Mortgage Matters update

Keeping you updated on the market! For the week of  January 21, 2013 MARKET RECAP Home builders appear committed to making up for activity lost over the past few years. We say that because housing starts surged 12.1% in December to 954,000 units on an annualized rate. For the year, starts rose a whopping 36.9%. What's more, home builders are expected to maintain the momentum at least through 2013. As to be expected, the gains in starts and new-home sales have had a meaningful impact on home-builder outlook. This time last year, the Home Builder Sentiment Index stood at 25. Today, it's at 47. The gains in home-builder optimism are impressive, to be sure, but it could be higher. Home builders are still frustrated with credit conditions that are too tight and property appraisals that are frequently too low. Most of us have had to deal with these two frustrating issues, but as 2013 progresses, we think these issues will become less frustrating. We say that because we expect home prices to continue to trend higher. The corollary to rising home prices is falling negative equity. Indeed, rising home prices lifted more than 100,000 homeowners out of negative equity in the third quarter of 2012, according to CoreLogic. Through the first nine months of 2012, 1.4 million homeowners were elevated into a positive equity position. Should home prices continue to appreciate (as we expect), the lending purse strings should loosen somewhat. Experiences has taught us that rising prices and economic growth tend to persuade regulators to take a less risk averse and a more accommodating stance. In other words, regulators tend to give lenders more latitude in underwriting. Of course, history never exactly repeats itself, and this time could be different. Indeed, many industry watchers are concerned that new regulation, namely the Ability-to-Repay/Qualified Mortgage (QM) rule, issued by the Consumer Financial Protection Bureau (CFPB), has placed a formidable hurdle for many potential home buyers to overcome. The new rule, scheduled to go in effect in January 2014, codifies eight requirements for lenders to verify a borrower’s ability to repay. That said, we remain sanguine on the credit outlook nevertheless. Yes, the new CFPB rule could make it more difficult for home buyers to get a mortgage. Keep in mind, though, we still have 12 months to go before the rule takes effect. A lot will happen between now and then, and we expect much of what will happen will be positive. As for the here and now, mortgage rates have leveled off after rising over the past month. We think this presents an opportunity to lock in a rate. Now, we'll freely admit there is no guarantee rates won't fall, particularly if the debt-ceiling (which the federal government has reached at $16.4 trillion) elevates risk-aversion in financial markets. This would lead to more money flowing into haven investments like the 10-year Treasury note. That said, the yield on 10-year Treasury remains near a six-month high, which suggests to us that mortgage rates, particularly on the 30-year fixed-rate loan, are unlikely to test recent lows. In short, we still see no reason to sit on the sidelines. Economic Indicator Release Date and Time Consensus Estimate Analysis Existing Home Sales (December) Tues., Jan. 22, 10:00 am, ET 5.09 Million (Annualized) Important. Rising prices will bring more inventory into the market, which should lift sales volume. Mortgage Applications Wed., Jan. 23, 7:00 am, ET None Important. The surge in purchase activity points to stronger 2013 home sales. FHFA House Price Index (November) Wed., Jan. 23, 9:00 am, ET 0.5% (Increase) Moderately Important. Previously released price data point to a rising FHFA index through 2012. New Home Sales (December) Fri., Jan. 25, 10:00 am, ET 385,000 (Annualized) Important. Sales should gain momentum based on recent housing start data. Keep an Eye on This Market We are speaking of the multi-family home market, where rents have been on a tear, and where apartment builders have been ramping up production. Over the past year, residential real estate investment trusts (REITS) have been the best performers in the REIT investment space. Such a strong run in multi-family home construction begs a question: Is the multi-family sector forming a bubble? We have to ask, because over the past 25 years, we haven't seen this much multi-family construction packed into one year. We obviously don't have a definitive answer, but at a minimum we can say that the multi-family market deserves to be closely monitored. On the other side of the coin, it appears the single-family sector still has plenty of room to run, and we think it will run in 2013. As rents continue to rise, home ownership will appear more attractive compared to renting. This paradigm will motivate more households to take the ownership plunge, and we see many of these households opting to plunge into single-family homes. In short, we see a strong housing market for 2013, but we see more of that strength shifting to the single-family sector.