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Home Prices Reach for the Stars

Temperatures across the U.S. are plunging and have left many cities frozen in ice and snow.  One thing not plunging is home prices.  The housing market has continued to experience rising prices along with rising mortgage rates leading to a decline in purchasing power.  Rising home prices and rates deal a double blow to affordability.

According to the S&P Case-Shiller Home Price Index, which follows 20 large cities in the U.S., home prices rose 13.61 percent year-over-year and increased .18 percent from the month of October to November.  Las Vegas had the largest year-over-year gain of 27.05 percent while New York and Cleveland tied for the smallest gain of 4.9 percent.

HomePriceReachUpCoreLogic’s most recent home price report for November 2013, reported home prices (including distressed sales) rose 11.8 percent year-over year.   November’s increase in home prices is the 21st straight month of year-over-year growth.  CoreLogic reports home prices gained 0.3 percent (excluding distressed sales) in November versus October.  CoreLogic economist Mark Fleming said in the release, “The housing market paused as expected in November for the holiday season with very low month-over-month appreciation.”

 According to CoreLogic data, 2013 was the best year for rising home prices in the past 8 years.  It is projected that  2013 year-end results will  show an overall  jump of 11.5 percent.  “It’s too early to tell if the marginal dip in the annual pace of house price inflation in November marks the start of the slowdown in price gains that we are expecting.  But we are confident that annual price gains will not remain in double-digit territory for much longer,” Capital Economics’ Paul Diggle commented.

This is positive news for potential home buyers  still waiting to get into the game.  Mortgage rates dipped to around 4.5 percent last week and many economists doubt this will hinder home sales in the short term (as noted in several  recent blogs).  Rates are still historically low.  Due to the recent pull back in mortgage rates, refinances ticked up 5 percent last week.  Overall refi activity is down 69 percent from a year ago when rates were more than a percentage point lower.

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Home Mortgage Applications Hit 13-year Low

Applications DownAs 2013 winds to a close, economic conditions have made large strides since the beginning of the year.  2013 Definitely had its fair share of headwinds surrounding the economy, job market and housing market.   Stock markets experienced strong gains the past few days, reaching new highs.  Home prices have increased and foreclosure rates are on the decline.  One thing holding the housing market back however is home mortgage applications.

According to the Mortgage Bankers Association (MBA), U.S. home mortgage applications fell for the  second consecutive week,  hitting a 13-year low, dropping 6.3 percent from the week prior,  December 20th.  Rising mortgage rates might be scaring away some potential home buyers.  The 30-year fixed mortgage rate averaged 4.64 percent last week.  Rates have steadily increased in response to the Federal Reserve’s decision to begin tapering asset purchases by $10 billion a month.

“Following the Federal Reserve’s taper announcement, mortgage application volume dropped again last week, with rates increasing and refinance application volume falling to its lowest level since November 2008.  Purchase application volume was weak too, continuing to run more than ten percent below last year’s pace. Notably, government purchase application volume is almost 25 percent below where it was at this time last year, with the larger drop compared to conventional purchase likely due to the increase in FHA premiums over the course of the year,” said Mike Fratantoni, MBA’s Vice President of Research and Economics.

As rates continue to tick up, the number of refinances will drop accordingly.  Refinances as a percentage of total mortgage activity, dropped to 65 percent from 66 percent in the week prior .  The MBA’s seasonally adjusted index of refinancing applications dropped 7.7 percent.

Reported November new home sales numbers offered more attractive data than application numbers.  Signed purchase contracts for new  homes dropped slightly but this was after October’s data was revised up 25 percent.  Squaring “the near highest level of new home sales in years with a multiyear low in mortgage applications to buy a home continues to tell me that investors are beginning to get their feet wet in the new home space with the goal of renting these homes out,” analyst Peter Boockvar of the Lindsey Group said. “The secular shift to renting should continue.”  When Boockvar broke down the numbers by region in the U.S. he noted, “The South is surging; the rest of the nation is not.  If you back out the South October surge, the numbers are in line with the tepid demand since July, when [mortgage] rates surged.”

With 2014 right around the corner, it will be interesting to see what the new year holds for the housing market.

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Oh Come, All Ye Taper

The long awaited final Federal Reserve meeting of the year and concluding meeting for Bernanke’s term has arrived.  Thursday the Federal Reserve released the news that it would finally begin to taper quantitative easing, albeit a slight taper, signaling the Federal Reserve is seeing signs of growth and strength in the job market.  Federal Reserve officials stated they would taper bond purchases from $85 billion a month to $75 billion.  How will this affect you and the housing market?

TaperBondsAs the Federal Reserve slows its printing press in light of the taper, rates are likely to increase, meaning homebuyers will pay more for home loans in the form of mortgage rates and business loans will cost more as well.  Current 30-year fixed rates are hovering around 4.57 percent and will probably head higher.  Ellen Haberle, an economist at the online real-estate brokerage Redfin commented, “Homebuyers aren’t going to be happy.  In the weeks ahead, mortgage rates are likely to reach or exceed 5 percent.”  It is important to note these rates are still at historic lows even though they are starting to climb.  Analysts believe this is not enough to halt the housing market recovery.  “It’s a better economy that gets people to buy houses,” said senior financial analyst at Bankrate.com, Greg McBride.

In most recent housing data the fear of a taper seems to have vanished.  Housing starts soared to a six-year high, jumping 22.7 percent in November according to the Commerce Department.  This was the biggest increase since January 1990 and the highest level of starts since February 2008.  Starts for multi-family homes jumped 26.8 percent and have risen strongly during the recovery as demand for rentals remains high for those unemployed or unable to qualify for a home loan.

Homebuilder confidence this month was positive and builders were optimistic regarding current sales conditions, forward looking sales and potential homebuyers.  The National Association of Home Builders monthly sentiment index (HMI) increased 4 points, its highest level since August.  “This is definitely an encouraging sign as we move into 2014.  This indicates that an increasing number of builders have a positive view on where the industry is going,” says NAHB Chairman Rick Judson, a homebuilder from Charlotte, N.C.

Now that there is more certainty in the housing market and the economy, businesses and consumers can make more educated decisions concerning hiring, taking out loans and making large purchases.  Craig Strent, CEO of Apex Home Loans in Rockville, MD, stated, “Mortgage interest rates generally hate the idea of uncertainty, so this definitely brings some certainty in terms of the Fed showing their cards as far as the direction of rates.”

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The New Year Brings New Changes in FHA Loans

House prices continued to grow during 2013 and it appears the housing market is on the road to recovery.  While more than one-third of the housing market is still being supported by cash investors, home sales and mortgage numbers increased during the first half of the year.  Foreclosures are also down due to fewer homes being foreclosed on by the banks.   As homebuyers gain more confidence in the market by a show in rising home prices, interest rates have also accelerated (30-year fixed rate was 4.48% last week) making home affordability harder to find.  With all these changes, the Federal Housing Administration (FHA) is rolling out some new plans of their own.

The newspaper LATEST NEWS with the headline CHANGE WILL COMEStarting January 1, 2014,  FHA is lowering its lending limits across the board.  FHA Commissioner, Carol Galante, said in a release, “As the housing market continues its recovery, it is important for FHA to evaluate the role we need to play.  Implementing lower loan limits is an important and appropriate step as private capital returns to portions of the market and enables FHA to concentrate on those borrowers that are still underserved.”  The new limit on less expensive loans is being lowered by over $75,000 to $271,050.  More expensive loans are being reduced by more than $100,000 to $625,000.  This is expected to affect approximately 650 counties in the U.S.

 FHA also announced it would further increase the fees they charge to lenders starting in March of the coming year.  Earlier this year FHA raised premiums and fees.  Unfortunately, the increased costs will end up being passed along to the borrowers in the form of higher interest rates.  “The new pricing continues the gradual progression towards more market-based prices, closer to the pricing one might expect to see if mortgage credit risk was borne solely by private capital.  These changes should encourage further return of private capital to the mortgage market,” noted the FHFA’s acting director, Ed DeMarco, in a release.

The economy and job market are still struggling to really make big leaps and the new FHA regulations could make it harder for first time homebuyers to purchase.   FHA has had financial struggles of its own, and increasing fees and lowering their risk is the prudent thing for them to do.  As home prices continue to rise and mortgage rates increase, purchasing power will lessen and those looking for an FHA loan might have to consider private financial resources.

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Home Prices Soar Due To Investors

Real estate marketThe housing market looks to have picked up some traction recently with new data report numbers released this past week showing growth in permits and home prices, which helps boosts the U.S. outlook. But Robert Shiller, Case Shiller Index co-founder and Yale University professor of economics, cautions this recent pickup might not be fundamentally sustainable and notes “we can’t trust the momentum in the housing market anymore.”  Is the housing market in a solid recovery state or does it appear to be a bubble lacking fundamental support?

Permits for construction on future homes hit a new 5-1/2 year high in October.  Building permits increased 6.2 percent to a seasonally adjusted annual rate of 1.03 million units, the highest rate since June 2008.  Multi-family permits surged 15.3 percent while single-family home permits increased .8 percent after dropping 1.9 percent in September.  The lack of supply has still not caught up with the strong demand of housing.  This has contributed partially to the rise in home prices and should continue to aid in increasing numbers for construction, rent and prices.

The price of single-family homes recorded big gains in the month of September.  The Case Shiller composite index reported solid increases in several regions across the U.S.  The index jumped 13.3 percent in September from a year ago.  This is the strongest gain recorded since February 2006.  Home prices were up 0.7 percent in August from the prior month; the tenth monthly increase in a row.  But this continued increase in home prices may not be maintainable.  Investors, specifically institutional investors, have helped push home prices to new highs and these investors are starting to pull back on their acquisitions.  These all-cash investors pushed home prices up more than 13 percent over the last 12 months which has priced out regular homebuyers.

Of all home sales in October, 6.8 percent were institutional investors according to RealtyTrac.  This was a significant drop from the month before which boasted 12.1 percent of all sales.  Anika Khan, senior economist at Wells Fargo Securities, told “Street Signs,” “In a lot of those hard-hit markets, we continue to see the greatest price increases. … A lot of this increase is exaggerated.  However, the underlying fundamentals are still very positive, especially in those markets that have strong household formations, strong population growth and strong job prospects. … We are seeing a recovery in the housing market.”  As investors exit their investments and slow their acquisitions, home prices will drop back to levels centered on supply and demand of non-investor homebuyers.  This could result in a pricing “bubble” pop.

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Mortgage Applications Dwindle

Prospective Fed Chairman, Janet Yellen, continues to ensure members of the Senate Banking Committee that she favors robust QE measures until the economy and labor market can exhibit strong growth.  She told the panel on Thursday “I consider it imperative that we do what we can to promote a very strong recovery.”  This has helped to send the equity markets soaring to new record highs but strong improvements elsewhere remain to be seen.  While the Fed believes the asset purchases have been nursing the economy back to health, the housing market has flat-lined or in some cases started to retract.

Mortgage Applications DropNotably in housing, mortgage applications continued to dwindle from the prior week’s report.  Applications dropped 1.8 percent according to the Mortgage Bankers Association (MBA) for the week of November 8th.  The prior week’s report was revised down from -7 percent to -2.8 percent.  These numbers come of the heels of a higher 30-year average fixed mortgage rate for conforming loans of 4.44 percent compared to 4.32 percent in the prior week.  The 30-year fixed mortgage rate averages for Jumbo loans and FHA backed loans also experienced increases that reached monthly highs.

Home builder confidence was reported flat due to rising construction costs this month.  The recent spike in interest rates over the last few months has hurt mortgage applications and construction costs are affecting the housing supply.  Other factors besides interest rates are influencing home buyers.  Rick Judson, NAHB Chairman, said in a release, “Given the current interest rate and pricing environment, consumers continue to show interest in purchasing new homes, but are holding back because Congress keeps pushing critical decisions on budget, tax and government spending issues down the road.”

The number of people looking to purchase a home dropped half a percent according to the purchase index put out by the MBA which is typical in a rising rate environment.  Interest rates are still historically low but the continued uncertainty from the Fed and Washington will continue to keep home buyers on the sidelines until more clarity can be seen.  The high unemployment numbers also add to the problem.  Inevitably this will hurt mortgage application numbers as home buyers sit on the sidelines.

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Homeownership Rate Tries To Rebound

The U.S. homeownership rate increased from its lowest level since the third quarter of 1995, indicating that the housing market is starting to attract more buyers.  This reading climbed from 65 percent in the second quarter of this year to 65.3 percent in the third quarter of this year.  Homebuyers are still trying to get into the market before interest rates and prices jump any higher.  The 30-year fixed rate was 4.27 percent during the last week of October.

homeownership rateOne reason homeownership has remained so slow can be linked to the large percentage of young Americans still living at home with mom and dad or those who are renting and living with roommates.  This group of young people has experienced some of the sharpest drops in homeownership since the financial crash in 2008.  Jed Kolko of Trulia, an online real estate company commented, “The share of millennials living with their parents rose from 31.4 percent in 2012 Q3 to 31.6 percent in 2013 Q3, based on the raw Census data. During the recession, many people doubled up with roommates or lived with relatives, including young adults who stayed in their parents’ homes. Even now, years after the recession technically ended, young adults remain much more likely to live with their parents than before the recession.”

Unemployment for young adults is still very high, even though it fell to 74.6 percent in October according to the Bureau of Labor Statistics.  The lack of employed young adults makes it very challenging for this group to obtain credit to purchase a home, thereby further damaging the homeownership rate.  Kolko reported there is an estimated 2.4 “missing households” of people who should either be in rentals or be homeowners but are not.  The prime age group for housing demand includes ages 25-34 year-olds.  With employment rates for this group still below the levels seen before the recession, the housing market has reason to worry about its recovery.

The recent jobs report release Friday appeared to be positive but it did not take into account the 932,000 Americans that dropped out of the labor force in October.  This takes the labor force participation rate of 62.8 percent to its lowest since 1978 (the third highest monthly rise in people dropping out of the labor force in U.S. history).  As young adults continue to face challenges obtaining employment, homeownership will continue to struggle because they will opt to live at home until economic conditions improve.

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Labor Market Effects on the Housing Market

The Federal Reserve announced last week, to no one’s surprise, that it would keep its cheap-money policy in place due to a lack of strength in economic data (particularly the labor market and consumer confidence).  Although the unemployment rate dropped to 7.2 percent in September, this number is not low enough for the Fed to start tapering its asset purchases.  Bernanke has stated he would want to see it at 7 percent before taking action.  Central bank officials noted that the pace of housing recovery “has slowed” and they warned again that “fiscal policy is restraining economic growth.”

The labor market has a strong relationship with the housing market in terms of sales and supply.  When people are unemployed or underemployed they are forced to seek cheaper housing, usually in the form of renting versus buying.  The philosophy of “build it and they will come” can only be successful if people can afford to purchase the homes built.  A lag in income growth compared to home price growth can also negatively affect this idea.

The Fed’s decision last week should help keep pressure off mortgage rates but this may not be enough to breathe life back into the housing market.  The continued growth in home prices, in part due to inventory pressures, has helped homeowners experiencing negative equity move to a position of positive equity.  This situation has decreased foreclosure rates but translates to increasing home prices for those looking to purchase in the midst of a still week labor market.

Mortgage applications for U.S. homes increased 6.4 percent from the prior week as the 30-year fixed mortgage rate dropped to 4.33 percent, the lowest rate since June of this year.  Some economists question whether this trend will continue as the demand for single family rentals continues to strengthen and home sales weaken.  Several buyers have been priced out of the housing market and many are still unemployed or underemployed.

Labor Market“When you look at the employment rate, employment opportunity measures, you get a different picture of slack in the labor market,” Scott Anderson, the chief economist for San Francisco-based Bank of the West, commented.  The average duration of unemployment has remained almost unchanged at 36.9 weeks (in September) over the last three years.  The 6.9 million Americans working multiple jobs in September has remained steady when compared to the average of last year.  What’s worse about the labor market, on average over the past 18 months, more Americans were working multiple jobs than during 2010 and 2011 averages.

It does not appear that the Fed’s actions have had the positive effect on the labor market as they had hoped.  Many believe it has actually hindered growth, like the Central Bank stated above.  Most can all agree; however, that the labor market needs to strengthen and economic growth needs to be present to help positively influence the housing market.

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Construction Spending and Home Prices Take Off

construction spendingHomebuilder sentiment was recently reported to be weakening, but U.S. spending on construction isn’t being held back by this news.   During the month of August, construction spending almost hit a 4-1/2 year high due to increases from both the private and public arenas, according to the Commerce Department.  The increase was .6 percent when compared to the month of July.  July’s figures were revised to a number more than double the original estimate.  These positive numbers show that there’s hope for growth in the third quarter this year.

Some may think this data seems a little dated, as we are nearing the end of October.  The government shutdown delayed the original release of this data, scheduled for October 1st.  The private sector of construction spending increased by 1.2 percent to a five-year high leading the market to believe higher interest rates have not lowered builder confidence, nor has it slowed activity as previously assumed.

With lots of money being spent on building new homes (increasing supply) theory would imply prices would start to cool, but this has not been the case.  Home prices have jumped more than 12 percent from a year ago making the affordability of buying a home more difficult.  Household income growth, up only 3 percent year-over-year, has not kept up with the rise in home prices.  Lawrence Yun, chief economist for the National Association of REALTORS® wrote in the September Sales report, “Affordability has fallen to a five-year low, as home price increases easily outpaced income growth.  Expected rising mortgage interest rates will further lower affordability in upcoming months.”

For home buyers this could be a challenging environment.  First time buyers tend to purchase lower-priced homes.  If income growth is not keeping pace with home prices, they could get priced out of the market and be forced to put off their home purchase for the time being. The glimmer of hope in this situation is that fixed mortgage rates have dropped to a four month low (30-year fixed rate is 4.13 percent this week).  This helps take a little pressure off the increasing home prices in regards to home affordability.  In the long term if incomes don’t keep pace with home prices, construction spending may start to decline due to a lack of demand.

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Government Re-opens But Builder Confidence Drops

After days of meetings, discussions and negotiating, the government finally came to a short-term resolution to allow the government shut-down to conclude and ensure default would not ensue.  But this “my way or the highway” mentality on both sides of the political isle has damaged Washington’s credibility and confidence ratings among Americans.  The lack of leadership in Washington and the “kicking the can down the road” ideology has affected several parts of the economy; both macro and micro in scope.

Reports released this Wednesday from the National Association of Home Builders (NAHB) showed a weakening in home builder confidence.  In the market for new single family homes, the NAHB/Wells Fargo Housing Market Index (HMI) reflected a two point drop from an already downward revised report in September.  NAHB Chief Economist David Crowe noted, “A spike in mortgage interest rates along with the paralysis in Washington that led to the government shutdown and uncertainty regarding the nation’s debt limit have caused builders and consumers to take pause.  However, interest rates remain near historic lows and we don’t expect the level of rates to have a major impact on sales and starts going forward. Once this government impasse is resolved, we expect builder and consumer optimism will bounce back.”

Builder ConfidenceThe NAHB describes the HMI as a an index that “gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.”  The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.”  Current sales, sales expectations and traffic of prospective buyers all experienced a two point drop showing confidence is waning.

It appears that home builders aren’t the only ones lacking confidence.  Consumers are showing signs of caution in the midst of Washington’s uncertainty.  Last week during the partial shut-down, mortgage applications for government mortgage products dropped to a six-year low according the Mortgage Bankers Association (MBA).  Mortgage applications to purchase a home declined by 5%.  “The government shutdown had a notable impact on the mortgage market last week. Purchase applications for government programs dropped by more than 7 percent over the week to their lowest level since December 2007, and the government share of purchase applications dropped to its lowest level in almost three years. FHA lenders with delegated authority have been able to continue, but those that rely on the regional homeownership centers have not. Additionally, HUD staff at headquarters are generally furloughed and not able to answer questions,” said Mike Fratantoni, MBA’s vice president of research and economics.

It will no doubt take time to re-instill confidence that the American people had in their government’s elected officials.  The negative impact of these past few weeks might haunt the economy and consumers for some time.

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Sources:  http://www.nahb.org

http://www.mbaa.org/NewsandMedia/PressCenter/85948.htm