The delinquency picture is changing, interest rates continue their short term trend, an update on housing starts and existing home sales; enjoy!
Interest Rates Soften Further
Following 5 weeks of declines, mortgage rates fell further for the week ending May 19th, 2011. According to Freddie Mac, the 30-year fixed rate eased from 4.63% to 4.61%, while the 15-year fixed dropped from 3.82% to 3.80%. A year ago, the 30-year fixed rate stood at 4.80%.
Weak industrial production, slow retail sales, and a poor housing data contributed to the soft interest rates for the week. Interest rates continue to be weaker, reminiscent of last year. But how far will rates fall before the subsequent rise? Potential contributors to lower rates include; sovereign debt crises, Middle East instability, and weak economic data here. What will stop the recent rate decline? The economic picture will slowly improve and we’ll be facing our own debt crisis which will cause a steep rise in rates over the long term.
Here’s a look at the last 12 months:
Existing Home Sales and Supply
The National Association of Realtors (NAR) reported sales of existing homes slowed in April to a seasonally adjusted annual rate of 5.05 million, a decline of 0.8% over March. April, 2011 is 12.9% lower than 2010 when the tax credit was in full swing. Based on the existing pace of sales, month’s supply grew to 9.2 months up from 8.3 months at the end of March.
In addition to softer numbers of existing home sales, investor sales fell from 22% of the market to 20% of the market. Cash sales dipped from 35% to 31% of transactions. NAR blamed tight underwriting standards and appraisal issues. In fact 11% of Realtors surveyed said they had a contract cancel due to a low appraisal. I have to agree with NAR on the appraisal issues. My firm had a property that received 2 appraisals; one appraisal arrived at a value of $190,000, the other $100,000. To say Zillow is substantially less accurate than appraisals takes a lot of chutzpah these days.
Could there finally be a light at the end of the tunnel? The Mortgage Bankers Association reported that levels of loan delinquency are in decline. The delinquency rate of 1-4 unit loans declined from 10.06% a year ago to a seasonally adjusted annual rate of 8.32% for the quarter ending March 31st, 2011. New loan originations from late 2008 until now have much stricter underwriting standards allowing levels of delinquency to decline.
– Full report on loan delinquency
Despite these big drops in loan delinquency, there are still many reasons for concern. The level of delinquency is still historically high and some states still have much many reasons to exercise caution such as Florida with 24% of all delinquent loans. Nevada still has an annual rate of 9% of all loans going into foreclosure, Arizona stands at 7%. These are some of the states where investors are putting emphasis because of incredibly low prices and projected high population growth rates.
Housing Starts Stall
The Census Bureau reported housing starts fell to an estimated 10.6% in April over March 2011, to a seasonally adjusted annual rate of 523,000. Year-over-year housing starts are an estimated 24% below April 2010, forecasting the worst year yet for home builders. Single family starts were down 5.1% in April over March. Building permits were also down to a seasonally adjusted annual rate of 551,000; down 4.1% from March 2011 and 12.8% below April 2010’s estimate of 623,000.
With housing starts and building permits creating new cyclical lows every month, supplies of existing homes both for purchase and rental will become constrained. We’ll see this constraing first in the rental market as people foreclosing or short-selling will be forced to become tenants. This plus the migration away from an ownership society will be a boon for investors. With little new product hitting the market, the investment side should continue to be profitable from the yield perspective.