Despite record low mortgage rates, 2011 has seen a surprisingly high level of cash home purchases.  Between tight lending standards and a desperate search for yield by investors, cash purchase of homes (especially distressed properties) became even more common in 2011 than last year.  According to data from Housing IntelligencePro, 38% of homes purchased in 2011 were bought with all cash.  That’s up from 34% in 2010, and double the 19% rate in 2006.  The trend is likely to continue in the near term, with investors being responsible for an increasing share of home purchases as prior home owners abandon the ownership market and head back to rentals.

In broader housing news, residential permitting activity rose to its highest rate in more than a year in November.  The surge in activity was almost entirely due to a jump in the 5+ unit multi-family segment, most likely apartments, while single-family construction activity posted slight gains.  Housing starts were also reported to have risen substantially, but the smaller sample size of the housing starts statistics resulted in the 90% confidence interval including zero, which means it is not a definitive indication that it was actually a gain.  The figures are also seasonally adjusted, and typically November is not a strong month for starting new building projects given that winter is on the way.  Nevertheless, the increases are welcome news for a housing market that needs all the help it can get.  On the other hand, the concentration on the rental market suggests a continuing exodus of prior home owners toward rentals, each one representing yet another surplus single-family housing unit that will have to be absorbed by the resale market. 

In economic news, initial jobless claims last week reached their lowest levels in over 3 years.  Metro employment and unemployment figures showed that 75% of all metropolitan statistical areas across the country in October experienced a decline in their unemployment rates over the past year.  This has caused sentiment in the housing market and the overall economy to improve moderately in recent months.

In October, 281 out of 372 metropolitan statistical areas across the country experienced a decline in their unemployment rates over the past year while only 76 areas recorded increases.  In this week’s data feature, we will take a look at REO and foreclosure activity over the past year in the nation’s large metro areas with the lowest unemployment rates.  Large metro areas are defined as places with a population of 1 million or more.

Minneapolis recorded the lowest unemployment rate nationwide out of all the large metro areas at 5.4% followed by Washington, D.C. at 5.7% and Oklahoma City, OK at 5.8%.  In areas with stronger labor markets, it should come as no surprise that there would be less default activity.  According to data from Housing Intelligence Pro, Minneapolis saw closings of bank-owned properties fall 23% in the year-to-date period ending October compared to that same period in the previous year; foreclosures were also down 23% for that same time period.  Oklahoma City experienced a 39% drop in REO closings and a 62% drop in foreclosures so far in 2011 compared to last year while Washington, D.C. saw a 20% drop in bank-owned property closings and a 15% decline in foreclosures.  Healthy labor markets lead to healthier housing markets.

Economic data releases have been relatively light but will be in abundance this week.  On the housing front, existing home sales and new home sales will be released over the next several days.  The National Association of Realtors recently announced that this week’s release will show downward revisions in existing home sales from 2007 through October 2011.  The trade group states they had over-counted the number of home sales due to various reasons so it will be important to keep an eye on how much weaker the housing market has been over the past few years than we previously thought.  Final third quarter GDP numbers and leading economic indicators will also be released this week.

The Economy
Headline inflation remained well-contained in November due to drops in transportation and energy prices.  The consumer price index was flat compared to the previous month on a seasonally-adjusted basis while decreasing 0.1% on a non-seasonally-adjusted basis.  This is the second straight month that headline consumer prices have declined on a non-adjusted basis.  Core consumer prices increased 0.1% compared to October levels on a non-seasonally adjusted basis and increased 0.2% on a seasonally-adjusted basis.

On an unadjusted basis, headline CPI increased 3.4% from its year ago levels while core CPI increased 2.2% year-over-year in November.  This matches the largest annual increase in core consumer prices since October 2008.  However, the annual increase in headline consumer prices are back to their tamest levels since April due to weaker energy prices which are excluded from core inflation figures.

First-time jobless claims fell sharply for the second straight week.  First-time unemployment claims dropped by 19,000 to a seasonally-adjusted figure of 366,000 in the week ended December 10th from an upwardly revised figure of 385,000 in the previous week.  This is the lowest initial jobless claims have been since May 2008.  The recent drop in jobless claims is a positive sign for the labor market and further readings at or below these levels will help the national unemployment rate continue to decline.

The preliminary reading for the University of Michigan/Reuters consumer sentiment index increased to 67.7 in December from 64.1 in November.  This is the fourth straight month that the index has increased and the highest it has been since June.  However, the index is still lower than it was this time last year when it recorded a reading of 74.5 in December 2010.

Housing Market
Building permits in November increased 5.7% from the previous month to a seasonally-adjusted annual rate of 681,000 units.  This is the highest building permit activity has been since March 2010.  Single-family building permits increased 1.6% from the previous month to a seasonally-adjusted annual rate of 435,000 units in November while multi-family building permits jumped 13.9% from last month to a seasonally-adjusted annual rate of 246,000 units.

The Commerce Department reported that U.S. housing starts increased 9.3% from the previous month to a seasonally-adjusted annual rate of 685,000 units compared to a figure of 627,000 units in October, but as previously noted the wider 90% confidence interval on the housing start survey means this figure cannot be definitively be identified as an actual increase.  Housing starts for the previous two months were also revised higher by 15,000 units.  The potential uptick in residential construction activity was due mainly due to a surge in multi-family activity.

The National Association of Homebuilders' housing market index increased two points in December from a downwardly revised reading of 19 in November.  This is the highest the index has been since May 2010.  It is also the third straight month that the index has increased.  Record-low mortgage rates, improvement in the labor market, and continued economic growth domestically were the main drivers behind December's gain.  All three component indexes also experienced increases in December.  The index for present conditions increased two points to a reading of 22; the index gauging single-family home sales in the next six months increased one point to a reading of 26; and the index measuring the traffic of prospective buyers increased three points from November levels to a reading of 18.

National average mortgage declined from the previous week to 3.94% with an average 0.8 points in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on December 15th.  This matches an all-time record low for the 30-year fixed rate mortgage.  This is the second straight week that rates have declined.  Rates have now averaged under 5.0% for 43 straight weeks and have averaged under 4.5% for 20 straight weeks.

In the week ending December 9th, the MBA’s seasonally-adjusted purchase index dropped 8.22% from the previous week.  The purchase index fell last week after coming off its highest reading in the previous week since April.  The reading on the purchase index is at a four-week low.

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