Archive for December, 2010

Why You Shouldn’t Put Too Much Faith In October’s Case-Shiller Index

December 30, 2010

Case-Shiller October 2010

The Case-Shiller Index posted awful numbers in its most recent reading. Each of the index’s 20 tracked markets showed home price deterioration between September’s and October’s respective report. Some markets fell as much as 2.9 percent.

The drop in values is nothing about which to panic, however. The Case-Shiller Index is just re-reporting what we already knew. It’s a common theme with the Case-Shiller Index, actually; a trait traced to the report’s methodology.

The Case-Shiller Index is an imperfect housing indicator with 3 inherent flaws.

The first flaw is that the index makes use of a limited data set, tracking values in just 20 cities nationwide. That data set is then projected across the more than 3,100 other municipalities in the United States. The “national figures”, therefore, aren’t really national.

The second flaw is that, even within the tracked 20 cities, not all home sales are included. The Case-Shiller Index only tracks sales of single-family, detached homes, and within that market subset, it only uses homes that are “repeat sales”. This specifically excludes sales of condominiums and multi-family homes, and new construction.

Lastly, Case-Shiller Index’s third flaw is its “age”. The Case-Shiller Index reports on a 60-day delay, and the values it reports are tied to contracts written even longer ago.  Sales contracts from July and August are responsible for October’s closings so when we see the Case-Shiller Index as reported in December, some of the data it’s reporting is 5 months old already. That’s too old to be relevant.

Looking back at 2010, housing was at its weakest between May and August. Therefore, it’s no surprise that the most recent Case-Shiller Index shows significant weakness.  Looking forward, we should expect the report to improve — especially because of how strong New Home Sales and Existing Home Sales have been since summer.

The Case-Shiller Index is helpful for economists and policy-makers. It’s not much good for individual homeowners, however. For accurate, real-time housing data, talk to a real estate professional instead.

Housing And Mortgage Predictions For 2011

December 29, 2010

Predicting mortgage and housingWith 2010 coming to a close, the “experts” are out in full force, making predictions for next year’s housing and mortgage markets on business television and in the papers.

Predictions for 2011 are wide-ranging:

The problem with housing and mortgage predictions is that — like all predictions — they’re just educated guesses about the future. Nobody knows what will really happen with the housing and mortgage markets in 2011. All anyone can do is theorize. As laypersons, though, it can be hard to separate theory from fact.

Television can make that task even more difficult at times.

As an example, when a well-dressed economist goes on CNBC and presents a clear, succinct argument for why home prices will fall on 2011, we’re inclined to believe the analysis and conclusion. After all, the outcome seems plausible outcome given the facts. But then, immediately after, a different economist presents an opposite argument — that home prices will rise in 2011 — and her analysis seems sound, too.

Even Freddie Mac can’t see the future.

Last year, the government group predicted mortgage rates to 6 percent in 2010. That never happened, of course. Instead, conforming mortgage rates dropped over a 7-month period this year to levels best be described as “historic”.  Freddie Mac couldn’t have been more wrong.

So, what’s a homeowner to believe?

About the only thing that’s certain right now is that mortgage rates remain low by historical standards, and that home prices do, too. Also, that both housing and mortgage markets appear to be riding momentum higher into 2011.  This suggests that it will be more expensive to buy and finance a home by the end of 2011.

Until that time, however, predictions are just guesses.

New Home Sales Rise In November; Hint At Strong Winter 2011

December 28, 2010

New Home Sales (Nov 2009 - Nov 2010)Like most housing data in November, the most recent New Home Sales report showed sales volume increasing last month, and home supplies falling.

According to the U.S. Department of Commerce, sales of new, single-family homes increased to 290,000 in November on an annual basis, a figure equal to the New Home Sales 6-month rolling average, and a 6 percent improvement from October.

At the current pace of sales, the national supply of new homes for sale will be exhausted in 8.2 months — a strong 0.6-month improvement from October.

This data is consistent with the most recent Existing Home Sales report. It showed sales volume rising 6 percent, too, and a similarly-strong inventory drop.

For the housing market , it’s another step in the right direction. Since May’s post-tax credit plunge, home prices have stabilized and a foundation for growth has been built. Home builder confidence data highlights this point.

Also interesting in the November New Home Sales report is the volume breakdown by price point. Less expensive homes powered the market:

  • Homes under $200,000 : 47 percent of all sales
  • Homes between $200,000-$299,999 : 29 percent of all sales
  • Homes between $300,000-$399,999 : 14 percent of all sales

Luxury homes accounted for less than 2 percent of sales last month suggesting that builders count first-time and move-up buyers as their core market.

As 2010 comes to a close, housing looks poised for a rebound. Sales in all categories are improving, relative to 6 months ago, and the economy is improving. In conjunction with rising mortgage rates, the best time to buy a new home may be now.

What’s Ahead For Mortgage Rates This Week : December 27, 2010

December 27, 2010

Existing Home Sales (Nov 2009 - Nov 2010)Mortgage markets worsened again last week as the holiday-shortened sessions did little to buck recent momentum. Although Freddie Mac reported mortgage rates dropping 0.02% from the week prior, loan officers on the street will report the opposite. Rates did not fall last week.

Conforming mortgage rates in Utah moved higher for 7th straight week.

For rate shoppers and home buyers, it’s been a harrowing two months.  

Since the Federal Reserve announced its QE2 program November 3, 2010, mortgage rates have moved from all-time lows to 7-month highs. Mortgage payments now cost $38 more per month per $100,000 borrowed as compared to the day before the stimulus was announced.

Mortgage rates look poised to increase again. Here’s why.

A major reason why mortgage rates were so low, for so long, was that the U.S. economy was suffering. Consumer spending was slow, business forecasts were dour, and job growth was negative. These conditions lasted for longer than a year.

Lately, however, the conditions are changing:

  • Consumer spending is up 5 months in a row (Bloomberg)
  • Fannie Mae is boosting its economic outlook for 2011 (WSJ)
  • Job growth is slow, but positive (Reuters)

And, furthermore, housing appears to be on solid ground. Existing Home Sales and New Home Sales improved last month, and home supplies are dropping. This, too, is good for the economy, which, in turn, is bad for mortgage rates.

This week, don’t be surprised is mortgage rates rise again. The week is again shortened by holiday and there’s a host of new data that may signal economic improvement including Pending Home Sales, consumer confidence surveys and the Case-Shiller Index.

Home Inventory Dwindles Into The New Year

December 23, 2010

Existing Home Supply (Nov 2009 - Nov 2010)Existing Home Sales jumped another 6 percent in November, the report’s third month of improvement since bottoming in July.

According to the National Association of REALTORS®, a quarter-million more existing homes were sold during the annual period ending in November as compared to October.  An “existing home” is a home that cannot be considered new construction.

Additionally, the national housing supply dropped by a full month. At the current pace of existing home sales, the complete stock of homes for sale will be exhausted in 9.5 months.

November’s strong housing data is yet another signal to buyers that the housing market’s foundation has been rebuilt, and that a rebound is imminent.  It’s helped that there are great “deals” on which for buyers to pounce.

In November, short sales and foreclosures accounted for one-third of all existing homes sold, and carried an average price discount of 10 percent and 15 percent, respectively, as compared to non-distressed sales.

Repeat buyers continue to power the market, too, representing more than half of all home buyers.

  • First-time buyers : 32% of all buyers
  • Investors : 19% of all buyers
  • Repeat buyers : 51% of all buyers

This breakdown suggests that housing has regained its footing. First-time buyers can’t support a market long-term like repeat buyers can and, as compared to 12 months ago, the percentage of repeat buyers is now up 14 points.

Home buyers take note. Raw sales volume is rising and available inventory is dropping. Basic supply-and-demand tells us that this will lead home prices higher. Furthermore, mortgage rates are rising quickly, increasing the cost of homeownership.

If buying a home is a part of your plan for 2011, consider accelerating your purchase time frame. Existing homes account for more than 80% of homes sold nationwide. If the market keeps improving like this, your home affordability will worsen.

Housing Starts Rise In November, But With A High Margin Of Error

December 22, 2010

Housing Starts Dec 2008-October 2010The number of single-family Housing Starts increased in November, adding 30,000 units as compared to October.

The Census Bureau defines a “housing start” as a home on which construction has started.

November’s starts represents a 7 percent increase from the month prior. However, if you see the Housing Starts story online or in the papers, you’ll notice that the press is calling the market gain at 4 percent.

So which result is right? The answer is both.

The government’s monthly Housing Starts data is published as a composite report; lumping activity among 3 separate housing types into a single, group reading.

The 3 housing types are:

  1. Single-family homes (i.e. 1-unit)
  2. Multi-unit homes (i.e. 2-4 units)
  3. Apartments (5 units or more)

The group reading is a fair description of the market and it’s easy-to-understand. As a result, it’s what the press tends to report. However, for home buyers in Utah , it’s the single-family category that’s most relevant.

 

The reason why single-family homes accounted for 84% of November’s Housing Starts is because that’s the type of home that most buyers buy. Few purchase 2-4 unit properties, and even fewer buy entire apartment complexes.

That said, it’s possible that November’s Housing Starts data is wrong. Within the press release, the government placed an asterisk next to the data, indicating that the figure’s margin of error exceeds its actual measurement.

Against a 7 percent gain, the reported margin of error is 13.5%. There is no statistical evidence, therefore, to prove the actual change was different from zero.

If Housing Starts did fall in November, it will help to reduce the housing inventory, which will, in turn, help keep home prices high. For home sellers, this could mean good news. Fewer homes for sale increase competition among buyers.

Foreclosure Activity Plunges (But With An Asterisk)

December 21, 2010

Foreclosures per household, November 2010

According to foreclosure-tracking firm RealtyTrac, the foreclosure filings fell 21 percent in November to 262,339 units nationwide. A foreclosure filing is defined as default notice, scheduled auction, or bank repossession. 

November marked the first time since February 2009 that the number of monthly filings failed to surpass 300,000 units.

There were other notable November statistics, too, included:

  • November’s 21 percent month-to-month decrease was the largest in RealtyTrac’s recorded history
  • November’s 14 percent year-to-year decrease was the largest in RealtyTrac’s recorded history
  • Nevada led the nation in foreclosure activity for the 47th straight month

However, we can’t read into November’s RealtyTrac report too much; ultimately, history may treat it with an asterisk. Controversy surrounding the so-called robo-signers forced some of the biggest banks to institute a temporary halt to foreclosures in November. Foreclosure activity did fall last month, but the moratorium makes the figures look better for housing than if there had been no interference.

The halt in foreclosures is also why Utah leaped into the #2 state for foreclosures nationwide. Perennial foreclosure-leading states like California, Michigan and Arizona posted double-digit improvements in November whereas Utah did not.

Banks have since resumed foreclosure activity so December’s results may be a better gauge for how the market is truly performing.

Foreclosures tend to be sold at discount and low home prices can entice home buyers to make an offer. If you’re such a buyer and want to look at foreclosed homes, talk to a real estate agent first.

Although there’s a host of online search engines that specialize in foreclosures, a licensed agent may have access to broader inventory, plus the ability to negotiate it more effectively.

What’s Ahead For Mortgage Rates This Week : December 20, 2010

December 20, 2010

Fed Funds Rate vs Mortgage Rates (2000-2010)Mortgage markets worsened again last week as belief in a U.S. recovery and concerns for inflation took hold on Wall Street.  Conforming mortgage rates rose in Utah for the 6th straight week.

According to Freddie Mac’s weekly Primary Mortgage Market Survey, the average 30-year fixed rate mortgage is 0.66% higher this week as compared to rates on November 11, but loan originators will tell you that figure is understated.

Real mortgage rates — mortgage rates available to everyday homeowners and buyers are up by as much as a full percentage point since November, and loan costs are rising, too.

The Refi Boom of 2010 is over.

Last week, mortgage markets revolved around the Federal Open Market Committee. The FOMC met Tuesday and voted to leave the Fed Funds Rate unchanged within a target range of 0.000-0.250. This was expected. However, markets seemed to be surprised by the Fed’s take on inflation.

In its press release, the Fed said inflation is running too low to benefit the economy. Its policies, including the group’s $600 billion bond market program, may be meant to spark inflation, then. This would lead mortgage rates higher and Wall Street knows it.

Mortgage rates spiked after the Fed adjourned.

This week, with a sparse data schedule and trade volume thinning because of holidays, expect mortgage rates to be volatile.

Although rates are higher since 7 weeks ago, they remain low, historically. There’s still a chance to capitalize on the lowest mortgage rates in decades. If you haven’t refinanced this year and want to know what’s available, talk to your loan officer right away.

Why Builder Confidence Surveys Matter To Buyers Of New Homes

December 17, 2010

National Association of Home Builders Housing Market Index (Nov 2009-Dec 2010)Home builder confidence is holding firm this month, according to the National Association of Home Builders.

The group’s monthly Housing Market Index survey posted 16 for December. That’s the same value as from November. It’s also equal to this 2010’s average HMI reading.

HMI is scored on a scale of 1-100, and is a composite of 3 separate home builder surveys measuring single-family sales; projected single-family sales over the next six months; and prospective buyer foot traffic.

The results of the 3 surveys were as follows:

  • Single-Family Sales : 16 (unchanged from November)
  • Projected Single-Family Sales : 25 (unchanged from November)
  • Prospective Buyer Foot Traffic : 11 (from 12 in November)

Values of 50 or better indicate favorable conditions for home builders. Values below 50 indicate unfavorable conditions.

In other words, although improving, conditions for home builders remain less from excellent. Home buyers can use this to their advantage. When builders feel pressure from the market, they’re more likely to offer discounts.

On the other hand, job growth is returning, the economy is expanding, and mortgage rates are rising. These 3 factors are thought to boost housing markets. So, despite an unfavorable HMI reading, home builders might still less willing to “make a deal”; holding out for a better 2011.

November’s strong Housing Starts data supports that line of thinking.

If you’re buying a newly-built home , or expect to buy sometime in 2011, keep an eye on home builder sentiment surveys. The better the builders feel, the more you may be asked to pay to buy your next home.

Simple Real Estate Definitions : Loan-Level Pricing Adjustments

December 16, 2010

Loan-level pricing adjustments add to mortgage costsLoan-level pricing adjustments are mandatory loan fees based on a borrower’s specific default risk.

First introduced in 2008, LLPAs were Fannie Mae’s and Freddie Mac’s logical response to massive balance sheet losses. At the time, the housing market was deteriorating and mortgage delinquencies were rising.

To “better align with loan risk characteristics”, the two entities created specific fees to be associated to specific loan traits, to be charged to all borrowers.

LLPAs are still in existence today.

Today’s loan-level pricing adjustments can be grouped into 5 basic categories. Application exhibiting any of the 5 traits can trigger LLPAs, adding to a borrower’s loan fees:

  1. Credit Score (i.e. the borrower’s FICO is below 740)
  2. Property Type (i.e. the subject property is multi-unit)
  3. Occupancy (i.e. the subject property is an investment home)
  4. Structure (i.e. there is a subordinate/junior lien on title)
  5. Equity (i.e. mortgage insurance is required by the lender)

In many respects, loan-level pricing adjustment are similar to auto insurance. All things equal, the driver of a “fast” car will pay higher costs than the driver of a “safe” car.  The same is true for mortgages.

Loan-level pricing adjustments are public information. Fannie Mae publishes the complete LLPA matrix on its website. The chart can be confusing, however. If you have questions about how LLPAs work, talk with your loan officer.