Friday, August 21, 2015

What a rate hike may mean for housing

Source: Union-Tribune
 
The Federal Reserve’s Open Market Committee is expected to raise a key interest rate that has played a significant part in keeping mortgage rates at historic lows in the wake of the biggest economic downturn since the depression. If the rate hike transpires, it would be the first since June 2006. As for the effect on housing, interest rate increases will be gradual, and there are too many other forces pushing prices upward in the state, such as low supply and high demand.
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Friday, August 14, 2015

Economic and Forecast Update (July 1, 2015)

The Economy
  • GDP growth was slightly negative in the first quarter but will pick up in the second half.  For the year as whole, GDP will expand at 2.1 percent.  Not bad but not great.  A slow hum.
  • Consumer spending will open up because of lower gasoline prices.  Personal consumption expenditure grew at 2.1 percent rate in the first quarter.  Look for 3 percent growth rate in the second half.
    • Auto sales dropped a bit in the first quarter because of heavy snow, but will ramp up nicely in the second half.
    • Spending for household furnishing and equipment has been solid, growing 6 percent in the first quarter after clocking 6 percent in the prior.  Recovering housing sector is the big reason for the nice numbers.
    • Spending at restaurants was flat.  That is why retail vacancy rates are not notching down.
    • Online shopping is up solidly.  That is why industrial and warehouse vacancy rates are coming down.
    • Spending for health care grew at 5 percent in the first quarter, marking two consecutive quarters of fast growth.  The Affordable Care Act has expanded health care demand.  The important question for the future is will the supply of new doctors and nurses expand to meet this rising demand or will it lead to medical care shortage?
  • Business spending was flat in the first quarter but will surely rise because of large cash holdings and high profits.
    • Spending for business equipment rose by 3 percent in the first quarter.  Positive and good, but nothing to shout about.
    • Spending for business structures (building of office and retail shops, for example) fell by 18 percent.  The freezing first-quarter weather halted some construction.  This just means pent-up construction activity in the second half.
    • In the past small business start-ups spent and invested.  It was not uncommon to experience double-digit growth rates for 3 years running for business equipment.  Not happening now.  But business spending will inevitably grow because of much improved business financial conditions of lower debt and more profits and rising GDP.
    • What has been missing is the “animal spirit” of entrepreneurship.  The number of small business start-ups remains surprisingly low at this phase of economic expansion.
  • Residential construction spending increased 6 percent in the first quarter.  Housing starts are rising and therefore this component will pick up even at a faster pace in the second half.
  • Government spending fell by 1 percent.  At the federal level, non-defense spending grew by 2 percent, while national defense spending fell by 1 percent.  At the state and local level, spending fell by 1 percent.
    • The federal government is still running a deficit.  Even though it is spending more than what it takes in from tax revenue, the overall deficit level has been falling to a sustainable level.  It would be ideal to run a surplus, but a falling deficit nonetheless does provide the possibility of less severe sequestration.
    • U.S. government finances are ugly.  Interestingly though, they are less ugly than other countries.  That is why the U.S. dollar has been strengthening against most other major currencies.  It’s like finding the least dirty shirt from a laundry basket.
  • Imports have been rising while exports have been falling.  The strong dollar makes it so.   Imports grew by 7 percent while exports fell by 6 percent.  The net exports (at minus $548 billion) were the worst in seven years.  Fortunately, with the West Coast longshoremen back at work, the foreign trade situation will not worsen, which means it will help GDP growth.
  • All in all, GDP will grow by 2.5 to 3 percent in the second half.  That translates into jobs.  A total of 2.5 million net new jobs are likely to be created this year.
    • Unemployment insurance filings have been rising in oil-producing states of Texas and North Dakota.
    • Unemployment insurance filings for the country as a whole have been falling, which implies a lower level of fresh layoffs and factory closings.  That assures continuing solid job growth in the second half of the year.
  • We have to acknowledge that not all is fine with the labor market.  The part-time jobs remain elevated and wage growth remains sluggish with only 2 percent annual growth.  There are signs of tightening labor supply and the bidding up of wages.  Wages are to rise by 3 percent by early next year.  The total income of the country and the total number of jobs are on the rise.
The Housing Market
  • Existing-home sales in May hit the highest mark since 2009, when there had been a homebuyer tax credit … remember, buy a home and get $8,000 from Uncle Sam.  This tax credit is no longer available but the improving economy is providing the necessary incentive and financial capacity to buy.  Meanwhile new home sales hit a seven-year high and housing permits to build new homes hit an eight-year high.  Pending contracts to buy existing homes hit a nine-year high.
  • Buyers are coming back in force.  One factor for the recent surge could have been due to the rising mortgage rates.  As nearly always happens, the initial phase of rising rates nudges people to make decision now rather than wait later when the rates could be higher still.
    • The first-time buyers are scooping up properties with 32 percent of all buyers being as such compared to only 27 percent one year ago.  A lower fee on FHA mortgages is helping.
    • Investors are slowly stepping out.  The high home prices are making the rate of return numbers less attractive.
  • Buyers are back.  What about sellers?  Inventory remains low by historical standards in most markets.  In places like Denver and Seattle, where a very strong job growth is the norm, the inventory condition is unreal – less than one month supply.
  • The principal reason for the inventory shortage is the cumulative impact of homebuilders not being in the market for well over five years.  Homebuilders typically put up 1.5 million new homes annually.  Here’s what they did from 2009 to 2014:
    • 2009: 550,000
    • 2010: 590,000
    • 2011: 610,000
    • 2012: 780,000
    • 2013: 930,000
    • 2014: 1.0 million
    • Where is 1.5 million?  Maybe by 2017.
  • Building activity for apartments has largely come back to normal.  The cumulative shortage is on the ownership side.
  • Builders will construct more homes.  By 1.1 million in 2015 and 1.4 million in 2016.  New home sales will follow this trend.  This rising trend will steadily relieve housing shortage.
  • There is no massive shadow inventory that can disrupt the market.  The number of distressed home sales has been steadily falling – now accounting for only 10 percent of all transactions.  It will fall further in the upcoming months.  There is simply far fewer mortgages in the serious delinquent stage (of not being current for 3 or more months).  In fact, if one specializes in foreclosure or short sales, it is time to change the business model.
  • In the meantime, there is still a housing shortage.  The consequence is a stronger than normal home price growth.  Home price gains are beating wage-income growths by at least three or four times in most markets.  Few things in the world could be more frustrating and demoralizing than for renters to start a savings program but only to witness home prices and down payment requirements blowing by past them.
  • Housing affordability is falling.  Home prices rising too fast are one reason.  The other reason is due to rising mortgage rates.  Cash-buys have been coming down so rates will count for more in the future.
  • The Federal Reserve will be raising short-term rates soon.  September is a maybe, but it’s more likely to be in October.  The Fed will also signal the continual raising of rates over the next two years.  This sentiment has already pushed up mortgage rates.  They are bound to rise further, particularly if inflation surprises on the upside.
  • Inflation is likely to surprise on the upside.  The influence of low gasoline prices has been bringing down the overall consumer price inflation to essentially zero in recent months will be short-lasting.  By November, the influence of low gasoline prices will no longer be there because it was in November of last year when the oil prices began their plunge.  That is, by November, the year-over-year change in gasoline price will be neutral (and no longer a big negative).  Other items will then make their mark on inflation.  Watch the rents.  It’s already rising at near 8-year high with a 3.5 percent growth rate.  The overall CPI inflation could cross the red line of above 3 percent by early next year.  The bond market will not like it and the yields on all long-term borrowing will rise.
  • Mortgage rates at 4.3% to 4.5% by the year end and easily surpassing 5% by the year end of 2016.
  • The rising mortgage rates initially rush buyers to decide but a sustained rise will choke off as to who can qualify for a mortgage.  Fortunately, there are few compensating factors to rising rates.
    • Credit scores are not properly aligned with expected default rate.  New scoring methodology is being tested and will be implemented.  In short, credit scores will get boosted for many individuals after the new change.
    • FHA mortgage premium has come down a notch thereby saving money for consumers.  By the end of the year, FHA program will show healthier finances.  That means, there could be additional reduction to premiums in 2016.  Not certain, but plausible.
    • Fannie and Freddie are owned by the taxpayers.  And they are raking-in huge profits as mortgages have not been defaulting over the past several years.  The very high profit is partly reflecting too-tight credit with no risk taking.  There is a possibility to back a greater number of lower down payment mortgages to credit worthy borrowers without taking on much risk.  In short, mortgage approvals should modestly improve next year.
    • Portfolio lending and private mortgage-backed securities are slowly reviving.  Why not?  Mortgages are not defaulting and there is fat cash reserves held by financial institutions.  Less conventional mortgages will therefore be more widely available.
  • Improving credit available at a time of likely rising interest rates is highly welcome.  Many would-be first-time buyers who have been more focused about getting a mortgage (even at a higher rate) than with low rates.
  • All in all, existing and new home sales will be rising.  Combined, there will be 5.8 million home sales in 2015, up 7 percent from last year.  Note the sales total will still be 25 percent below the decade ago level during the bubble year.  Home prices will be rising at 7 percent.  For the industry, the business revenue will be rising by 14 percent in 2015.  The revenue growth in 2016 will be additional 7 to 10 percent.

Friday, August 7, 2015

Interest Rate Update





Interest Rate Update

Interest rates are still looking good. The experts feel the Federal Reserve will hold off any in-terest rate raise until next year

New Home Price Numbers Just Out

I have been saying for years that the best way to get (and keep) the housing market moving up-wards is to get the media involved as a cheerleader. For almost a year now the Orange County Register has been reporting how real estate is back and booming in the Orange County area. Another example is in today’s Register. The front page has a blip about the median home price and the Business section has a big article. The median priced home in Orange County is now back up to $629,500!! That is just below the record high of $645,000 reached in June of 2007.

How Does This Affect You ?

I have talked to several buyers who are "waiting" for prices to ease. I don’t see that happening anytime soon. Prices should begin to level off a bit but I would bet that prices continue to move upwards for several years. The Federal Reserve was set to start increasing interest rates but re-cent economic data and world events have caused a change in tone from the Feds who now see an increase either late this year or possibly into 2016. All good news. Pass this along and lets all have fun while the ride lasts.



30 Year Fixed up to $417,000 3.75% to 4.125%
30 Year Fixed "Agency" up to $625,500 3.875% to 4.25%
30 Year Fixed FHA up to $417,000 3.50% to 3.75%
30 Year Fixed FHA "Jumbo" up to $729,500 3.625% to 3.875%

Friday, July 31, 2015

Market Matters

MBA's Stevens: We are in the middle of a housing crisis
Source: HousingWire

The word “crisis” can sound alarmist, but Mortgage Bankers Association President and CEO David Stevens has used that term to describe the current state of housing, or better put, the lack of focus on housing as an opportunity by Washington policy makers. He places the blame at the top of the ladder, opining that President Barack Obama has not built enough confidence in consumers' views about homeownership. Due to the lack of focus, Stevens notes that “Today's environment is not encouraging credit expansion. It's forcing lenders to be overly conservative - ultimately failing entry-level homeowners on every front.”
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Real estate experts weigh in on SoCal housing market
Source: KPCC
 
Want to hear from two top academic experts on the housing market? KPCC interviewed Raphael Bostic, Judith and John Bedrosian Chair in Governance and the Public Enterprise at USC’s Price School of Public Policy, and Stuart Gabriel, professor of finance and director of the UCLA Ziman Center for Real Estate. The experts discussed state of housing, including a report from the CALIFORNIA ASSOCIATION OF REALTORS® noting that low supply has a lot to do with homeowners choosing to stay up rather than start over as buyers.
Read the full story
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The subprime mortgage crisis wasn't about subprime mortgages?
Source: Fortune
 
The media, in explaining the causes of the financial crisis, has frequently painted the narrative that once subprime borrowers began to default, falling dominoes sent the entire mortgage market, U.S. financial system, and global economy into crisis. Consequently, subprime borrowers and lenders have received a great deal of attention and blame in analysis of the crisis, but new research suggests this is misguided. The study notes that the vast majority of mortgages in the U.S. were still given to prime borrowers, which means that the real estate bubble was a phenomenon fueled mostly by creditworthy borrowers buying and selling homes they simply thought wouldn’t ever decrease in value. Simply put, the foreclosure crisis would have happened even in the absence of such risky lending.
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Friday, July 17, 2015

Water Conservation

Water is at a premium throughout drought-stricken California, and home buyers will no longer be able to  “go with the flow” as residents are tasked with conserving more. Typical U.S. households use approximately 260 gallons of water every day, according to the Environmental Protection Agency (EPA).  And as mandatory water restrictions require residents to reduce their water usage by 25 percent, a water-efficient home can help play a large role. 



Here are some common features of new construction that can help conserve our “liquid gold":

1. “Green” landscaping:  The average suburban lawn consumes a whopping 10,000 gallons of non-rain water each year.  That’s why some of today’s most coveted gardens utilize the principles of “xeric” or drought-tolerant landscaping. Native plants, such as lavender, ice plant and succulents are well-suited to drought-like conditions and drier soil, thereby helping to reduce water usage. Also, consider a smart “weather-sensing” irrigation system to automatically adjust the water schedule based on weather, seasonality and even zone type. After all, no one wants to see sprinklers running during an unexpected rain.
2. Efficient plumbing lines:  New homes generally employ efficient plumbing lines including pressure-regulating valves, which can limit water usage to 60 pounds per square inch (psi). This reduction helps with leaks, saves water and money, and can lessen the possibility of pipes bursting. New homes may also include well-insulated hot water pipes, which speed hot water to the user, reducing the amount of water wasted in warming it up.
3. Improved water heaters:  New choices including tankless heaters, heat pumps, or solar hot water heaters save both water and energy.
4. Low-flow plumbing fixtures:  Faucets and showers account for 15 and 17 percent of household water use respectively.  Improved low-flow options save water (about 30 percent for sinks and 25 to 60 percent for showerheads) without sacrificing quality, appearance or functionality.
5. Dual-flush toilets:  Toilets are the number one source of water usage in the home, accounting for nearly 30 percent of residential indoor water consumption. Low-flow models are a step in the right direction, but dual-flush options are even better, offering a full flush volume for solids and a reduced flush for liquids.
6. Energy-efficient dishwashers:  On average, dishwashers earning the ENERGY STAR label are 15 percent more water efficient than standard models. These newer-model dishwashers can save up to 1,600 gallons of water over the lifetime of the appliance.
7. Updated washing machines:  Take a brand new washing machine for a spin and save on the second-highest water demand in the house. Models manufactured and sold since March 7 are required to use even less water than previous energy-saving models. Even as capacities have expanded, maximum water usage has decreased, helping to save as much as eight gallons more per cycle than older models.

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