Real Estate Renaissance at Risk Despite Some Good Signs
Keep your eye on the economy and keep your money close to your belt.
Despite increases in mortgage rates last week, mortgage activity still rose and teased us with seemingly sustainable traction. Rising activity with higher rates, though just slightly increased, is but one of several subtle signs of revival to surface over recent months. Clearly, though, all is in flux currently, as the risk of economic shift into recession and the threat of increasing unemployment would surely stall and reverse any real estate renaissance.
Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.
The latest sign of real estate life came in this week’s mortgage activity data. Over recent weeks, we’ve also seen the first year-over-year growth in several other housing metrics, qualified of course by the low bar real estate set last year for the recording of growth this year. We’ve been forecasting this eventuality here since the start of the year, and yet, we have been more recently focusing investor attention to undesirable economic developments and the new hurdles they present for all of our nation’s industries, including housing.
For the period ending October 7, 2011, the Mortgage Bankers Association’s (MBA) Market Composite Index improved 1.3% over the week just preceding it. This occurred despite the increases in rates for conforming, jumbo and FHA sponsored loans. Even the nimble refinancing activity improved despite the increase in rates, as the MBA’s Refinance Index also rose 1.3%.
Purchase activity, which measures loan applications for the purchase of homes, is less nimble due to the illiquid nature of real estate and the long-term decision making and investment process that it encompasses. Thus, it was a bit less surprising to see the seasonally adjusted Purchase Index increase 1.2% in the measured period. Supporting a pessimistic view, Purchase Activity was 2.9% short of the prior year period. Keep in mind, though, that the holiday filled September and variation year-to-year offers noise to the measurement.
The portion of refinancings against purchase applications remains out of balance on record low rates, and it stuck at 79.1% in the latest period. Adjustable Rate Mortgage (ARM) share continues to shrink, of course, given the record low rates; it dropped to 6.0% this week, versus 6.4% in the previous week.
As far as rates went, the average contracted rate on 30-year fixed rate mortgages with conforming balances ($417,500 or lower) rose to 4.25%, from 4.18% the week before. The average contracted rate on 30-year fixed rate mortgages with jumbo loan balances rose to 4.59%, from 4.49%. The average contracted rate on 30-year fixed rate mortgages backed by the FHA rose to 4.06%, from 4.05%. Contracted rates on 15-year fixed rate mortgages also increased last week, to 3.53% from 3.49%. On net and on an absolute basis, the rate changes were not very important. However, when considering the state of uncertainty that has existed in the real estate market, it was still enthusing to see increased activity against higher rates, however minimal the increase.
Now that we’ve outlined our enthusiasm with the latest metric in a string of metrics showing stabilization to growth, you can throw all that out the window. Rather, our investment valuation models should now be focused on the macro conditions that will shape all investment decisions and on security sensitivity to that systemic change. In other words, and except in cases of acquisitions of deeply discounted distressed property free of encumbrance, keep your eye on the economy and keep your money close to your belt.
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