PruCalVoices » Dean Rizzi

Don’t Expect Too Much From Tax Credits

Dean Rizzi — Wed, 10 Mar 2010 02:01:28 +0000

We are speaking of the federal homebuyer tax credits, in particular, which seem to be invoked as the blanket explanation for anything that does or doesn’t happen in the housing market. We were more circumspect than most of their ability to sustain any market rally after being extended and embellished in November. That appears the case today. Credits are good at pushing demand forward, but not so good at sustaining demand over time.
We’ve also been circumspect over the ability of low interest rates to keep things moving forward in perpetuity. To be sure, low rates matter and low mortgage rates make more homes more affordable to more people, but it’s still a matter of taking on new debt with a home purchase or lower-cost debt with a refinance. The only way debt can be serviced is with income, usually a job.
It’s really all about employment at this point. Fortunately, the news is improving on that front based on the past three months of employment data. Things might be moving slower than we’d like, but for potential borrowers, that’s actually good news. When employment shifts into gear, interest rates are likely to follow.
So, we’ve said it before, but we’ll say it again: improving employment, low mortgage rates, and stabilizing home prices (which, by the way, we think will remain stable, even with the REO and foreclosure overhang) coupled with soon-to-expire tax credits suggest to us that now is not the time to procrastinate

From the weekly newsletter of Dean Rizzi

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Is Housing Still the Leader?

Dean Rizzi — Tue, 02 Mar 2010 00:24:19 +0000

That appears to be the case, at least according to data released from the Census Bureau. Going back to 1968, the trend in housing starts has portended the trend in the overall economy. Should we be optimistic or pessimistic? That’s difficult to say. Monthly figures on starts are volatile, and housing starts fluctuate more than many indicators. It takes several months for total housing starts to establish a trend. The good news is that going back to October, the trend in starts has been mostly stable and up. The bad news is that January’s free-fall in new-home sales could pressure the trend to change direction. Or maybe not. The problem in vetting the data is that no two periods are exactly alike and history never repeats itself perfectly. For example, Census Bureau data show that housing completions generally lag housing starts, as would be expected, except in the latter half of 2009, where starts have fallen off a cliff compared to completions, creating a wide, unprecedented divergence. So what does it all mean? Economists who believe that housing is the leading economic indicator aren’t very bullish on the economic outlook. We tend to be a little more bullish, because it can be misleading to read too much into historical correlations of two variables – in this case, housing and the economy. What’s more, the more correlations are vetted and become known, the more their predictive value tends to break down.

DeanRizzi
http://www.drlending.com/

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The Farther They Fall, The Higher They Could Rise

Dean Rizzi — Tue, 26 Jan 2010 18:21:14 +0000

Richard Carson and Samuel Dastrup, two university professors, recently published an interesting academic paper (a synopsis is posted at Econbrowser.com). Carson and Dastrup examined how the magnitude of housing-price declines correlated with various factors, such as overbuilding, extent of sub-prime lending, and median income. Not surprisingly, these factors were related to price declines. However, the most important factor was the magnitude of the previous price run-up, which accounted for more than half of the observed variance in the size of the price decline.

The takeaway from Carson and Dastrup’s research is that the farther prices ran up in a hot market, the farther they tend to run down in the subsequent cooling. Not surprisingly, the hottest markets – Las Vegas , Riverside , Miami and Sacramento – have fallen the farthest and cooled the fastest. Many of these markets are now as cold as an Arctic winter, particularly Las Vegas , where home prices have dropped 50% and more.

However, cold markets often provide the best buying opportunity. Consider Las Vegas : a home that cost $200,000 in 2007 and lost 50% of its value costs $100,000 today. A 50% gain pushes its value up to $150,000. In other words, prices do not have to appreciate back to their peaks for people to book considerable equity or an investment gain. This simple math is worth repeating to homebuyers and residential real estate investors, especially to those residing in or near frigid markets.

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A Look at the Past and a Look at the Future

Dean Rizzi — Wed, 30 Dec 2009 20:49:22 +0000

This time last year we predicted that 2009 would end a lot better than it began. We were right, though it wasn’t a great accomplishment to be right considering how low the housing market, stock market, and overall economy had sunk during the latter half of 2008. As we’ve stated repeatedly over the past year, a low base and a dour outlook provide an excellent buying opportunity, so we weren’t surprised when buyers stepped forward to exploit the opportunities.

Looking ahead to 2010, we see continued improvement in home sales and home prices. In fact, we wouldn’t be surprised if the market turns to a sellers’ market from a buyers’ market by year’s end. We are almost certain that will be the case if we see a two to three percentage point drop in the unemployment rate. Low mortgage rates and income tax credits are contributing factors in stabilizing the market, to be sure, but no factor is more important than employment in not only maintaining stability but stimulating activity.

We also think 2009 will mark the end of the sub-five-percent 30-year fixed-rate mortgage for the foreseeable future. Many economists predict rates quoted in the low sixes will be the norm for 2010. We agree. But that’s not bad news. The higher rates will likely be accompanied by a more robust economy, with more jobs and greater consumer demand. We also think that higher rates will be accompanied with more relaxed underwriting standards, as banks and other lenders become less risk adverse.

In the meantime, mortgage rates are still very good, as are housing prices, which is why we continue to urge borrowers to refinance and buyers to qualify for a loan and buy. It’s worth remembering that today’s deals in both the mortgage and housing markets are the anomaly not the norm, and that the norm can return faster than many of us expect.

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Are We There Yet?

Dean Rizzi — Tue, 15 Dec 2009 19:16:38 +0000

We cannot say for sure, but we think we are darn close. Of course, we are speaking of the bottom in mortgage rates. Last week we explained how the Federal Reserve has influenced the market with its massive purchases of mortgage-backed securities. This week we offer statistical support for our contention that rates are at least close to bottoming, if not likely to reverse soon.
Calculated Risk, an insightful Web site that tracks the comings and goings of the housing and mortgage markets, supplied the evidence. Calculated Risk has noted (as have we) the close relationship between the 30-year conventional fixed-rate mortgage and the yield on the 10-year Treasury note. Based on statistical analysis reprinted on Calculated Risk’s Web site, the 30-year conventional fixed-rate mortgage is expected to rise to 5.4% based on the current 10-year Treasury yield of 3.45%.

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Still the Time to Borrow and Buy

Dean Rizzi — Fri, 20 Nov 2009 20:19:57 +0000

For the past four months, we have been forwarding the argument that housing prices have stabilized. Wells Fargo has provided another arrow for our quiver. To avoid defaults and foreclosures, the banking giant is offering homeowners with Alt-A ARMs the option to offset monthly payment increases with interest-only loans to defer amortization for six to 10 years.

It sounds like a risky move. After all, interest-only loans were a contributing factor to the housing meltdown. But many of those loans were originated in a much riskier era – near a market top. That is certainly not the case today, which is why Wells Fargo is betting that home prices have stabilized and that the economy will improve. We think it is a smart move.

We also think it is a smart move to refinance or buy today. Rates are very, very good (but they will not be forever, for sundry reasons we have previously stated). What’s more, the purse strings aren’t nearly as tight as borrowers might think. According to the Federal Reserve, the rate of banks that reported tightening lending standards for prime residential real estate loans was 25% in October, which is well off the peak of 75% reported in July 2008.

In other words, 30-year fixed-rate mortgages are readily available at 5% (which for borrowers in the 28% federal income tax bracket works out to 3.6% after tax). Meanwhile, the 5/1 hybrid ARM presents an intriguing option for borrowers planning to move within the next few years. A 3.75% 5/1 works out to a mere 2.7% after tax for someone in the 28% tax bracket. Yes, rates could go lower, but not much lower.

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Possibly Overstated, But That’s Okay

Dean Rizzi — Sun, 08 Nov 2009 16:28:54 +0000

Many kudos have been given to the federal homebuyer’s credit for revitalizing the housing market. To be sure, the credit has moved people into the market who wouldn’t have been there otherwise. However, are we overstating the impact? The question is worth asking, considering a recent analysis of the cash-for-clunkers program by Edmunds.com, which found the overwhelming majority of auto sales during the program would have occurred anyway. In other words, sales were simply moved up a little because of the credit.
Perhaps the same situation has occurred in the housing market. Perhaps too many of us are giving too much credit to the homebuyer’s credit while giving short shrift to important economic variables. After all, low home prices and low mortgage rates should be expected to lift the market. That said, no one could say which had the bigger impact, so it is understandable the industry is playing it safe and lobbying for the credit extension. Nevertheless, should its efforts fail (and don’t get us wrong, we’d like to see the credit extended), it’s worth noting that most decisions are based on economic reasons, not tax reasons.
And the economic reasons still suggest now is the time to buy: Home prices remain attractive, though we think they will become less attractive given the recent drop in inventory. Mortgage rates remain low, and we doubt they will remain low as well, especially when considering that gross domestic product posted a better-than-expected 3.5% annualized gain for the third quarter and that more market watchers are expecting the Federal Reserve to raise the federal funds rate in the near future.

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Up, Down, or Sideways?

Dean Rizzi — Sun, 11 Oct 2009 14:31:24 +0000

We are speaking of mortgage rates, which continue to move down. Bankrate’s latest survey had them averaging their lowest levels in over four months last week, with the 30-year fixed-rate mortgage averaging 5.25% and the 15-year fixed-rate mortgage averaging 4.64%. Given the recent qualms over unemployment, rates would seem likely to move down further.

And they could, but they could also move up. Last week, Dallas Federal Reserve President Richard Fisher said that the winding down of the Fed’s stimulative monetary policies needed to start as soon as the economy shows signs of sustained improvement. “When it comes time to tighten monetary policy, my colleagues and I will move with an alacrity that, if needed, will be equal in speed and intensity to that with which we pursued monetary accommodation,” Fisher said in a speech to the Texas Christian University Business Network of Dallas.

Until Friday, financial markets were heeding Fisher’s words, with derivatives prices suggesting the fed funds rate will rise to 0.75% by mid-2010. (Since December 2008, the Fed has held the rate at a lowest-ever range of 0% to 0.25%.) Granted, the odds of an immediate increase dropped after Friday’s employment report, but the May fed funds contract is still priced for a 72% chance of a 0.5% fed funds rate at the late-April rate-setting meeting.

We think it’s worth heeding the Fed’s intention to “move with an alacrity” once it determines the economy is fixed (and no one can be sure when the Fed will make that determination). We think it is worthwhile for potential borrowers to move with alacrity as well, particularly first-time homebuyers. After all, there is no guarantee that the $8,000 credit will be extended beyond November 30.

Dean Rizzi

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