Investment Mortgage Guy

The housing market continues to expand, and surprise.

According to the National Association of REALTORS®, November’s Pending Home Sales Index gained 3 percent from October. A “pending home sale” is a home under contract but not yet closed. 

The index is now at its highest point since April 2010′s federal tax credit contract expiration deadline.

If the tax credit really did “borrow” sales from the summer months, as has been theorized, housing has rebuilt its foundation. 

We know this because, of all the housing data available to St Paul  homeowners and home buyers, the Pending Home Sales Index stands apart as a forward-looking report — its designed purpose as described in its methodology.

Because 80% of all homes under contract close within 60 days, and a statistically significant share of the rest close within months 3 and 4, the Pending Home Sales Index is an excellent predictor of future Existing Home Sales data.

This is in contrast to the New Home Sales data and Case-Shiller Index, as examples, which both describe the real estate market as it existed two months in the past. The Pending Home Sales Index reports on housing as it exists right now. We should expect January’s Existing Home Sales report, therefore, to show marked strength, consistent with a housing market recovery.

The downside of the Pending Home Sales Index is that it’s a national report and real estate is not sold nationally — it’s sold locally. To get a feel for your home market and how it’s faring, talk to a licensed real estate agent with access to local home sale data. 

If pending sales data is available, so much the better. Forward-looking figures can be more helpful than data that’s already old.

Mortgage markets improved last week during a snow- and holiday-thinned series of sessions on Wall Street. Mortgage bonds improved on year-end profit-taking, mostly, leading conforming mortgage rates in Minnesota lower.

Last week marked the first calendar week in which mortgage rates dropped since early-November, a pleasing development for rate shoppers and home buyers. Falling rates means lower monthly mortgage payments.

But don’t expect for rates to improve again this week, however. Last week’s gains were the result of extremely low trading volume and a close-out of 2010 mortgage bond positions. With markets re-opened for 2011, and Wall Street back at full volume, mortgage rates may resume rising.

There will be a lot of data and information on which for mortgage bonds to trade, too.

The week starts with a growth report from the U.S. manufacturing sector. The Institute for Supply Management’s monthly report has shown improvement over 16 straight months, and Monday’s report is expected to show the same. Because manufacturing is key in U.S. economy, a stronger-than-expected value could send stock markets higher, and mortgage rates, too.

Then, Tuesday, the Federal Reserve releases the minutes from its December meeting. There won’t be policy changes transcribed in the minutes, but Wall Street will scrutinize its pages for clues on the economy. A bullish bias from the Fed will push rates higher. A bearish bias will drag rates lower.

And lastly, Friday, the government will release its Non-Farm Payrolls report for December. This is a major market-mover because of how closely jobs are tied to the economy overall. Plus, Fed Chairman Ben Bernanke speaks Friday — another risk to mortgage rates.

The gravity of this week’s economic releases and speeches should make shopping for a mortgage difficult. Stay in close touch with your loan officer about mortgage rates and how they’re moving. And if you see a rate you like, lock it.

There’s no promise rates will ever go lower.

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.

With 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:

• Some say home prices will rise in 2011
• Some say home prices will fall in 2011
• Some say mortgage rates will rise in 2011
• Some say mortgage rates will fall in 2011

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 Minneapolis 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.

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 in Minneapolis , 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.

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 Wisconsin 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.

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 in Burnsville 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.

The 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 Wisconsin , 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 Burnsville 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.

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 in Minneapolis 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.

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 Minnesota 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 in St Paul 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.