May 2011

The Fed’s New Dilemma

Affordability Soaring


ach time the Federal Reserve Board has met in the past few years, the questions have been the same. How do we overcome a huge recession and the hangover caused by this recession? The real estate market was a mess. Unemployment was soaring. Confidence was waning. The response by the Fed was comprehensive and massive, including super low rates, purchase of mortgage and Treasury securities and providing liquidity to banks and other financial institutions. The end of the recession did not bring a pause in the Fed's work. The tepid recovery was fragile and required more of the same. But now things are changing. Overall, this is very good news because the economy is moving forward. Jobs are being created and even the real estate market is starting to stir. However, a recovery brings new issues for the Fed to consider. Soaring oil prices and other commodities bring the threat of inflation. The massive government debt is spawning a massive debate with regard to what to cut and how quickly. The threat of a government shut-down last month and the coming debate on the debt ceiling is changing the focus of those in Washington. The Fed must play both sides of the fence. A strong economy is necessary not only to create the jobs we have lost but also to increase government revenues. However, the markets are expecting the Fed to be diligent to prevent a permanent outbreak in inflation. The Fed is now hearing voices strongly urging the raising of rates from the lowest levels in history. The markets have already taken into account higher short-term rates and many are expecting the move sooner rather than later. Believe it or not, this move by the Fed actually may be necessary to keep longterm rates low in the long run -- along with serious action to cut the deficit. While the economic recovery is great news, for the Fed it presents a new set of decisions to keep the ball rolling...

Shortage of Homes Coming?


In 35 years I've never seen a shortage of new construction like the one I'm seeing today," declares Mike Castleman. "America needs to build a lot more houses. And in most markets the price of new homes is fixin' to rise, not fall." Castleman is in a unique position to know. As the founder and CEO of a company called Metrostudy, he's spent more than three decades tracking data on the country's inventory of new homes.

new report from Deutsche Bank notes that housing affordability is presently at an all-time high. DB's proclamation is based on figures compiled by the National Association of Realtors. Bank analysts note that the acceleration in affordability is "unprecedented" and it should help stabilize both housing starts and residential construction. DB believes the chief reason why housing activity has stalled is lending standards. "This is the one area where senior loan officers are still tightening, unlike what they have done for consumer and commercial/industrial loans," the bank said. Its analysts believe when banks and lenders "become willing to make home loans, surging affordability should lift construction—perhaps by a significant amount." Rates are off their historic lows of the fall and early winter, but some lenders report that potential home buyers are becoming more active, believing that rates will continue to rise and want to lock-in now. Source: Source Media

The key figures that Metrostudy collects are the number of homes that are vacant and for sale in each city, and the number of months it takes to sell all of them. Together those figures measure inventory to determine whether a market has a surplus or a shortage of new housing. Today Castleman is witnessing an extraordinary reversal of the newhome glut that helped sink prices just a few years ago. In the 41 cities Metrostudy covers, a total of 78,000 houses are now either vacant and for sale, or under construction. That's less than one-fourth of the 343,000 units in those two categories at the peak of the frenzy in mid-2006, and well below the level of a decade ago. "If we had anything like normal levels of buying, those houses would sell in 2½ months," says Castleman. "We'd see an incredible shortage. And that's where we're heading." Source: Fortune

Job Growth Continues

Selected Interest Rates
April 21, 2011 30 Year Mortgages——–4.80% 2010 High (April 8)——–5.21% 2010 Low (Nov 11)——–4.17% 15 Year Mortgages——–4.02% 5/1 Hybrid ARMs———–3.61% 1 Year Adjustables——3.16% 10 Year Treasuries——3.40%

Did you know… ♦Apartment bargains once dominated the housing market, but those bargains have slowly faded away. As vacancies decrease and rents rise, renters are finding fewer deals. Analysts expect vacancies to decrease even more and rents to continue to rise through 2013, as the economy continues to improve. Rental activity recorded its best start for the year since 1999, according to Reis Inc. Vacancy rates have fallen to mid2008 levels and rents have increased for the past five quarters. Source: MSNBC ♦Many have overlooked the fact that the VA Mortgage Program still offers loans with no money down. The program exists as a benefit to veterans, reservists and active military. The program is beneficial in helping those eligible to purchase a home. Want to find out more about VA mortgages? Contact us for a free article: VA Helps Veterans Become Homeowners.

©2011, All rights reserved The Hershman Group

Sources—Fed Reserve, Freddie Mac Note: Average rates do not include fees and points. Information is provided for indicating trends only and should not be used for comparison purposes.