Mixed Signals in Housing Data

Another mixed bag of housing data was released over the past week starting with last Thursday’s report from the National Association of Realtors that showed an unexpectedly drop in existing home sales. NAR reported that sales of existing homes in August fell by 2.7% form the prior month. This broke a four month trend of consecutive increases but still reflected a 3.4% increase form the same month a year ago. The report caught many economists off guard as extremely low interest rates, low prices and the government’s $8,000 tax credit were expected by most to boost sales for the month.

The Commerce Department reported on Friday that new home sales rose in August but only by a modest .7%. Even more disappointing is the fact that August new home sales were off 3.4% from a year earlier. Still, the slight increase for the month marked the fifth consecutive month of increases in the number of new homes sold. Mike Larson, an analyst with Weiss Research, Inc. said, “Price cuts and dramatic cutbacks in home construction are clearing out inventory in a big way.” “We now have the fewest number of new homes for sale since November of 1992,” he added.

Mortgage rates are still at eight month lows with the benchmark thirty-year fixed-rate flirting with 5.00%. Government rates, which usually lag behind conventional rates, are beginning to follow the downward trend with most FHA, VA and Rural Development thirty-year programs at or below 5.25%. Jumbo rates, rates for loans in excess of $417,000, are still in the high 6% range as that market remains highly illiiquid. I have been saying for some time that the run-up we have seen in the stock market this year has been irrational as concete evidence of an economic rebound has so far been lacking. The bond market, at least, agrees with me as demand for the safety of bonds remains high keeping interest rates low.

Rates Lower – Single Family Starts Fall

We have had some good news on the housing front over the past week as the National Association of Homebuilders reported that builder confidence rose in September for the third consecutive month to its highest level since May of 2008. The Census Bureau also released a report on August home starts that showed builders broke ground on 598,000 new homes, up 1.5% from July.

The good news was tempered, however, by a surprising drop in the number of single family home starts. While overall starts were up, thanks to a resurgence in multi-family property starts, single-family starts actually fell 3% in August. Some analysts suggested the drop in single-family home starts could simply be an anomaly and point to the overall report as yet another sign that the housing market has bottomed.

Mortgage rates have continued to defy the rally in the stock market with the benchmark conforming thirty-year, fixed-rate settling in at 5.125% with no points. The fifteen year fixed also improved to just under 4.50% as the bond market continues to bet that the Federal Reserve will keep rates low for the foreseeable future. Fed Chairman, Ben Bernanke, has helped reaffirm this belief by stating that while the economy may be approaching the end of the recession the overall economy, and particularly job growth, are likely to remain weak for some time. With the apparent lack of any inflationary pressures on the horizon, the Fed is determined to keep monetary policy very accommodating to insure the economy does not slip back into recession. Over the short-run, I expect mortgage rates to remain in their current narrow range and could ease even further.

One late report out this week from the IRS said that, so far, 1.4 million first-time homebuyers have taken advantage of the $8,000 tax credit. The credit is due to expire on November 30th though there are already some calls from Congress that it should be extended. I’ll keep you posted.

Record Pace for Contracts on New Homes

The National Association of Realtors reported Tuesday that its index of pending home sales rose 3.2% in July from June marking the sixth consecutive month of increases. Though not quite as high as the 3.6% increase reported in June, July’s increase marks the first time the index has posted six months of increases since NAR began tracking pending home sales in 2001. Economists generally expected a July increase of only 1.5%. NAR Chief Economist, Lawrence Yun, said in a written statement that “momentum in the housing market has clearly turned for the better.” “The recovery is broad-based across many parts of the country,” Yun said. “Housing affordability has been at record highs this year with the added stimulus of a first-time homebuyer tax credit.”

Mortgage rates have managed to ease slightly as bond prices have risen over the past few days as the Dow has shed over 200 points in the past two days in a sign that investors may finally be pulling back from what many have seen as a premature rally over the past six months. Thirty-year, fixed-rates fell to 5.25%, approaching a six month low and fifteen year rates hovered near 4.50%. We have yet to see any drop in jumbo rates which have remained above 7% for some time with little hope of relief in the foreseeable future as the secondary market for jumbos is nearly non-existent. Look for rates to remain in their current range with the possibility of further easing not our of the question over the coming week.

Home Prices Post GAIN

We have received more good news on the housing market this past week beginning with Last Friday’s report from the National Association of Realtors’ report on July existing home sales which showed a jump of 7.2% over June and up 5% from July of 2008. It was the biggest month-over-month increase in existing home sales since NAR began tracking the statistic in 1999.

On Tuesday, the S&P/Case-Shiller Home Price Index showed home prices increased 2.9% in the three months ending June 30th. This was the first quarter-over-quarter increase in three years providing further evidence that the housing market has since bottomed and is on the road to recovery. Late breaking news on new home sales came in this morning which showed a jump of 9.6% in July, the highest level since September 2008.

Mortgage rates have stayed in a range over the past week with only mild daily fluctuations in contrast to the increased volatility we had seen in the week prior. The Fannie Mae/ Freddie Mac conforming fixed-rate for single-family purchases stands at 5.375% with no points and the fifteen year stands at 4.625%. Rates have been helped by tame inflation reports and a well received government bond auction last week.

Rates have even managed to brush off a better than expected 4.9% increase in durable goods orders reported today with bonds actually a hair higher after the report. I expect rates will remain in their current range over the next week as they have for the past month or so. In the longer term, we will have to see if there are further signs of an improving economy and, if so, will those signs be strong enough to bring some inflationary fears back into the market. So far all indications are that though we are in the beginnings of a recovery, it will be very slow and take some time to fully rebound.

Mixed Signals in Housing Data

We got a mixed bag of economic data on the housing front this week that, on one hand disappointed, but upon closer analysis showed yet another sign that the battered housing market is recovering. On Tuesday the Commerce Department said that initial construction of new homes fell in July after surging in June. Housing starts fell 11% to a seasonally adjusted rate of 581,000 down form 587,000 in June. Commerce also reported that applications for new building permits also fell in July by a more modest 1.8% though both reports came in below economist’s forecasts.

One caveat, however, was that when broken out by construction type, housing starts for single-family homes actually posted a 1.7% gain in July and applications for single-family permits rose by 5.8%. This is the silver lining in these reports as single-family homes are considered the core of the housing market and the overall numbers include the hard hit multi-family sector.

Mortgage rates remain very attractive after last week’s meeting of the Federal Reserve’s Open Market Committee reassured investors that interest rates would remain low for the foreseeable future as inflationary pressures are anticipated to remain weak for some time. Stocks have also helped out rates as consumer spending and consumer sentiment figures released last week have cast more doubt about a speedy recovery for the economy.

The thirty-year conforming fixed rate is sitting right at 5.25% for single-family purchases and the fifteen-year is at 4.625%. Government rates have been just a tad higher at 5.50% and 5.00% respectively. As long doubts linger over the economy, we will continue to have the uncertainty factor that tends to maintain demand in the bond market and keep rates low. Without any inflationary pressures in the short-run, I don’t see any significant rise in rates over the coming weeks and we may even see some further easing.

Rates Ease and Home Prices Post Record Fall

Mortgage rates have eased since last week with the rate on the benchmark thirty-year, fixed-rate falling back below 5.50% to settle in at 5.375%. That’s a .25% improvement since last week’s spike up to 5.625%. Rate shave been benefiting form some profit taking in the stock market which has cooled a bit in August following it’s month long rally in July. This is interesting considering last Friday’s unemployment report for July showed far fewer jobs lost for the month than economists expected and an actual decline in the overall unemployment rate to 9.4%. News like this usually provides the impetus for renewing a stock rally as it indicates an economy that may be pulling out of recession and stocks did surge on the news but have since pulled back as worries that we’re not out of the woods yet continue to linger. I have felt all along that the optimism on Wall Street over the better part of this year has been premature and has put the cart well before the horse. The fact bond prices have remained high and rates low supports this theory.

After a plethora of good news on the housing front we finally received a sobering report on June home prices this week. The National Association of Realtors on Wednesday said that home prices fell a record 15.6% for the three month period ending June 30 compared with the same period in 2008. Analysts attribute much of the decline on the excess inventory of distressed properties on the market, those that are either in foreclosure or short-sales, as these properties on average sell at a 15% discount compared to non-distressed properties. Yet there was a glimmer of hope in the report as median home prices actually rose 4% and quarter-over-quarter home sales rose 3.8%. Though fairly typical of a normal spring buying season, it is yet another sign that the worst of the housing market correction may be behind us.

Rates Rise – Home Sales Too

Mortgage rates held up well last week as the Federal Reserve auctioned off a whopping $200 billion in US Treasury debt and even managed to improve somewhat by week’s end as I had predicted. This week has been another story however. After sliding to 5.25%, the rate on the benchmark thirty-year, fixed-rate climbed back to 5.50% as the ten-year Treasury note yield rose to 3.73% by Wednesday morning.

Bonds prices have been falling in reaction to positive economic news and a renewed rally in the stock market though stocks looked ready to pull back by mid week. After a period of relative calm over the past several weeks, we are seeing a return to volatility and I expect to see some see-sawing of rates over the short-run as investors try to digest the mix of economic data and corporate earnings.

Yet another sign of a thawing housing market could be seen in a report released on Tuesday that showed pending home sales rose for the fifth consecutive month in June. According to the National Association of Realtors, the Pending Home Sales Index rose to 3.6% during June. That was 6.7% higher than in June of 2008 and the first five consecutive month increase since July of 2003. The number surprised most analysts who had expected a meager .7% increase. The majority of the sales were in the lower-end segment of the market indicating that many first-time buyers are getting off the fence, lured by low rates, low prices and the $8,000 tax credit. With a deadline closing date of November 30 to be eligible for the credit, I expect we will see a surge of first-time buyer activity in the next ten weeks or so.

Rates Hold, Home Sales Picking Up

Mortgage Rates have managed to survive some significant volatility in both the equity and bond markets over the past week to remain at 5.50% for thirty-year, fixed-rates. Stocks reacted positively last week after some better than expected initial corporate earnings but have since pulled back on more sober earnings reports and a second monthly decline in consumer confidence. Bond market volatility has been driven by a reaction to stocks along with a massive $200 billion government debt auction this week.

It is expected that the Chinese and others will readily buy up this new debt but concerns linger as to how much of an appetite they will have in the long run as the Federal Reserve raises an unprecedented amount of cash to pay for stimulus and the purchase of mortgage-backed securities. As I have discussed before, it is this delicate balance between the issuance of new government bonds, creating excessive supply, and the purchase of mortgage-backed securities, to create demand, that has managed to keep rates low thus far. If bond prices can hold up through this week we should see reduced volatility and perhaps a slight dip in rates next week.

Last Friday the National Association of Realtors released June existing home sales figures that, while showing an increase of 3.6%, also showed prices of existing homes were 15.4% lower than in June of 2008. Still, the 3.6% increase in sales was slightly better than the 3.4% most economists had expected. On an even more positive note, the government said on Monday that new home sales rose by a whopping 11% in June to a seasonally adjusted 384,000 homes. And while that was still 21% below the same month last year, it still easily beat economists’ forecasts of 352,000 new homes sold.

Perhaps the best news of the week came on Tuesday when the Case-Shiller index of home prices was released for May showing that home values rose on a monthly basis for the first time in nearly three years. The .50% increase was the first month-over-month increase since July of 2006. The Case-Shiller index also showed that home prices for May were off some 17.1% in the 20 major markets but May also marked the fourth straight month where the year-over-year decline lessened in those markets.

I have been reporting a lot of real estate statistics over the past eight months and what jumps out at me most is that in January it seemed for every positive report on housing, there were two that were negative. . . a kind of ‘one step up and two steps back’ scenario. By the middle of the spring, I was reporting roughly a 50/50 split between good news and bad news but now, for the last several months, all I am seeing is positive news. Granted, much of it, though positive, has not exactly been enough to make one jump for joy for a resurgent real estate market but it has been encouraging nonetheless. Two things are abundantly obvious in the recent data. Home sales, both new and existing, are rising and home prices are stabilizing. This has what has long been needed to correct the oversupply of housing through lower prices and increased demand. Let us hope this positive trend continues.

Mortgage Rates Hold Steady at 5.5%

Mortgage rates have managed to hold steady despite renewed optimism in the stock market spurred by better than expected corporate earnings reports and evidence the recession is nearing an end. The benchmark thirty-year, fixed-rate is right at 5.50% with no points and we are seeing more parity with other mortgage programs lately as both FHA and VA thirty-year rates are also at 5.50%. The rate on the fifteen-year, fixed-rate stands at 5.00%.

Mortgage rates have benefited from reassuring remarks from Fed Chairman Ben Bernanke who on Tuesday told lawmakers at his semi-annual address before congress that he plans to keep monetary policy “extremely accommodative” for some time meaning no rate increases are likely for the foreseeable future. I do not expect to see rates rise over the next week unless the stock market gets on an exceptional run of gain. Many analysts still feel the market exuberance seen of late is still premature as investors continue to cheer less than expected losses instead of actual increases in net profits.

We had some great news on the housing front last Friday as the government reported that initial construction of homes as well as new applications for building permits surged more than economists had expected. Housing starts rose to as seasonally adjusted annual rate of 562,000 in June, up 3.6% from May. The consensus estimate was for an annual rate of 524,000. Single-family housing starts were up a whopping 14.4%. Building permits rose 8.7% in June to an annually adjusted 563,000 while economists had expected only 530,000. This was the highest number of new permits since December and the second straight month of increases since the all-time low set in April. All this is just more evidence that the battered housing market has bottomed and finally on the upswing despite a continuing rise in unemployment.

The Mystery of the Term 'Condo-tel'

Since I am getting so many questions these days regarding condos and condo-tels and since the secondary market for these properties, i.e. Fannie and Freddie, has all but disappeared, I thought I would try and clarify why a project will or will not fly. First, a condo-tel is not a new concept. It has always been a type of property designation we use along with single family detached, duplex, etc. The problem is that for many years, Fannie and Freddie did not adequately identify beach-front, resort-style condominiums for what they really were. So what makes a condo-tel? Actually, any number of things. I have heard many times that a project is not a condo-tel because it doesn’t have an on-site rental desk. While an on-site rental desk would classify a project as a condo-tel the absence of one does not make it immune. If they have a website that advertises rentals it is a condo-tel. If an owner is required to rent per the bylaws it is a condo-tel. If it has daily maid service it is a condo-tel. So if a project doesn’t have any of these things then it is okay with Fannie and Freddie and fixed-rate financing is available? Not necessarily.

There is another classification we use for condominiums and this is the term ‘warrantable.’ Warrantable refers to whether it can be warranted as sellable to Fannie or Freddie meaning it meets their criteria for an acceptable condominium project. So what makes a condominium ‘non-warrantable’? If the developer is still in control of the HOA it is non-warrantable. If more than 50% of the units are investor owned it is non-warrantable. If one entity owns more than 10% of the total units it is non-warrantable. If the project has pending litigation against it or if a large percentage of owners are delinquent in their HOA dues, or any number of other factors cited by the appraiser can lead to a project being classified as non-warrantable. Every once in a while we come across a project that we can warrant but they are rare to say the least.

Between a project having one or more condo-tel attributes or having one or more of the non-warrantable attributes, you can see that most every condo here on the beach has no secondary market financing available. This is why a few banks like Vision have developed alternative vehicles to get these properties financed. Our portfolio 3/1 and 5/1 ARMs are not a panacea. Yes, they carry a certain amount of risk and the rates are at a premium over the current thirty-year fixed-rates, but, in the absence of a secondary market, these ARMs are the best alternative for providing financing to the buyer while protecting the bank from interest rate risk and meeting our future capital requirements. It is our hope that in there will eventually be a thawing in the secondary market for condos and that our products can provide a bridge to that future. In the meantime, we will continue to lend on these properties because we have a vested interest in seeing them sell and we have a firm belief that the collateral is sound.