It's Not All Bad. Right.

"In a faint hint of hope for the country’s struggling housing market, home prices did not fall as fast in April as they did in previous months..." [click here to see the whole article.] Wow, doesn't that sound great! A "faint hint"; that sounds more like the Cub's chances to win the World Series. That's how the New York Times described the latest data from Case-Schiller.

Years ago I worked with a researcher, Rhea, who had a tendency towards negativity, usually about one of my ideas. Once she said something very astute (actually, I attribute a lot of smart things to her; this one I remember). When asked why she said "No" more than "Yes" her reply was, "When I say 'No' or 'It won't work', I'm right more often than I'm wrong." Back then we were talking about consumer behavior and advertising; today I think her insight is more appropriate than ever before.


This morning Case-Schiller reported the first positive news for real estate in many months (house price declines were slower than in previous months.) The majority of markets the consultants track showed positive trends last month. But the recovery of the housing market still seems way off. As a society, we may have managed a correction in the behaviors that led us to our current state. Home prices have come down, the Fed is managing interest rates downward, the stock market is up 20% this year...it all sounds good. Better, many real estate agents are touting a renewed and vigorous level of activity in sales!

Yet unemployment is still high (9%+), our personal debt levels are high and credit standards are more traditionally rigorous. I see more foreclosures and I've been involved in three short sales in the last 45 days. I'm sorry, I just don't see where the optimism deserves a place.

A friend once described me as being "disgustingly enthusiastic". I try to find the silver lining in every situation. But today, thinking about the optimism in the real estate market, I am more aligned with Rhea and have to say, "I don't think so."

I hope I'm wrong.

DS

Good News? I Don't Think So.

This morning the government announced a positive report on the jobs front: only 6.7MM people sought jobless benefits this week, down from 6.9MM last week. Terrific. Six point Seven Million people out of a job. And that's not the full accounting. But we're not interested in that right now. It's just a huge number that won't go away soon.

This afternoon, the US Treasury announced $104 BILLION in new notes - two, five and ten year notes. That is a record amount; the last record was $101Billion. This activity is intended to support the Federal government's stimulus efforts. That's not good news either. Here's how Reuters reported the news:

The benchmark 10-year note's price was down 28/32 and its yield, which moves inversely, was 3.81 percent, up from 3.70 percent late Wednesday but still below the eight-month high of 4 percent set last week. [Bold added for effect.]


Fed, Supply Ahead


The latest jobless and business readings rekindled worries the Fed may tighten monetary policy by the end of the year. Fed policymakers will convene next Tuesday and Wednesday and are widely expected to signal they will not change the Fed's near-zero interest rate policy. Traders are hoping the Fed—the U.S. central bank—will expand its purchases of Treasuries in a move to hold down long-term borrowing costs.

Note, the Fed is trying to hold down borrowing costs. The reason this is important is that it is widely believed that consumer borrowing for home purchases is key to an economic recovery. As rates for Treasuries rise (to attract buyers) the cost of lending goes up. For home buyers, the 10-year is incredibly important and it will probably carry the highest rate. We need that rate to stay low so we can find affordable loans.

Two weeks ago there was a flurry of buying on the North Shore. Rates were in the 4 7/8% range. These buyers were worried the rates were going to jump, which they did. The next week, almost all buying stopped and, in fact, a few deals from the prior week were cancelled. Why? Rates continued to 5 .9%. Twenty percent higher in a matter of days. Buying since then has been sporadic, usually really well priced homes.

Anyway, watch the mortgage rates. If you're a buyer, try to lock in a rate now. There are several "Lock And Shop" options. That may be a areal smart move right now. This activity by the US Treasury can't be good for the mortgage market.

DS

Good Economic News .... At Least for this Week

Housing starts increased substantially last month. Home sales also increased, substantially. Behind each were extremely (artificially?) low interest rates. The Obama administration has worked very hard to get and keep rates low in order to spur on a rebound in the real estate markets.

A few points to be aware of:

1. "...home builders are likely to be wary of breaking ground on new projects. Credit markets remain tight for construction loans, and potential buyers are still wary about losing their jobs or further declines in home values." (Italics added for emphasis; from NY Times, 6/16/09.) These are two extremely important drivers in the real estate market. Lenders continue to be rigorous in loan approvals. The money is not as easy to come by as it was last year. The overall pessimism is still there. People are very concerned about their job security and how to make ends meet.
2. "Rates are high." Now, let's put that in perspective - rates are higher than they were a few weeks ago (4.875% for 30 year fixed.) Last week, rates jumped 20% to 5.75% and 5.9% when the government bond rates surged. today's buyer is skeptical of the list price of a home and seeks affordability. A new conservatism has worked its way into our collective psyche. We want to have money set aside for the unexpected; we no longer look to our homes as back up emergency funds or ATMs. Buyers are behaving quite rationally and exerting greater scrutiny on how every dollar is spent.

The housing starts is good news. Even the interest rate news is good, too. We saw a number of homes go under contract, several in multiple offers. There seems to be more people who have sold their last home and now need to buy their next. Maybe, just maybe, we are seeing the beginning of the housing recovery on the North Shore.