Housing starts and building permits, which are leading indicators of the new home construction market, both came in below expectations that were already low. Broadly speaking, foreclosures and short sales are expected to continue to impact new home construction for the next couple of quarters but real estate conditions are very local – so your particular market may be quicker or slower to improve.
Manufacturing reports were also disappointing last week. For example, Industrial Production, Capacity Utilization and the Philadelphia Fed Manufacturing Index all came in below expectations.
So why didn’t bonds and home loan rates improve?
The recent rally in bonds and home loan rates was partly sparked by the notion that U.S. economic growth will slow – which the economic reports last week seemed to indicate. And when you also factor that the only two ways the government can lower the budget deficit is by cutting spending or raising taxes - or some mix of both - the austerity measures could indeed slow the economy.
Normally, such soft economic data would help bonds and home loan rates. But last week, bonds had trouble making gains because – despite the negative economic headlines – some of the reports included data that was unfriendly to bonds.
Here’s an example…
Last week, the Empire State Manufacturing Index reported weaker than expected. But, when you look beyond the headline number, you see that the “prices paid” component of that report – which measures wholesale inflation – showed the highest rate of inflation in three years and the second highest reading ever.
Additionally, the employment index of the Empire State Index was positive, which suggests hiring. And, in a separate report released last week, the Labor Department’s Initial Jobless Claims number also showed the lowest level of unemployment claims in a month. Not only was that a good number from the standpoint of beating expectations, but it also indicated that April's surge in unemployment claims was more likely due to temporary factors rather than a worsening labor market.
In the end, the positive employment news combined with the concerns over inflation offset some of the negative economic news last week and kept bonds and home loan rates relatively unchanged. Both mortgage backed securities and treasuries traded flat on a ceiling of resistance last week. And unless bonds can break above this ceiling, prices can't improve further.
As you can see in the chart below, last week was volatile – with mortgage bonds moving up and down before ending the week near unchanged.
Chart: Fannie Mae 4.0% Mortgage Bond (Friday, May 20, 2011)
Real Estate Markets Improving -- Toll Brothers Reports
One of the largest homebuilders in America reported quarterly earnings and indicated an uptick in the housing market. As the negative feedback cycle continues with respect to real estate, Toll Brothers appeared very upbeat in their commentary.
Other key metrics and guidance:
- Toll expects to deliver 2,300 to 2,800 homes in fiscal 2011; the estimate is an increase at the low end from 2,200 to 2,300.
- Toll ended the year with 203 selling communities, compared with 190 a year ago.
- Backlog as of fiscal second quarter was $1.0 billion, or 1,706 units, up 1%.
- The average delivered price in the next two quarters is expected to be $540,000 to $560,000, although TOL is seeing "flat to better pricing" in many markets.
- Toll says it believes it is gaining share in the high-end market.
- The balance sheet is still the best in the sector, with $1.5 billion in cash (up from $1.1 billion last quarter) and $1.5 billion in senior debt.
- The press release did note that Gibraltar has acquired about $2 billion in principal value of loans and properties.
Overall, consumers continue to endure a negative media blitz magnified by continually bad housing numbers from Washington. What consumers must realize is that these numbers are backward looking whereas Toll Brothers sees the future of housing in a brighter light. Granted, Toll is a public company and, as such, is beholden to shareholders. However, the Toll Brothers CEO has always been a straight shooter and was the first to publically admit the housing problem 2 years ago. The fact that he has become somewhat bullish and plans land acquisitions and expansion in 2011 is certainly encouraging.
At PV Brokers, we continue to believe that once the negative media blitz subsides, we will have a restoration of confidence which will force many bottom feeding buyer to act on purchases. Once this begins happening and modest growth is restored, there will be a mini-panic buying spree that will occur. This will increase housing prices by 5-10% which will further scare sideline money (including Treasuries) into the real estate market. We will see a flight to quality into more affluent communities while some of the more depressed areas of the market, including the 2nd home market, will remain stagnant.
- Bart and Cathy Cleveland
- Our Approach
At PV Brokers, our approach to Palos Verdes real estate sales and marketing begins with integrity and experience. These founding principles ensure that our clients receive ethical, personalized attention from our knowledgeable representatives. We strongly believe in long-term relationships with our clients resulting in a fair and enjoyable home buying experience. We understand the emotion and importance attached to the purchase of your new home. As such, we carefully listen to the needs of our clients and only then apply our expertise and experience to meet their expectations. At all times, we operate with the upmost integrity and professionalism, remembering that our practice is client-centered and client-driven. Simply, at PV Brokers, we listen.
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