June 23, 2009

Questions, Questions…

We go into the summer season with many questions. We know the economy is no longer free falling, but will it actually turn around or will we just stagnate for the time being? In the real estate market there is plenty of excess inventory to work off. On the other hand, wholesale inventories have fallen for the past eight months and this could portend a pick-up in manufacturing. Gas prices at $2.50 per gallon brings up another question. Will the summer driving season be muted because of these higher prices and the weaker economy? Typically a weaker economy translates to less flying but more driving vacations. However, higher gas prices could soften the trend.

It is not too soon to start thinking about back-to-school sales. Yes, the kids have just started summer vacation in certain parts of the country, but they will be going back to school during the middle and end of the summer. This is an important season for retailers and it remains to be seen if consumers will open up their pocket books. Finally, last week we spoke of the danger of higher rates, especially with regard to the real estate market. We believe that the markets are likely to be "self-correcting" in this regard. If rates slow the economy down, they will come back down. If high gas prices keep people from driving, they will also come back down. Of course, we are not predicting these things will happen. With so many questions to be answered, prognostications are not likely to be of any value. Let the summer games begin!

The Markets. Rates on home loans fell last week. Freddie Mac announced that for the week ending June 18, 30-year fixed rates averaged 5.38%, down from 5.59% the week before. The average for 15-year fell to 4.89%. Adjustables fell as well with the average for one-year adjustables decreasing to 4.95% and five-year adjustables falling to 4.97%. A year ago 30-year fixed rates were at 6.42%. "Reports of benign inflation figures reversed the upward trend of rates this week,” said Frank Nothaft, Freddie Mac vice president and chief economist. “The producer price index rose only 0.2 percent in May, roughly a third less than the consensus forecast and the consumer price index increased by just 0.1 percent. Moreover, the 12-month drop of 5.0 percent in producer prices was the largest since 1949 and the 1.3 percent yearly decrease in consumer prices the biggest since 1950.It’s still too early to tell whether the decline in housing market activity has hit bottom yet. New construction of one-family homes rose for the third consecutive month in May by 7.5 percent, but the National Association of Home Builders reported that homebuilder assessments of market conditions in June and for the remainder of this year had weakened."

Current Indices For Adjustable Rate Mortgages
Updated October June 19, 2009

	Daily Value	Monthly Value
	June 18	May
6-month Treasury Security	0.34%	0.30%
1-year Treasury Security	0.52%	0.50%
3-year Treasury Security	1.88%	1.39%
5-year Treasury Security	2.86%	2.13%
10-year Treasury Security	3.86%	3.29%
12-month LIBOR		1.701% (May)
12-month MTA		1.210% (May)
11th District Cost of Funds		1.380% (April)
Prime Rate		3.25% (Dec)

With prices down, small investors in commercial property are returning to the market searching for properties to buy, says Dana Brody, a practitioner with Grubb & Ellis in Los Angeles. Brody says even though there are some eager buyers, the market remains slow because buyers are holding out for better deals and few sellers are willing to take lowball offers. Richard Ziman, manager of a $630 million real estate investment fund, says waiting may be a good idea. But for those determined to buy, he suggests making a supportable offer. He advises calculating how much it would cost to build the target property – the replacement cost – and offering that. Ignore the value of the land, he says. The kinds of properties on Ziman’s buy list include mobile home parks, industrial buildings, and small retail centers anchored by grocery or drug stores. Source: Los Angeles Times

National home prices tracked monthly by Integrated Asset Services LLC’s IAS360 House Price Index have ceased falling and stabilized for the first time in 10 months. For the nation as a whole, the index found virtually no change in prices between April and March. The index last registered a month-to-month increase in prices in June 2008 when they rose 0.16%. Since that time home prices nationally have dropped by 13.3%. Within the country’s four main regions, only the South saw a slight decline of 0.3% in the latest month-to-month period. Prices in the Northeast jumped the most, at 0.6%, while prices in the Midwest inched up by 0.1% and prices in the West remained stable. "It’s too soon to call this a turn in the housing market, particularly given all the political and regulatory uncertainties," said Dave McCarthy, president and chief executive officer of Integrated Asset Services, Denver. "I think that we’re still in for some difficult spells ahead, but we are seeing a certain kind of pricing equilibrium in several important markets. That’s encouraging for the long term." Source: National Mortgage News

Homebuyers may be surprised to find that homeowners insurance isn’t going down, despite precipitous declines in sale prices. "There has been a lot of noise lately around market values, but market value and the cost to rebuild are two totally different things," says Elaine Baisden, vice president of national property for property casualty insurer Travelers. Marshall & Swift, which calculates building costs, says it can cost as much as 30 percent more to rebuild than to build. Reconstruction costs are greater because of demolition and removal expenses and the price of bringing older structures up to current codes. While mortgage companies require borrowers to carry 100 percent coverage at time of closing, it is unnecessary to continue this coverage because the value of the land isn’t at risk. Typically, the building lot accounts for 25 percent of a home’s value. Source: United Feature Syndicate