Active Listings Fall

After peaking in September and matching 2012 levels, Active Listings have seen the seasonal decrease into yearend.  This is quite encouraging since listing could have easily kept increasing from the historic lows seen in 2012.  Typically listings don't pickup until March signalling the start of "Selling Season".  Even though inventory levels are only 250 homes away from the record low last year, it seems unlikely that inventory will drop that low during 2014. 

2013 Closings beat 2012 every month until petering out into yearend.  The interest rate spike in May and June may have prodded many fence sitters into buying resulting in the strong sales during the Summer.  Brisk September/October sales suggest interest rates aren't the only factor in sales rates.  Should the market produce sales above 2,200 in January/February inventory will remain depleted setting the stage for price increases. December's Months of Supply at 1.05 serves as a reminder of tight inventories.

In 2013 record low inventories coupled with increasing buyer interest pushed Case-Shiller prices up 14% last year.  After peaking in July prices leveled out thru October.  With weaker sales in November/December and ample inventory, Case Shiller prices ought to drift lower in November/December.  If inventory remain scarce into the Spring, prices are poised for another run up in 2014.  14% increases won't be seen as interest rates will continue to upside appreciation.  7% wouldn't be surprising.

2014 ought to be a good year for Builders/Flippers that can bring inventory to the market during the Selling Season.  Waiting until the Spring to set prices may be a profitable decision.

Implications of Higher Interest Rates on the Real Estate Industry

With interest rates breaking out to new highs it's interesting to speculate on the implications for the Real Estate Industry.

 

As noted here 10yr Interest Rates recently broke an 8 year trendline signalling higher rates ahead.  Curiously, over long term periods interest rate movements don't appear to have a direct correlation to home sales.

This chart of Used Home Sales shows the sharp dropoff in sales that started in 2007.  Used Home Sales continued to drop thru 2012.  This decline in sales was during a period of declining interest rates as seen in the interest rate chart at the top.  Sales of Used Homes began increasing at the beginning of 2013 which was shortly after interest rates turned up.  It seems Home Sales are more tightly correlated to strength in the economy and consumer confidence rather than strictly tied to interest rate movements.  Reasonably higher interest rates don't spell doom for the housing market.

The Homebuilding Industry doesn't appear to be affected too greatly by higher rates either.

 

When rates spiked starting in May, the Homebuilders had just come off a strong run from the 2009 bottom.  As rates quickly jumped 87%, the Homies corrected a mere 14%.  Since the rate run started again in November  both rates and Homebuilder stock prices are both headed up.  Higher interest rates aren't an impediment to higher Homebuilder stock prices.

 

Mortgage refinancing have dropped sharply throughout 2013.  Refinancing is highly sensitive to interest rates changes since most homeowners would voluntarily agree to higher mortgage payments.  The prospects of higher interests rate is going to continue to make life for Mortgage Brokers increasing difficult.  As it stands now, any loans a Broker made since 2011 is now dead money, since few of their clients from then will refi again.   Of course this also suggests than any borrower who intends to stay in their home should refinance now.

Higher interest rates are helping Regional Banks out.

 

Banner Bank's stock price is up 32% since September.  Regional Banks have had difficulty making money in the ultra loan interest rate environment.  Even with a cost of funds from depositors near .3% it is hard for banks to make money lending it out at 4%.  The Fed's pledge to keep short rates near 0% while opportunities to lend it out at higher rates has made regional banks an appealing investment for investors.  This situation ought to entice the Regional Banks back into real estate A&D loans now that they have better rate spreads and more evidence of a rebounded housing market.

 

Income Producing properties prices have rebounded quicker than residential.  Ultra lows interest rates have benefited Cap Rate calculations supporting higher prices.  An increase in interest rates will weaken Cap Rate calculations.  Cash flow will become an increasingly important investment criteria for income producing properties.  Without strong cash flows the standard ploy in a declining interest rate environment of a cash out refi without a paydown of principal will be more difficult to accomplish.   

The prospects of higher interest rates will create many winners and losers within the Real Estate Industry.  The key question remains why interest rates rise.  If it is within the context of an improving economy then the impact on the Real Estate Industry should be taken in stride.  If higher rates are the result of the removal of artificial support from the Fed the outcomes will be significantly different.

 

 

10yr Rates Hit a 2 Year High

Improving economic data and continuing taper blather pushed 10yr rates over 3% this week.

 

The Bull Market in rates continues on with higher highs throughout November and December resulting in a new high for rates this year.   Rates are now up 20% since the beginning of November. 

 

 Not only did rates set a new annual high, they are the highest they've been since 2011.  The new high broke a significant down trendline in place since 2011.  As resistance now becomes support at 2.9%, this ought to set a downside boundary for rates.  There isn't much resistance until rates reach 3.25%.  The indicators are still pointing up leaving plenty of room for rates to get there.

 It's looking like a convincing break of a 7 year downtrend.  All the indicators have room to move up.  The MACD in particular has room after just crossing up.  3.25% by midyear is only a matter of time.

  The bigger question is now how high can they go.  This 20yr chart adds a little perspective.  The 20 year downtrend is clearly evident.  It suggest significant resistance just below 3.5%.  It is unlikely to break such resistance on the first go around.  The most likely scenario is that rates touch resistance late in the Summer and back off thru the end of 2014.  Hitting the upper channel should cause the indicators to reset to Bull Market settings making RSI's in the 30's a thing of the past.