Monday, May 6, 2013

A Caution on the Housing Market??

An unusual turn in direction in this week's Mortgage Matters!!

The Market Recap of Real Estate focuses on the mass purchases of properties by large investors(Blackstone Group noted) to hold as rental properties and the possible distortion in market direction.  No doubt, the improvement in the market can be distorted by investors purchasing and holding property.  Yet, this would only be true if there were not additional inventory for the non-investor to buy.

As Jim Belote notes below, the former bubble markets of California, Arizona and Florida have seen lots of Market Speculation which has fueled good recovery in pricing in these areas.  The question that is posed is that is it time to take caution as a home buyer contract on his/her new home.

This may be a very valid question if one lives in one of these states or in a given market that has seen double digit recovery in prices in the past two year. Yet, this isn't a valid question for Hampton Road buyers.

In the Hampton Roads area encompasing Chesapeake, Virginia Beach, Norfolk, Portsmouth, Suffolk, Newport New, Hampton and up to Williamsburg/James county area as well as Northeastern North Carolina, we have seen a steady increase in values over the past three years in the 2% to 7%(last year) with a tightening of inventory.   The tight inventory is not due to a large company picking up 100s or 1000s of homes to rent out such as Blackstone did in some other parts of the country. 

Rather the shortage is due to buyers coming out to grab the 3.5% rates before they disappear while many sellers are on the fence about moving.   The tight inventory will pressure home prices as buyers bid on homes; homes under $300,000 are already seeing multiple offers.  Yet, a seller that needs to move may hit the double whammy of a higher value for his/her home coupled with higher interest rates. 

If a $300,000 home increases to $310,000 and rates move from 3.5%, 30 year note to a still very good 4.5% rate, 30 year note, the buyer has to come up with $223.59 per month.  For many buyers, this risk causes them to hit the market now.  A very wise move indeed!!

Sellers need to respond as well to reap the increase buyer activity and not wait until the buyers pause because "the market" seems against them.

Keeping you updated on the market! For the week of 
May 6, 2013

Time to Get a Little Cautious
Home prices continue to chug along the upward trajectory.
The latest edition of the S&P/Case-Shiller Home Price Index shows that home prices rose in all 20 metropolitan areas the index tracks. What's more, not only were prices up, they were up strongly: Prices in the aggregate rose 1.2% month over month in February, which, when combined with previous monthly increases, produces a 9.4% year-over-year price gain – the highest annual gain since 2006.

To state the obvious, home prices have been on tear over the past 12 months. Many metropolitan regions have experienced double-digit year-over-year gains, and a select few are approaching triple-digit gains.
How times have changed.

In the dark days of 2009 and 2010, when home prices were continually trending lower, we repeatedly championed the need to remain positive. To be sure, the ride down was painful, but we reasoned that prices always bottom. Today, we see that in the majority of local markets prices have not only bottomed but have recovered nicely.

Prices continue to recover, and in many markets the price recovery has advanced to the point where prices are approaching previous highs. This tells us that the housing recovering needs to be viewed with a more discerning eye. We say that because this is a recovery unlike any other.
For one, the recovery is being driven by investors and not owner-occupied buyers. What really makes it unusual, though, is that institutional investors, who in the past drove the multi-family rental market (e.g. apartments), are buying single-family homes en mass.

For example, Blackstone Group, the world’s largest private equity firm, has invested over $3.5 billion to purchase 20,000 vacant and foreclosed single-family homes. In the past, this single-family rental market had been the domain of the small investor.

Not surprisingly, the Blackstones of the world are buying these properties and renting them. This makes economic sense. Vacancy rates are at multi-year lows, while rents are at multi-year highs. Rising rents warrant rising rental property values. Our concern is that we've never seen such a strong push into single-family rentals that we are seeing today. Is this creating a market-distorting effect? We can't say for sure.

We are also concerned by the rise in market speculation, particularly in the former bubble markets in Florida, California, and Arizona. We've noticed a considerable rise in the number of cable television shows devoted to rehabbing and flipping homes. RealtyTrac has even penned an article titled “25 Markets Where Flipping Homes is Most Profitable.”

In short, housing is showing signs of becoming the hot market again, and that alone is reason to vet the market more cautiously.

That said, we still view housing positively. We think there is plenty of improvement to be had in many markets. We also think there is plenty of room left to grow. After all, the upside to rising home prices is more mobility and more buying and selling.

What's more, the lifeblood of the market – financing – remains very attractive. Indeed, mortgage rates have fallen steadily over the past two months and are now flirting with the lows seen late last year.
The mortgage market is also showing signs of becoming more inclusive. More lenders are willing to venture into riskier lending. The Los Angeles Times reports that a growing number of lenders are embracing subprime lending. That's good news, because loans are being underwritten with eyes wide open. More important, they are being underwritten with the risk properly priced in.

And as for risk, it's something we need to become more aware of as the recovery progresses.
Date and Time
Consumer Credit
Tues., May 7,
3:00 pm, ET
$12 Billion (Increase)
Important. Student-loan growth is driving the increase in credit use, which suggests a slowdown in overall consumer spending.
Mortgage Applications
Wed., May 8,
7:00 am, ET
Important. Purchase activity slowed this past week, but the longer-term trend still points to an uptick in spring sales.
Wholesale Inventories
Thurs., May 9,
10:00 am, ET
Moderately Important. Modest inventory growth is a reflection of rising business-to-business sales.
An Overlooked Positive
In the content above, we reasoned why caution is warranted, but we didn't reason that pessimism is, because we don't think it is.

Investment in residential real estate construction is a significant reason why we don't think the housing recovery is likely to wilt. Contrary to popular perception, consumption doesn't drive growth, investment does. We say that because production precedes consumption.

The good news is that private residential investment is on the rise, which portends a rise in sales and sales-related activity. Looking at the bigger picture, private residential investment tends to lead economic growth, so this is obviously a good sign going forward.

Though relatively more cautious, we remain bullish on housing. But as we've noted many times in the past: all real estate markets are local, which means we are more bullish on some markets and less bullish on others.
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