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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.