Keeping you updated on the market!
For the week of
February 28, 2011
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MARKET RECAP Getting a read on the direction of housing is always tough, especially in the winter. This winter has been exceptionally difficult, given that large swaths of the country have been either buried in snow or frozen over. Perhaps the weather explains the latest news on home sales. In January, existing-home sales rose 2.7 percent to a higher-than-expected annual rate of 5.36 million units, though it appears there was significant discounting. The median price fell to a nine-year low of $158,000. The good news was that supply declined to 7.6 months at the current sales rate from 8.2 months, which may or may not be related to the foreclosure moratorium. It's more plausible that weather was the reason new-home sales declined to an annual rate of 284,000 units in January, but we are not sure. Homebuilders might simply be embracing more austerity. The supply of new homes fell 0.5 percent to 188,000 units, while the median sales price rose to $230,600. This suggests that homebuilders are tired of discounting. They would rather reduce output than sell at prices that fail to produce a reasonable return on investment. Pricing remains a national concern. The closely watched S&P/Case-Shiller home price index reported that national home prices declined 3.9 percent in the fourth quarter of 2010. After the index was released, Robert Shiller, the index's co-creator, made the rounds to various media outlets to let everyone know that he's concerned that home prices will continue to fall, and not just a little. Shiller sees prices dropping 15 to 25 percent in real terms. It's important to note Shiller's qualifier, “real terms,” which means prices before inflation and in comparison with other goods and services. It doesn't mean list prices will fall 15 to 25 percent, because we transact in nominal terms, or in inflation-adjusted dollars. Inflation is very much an issue these days: gas is over $3 a gallon in most states and food prices continue to invoke sticker shock. Inflation alone will put a brake on falling real estate prices. This same concept applies to mortgage rates. Yes, rates have stabilized over the past two weeks, as Treasuries have regained their haven status because of Middle East unrest. However, 2 to 4 percent yields on Treasury securities won't be considered a haven when inflation consumes all the return. It is only a matter of time before credit investors demand higher lending rates.
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|
Economic
Indicator |
Release
Date and Time |
Consensus
Estimate |
Analysis
|
|
Personal Income |
Mon., Feb. 28, |
Income: 0.3% (Increase) |
Important. The increase in outlays is being driven by higher food and energy prices. |
|
Pending |
Mon., Feb. 28, |
92.9 Index |
Moderately Important. The index is expected to post lower on inclement weather. |
|
Construction Spending |
Tues., March 1, 10:00 am, et |
0.7% |
Moderately Important. Spending on single-family construction will likely ease after recent gains. |
|
Mortgage Applications |
Wed., March 2, |
None
|
Important. Refinances are surging on steady rates, while purchases are trending higher. |
|
Federal Reserve Beige Book |
Wed., March 2, |
None
|
Important. Price inflation could shift the Fed's stance on maintaining low interest rates. |
|
Employment Situation |
Fri., March 4, |
Unemployment Rate: 9.1% |
Very Important. After posting mixed results last month, credit markets will be vetting the data for an employment trend. |
It's easy to lose focus on what is really occurring. A lot of nonsensical speculating and erroneous punditry muddies the waters; therefore, it's worthwhile to step back to perceive the forest through the trees.
For example, many commentators repeat the notion that housing prices have to reach 2006 levels before the economy will recover. Sure, we would all like to see home prices hold steady and at least appreciate with the rate of inflation. However, we need to remember that the housing market five years ago was an anomaly. Today's prices are tough for sellers who bought during the market peak, to be sure, but they are good news for today's buyers, who are helping to clear excess inventory from the market.
Defaults and foreclosures are contributing factors to this inventory overhang, which is why we shouldn't encourage more inventory. Defaulting on a mortgage does not necessarily reflect an inability to pay. The current rules – as well intended as they may be – have produced a new phenomenon: homeowners who default by choice. Moratoriums actually encourage more people who are able to pay to walk away from their obligations, thus producing more distressed inventory.
On a more positive note, national foreclosures are a problem (and predominantly a sun and sand state problem), not a crisis. Real estate is local, and it is even local within our own locality. It's not unusual to see markets not even a mile apart display wildly divergent pricing trends. Fortunately, more commentators are catching on to this reality and are tempering the imperative to make every national problem a local one.
