Fed Says Interest Rates to Expected to Increase

Federal Reserve Chair Janet Yellen confirmed in speech held today at the Providence Chamber of Commerce in Providence, Rhode Island, that interest rates will likely increase later this year due to the gradual improvement in the economy.

“Because of the substantial lags in the effects of monetary policy on the economy, we must make policy in a forward-looking manner. Delaying action to tighten monetary policy until employment and inflation are already back to our objectives would risk overheating the economy,” Yellen said.

In her speech, Yellen discusses the condition of the improving, but still wavering, economy and says that if the it improves as expected, she believes it will be a good time for the Fed to raise the Federal Funds Rate this year, which in turn, would affect mortgage interest rates.

“For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy,” Yellen said. “To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2% over the medium term.”

She also talks about employment rates, consumer price inflation, and the housing crash. She noted that these factors affect the economy overall and even though it is improving, there is still more work to be done. She adds that households are seeing the benefits of improving jobs situations, consumer confidence has been solid, and the drop in oil prices encouraged household purchasing power.

“The housing crash left many households with less wealth and higher debt, weighing on consumer spending, Yeller said. “Many homeowners lost their homes, and many more ended up “underwater,” owing more on their mortgages than their homes were worth. Economists have noted that areas of the country that saw a larger boom and bust in housing have subsequently fared worse economically than other areas of the country.”

Residential construction activity remains low, despite the recovery in home prices and home sales, Yellen says. She noted the ongoing issues with mortgage credit, a weakening job market, and slow wage gains seem to have made many people double-up on housing, and many young adults live with their parents.

“Population growth is creating a need for more housing, whether to rent or to own, and I do expect that continuing job and wage gains will encourage more people to form new households, Yellen said. “Nevertheless, activity in the housing sector is likely to improve only gradually.”

Yellen added that although she believes the Fed will raise rates, ultimately, their decision will be dependent upon new economic data and improvements.

“We have no intention of embarking on a preset course of increases in the federal funds rate after the initial increase, Yellen concluded. “Rather, we will adjust monetary policy in response to developments in economic activity and inflation as they occur. If conditions improve more rapidly than expected, it may be appropriate to raise interest rates more quickly; conversely, the pace of normalization may be slower if conditions turn out to be less favorable.”

Nowcast Expects Existing-Home Sales to Remain Weak in May

According to Auction.com’s, LLC Real Estate Nowcast for May, despite an unexpected drop in April, existing-home sales in May are expected to pick up and fall between seasonally adjusted annual rates of 5.03 and 5.34 million annual sales, with a goal of 5.18 million. This is a 2.9 percent increase from April and a 5.8 percent increase from a year ago. Auction.com expects May sales to come in at 5.18 million units (SAAR), and median sales prices at $220,799.

The Nowcast predicts market trends as they are happening before actual findings are released using industry data, proprietary company transactional data, and Google search activity, the company says.

“Heading into the summer buying season, we’re expecting to see healthy increases in home sales activity – though those increases will likely occur at a more modest pace,” said Rick Sharga, EVP at Auction.com. “While the jump we saw in March somewhat made up for lackluster performance in January and February, tight inventories, strict lending standards, and diminished participation by investors remain significant obstacles for the market.”

Yesterday, the National Association of Realtors (NAR) reported that home sales were at 5.04 million units, a 3.3 percent decrease from March, though up 6.1 percent from a year ago. Both, Auction.com and Consensus estimates were off for April because they predicted a stronger performance based on data released in March.

However, Auction.com’s estimate of $201,052 and $222,215 for existing-home prices in April was correct, according to the company. The NAR reported an increase in existing-home prices in April to $221,230, revealing an 8.9 percent increase compared to a year ago and marking a new high for home prices, which are now 2.6 percent below their pre-bust level.

“It’s important to keep blips like the one we saw in March in context. We’re in an unusually volatile period in the housing market, with almost unprecedented swings in sales volumes from month to month, Sharga said. “The bottom line is that in a truly healthy housing market, we’d already be on pace for 6 million existing home sales, but at this rate, I expect that the market will stay in the 5 million range for at least the remainder of the year.”

For May, the Nowcast suggests that existing-home sales prices will increase 4.2 percent year-over-year for the month, and will fall between $209,759 and $231,839, with a targeted price of $220,799.

“In our estimation, this burgeoning home price strength should help to boost sales out of their range, as a key constraint to sales at this time is the low level of inventory for sale,” said Peter Muoio, Auction.com chief economist. “Higher prices should entice more sellers into the market.”

According to the company, stronger owner-occupier demand is also needed to offset current subdued investor purchasing activity.

“The good news on that household formations have been following a much better path recently, following the Census Bureau’s massive revisions released last summer,” Muoio said. “The improving economy should generate continued healthy household formations and therefore stronger demand for homes down the road.”

REO Share Still Way Above ‘Normal’ Levels in Many Metros

The national percentage of residential single-family properties that were REO was 10 percent as of February 2015, which is five times its pre-crisis share (2 percent), meaning that in many metro areas the REO share is still way above pre-crisis levels, according to CoreLogic Senior Economist Molly Boesel.

In CoreLogic’s May 2015 MarketPulse released earlier this week, Boesel examined the question of whether or not REO share was headed back toward “a more normal level.” Its most recently measured rate of 10 percent is far below the share at the worst of the crisis, which was 28 percent. In some metros, the REO share got as high as 70 percent at the worst of the crisis.

One of the benefits of declining REO inventory is the elimination of the “saturation effect,” or the narrowing of the discount of REO prices to non-distressed resales, according to Boesel. During the crisis, the discount narrowed to about 30 percent, whereas it fell between 40 and 60 percent before the crisis.

“Falling REO shares would most likely help local prices, not only because fewer REOs are selling at a discount, but also because the saturation effect should go away,” Boesel said. “REO sales can also serve as a substitute for new home sales. Many areas were overbuilt in the run-up to the housing crisis, therefore a lower REO share my boost homebuilding in some areas of the country.”

In an examination of 386 metro areas which had at least 100 home sales in the last year, CoreLogic found that only 16 of them had REO shares below their pre-crisis means (calculated during a six-year period from 2000 to 2006) and the median distance between the REO share in the metro areas in February 2015 and pre-crisis was 6.2 percent. Only 3 percent of the metros measured (14 of them) had REO shares in February 2015 that were within 1 percent of their pre-crisis shares, according to CoreLogic. Six metros (2 percent) had February 2015 REO shares that were more than 20 percent higher than their pre-crisis means, led by Detroit, which was 48 percent in February 2015 compared to just 5 percent before the crisis.

Boesel cautioned that housing markets do not need to fall below their pre-crisis REO inventory levels in order to completely heal, but comparing current REO shares to those during a more “normal time period” does present an idea of “how far away the metros are from normalcy.”