Weekly Market Update

Keeping you updated on the market!
For the week of

July 25, 2011

MARKET RECAP

Homebuilders are a little happier in July than they were in June. The homebuilders’ sentiment index increased two points to register at 15 this month, while the index on expectations for future sales jumped seven points to 22. We need to keep in mind, though, that any reading below 50 is considered pessimistic.

Then again, perhaps this is the beginning of a positive trend in homebuilder sentiment. Housing starts jumped 14.6 percent to an annualized pace of 629,000 units in June. The gain was lead by a 30.4 percent surge in multifamily housing starts. The really good news is that the much larger and more important single-family component registered a 9.4 percent gain. Looking ahead, permits increased 2.5 percent and are actually up 6.7 percent year-over-year.

As for existing homes, sales slipped 0.8 percent to an annualized rate of 4.77 million units in June. However, what was sold was sold at a higher price: The median price for existing homes increased 8.9 percent month-over-month to $184,300, which pushed the year-over-year rate into positive territory for the first time in 2011.

We've noted in past issues that firming prices would likely draw more supply into the market, and that appears to be the case. Supply of existing homes rose to 9.5 months at the current sales rate in June compared to 9.1 months in May. As prices continue to rise, supply will likely rise as well.

The latest data on housing aren't perfect, but they are encouraging. To state the obvious, housing has been in a funk far longer than all of us would like. However, we view the recent data on prices as possibly foreshadowing what lies ahead. Stable prices will invariably draw more buyers into the market.

Even though we've been caught in the trap of forecasting rising mortgage rates, we do think rates are as low as they are likely to go. Rates have been holding 2011 lows for a couple weeks now, which has produced a surge in refinances. Credit markets are somewhat unsettled over the prospect of the federal government defaulting on its obligations, though they are not overly unsettled. The 10-year Treasury note continues to yield less than 3 percent.

We are more concerned with the unseen than the seen at this point. The majority harbors a negative sentiment on economic growth, on job growth, and on housing inventory. A lot of pessimism is baked into the system. In other words, it doesn't take much news contrary to the majority opinion to set markets moving in the opposite direction. A little encouraging news on the economy or job growth could easily get mortgage rates moving higher.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

S&P Case-Shiller Home Price Index
(May)

Tues., July 26,
9:00 am, et

0.2%
(Decrease)

Moderately Important. Recent gains in home prices are slowing the decline in the three-month moving average.

New Home Sales
(June)

Tues., July 26,
10:00 am, et

315,000 (Annualized)

Important. Prices have stabilized and sales have trended mostly up over the past four months.

Mortgage Applications

Wed., July 27,
7:00 am, et

None

Important. Refinances spiked on recent rate drops, but much of the activity is repeat business.

Pending Home Sales Index
(June)

Thurs., July 28,
10:00 am, et

4.0%
(Increase)

Important. Recent housing data point to rising activity over the second half of the year.

Employment Cost Index
(2nd Quarter 2011)

Fri., July 29,
8:30 am, et

0.5%
(Increase)

Moderately Important. Costs have risen on increased benefits costs, while wages have remained flat.

Gross Domestic Product
(2nd Quarter 2011)

Fri., July 29,
8:30 am, et

1.7%
(Annualized Growth)

Important. Growth has been sluggish in the first half of 2011, which is one reason interest rates have remained low.

The High Cost of Anchoring to the Past

People are naturally inclined to set expectations based on recent experience. In many instances, this strategy is useful. You buy a loaf of bread at the grocery store for three dollars this week; you expect to pay the same price next week, and you probably will.

The strategy isn't always reliable, though. The recent past in housing has been largely negative, which means many people have extrapolated today's negative news much further into the future than is reasonable. Two reports this past week, one from Morgan Stanley and another from Pimco, basically forecast the end of a homeowner society. They believe that high rates of mortgage delinquency, foreclosures and liquidations mean there is too much risk in owning a home.

We couldn't disagree more. There hasn't been a better time to own a home in the past three decades, especially for first-time buyers. Prices in many markets are firming and rising, low prices are clearing inventory, mortgage rates are at 50-year lows. This prompts us to ask an obvious question: When is the best time to buy and leverage real estate, after prices have surged on unfettered optimism or after prices have dropped and stabilized after unfettered pessimism? We'll take the latter scenario.