Real Estate Information Archive

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.

Information courtesy of Jessica Regan.

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 spat 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.

Perseverance is a virtue, and the nation's home builders are displaying plenty of perseverance, even if they are not necessarily displaying it happily. The home builders' housing index remained unchanged in August, at a depressed level of 15. Components for present sales and buyer traffic inched higher, but home builders still aren't expecting any noticeable improvement in sales over the next six months.

The market for new-home sales might not be improving, but it doesn't appear to be worsening either. Housing starts dipped slightly in July, but continue to hover around 600,000 units per year, which is actually a higher level than what was seen six months ago. Unfortunately, the new-home market will likely remain anemic until we see a significant uptick in employment numbers.

Weak job growth is also taking a toll on existing home sales. July sales failed to live up to expectations, falling 3.5 percent to a 4.67 million annual rate. The good news is that prices remain stable nationally, with the median price holding near $174,000 and the average price holding at $224,000. Month-over-month, the price trend has been positive, though it is still slightly down year-over-year.

Price trends in producer and consumer goods, on the other hand, have been decidedly up. Consumer prices, in particular, have been moving perceptively higher. Consumer prices were up 0.5 percent in July and are up 3.6 percent year-over-year. This exceeds the Federal Reserve's 2 percent annual price-inflation target.

Many economists have raised concerns of a growing inflation threat. Credit markets, on the other hand, are showing no concerns. In fact, over the past week, the 10-year Treasury note – the baseline investment for 30-year fixed-rate mortgage loans – is down over 25 basis points and is yielding below 2.10 percent, an all-time low.

Prime 30-year fixed-rate mortgages are usually priced 2.25 to 2.5 percentage points above the 10-year Treasury yield. Not surprisingly, interest rates on these loans are also approaching an all-time low. This tells us that the state of the economy, not inflation, is the overriding concern of credit investors.

Can mortgage rates go lower still? Yes, they can, but will they do so is another matter. Timing markets is impossible, which is why we advise borrowers to lock if they are happy with their rate and payment schedule. We then advise them to cease following mortgage rates. After all, there is no sense in self-inflicting frustration when you are perfectly happy with the deal you received.

Harrisburg PA Real Estate Market Update brought to you by Jessica Regan, GMH Mortgage:

"It's d éjà vu all over again,” or so goes one of Yogi Berra's more famous malapropisms. There is a whiff of appropriateness to it, because home prices and foreclosures are reoccurring themes.

This week, the news on home prices was mixed, but encouraging. Zillow reported that home values were up 0.4 percent for the second quarter of 2011 compared to the first, but down 6.2 percent year-over-year, with the average home valued at $171,600.

The National Association of Realtors also reported a year-over-year decline. According to the NAR, the median sales price of existing homes fell 2.8 percent to $171,900 in the second quarter compared to the same year-ago quarter. The good news is that the NAR's data show prices trending modestly higher in recent months.

The question is, will the price trend continue? Foreclosures are the elephants in the room. RealtyTrac reported that foreclosures fell 35 percent, hitting a 44-month low, in July compared to the same year-ago period. In most markets that would be good news, but not necessarily in this one; the drop is attributed to banks still working through last year's servicing fiasco. Many market watchers are expecting a surge in foreclosures that could plague housing through 2012.

If there is a foreclosure surge, it will likely be regional. RealtyTrac also reported that 73 percent of foreclosure activity has been concentrated in a few states: California, Florida, Georgia, Michigan, Illinois, Nevada, Arizona, Ohio, and Wisconsin. The aggregated numbers might appear dire, but that doesn't mean that any one market is necessarily weakening.

Speaking of one market (actually, a number of smaller markets), overbuilt Florida is showing observable improvement. Existing home sales in the Sunshine State are up year-over-year. The median sales price has improved 17.3 percent, to $94,000, from the first quarter to the second. Florida has suffered home-price depreciation as much as any state, but lower prices spur demand, which helps stabilize prices. It's simple economics, and it's working.

The economics of mortgage rates are anything but simple. A few of our colleagues have been lamenting Standard & Poor's downgrade of U.S. Treasury debt, believing higher rates are on the horizon. We're not so sure. Mortgage rates are tightly tethered to 10-year Treasury-note yields. The current yield on these notes has dropped below 2.2 percent, lower than the yields in early 2009, and for the past 50 years. Investors obviously aren't concerned.

Much hoopla was made of the news that the Federal Reserve plans to hold short-term rates close to zero until 2013. But the Fed doesn't control the longer end of the market, which is influenced by the general level of economic uncertainty, credit worthiness of borrowers, time preference, and risk aversion. Sentiment and perceptions of these variables can change, and they can change on a dime, as the recent collapse of stock prices shows.

In short, we don't think mortgage rates are rising soon, but we'd be hesitant to play the rate game just to save a few extra basis points.

We've reworded Yogi Berra's quote into a question because of the volatility and hard sell-off in stocks. Could we possibly be setting ourselves up for a repeat of a decade ago? If you'll remember, many investors sold stocks in late 2000 and early 2001. A lot of that money was then funneled into real estate.

Admittedly, many people were subsequently burned by poor decisions – namely paying and borrowing too much. But as the sting of these losses subsides and stock losses accumulate, it's not outside the realm of possibility for money to cycle back into value-priced real estate. One of the overlooked benefits of real estate is that prices aren't continuously updated, so investors aren't whipsawed emotionally with real estate like they are with stocks.

This isn't to say that we expect a cascade of dollars to flow into real estate, but it's worth noting that investments compete with each. Given recent action in the stock market, the real estate market is looking quite a bit better in comparison.