Housing Market Insight – Week of September 27th

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Highlights from last week’s housing market include; home price reports from the Federal Housing Finance Agency and Radar Logic, an update on interest rates and mortgage applications, and an important report from the National Association of Realtors on existing home sales and inventories.

Double-Dip in Home Prices Becomes Reality

This week the Federal Housing Finance Agency’s House Price Index, a precursor to the Case-Shiller Index, reported home prices fell 0.5% in July. The FHFA revised its June price decline from 0.3% to 1.2%. Year-over-year the House Price Index shows a 3.3% decline. Meanwhile, Radar Logic’s RPX Composite Index also showed declines. Radar Logic CEO Michael Feder said, “We believe that 2010 will prove to be a transition from government support for housing to further price declines fueled by a huge supply overhang and weak housing demand”.

Housing showing price declines is likely to be the trend for some time. The question is how big will the decline be and how will it impact the economy? The biggest fear is that this will cause new waves of negative equity. We’ve learned that if negative equities exist, people are more likely to default. Will this 2^nd leg down in home prices trigger new waves of foreclosures? The saving grace could be the rest of the economy. We’re seeing some economic growth and although soft, many economists agree that we’re unlikely to have an actual economic double-dip.

Interest Rates Hold Steady

Interest rates held firm this week as reported by Freddie Mac. The 30-year fixed rate remained unchanged at 4.37% after rising over the last 2 weeks. The 15-year fixed interest rate remained at its record low of 3.82%.

Following the Fed’s statement that rates are going to remain prolonged at low levels in its outlook, rates had little reason to continue their rise. The Fed sees inflation lower than what’s considered healthy and is maintaining low rates to try to stimulate the economy. The inflation(or shall we say deflation) situation is a little more dire. When home prices are factored into inflation numbers, deflation is clearly where we are today.

Mortgage Applications: Purchases and Refinances Fall

The Mortgage Bankers Association reported that both its Purchase and Refinance Indicies fell over the past week. The Market Composite Index, the overall barometer of mortgage application activity in the market, reported a decline of 1.4% from the prior week. This was lead by a drop in its Purchase Index of 3.3% while, refinances declined only 0.9%. The 4-week moving average for purchase applications is still up 1.0% while refinances are down a full 3.0%.

After a 2 weeks of interest rate rises, mortgage application activity is relatively flat. This is a trend I expect we’ll continue to see over the near future. It seems there are limited reasons to rush into a purchase of a new home especially with high volatility in the equities markets and home prices trending downward over the next couple quarters.

Existing Home Sales Rise

The National Association of Realtors (NAR) reported a 7.6% rise in existing home sales during the month of August. The seasonally-adjusted annual rate of sales is now 4.13million compared to an upwardly revised 3.84million in July. Still the rate is below the 5.10million pace in August of 2009. Meanwhile supply stands at 11.6-month supply down from a 12.5-month supply in July.

The existing home sales rise represents a market recovering in a post-government intervention environment. Existing home sales fell off a cliff in July so a rebound was anticipated, if not expected. It’s important to note that investors now make up 21% of the existing home buyers, up from 19% in July. Also interesting are cash sales dropped from 30% to 28% in August. I think we’re entering a period where people will be more driven by their own confidence than interest rates.

12 Months from Now

Many are wondering where we’ll be a year from now in the housing market. While this is impossible to predict, there are few things we can project and even control. One can buy an investment property today at very low prices, lock in a low interest rate, and create a high yielding investment for themselves on a 12-month lease. One year from now if you did this, you’ll have garnered a year’s worth of tax benefits, cash flow, equity pay down, and a yield which was secured on a physical asset. The other route is waiting. Waiting until rates are lower, home prices are lower, rents are higher, etc. What makes real estate attractive is the ability to have a semi-controlled investment which allows you to do what I mentioned at the beginning of this paragraph. Sure there are many variables in real estate such as tenant problems, maintenance, and vacancy. Looking at a 12-month slice, you have a great deal of control by finding a solid tenant in a well maintained area with low locked in interest expenses. No economist or analyst knows when the housing market will recover. Understanding this and working within the constraints of the market are essential to having the confidence to invest today.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.