Market Comment for Week of January 17, 2011…

MARKET COMMENT   Mortgage bond prices started the week in positive territory. We were able to establish some interest rate improvements as flight to quality buying emerged heading into some European debt auctions. Unfortunately there was a spike in rates the middle of the week as the buying reversed following an announcement by Japan that they would support the European markets. Higher than expected weekly jobless claims Thursday helped reverse this spike and enabled rates to fall. We ended the week on a rather sour note as profit-taking ensued heading into the extended holiday weekend. Mortgage bonds ended the week positive by about 5/8 of a discount point despite the continued large market swings. 

Housing starts and weekly jobless claims data will set the tone for trading this week. 

LOOKING AHEAD 

  • Housing Starts; Jan. 19; Consensus Estimate 512k; Important. A measure of housing sector strength. Weakness may lead to lower rates.
  • Weekly Jobless Claims; Jan. 20; Consensus Estimate 448k; Important. An indication of employment. Higher claims may result in lower rates.
  • Existing Home Sales; Jan. 20; Consensus Estimate 4.52m; Low importance. An indication of mortgage credit demand. A significant decrease may lead to lower rates.
  • Leading Economic Indicators; Jan. 20; Consensus Estimate Up 0.9%; Important. An indication of future economic activity. A smaller increase may lead to lower rates.
  • Philadelphia Fed Survey; Jan. 20; Consensus Estimate 22.8; Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.

 LEI  The index of leading economic indicators (LEI) is a weighted average of eleven economic variables that “lead” the business cycle. It is constructed for forecasting future aggregate economic activity. The eleven variables that make up the LEI measure workers’ hours, initial unemployment claims, new factory orders, vendor performance, contracts and orders for plant and equipment, new housing permits, changes in unfilled orders, prices of raw materials, stock prices, money supply and consumer expectations. 

Each of the variables that comprise the index has a tendency to predict (or lead) economic activity. For example, new orders for manufactured goods, new orders for plant and equipment, and new building permits are all direct measures of the amount of future production being planned for the economy. 

Analysts monitor the LEI in an effort to predict future economic growth. When the LEI report is up, mortgage market participants expect credit demand to increase and inflationary pressures to build. Thus, when the LEI report is rising, interest rates tend to rise as well. 

The LEI report is a valuable forecasting device that correctly predicts most economic turning points. The percentage change in the LEI is reported monthly and is an indication of the activity that will occur within the next three to six months. The LEI tends to turn down before peaks in the business cycle. Continuous declines are generally accepted as evidence that a recession continues. 

Nine of the eleven components that make up this index are known before the release of the report, so the index is easy for economists to predict. Thus, although this is important predictive data for market participants, surprises are not common with the release of this data. 

Source: Todd Kabel, US Bank; blog distribution provided by Kenneth Bargers and Bargers Solutions residential real estate services located in Nashville, Tennessee

Housing Starts Expected to Climb in 2011

New home construction is looking up this year. 

During an economic update Wednesday at the International Builders’ Show in Orlando David Crowe, chief economist of the National Association of Home Builders, projected single-family housing starts to rise by 21 percent in 2011, reaching 575,000 units. 

The estimate is slightly more conservative than the Dec. 30 projection of 716,000 housing starts this year by Lawrence Yun, chief economist of the National Association of REALTORS®. Both estimates assume sustained job growth, increasing U.S. population, as well as continued low interest rates driving construction. 

Yun expects about 2 million jobs to be added in 2011. However, as NAHB presenter Frank Nothaft, chief economist for Freddie Mac, pointed out, 2011 got off to a slow start with nonfarm payrolls rising only by 103,000 in December. He called the figure weaker than expected. 

Credit is another factor. Lending remains tight, but if it opens up with safe underwriting standards for creditworthy buyers, Yun says there would be a bigger boost to the housing market with spillover benefits for the broader economy. The 30-year fixed-rate mortgage is forecast to rise gradually to 5.3 percent around the end of 2011; at the same time, unemployment should drop to 9.2 percent, according to NAR. 

In addition, over the past 10 years the U.S. has added 27 million people. Continued population growth will also spur home construction and sales. “All the indicator trends are pointing to a gradual housing recovery,” Yun says. 

An even more conservative projection of 492,000 housing starts in 2011 was released by the Portland Cement Association during the International Builders Show Wednesday. Edward Sullivan, PCA chief economist, does not expect significant increases until 2012 due to tight lending standards, a high home inventory count, and unstable housing prices. He also says that new home construction will vary considerably by region. 

Source: Erica Christoffer, REALTOR® Magazine; blog distribution provided by Kenneth Bargers and Bargers Solutions residential real estate services located in Nashville, Tennessee

Overpriced, Underpriced Housing Markets

What are the most overvalued and undervalued housing markets in the country? The Local Market Monitor recently released a list for investors analyzing buying conditions for real estate markets in the United States. 

Overall, Las Vegas was a city they flagged as the worst — or “frankly dangerous,” as they referred to it. They said the city is not only one of the most undervalued housing markets in the country but is also considered one of the worst housing buys. Orlando, Fla., was another city the Local Market Monitor considered a bad investment city. 

Las Vegas’ median home price is less than $145,000–a drop of more than half in its median home price since its housing peak days. The Local Market Monitor says Las Vegas is also nearly 30 percent less than what would be considered fair market value. Both Las Vegas and Orlando have been plagued with high inventories of homes due to overbuilding from a few years ago, and also are two of the hardest hit areas for foreclosures. 

Here’s a list of the most overpriced housing markets and the percentage they are overvalued by, according to the report: 

  1. Nassau-Suffolk, N.Y.: 26% ($418,416 median home price)
  2. Los Angeles: 24% ($368,056 median home price)
  3. Portland, Ore.: 24% ($240,912 median home price)
  4. Anaheim, Calif.: 23% ($449,396 median home price)
  5. Edison, N.J.: 20% ($286,900 median home price)

Here is a list of the top 5 most undervalued markets: 

  1. Las Vegas: -27% ($144,636 median home price)
  2. Akron, Ohio: -22% ($155,673 median home price)
  3. Cleveland: -21% ($154,674 median home price)
  4. Warren, Mich.: -21% ($111,114 median home price)
  5. McAllenn, Texas: -20% ($131,871 median home price)

View a complete list of overvalued and undervalued cities.

Source: “America’s Most Overvalued – and Undervalued – Cities,” CNNMoney.com (Jan. 10, 2011); blog distribution provided by Kenneth Bargers and Bargers Solutions residential real estate services located in Nashville, Tennessee

National Outlook: Pending Home Sales Continue Recovery

Pending home sales rose again in November, with the broad trend over the past five months indicating a gradual recovery into 2011, according to the NATIONAL ASSOCIATION OF REALTORS®. 

The Pending Home Sales Index, a forward-looking indicator, rose 3.5 percent to 92.2 based on contracts signed in November from a downwardly revised 89.1 in October. The index is 5.0 percent below a reading of 97.0 in November 2009. The data reflects contracts and not closings, which normally occur with a lag time of one or two months. 

Lawrence Yun, NAR chief economist, said historically high housing affordability is boosting sales activity. “In addition to exceptional affordability conditions, steady improvements in the economy are helping bring buyers into the market,” he said. “But further gains are needed to reach normal levels of sales activity.” 

The PHSI in the Northeast increased 1.8 percent to 72.6 in November but is 6.2 percent below November 2009. In the Midwest the index declined 4.2 percent in November to 78.3 and is 7.7 percent below a year ago. Pending home sales in the South slipped 1.8 percent to an index of 91.4 and are 7.2 percent below November 2009. In the West the index jumped 18.2 percent to 123.3 and is 0.4 percent above a year ago. 

“If we add 2 million jobs as expected in 2011, and mortgage rates rise only moderately, we should see existing-home sales rise to a higher, sustainable volume,” Yun said. “Credit remains tight, but if lenders return to more normal, safe underwriting standards for creditworthy buyers, there would be a bigger boost to the housing market and spillover benefits for the broader economy.”

The 30-year fixed-rate mortgage is forecast to rise gradually to 5.3 percent around the end of 2011; at the same time, unemployment should drop to 9.2 percent. 

For perspective, Yun said that the U.S. has added 27 million people over the past 10 years. “However, the number of jobs is roughly the same as it was in 2000 when existing-home sales totaled 5.2 million, which appears to be a sustainable figure given the current level of employment,” he explained. “All the indicator trends are pointing to a gradual housing recovery,” Yun said. “Home price prospects will vary depending largely upon local job market conditions. The national median home price, however, is expected to remain stable even with a continuing flow of distressed properties coming onto the market, as long as there is a steady demand of financially healthy home buyers.” 

Existing-home sales are projected to rise about 8 percent to 5.2 million in 2011 from 4.8 million in 2010, with an additional gain of 4 percent in 2012. The median existing-home price could rise 0.6 percent to $173,700 in 2011 from $172,700 in 2010, which was essentially unchanged from 2009. 

“As we gradually work off the excess housing inventory, supply levels will eventually come more in-line with historic averages, and could allow home prices to rise modestly in the range of 2 to 3 percent in 2012,” Yun said. 

New-home sales are estimated to rise 24 percent to 392,000 in 2011, but would remain well below historic averages, while housing starts are forecast to rise 21 percent to 716,000. 

Yun sees Gross Domestic Product growing 2.5 percent in 2011, and the Consumer Price Index rising 2.3 percent. 

Source: NAR (123010); blog distribution provided by Kenneth Bargers and Bargers Solutions residential real estate services located in Nashville, Tennessee