Weekly Market Update

Keeping you updated on the market!
For the week of

May 23, 2011

MARKET RECAP

We suspect that there are a few businesses tougher than the home-building business these days, but we are hard pressed to think of any. The homebuilders likely agree, given the homebuilder index remains at a depressed 16 reading for May.

Homebuilders continue to report lousy conditions. They blame competition from distressed sales, which made up 39 percent of the homes sold in the first quarter, as well as unavailability of construction credit for their woes. What's more, sales of distressed homes also pressure prices of existing homes, which means new home sales have been crimped further by buyers unsure that they will be able to sell their existing home at a favorable price in order to trade up.

Homebuilders are surely frustrated by the sputtering and the false starts that they've had to endure over the past 18 months. Just when it appears a positive trend in starts will take hold it reverses and falls again. Starts rebounded 7.2 percent in March but reversed 10.2 percent in April, dropping to an annualized rate of 523,000 units. The drop was led by a 24.1 percent fall in the volatile multifamily-starts component, but the larger and more significant single-family component was off 5.1 percent. Unfortunately, we doubt that homebuilder fortunes will improve much in the coming months.

Pricing – for everyone – remains the front-burner concern. The NAR reports that the median sales price in the first three months of the year was 4.6 percent lower compared to the first quarter of 2010. Prices have declined in 118 of the 152 metropolitan areas included in the NAR's report. We are quick to note, though, that year-over-year comparisons are irrelevant when one quarter is advantaged by tax credits and another quarter isn't. We will be much more interested in data from the second half of this year compared to the second half of 2010.

The good news is that lower prices have helped rejuvenate sales volume. Total home sales increased 8.3 percent to a seasonally adjusted annual rate of 5.14 million units in the first three months of 2011 compared to the last three months of 2010. Our economic textbooks haven't failed us on this market process: lower prices produce higher demand, and, therefore, help to clear inventory.

Admittedly, our textbooks have been less prescient on mortgage rates. Despite obvious price inflation in consumer, producer, and financial markets; strong job growth; and worries over the United States ' fiscal conundrum; mortgage rates (as well as most U.S. Treasury rates) continue to fall. Indeed, we are now looking at 30-year fixed-rate mortgages near a five-month low, well below 5 percent.

Obviously, other factors are at work here, and it could simply be a supply and demand imbalance and surprisingly strong demand for U.S. Treasury securities that are keeping mortgage rates low. Whatever the cause, we still don't think they will hold. There are simply too many variables favoring higher rates, and none more influential than the Federal Reserve's eventual need to shift to a tighter monetary policy from an expansionary one.

This isn't to say we couldn't be wrong, but if we are, then some of our economics textbooks might need a rewrite.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

New Home Sales
(April)

Tues., May 24,
10:00 am, et

315,000
(Annualized)

Important. Sales of distressed properties continue to take sales away from new homes.

Mortgage Applications

Wed., May 25,
7:00 am, et

None

Important. Falling rates are stimulating refinance activity.

FHFA Home Price Index
(March)

Wed., May 25,
10:00 am, et

1.5%
(Decrease)

Moderately Important. The index is assured to post a decrease based on more contemporary price information.

Personal Income & Expenditures
(April)

Fri., May 27,
8:30 am, et

Income: 0.4% (Increase)
Expenditures: 0.5% (Increase)

Moderately Important. The trends in income and spending reflect a steadily growing economy.

Pending Home Sales Index
(April)

Fri., May 27,
10:00 am, et

94 Index

Important. Lower prices and better job prospects are stimulating buyer demand.

Could Home-Priced Insurance be a Contrarian Indicator?

SmartMoney ran an interesting article this past week on insuring against a drop in home prices. In short, the article focused on how underdeveloped the market for hedging and insuring against falling home prices is and how it is starting to develop.

Up until recently, the only way to insure a home against falling prices was to buy futures contracts on home prices in 10 metropolitan areas, including Boston , Miami , and Las Vegas . Of course, if you didn't live in one of the 10 metropolitan areas, you won't be perfectly insured. If you lived in Reno and bought futures contracts based on home sales falling in Las Vegas , you could still lose if Las Vegas home prices rose while Reno home prices fell.

Today, firms are beginning to sprout around the country offering direct insurance for local markets. One, Home Headquarters, a nonprofit, sells insurance at a cost of 1.5 percent of the home's value for homes located in Syracuse , New York . More firms are set to enter the market this year.

This tells us something: new products (and articles about them) tend to proliferate toward the end of a strong trend – either down or up. Perhaps this latest data point on insuring against falling home prices, combined with all the other negative data points on housing, is a sign the end is near in a good way.