MARKET RECAP

Home sales have developed a positive up trend in the past six months, and it appears that trend will be sustained at least into the near future.

The pending home sales index rose 2.0 percent in January to hit 97, the highest reading in nearly two years. New contract signings were particularly strong in the South, which posted an impressive 10.5-percent gain. The good is that the rest of the country isn’t lagging far behind: national year-over-year contracts are up 8.0 percent.

Lower prices are an obvious factor in driving sales volume. While lower prices drive demand, they also reduce supply. Home supply has been dropping nationally for some time now, though concrete numbers are tough to gauge given the uncertainty over the hidden inventory of foreclosed properties. The estimates we’ve seen on these shadow homes range between two million to four million nationally.

Whatever the actual numbers are on distressed properties, it appears many markets have already reached peak saturation, which means levels should begin falling. According to analysts at Clear Capital, Atlanta and Tuscon, Ariz. are two regions likely to see a drop in REO properties during the year. We wouldn’t be surprised to see similar prognostications forthcoming for Las Vegas, Phoenix, and Central California.

The fact markets are reaching an REO saturation point is one sign that housing is reaching a tipping point. Affordability is another. In many parts of the country, affordability is at a multi-decade high.

We’ve been preaching over the past year that residential real estate is the investment for the next decade. We stand by our exhortations. Unfortunately, many potential buyers still feel otherwise. They are weary of catching a falling knife; that is, buying a property that will continue to depreciate.

Falling knives were a very real concern three years ago; that’s not the case today. Yes, home prices nationally could continue to fall, but you always have to look past national numbers to the local market – many of which are rebounding.

Mortgage rates are another reason we like real estate. Rates continue to skim along a 60-year low. But the economy is improving – GDP posted a better-than-expected annual 3.0-percent growth rate for the fourth quarter of 2011. What’s more, job growth has accelerated and unemployment has dropped. In other words, rates are unlikely to go much lower.

Costs associated with mortgages could go higher, though. The buzz on the new HARP 2.0 is growing louder and attracting many underwater borrowers keen to refinance. The buzz will grow even louder over the next month as interest intensifies.

Rising loan demand tilts the table toward lenders, so we think its prudent for potential buyers to not wait and to take advantage of what remains a very low-cost mortgage financing market.

The Foreclosures-to-Rental Solution

We tend to become more cautious when a theme grips the market. Residential rental property is the hottest theme these days. Even the great Warren Buffett is bullish on rentals, declaring that he would buy a couple hundred thousand single-family homes and rent them, if only he had a way to manage them.

Another prominent supporter of rentals, Lewis Ranieri, the co-inventor of the mortgage-backed security, lays out the case in a research paper for using federal entities to support converting foreclosed properties into rentals. According to Ranieri, his foreclosure-to-rental model can be developed in “most every market in the United States,” and thus help clear the distressed-housing overhang.

We see a few unintended consequences, though. When markets don’t develop organically, there tends to be inefficiency – you get too much or too little of something. Just look at housing for the past six years. The market was incentivized for more home ownership, and we got too much of it.

Single-family rental properties are fine, to be sure, but large swaths of single-family rentals might not be. Rents are rising, but they don’t always rise. Rents impacted capitalization rates. If rents drop, so will capitalization rates and property values. In addition, renters don’t care for properties as well as owners. Could a higher percentage of neglected properties translate into more downward price pressure for owners?

All we’re saying is that before we ask for something we need to be sure we really want it; unintended consequences can be very costly in the long run.

Graph Courtesy from NY Times in an article by Vickie Elmer March 1, 2012.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

 The Federal Reserve took center stage last week following through with its commitment to become more transparent.  The Fed has revealed that it intends to keep rates “extraordinarily low” for a longer period than thought, potentially through 2014.  Additionally, the Fed has now officially stated that it will use an inflation target to help control monetary policy.  Following the Fed’s announcement, Fed Chair Bernanke revealed that the Fed is considering a QE3, potentially later this year.  Mortgage rates had been on the rise until this statement which many interpreted as the fed showing signs that it has significant concerns about the overall state of the economic recovery.

This week is jam packed with economic news and data for markets to digest.  We have both ISM Indices due, Consumer confidence, and the monthly employment data.  Should any of these reports reveal signs of economic slowing, mortgage rates are likely to move back toward record lows.  However, a week of positive economic data could nudge rates just slightly higher at the week’s end.

 Graph Courtesy from NY Times in an article by Vickie Elmer January 27, 2012.  Data and Commentary provided by Noori Rafael, from GFI Capital Resources Group, Inc.