Weekly Market Update

Keeping you updated on the market!
For the week of

May 2, 2011

MARKET RECAP

Based on several leading indicators, and on our own anecdotal evidence, we thought March real estate numbers would be noticeably better than January and February. That's indeed turning out to be the case.

Sales of new homes jumped more than expected in March. A look at March's numbers shows a 300,000 unit annual sales rate versus 270,000 in February. Supply at the current sales rate fell to 7.3 months from 8.2 in February, while the median price rose 2.9 percent to $213,800 for a year-over-year contraction of 4.9 percent, less deep than February's contraction of 6.4 percent.

We don't give too much currency to year-over-year price comparisons because of the distorting effect of last year's tax credits. We also tend to discount the S&P/Case-Shiller home price index, which it is too far behind the curve. That said, the index shows that prices in February for its 10- and 20-city composites are lower than a year ago, but still slightly above their April 2009 bottom.

Contemporary data are more encouraging. Data from Housingtracker.net for the 10 cities in Case-Shiller’s 10-city index suggest a developing uptrend. As of this past week, the unweighted month-to-month change was up 1.1 percent, which is on top of March's 3.1 percent gain. Even more encouraging, the three-month change is up 4.4 percent.

We are not surprised. Prices only go so low before buyers no longer ignore them. Consider Miami , one of the more distressed housing markets in the country. Three out of five homes sold there are foreclosures or short sales. At the same time, the supply of Miami-area homes for sale has dropped nearly 24 percent. Today it would take seven months to clear Miami 's market at the current sales pace; six-months ago it would have taken 17 months. If we were to wager on where median and average home prices in Miami will be this time next year, we would take the higher-priced side in a New York second.

It's not only Miami, though. The latest NAR data show interest picking up around the country. The March index of pending home sales rose 5.1 percent to 94.1 from a downwardly revised 89.5 in February. The NAR has upped its sales estimates, with existing-home sales rising 5 to 10 percent this year.

Mortgage rates continue to hold steady and keep the affordability index low. Rates have held their lows longer than we had anticipated, but that's good news for qualified buyers. Unfortunately, many qualified buyers are attracted to trends, but once a trend is established, the best deals have been taken. We've always favored mustering the courage to get in at the base of a perceived new trend – a contrarian move – instead of waiting to hitch a wagon to an established trend. For buyers who can muster the courage or financial wherewithal, the market is very favorable.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Construction Spending
(March)

Mon., May 2,
10:00 am, et

0.4%
(Increase)

Important. Residential spending continues to lag, but spending on private commercial projects is improving.

Factory Orders
(March)

Tues., May 3,
10:00 am, et

1.6%
(Increase)

Moderately Important. Orders reflect continued business-sector growth.

Mortgage Applications

Wed., May 4,
7:00 am, et

None

Important. Purchase activity should resume after the surge to get lower-cost FHA loans.

Productivity
& Costs
(1st Quarter 2011)

Thurs., May 5,
8:30 am, et

Productivity: 0.5% (Increase)
Costs: 0.2% (Increase)

Important. Productivity gains appear to have momentarily peaked, which means a possible pick up in employee hires.

Employment Situation
(April)

Fri., May 6,
8:30 am, et

Unemployment Rate: 8.8%
Payrolls: 200,000 (Increase)

Very Important. Continued job growth will increase the pressure on the Federal Reserve to raise interest rates.

Continued Demand and the Rise of Rentals

The Census Bureau reports that the home-ownership rate dropped to 66.4 percent in the first quarter of 2011, its lowest posting since 1998. This is good news, because demand remains strong. A recent Pew Research survey showed that 81 percent of adults still believe that owning a home is the best long-term investment, which is down only 3 percent from 1991. This tells us that few people have been scared off by all the negativity on home ownership and housing that's been reported over the past couple years.

Many of these people might be unable to afford a house today, but in the future, they will. In the meantime, they and many others need a place to live. It shouldn't be a surprise, then, that the rental market has helped stabilize the housing market. We think today's residential real estate market is particularly appealing to investors. Rents are on the rise, which means values will soon follow. Buy a house today, collect cash flows, sell an appreciated asset to an owner-occupier a few years down the road. That's the very essence of successful investing.