Monday Morning Cup of Coffee: WhatÕ the diagnosis for the “sick” housing market?

Still, confidence remains high

Monday Morning Cup of Coffee takes a look at news coming across HousingWire's weekend desk, with more coverage to come on bigger issues.

An insider brings us a candid perspective perspective on the American Mortgage Conference in Raleigh, North Carolina last week, and this source doesn’t mince words. This source takes the highly contested position that credit is too tight.

Peel back the usual layers of rah-rah-go housing optimism, and there was one big takeaway if you read between the lines, the source says: “The system is sick.”
The source quotes Federal Housing Administration principal deputy assistant secretary Ed Golding, who told conference goers that an estimated 1.2 million borrowers are "missing" from the market, many of whom are black, young, or have imperfect credit.

So in this climate who is getting loans? Well, people like the folks at the conference talking about all this.

"The well-heeled wealthy borrower has all the options in the world," Golding said. Meanwhile, prices are getting further out of reach.

The "good" inventory, the source says – that is inventory that is affordable, decent and saleable – is getting tough to find in a lot of markets.

In Seattle, Charlotte and other cities, fresh inventory was at multi-year lows in March and prices are growing too fast.

“For millennials in particular, mom's basement is looking pretty good right now,” the source said.

Turning to the mortgage bond market outlook, Chris Flanagan and his team at Bank of America/Merrill Lynch say in a client note that spreads are tightening, and discuss their outlook on Federal Reserve rate and monetary policy.

“Before examining the spread volatility view, we address the last statement on ‘modest tightening of monetary policy.’ At this point, our official view is that the first Fed rate hike will be in September,” he says. “Also, due to disappointing data to start off 2015, BofAML Economist Michael Hanson believes next week’s Fed statement ‘may add that the Fed anticipates a ‘gradual’ normalization process, to complement existing language that economic conditions may warrant lower-than- normal policy rates for some time.’

“In other words, “modest tightening of monetary policy” in 2015 still is our operative framework. If anything, the weak data to start 2015 means that the tightening will be even more modest than we anticipated back in November 2014. In our view, this bodes well for spread volatility going forward,” he writes. “We maintain a sector overweight on our outlook for range bound rates, favoring TBA 3.5s. The Fed's daily purchases in MBS are having a significant effect, a reversal from 2014, reflecting weak liquidity in 2015. The Fed's influence has contributed a half a point of value to performance YTD. We highlight trading takeaways, by sector.” 

Confidence among housing industry professionals – remodelers, landscapers, construction workers and the like – is pretty high despite the weak start to 2015.

The first quarter Houzz Renovation Barometer, which tracks confidence among industry professionals, reveals home renovation pros are bullish about the second quarter of 2015, with general contractors, design-build firms, and landscape/outdoor specialties being particularly optimistic.

Here are a few highlights.

  • Bolstered by seasonal uptick in demand, professional confidence for quarter-over-quarter improvements in the home renovation market is strong.
  • Home renovation professionals continue to report widespread year-over-year improvements in the home renovation market in Q1 2015, with those in the Northeast remarkably resilient to record winter conditions.

 “The Houzz Renovation Barometer gathers input from a variety of professionals, from the design community, to contractors, to landscape specialists, offering unique insights into the health of the industry on the whole,” said Nino Sitchinava, principal economist at Houzz.  “As we continue into 2015, our community of home remodeling professionals are consistent in their optimism for the growing willingness of homeowners to invest in their homes.”

Read the full report here.

This week we’ll see how that plays out for the rest of the industry. On Tuesday we’ll get the S&P/Case-Shiller 20-city home price index. It rose 0.9% in January following a 0.9% gain in December and a 0.8% rise in November. This is the strongest streak for this report since late 2013.

Year-on-year, however, prices are still on the soft side, up only 4.6% in January and only fractionally higher than the prior two months.

The S&P/Case-Shiller home price index tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the U.S. The composite indexes and the regional indexes are seen by the markets as measuring changes in existing home prices and are based on single-family home re-sales.

Wednesday we get the big picture in terms of the gross domestic product for the first quarter and they’re not setting the bar very high. Consensus is about 1%, with the range running from a contraction of 0.2% to optimists predicting as high as 2%.

The economy grew 2.2% in the fourth quarter.

That same day, the National Association of Realtors will have its pending home sales index for March. The NAR pending home sales index picked up steam in February, up a much stronger-than-expected 3.1% on top of a 1.2% revised gain in January. This was the first back-to-back gain since April and May last year.

And we’ll finish the week seeing how construction companies did in March. Construction spending dipped 0.1% in February after falling 1.7% in January. Market expectations were for a 0.2% increase.

February's decrease was led by public outlays which dropped 0.8%. Private residential spending slipped 0.2%.

No banks were closed the week ending April 24 according to the FDIC.

3d rendering of a row of luxury townhouses along a street

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