Market Insight

Can The US Economy Be Kept Afloat by Today’s Fed Actions

In case you missed it, the Federal Open Market Committee (FOMC) met today to discuss monetary policy. Today’s meeting was the 5th of eight scheduled meetings and sixth overall for 2010.

Financial analysts and economic forecastors worldwide have attempted to estimate what the Federal Reserve will or will not change in their policy statement prior to the meeting. Often times it comes down to a single word that has been inserted or left out of the policy statement.

Why all the scrutiny of words? What’s the purpose of these meetings and why should home buyers and homeowners in Northwest Indiana care about the FOMC meetings?

First of all, the FOMC meetings provides a bird’s eye view of what the Federal Reserve believes to be important factors impacting the overall economy.

Second and more importantly, the press release from the FOMC meetings provides guidance to the financial markets on how the Federal Reserve Banks intend to control the supply and demand of money. It is this monetary policy that can and will dictate future economic growth.

According to FOMC Statement Press Release from today, the FOMC has a unique spin on the economy.

Positive economic factors:

• Household spending is increasing gradually
• Business spending…is rising
• Underlying inflation has trended lower

Negative economic factors:

• Household spending…constrained by high unemployment, modest income growth, lower housing wealth, and tight credit
• Business spending…weak investments and reluctant to add to payrolls
• Bank lending continues to contract

Based on the Federal Reserves interpretation of the economy, they voted 9-1 to do the following:

1. maintain the target range for the federal funds rate at 0 – 0.250% for an extended period
2. support price stability by reinvesting in longer-term Treasury securities (new clause)

What does all this mean?

The Fed is 100% committed to keep interest rates low until they are confident that the economy is en route to a full recovery. Thankfully, home buyers and homeowners in Northwest Indiana still have time to take advantage of historic low mortgage interest rates.

If All Real Estate Is Local, Who Cares About Averages

All real estate is local! If you’ve heard it once, you have most likely heard it a thousand times. How could you not hear this old cliche when working with real estate and mortgage professionals.

The May 2010 Public Awareness Campaign from the National Association of REALTORS® even states:

“Every market’s different, call a REALTOR® today.” – What Matters Most

If this is true, why is all the focus on averages? Why should you, for instance, care about averages?

Here is a sample chart to illustrate average days on market for single family homes in Schererville Indiana.

From this chart, it appears that the Schererville Indiana real estate market is improving as the average days on market is nearing 180 days which is an indication of a balanced market. Be mindful that this is the average days on market for the entire spectrum of single family homes for sale in Schererville Indiana.

Wait a minute. Your home is not like everyone else’s home and the home you want to buy is so much nicer than other homes on the market. Let’s break the average days on market down to quartiles based on list price. The chart on the left below represents the top 25% of homes for sale in Schererville Indiana. The chart on the right below represent the bottom 25% of homes for sale in Schererville Indiana.

        

 

Do you notice anything different? Do you notice anything that is similar?

If  you recall, the average days on market for the entire spectrum of single family homes for sale was nearing 180 days. For the homes listed in the top quartile, most expensive, the average days on market is 40% longer. For the homes listed in the bottom quartile, least expensive, the average days on market is 15% less.

Depending on what price point you are looking to buy a home or sell a home, knowing the specific real estate trends and statistics to that real estate market would be critical to your decision making process. So back to the question…why should you care about averages?

Regardless of which graph you look at above, the real estate trend for average days on market in Schererville Indiana is definitely improving. Averages help illustrate trends and consequently helps manage expectations.

Like It Or Not “Cash-In” Refinancing Is All The Rage

If you own a home and/or know someone who owns a home, you have most likely heard of a cash-out refinance. During the economic and housing boom in the early part of the decade, cash-out refinances were all the rage and fueled consumer spending.

Fast forward to the present and check out these recent news headlines.

• “Cash-In Refinancing Rise in Second Quarter: Tied for Third Highest Cash-In Share on Record” – Freddie Mac, July 28, 2010
• “US Borrowers Pay Down Mortgages” – Financial Times, July 28, 2010
• “More Borrowers Are Paying Down Their Mortgages: Freddie Mac” – DSNews.com, July 29, 2010
• “Cash-In Refinancing Nears Record High in Q210: Freddie Mac” – HousingWire.com, July 28, 2010

So what exactly is a ”cash-in” refinance? A “cash-in” refinance is when a borrower brings cash to closing to get the home loan they desire. Yes you heard that correct. A borrower would bring their own money to pay to get the loan they desire.

Frank Nothaft, Freddie Mac’s vice president and chief economist, gives the following statement as to the rationale behind a “cash-in” refinance.

“Interest rates on fixed-rate mortgages are at 50-year lows, making refinancing attractive if borrowers qualify, and similarly rates on savings instruments like CDs are also very low, which makes the choice of paying down mortgage principal very attractive to borrowers with extra cash reserves.”

“If you pay down your mortgage balance you save the interest you would pay on the loan, about 4.6 percent at today’s rates, over the life of the loan versus earning a percentage point or less in CDs and money markets and without the riskiness of stock market investments, which have not performed well in the past couple of years either.”

It seems to make sense unless you read the details of the Freddie Mac 2nd Quarter Cash-Out Refinance Analysis. The report actually states the following as the main causes in the decline of cash-out refinancing:

1. Reduced Home Prices
2. Tighter Underwriting Standards for Loan-To-Value Ratios
3. Negative Appreciation Rates – Declining Home Values

Freddie Mac was quick to declare that “22 percent of homeowners who refinanced their first-lien home mortgage lowered their principal balance by paying-in additional money at the closing table”.

“Cash-In” refinancing is all the rage, not because homeowners want to, but because they have to.

Existing Home Sales Drop But Move Up Buyers Rise In June

Consistent with most post-home buyer tax credit housing news, the National Association of Realtors® says Existing Home Sales eased lower last month.

An “existing home” is a home that cannot be considered new construction.

The 5 percent drop in sales from May to June was expected, but a closer look at the month’s data reveals some interesting trends.

First, repeat buyers accounted for 44 percent of home resales in June, up from 40 percent in May. That’s a healthy increase for just 4 weeks’ time and the tax credit is a likely catalyst. First-timer buyers bought starter homes owned by former first-timers, who were then free to “move up” to larger, more expensive property.

Housing markets can be trickle-up and, not coincidentally, the jumbo/luxury housing market is now in the midst of rebound.

Second, June’s “distressed sales” accounted for 32 percent of all home resales, up from 31 percent in May.

A figure like this hints at the large role foreclosures continue to play in a Portage Indiana home buyer’s home search strategy.  And why not? The National Association of Realtors® suggests that distressed homes are sold at a 15 percent discount.

Lastly, take note that home inventories are still rising in Portage Indiana. As of July 16, 2010, there were 262 homes actively listed for sale in Portage Indiana and inventories are back to their highs from December 2009.

Overall, the Existing Home Sales data from June is a mixed bag. There’s support for the middle- and upper-price tiers, but a growing overhang of supply. The market looks favorable for buyers given low mortgage rates and strong negotiation leverage.

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Sagging Homebuilder Confidence Opens Door To Good Deals

Builder confidence in the housing market slipped this month, according to the National Association of Homebuilders’ monthly Housing Market Index.

The Housing Market Index is actually a weighted composite of 3 separate surveys. One measures current single-family sales; one measures projected single-family sales; and one measures traffic of prospective buyers.

All three surveys were down in July:

• Single-Family Sales : From 17 (June) to 15 (July)
• Single-Family Project : From 22 (June) to 21 (July)
• Buyer Foot Traffic : From 13 (June) to 10 (July)

The HMI’s July reading of 14 puts confidence at its lowest point since April 2009.

For home buyers in Dyer Indiana, a drop in builder confidence could create an opportunity for negotiation.

Remember, it wasn’t too long ago that most builders were flush with home inventory, unable to find willing buyers. To help move product at that time, builders dropped prices and offered incentives including free upgrades. If confidence continues to sag going forward, home purchase deals of that nature may return — especially as the foreclosure market gets larger.

Builders’ main competition for buyers in the past were existing home sellers. Today, builders must compete with the existing home sellers and the banks with REO. 

It’s a terrific time to be a home buyer, in other words — sellers are fighting for you. It’s no wonder sellers have little leverage anymore. Couple that with all-time low mortgage rates and affordability for homes is at an all-time high.

If you’re planning to buy a home later this year, you may want to consider moving up your time frame. The market looks ripe for good deals this summer.

Steady Pace Of Foreclosures Slow Down Again In June 2010

313,841 foreclosure filings were made in June, according to foreclosure-tracking firm RealtyTrac. The figure represents a 3 percent drop from May and 7 percent drop from June of last year. However, foreclosure filings remain relatively high nationwide.

June marks the 16th straight month the filings topped 300,000. 1 in every 411 U.S. homes received some form of notice last month with foreclosure density varying wildly from state-to-state.

Like everything else in real estate, it seems, foreclosures are a local phenomenon.

The states with the highest foreclosures per capita were:

• Nevada : 1 foreclosure filing per 88 homes
• Florida : 1 foreclosure filing per 171 homes
• Arizona : 1 foreclosure filing per 189 homes

The states with the lowest foreclosures per capita were:

• Vermont : 1 foreclosure filing per 26,051 homes
• West Virgina : 1 foreclosure filing per 8,058 homes
• South Dakota : 1 foreclosure filing per 6,528 homes

Overall, 40 states beat the national Foreclosure Per Capita average and 10 states fell below. The sheer volume of REO, though, is creating interesting buying opportunities for first-time home buyers, move-up home buyers, and real estate investors in Crown Point Indiana.

Homes bought from banks are usually less expensive than non-foreclosure homes. This is one of the major reasons why distressed sales account for roughly 30 percent of all home resales. Less expensive, though, doesn’t always mean “cheaper”. Foreclosed homes are often sold as-is and may be defective or otherwise uninhabitable.

Making repairs to get these homes into “living condition” can be costly.

Therefore, if you’re buying a foreclosed home, make sure you know what you’re buying before you make your bid. Have a certified professional inspect the home to check for damage, and consider enlisting the help of a real estate agent to assist with negotiations and management of the contract.

The process of buying a foreclosed home is different from buying a typical resale. Make sure you do your homework. Otherwise, contact me for a referral to a great local real estate agent who can guide you through to a successful real estate transaction.

Obama’s Right. Jobs Report Wasn’t As Bad As The Headlines

In June, for the first time since December 2009, the U.S. workforce shrank.

According to the Bureau of Labor Statistics, the economy shed 125,000 jobs last month even as the Unemployment Rate dropped to 9.5 percent. The drop in the Unemployment Rate is being attributed to fewer Americans looking for work.

At first glance, the jobs report looks weak but a deeper look shows something different.

Excluding the 225,000 government Census workers that recently left the workforce, the total number of employed persons actually grew by 83,000 in June. That’s 50,000 more working Americans as compared to May.

And, since the start of the year, the U.S. workforce has grown by 857,000.

Jobs growth is closely tied to economic growth because more working Americans means more disposable income which, in turn, stokes consumer spending. Job growth is better than job loss.

Consumer spending makes up the majority of the U.S. economy so as consumer spending grows, investor mentality tends to shifts toward “return on principal” (i.e. stock markets) from “safety of principal” (i.e. bond markets).

A move like this is often bad for home affordability because falling demand for bonds is tied to higher mortgage rates. In addition, demand for homes is likely to increase with the growing number of Americans earning a paycheck. Thereby helping to push home prices higher.

The June jobs report therefore should be bad for rate shoppers and home buyers in Valparaiso Indiana. Fortunately, the markets aren’t reacting that way. Mortgage rates for now are slightly improved since the jobs report’s release.

Perhaps Wall Street is watching the wrong figures, but don’t let that be your loss. If you’re shopping for a mortgage, a home, or both, now may be your best time while rates are still low and with home prices down. Make a move before traders change their tune and you lose your window of opportunity.

The Good News Behind May’s Pending Home Sales Report

The Pending Home Sales Index plunged in May 2010, just one month after the expiration of the federal home buyer tax credit program.

The Pending Home Sales Index is now at a record-low level.

A “pending home sale” is an existing home under contract to sell, but not yet closed. According to the National Association of Realtors®, 80 percent of homes under contract close within 60 days.

Because of this timeline, we can expect the summer’s Existing Home Sales to be weak, too. With fewer homes going under contract, fewer homes can close.

On the surface, May’s Pending Home Sales Index looks like terrible news for housing. It just might be if you’re a seller. But, the story reads differently if you’re a buyer.  Just consider the market conditions. 

A broad look at the housing market shows:

1. Home supplies are rising in most markets
2. Home sales are falling in most markets
3. Mortgage rates are at all-time lows

In other words, in most markets, more sellers are competing for fewer buyers, and the “winning” buyers are financing their homes at the lowest rates in history.

It’s an excellent time to be a home buyer in Portage Indiana.

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