Housing Market Expands

The latest data from the National Association of Home Builders (NAHB) gives every indication that the national housing market continues a steady improvement. According to the NAHB Improving Market Index (IMI) the positive market trend has now risen for the fifth straight month.

NAHB Chairman Barry Rutenberg, says that the Improving Market Index was created in September 2011 as a means of tracking metropolitan housing markets that were “on the mend” in spite of the contrary market news and environment.

Statistics from the index reveal that as of January there are 242 markets that are improving according to the index criteria, this number is up from 201 markets listed as improving in December. There are 361 metro areas on the list representing almost every state, in addition there were 47 new metro areas listed for January while six were dropped.

The identifying criteria for the IMI measures market improvement in housing permits, employment and housing prices for at least six consecutive months. The IMI data for housing permits in drawn from single-family housing permit growth given by the U.S. Census Bureau. Employment data comes from the Bureau of Labor Statistics, while housing stats are housing price appreciation figures from Freddie Mac.

Some of the newly added metro areas seen as improving include: Los Angeles, Calif.; Auburn, Ala.; Des Moines, Iowa; Nashville, Tenn.; Richmond, Va.; and Cleveland, Ohio.

In assessing the overall market, NAHB Chief Economist David Crowe states that, “The story is no longer about exceptions to the rule, but about the growing breadth of the housing recovery even as overly strict mortgage requirements hold back the pace of improvement.”

Crowe goes on to say that the number of metro areas listed on the Improving market Index has almost doubled in the past two months. He does caution that the IMI may see some reductions in the months to come, due more to the slower winter months for the market than any net change in the overall market environment.

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Home Prices Help Advance Economy’s Slow Recovery

Original Post Date: January 30, 2013

By: Conor Dougherty

The U.S. housing recovery continues to gain strength and breadth, helping to lift the economy at a time when overall growth remains sluggish.

Home prices rose 5.5% in November from a year ago, the strongest increase since the peak of the housing boom in August 2006, according to the Standard & Poor’s/Case-Shiller index, released Tuesday. A separate survey out Monday from Lender Processing Services Inc., LPS which tracks about 600 cities, showed home prices were up an average of 5.1% in November from a year ago.

The Case-Shiller report showed that 19 of the 20 metropolitan areas it tracks registered year-over-year price increases, with New York as the sole city to see prices fall. The improvement has been considerable in much of the nation: 11 cities in the Case-Shiller index saw year-over-year price gains of 7% or more.

The West, which was hit hard by the housing bust, has been a standout. Phoenix home prices were up 22.8% year over year, the best performance in the nation. In San Francisco, where home prices have been pushed up by the booming technology sector, prices increased 12.7% from November 2011.

Prices are rising after housing inventory fell precipitously over the past year. While much of this was driven by investors who buy homes in bulk and pay cash, the flurry of activity put a floor under prices and made regular consumers more confident about buying again—a development helped by low interest rates.

Many economists expect home prices to keep rising in 2013 because those two forces—low interest rates and a slender inventory of homes for sale—are expected to persist throughout the year. “We’re not building enough at a high enough rate,” said Patrick Newport, an economist at IHS Global Insight.

Price gains have transformed housing from an economic drag to a key cog in the nation’s recovery. Through the third quarter of 2012, about 1.4 million homeowners saw their mortgages go from “underwater” to above, meaning that until recently their homes were worth less than they paid for them, according to real-estate research firm CoreLogic CLGX. Meantime, Federal Reserve data show real estate wealth increased $1.0 trillion through the first three quarters of 2012.

Despite this lift, consumers’ outlooks have dimmed in 2013 as rising taxes and dysfunction in Washington have made them less optimistic. A gauge of consumer confidence tracked by the Conference Board fell 8.1 points in January, to 58.6. Consumer confidence has fallen for three months straight and is now at its lowest level since November of last year.

The pessimism was widespread: Consumers felt worse about their job and income prospects, and are adjusting some of their spending to match. The share of respondents who planned on buying a car soon fell in January. The share that expected to buy a home was flat and the share that expected to buy a big appliance such as a washing machine increased.

Confidence fell late last year, in part because of budget brinkmanship in Washington. While the federal government’s fiscal concerns have been resolved for the time being, consumers saw their paychecks shrink with the expiration of the payroll-tax holiday at the beginning of the year.

A report on the home-ownership rate, released Tuesday by the Census Bureau, showed that the percentage of Americans who owned their home fell to 65.4% at the end of last year from 65.5% in the third quarter of 2012. The rate is down from its peak of 69.2% in 2005, but the decreases have slowed over the past year as the housing market has improved.

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From Power Tools to Carpets, Housing Recovery Signs Mount

Original Post Date: January 28, 2013

By: Kate Linebaugh and James R. Hagerty

The U.S. housing recovery is starting to show up in corporate results.

Companies that sell power tools, air conditioners, carpet fibers, furniture and cement mixers are reporting stronger sales for the fourth quarter, providing further evidence that a turnaround in the housing market is taking hold.

The results add to data on home construction and pricing that indicate a bottom may have been reached after the sector’s long slide. While the incoming data continue to be mixed, evidence that Americans are spending more to build and refurbish homes is raising executives’ confidence that the housing market will continue to improve and help fuel the broader economy.

Honeywell International Inc., HON +0.29%which derives about 5% of its sales from the U.S. residential housing market, said sales of heating and cooling systems rose 6% in the fourth quarter compared with the year-earlier period.

“That is the first sign of life that we have had in a while, and that is a good sign,” Honeywell Chief Financial Officer Dave Anderson said.

United Technologies Corp., UTX -0.38%which makes Carrier heating and cooling equipment, said orders of residential air-conditioning and heating products rose 20% in the fourth quarter compared with a year earlier, the fourth-straight quarter to notch a gain.

“Housing is what we see leading the economy out of the doldrums,” said Greg Hayes, chief financial officer of the industrial conglomerate.

Elsewhere, Oshkosh Corp. OSK +0.18%said orders for its McNeilus cement mixers and JLG extended forklifts, both used for home building, rose in the last three months of 2012. DuPont Co. DD -0.27%said demand for its Sorona carpeting fiber was stronger during the quarter thanks in part to the housing recovery. And Stanley Black & Decker Inc. SWK -0.03%said sales of power-tool sales rose 5% last year, a sign that Americans are investing in home repair.

The results follow a string of encouraging data on the housing market last year. Sales of existing U.S. homes rose to their highest annual level in five years in 2012 and registered their largest annual jump since 2004, according to the National Association of Realtors. Home construction, meanwhile, rose 12% in December and finished the year with the most new homes started since 2008. For all of 2012, 780,000 new homes were started, a 28% increase from the year earlier. Remodeling activity is also showing improvement, according to the Joint Center for Housing Studies of Harvard University.

That said, the sector is hardly out of the woods. The market hasn’t worked through the overhang of depressed properties, and conservative lending standards at banks mean mortgages aren’t always available to would-be buyers. It is also hard to tell how the sector will react when the Federal Reserve eventually dials back its aggressive efforts to keep rates on home loans low.

New data out of the Commerce Department disappointed markets Friday by showing a 7.3% drop in sales of new homes in December. While new-home sales finished the year up 20%, 2012 was the third-worst year for new-home sales on record dating back to 1963.

Still, executives at companies exposed to housing are growing more optimistic. Improvement in the sector could help broad tracts of the economy by creating jobs, improving consumer confidence and boosting property-tax receipts for municipalities. Construction typically is a big job creator during expansions, though the industry has been slow to staff up during the current recovery.

“The housing recovery will help lift businesses that have long been dormant,” said Mark Vitner, senior economist at Wells Fargo WFC +0.34%. “People will be fixing up homes to put them up for sale—buying new air conditioners, painting, fixing roofs. As the new-home market picks up, that really feeds into [gross domestic product].”

Daniel Oppenheim, a Credit Suisse AG CSGN.VX -1.20%analyst based in New York, predicts that home-improvement spending will rise 7% this year and 8% in 2014. He also expects construction of new homes to rise, and predicts that USG, a Chicago-based maker of gypsum wallboard, will record its first profit in 2013 after five years of heavy losses.

“As customers feel more confident in the value of their homes, they tend to make improvements and buy new furnishings,” said Farooq Kathwari, chief executive officer of furniture maker Ethan Allen Interiors Inc. ETH -0.12%But he cautioned that the economic recovery is still “fragile,” which is likely to prevent some customers from splurging. Ethan Allen, based in Danbury, Conn., last week reported that earnings in the quarter ended Dec. 31 rose 22% from a year earlier to $9.8 million.

Rail-freight operators are benefiting from the increased movement of furniture and supplies. Union Pacific Corp., UNP +1.29%which posted a 7% rise in quarterly profit, said lumber shipments increased 17% as housing starts showed solid year-to-year improvement.

In the second half of this year, Union Pacific’s business that transports goods by land, sea and air will be driven by furniture and “the things that you build housing with,” said the railroad’s marketing executive, Eric Butler.

At specialty truck maker Oshkosh, quarterly profit rose 20% at the end of 2012. Sales of the company’s cement mixers rose 36% to $63 million in the quarter, while sales of its extended-reach forklifts—called telehandlers—increased 39% to $207 million. “We’re seeing that come right up with the housing starts, which has been some good news,” said Wilson Jones, Oshkosh’s president.

Sounding a cautionary note, however, he said some of the company’s smaller customers are still struggling. While sales of cement mixers have nearly doubled from the same quarter in 2010, Mr. Jones said the gains are coming from a low base, and that sales are still as much as 70% below their precrisis peak.

Executives also warn that the broader economic environment remains fragile, in part due to continued battling over the budget in Washington.

“Just because the news looks a little better the last couple of weeks, we just don’t think this is a good time to declare economic victory,” Honeywell CEO David Cote said.

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Qualified Mortgage vs. Qualified Residential Mortgage

The terms ‘Qualified Mortgage’ versus ‘Qualified Residential Mortgage’ are loan identifiers that will be completely foreign to the average borrower, but are terms industry professionals may, or at least should, become familiar with as part of the latest industry reform.

Granted that the terms do sound similar, but there is just enough difference that they do need to be distinguished from one another.

The National Association of Home Builders (NAHB) has defined a ‘Qualified Mortgage’ (QM) as “all mortgages that will be available to consumers.” It’s a broad definition but would be guided by specific standards for consumer loans, these being established by guidelines and standards driven by industry reform via the Dodd-Frank legislation. Some of these guidelines are just now coming to the forefront.

The NAHB suggests that any loan originated outside these guidelines may be categorized as “predatory” lending.

A “Qualified Residential Mortgage” (QRM), is distinguished as being any loan “that can be sold by the lender on the secondary market.” Traditionally Fannie Mae and Freddie Mac have been the primary buyers of these loans on the secondary market, but lenders are not required to sell their loans on the secondary market.

Lenders have a pool of capital available to them to give out in the form of loans, in this case home loans. In order to continue the process of making new home loans, lenders will typically sell these mortgages on the secondary market in order to refresh their capital resources quickly. Because of this the QRM would become the industry standard for these loans.

The NAHB says that the QM guidelines will fall under the “ability-to-pay” provisions of the Dodd-Frank legislation. The intent is to be sure that borrowers have a “reasonable chance” in paying back the desired loan. Some of the more important rules will be that there are to be no negative amortization or interest only loans, points and fees cannot exceed 3% of the loan amount, and income and assets must be verified.

The NAHB offers more information relative to QM and QRM standards. See the web address below and scroll down to the bottom of the page in order to be directed to additional information.

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Housing Highlights

At the peak of the real estate downturn more than 12 million borrowers were underwater by owing more on their mortgages than what the homes were worth on the market. By last year that number had fallen by more than 4 million yet still leaving 7 million homeowners underwater.

But thanks to the price recovery in some of the hardest hit markets this number could drop to as low as 4 million in the next two years according to JPMorgan Chase & Co.

Clearly the housing market is in a sustained growth period. With the Federal Reserve buying up bonds in order to keep interest rates low, investors are snatching up homes along with ordinary consumers either entering the market or moving up. According to Bank of America, housing construction alone could boost gross domestic product by 0.4 percentage points while home price appreciation could add another 0.2 percent.

As an example of hard hit housing markets that are recovering, Phoenix is leading the U.S. in price appreciation with a dramatic jump of 22 percent in the 12 months through last October, this according to a S&P/Chase-Shiller index. The index saw its greatest year-over-year increase since May 2010 as eighteen of the twenty cities in the index had increases from a year ago.

According to Zillow, home values rose by more than $1.3 Trillion to $23.7 trillion since the end of 2011. Prices are expected to rise by 3.5 percent this year after increasing 4.5 percent last year, this based on estimates by15 economists surveyed by Bloomberg. Sales of existing homes will increase by 7.2 percent this year rising to 4.98 million units sold. This will be the highest level since 2007.

Interest rates remain at historic lows but are expected to continue a slow rise to around 4.0 to 4.2 percent by years end.

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Consumer Borrowing to Rise

Information released by American Banker says that consumer borrowing will rise in the next six months.

According to a survey conducted by the Professional Risk Managers’ International Association, and sponsored by FICO, 61% of the risk managers surveyed believe that consumer requests for home, auto and other consumer loans will increase over the next six months. Just three months earlier the same survey found only 48% of risk managers expected that loan requests would increase in the following months.

An ample supply of credit will be available over the next six months, particularly for auto and credit card loans, say the risk manager respondents in the survey. Of the respondents, 74 percent said that credit available for auto loans would “meet or exceed” demand, while 71% said that credit card lenders would also meet or exceed demand.

The improving economy appears to be changing consumer outlook relative to taking on more debt. This is a reversal over the last several years where consumers were diligent in paying down debt.

Risk managers, based on the survey results, say that because of the better economic picture more existing borrowers will be able to keep up with their monthly payments. As to mortgage delinquencies, less than 30% of the respondents expect that loan delinquencies will rise in the next six months. At the same time approximately 50% of the risk managers expect to see no increase in delinquencies on small business or auto loans.

In looking at student loans the survey results show that risk managers are more pessimistic. Almost half of the respondents anticipate that student loan delinquencies will increase in the next six months, with 11% of the risk managers predicting that these delinquencies will “rise substantially.”

In commenting on future consumer borrowing Andrew Jennings, the chief analytics officer at Fico, says, “With both the job market and real estate sector showing signs of life, American consumers may be willing to fund their lifestyles by taking on more debt. And it appears that banks are willing to oblige.”

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Financing Your First Home

Potential homebuyers wanting to jump into the purchase market will of necessity have to go through the process of financing their home mortgage. There are certain steps that can be taken to assist the buyer in that finance process.

The first real step will essentially be a self-evaluation of your own financial picture. You know better than anyone what your overall monthly expenses are currently, or what you can truly afford relative to any monthly mortgage payment.

Your monthly housing expenses will include the monthly loan principal and interest along with any home or hazard insurance. Escrow costs, property taxes and any potential homeowners association fees will also need to be factored in.

Of course you don’t know what these costs are ahead of time, it’s just that once you determine what fits your monthly budget understand that you need to be firm with any lender that the monthly mortgage payment, and all attendant costs, must fit into that figure. Don’t go beyond what you can comfortably afford. Don’t let a lender or realtor push you past your determined budget.

Do not under any circumstances go out and purchase any high-ticket items, such as a new car or furniture, on credit prior to securing a home loan. You want your credit and financial profile to be as appealing as possible. Purchases like these can eschew your credit and financial picture enough that you may not be able to qualify for that loan.

Because lenders today want to see a total debt-to-income ratio of less than 40 percent, you may have to pay down debt. Pay down those credit cards. Ideally you want your credit card debt on any given card to be no more than 30 percent of available credit. This will optimize and improve your credit score.
Talk to a credit counselor that is not tied into any lender if needed. Attend a first-time buyers seminar. The U.S. Department of Housing and Urban Development (HUD) offers free housing counseling and seminars. HUD also offers free brochures on home financing and closing costs.   

Visit a qualified lending professional, and do so before seeing a realtor, get pre-qualified for a loan based upon your full financial picture. This makes the home shopping process easier because you present a picture of being a serious and qualified buyer.

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A 20% Downpayment Requirement?

Over the past several years mortgage and real estate industry analysts have been saying that the housing market would be further along to a more robust recovery if some reactionary restrictions in lending practices could be softened. This could be a pipe dream if a 20% down payment becomes a requirement.

Industry sources say six federal agencies, in addressing new lending issues via the Qualified Residential Mortgage (QRM) standards, have presented proposals that could potentially make 20% down payments an industry standard.

Critics of the proposals say that such a requirement could force many low-risk qualified first-time buyers to put off home ownership by as much as a decade or more. Taking out a high cost loan based on a lower down payment would be another option, but this could make homeownership not cost effective for many consumers, potentially pushing them out of the market altogether.

In 2012 a joint study released by the Center for Responsible Lending and the UNC Center for Community Capital found that this rule could push as many as 60 percent of credit worthy borrowers out of the market, or into high cost loans.

Other portions of the study found that provisions in the recent Dodd-Frank financial reform legislation…those that ban high-risk loans, such as no-doc or no income verification loans and those with prepayment penalties…were more than adequate in addressing issues of bad underwriting, in what many believe was the root cause of the mortgage and real estate housing crisis.

A 20% down payment requirement would indirectly be blaming low down payment loans as being a major culprit in said housing crisis. Nothing could be further from the truth. Low down payment loans have been successfully advocated and used since the 1930s via the FHA, and later through non-FHA loans. Low down payment loans have helped millions of qualified buyers become successful lasting homeowners.

If low down payment loans are eliminated then the current housing recovery will in all likelihood falter, and along with it any hopes of an economic recovery for years to come.

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Time to Buy

If you happen to be a fence sitter and can’t decide if this is a good time to buy, you shouldn’t hesitate any longer. If you have a steady secure job and good credit, in all likelihood you are a great candidate for home-ownership.

Mortgage interest rates are at historic lows, but are projected to start rising, albeit slowly. Home prices have probably hit bottom in the majority of metropolitan markets, and in most of these markets prices are beginning to edge upwards.

According to a National Association of Home Builders (NAHB) survey taken last year, homeowners still place a very high value on owning a home, and strongly recommend ownership to others.
Data from the survey reveals that 96 percent of homeowners are happy with their decision to own. Another 79 percent would advise a friend or family member “just starting out” to buy a home. Seventy-four percent of respondents said that despite the ups and downs in the housing market, purchasing a home has been the best long-term investment they could make.

There is a growing inventory of new homes on the market with home building start-ups increasing, and many of these are “move-in ready.” Foreclosure and short sale properties present an opportunity for many would be homeowners. Many existing homes are coming onto the market as relocation sales increase with the improving economy, or existing homeowners are choosing to sell and “move up.”

Unlike other investments, a home purchase can be done through “leveraging.” Simply put, potential homeowners do not have to come up with the full purchase price out of their own pockets, but can borrow the money for nearly the full purchase amount. For other investments, such as stocks, this isn’t so.

With home values once again on the increase, homeownership will lead to the building of equity in the home. In many metro areas recent price gains have out performed the stock market, once again setting the stage for financial wealth and security for homeowners.

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Mortgage Applications Rise

The latest data from the Mortgage Bankers Association shows that mortgage applications for the beginning of January rose after falling the last two weeks of December, with the December reduction allowing for any Christmas holiday decline.

According to the MBA mortgage applications increased for the first week of January, this likewise adjusted for the New Year’s holiday. The increase was 11.7 percent higher than one week earlier according to the MBA’s Mortgage Application Survey.

Survey respondents include mortgage bankers, commercial banks and thrifts. The survey has been conducted since 1990 and covers over 75 percent of all retail residential mortgage applications in the U.S.

The Market composite Index, which is a measure of the volume for mortgage loan applications, increased by 11.7 percent over the previous week, this on a seasonally adjusted basis. The index increased by 49 percent on an unadjusted basis, this also compared to one week earlier.

The Refinance Index increased 12 percent from the preceding week, but is up less than 1 percent form two weeks prior.

Refinance originations still dominate the mortgage market with refinance activity making up 82 percent of total applications. There was no change from the previous week, which also registered 82 percent of mortgage activity.

The Purchase Index increased by 10 percent over the previous week, this on a seasonally adjusted basis. The unadjusted Purchase Index increased by 49 percent also compared to the previous week, but was 8 percent lower than the same period one year earlier.

Clearly fixed-rate mortgages are the loan of choice. This fact is validated in that adjustable-rate mortgage (ARM) activity captured only a 3 percent share of loan activity for the week, this figure unchanged from a week earlier. The HARP share of refinance activity decreased to 25 percent, down from 27 percent a week earlier.

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