Incline Village Real Estate Blog

Steve Peterson, Branch Manager
Chase Home Finance
Office: (800) 894-5440 Ext. 214
Cell: (775) 219-7151
The economic indicators this week are rather glum, and I have to say that I expect them to remain rather negative for quite some time. Oddly, though, that won’t necessarily mean that the real estate market is getting worse–even though analysts in the newspapers will say it does.
 
We have a great deal of restructuring ahead of us. The financial markets–notably stock brokerages–have a lot of work ahead, primarily to regain some degree of confidence from investors and to assemble a system of regulation that makes sense, probably headed by the Federal Reserve.
 
While this is going on, mortgages will increasingly be written, houses will increasingly be sold…but we’ll all be rethinking the way we practice our trade and making changes where they seem right.
 
Warm regards,

Steve

Weekly Commentary

Thumbnail Sketch: There were a number of other important economic indicators released last week. Let’s review them:

Industrial production rose 0.3% in March, which suggests that, though the sector isn’t growing with much vigor, any weakness is rather muted. This is in agreement with the thesis that the recession—which most noted economists agree we have already entered—should prove to be relatively mild.

It is partly due to this apparent strength in the manufacturing sector and the Fed-induced growth in the nation’s money supply that the Index of Leading Indicators halted its gradual decline after five months and rose in March by 0.1%.

Meanwhile, sales of existing homes in March declined by 2%, with the supply of homes on the market slightly higher than the prior month, at 9.9 months’ worth (meaning, of course, that it would take 9.9 months to sell off all current inventory at current rates of sale, assuming no further homes were added to the inventory). The median price of a home was 8% lower than at this time last year. All in all, the real estate market is eating feathers here—but the story becomes far more intriguing, as usual, if you look at reality a bit more closely.

One rather fascinating report that reached the news recently is that homes within easy driving—or even walking—distance of places to work in metropolitan areas have recently shown about a 10% jump in median selling values. This may signal a major change in what buyers are looking for. With gasoline prices unlikely to drop by much in the foreseeable future, with concerns about the environmental expense of long commutes—not to mention the expense in terms of time wasted—more and more homebuyers are placing more and more value on housing that is closer to work. Further, there is a revitalization of many of our nation’s cities underway. These are important trend-makers for the future of real estate here.

Two other observations, both of them rather intuitive: First, you may have noticed that interest rates tend to edge north whenever we go through an economically neutral period—generally, with few startling economic indicators. This underscores a belief that we are unlikely to see interest rates fall much further unless lower rates are clearly needed to rescue a plummeting economy.

Second, we may not even see the real estate recovery when it has settled in our midst—because it might not look the way we expect it to. Certainly, it won’t look like the market of two years ago. We’ll need to remain very alert to market changes.

KEY INDICATORS 

Gold $924.30/ounce [down]Crude Oil (Brent) $116.46/brl             [up]U.S. Dollar to…    Euro .6251 [slightly down]    Japanese Yen 102.89 [up]6-mo Treasury Bill Yield 1.63%10-yr Treasury Note Yield 3.72% [6-mo up 19 bps, 10-yr up 13 bps]11^th Dist Cost of Funds: 3.560%30-yr Fixed-rate Mortgage 6.68%15-yr Fixed-rate Mortgage 6.13%1-yr ARM 6.86% [HSH averages rates: 30-yr up 32 bps, 15-yr up 25 bps; 1-yr ARM up 49 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 4/11  Overall    743.4 (up 2.5%; up 5.4% the week prior)  Purchase Money Loans     381.6 (down 0.8%; up 8.1% the week prior)  Refinancing Loans    2866.0 (up 5.2%; up 3.4% the week prior) 

Weekly Jobless Claims 4/12372,000 first computation – 355,000 prior week (with downward revision of 2,000) 

Consumer Price Index (CPI) Mar    Up 0.3% - core (w/food &energy prices removed) rose 0.2% - annual inflation rate 4% (core was 2.4%) 

New Housing Starts March

    Down 11.9% - permits down 5.8%

Steve Peterson, Branch Manager
Chase Home Finance
Office: (800) 894-5440 Ext. 214
Cell: (775) 219-7151

A few more tea leaves telling us that recovery is gradually beginning…but leaving us totally in the dark as to how the recovery will look. One thing seems clear: It will look different from what most of us expect (which is, I suppose, the re-emergence of a market like the one we experienced about two years ago. Not going to happen.)

Warm regards,                                                      
Steve

Weekly Commentary

Thumbnail Sketch: The optimistic signs are rather weak tea at the moment, but they may prove significant nonetheless, especially as regards the very slow recovery builders are beginning to predict.

How are they predicting a recovery? As we said—it’s weak tea, but it’s there. The National Association of Home Builders Index, which results from a survey of major builders, is no longer declining. In fact, it has stalled at a reading of 20 for three months now. That’s a low reading, of course, but the significant part is that it appears unlikely to fall lower again. As Aaron Smith suggested in Moody’s Economy.com, “Homebuilder confidence may have bottomed.”

The good signs in the latest NAHB survey are reports from builders that, though current sales are still very slow, potential buyer traffic is improving. Further, the “expectations index”—a measure of optimism among builders regarding how sales volume will look in a few months—rose by four points, the largest monthly increase in a year.

At the same time, there are signs that our nation’s manufacturing sector is doing slightly better than expected, and even the unemployment insurance claims (see Weekly Jobless Claims to the left) seem to be declining again.

One major bugaboo is the mounting worry over inflation, both in our nation and in the world. We are reaching the point where so-called “core inflation”—the numbers resulting when you remove food and energy data because they are so volatile—no longer seems as relevant, because food and energy prices continue to climb at a very fast pace. The effects of higher food and energy prices are by now working their way into all the other prices in our economy. With India and China becoming greater consumers of food (notably, for example, grains and beef) and energy (notably crude oil), higher prices for these staples are likely to remain with us for many years to come.

The overall economy, therefore, is somewhat precarious. Our financial systems, as discussed recently, need regulatory structures. Our commodity prices remain very high. But the tendency seems to be to edge toward greater economic health.

All of which raises an increasingly salient question: If health is returning to the real estate sector, what exactly will it look like? We will need to be on our toes for changes, for new opportunities, as well as for new potential problems. Watch, in particular, for new mortgage programs—and old (e.g., FHA)—to become very important to a recovering market.

KEY INDICATORS Gold $932.00/ounce [up]Crude Oil (Brent) $111.58/brl [up]U.S. Dollar to…    Euro .6336 [slightly down]    Japanese Yen 101.75 [down]6-mo Treasury Bill Yield 1.44%10-yr Treasury Note Yield 3.59% [6-mo down 12 bps, 10-yr up 4 bps]11^th Dist Cost of Funds: 3.560%30-yr Fixed-rate Mortgage 6.36%15-yr Fixed-rate Mortgage 5.88%1-yr ARM 6.37% [HSH averages rates: 30-yr down 16 bps, 15-yr down 11 bps; 1-yr ARM up 13 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 4/4  Overall    725.6 (up 5.4%; down 28.7% the week prior)  Purchase Money Loans     384.7 (up 8.1%; down 11.8% the week prior)  Refinancing Loans    2724.7 (up 3.4%; down 38.1% the week prior) Weekly Jobless Claims 4/5357,000 first computation – 410,000 prior week (with upward revision of 3,000) 

Producer Price Index (PPI) Mar    Up 1.1% - core (w/ food &energy prices removed) rose 0.2% NAHB Housing Market Index Apr

    Flat at 20 for third month in a row

Steve Peterson, Branch Manager
Chase Home Finance
Office: (800) 894-5440 Ext. 214
Cell: (775) 219-7151

Thumbnail Sketch: There is a curious contrast between the fervor with which many in Washington are seeking programs that will ease the real estate madness and the lackadaisical way others are brushing aside any sense of urgency. 

Why the contrast? Those on one side of the issue are motivated by specific interests: they want relief for homeowners, for builders, for the real estate market. Those on the other side seem motivated by the belief that any intervention by the government should be a last resort measure—and we should give the earlier legislation and rate cuts time to take effect before doing anything more. 

This is a political drama now, where it was more of a bipartisan rush to respond earlier in the year when the Economic Stimulus Act was passed so quickly. At this point, the contents of further legislation are difficult to predict. 

The building industry is working diligently to get major tax relief from legislation allowing builders to take a four-year carry-back on recent losses (that is, to bring the losses to bear on profits earned as much as four years ago, rather than just two). Such a change would bring many builders something of a windfall and would likely mean the difference between survival and bankruptcy for many small builders. 

Another idea with a good deal of backing is to provide tax credits to those who buy a home where a foreclosure process has begun. 

Another is to raise the FHA loan level for refis to $550,000—and not temporarily, it seems—allowing the FHA program to offer the opportunity for people to refinance their way out of trouble brewing with their existing subprime loan.  

Meanwhile, there is a problem that Washington can’t do much about. Lenders have kept rates higher—whether on adjustable rate mortgages or on 30-year fixed-rates—due in part to a disinclination to loan unless the borrower is extraordinarily qualified. 

The 30-year fixed-rate loan usually follows the ups and downs of the 10-year Treasury note, but it has been moving independently for many weeks. The same is true of ARMs tied to shorter-term Treasury bills and notes. Treasury rates have declined far more than have the actual ARM offered rates. 

We have not heard from major lenders why this is so. We seem to sit in the midst of a tornado, not quite knowing which way it will turn next. The good news? The recessionary tornado so far looks relatively mild.

KEY INDICATORS 

Gold $918.00/ounce [down]Crude Oil (Brent) $106.76/brl             [up]U.S. Dollar to…    Euro .6360 [slightly up]    Japanese Yen 102.42 [up]6-mo Treasury Bill Yield 1.56%10-yr Treasury Note Yield 3.55%[6-mo up 5 bps, 10-yr up 11 bps]11^th Dist Cost of Funds: 3.560%30-yr Fixed-rate Mortgage 6.52%15-yr Fixed-rate Mortgage 5.99%1-yr ARM 6.24%[HSH averages rates: 30-yr up 11 bps, 15-yr up 19 bps; 1-yr ARM up 76 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 3/28  Overall    688.3 (down 28.7%; up 48.1% the week prior)  Purchase Money Loans     356.0 (down 11.8%; up 10.6% the week prior)  Refinancing Loans    2636.0 (down 38.1%; up 82.2% the week prior) 

Weekly Jobless Claims 3/29    407,000 first computation – 369,000 prior week (with upward revision of 3,000) 

March Employment Report    Payroll jobs down 80,000 – unemployment rate up to 5.1% 

Consumer Credit Feb    Up 2.4% - revolving up 6.1% - non-revolving up 0.4%

Thumbnail Sketch: Though it is important to remember that existing home sales are down 23.8% from their year-ago level, the February uptick of 2.9% over January’s sales level may suggest that the market has hit bottom. Even more impressive is the fact that the number of homes available for sale is dropping—with February’s drop in inventory larger than any since October 2001. 

Does this mean the recovery is here? That’s a tough call, of course. Most economists believe the market has much further to fall, primarily because they expect huge numbers of foreclosures to continue swelling the inventory on the market. There are, however, two factors—at the least—that argue somewhat persuasively for a market bottom: 

First, the number of new listings coming to market typically rises during the beginning of a calendar year. This February, there were 400,000 fewer new listings that came to the market than in February 2007. This coupled with signs that home purchases are just now starting to increase in number suggests a turning point—though turning around fully could take a long time. 

Second, as many contrarians have noted, every tangentially relevant government agency is working on the housing problem and the major issues in the financial markets. This brings to mind the so-called “Business Week Indicator.” Investors have long held that a stock sector’s appearance on the cover of the magazine should tell us that we’re looking at old news, and where the magazine may be suggesting we buy, we might profit far more by selling. Similarly, many suspect that the enormous amount of attention being showered upon the housing market’s problems suggests that they may be about over. 

But again, the best advice may be to expect that the real estate market may bounce along a rocky bottom for several months before a recovery gains traction. 

Meantime, nearly everyone is becoming aware that we have problems of “epic” proportions (to use economist Paul Krugman’s term) that will need to be mended—as the Bear Stearns mess is still in the midst of repair—and, even more important, our financial market needs to be reinvented, especially in the ways it has and has not been regulated over recent years.  

This is not an anti-free-market observation. The bastion of free marketing thinking, London’s The Economist, declares: “No doubt, there are many ways in which financial regulation needs to be fixed; but that is for later. The priority for policymakers is to shore up the financial system.”

KEY INDICATORS 

Gold $936.50/ounce [up slightly]Crude Oil (Brent) $103.77/brl             [up]U.S. Dollar to…    Euro .6331 [slightly down]    Japanese Yen 99.24 [down]6-mo Treasury Bill Yield 1.51%10-yr Treasury Note Yield 3.44%[6-mo down 4 bps, 10-yr down 7 bps]11^th Dist Cost of Funds: 3.970%30-yr Fixed-rate Mortgage 6.41%15-yr Fixed-rate Mortgage 5.80%1-yr ARM 5.48%[HSH averages rates: 30-yr down 4 bps, 15-yr down 25 bps; 1-yr ARM down 72 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 3/14  Overall    652.0 (down 2.9%; down 1.9% the week prior)  Purchase Money Loans     365.0 (down 1%: up 1.6%  the week prior)  Refinancing Loans    2335.0 (down 4.6%; down 4.7% the week prior) 

Weekly Jobless Claims 3/15    378,000 first computation – 356,000 prior week (with upward revision of 3,000) 

Conference Board Leading Indicators Index Feb    Down 0.3% (fifth month down – consistent with mild recession) 

Existing Home Sales Feb    Up 2.9% - inventories down 7.5% -  median price down 8.2% 

NAHB Housing Market Index Mar    Unchanged at 20 

Housing Starts Feb    Down 0.6% - permits down 7.8% 

Fed funds rate cut by .75%

Steve Peterson
Branch Manager, Chase Home Finance
Office: (800) 894-5440 Ext. 214
Cell: (775) 219-7151

Thumbnail Sketch: Though it is important to remember that existing home sales are down 23.8% from their year-ago level, the February up tick of 2.9% over January’s sales level may suggest that the market has hit bottom. Even more impressive is the fact that the number of homes available for sale is dropping—with February’s drop in inventory larger than any since October 2001. 

Does this mean the recovery is here? That’s a tough call, of course. Most economists believe the market has much further to fall, primarily because they expect huge numbers of foreclosures to continue swelling the inventory on the market. There are, however, two factors—at the least—that argue somewhat persuasively for a market bottom: 

First, the number of new listings coming to market typically rises during the beginning of a calendar year. This February, there were 400,000 fewer new listings that came to the market than in February 2007. This coupled with signs that home purchases are just now starting to increase in number suggests a turning point—though turning around fully could take a long time. 

Second, as many contrarians have noted, every tangentially relevant government agency is working on the housing problem and the major issues in the financial markets. This brings to mind the so-called “Business Week Indicator.” Investors have long held that a stock sector’s appearance on the cover of the magazine should tell us that we’re looking at old news, and where the magazine may be suggesting we buy, we might profit far more by selling. Similarly, many suspect that the enormous amount of attention being showered upon the housing market’s problems suggests that they may be about over. 

But again, the best advice may be to expect that the real estate market may bounce along a rocky bottom for several months before a recovery gains traction. 

Meantime, nearly everyone is becoming aware that we have problems of “epic” proportions (to use economist Paul Krugman’s term) that will need to be mended—as the Bear Stearns mess is still in the midst of repair—and, even more important, our financial market needs to be reinvented, especially in the ways it has and has not been regulated over recent years.  

This is not an anti-free-market observation. The bastion of free marketing thinking, London’s The Economist, declares: “No doubt, there are many ways in which financial regulation needs to be fixed; but that is for later. The priority for policymakers is to shore up the financial system.”

KEY INDICATORS 

Gold $935.00/ounce [down]Crude Oil (Brent) $100.13/brl [down]U.S. Dollar to…    Euro .6405 [very slightly up]    Japanese Yen 100.15 [down]6-mo Treasury Bill Yield 1.55%10-yr Treasury Note Yield 3.51%[6-mo up 24 bps, 10-yr up 2 bps]11^th Dist Cost of Funds: 3.970%30-yr Fixed-rate Mortgage 6.53%15-yr Fixed-rate Mortgage 6.05%1-yr ARM 6.20%[HSH averages rates: 30-yr up 5 bps, 15-yr up 27 bps; 1-yr ARM up 19 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 3/14  Overall    652.0 (down 2.9%; down 1.9% the week prior)  Purchase Money Loans     365.0 (down 1%: up 1.6%  the week prior)  Refinancing Loans    2335.0 (down 4.6%; down 4.7% the week prior) 

Weekly Jobless Claims 3/15    378,000 first computation – 356,000 prior week (with upward revision of 3,000) 

Conference Board Leading Indicators Index Feb    Down 0.3% (fifth month down – consistent with mild recession) 

Existing Home Sales Feb    Up 2.9% - inventories down 7.5% -  median price down 8.2%