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Tuesday, January 15, 2013
Mortgage Matters UPDATE
Keeping you updated on the market!For the week of January 14, 2013
We are still early into 2013, but the data releases so far are extending the trends established in 2012.
Consider inventory: The numbers continue to drop. According to data provider Movoto Real Estate, inventory dropped 9%, or by 9.551 homes, month over month in December. The latest monthly drop means inventory levels ended 2012 27% lower than where they began.
Falling inventory has been a mixed blessing: On the one hand, less supply has helped lift prices higher. (The paradigm of falling supply/rising demand will always do that.) On the other hand, lower inventory has truncated sales activity. It's obvious to say that we all could have been busier if there were more homes for sale.
Inventory has been squeezed for two reasons: (1) Many homeowners remain underwater, so they're in no position to sell; and (2) the rising price trend has kept properties off the market, because potential sellers believe a higher price is forthcoming.
Both these situations will rectify themselves over time: Rising prices coupled with continued mortgage amortization will lift many underwater homeowners above water. Rising prices will also reach an action point for more homeowners, where the price finally justifies putting the home on the market. In short, we expect inventory levels to rise as the year progresses.
In the meantime, there is little reason for anyone interested in buying a home not to buy.
Despite steady price increases, homes remain very affordable. The NAR's Housing Affordability Index will likely have ended 2012 at a record high. 2013 is also expected to be a high-affordability year (though affordability is expected to drop as the year progresses).
In addition, rent payments and mortgage payments have reached a multi-year gap, with rent payments becoming much less attractive when compared to mortgage payments.
We thought it was interesting that the NAR mentioned in its release on housing affordability that “a more sensible lending environment that makes it easier for other financially qualified buyers to get a mortgage would allow many more households to enter the market, boosting home sales as much as 10% to 15%.”
Of course, we agree. We also think that as the economy improves, the lending environment will become more “sensible.” The downside is a more-sensible lending environment will likely lead to a higher-rate environment. In fact, 2013 has been marked by higher mortgage rates. We're not surprised given the recent surge in the 10-year U.S. Treasury note yield.
Release Date and Time
Retail Sales (December)
Tues., Jan. 15, 8:30 am, ET
Important. Sales continue to trend higher at a modest, though sustainable, rate.
Wed., Jan. 16, 7:00 am, ET
Important. Purchase and refinance applications climb despite recent rate increases.
Consumer Price Index (December)
Wed., Jan. 16, 8:30 am, ET
All Goods: 0.0% Core: 0.2% (Increase)
Important. Low consumer-price inflation continues to support a low-interest-rate environment.
Home Builders' Index (January)
Wed., Jan. 16, 10:00 am, ET
Important. Sentiment points to a strong new-home market in 2013.
Housing Starts (December)
Thurs., Jan. 17, 8:30 am, ET
Important. The rising starts trend will help fuel economic growth.
The Federal Reserve Gives, But Does it Want to Take Away?
Mortgage rates are at historical lows due to the Federal Reserve's unprecedented purchases of Treasury and mortgage-backed securities. The Fed had said previously that it would continue to buy these securities indefinitely. Now, there are signs that “indefinitely” could be closer than the Fed had previously suggested.
At the last meeting of the board of governors, there was heavy debate about how long the Fed should continue buying Treasuries and mortgage-backed securities. A few governors believe economic growth is on track. Other governors expressed concerns that the Fed's mounting debt purchases will be difficult to unwind and could roil credit markets.
The bottom line is that the Treasury and mortgage-backed securities purchases could end before the end of the year, which would be sooner than most Fed watchers had anticipated. Should the Fed cease its debt purchases, interest rates and mortgage-lending rates will surely rise.
A couple weeks ago, we said that mortgage lending would likely become a more “normalized” market. To that end, a more normalized mortgage-lending market entails a market without a Federal Reserve subsidy.
The point we want to emphasize – one we've emphasized many times – is that the risk of holding out for lower mortgage rates (or expecting current rates to be maintained) is rising, and this rising risk is something all refinance candidates and home buyers need to keep in mind.