Market Update for December 27th

Keeping you updated on the market!
For the week of

December 27, 2010

MARKET RECAP

The latest housing data are raising optimism. Existing home sales rose 5.6 percent in November to a seasonally adjusted annual rate of 4.68 million units. More encouraging, prices didn't soften to stimulate sales. To the contrary, they rose, with prices up slightly to a median of $170,600, thus ending a nearly six-month run of declines. As for the number of homes on the market, supply fell for a third-straight month and is down to 9.5 months.

The news on new homes wasn't quite as cheery, but affirming nonetheless. The Commerce Department reported sales increased 5.5 percent to a seasonally adjusted 290,000 annual rate in November, while supply of new homes on the market fell to 8.2 months' worth, mostly because fewer homes were built. But those that were built were fetching a better price. The median sales price for a new home increased 8.0 percent, to $213,000, in November.

In addition to the NAR and Commerce Department reporting better home prices, the Federal Housing Finance Agency reported that prices rose 0.7 percent in October. Most market watchers (us included) were expecting a slight drop, especially after all the alarming news on foreclosures, distressed sales, and negative equity that has flooded the markets in the past two months.

All things considered, the news, when aggregated, suggests to us that we are close to being out of the woods, though not everyone agrees. A few economists think that price discounting will continue at least for another year. MacroMarkets surveyed a panel of economists and the consensus was that national home prices would not increase year-over-year until the fourth quarter of 2012. Specifically, they expect prices to remain 0.17 percent below where they will end in 2011. Farther down the road, they see rays of light: by 2015, prices, the economists say, will increase by more than 3.5 percent from wherever they will end in 2014.

We can't help but question the validity of MacroMarkets' survey; the numbers are simply ridiculously precise. It would be like us saying that mortgage rates will be 47.3 basis-points higher at the end of 2011 than they will be at the end of 2010, even though we have no idea what the exact rates will be a week from now. For us to say that the 30-year fixed-rate mortgage will average over 6.5 percent in 2015 is no less foolish. There is no way to know.

The best anyone can do (at least to be believable) is to talk in generalities, and generally we think mortgage rates will end 2011 higher than they will end in 2010. How much higher? Fifty basis points seems reasonable, given the outlook for money supply, budget deficits, and economic activity. A full percentage point seems within the realm of possibilities as well. Could rates go lower? Sure, but we think the odds favor higher rates. We just don't have a specific number for those odds.

In the meantime, we know where we stand now: in a more volatile mortgage-rate environment, with rates trending higher. We did experience a slight pullback this past week, but we don't expect the pullback to instigate a new trend in lower rates.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

S&P Case/Shiller Home Price Index
(October)

Tues., Dec. 28,
9:00 am, et

None

Important. Recent data releases point to a slight drop in the October prices.

Consumer Confidence
(December)

Tues., Dec. 28,
10:00 am, et

56.1 Index

Moderately Important. Recent surveys reflect greater optimism on employment.

Mortgage Applications

Wed., Dec. 29,
7:00 am, et

None

Important. Refinances continue to abate, but purchases are holding steady.

Pending Home
Sales Index
(November)

Thurs., Dec. 30,
10:00 am, et

90 Index

Important. The index suggests a sustainable upswing in sales.

Don't Fear Rising Mortgage Rates

The most invoked argument against higher mortgage rates is that they lower the home affordability index. It's a legitimate argument, to be sure, in that mortgage interest is a significant cost of homeownership.

But there are other factors to consider: Rising rates spur people to action, something we've been saying for the past six months that is showing some validity. Campbell/Inside Mortgage Finance surveyed 3,000 real estate agents nationwide on homebuyer activity and found a jump in first-time homebuyer purchases in November over October. The principal reason for the jump was nervousness over rates going higher still, which motivated many fence sitters to act.

It is also worth noting – again – that higher interest rates reflect an improving economy and greater economic activity, which are, in turn, indicative of higher employment and higher wage rates. So even though the interest-expense component of the home affordability index might rise, it will be offset by more employment and rising incomes, which means more people can afford a higher-cost home. That's not such a bad thing.