Sep182014
Low mortgage rates fail to overcome buyer reluctance
Mortgage interest rates are lower than last year, but sales volumes are also lower than last year as low rates fail to entice additional homebuyer demand.
I would like to own a Lexus LS 460. It’s a beautiful and luxurious automobile; however, I am reluctant to buy one because the price is just too high. They could lower the interest rate to zero, and I would be unlikely to buy a car that costs that much. No matter how much people may want something, if the price is too high, they will be reluctant to buy it.
Most Americans want to own a house; study after study shows that. However, Americans aren’t willing to overpay for a house and risk losing their equity and submerge beneath their debts, particularly since they know house prices can go down. This buyer reluctance is reducing demand.
Real estate demand has two components: purchasing power, and total number of qualified buyers. Low mortgage rates increases the buying power of the majority who use financing, so low rates tend to make prices rise; however, low rates do nothing to increase the size of the buyer pool to improve sales volumes. Our current economic environment, the weak job and wage growth hobbles housing; thus transaction volumes are very low, despite low mortgage rates.
Further, low rates are not likely to stimulate more demand due to buyer reluctance at higher prices. Potential buyers saw prices plummet for five years then rise rapidly for two years. The market looks anything but stable, and with the pain they witnessed many of their peers and parents get trapped in houses and struggle with large payments. It’s a natural and prudent reaction to be cautious about repeating the mistakes they just witnessed. It’s one of the many reasons buyers are boycotting the market right now.
Home Buyers Lose as U.S. Bond Rally Skips Mortgage Rates
By Jody Shenn Sep 3, 2014 2:31 AM PT
… a potential catalyst to get the faltering U.S. housing recovery back on track is failing to materialize. …“People that had an optimistic bent about housing are certainly disappointed here,” Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said yesterday in a telephone interview. “Obviously it couldn’t hurt” to have rates even lower, “though it’s not going to be a magic bullet.”
(See: Why aren’t falling mortgage interest rates increasing sales?)
… the seasonally adjusted pace of existing home sales was down 5.4 percent in the same stretch of 2014, according to National Association of Realtors data. New home sales ran 1.8 percent below last year’s level, Commerce Department data show.
The market was supposed to see increasing sales volumes in 2014 — I’m not sure why, but that’s what the consensus predicted. It hasn’t worked out that way.
With housing failing to power enough economic growth to fuel a surge in wages and inflation, yields on 10-year Treasuries have retreated from as high as 3 percent in December, defying economists’ forecasts and ending yesterday at 2.42 percent.
In recent weeks mortgage rates rose significantly, and we may see rates finally start to trend higher.
“When competitive pressures mount and lending volumes shrink, banks will typically respond by easing lending standards and lowering rates in an attempt to maintain market share at the cost of profit margins,” they wrote last month in a report. “Curiously, there has been little movement in pricing.” …
That’s resulted in “very sticky” mortgage rates that may reflect lenders cutting staff in response to a drop in volumes, meaning they’re not fighting to create more demand, said Scott Buchta, the head of fixed-income strategy at Brean Capital LLC. …
Measures of employment in the industry suggest a drop of about 8 percent between April 2013 and March 2014, and little change since, according to Goldman Sachs Group Inc. analysts Hui Shan and Spencer Rogers.
Over the summer, mortgage interest rates were lower than the previous year, yet despite lower rates, sales volumes were also lower, suggesting lower rates would not stimulate more demand.
“This suggests that mortgage lenders do not see today’s lower mortgage rates as justifying an expansion in production capacity,” they wrote yesterday in a report. The lenders may “expect the recent rates rally to be short-lived and interest rates to move higher soon.”
With the shift in loan demand away from refinancing, lenders may also see offering lower rates as doing little to boost volumes because “home purchasing decisions depend on many other factors such as income prospects and house prices,” they said.
Even if buyers wanted to pay higher prices — which they don’t — many are unable to do so because they lack the down payment and verifiable income.
‘Just Reluctant’
… Shapiro, the Maria Fiorini economist, said that a recovery in the labor market that’s been particularly soft for middle-income jobs, along with a jump in home prices, pose challenges that can’t cured by mortgage rates. Even amid slowing appreciation, values in June had climbed 28 percent from a 2012 trough, according to S&P/Case-Shiller index data.“People are just reluctant to chase the prices created by the speculative demand,” he said.
I agree with his assessment, and it pleases me to see people behave this way. During the housing bubble, people became excited by speculative demand and rising prices and wanted to participate in the market because of it. The fact that people are turned off to speculative house prices increases is one of the factors preventing a housing bubble from inflating now. That’s a change in the market to be embraced.
There is a solution to high prices… Warning: foul language
[listing mls=”OC14194612″]
Housing starts nosedive 14.4% in August
Privately-owned housing starts plunged 14.4% in August, according to the U.S. Census Bureau.
Starts were expected to drop after a strong July but not by this much.
Housing starts for July jumped to an annualized pace of 1.093 million units-up from 0.945 million units the prior month. July was up a sharp 15.7%.
Housing starts printed at a seasonally adjusted annual rate of 956,000, well below analyst expectations, but 8% above the August 2013 rate of 885,000.
Single-family housing starts in August were at a rate of 643,000; this is 2.4% below the revised July figure of 659,000. The August rate for units in buildings with five units or more was 304,000.
Privately-owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 998,000. This is 5.6% below the revised July rate of 1,057,000, but is 5.3% above the August 2013 estimate of 948,000.
Single-family authorizations in August were at a rate of 626,000; this is 0.8% below the revised July figure of 631,000. Authorizations of units in buildings with five units or more were at a rate of 343,000 in August.
HOMEBUILDER CONFIDENCE SURGES TO 9-YEAR HIGH
http://www.businessinsider.com/nahb-housing-market-index-sept-2014-2014-9
“It was also the highest reading since November 2005.”
Reality bats last?
I remember that headline from yesterday too. I have to wonder what they are smoking.
At one level I understand because long-term, the industry is poised to get better, but short-term, the outlook is not good, particularly for the next six months or so.
Further, if they don’t make the pricing adjustments they need to make to sustain momentum, sales are going to be horrendous for quite some time.
Builders are still living under the old paradigm of affordability products and escape velocity. The housing market simply doesn’t work that way any longer, and the builders haven’t realized this yet.
Housing starts are a highly volatile data series which provides Housingwire the perfect opportunity to use words like “surge” and “nosedive” every other month, depending on the direction of that month’s volatility. The real story, which is more boring, is that housing starts are moving sideways in a range between 900,000 and 1,100,000. ZZZzzzzz…..
And the real story is that this level of building is near the lowest levels of the last 50 years, and we’ve been stuck at those levels for the last four or five. The volatility is a reason to grab headlines, but the real story is the very low levels of construction that have persisted since the housing bust.
Agreed. Builders are taking on tactical in-fill projects here and there, but very few large-scale developments are in the works. With high rental rates in many areas, they can build multi-family projects more easily than single-family, and be assured of a less risky source of cashflow.
Credit Default Rates Inch Up in August
Credit default rates in the United States rose slightly in August, pushed in part by an uptick in mortgage defaults.
The national credit default rate, which includes bank cards, auto loans, and both first and second mortgages, edged up to 1.03 percent in August from July’s historical low of 1.01 percent, according to data compiled by S&P Dow Jones Indices and Experian.
The monthly increase was fueled by a rise in first mortgage default rates, which were up to 0.91 percent from 0.88 percent the month prior, ending a nine-month declining streak. Defaults among auto loans also moved up, climbing to 1.00 percent from 0.96 percent.
David M. Blitzer, managing director and chairman of the Index Committee for S&P Dow Jones Indices, said the increases reflect brisker business in both the auto and housing industries.
“With the recent and continued growth in the economy, sales of automobiles and existing homes have gained since the start of the year,” Blitzer said. “These factors may be leading to more borrowing and modest increases in default rates.
“No return to the extreme default experience of a few years ago is imminent,” he added.
Default rates improved in the other two categories, with the bank card index declining 13 basis points to 2.73 percent and the second mortgage index slipping 1 basis point to 0.51 percent.
The S&P/Experian report also included default percentages for five of the nation’s top metros: New York, Chicago, Dallas, Los Angeles, and Miami.
According to the report, defaults were down in both Miami and New York, dropping to 1.45 percent and 1.07 percent, respectively. New York’s new index level was its lowest on record, while Miami’s was the lowest in eight years.
Meanwhile, Los Angeles was the only market to post an increase, rising to a default rate of 0.72 percent from 0.66 percent in June.
Federal Reserve Announces Bond-Buying Cuts
More than two years after the central bank kicked off its latest economic stimulus program, policymakers at the Federal Reserve once again voted this week to scale down monthly asset purchases—and hinted that the end is in sight.
In a statement released Wednesday following the end of the Federal Open Market Committee’s latest meeting, the Fed announced that starting in October, it will dial back its monthly purchases of agency mortgage-backed securities and Treasury securities to a combined pace of $15 billion per month.
The bond-buying program has been on a steady downward slope since January after the Fed’s announcement late last year that it had decided to start tapering its stimulus thanks to improving economic conditions.
Barring any significant setback in the economy in the next month, the committee announced it could end its asset purchases at its October meeting.
While the central bank evidently sees enough momentum for the economy to roll on at a “moderate pace,” forecasts from the committee were mixed. In a separate report of economic projections, the committee predicted a drop in growth compared to its June forecast, with GDP set to expand 2.0 to 2.2 percent for 2014, down from 2.1 to 2.3 percent previously.
At the same time, the labor market outlook was brighter, with the committee calling for an unemployment rate of 5.9 percent to 6.0 percent by the end of the year.
In looking ahead to its next step, the Fed stayed committed to its usual language, maintaining it will keep its current target range for the federal ranges rate for a “considerable time” after the end of the program.
Just how long the Fed thinks to be a “considerable time” has been a matter of speculation among investors and economists. At a press conference in March, Fed Chair Janet Yellen hinted that rate increases could come as soon as six months after the end of the current easing program, sending waves through the markets. Since then, she’s been more careful with her wording, insisting in Wednesday’s press conference that the decision will not be calendar-based.
“It is highly conditional and it is linked to the committee’s assessment of the economy,” she said.
A recent survey of economists by the Wall Street Journal found most don’t expect the first hike to come until June next year.
Paul Edelstein, director of financial economics for IHS Global Insight, agreed with the June prediction.
“The tone of the Fed’s latest policy statement was decidedly dovish,” he said in a note. “There was some hesitancy over current conditions and the forward guidance was left intact. However, this was not enough to alter the general course of monetary policy.”
The committee’s monetary policy action passed with an 8–2 vote. Casting votes against the action were Dallas and Philadelphia Fed presidents Richard Fisher and Charles Plosser.
Bank of America, J.P. Morgan Move Forward Fed Forecasts
Two major banks said Friday that they now believe the Federal Reserve is likely to increase short-term interest rates sooner than they had previously expected.
In notes to clients, Bank of America Merrill Lynch and J.P. Morgan still hold to a dovish line. But both firms now believe that it will most likely be June when the Fed first raises rates of off what are currently near zero percent levels. Bank of America had reckoned the Fed would begin to end its ultra-easy monetary policy stance in September 2015, whereas J.P. Morgan had been forecasting a first rate rise sometime in the third quarter of next year.
The banks’ revised outlooks appears to put them in line with what core Fed officials have said about monetary policy, and that is while what happens depends on the economy, the most likely timing for interest rates would be around mid-year 2015. In changing their views, both firms acknowledged the importance of better-than-expected economic data.
The shift comes ahead of the monetary-policy setting Federal Open Market Committee meeting scheduled for next Tuesday and Wednesday. Officials are widely expected to press forward with their wind down of the Fed’s bond-buying stimulus effort, and to keep short-term rates near zero percent. The most significant change that’s expected is for the Fed to stop indicating rates will remain very low for a “considerable time” into the future, and to instead make the outlook for policy more conditional on what happens in the economy.
The Fed meeting also comes amid a widespread debate about the future of policy. While last week’s release of underwhelming jobs data for August helped reaffirm the case to keep monetary policy on a very easy setting, many inside and outside of the Fed have been wondering if the Fed may be able to raise rates sooner than expected. Most on Wall Street have also been looking to mid-year 2015 for rate hikes. The forecast changes offered by Bank of America and J.P. Morgan put them in line with the consensus view.
Bank of America economists noted “pinpointing the exact timing of the first rate hike is more of a guess than a forecast.” They wrote that growth data has been better-than-expected and inflation has matched Fed forecasts. At the same time, “there has been a gradual change in rhetoric from Janet Yellen and her allies” that supports the possibility of earlier rate hikes, the bank said.
This is a very good rent versus own calculator and map for Southern California
Rent or own: Where can you afford to live?
Buy? Rent? Move? How much house you can afford depends a lot on where you live. Enter your household income and other factors to see where you can afford the mortgage payment on a median-priced house or the rent on a typical two-bedroom apartment.
Affordability is calculated based on the industry rule of thumb of 30% of gross household income (though you can choose to spend less or more). Ownership calculations do not include mortgage interest tax deductions. In each ZIP Code, calculations are based on the median price for re-sold single-family homes in the second quarter of 2014 and the median rent for a two-bedroom unit in the last 12 months.
*Monthly home cost is calculated based on mortgage payments, property taxes, maintenance, insurance and other expenses.
Fascinating map! I put in my data and the only places where it is cheaper to buy is South LA (!) and the Inland Empire. I’m a bit confused. Larry, you’ve been saying for a while that there is no bubble because people can still save money on a monthly basis by buying, yet for me it didn’t seem to be the case according to the map. Have I been misunderstanding you?
No, you haven’t misunderstood me. They just use a different methodology that gives a slightly different result. I stand behind my analysis based on historic norms for rent versus own. I wish I had their mapping technology tied to my reports.
The real test is to go to your search area and use this site to find properties at or below rental parity. You will find more in the Inland Empire and fewer near the beach, but they are everywhere — which is actually surprising to me. I figured almost none of the beach properties would be near rental parity, but rents are also very high there, so many sky-high asking prices are justified based on the sky-high rents.
Go do a search and let me know what you find. I suspect you will find some highly rated properties at or below rental parity even near the beach.
I would agree that rental parity can still be had due to low interest rates and fast-rising rents. For instance, my house has gone up about 15% since we purchased it, but the rents have also gone up about 15% over that same time. Since interest rates are at about the same level now as they were then, the property is still at rental parity.
If interest rates begin to rise from here, the value will begin to exceed what rents can justify and that might lead to falling home prices.
I’ve noticed myself looking at properties that are not very desirable and finding the prices insanely high, but when I look at the details of the cost of ownership and rent, the impact of super low interest rates becomes apparent.
The prices of the housing bubble that were insanely stupid 8 years ago are coming back. The only reason they don’t look as ridiculous today is not due to inflation, but entirely due to the difference in cost of ownership created by 4% interest rates rather than 6.5% rates. If we had the same interest rates we had during the bubble, house prices today would look just as insane.
There’s just no urgency. Even if you have the provable income and downpayment to purchase the home you desire, there’s no reason why it must be done now. Also, everyone has competing interests. After this Lesser Depression, I’m more interested in paying off debt completely and building reserves, than I am in living in a house I own/finance and can customize.
Though, I could be easily fooled into jumping back in. If the other neighborhoods (other than Pavilion Park) in the Great Park begin selling in late 2015 at prices that are attractive relative to what we’re seeing today, I’ll be tempted. I’ll look. And if my financial statement is where I want it, I’ll probably buy.
I wrote a post some time ago making this same point. The new mortgage regulations level the playing field, so houses will be just as expensive relative to income years from now as they are today. Without affordability products to artificially boost prices above what people can really afford, everything sorts out by income as it should.
Wait for the next recession and buy at a discount. I have a feeling they will be building new homes at the Great Park for years to come. Perhaps pick one up from somebody that overextended buying direct from the builder.