Tuesday, April 23, 2013

Mortgage Matters

Keeping you updated on the market! For the week of 
April 22, 2013

A Mild Case of Schizophrenia
For the past year, we've been saying that housing will become an important variable in economic growth. The trend in housing starts is proving that's the case.
Starts were exceptionally strong in March, moving ahead 7.3% to an annualized rate of 1.036 million units. Looking year over year, total starts are up 46.7%.The multi-family component has been exceptionally strong, driven by increased investor demand. That said, the single-family component has also posted a robust gain, rising 28.7% year over year.
Housing construction is now running at a rate unseen since 2008.
Looking ahead, considerable upside still exists. Over the past two years, annual housing starts have increased to one million from 600,000. Despite the strong surge in starts, they remain 50% below the historical norm of 1.5 million annualized unit. In other words, housing is far from running the course.
In the interim, though, there are a few concerns. Permits declined 3.9% in March, falling to an annual rate of 902,000 units. The decline points to a slow down in building activity over the next month or two.
Builder sentiment also suggests something might be amiss in the short term. The National Home Builders Association sentiment index dropped two points this month to 42. This is the second-consecutive monthly drop, which pushes sentiment down to a six-month low.
Builders are citing a litany of issues for their souring outlook: low inventory (which more starts should rectify), falling buyer traffic, rising construction costs, and still restrictive lending (particularly construction lending).
We can't quarrel with the builders' complaints, but on a positive note we could be seeing a loosening of the purse strings on the lending front.
We see mortgage lending becoming more inclusive. We particularly like what is occurring in purchase lending. This past week, the Mortgage Bankers Association reported that the mortgage purchase index increased 4%, posting its highest activity level since May 2010. What's more, conventional purchase activity is up to levels unseen since October 2009.
More lenders are also showing a willingness to extend credit on lower down payments. It's especially encouraging to see more lenders willing to extend conventional mortgages with 5% to 10% down payments.
The positive trend in conventional loans tells us that regulatory concerns are receding and that lenders are becoming less risk adverse. This is good news, because we've been saying for some time now that we need a more diverse, more accommodating lending market. In other words, we need a more normalized market. This appears to be the direction the mortgage market is taking.
Date and Time
Existing Home Sales
Mon., April 22,
10:00 am, ET
5.02 Million (Annualized)
Important. Rising home prices are prompting more owners to list their home, which will help alleviate inventory shortages.
New Home Sales
Tues., April 23,
10:00 am, ET
420,000 (Annualized)
Important. Sales are rising, but are also being held in check by historically low inventory.
Mortgage Applications
Wed., April 24,
7:00 am, ET
Important. Rising purchase activity points to more own-occupied buyers.
Gross Domestic Product 
(1st Quarter 2013)
Fri., April 26,
8:30 am, ET
3.0% (Increase)
Important. If economic growth is stronger than expected, interest rates will be pressured to move higher.
What is Gold Telling Us?
Gold sold off big this past week, posting its largest two-day dollar drop ever, and its biggest percentage drop since 1980. Okay, but what does gold have to do with mortgage lending and housing?
Gold is considered a haven asset. Gold is an asset investors flock to when they are fearful, particularly if they are fearful over slow economic growth and inflation. When investors are fearful money flows to gold.
But the recent sell off points to money flowing out of gold. This tells us that investors are becoming less fearful and that more money will be flowing into other asset classes. This also tells us that more investors are expecting more economic growth – which is good news for housing and mortgage lending. When more people expect more economic growth, interest in housing rises and financing becomes easier to come by.
We mention gold because assets markets are interconnected: money flows from one asset class to another. Money flowing out of gold means more money will likely flow into stocks, real estate, and capital investment, which should help the economy and increase job opportunities and wages.
In other words, investors today are becoming more interested in growing wealth than preserving it. This is good news for the economy in general, and for large-item goods (like housing) in particular.
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