The Real Estate Report 9/17/2014

Employment Report Analysis

At first blush, it appeared that the jobs report was disappointing. The addition of 142,000 jobs in August was much less than the average of over two hundred thousand for the previous six months. Yet, the day of the report, the stock market reacted positively and interest rates did not fall as expected. What could have caused this "adverse" reaction? To us there are three possibilities. First, the same day as the jobs report, a cease fire was signed in Ukraine. As we have said previously, the world news is over-shadowing our domestic economic news this summer. If the truce holds, this is a positive indicator for the stock market but not necessarily positive for the continuation of lower interest rates.

Secondly, the markets may be betting that the lower number of jobs added might be a one-time occurrence. The jobs numbers are often revised in future months and the markets are not likely to get upset over one report. Now, if we get two or three reports below an average of 150,000 jobs each month, this could be worrisome to the markets. Looking at other indicators such as first time claims for unemployment and the ADP private payroll report, there was no indication that the job creation machine slowed down last month.

Finally, even if the production of jobs does slow down, the markets may not be too upset. Slower job growth might cause the Federal Reserve Board to keep short-term interest rates lower for a longer period of time and nothing would boost the stock market more than the prospect for a continuation of lower rates. This factor would apply if the production of new jobs does not slow any further from here. As we indicated last week, it is a good sign with regard to how far we have come in our recovery for the markets to now consider over 140,000 jobs created in a month a poor performance. Which of these factors is correct? There could be a bit of truth in each theory. You can bet on the fact that the Federal Reserve Board's Federal Open Market Committee will be considering these possibilities as they meet this week.

At least 2.5 million borrowers will face an average increase of $250 per month on their monthly mortgage payment due to the imminent reset in home equity lines of credit over the next three years, according to Black Knight Financial Services’ Mortgage Monitor Report. However, depending upon borrower behavior between now and the time of the reset, payment increases could change, Kostya Gradushy, Black Knight’s manager of research and analytics, said. Borrowers whose HELOCs will reset over the next three years are utilizing just under 60% of their available credit. If these borrowers utilize more of their credit, they could face even more payment shock as the monthly increase would rise above the $250. And the news is not much better for the borrowers whose payments are not likely to reset until 2019. These borrowers are exhibiting even lower utilization ratios — about 40% of their available credit. Once reset, they will likely face an average monthly increase of $200. "Should their drawing pattern match that of older vintages, we could be looking at a significantly higher risk of ‘payment shock’ for this segment,” Gradushy said. Source: HousingWire

Builder confidence in the market for new, single-family homes rose two points in August, bringing the National Association of Home Builders/Wells Fargo Housing Market Index to its highest score since the beginning of 2014. NAHB surveys builders across the country and asks them to rate their sales expectations for the next six months, their confidence in current single-family home sales, and their perceptions of prospective buyer traffic. “Each of the three components of the HMI registered consecutive gains for the past three months, which is a positive sign that builder confidence appears to be firming,” NAHB chief economist David Crowe said in a statement. Builder confidence in current sales conditions rose to a score of 58, while expectations for future sales rose to 65. The third index, which gauges expectations for prospective buyer traffic, hit 42. The overall increase in the HMI index can be attributed to factors including sustained job growth, historically low interest rates, and affordable home prices, Crowe said. Source: NAHB

Recently, the Federal Housing Administration announced that they are halting the policy of allowing lenders to collect interest to the end of the month when the homeowner's FHA mortgage is paid off. Beginning in January of 2015, lenders will be able to collect interest until the day the loan is paid off. However, it should be noted that for the millions of homeowners who currently have home loans insured through FHA, there is no change in policy. The new policy affects only those who obtain new FHA loans in January of 2015. What does this mean for present homeowners? It is important to time refinances and sales of houses to allow time to get the payoff to the present lender before the end of the month. Otherwise, the homeowner could owe a full month of extra interest. The worst time to close on a real estate transaction is the last day of the month because all service providers are especially busy on that day -- from the lender to the settlement company. This rule is more on target for those who have FHA loans because payoffs do not go to the lender the same day. On refinances, the homeowner should close their new loan 10 days before the end of the month because the present loan is not paid off until a three day "right of rescission" expires. On a purchase, allow at least one full week before the end of the month to make sure you don't get stuck paying almost a full extra monthly payment on the present loan being paid off. Note: If you are considering moving up or refinancing your present home and are not sure whether you presently have an FHA loan, we would be happy to help you determine this as well as assisting you with your new transaction. 

Laura Glass Landmark Bank Mortgage

Weekly Real Estate Report

Well, Perhaps Not The Best of All Worlds

Last week we spoke with optimism about the fact that the economy is indeed recovering but interest rates are remaining lower than most had predicted for this year. We wondered whether we might actually have the best of both worlds -- at least for a short period of time. However, we have to recognize why rates are so low while the economy is edging its way back to normal. If rates are low because there is no evidence of inflation and the economy is not in danger of overheating, that is a good thing. As long as the economy keeps improving.

On the other hand, if rates are down because of the violence which is occurring in several areas of the world, that is another matter. When the world is in crisis, it is not unusual for U.S. Treasuries to be a safe haven for investors. While the effects of low rates are still positive for our economy, we can't actually describe this as a good thing. And there is a connection between the economy and these events. For example, the economic sanctions levied against Russia are already affecting the European economy. During the financial crisis we saw how an under-performing economy in Europe can affect our economy's performance.

With regard to our economic recovery, this past week's jobs report gave us evidence that the economy is not about to overheat and thus the Federal Reserve Board is not likely to move on increasing interest rates more quickly than originally anticipated. Wage growth has not been strong enough to contribute to concerns about inflation at this point in time. When you add the aforementioned concerns about world conflicts, it appears the Fed is more likely to keep rates low until sometime next year. On the other hand, the fact that 142,000 new jobs added in a month is now considered disappointing shows how far our economic recovery has progressed over the past year. 

A pick-up in the economy is expected to help propel the housing market forward, with an increase in household formation and a stronger recovery, according to Freddie Mac's Economic and Housing Market Outlook for August. "We are getting closer to a more normalized economy, and now we are expecting to see housing driven by fundamentals, and, in fact, we've already seen this in some markets," says Frank Nothaft, Freddie Mac's chief economist. "The economic growth and labor market gains we saw in the second quarter of this year are projected to continue, strengthening household formations and the housing sector. A recovering housing sector will sustain the rally in homebuilding, despite likely increases in long-term rates. Increased construction activity will further accelerate the improvement in labor markets and fuel even more household formations and more housing demand. The result is an economy that gradually recovers back toward its potential." The labor market has added an average of 230,000 net new jobs during the first seven months of the year, the first solid improvement after several years of weak employment. Over the past four quarters, net household formations totaled 458,000, according to Census Bureau data. But the Joint Center for Housing Studies is projecting that to jump 1.2 million to 1.3 million per year in the long-term. The number of persons per household has risen by 2.6 percent since 2005, from 2.69 to 2.76 persons. "If the persons per household had held steady over the period, there would be an additional 3 million households today," according to Freddie Mac's report.Source: Freddie Mac

Following two years of increasing home sizes, the median size of new-homes appears to be leveling off as entry-level buyers return to the market drawn to more modest homes. The median size of homes that builders started construction on in the second quarter was 2,478 square feet, holding the same as the previous quarter. It remains near the record high of 2,491 square feet, which was reached in the third quarter of 2013, the Commerce Department reports. The median size of new homes began to increase in 2012 as move-up and luxury buyers began a drive to purchase larger homes. Also, buyers were showing preferences for more bedrooms (at least three), larger garages, basements, and wide-open living spaces like great rooms, according to a 2012 survey of new-home buyers conducted by the National Association of Home Builders. While move-up and luxury buyers mostly drove the demand to bigger homes, entry-level and first-time buyers, who tend to buy smaller homes, have been notably absent from the market. However, homebuilders are reporting a slight uptick in entry-level buyers heading back into the market. Homebuilders such as D.R. Horton Inc., KB Home, PulteGroup Inc., and Century Communities Inc. have all reported a slight increase in entry-level buyers re-emerging. For example, Pulte reports that sales of its entry-level Centex homes, priced at an average of $202,000, rose by 26 percent in the second quarter compared to a year earlier. "The expectation will be, whenever we see an increase in first-time buyers, that will put downward pressure on the trend of new-home sizes," says Robert Dietz, an economist with the home builders group. "Then it will be a question of whether we'll see some actual decreases in the median as the market mix [of buyers] changes over the next two years." Source: The Wall Street Journal

The next generation of home buyers say they will move to the suburbs if it means they can find quality schools there, according to a newly released survey by realtor.com®. In fact, millennials – the generation born between 1980 and 2000 – are less likely than other generations to compromise on school districts when in house-hunting mode, the survey revealed. Fifty-two percent of millennials said school districts are a deal-breaker in their home search, compared to 31 percent of all buyers, the survey found. “Local schools are clearly more important to specific population segments—such as today’s millennials, who either have or are planning to have children,” says Jonathan Smoke, the realtor.com® chief economist. “High-ranking schools can have a positive impact on home values over time as new families pay a premium for access to better schools.” The majority of buyers who are using the realtor.com® search-by-school web tool to find school information are researching elementary schools in particular while looking up homes for-sale online, according to realtor.com®. “This indicates the majority of people who research good schools either have young children or expect to start a family when they buy their next home,” realtor.com® notes. Source: realtor.com®

Laura Glass with Landmark Bank Mortgage

Interesting September Facts...

Laura Glass Landmark Bank Mortgage