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MARKET RECAP We dabbled a little in economic theory last week, noting that more inventory produces lower prices and more sales. This week, the opposite occurred: less inventory produced higher prices, but also lead to more sales. We are speaking of sales of new homes, which jumped 7.3 percent to a higher-than-expected annualized rate of 323,000 units. Strong sales drew down supply to 6.5 months from 7.2 in March. Here's the economics at work: Lower supply is firming prices, with the median price of new homes up 1.6 percent to $217,900. Year-over-year, the median price is up 4.6 percent. The lesson here is that the laws of supply and demand remain unbreakable. Pricing has been the overarching headache since the beginning of the year, but there are only two ways to ameliorate it: decrease supply or increase demand. We saw the latter, demand, temporarily stimulated with tax credits last year. But that was only a Band-Aid that simply moved existing demand forward instead of increasing overall demand. It is important to note that supply, demand, and pricing in housing are all heterogeneous, meaning it is not one market. We've noted in the past that real estate differs geographically, but homes and buyers also differ. That point often gets lost in the monthly aggregated data on sales and prices. Unfortunately, the aggregated number always grabs the headline, but that number is really a fiction and not representative of any particular market. Toll Brothers CEO Douglas Yearley's take on home prices and markets is insightful. Yearley says, “We question the recent media headlines announcing that home prices continue to fall. Many studies quoted in the media combine distressed sales data, including foreclosures and short sales, with new and/or non-distressed existing home sales data. We believe that averaging distressed and non-distressed sales data provides a misleading picture to the public regarding home price direction.” We agree with Mr. Yearley's assessment: existing homes, new homes and distressed homes are all different markets. To be sure, each doesn't operate in a vacuum; what occurs in one market can affect another. A buyer interested in a new home might be persuaded to consider a newer existing home, but he is unlikely to consider a distressed home. The point is that we are not looking at one big mass of buyers and sellers – each is unique. Nor are we looking at one big mass of borrowers, which is why we've occasionally criticized FICO-score methodology. Trans Union reports that troubled borrowers who default on their mortgages (during the housing-bust anomaly) are less likely to develop long-term poor credit behavior compared to those who default on other kinds of loans. This suggests to us that risk is being overstated and that overly stringent underwriting standards are crimping the housing recovery. We still have leeway to work with borrowers, to be sure, which is a good thing when considering rates remain well below 5 percent. We would just like a little more leeway.
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Economic |
Release |
Consensus |
Analysis |
S&P/Case-Shiller Home Price Index |
Tues., May 31, |
0.5% |
Moderately Important. Prices will likely have dropped nationally due to higher distressed-property sales. |
Mortgage Applications |
Wed., June 1, |
None |
Important. The up trend in purchase applications should lead to strong May sales figures. |
Construction Spending |
Wed., June 1, |
0.3% |
Important. Residential construction is showing signs of increased activity. |
Productivity & Costs |
Thurs., June 2, |
Productivity: 1.9% (Increase) |
Moderately Important. Productivity gains are peaking, which could lead to more hiring. |
Employment Situation |
Fri., June 3, |
Unemployment Rate: 8.9% |
Very Important. Another month of strong jobs growth could push interest rates higher, as money cycles out of debt and into equities. |
This Time it Really is Different In past housing recoveries, the first-time buyer was the correcting force. This time it appears investors are. News on residential real estate rental rates has been positive and prices on many rental properties, particularly multifamily properties, have been on the rise. We suspect single-family home values will rise with the investment market. In fact, more investors are bullish about home prices in the coming year and are beginning to hunt aggressively for residential real estate investments, according to a new survey conducted by Move Inc. The firm's real estate investor survey found 22 percent of investors are bullish about home prices rising in the next six to 12 months. Twenty-two percent might seem low, but it is actually much higher than Move Inc. expected. If you think home values will generally rise over the next five years (and we do), borrowing and buying instead of buying with cash is the savvier financial option. For one, you get more home for the money. Second, you get the benefit of greater returns that leveraged real estate provides in a rising market. We remained convinced that real estate, especially leveraged real estate, is today's best investment.
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