properties in some stage of mortgage distress.

The low-lights of RealtyTrac's report show that home foreclosures set a record for the second straight month in May, with increases in every state. Bank repossessions climbed 44 percent from a year earlier and will likely set a record in the second quarter. The average price of a distressed property was $171,971; the discount will probably stay between 25 percent and 30 percent as lenders carefully manage the number of new foreclosure actions to avoid flooding the market.

The increasing adoption of short sales as a loss mitigation tool will likely exacerbate matters, when you consider that short sales are used as comparable properties for valuations used in refinances, modifications, and sales. Disturbingly, the 2008 vintage of conventional and Alt-A mortgages are performing nearly as poorly as their 2006 and 2007 brethren.

Poking around for a semblance of a silver lining, we found that the S&P/Case-Shiller Home Price Index showed healthy price increases in April. In short, the 20-city index posted a 4 percent increase year-on-year, lead by San Diego and San Francisco , which posted price increases of 12 percent and 18 percent, respectively. Even Phoenix beat the national average, with a 5 percent rise. Only Miami and New York posted price declines.

We're keeping our enthusiasm in check, though: First, the Case-Shiller data is stale; April is over two months ago. Second, the data is skewed by the rush to take advantage of expiring federal tax credits. We expect to see some softening in prices over the next month or two when factoring the aforementioned foreclosure data and the fact the index of pending home resales dropped 30 percent from April to May.

Farther out, we're more bullish, which is why we're still not in favor of reviving the federal tax credits, as some market commentators suggest. We liken today's market to ingesting cod-liver oil: We don't like it, but it's something we'd prefer to take in one gulp instead of many small sips. Inventory has to be cleared, and we think the faster it's cleared, the more robust and sound the recovery will be.

We're also not in favor of continued mortgage rate drops. Yes, the drops have been marginal week by week, but weekly marginal drops can accumulate into a substantial drop over time. The only reason rates continue to drop is that investors remain excessively risk averse. As we stated last week, excessive risk aversion is not good for the overall economy.

But it is good for borrowers looking to move from a 30-year to a 15-year fixed-rate loan. The potential to save serious money on interest over time is huge, which is why we are counseling many borrowers to consider refinancing into the shorter-term option.

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Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

ISM Non-Manufacturing Index
(June)

Tues, July 6,
10:00 am, et

55.4 Index

Moderately Important. Overall business activity appears to be stalling.

Mortgage Applications

Wed, July 7,
7:00 am, et

None

Important. Rate drops are spurring refinance demand, but purchase demand remains weak.

Consumer Credit
(May)

Thurs, July 8,
3:00 pm, et

No Change

Important. Tighter credit standards and lower consumer confidence continue to limit credit use.

Wholesale Trade
(May)

Fri, July 9,
10:00 am, et

0.5%
(Increase)

Moderately Important. Higher energy costs are responsible for most of the increase in trade.

Show Us the Jobs

The monthly employment report is worth a little expatiation, because employment is key to opening the door to prosperity. But the report can be exasperating at times. The June report showed that payrolls declined by 125,000, while the unemployment rate dropped to 9.5 percent from 9.7 percent. It's a paradox, until you read the fine print and discover the rate drop was due to 652,000 people giving up their job search.

This latest edition of the employment report wasn't particularly well received by economists, with one particularly off-put fellow lamenting, "We need unprecedented rates of growth to get out of this hole in a reasonable amount of time. It's hard to overstate how deep the hole is."

Actually, it isn't hard. Bad news is always more titillating than good news: many of us simply enjoy wallowing in misery. We don't, which is why we have no compunction in pointing out that the employment situation really isn't as bad as all that. Yes, payrolls declined by 125,000, but only because 225,000 temporary census workers were given their walking papers. Glossed over in the report is the news that the private sector added 83,000 jobs. The private sector is where we want the growth, and we are getting it.

All in all, we still see a sustained recovery, which is why we continue to badger for home purchases and mortgage refinances today over home purchases and mortgage refinances tomorrow.

Keeping you updated on the market!
For the week of

June 28, 2010

MARKET RECAP

The housing market is playing out close to what we had anticipated post-April 30, so we weren't surprised to hear that existing-home sales slipped in May, posting a 2.2 percent drop to an annualized adjusted rate of 5.66 million units. The consensus opinion called for sales to increase to 6.07 million units, due to an anticipated push to close by June 30, so the unexpected slip was disappointing. The good news was that the median sales price, at $179,600, remains 2.7 percent above last year's median price, while inventory tightened to an 8.3-month supply.

The slip in existing-home sales was nowhere near as disappointing as the tumble in new-home sales, which hit their lowest level since 1963. Whereas the consensus expected sales to post at an annualized rate of 470,000 units for May, the market was only able to deliver a 300,000-unit rate. To get a perspective on just how far new-home sales have dropped, only five years ago new homes were selling at a 1.39-million annualized rate. There was one notable positive in the new-home data – inventory tightened to an 8.5-month supply.

The disappointing data on home sales has rekindled talk of a double-dip recession. Many pundits were expecting existing-home sales to improve until July, after which the full impact of the tax-credit expirations would be felt. We've stated in past editions that we expect housing sales to behave similarly to automobile sales when they underwent a similar stimulus. In other words, we expect to see a precipitous sales drop (which we are seeing) followed by stabilizing and increasing sales.

Other market watchers are less sanguine. Employment worries have been the gut reaction to the lackluster demand for new homes. Construction will certainly suffer if fewer new homes are being built, so goes the extrapolative train of thought. Keep in mind, though, that renovations on foreclosures and short sales will pick up some of that slack. The more pressing issue, in our opinion, is draining the inventory of existing homes before building more new ones, which appears to be occurring. After all, when you want to drain a tub, you don't keep adding water.

Sales aren't the only housing-market variable hitting lows. Mortgage rates continue to hold, and at times exceed, historical lows, and could continue to do so into the near future. The Federal Reserve noted that inflation is “likely to be subdued for some time.” The Fed also said that “prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower.” But a few dissenting voices note that the low-rate pledge might fuel another asset-price bubble. Experience has taught us that dissenting voices are worth listening to.

.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Personal Income & Outlays
(May)

Mon, June 28,
8:30 am, et

Income: 0.4% (Increase)
Outlays: 0.2% (Increase)

Important. Spending is expected to ease on renewed economic concerns.

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

Tues, June 29,
9:00 am, et

3.4%
(Increase)

Moderately Important. April's prices will likely be skewed by the push to exploit federal tax credits.

Consumer Confidence
(June)

Tues, June 29,
10:00 am, et

62.9 Index

Moderately Important. Confidence is easing, but remains healthy.

Mortgage Applications

Wed, June 30,
7:00 am, et

None

Important. Low rates alone are no longer stimulating lending activity.

Construction Spending
(May)

Thurs, July 1,
10:00 am, et

0.5%
(Decrease)

Important. The drop in new-home construction will hurt overall spending.

Pending Home Sales Index
(May)

Thurs, July 1,
10:00 am, et

99.8 Index

Important. Sales will decline after the April surge.

Employment Situation
(June)

Fri, July 2,
8:30 am, et

Unemployment Rate: 9.7%
Jobs: 70,000 (Decrease)

Very Important. Deviations from the consensus opinion will impact interest rates.

The Costs are Outweighing the Benefits

We've stated that the benefits of low interest rates have run their course. We hold to our contrary opinion that low rates are actually hindering more than helping markets these days. Consider the mortgage market: Even though mortgage rates are dwelling in the basement, fewer people are applying for mortgages. The MBA reported that purchase activity declined 1.2 percent to the second-lowest level since 1997 last week, while refinancing activity slid 7.3 percent from its May 2009 highs.

The Federal Reserve's low-rate policy is hardly inspiring confidence. “Rates must be low because the economy is circling the drain,” so the man-on-the-street rationale goes. It's the wrong message to send, because promoting risk aversion also means promoting inertia. Risk-averse markets are simply less willing to engage in riskier, but worthwhile, economic activity.

This risk-averse sentiment is readily reflected in the capital markets, where the relatively non-productive assets of gold and Treasury securities continue to be the investments of choice. That's unfortunate, because we'd all be better off if there were more investment in the very productive (though riskier) assets of home purchases and renovation and mortgage lending.

Keeping you updated on the market!
For the week of

June 21, 2010

MARKET RECAP

Some people are just unsure of where they're going. We'll slot homebuilders into this category. After posting steady gains over the past few months, the National Association of Homebuilders/Wells Fargo Housing Market Index tanked five points to 17, which means homebuilders have turned sour once again.

The mood change is understandable, given that housing starts sank to their lowest levels in five months. The numbers are hardly encouraging: starts fell 10 percent in May from April to a seasonally adjusted annual rate of 593,000 units. The good news is that compared to the same time last year, starts are up 7.8 percent.

The drop should have been anticipated. In the previous two months, improvements were driven by federal tax credits, which are now gone. We've noted in past editions that the current activity pattern isn't unprecedented, using the purchasing patterns in automobiles as an example. After the cash-for-clunkers program expired, auto sales plummeted, but then recovered steadily over subsequent months. The fact is, we are transitioning from a government-aided recovery to a more-sustainable market-based one. And while it takes time for the transition to occur, it won't be pain free.

Even though new homes aren't getting the attention from potential buyers that homebuilders desire, more people are buying – at least that appeared to be the case last week. The Mortgage Bankers Association reported that purchase activity rose 7.3 percent, halting a plunge that took the measure the prior week to the lowest level since 1997.

Refinances were also on the upswing last week, thanks to more borrowers believing mortgage rates are about as low as they can go. Our mantra on the subject remains unchanged: rate decreases will be marginal at best. Many borrowers, though, are relentless bargain hunters and want the absolute best rate possible, which leads to the inevitable question: should I lock shortly after applying or wait until the closing date is near?

Sometimes the decision is made for you; some banks require a lock when the application is sent. Many borrowers wish to lock as soon as possible anyway. We suggest that once the rate is locked you stop checking rates; there is no sense stirring up feelings of remorse over a few basis points. Life is too short.

On the other hand, some borrowers are risk accepting (at least that's what they say), and they want those few basis points. To those people we say “go for it,” but only if they are willing to accept the very real risk, and won't be driven to agony, by a rate spike. No one, us included, can know with certainty where rates will be 30 days from now. But if the choice is between noticeably higher or noticeably lower, we'd side with the former.

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Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Existing Home Sales
(May)

Tues, June 22,
10:00 am, et

6.07 Million (Annualized)

Important. Despite the lack of tax credits, sales are expected to hold steady.

FIFA House
Price Index
(April)

Tues, June 22,
10:00 am, et

None

Important. Prices should post a slight increase on a buying surge.

Mortgage Applications

Wed, June 23,
7:00 am, et

None

Important. Another increase in purchase activity could suggest renewed buyer interest.

New Home Sales
(May)

Wed, June 23,
10:00 am, et

470,000 (Annualized)

Important. Markets are expecting a post-tax-credit hangover.

Federal Reserve FOMC Meeting

Wed, June 23,
2:15 pm, et

Federal Funds Rate: 0.0% to 0.25%

Important. The Fed will continue to hold short-term rates near zero.

Durable Goods Orders
(May)

Thurs, June 24,
8:30 am, et

0.9%
(Decrease)

Moderately Important. The longer-term trend has been up, but recent monthly figures have been volatile.

Gross Domestic Product
(1st quarter 2010)

Fri, June 25,
8:30 am, et

3.0%
(Annualized)

Moderately Important. This final revision shows slightly slower economic growth than first anticipated.

How Risky is this Market?

The May/June edition of the Financial Analyst Journal featured an article titled “Dimensioning the Housing Crisis” (available for download at CFAinstitute.org). The article is noteworthy for encapsulating the problems of the housing market in a mere 12 pages.

The article is replete with sundry graphs, most of which accentuate just how bad things got over the past two years. One graph features the spike in first-time defaults; another features the seemingly exponential growth in housing overhang; yet another features the precipitous drop in cure rates for 30-day, 60-day, and 90-day delinquencies. The author notes, in pointed prose, that “we have a housing problem that affects 11 million to 12 million units. If nothing is done, more than one homeowner out of every five will face eviction.”

It's a pessimism-inducing article, to be sure, but we remain upbeat nonetheless. Reason being, these problems are well documented today, which means there are few shocks left to rock the market. What's seen isn't what kills, it's what's unseen.

Savvy buyers know that the time to buy isn't when everything is dear but when everything is disdained. Everything in housing isn't disdained, but sentiment remains low. So, we ask ourselves, was it riskier to buy a house in 2006 or is it riskier to buy one today? The sentiment feels riskier today, but the data show that 2006 was overwhelmingly riskier.

Keeping you updated on the market!
For the week of

June 14, 2010

MARKET RECAP

The week was light on housing and mortgage data, which was a good thing; most of what was released offered little cheer. For instance, Capital Economics reported that 2.5 million households are going through the foreclosure process, while 5.4 million households have missed at least one mortgage payment. Capital Economics also expects another three million homes to be added to the foreclosure rolls by the end of 2011. In short, Capital Economics is calling for a housing-market double-dip.

Problems persist aside from the above mentioned, to be sure. According to more than a few sources, housing prices are under pressure. ZipRealty, for one, has noted that more than 43 percent of home sellers cut their home's list price in May, dropping the national median “for sale” price 2 percent to $265,000.

Of course, we can always question the usefulness of national data. But if we are going to talk nationally, it's worth broaching the positive as well. On that front, Integrated Asset Services reported that its house price index rose 0.9 percent in April from March. IAS also reported that three of the four US census regions showed home-pricing gains for the month.

The expiration of the federal homebuyer tax credits remains the elephant in the room, according to the commentariat, though it appears to be less of a concern for people who actually earn a living in the housing sector. Publicly traded homebuilders are seeing sales recover after an initial drop-off following April 30. A recent analyst's report from JMP Securities noted that sales at several homebuilder communities in California , Texas , and Phoenix – those notoriously hard-hit regions – have begun to improve and are approaching pre-April numbers. JMP's report also noted that many builders are raising prices and that higher-priced homes are moving briskly.

We noted in last week's edition that the housing market could easily follow the automobile market's lead, where sales initially drop after tax-credit expiration but then regain momentum. We've also noted – quite frequently in many past editions – that employment is the real cure to what ails us. Even though last week's employment report was tepidly received, we remain encouraged. Job openings jumped to the highest level in 16 months in April, with the number of jobs advertised rising to 3.1 million from 2.8 million. The fact that private employers accounted for the entire gain was a particularly encouraging sign.

An improving jobs outlook is good news for the economy, but less so for mortgage rates. Yes, rates continue to hold at historical lows (with improvements being marginal at best), but Federal Reserve rumblings on raising rates continue to build, which is why we continue to counsel against procrastination on a refinance or a home purchase. We also counsel that money is available: little, or negative, equity is not an exclusion to a favorable refinance.

.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Import Prices
(May)

Tues, June 15,
8:30 am, et

0.8%
(Decrease)

Important. The price trend remains non-inflationary.

Housing Market Index
(June)

Tues, June 15,
10:00 am, et

22 Index

Important. Homebuilder optimism continues to improve with the overall economy.

Mortgage Applications

Wed, June 16,
7:00 am, et

None

Important. Low rates appear to have reached a saturation point.

Housing Starts
(May)

Wed, June 16,
8:30 am, et

650,000 (Annualized)

Important. Markets are expecting a post tax-credit retreat, though activity appears stable.

Industrial Production
(May)

Wed, June 16,
9:15 am, et

0.7%
(Increase)

Important. Strong business demand is driving recent production increases.

Consumer Price Index
(May)

Thurs, June 17,
8:30 am, et

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

Important. Consumer prices continue to show that inflation remains subdued.

Leading Indicators|
(May)

Thurs, June 17,
10:00 am, et

0.2%
(Increase)

Moderately Important. The indicators suggest the economic recovery remains on track.

Another Round of Reasonable Perspective

There is no question that we face formidable, long-term structural problems – problems that have made US markets less attractive in recent years. But these problems are surmountable. We have no qualms saying that the spirit of innovation and entrepreneurship that has defined America in past crises will prevail today.

Though housing remains tepid and debt and deficit levels are rising, compared to the rest of the world the United States is in good shape. Our economic fundamentals are sound: manufacturing levels are up and interest rates and inflation are low. What's more, the broader economic recovery is translating into meaningful employment improvements and corporate-profit growth that could potentially reach a record high in this year's third quarter.

R isks clearly remain, but markets are always fraught with risks: there are no perfect markets. To the contrary, when markets seem the most perfect, that's when they are the most risky, as the housing and mortgage markets post-2006 have so painfully revealed. Things still aren't so rosy today, but that's okay, because we're sure that better days lie ahead.