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Keeping you updated on the market! For the week of
August 20, 2012
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MARKET RECAP
It looks like a new trend is developing in the second half of 2012: upping the home-price outlook. Last week, we mentioned that Zelman & Associates raised its home-price forecast for 2012. This week, it's Bank of America's turn.
At the start of the year, analysts at Bank of America predicted home prices would rise a mere 0.5 percent for 2012. Today, these same analysts believe national home prices will post a 2-percent gain, followed by another 2-percent gain in 2013, which is up from their original estimate for a 0.3-percent gain.
We weren't surprise to see Bank of America raise its price expectations. We also weren't surprised by its rationale. Bank of America cited many of the same variables we've cited over the past year: a shift toward shorts sales among creditors, a decreased flow of foreclosures, a reduction in supply. Increased demand also helps, which when coupled with decreased supply leads to the inevitable – higher prices.
Home builders have also held supply in check. Starts, especially on single-family units, remain at lows that are below those seen during the 1981-1982 recession.
Home builders still have a long way to go before they hit the long-term annual average, but they've been ramping up production over the past year. Housing starts came in at 746,000 annualized units in July, which is down 1.1 percent from June. It's important, though, to keep an eye on the big picture. In that context, starts are up 21.5 percent year-over-year. It appears starts will continue to gain momentum, considering permits rose 6.8 percent to 812,000 annualized units in July.
Increased new-home inventory won't materially change today's low inventory levels. In other words, home prices – new and existing – should continue to gain traction across the country. (Of course, all markets are local and the degree of traction will vary among markets.)
As for the overhang of shadow inventory, the longer it remains in the shadows, the less likely it will be inventory. Houses, we often forget, are depreciating assets if they are insufficiently maintained. Houses can, and do, go away. We actually lose over 300,000 housing units annually through neglect, fire, or natural disasters.
In short, we still see persistent price gains for much of the country.
Speaking of prices, the price of most mortgages rose this past week. This actually marks the third-consecutive week where mortgage lending rates rose. Granted, we are talking about a couple basis points in some instances, but it's still a trend.
An improving economic outlook (which raises loan demand) was the most repeated explanation for rising lending rates. Retail sales are trending higher, and increased sales reflect rising consumer confidence. Increased home-building activity is also bolstering the outlook for the economy.
So where are rates going? The 10-year U.S. Treasury note is a useful proxy for gauging mortgage lending rates, and it's been trending higher over the past month. So we don't expect a pull-back in rates this week. In fact, we wouldn't be surprised to see a fourth-consecutive week of rate increases. |
Economic
Indicator
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Release
Date and Time
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Consensus
Estimate
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Analysis
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Mortgage Applications
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Wed., Aug. 22,
7:00 am, et
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None
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Important. Recent purchase activity points to a reduction in sales growth heading into fall.
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Existing Home Sales
(July)
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Wed., Aug. 22,
10:00 am, et
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4.5 Million (Annualized)
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Important. Sales have flattened in recent months over economic-growth concerns.
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New Home Sales
(July)
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Thurs., Aug 23,
10:00 am, et
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370,000 (Annualized)
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Important. Rising new home sales and construction spending should help lift the economic outlook.
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FHFA Home Price Index
(June)
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Thurs., Aug 23,
10:00 am, et
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0.5%
(Increase)
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Moderately Important. The index will further confirm the upward trend in home prices.
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The Last Hold Out
One of our frequent laments over the past year has been the lack of diversity in the mortgage lending market. Fannie Mae, Freddie Mac, and the FHA back more than 90 percent of all new loans today, up from a third five years ago.
Unfortunately, the level of diversity might not be rising soon. Housingwire.com reports that regulators are pushing for lenders who offer high-risk mortgages to hire certified, licensed appraisers to conduct interior property inspections. (A high-risk mortgage is defined as one secured by a home with an interest rate above a certain threshold.) What's more, if a seller acquires this high-risk property for a lower price within six-months, an additional appraisal must be supplied at no cost to the consumer.
Basically, the regulators' proposal would raise the cost of higher-risk loans, which means there will be fewer of these loans. In turn, higher costs could make lenders even more risk averse, which would further shrink the pool of potential home buyers.
At this point, we think it makes financial and economic sense for lenders to venture further out on the risk scale. We understand the concerns, given the number of loans that went sour a few years ago. But today, there are simply too many potential borrowers relegated to the sidelines because of excessive risk aversion and its accompanying regulatory costs.
Prudent and thoughtful lending doesn't mean eschewing risky lending, it means approaching risky lending with intelligent underwriting procedures. |
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