Aug
26

Mortgage Market Trends for week ending August 26, 2011

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MARKET RECAP

The woes of homebuilders and anyone dependent on home building continue. The July report on new home sales shows that the annual sales rate has fallen to 298,000 units, hitting a five-month low. The good news is that supply isn’t expanding. In fact, only 165,000 homes are in inventory. This is a record low and a 6.6-month supply at the going sales pace.

Homebuilders face a cluster of problems: bargain-priced foreclosures; higher lending standards; and skittish buyers, many of whom have been further put off by the recent stock market sell-off. Mounting concerns of a double-dip recession and rising cancellation rates have only exacerbated homebuilder worries. The chief concern now is that builders could be forced to cut prices, something they’ve been fighting tooth-and-nail.

Despite the recent spate of bad news, home prices continue to hold their own, and in many instances are moving higher – at least month-over-month. The FHFA home price index for June increased 0.9 percent after posting 0.4 percent and 0.3 percent increases in May and April respectively.

However, does the slump in new and existing home sales portend falling home prices? We remain optimistic that prices will hold. People are understandably wary about big-ticket purchases, like a home, because of slow job growth and stagnating economic activity. But all have a reservation price (a price they will not sell below). Houses (that is, habitable houses) won’t be given away; they’ll be taken off market if the sales price doesn’t exceed the reservation price.

Reservation prices could fall and the monthly price trend could reverse, of course. That said, we think most of the bad news is baked into the system, so we don’t think there will be any heavy discounting. In short, we still think a home is a worthwhile investment in today’s market.

Mortgages have also been holding a price trend. Bankrate reported that its weekly survey on rates posted another all-time low. It’s worth noting, though, that after the survey was released, yields on the 10-year Treasury note spiked 10 basis points, which points to higher mortgage rates in the next survey.

A surfeit of negative news has kept mortgage rates low. This has lead many analysts to opine that ultra-low mortgage rates are the new norm. We think this is a dangerous way of thinking (which we’ll explain below) and that it is still best to take advantage of rates unseen in over 50 years.

Is This the New Norm?

We’ve gone down the higher-inflation, higher-interest rate road many times in the past, only to find ourselves doubling back. There is an interesting trend occurring with banks, though, that could persuade us to go down it once again.

One of the more vocal criticisms of banks is that they haven’t been lending as much as they should. There is some validity to the criticism; banks have been squirreling away a higher amount of reserves with the Federal Reserve, which has attenuated loan supply and, therefore, money supply, thus keeping inflation in check.

Data released by the Federal Reserve show this period of containment appears to be ending. In other words, excess bank reserves are leaking into the economy and money supply is growing. Because we operate in a fraction-reserve banking system, which means one dollar can be sufficiently leveraged to produce nine more; more reserves put to work can quickly raise inflation pressure.

This all might seem abstruse to the layperson unfamiliar with the intricacies of the Federal Reserve and fractional-reserving banking. All we are saying is that it is folly to write off price inflation and the possibility of higher mortgage rates, because there is no “normal” when it comes to financial markets.

 

Graph Courtesy from NY Times in an article by Vickie Elmer August 26, 2011.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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