Jim Belote, Union Mortgage, has a great update on part of the commentary...that related to homeowners "underwater". As he notes, it could be overstated and the "dramatic" element of people walking away is simply an irrational response to a given dilemna.
You have to read to the end. As he states so well, the fear of today is ridiculous. In three to five years, buyers are going to be doing hand springs for buying a house at this time with these rates.
MARKET RECAP
Negative equity pushed aside home price trends as the hot topic this past week. CoreLogic, which had a lot to say the previous week on prices, also had a lot to say about negative equity.
CoreLogic reports that 22.7 percent of all U.S. homeowners owed more than what they owned at the end of the first quarter of 2011 (which is actually an improvement from the 23.1 percent posted in the first quarter of 2010). CoreLogic states that 10.9 million borrowers are underwater and another 2.5 million borrowers are in a near-negative equity position, defined as having less than 5-percent positive equity.
We are obviously on the inflated end of the negative-equity scale, considering that CoreLogic was reporting 7.5 million borrowers were in a negative-equity position in 2008. However, do elevated negative-equity levels mean we are looking at another surge in foreclosures? Not according to the Federal Reserve Bank of Boston , which studied the relationship between the two. Based on data from the 1990s, the Boston Fed found that fewer than 10 percent of homeowners underwater lost their homes to foreclosure.
Self-interest, not surprisingly, was the deciding factor. Fed economists found that borrowers with negative equity who had ample liquid wealth would usually find it in their economic interest to stay in their homes. Economic interest is usually tied to the job market and regional economic growth. The good news is that job and economic growth for the country as a whole continue to trend higher. The bad news is that they haven't been trending quite as high in the past month.
As for mortgage rates, they continue to trend lower. Rates dropped again this past week to hit their lows for the year. We've obviously been on the wrong side of this bet over the past couple months. Given the Federal Reserve's massive injection of money into the banking system, the rising costs of many consumer staples, and the expectations for economic growth, we thought we would be looking at rates a quarter to a half percentage point higher than what we had at the start of the year.
The economic variables noted above have been overpowered by debt worries in Europe and the various crises in the Middle East , which have many investors flocking to the haven of U.S. government debt. The influx of money into U.S. debt markets coupled with slack aggregate mortgage demand has pushed mortgage rates lower. That said, high money levels, rising prices, and economic growth remain, which is to say that they are capable of moving to the foreground and pressuring interest rates higher in coming months.
Economic IndicatorRelease
Date and TimeConsensus
EstimateAnalysis
Producer
Price Index
(May)Tues., June 14,
8:30 am, etAll Goods: 0.2% (Increase)
Core: 0.2%
(Increase)Important. Productivity gains have kept price inflation in check, but rising energy costs could move prices higher.
Retail Sales
(May)Tues., June 14,
8:30 am, et0.3%
(Decrease)Moderately Important. Rising prices are reducing overall consumer demand.
Mortgage Applications Wed., June 15,
7:00 am, etNone Important. Purchase applications ended flat for May, but the monthly trend remains up.
Consumer
Price Index
(May)Wed., June 15,
8:30 am, etAll Goods: 0.0%
Core: 0.2%
(Increase)Important. Retail prices suggest inflation is running higher than the CPI estimates.
House Builders Index
(June)Wed., June 15,
10:00 am, et16 Index Important. Low inventory levels and price stability should boost future demand.
Housing Starts
(May) Thurs., June 16,
8:30 am, et 535,000 (Annualized) Important. Starts remain volatile and unable to establish a trend.
Leading Indicators
(May) Fri., June 17,
10:00 am, et 0.2%
(Increase) Moderately Important. The indicators point to slowing near-term economic growth.
Still Sold on Real Estate
Over the past six months, we've proselytized frequently on why we think real estate is today's best investment. The Wall Street Journal, in an article titled "Why It's Time To Buy," encapsulates and expounds many of the reasons we've previously stated on why we think real estate is such a wonderful opportunity. For one, the ratio of home prices to income is now 20-percent lower than the 15-year average through 2010, and 12-percent lower than the 1989-2004 average, according to Moody's Analytics. Moody's data also show that household formation increased to nearly 950,000 last year, and should average 1.2 million over the next decade. Greater demand leads to higher prices, and, eventually, to greater new-home supply.
The short-term outlook looks discouraging, though: job growth has slowed and foreclosures and inventory still weigh on pricing. However, longer-term - three-to-five years out - job growth won't be sluggish and inventory will have returned to more normal levels. In other words, buyers today will likely be looking at positive equity in the not-to-distant future. This is an important message to convey to our buy-side clients, many of whom remain hesitant to make what will likely be a very profitable investment.
Agree?? Disagree??? No matter what the reports say in the next week, long term is positive.
Bryan Cerny, Associate Broker, GRI, ABR, SRES, SFR
Rose &Womble Realty, Chesapeake, VA
Licensed in VA & NC
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