Month: December 2013

Does the November report signal a slowdown in the housing market?

Existing home sales dropped in November, according to the National Association of Realtors. The annual pace of 4.90 million sales fell from 5.12 million in October.

Year-over-year, the sales pace was down 1.2%, which was the first time in 29 months that sales registered a decline from the previous year.

Lawrence Yun, the NAR chief economist said in a press release, “Home sales are hurt by higher mortgage interest rates, constrained inventory and continuing tight credit.”

A few additional notes on the November report:

• The median sales price $196,300 was up 9.4% from the previous year.
• Inventory ticked up to 5.01 months of supply.
• 14% of sales were distressed.
• The average discount for foreclosures was 17% and for short sales it was 13%.

Read the full report here.

Now for the analysis.

 

1. (Wall Street Journal) “Home sales surged this summer even after mortgage rates spiked in June. But there were signs by September that demand was waning among buyers who weren’t already active in the market before the rate surge.”

This article identifies five reasons sales have slowed:

• Mortgage rates increases
• Higher sales prices
• Less investor activity
• The government shutdown (though this is hard to quantify)
• Low inventory

The article also included an interesting example of how higher mortgage rates can affect what borrowers can afford.

For a borrower looking to make a $1,000 monthly payment, rates of around 3.5% in April allowed a homeowner to borrow as much as $222,000. At today’s rates, by contrast, that $1,000 monthly payment allows for a mortgage of $197,000. In other words, higher rates have reduced buyers’ purchasing power by 11%.

 

2. (Calculated risk blog) “The NAR reported that 14% of sales were distressed in November… last year the NAR reported that 22% of sales were distressed.”

McBride mentions this in context of “conventional sales”, which overall are higher. He sees the report as solid. (Read more).

 

3. Twitter Reactions:

Trulia’s chief economist Jed Kolko wrote on Twitter:

Non-distressed existing home sales up 9% y/y, but down for three months straight. Not good. Tight credit, higher rates, shutdown …

— Jed Kolko (@JedKolko) December 19, 2013

Wall Street Journal reporter Nick Timiraos gave a historical perspective. This is the best year for sales since 2007.

Annual existing home sales: 2007 5.04M, 2008 4.11M, 2009 4.34M, 2010 4.19M, 2011 4.26M, 2012 4.65M, *2013 4.71M *(2013 through Nov)

— Nick Timiraos (@NickTimiraos) December 19, 2013

Feeling wealthier after last month? Try 0.2%. Personal income for U.S. citizens rose by 0.2% in November, including a 0.4% bump in wages and salaries. The savings rate dropped to 4.2% in November (down from 4.5% in October). Consumer spending rose 0.5% in the month, as folks geared up for holiday gifts and travel.

These incremental changes seem small, but they translate to billions of dollars. For example, spending on retail and food services in November rose 0.7% in November after seasonal adjustments. This actually translates to $3 billion more in spending for the economy, bringing the total number from about $429 billion to $432 billion.

The Dow Jones Industrial Average set another record high to begin the trading day today. Meanwhile, the broad-based S&P 500 index reached gains of 28% for the year.

Third quarter U.S. GDP growth was revised up to 4.1% from 3.6.%. Demand (and sales) came in better than expected, which helped account for the sharp increase.

Put it all together, and the U.S. economy generally shows more signs of slow improvement heading into the new year.

The Federal Reserve seems to agree.

The big news last week came as the Federal Open Market Committee (FOMC) decided to reduce the Fed’s “quantitative easing” stimulus program by easing monthly bond purchases from a total of $85 billion to $75 billion. The FOMC identified “cumulative progress” in the U.S. employment situation.

The QE program has had a major impact on mortgage rates. In mid-2012, the Fed added $40 billion in monthly mortgage-backed security bond purchases per month. This action helped rates drop to record low levels and spur a refinance and buying boom.

Reduction of QE would remove some of the downward pressure on rates, and investors wanted to make sure to get ahead of the curve. Speculation about “tapering” of QE went on for much of 2013. As the year progressed and economic data improved, mortgage rates began to rise – even as the Fed continued QE in full. These jumps occurred as markets began to “price in” the eventual reduction of QE, modifying their bets for the future.

Though the December decision was a bit surprising (expectations seemed to shift to Q1 of 2014 as the date), markets were prepared, and mortgage rates made very little movement.

Read more about the decision – including how the Federal Reserve is able to affect mortgage rates – over on our website, where we covered the event in full.

Happy holidays! Hope you enjoy your week.

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The Federal Open Market Committee begins a two-day monetary policy meeting tomorrow (Tuesday), December 16, and markets will be looking for guidance about when the central bank will “taper” its quantitative easing stimulus program. In its third iteration of QE, the Fed has been buying $85 billion per month of U.S. Treasury bills and mortgage-backed securities, while keeping the federal funds rate near zero.

The Fed’s actions were designed to aid the U.S. economic recovery, in part by keeping credit fluid.  Upon the Fed’s implementation of QE in late-2012, mortgage rates fell to record low levels, thus helping aid a refinance boom and making home purchases more affordable.

Central Coast Lending is a SLO County-based mortgage lender. Their website is the top local source for mortgage news and analysis. Give them a call at 805.543.LOAN with any questions. 

However, as the economy has improved, speculation has increased that the Fed could scale back or “taper” QE. Meetings throughout 2013 were watched carefully, but the FOMC didn’t budge. One side effect of this speculation was for investors to “prepare” for a taper by “pricing in” the eventual reduction of demand in the U.S. Treasury and mortgage-backed security markets. As this process played out, mortgage rates increased.

Earlier in the year, markets seemed pretty confident that tapering would begin by the end of 2013. This changed as the Fed noted that while the U.S. economy was advancing, it still remained relatively sluggish. Now expectation seems to be that the Fed will wait until the first quarter of 2014 to taper.

The Fed will be digesting some of the recent positive employment news. The unemployment report of November turned in much better than expected, with payrolls adding 203,000 jobs and the unemployment rate dropping to 7.0%. Jobless claims have been trending downward for awhile now (even after last week’s spike).

The Wall Street Journal asked a selection of economists if the Fed should taper in December, and the results were mixed. We saw a selection of answers, including “it is absolutely too early” to “the Fed should taper because… there are large risk of future inflation and higher future interest rates.” Several economists asked if there was evidence that QE was doing anything to help, and others speculated that the data hadn’t been consistent. Read more here.

Mortgage rates moved higher last week, and begin the week flat. See here for the rates. We will see data on housing starts, inflation, jobless claims, existing home sales, and GDP this week. And, of course, Fed Chairman Ben Bernanke will announce the Fed’s policy decision.

In other real estate market news:

– Foreclosures drop to eight-year low as crisis wanes (Bloomberg). “Foreclosure filings in the U.S. plunged last month to the lowest level in almost eight years as investor purchases and an improving economy brought the end of the housing crisis with sight.” There were 111,454 properties in November that were issued default, auction, and repossession notices. (Link)

– Mortgage rates slightly lower in latest week (Wall Street Journal). “Average mortgage rates in the U.S. fell slightly in the latest week, according to mortgage-finance company Freddie Mac, as markets looked ahead to the Federal Open Market Committee meeting next week for indications of whether the Federal Reserve will taper its bond-buying program.” (Link)

– Home equity lines of credit, and lavish renovations, return (Bloomberg Businessweek). “Spending on home renovations is hitting records as banks such as Wells Fargo (WFC) and JPMorgan Chase (JPM) increase lending for home equity lines of credit.” (Link)

– Short sale sellers need a sense of urgency (Washington Post). “The Mortgage Forgiveness Debt Relief Actof 2007 sunsets at the end of December, just two weeks from now… If the act is not renewed, the amount of the mortgage that isn’t paid back to the bank will, as of January 1, be considered income and taxed just as if it had been received in cash.” (Link)

– Trulia’s housing predictions: how 2014 will be different (Trulia). “Next year looks to be the year of the repeat home buyer, as worsening affordability discourages first timers and investors; also, the buying process will be less frenzied. Hot markets to watch are primarily in the South, Plains, and Mountain states. Rental activity will swing back toward urban apartments, away from single-family homes.” (Link)

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Holiday season! Time to think about Christmas gifts. How about a car? The year 2013  saw the two most expensive car sales ever at auction. A 1967 Ferrari sold for $27.5 million and a 1954 Mercedes-Benz W196R sold for $29.7 million. Collectors spent $1.2 billion on cars in U.S. auctions this past year.

Or perhaps you would prefer something more sprawling for your eight figures? This mansion, vineyard, 230 acre… thing… is a 6 bedroom, 9 bathroom affair in the hills of Arroyo Grande. Also involved: olive orchards and straw production. It will set you back $21.85 million, but I suppose everything is negotiable.

Sometimes it is fun to dream, but back to real life. One possibility: help a relative purchase a home. See here to learn about gift giving guidelines for home down payments, closing costs, and prepaid items.

Last week, we saw a couple of  strong pieces of U.S. employment news. Unemployment claims dipped to 298,000 for the last week of November, which is the second lowest level of the recovery and the seventh drop eight weeks. The employment situation, meanwhile, was better than expected for the second-straight month. The unemployment rate dropped to 7.0% in November as payrolls added 204,000 jobs. (For more on the employment news).

The Federal Reserve has maintained its stimulus program in full through 2013, citing still-sluggish economic data as a reason to keep buying $85 billion in bonds per month. The FOMC has said that it would look at economic indicators – specifically  job creation – to decide when to reduce its involvement in the economy. Thus, as the news has improved, speculate about a tapering start-date has picked up.

Mortgage rates have increased as markets prepare for this eventuality. QE fiscal policy specifically facilitated the mortgage rate drop to record-low levels. Though QE continues in full, the impending reduction of QE has investors preparing for a return to normalcy. Freddie Mac reported that the national average of the 30-year fixed rose to 4.46% last week, up from 4.29%. This is over 1.0% higher than earlier in 2013, but still quite low historically.

One rough way to track mortgage rate movement is to look at the 10-year Treasury bond yield. The 10-year movement correlates to movement of the 30-year fixed mortgage rate. As the yield rises, so do mortgage rates.

Daniel Podesto, Central Coast Lending co-owner and co-host of popular local radio program Mortgage Matters on KVEC 920, said the following about recent rate movement:

Leading up to the employment report on Friday last week, we saw the 10-year Treasury yield rise to around 2.85% in anticipation of a strong report.  The number of jobs added and the decline in the overall unemployment rate surpassed expectations. This morning, yields have remained at the elevated levels with speculation once again surrounding the timing of QE tapering, perhaps as early as this month. Some traders are calling for the 10-year to reach 3.00% before the Fed meeting.  I am still of the opinion that tapering will not occur until sometime in the 1st quarter of 2014.  Regardless, tapering is going to happen sometime soon, and I believe the days of 10-year yields at or below 2.50% are behind us.

This is a light week for economic data. Check in tomorrow on our website for a complete rate update.