Fewer Housing Starts - Good News or Bad?

With respect to housing data, news is rarely positive or negative on a universal level. There's always two perspectives to consider, after all.
The home buyer's perspective
The home seller's perspective
Usually, when data is beneficial to one group, it's less beneficial to the other. This is true for rising home prices, average days on market and so forth.
Today, the group that gets the most benefit from data is the home seller group.
Published Thursday, a government report showed that Housing Starts fell 11 percent nationwide in March and also fell short of analyst expectations. A "Housing Start" is a new housing unit on which construction has started.
The press is calling this a stumbling block for the economy, but that's not exactly true.
Fewer Housing Starts last month means that fewer new homes will come on the market later this year. This is not necessarily bad news. Especially if you're planning to sell your home in the latter half of the year. With fewer homes for sale, the supply-and-demand curve should shift in favor of home sellers. This helps stabilize home prices at a time when they might otherwise be prone to fall.
If it's true that stable housing markets are key in an economic recovery, then fewer Housing Starts is actually a push in the right direction.
But there's more to the story (as always).
As footnoted in the Commerce Department's report, a statistical disclaimer states that the Housing Starts data's Margin of Error was so high that the report's conclusion is just a guess. Technically, the entire report is invalid anyway
So, the government won't issue its final March 2009 Housing Starts data for months, but if the initial figures stick, home sellers may be in position to command higher sale prices later this year to the detriment of home buyers. It's basic economics.
And from a home seller's perspective, that news is good.

Why does the President want you to Refinance now?

Last Thursday, President Obama sat down with some homeowners who had recently refinanced their mortgages to declare some 'good news'. "We are at a time where people can really take advantage of this", he said. As far as I can tell, the President gets to live rent-free in the White House, so why is he urging refinances now?

Some quick back of the envelope calculations may give a hint. There are over $10 Trillion in outstanding mortgage debts in the US. $6 Trillion of that is under the guidelines issues by Fannie Mae / Freddie Mac with an average interest rate of 6.5%. If all those loans could be refinanced at 5.0%, it would save homeowners $900 million a month in interest charges. (The savings on a $200,000 mortgage dropping from 6.5% to 5.0% would be $190 per month). Let's hope that half of all the mortgages outstanding could qualify to refinance, and that half of those who can qualify, do. That results in $2.5 Trillion new mortgages this year with interest savings of $375 Million per month. This $375 million can then be used for further reducing debt, investing, or spending. I think the government prefers the last option, as consumer spending would cause the economy to grow.

The other factor I didn't mention is that many people who refinance will be able to and choose to extract additional equity from their home to pay of 2nd mortgages, credit cards, or to fund home improvements. This extra cash flow entering the economy will further expand the impact of refinancing now.

So, if you are wondering why does the president care if you refinance, think of the benefit to you personally, and to the country as a whole, if even just half of those who could benefit from a refinance get that done this spring.

The 2% Rate drop Myth

It is 1970’s era thinking that interest rates must drop by 2% + to justify the cost of refinancing.
First problem with that: If you are currently at 6% waiting for a 2% drop in rates, you are unlikely to see 4%.
Second problem: In 1978 the price of home was about $38,000 which meant $2000 in closing costs took a while to recoup.
With the average home now closer to $200,000 the dollar savings on smaller interest drops is bigger. Yes, 2% is nice, but not a universal number.
What if you can save $150-200 each month for 30 years? That certainly adds up.
Skip the temptation to make decisions based on rules of thumb. Watch this video. Run the numbers. Make an informed decision based on your circumstances, not rules of thumb you hear on TV.

More good housing news - homes under contract up 2%

The number of homes under contract to sell is rising, another signal that the housing market may be regaining its footing.
As reported by the National Association of Realtors, an industry trade group, the Pending Home Sales Index gained 2.1 percent in February. The report measures MLS-listed homes in "pending" status -- sold but not yet closed.
Pending Home Sales is not a perfect statistic, though, by any means.
For one, the Pending Home Sales Index doesn't account for non-MLS listed homes including For Sale By Owner properties and mass foreclosure auctions. In certain markets nationwide, these two categories represent a large percentage of the overall transaction volume.
Secondly, Pending Home Sales samples just 20 percent of all MLS-based transactions -- hardly a complete listing.
But most importantly, a "pending" home sale is not the same as a closed home sale. A lot of things can go wrong between the time a home goes under contract and the supposed closing date. For example, the home inspection could fail, the contract could fall apart, and/or the buyer's financing could be denied in underwriting.
All things equal, though, Pending Home Sales is a fair forward-looking indicator for the housing market as a measurement of buy-side demand for homes.
When Pending Home Sales rise, it's tells us that buyers and sellers are matching up, clearing out market inventory. And actual home sales often follow "pending" ones -- 80 percent of Pending Home Sales will close within 60 days.

So, this isn't a guarantee, but another positive indicator for the housing market.

Are home prices really falling?

Depends On Who You Ask.
A report published Tuesday showed that home values fell nearly 3 percent in January 2009 versus the month prior and by 19 percent from last year.
On the surface, data from the study looks like more bad news for housing. With deeper inspection, though, we uncover reasons to discount the report's finding.
For one, the report includes home price data from just 20 cities around the country -- and they're not the 20 most populated cities, either.
For example, data from #4-ranked Houston is not included and neither is #7 San Antonio nor #10 San Jose. #54 Tampa, however, is included.
Secondly, the report is two months lagging.
Published March 31, its data is only accurate as of January and a lot has happened in the last 2 months. This includes a record-drop in interest rates and the introduction of an $8,000 tax credit for qualified first-time home buyers. The stimulus has helped raise home sales volume on both new homes and previously-owned ones.
And lastly, one more reason to question the relevance of the Case-Shiller report is that a government study on the same topic showed home values rising over the same period, not falling. According to the Federal Housing Finance Agency, home values grew 1.7 percent from December 2008 to January 2009.
In the end, home values are a local phenomenon that can't be summarized as a national "summary". National data can be helpful for watching longer-term trends, but it shouldn't be used to make a "Buy or Not Buy" decision.
For many, the reports of home values should just be one criteria. You also need to look at quality of life issues, that is, are you living where you want to live, are your kids in the school you want them in, etc.
Source List of United States cities by population http://en.wikipedia.org/wiki/List_of_United_States_cities_by_population