Market Update-January, 2014

Can We Trust the Numbers? We'd like to think we can, but we have to ask, even if we ask tongue-in-cheek: Are these numbers real and do they reflect the state of the economy? We're referring to the employment numbers released last Friday, which we found to be highly unusual and very surprising. According to the Bureau of Labor Statistics , the unemployment rate dropped to 6.7%, the lowest it has been since the Bush Administration. That's the good news, and news we can understand, given strong economic growth in the waning months of 2013. The bad news – and the news that left us scratching our heads – is that payrolls increased by a mere 74,000 in December, which fell far short of the consensus estimate for 193,000. Even more disconcerting, many of the new jobs – 55,000 – were in retail, which tends to be a lower-compensated segment of the economy. We were, quite frankly, expecting job growth to hover near 200,000, especially when considering payrolls increased 241,000 (revised up from 203,000) in November and 200,000 in October. We thought elevated monthly job growth would coincide with gross domestic product , which had risen through most of 2013. But at least the unemployment rate is falling, you might reason. This is a point of contention among economists, because it's falling on falling labor participation . Those working or seeking work has dropped to 62.6% of the population, the lowest since 1978. As recently as 2008, the labor participation rate was at 66%. Many market commentators fret over the low labor participation rate. But there appears to be a mitigating factor: There is evidence the lower participation rate is related to a higher retirement rate. If that's the case, today's flaccid labor participation rate is less dire than first appearances might lead us to believe. Employment and economic growth is a recurring theme in these pages because of their importance to the housing and mortgage markets. We've said repeatedly that we'd love to see more jobs and more economic growth, even if they lead to higher lending rates. The upside to disappointing job growth is falling mortgage lending rates, which is what happened this past week. reports the average rate on the 30-year fixed-rate mortgage dropped nine basis points to 4.57%. Freddie Mac's survey shows the average rate on the 30-year loan fell 10 basis points to 4.41%. The sizable drop in mortgage rates over the past couple weeks has ignited application activity, which we're glad to see. The Mortgage Bankers Association's latest survey shows that refinance activity jumped 11% last week. More important, purchase applications increased 12%. The surge in purchase applications leads us to believe that job growth for December was an aberration. After all, a loan is frequently contingent on the borrower being employed. So if the December job numbers prove to be an aberration, then today's lower lending rates are likely an aberration, and also a window of opportunity. If the January job numbers move up to the 200,000 range, you can be assured mortgage lending rates will move up with them. Recent positive economic reports, along with our instincts, lead us to believe January's payroll numbers will be closer to 200,000 than 100,000.

Market Update-July/Aug 2013

Fed Chairman Settles Mortgage Markets After sprinting a full percentage higher over the past two months, the 30-year fixed-rate mortgage has finally taken a breather. Last week, the bellwether loan was staid, holding near the prior week's rate. This week, the rate actually fell a few basis points. Lending markets have finally settled down, and for this we can thank Federal Reserve Chairman Ben Bernanke, who assured credit-market participants the Fed is unlikely to taper QE3 in the near future. This means the Fed will continue to purchase long-term U.S. Treasuries and mortgage-backed securities. In short, mortgage rates have likely plateaued for the near future, which gives frantic buyers some breathing room. The interesting lesson in the mortgage-rate surge is that it failed to materially impact the purchase market. Indeed, the four-week purchase-application trend held steady. What's more, the latest data from the Mortgage Bankers Association show purchase applications actually rose 1% last week. Purchase applications are obviously related to home sales and building activity. On the latter, there's concern rising rates could translate into falling activity because of falling consumer demand. The latest data on housing starts, released Wednesday, raised a few eyebrows, and a few concerns. Housing starts were down significantly, dropping 9.9% to 836,000 units on an annualized basis in June. After the news was released, we ran across a number of comments forecasting the end of the housing recovery. Upon closer inspection, though, it appears housing's imminent demise was highly exaggerated. We say that because the drop in starts was lead by the smaller and more volatile multifamily component, which declined 26.2% in June after rising 28.2% in May. In contrast, the larger and more stable single-family component slipped a modest 0.8% for the month after rising 0.5% in May. It's informative to consider the longer-term starts trend; by this measure, the residential construction industry looks quite healthy. Over the first half of 2013, multifamily starts are up nearly 34% from the same year-ago period, while single family starts are up 20%. These are meaningful increases in activity and tell us we've come a long way in a short time. Moreover, there is plenty of room left to run. Starts remain low when viewed from a historical perspective. From 1959 through 2000, roughly 1.5 million housing units were started annually. (And keep in, the population was meaningful smaller back then.) So, yes, we've come a long way on residential construction, but we still have long way to go. This suggests that housing will remain healthy and will remain a key economic driver for at least the next couple years. And even if mortgages continue to climb, we think that's unlikely to change.

The Mortgage Contingency Clause-Written By: Barry Weidenbaum, esq (212)832-7400

Sellers and Buyers alike often inquire as to the meaning of the "mortgage contingency clause," one of the more significant clauses in New York real estate contracts. Simply put, a mortgage contingency clause ensures that if a buyer promptly applies for a loan from a qualified lender, but fails to obtain a firm commitment for financing within the specified time period, then the buyer may elect to cancel the contract and receive the return of the initial downpayment. It should be noted that the commitment letter should not be confused with the "pre-approval letter." A pre-approval letter is typically a nonbinding letter of very little legal weight issued by a bank prior to conducting a more detailed investigation of the borrower and the property. There is often a great deal of confusion in the New York real estate market as to whether a mortgage contingency clause is "necessary." The common explanation given is that buyers should request the clause because it affords them added protection if they are applying for financing, while sellers should avoid the clause because it may result in delays caused by the buyer's loan approval process, or by having to find a new buyer altogether in the event that the buyer in contract cancels under this clause. Whether a mortgage contingency clause is "necessary" depends on several factors, including: (1) the financial status of the buyer; (2) the appraised value of the unit for sale; (3) in the case of co-ops and condominiums, the financial viability of the co-op or condominium community of which the unit is a part; (4) overall real estate market conditions (e.g., buyer's market, seller's market, lender's market). For example, a relatively wealthy individual buying a co-op unit that appraises below the contract price and in which the bank's underwriters are not satisfied with the financial condition of the co-op may be denied a loan, where a person with relatively less wealth buying a condo that appraises exceptionally high in a financially solid building might be approved. And in either case, the overall real estate market conditions may result in a very different reality. For example, in a "seller's market," a seller who has prospective buyers banging down the door with offers well above asking price will have little incentive to agree to a mortgage contingency, while in a "buyer's market," the same seller might have no other option but to include the contingency or lose a potential buyer. It should also be noted that there is no "standard" mortgage contingency clause in New York, although there are a number of common clauses circulating through the industry. Some clauses act like protective bubbles that surround the buyer for a time, and then "pop" and disappear altogether once certain conditions are met. Other clauses act more like shields that guard the buyer from certain conditions throughout the entire contract process. It may be possible to find a middle ground that can will satisfy the buyer's need for financial protection, while reassuring the seller that the contingency period will be short. Therefore, we strongly urge prospective buyers and sellers to consult with their attorneys about this clause in particular, and about the overall process of negotiating a deal from the time of offer/acceptance, to signing the contract, to closing!

The U.S. Housing Bust Is Over-July 11, 2012

The U.S. finally has moved beyond attention-grabbing predictions from housing "experts" that housing is bottoming.

Housing Passes a Milestone -July 12, 2012

The housing market has turned—at last. The U.S. finally has moved beyond attention-grabbing predictions from housing "experts" that housing is bottoming. The numbers are now convincing. Nearly seven years after the housing bubble burst, most indexes of house prices are bending up. "We finally saw some rising home prices," S&P's David Blitzer said a few weeks ago as he reported the first monthly increase in the slow-moving S&P/Case-Shiller house-price data after seven months of declines. The U.S. finally has moved beyond attention-grabbing predictions from housing "experts" that housing is bottoming. Nearly 10% more existing homes were sold in May than in the same month a year earlier, many purchased by investors who plan to rent them for now and sell them later, an important sign of an inflection point. In something of a surprise, the inventory of existing homes for sale has fallen close to the normal level of six months' worth despite all the foreclosed homes that lenders own. The fraction of homes that are vacant is at its lowest level since 2006. The reduced inventory of unsold homes is key, says Mark Fleming, chief economist at CoreLogic, a housing data-analysis firm. For the past couple of years, house prices have risen in the spring and then slumped; the declining supply of houses for sale is reason to believe that won't happen again this year, he says. Builders began work on 26% more single-family homes in May 2012 than the depressed levels of May 2011. The stock of unsold newly built homes is back to 2005 levels. In each of the past four quarters, housing construction has added to economic growth. In the first quarter, it accounted for 0.4 percentage points of the meager 1.9% growth rate. "Even with the overall economy slowing," Wells Fargo Securities economists said, cautiously, in a note to clients, "the budding recovery in the housing market appears to be gradually gaining momentum." Economists aren't always right, but on this at least they agree: A new Wall Street Journal survey of forecasters found 44 believe the housing market has reached its bottom; only three don't. (The full results of the Journal's July survey will be released at 2pm ET) Housing is still far from healthy despite the Federal Reserve's efforts to resuscitate it by helping to push mortgage rates to extraordinary lows: 3.62% for a 30-year loan, according to Freddie Mac's latest survey. Single-family housing starts, though up, remain 60% below the 2002 pre-bubble pace. Americans' equity in homes is $2 trillion, or 25%, less than it was in 2002 and half what it was at the peak. More than one in every four mortgage borrowers still has a loan bigger than the value of the house, though rising home prices are reducing that fraction slowly. Still, the upturn in housing is a milestone, a particularly welcome one amid a distressing dearth of jobs. For some time, housing has been one of the biggest causes of economic weakness. It has now—barely—moved to the plus side. "A little tail wind is a lot better than a headwind," says economist Chip Case, the "Case" in Case-Shiller. From here on, housing is unlikely to drag the U.S. economy down further. It will instead reflect the strength or weakness of the overall economy: The more jobs, the more confident Americans are about keeping their jobs, the more they are willing to buy houses. "Manufacturing had led growth and construction had lagged," JPMorgan Chase economists said last week."Now the roles are reversed: Manufacturing growth has slowed as private construction comes to life." Plenty could go wrong. The biggest threat is a large shadow inventory of unsold homes, homes which owners won't put on the market because they are underwater, homes that will be foreclosed eventually and homes owned by lenders. They have been trickling onto the market, slowed in part by government efforts to delay foreclosures; a flood could reverse the recent rise in prices. Or the still-dysfunctional mortgage market could get worse. Or overly zealous regulators or a post-election change in government policy could unsettle mortgage lenders or home buyers. But the housing bust is over.