Weekly Market Update

Keeping you updated on the market!
For the week of

April 4, 2011

MARKET RECAP

The monthly S&P/Case-Shiller home-price index always attracts a good deal of media attention. This month's edition was no different. In fact, because of a strong pessimistic bias, it probably drew more attention than it should have.

Once again, falling home prices elevated fears of a double-dip recession in the home-buying market and a longer slog toward recovery than once anticipated. According to Case-Shiller, the average sale price of single-family homes in 20 major metropolitan areas fell 1 percent from December and 3.1 percent from a year ago. Only two areas – San Diego and Washington – recorded price increases year-over-year.

We offer our usual caveats with the Case-Shiller index: For one, it's two months in arrears. Recent data on home prices have been less dour. In addition, 20 metropolitan areas is hardly a complete picture. Real estate is much more localized than it was during the recession. Even within major metropolitan areas, we see differences in pricing trends. So, yes, on a national level prices have fallen, and have fallen 31 percent since the 2006 highs. However, prices, like mortgage rates, can go only so low, and there isn't much room on the downside, as many local markets have already shown.

It's also worth noting that the pending home sales index rose 2.1 percent in February, which is encouraging when considering how miserable the weather was in February. What's more, the pending home sales index has trended higher since bottoming in June, with contract activity 20 percent above the low point. More activity isn't a price panacea, but it helps.

Shadow inventory has been the counterclaim, because it continues to apply downward pricing pressure. The good news is that shadow inventory is improving. CoreLogic reports that 1.8 million properties make up the shadow inventory of foreclosures, but that's down 11 percent from a year ago. We expect this inventory to dissipate further, thanks to robust economic growth and a pickup in job creation and wage growth.

Low financing rates will also help the liquidation process. A quote below 5 percent on a 30-year fixed-rate mortgage remains the norm. To be honest, the norm has held longer than we had expected. That's a good thing, to be sure, but it does tend to induce complacency and procrastination at times.

Buyers these days have to balance high inventory levels against the likelihood of higher mortgage rates. Excess supply is a persuasive argument to house shop at a leisurely pace. However, just because rising prices aren't an immediate concern doesn't mean rising mortgage rates aren't. We noted in last week's commentary that buyers have the best of both worlds – low mortgage rates and low home prices. We doubt we will be saying that this time next year.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Federal Reserve
FOMC Meeting Minutes

Tues., April 5,
2:00 pm, et

None

Important. The minutes are expected to reveal a growing bias toward higher interest rates.

Mortgage Applications

Wed., April 6,
7:00 am, et

None

Important. Though lagging slightly over the past couple weeks, purchase applications remain in an uptrend.

Consumer Credit
(February)

Thurs., April 7,
3:00 pm, et

$3 Billion (Increase)

Moderately Important. Growth in non-revolving credit reflects increasing consumer confidence in the economy.

Wholesale Trade
(February)

Fri., April 8,
10:00 am, et

1.0% (Increase)

Moderately Important. Businesses continue to build inventory in anticipation of rising consumer demand.

Is It Really Only A Matter of Time?

Faithful readers of these missives know that we've been saying that it's a matter of time before mortgage rates head higher (which puts us in the majority opinion). Indeed, since November, rates have headed higher, but not as high as many, including us, would have thought. Granted, we were right in saying that rates holding under 4 percent were unlikely, but that was an easy call. Four percent simply isn't sustainable when inflation is the norm.

Inflation is the reason we still think rates are headed higher. Many market watchers have been lulled into a false sense of security because consumer and producer prices – though rising in the past two months – haven't spiked out of control.

There are many variables that go into prices – productivity gains, technology, consumer demand – all of which can offset the increase in money supply that has occurred over the past two years. It can't last forever. If we peruse any long-term chart of consumer and producer prices, we see that prices rise persistently higher. As a corollary, when we peruse a chart of the US dollar, we see a persistent drop in value.

Eventually, all the new money in circulation will begin chasing consumer goods, and then we will see an increase in price inflation. We expect the bond market to anticipate this event, which is why we think mortgage rates will head higher before price inflation becomes more of a front-burner issue.