Before talking about real estate, the informed investor should know and be able to describe the key indicators driving the national economy. The housing market is a derivative of the national economy. The national economy has to show signs of wellness before the housing market can rebound. Three of the main key indicators driving our national economy are: Gross National Product, Price Index & Employment.
First let’s shed some light on the economic factors.
GROSS DOMESTIC PRODUCT
What is Gross domestic product? Gross Domestic Product (GDP) is the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports. Real gross domestic product increased at an annual rate of 1.7 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the “third” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent. GDP includes only goods and services produced within the geographic boundaries of the U.S., regardless of the producer’s nationality. GNP (Gross National Product) does not include goods and services produced by foreign producers, but does include goods and services produced by U.S. firms operating in foreign countries. The important thing to note here, is that GDP has been positive 4 quarters in a row.
The consumer price index (CPI) is an inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. The CPI is published monthly and is also called the cost-of-living index. Domestic purchases, which measures prices paid by U.S. residents, increased 0.1% percent in the second quarter and 2.1% in the first quarter. An increasing price index moves in tandem with increasing inflation.
The CPI is the most widely used measure of inflation and is sometimes viewed as an indicator of the effectiveness of government economic policy. It provides information about price changes in the Nation’s economy to government, business, labor, and private citizens. It is used as a guide to making economic decisions.
The purchasing power of the consumer’s dollar measures the change in the value to the consumer of goods and services that a dollar will buy at different dates. In other words, as prices increase, the purchasing power of the consumer’s dollar declines. A healthy economy is marked by “low” inflation rates.
Employment: Jobless claims are dropping and employment is improving, currently @ 9.5%. Private sector job growth is up six months in a row. The Dept. of Labor anticipates 1MM net additional jobs in 2010 and 2 MM net new jobs in 2011. Immigration and population growth is increasing. In the building industry, the credit crunch on consumer loans is keeping builders and construction workers on hold. At the same time, it is good to keep a balance of the supply and demand of homes.
A Second Wave of Foreclosures
Redfin predicted that foreclosures would moderate in early summer 2010, allowing prices to stabilize. This is exactly what has happened. But it happened mostly because banks have gotten slower to foreclose, not because consumers could pay their mortgages.
A second wave of foreclosures may be coming next year. The first wave of foreclosures hit people who could never afford their mortgage and suddenly found themselves unable to flip the house or borrow more money. But when teaser rates on loans from 2006 and 2007 expire in 2011 and 2012, another wave of foreclosures could hit a new group of people: folks who can afford the teaser rate but not the new rate.
If employment recovers by then, or if sellers can accumulate enough equity in the loan’s first five years that they can re-finance, this won’t be a problem. We think banks will increase loan modifications to avert a disaster.
NATIONAL HOUSING PRICES
NEW YORK (CNNMoney.com) — Home prices have risen for five straight months, but the rate of growth has slowed, according to an industry report released Tuesday.
Prices inched up 0.6% in July compared with June, according to S&P/Case-Shiller 20-city home price index. On a year-over-year basis, prices rose 3.2% compared with July 2009. Experts polled by Briefing.com had forecast a year-over-year rise of 3.3%. S&P’s 10-city index has gained 4.1% over that period.
The weak readings reveal the ongoing strife in housing markets. Sales of both new and existing homes are well below the standards set during the housing boom years. New home sales have been running at or near record lows.
“Anyone looking for home prices to return to the lofty 2005-2006 levels might be disappointed,” said David Blitzer, spokesman for Standard and Poors. “Judging from the recent behavior of the housing market, stable prices seem more likely.”
Half the 20 cities have recorded gains over the past year, led by San Francisco, where prices have risen by 11.2%.
Las Vegas is the only market to have hit a new low during July. Prices there fell 0.8% from a month earlier and were down 4.9% from 12 months ago. The loss from the price peak, set in August 2006, was 57%.
First time home buyers represent 43% of the market; 20% of the market are repeat buyers; 13% of the market are investors and 24% of the market are cash investors. Pre-foreclosures peaked in April 2009 and have been decreasing since that time. Banks are not as aggressive in filing foreclosure and are allowing more time for homeowners pursue workouts and short sales compared to a year ago.
Freddie Mac: 30-year mortgage rate ties record-low
by reggielal on September 30, 2010
Mortgage News: Freddie Mac said Thursday the 30-year fixed-rate mortgage average fell this week to tie the all-time low of 4.32% with an average 0.8 point for the week ending Sept. 30.
In the previous period, the average mortgage was 4.37%, and the year-ago average was 4.94%. “Confidence in the state of the economy fell among consumers and businesses, which led to a decline in long-term bond yields and brought many mortgage rates to record lows this week,” said Frank Nothaft, Freddie Mac chief economist, in a statement. “Consequently, mortgage rates for the 15-year fixed mortgage and the 5-year hybrid ARM reached new all-time lows and mortgage rates for 30-year fixed mortgages tied its record set just four weeks ago.”
Mortgage Interest Rates
|Overnight Avg Rate||Latest Rates||Change||Last Week Rates|
|30 yr fixed||4.43%||Increase||4.31%|
|15 yr fixed||3.83%||Increase||3.79%|
|30 yr refi||4.30%||Decrease||4.32%|
|15 yr refi||3.78%||Decrease||3.80%|
California Foreclosure Report – August
Notices of Default filings, the first step in the foreclosure process, jumped 16.6 percent in August, the fourth successive increase in as many months.
Fewer homeowners found foreclosure relief as foreclosure cancellations dropped 11.2 percent while more homes were lost, up 15.6 percent to 17,841 foreclosure sales.