Market Update: March 15, 2016
Here's what to watch and know about this week:
- Fed Meeting and rate increase?
- Are There Signs Of A Housing Bubble?
- What's Going On With House Flippers?
- Reports To Follow
The Fed Meeting
According to MarketWatch, the Fed may have little reason to pause at Today's Meeting, but it will.
The Federal Reserve doesn't have much excuse to pause from raising interest rates for the second straight meeting, but the market consensus is the U.S. central bank will do just that.
At the moment, the market only expects one interest-rate hike in 2016, in June. About 76% of economists polled by the Wall Street Journal said the Fed would next raise interest rates in June.
"The Fed is not going to do anything interesting," said Ethan Harris, global economist at Bank of America Merrill Lynch.
Despite moderate growth, healthy labor market and a pickup in inflation, the Fed won't move because "the dust hasn't settled" from the severe market turmoil during the first seven weeks of the year, Harris said.
Fed officials met today and will meet tomorrow. At the end of their deliberations, the Fed will release a policy statement, updated economic projections and Fed Chairwoman Janet Yellen will hold a press conference.
The central bank will use all three of these forms of communication to send a message to financial markets.
No Sign Yet of Housing Bubble
"Home prices are rising too fast in much of the country," said NAR's Laurence Yun. In Dallas and Denver, prices have surpassed their prior peak and have risen over the past two years by 18% and 20%, respectively. Similar gains were recorded in many Western cities, including Seattle and San Francisco, regaining most of the price declines during the bust years to reach very close to their prior peak. Nationwide, home prices have risen by 10% over the past two years, according to the Case-Shiller repeat price index, and by 13% in the median home price.
The national price gains are not super-spectacular, but are nonetheless rising 3 to 4 times as fast as the national average wage growth rate. On top of these trends, overall credit conditions appear to be loosening.The average credit score of mortgages that were approved was 719 in January according to Ellie Mae ELLI +0.51%, which is below the 730 to 740 range of most of last year. Consequently, there are increasing discussions about a new bubble - just like the last one fueled by easy credit - that is not sustainable and bound to collapse.
However, the suggestion of a new bubble is misplaced, because three major items are left out when looking at the current housing market trends. First, even though the credit conditions appear to be easing somewhat, the move is from overly stringent conditions to not-so overly stringent conditions. It is a far-fetched view to imply the current mortgage approval process in any way resembles the loosey-goosey, easy subprime mortgage access conditions of a decade ago.
MReport: New Opportunities Open Up for Home Flippers
Homes bought specifically to resell within a year for profit, or flipped homes, recently captured the industry's attention with major gains in store for investors.
According to a Redfin report, flipped homes made up an estimated 3.1 percent (43,000) of all home sales in 2015, down from 46,000 in 2014. Flips were at their highest in 2005 during the housing boom at 4.4 percent (95,000) and lowest in 2008 at 1.4 percent (16,000) during the bust.
"Even though it reflects such a small portion of sales, flipping activity can tell us a lot about overall market conditions," Redfin said. "Investing in a flip involves making a bet on the market. It's a vote of confidence that prices will appreciate, that value added by any improvements will outweigh the costs, and that a buyer will want to buy the home for the higher asking price."
The report found that home flippers gained the most from their flips in 2015 at an average of $102,400 per home, the highest gain ever recorded. Redfin noted that "gain does not equal profit as we do not know how much each flipper invested in renovations and updates."
Reports To Follow This Week:
- This morning, The National Association of Home Builders/Wells Fargo Housing Market Index report was unchanged at 58. Sentiment had been as high as 62 last October, but this month's reading is an improvement over March of 2015, when sentiment stood at 52.
- Fed Meeting concludes on Wednesday and we'll find out if Yellen and company will hold off on hiking rates.
- The week ends with weekly Jobless Claims reported on Thursday and Consumer Sentiment on Friday.
Author: Kirsten Hamling