Northern Virginia Real Estate Blog

Statistics are what you make of them, but sometimes, they can provide good perspective.

For example, from its peak in 2005 to its trough in late-2007, the number of “used” homes sold nationwide plunged.

• In 2005: Roughly 7 million homes sold annually
• In 2007: Roughly 5 million homes sold annually

Through all of 2008, though, Existing Home Sales volume has been essentially flat.  Some months up, some months down, but always hovering near the 5 million unit mark.

The data from September is no different. 

For the 13th consecutive month, the number of home resales nationwide straddled the 5 million benchmark, clocking in at 5.18 million units.  This tells us that everyday Americans are still buying and selling real estate at a fairly steady clip — despite what the news keeps telling us.

Versus August, September sales volume grew by 5.5 percent.

Now, couple this two other data points and we can see that the housing market is showing multiple signs of strength:

1. The national home supply is now down to 9.9 months
2. The number of homes under contract is up 7.4 percent

Again, though, statistics are what you make of them.  Just as there are positive signals about real estate, there are negative ones, too.  The credit markets are one example of that.   

But, either way, with a full year of stable sales volume behind us and stories of recovery in beat-up markets like California, we can’t ignore the idea that housing may be done trolling its bottom.

It takes willing buyers and willing sellers to turnaround a market.  It appears that housing may have both.

(Image courtesy: The Wall Street Journal Online)

For homeowners with soon-to-adjust adjustable rate mortgages, the recent banking turmoil worldwide may lead to budgetary pain.

This is because most conforming ARMs made since 2003 are based on a borrowing cost called LIBOR and LIBOR is up an uncharacteristic 2 percent since September.

LIBOR stands for London Interbank Offered Rate and is the rate at which banks lend money to each other. 

Historically, LIBOR has tracked the U.S. treasury market, plus a half-percent increase.  This suggests that banks are only slightly less likely to default versus the U.S. government.

Today, that spread is close to 4.5 percent.

Since Lehman Brothers failed in September 2008, banks are fearful that their peers will meet a similar fate.  Looking at the chart, we can see how LIBOR has responded. 

The LIBOR spike is harming homeowners with adjustable-rate mortgages because adjusted rates on conforming mortgages are often calculated by adding 2.250 percent to the current 12-month LIBOR rate. 

On sub-prime mortgages, the adjustments are even more steep.

In general, though, as LIBOR rises, household payments rise, too, so if your home loan is adjustable and is due to reset soon, call or email your loan officer to talk about how LIBOR may impact your adjusted mortgage rate and payment.

For many homeowners, it’s less expensive to refinance into a new home loan that to just let the adjustment happen.

(Image courtesy: Wall Street Journal Online)

Private Mortgage Insurance (PMI) is an insurance policy paid to a lender in the event that a homeowner defaults on his home loan. 

With the growing number of mortgage defaults nationwide, mortgage insurers are finding their balance sheets under attack and their revenues in the red.

So far this year, mortgage insurers have paid out $6 billion in claims.

In response to the losses, the mortgage insurance industry is using two tactics to return to profitability — and both mean bad news for homeowners.

1. Raise the minimum standards to get insurance
2. Raise the annual mortgage insurance cost

This is very similar to what Fannie Mae and Freddie Mac are doing to shore up their respective balance sheets; lending to only the most credit worthy, and making sure to charge them for their commensurate risk.

Because of the higher PMI rates, it’s getting more expensive for small-downpayment home buyers to finance their homes.  And that’s if they can even still get mortgage insurance. 

Some mortgage insurers now require a 10 percent minimum downpayment in certain states.

So with the number of mortgage defaults expected to rise through 2009, qualifying for PMI should get more expensive and more difficult.  If you plan to make a small downpayment on your next home — or plan to remortgage your current low equity home — consider moving up your timeframe.

It may not be as cheap or as easy to get financing as it is today.

(Image courtesy: The Wall Street Journal)

Housing Starts measure the number of new housing “units” on which construction has started and in July, Housing Starts fell to its lowest levels since March 1991.

For homeowners, this is a welcome bit of good news because as fewer homes are built, there is less inventory from which home buyers can choose.

With fewer homes for sale, the supply-and-demand curve shifts in favor of home sellers and this adds a support floor for home prices.

For home buyers, though — and for the opposite reason — the low number of Housing Starts may not be as welcome.

With fewer new homes on the market, owners of “used” homes may feel less pressure to lower their asking prices or to make other concessions to interested buyers.  This means that home buyers may pay more for a home, or get fewer “throw-ins” on the contract.

For all of the hocus-pocus that surrounds real estate data, in the end, home prices are based on the supply of homes versus the demand for homes.  When supply outpaces demand, home prices fall.

Homebuilders learned this lesson and July’s Housing Starts data supports that.

(Image Courtesy: Wall Street Journal Online)

Statistics won’t always tell the whole story, but they often provide good perspective.

The graph at right shows Existing Home Sales data going back three years. An “existing home” is one that can’t be called new construction; a “used home”, so to speak.

Note the steep decline from 2005 through late-2007.

Since November, however, Existing Home Sales have remained within a very tight range and appear to have reached a flattening point.

The Existing Home Sales data supports the word-on-the-street from real estate agents nationwide that buyers are returning to the housing market in search of good values.

But let’s not forget — demand is only half of the story. There is the supply factor, too, and the supply side of the housing market is showing the same leveling signs as the demand part.

Looking at the national inventory at left, the number of existing homes for sale has hovered near 4.5 million for the last several months. No change suggests strength.

Now again, statistics won’t tell the whole story but there are plenty of positive signals from the real estate market right now, just like there are negative ones, too.

This is one reason why real estate data causes so much debate — people want to take an either/or proposition about the state of the real estate and it doesn’t work like that. Real estate can be simultaneously strong and weak and when it is, buyers look for value.

Perhaps this is why the national housing data is beginning to level off after a 3-year slide. There’s good values to be had, and today’s home buyers know it.

(Images courtesy: Wall Street Journal Online)

A “Housing Start” is a new home on which construction has commenced and in May, Housing Starts fell to a 17-year low nationally.

At first glance, this may seem like a negative for the already-battered U.S. housing market.

It’s not.

Falling Housing Starts reflects the broader real estate market and shows us that builders are working hard to get their already-built homes “off the books”.

It would be foolish for them to build new homes now — each new unit makes selling the existing ones tougher.

So, when we look at the figure objectively, we can see that Housing Starts reaching a 17-year low is actually good news — real estate prices are based on Supply and Demand, after all.

With Housing Starts touching new lows, we can infer that there will be fewer new homes coming on the market in the coming months and that should help support higher home values nationwide for everyone.

(Image courtesy: The Wall Street Journal Online)

Retail Sales measures total receipts at stores that sell tangible “things” and — aside from weak demand for automobiles and automobile parts — Retail Sales displayed surprising strength in April.

So much strength, in fact, that many experts are changing their predictions about the U.S. economy’s fate.

Several months ago, most pundits declared that a economic recession was all but inevitable. Today, a growing number are changing their views.

Not only are stock and credit markets improving, but data such as April’s Retail Sales figures suggest that their fears were overblown.

The takeaway from a story like this is that “experts” do a much better job of interpreting the past than predicting the future. A person can make an educated guess, but it’s impossible to know what the future holds for the economy, or for housing, or for mortgage rates.

Even when the outcome is “inevitable”.

Source
Recession? Not So Fast, Say Some
Kelly Evans And Justin Lahart
May 14, 2008, The Wall Street Journal Online
http://online.wsj.com/article/SB121068163716188223.html

The ubiquity of “free” credit reporting services like FreeCreditReport.com, TrueCredit.com, and AnnualCreditReport.com have helped breed a new generation of credit-aware Americans.

Because credit ratings have more importance to everyday life than in years past, this is a welcome development. For example:

• Lenders use credit ratings to determine borrowing rates
• Insurers use credit ratings to determine premiums
• Employers use credit ratings to make hiring decisions

Unfortunately for Americans, though, not all credit reports are created equal. And when it comes to actually applying for credit in the form of a new credit card or mortgage, the free reports are worth precisely what they cost.

This is one reason why home buyers should have their credit reviewed by a mortgage lender as soon as possible in the home buying process — the free reports offered by the major credit bureaus may be misleading and incomplete.

Free credit reports are useful for identifying identity theft and reviewing active accounts but do very little to help a potential creditor gauge your creditworthiness.

As the chart shows us, each industry’s creditors has a way they like to do business and that way is the “standard” way.

(Image courtesy: The Wall Street Journal)

According to the Bureau of Labor Statistics, the U.S. economy shed 20,000 jobs in April 2008. The labor force now counts at 146 million people as employed.

Normally, a loss of jobs would foretell economic weakness and would be a good thing for mortgage rate shoppers. Today, though, traders had been expecting a larger loss of 70,000 jobs.

In other words, today’s jobs report looks surprisingly strong.

The stock market is now rallying on optimism that “the worst is over” for the U.S. economy and evidence supporting the Federal Reserve’s remarks that its rate cuts were starting to take hold.

The stock market’s gains are the bond market’s losses.

Mortgage rates are up today because the cash that is fueling the stock market is coming from the sale of all types of bonds — including mortgage bonds.

This is unwelcome news for people doing mortgage comparisons today, or buying a home this weekend.

Rates should be higher Monday than they are today. In general, adjustable-rate mortgages are increasing more than fixed-rate mortgages.

(Image courtesy: Wall Street Journal Online)

The Fed lowered the Fed Funds Rate by a quarter-percent to 2.000% this afternoon.

Because it is tied to the Fed Funds Rate, Prime Rate also fell by a quarter-percent. Prime Rate is now 5.000%.

Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month’s statements.

Mortgage rate shoppers are also benefitting.

Each time the Federal Reserve cuts the Fed Funds Rate, it’s meant to stimulate the economy in growth. Too much stimulation can create too much growth and that often leads to inflation (which causes mortgage rates to rise).

This is one reason why mortgage rates had not fallen over the past few months. Each Fed Funds Rate cut made it more likely that the economy would overheat in the second half of 2008.

So, because the Federal Reserve signaled that a rate-cutting “pause” may be ahead, investors are reducing expectations for a Fed-induced inflation cycle for later this year, pushing rates lower.

The FOMC’s next scheduled get-together is a two-day meeting June 24-25, 2008.

Source
Parsing the Fed Statement
The Wall Street Journal Online
April 30, 2008
https://online.wsj.com/internal/mdc/info-fedparse0804.html