Home-Account.com

Refinancing applications continue at a torrid pace, up another 3.7 percent last week driven by even lower rates, according to the Mortgage Bankers’s ssociation, while new home mortgages remain almost nonexistent.

Loan rates hit a new low last week, the MBA said, although the decline from the previous week was slight: The average contract rate for 30-year loans dipped to 4.61% percent from 4.63 percent. The 30-year loan rate has tumbled from 5.07 percent in early January as the Federal Reserve has ramped up its efforts to push down mortgage costs by buying mortgage-backed securities in the open market.

Although refis have soared, the MBA index that measures loan applications for home purchases has risen only modestly in recent weeks, despite the plunge in loan rates. The purchase-loan index edged up less than 0.1 percent last week and is up just 14% since reaching an eight-year low the week of February 6, even though home affordability, as measured by a National Association of Realtors index, is at its highest level since the group created the index in 1981.

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New economic numbers released by the government yesterday suggest that if the recession isn’t getting better at least it isn’t getting worse, either. Retail sales have held steady recently. And there are signs that the housing market is stabilizing.

The number of newly issued residential building permits, which offers a glimpse of construction activity in coming months, ticked up 3 percent in February from January. Existing-home sales were up 5.1 percent, according to industry data released this week. And yesterday, government data showed that sales of new single-family homes increased 4.7 percent, the first increase in that market in seven months. Median sale prices of those homes, however, were down 18 percent over a year ago.

The positive signs in the housing market are particularly encouraging. It was the housing bust that led the nation into recession, and for months analysts have said that a recovery in the market will be key to leading the nation out of recession.

Analysts said buyers are being enticed back into the market by plummeting home prices, along with historically low mortgage rates and an $8,000 tax credit for first-time home buyers in the stimulus package.

“There are some pieces of information that reconfirm that we are very near the bottom. . . . I want to see a couple more before I am confident that this truly the bottom,” said David Crowe, chief economist for the National Association of Home Builders.

Forecasters, for their part, stress that even after the worst is over, the economy will be fragile for some time. Recovery is expected to be weak, especially in the housing market, because there’s so much excess inventory. Consumers are still deeply in debt, unemployment is still on the rise, and countries around the world remain mired in recession, crippling demand for U.S. goods.

“Businesses have a ways to catch up to weak demand over last six months, so business spending will be extremely weak. . . . Exports will fall further as the global economy falls,” said Scott Anderson, an economist with Wells Fargo. “But this increases the odds the economy will start growing at the end of this year.”

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A couple weeks ago I wrote a post about using Case-Schiller Home Price Index futures to predict when the housing market would hit bottom.   Part of the Case-Schiller Index of course shows how prices have changed over time but the futures are a good guess about where they are headed in the months and years ahead.  The news was bad in that it predicted a market bottom around 2011 but good in that the bottom had a few months before been pegged as coming as late as 2013.  This shortening can happen because Case-Schiller futures are not just a prediction of where prices are going but a BET, and such bets can change over time.  Still what makes it so compelling is that very betting aspect, since these aren’t the prognostications of some analyst who says, “Jesus, it’s Monday and I’d better predict where the housing market is headed:” they are the results of trading volume involving real money and are only secondarily an estimate of future behavior. 

A lot of words lately have been written about when this market is going to turn and why.  Take a look back at that column and study the chart then tell me the people who say the market is bottoming RIGHT NOW have a clue at all.  They are either full of beans or are trying to PREDICT housing out of a slump, which won’t work.  You can’t fool professional traders when their money is at stake and real data is readily available to show that we are nationally FAR from that market bottom. 

To be clear, the data don’t show a precipitous decline from here but rather a bumpy bottom that won’t start to rise again until sometime after 2011.  This could change further over time as lower mortgage rates and – hopefully – banks actually funding loans help to firm prices.  But we’re not there yet.  And to explain why, let’s move a bit further down the Case-Schiller data food chain. 

It’s all a matter of supply and demand. 

Here are three charts thanks to a very helpful reader who has spent 25 years as a futures trader.  You don’t survive 25 years in futures without understanding markets and this one is clear. 

The first two charts show the inventories of U.S. new and existing homes over a period of several years as well as the months of available supply in each case.  This latter figure is also used in tracking car sales and is a useful statistic for gauging the health of any retail market for physical goods.  The third chart is just the Case-Schiller historical prices for the same period with break-outs for certain major markets.

House inventories respond to both demand for new homes and to economic conditions that may stimulate re-sales of existing homes.  In the case of new homes, developers always have to guess because they can’t know exactly whether the market will still be as eager to buy that new house when they pull the trigger on construction months before the property is available for sale.  They have to guess what demand will be. 

As you can see, historical inventories amount to about four months for both new and existing homes while the figure for both now stands at about 11 months.  This is not good news for people trying to sell these houses.  Builders have carrying costs on their unsold houses, which were generally built with borrowed money.  Even if they weren’t built with borrowed money there are still opportunity costs because that money could have been better used for something else.  With money going out every month to keep and market those houses, the potential profit from their sale naturally drops over time.  And remember that new houses are still being built, though at a much lower rate than before.  So if a house is finished this week built at a cost of $300,000 and the builder is financing it with an interest-only loan at seven percent, the cost of simply holding the house until it is likely to sell in the current market (if unchanged) is about $20,000 or about $12,000 more than it would have been with historic turnover rates.

That $12,000, then, is the discount any rational builder would give off the selling price TODAY just to get the house off his hands.  While a $12,000 discount may not seem like much for a house that cost $300,000 to build, it is more than half the builder’s historic profit margin for such a house.  So it isn’t a great deal already for the developer and that’s his absolutely best case given the market.  What if things get worse?  In many ways they already have.  Builders have drastically cut back new construction for good reason, but this spreads their overhead across a smaller number of units cutting further into the profit margin of each new house IF it can be sold.  At this point most U.S. builders would be happy to get rid of their current inventory AT COST.  

Comparing all three charts you can see that as supply began to rise in 2006 prices stopped rising.  Those supply increases started as bad decisions in 2004.  The subprime mortgage crisis didn’t come to a head until 2008.  There is cause and effect in these numbers and in every case a lag that probably can’t be removed.  Just as we learned in high school economics, increasing supply leads to softening prices.  Lax lending policies, overzealous mortgage marketing and regulators who were, at best, asleep at the wheel, allowed this system to spiral out of control. UNDER THE BEST POSSIBLE CONDITIONS this suggests that the housing market has two more years of hurt ahead of it (that two year lag again).  

But these aren’t the best possible conditions, are they?  So absent some really extreme actions on the part of someone, maybe the Fed (who knows?) we probably have more than two years before the situation starts to improve and house prices recover.  It’s pretty easy to see a bottom in 2011 and an eventual recovery after 2013 IF WE ARE LUCKY.  Remember it took Japan a decade to even start such a recovery under a similar circumstance, so four years is actually optimistic.

That’s the future based on current forces at work.  There are ways it could be made worse and some that could make it better.  Concentrating on the optimistic side, though, there are only a few actions that could make the downturn shorter, which is to say increase U.S. housing demand thus firming prices.  Here is the list which would seem to me comprises possible actions by the Obama Administration.  I’m not condoning or condemning any of these possible moves, by the way, just listing them for discussion purposes.   

To stimulate housing demand and firm prices the U.S. could:

–  Throw open the doors and allow unlimited immigration.

–  Buy houses and tear them down, thus permanently reducing inventory, possibly aligned with energy policy (similar to junking gas guzzlers).

–  Take over mortgages, foreclose, then turn excess housing inventory into rentals with Uncle Sam as the landlord, to be resold years from now after the market recovers.

The most contentious item here is immigration, but it is also the only one of the three that doesn’t cost tax dollars.  So look for the immigration debates of two years ago to be rejoined but with new priorities and possibly new outcomes.

Remember you read it here first.

cringely Blog Blog, housing prices, mortgage, policy, real estate economics

With apologies to Charles Dickens, which is this, the best or worst time to buy a house or refinance your mortgage? Those are two completely different questions, but the short answer is that it’s a lousy time to buy and not all that good a time to refi, either, despite record low mortgage rates.

Home prices are down nationally and you’d think that would make this a good time to buy but it isn’t. That’s because values are STILL DROPPING. The time to buy an asset is when it is just starting to appreciate. I’m not demanding here that every potential home buyer try to time the market but it is simple logic that it makes little sense to buy something today if you can buy it cheaper tomorrow. Home prices are dropping and it looks like they will continue to drop at least through 2010 and maybe even to 2012 according to the S&P/Case-Shiller Housing Futures Index traded on the Chicago Mercantile Exchange. The Case-Shiller is the best indication we have of where housing prices are headed. And though the index has shortened a bit in recent months from predicting a 2013 housing market bottom, renting still looks smarter than buying until at least 2011.

If you are selling, not buying, it doesn’t look all that good, either. Yes, sell now if you can’t wait for 2013 or later when some price recovery will have finally taken place, but there aren’t that many buyers out there specifically because the smart money is still waiting for the market to hit bottom. Houses will always sell at the right price but these days the right price sucks.

What about refinancing your mortgage, then, and hanging onto your house? The perception in the news is that rates are down and refinancing is hot, hot, hot, except not that many people are actually getting loans. Fannie Mae and Freddie Mac lending guidelines have just tightened-up. Banks are demanding bigger down payments, more reserves, and dramatically higher credit scores than in the past. Today the rate you could get a year ago with a 660 credit score requires a 740 number. Ouch!

And all those properties that are under water with their owners having no equity at all and owing more than the house is worth – those properties are IMPOSSIBLE to refinance under current circumstances.

What we’ll see then in the coming months is a small bump in refi business but not at all the resurgence one might expect. Defaults and foreclosures will continue to rise for at least another year or more no matter what the Obama Administration does.

So this would be a great time for someone to come up with a new approach to home finance, please, because things are going to get a lot worse before they’ll get better.

Sorry.

cringely Blog Blog, Case-Shiller, futures market, housing prices