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Economic Update – June, 2013

Home Buying Remains Affordable Despite Rising Rates

Mortgage interest rates increased for the fifth consecutive week ending June 6, according to Freddie Mac.

The 30-year fixed rate hit 3.91 percent, meaning, when compared to a month ago, an increase of $30 per month for every $100,000 of debt. The rising rates have prompted concerns about the impact on home affordability, however, a Goldman Sachs report indicates these concerns are premature.

Using National Association of Realtors data, the report says, “Even if mortgage rates continue to increase from here, the median home will still be affordable to the median borrower, based on the conventional 25 percent debt-to-income threshold.”

Mansions are Back

New single-family homes are getting larger, according to Census Bureau data.
The median size rose to 2,306 square feet in 2012, up 8 percent from 2009, marking the highest median square footage since 1973 when the Census Bureau began tracking square footage. Despite an average home buyer household of fewer than three people, 41 percent of new homes had four or more bedrooms, and 30 percent had at least three bathrooms.

Following the financial crisis, the average new home decreased in size by 6 percent over two years, prompting some industry experts to predict the Mansion trend to be over. However, home builders now say money or lack thereof influenced the move away from Mansions. Now that the economy is turning around, buyers are looking for bigger homes because they can afford to buy them again.

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Arizona and National Economic Update ~ May 28th, 2013

Arizona Snapshot:
The latest population figures from the U.S. Census Bureau show that Arizona and Greater Phoenix are growing more rapidly than most places. But, the absolute rate continues to be slow by historic standards. Maricopa County accounts for the bulk of the population growth in the State. The Southern Arizona housing market continues to improve, but, at a much slower rate than in Greater Phoenix. Retail sales in the State were up strongly in April with information, clothing, building materials and motor vehicle sales leading the way in the year over year comparisons.

U.S. Snapshot:
Initial claims for unemployment insurance continued to show moderate improvement as did new orders for durable goods. Total existing home sales continued to show improvement and median prices of existing homes continued to increase. New home sales and prices followed the same trends as existing homes.

The latest population data for mid-year estimates as of July 1, 2012 show that Maricopa County grew by 73,644 or 1.9%. While this is very slow by historic standards, it shows an improving trend following the Great Recession. Pima County grew by a modest 0.5% and Pinal County grew by 1.0%. Within Maricopa County in terms of the top ten largest cities, Gilbert was the fastest growing city in percentage terms (3.4%) followed by Chandler (2.5%). The City of Phoenix is ranked as the 6th largest city in the U.S. and, according to the Census Bureau, grew by 1.7%. In terms of all cities in the U.S., Buckeye was one of the fastest growing cities with populations over 50,000.

The Southern Arizona housing market continued to show moderate improvement. Median resale prices were up 10.7% over a year ago to $164,900 while median new home prices were up 12.0% to $239,700. A total of 172 new homes were permitted in the Greater Tucson area. This is up 21.1% over a year ago. Foreclosures were down about 31% from a year ago.

Retail sales in April were up a strong 8.2% over a year ago. Leading the way were information, clothing, building materials and motor vehicles. Year to date, retail sales are up 7.3%.

Initial claims for unemployment insurance were 340,000. This continues the moderate decline that has taken place over the last few months. Last week’s figure was 8.4% below a year ago. New orders for manufactured durable goods in April increased $7.2 billion or 3.3%. This increase, up two of the last three months, followed a 5.9% decrease in March.

Existing home sales in April were 9.7% above year earlier levels and about flat with March levels. Median home prices for existing homes now stand 11.0% above year earlier levels to $192,000 compared to $173,700 a year ago and $183,900 in March. New home sales were up 16.8% in April compared to a year ago and were about flat with March. Median new home prices were up 14.9% over the last year to $271,600. This, combined with a rising stock market, should make consumers feel better and create a situation where fewer home owners are under water. All of this is good news.

Office: 480-213-5251

National Economic Update

The Blue Chip consensus forecast remains basically unchanged. Real GDP is estimated to increase at a 1.7% annual rate in the fourth quarter of 2012. After an estimated real GDP gain of 2.2% in 2012, the panel expects a 2.0% gain in 2013. That assumes the fiscal cliff is resolved. In the absence of a resolution, the Congressional Budget Office expects real GDP in 2013 to decline and unemployment to increase. U.S. initial claims for unemployment insurance remain about where they have been for quite some time. This is surprising for this point in the cycle and is another indicator of the lackluster performance the economy continues to deliver.

On the positive side, the University of Michigan consumer sentiment index rose again in November to 84.9. This is up from 82.6 in October and 64.1 a year ago. The domestic consumer is the ultimate engine of the U.S. economy and this report points to a rising contribution from consumer spending. In that regard, U.S. consumer credit increased in September at a 5% annual rate. With revolving credit declining at a 1.5% annual rate while non-revolving credit, such as auto loans, increased at a 6.5% annual rate. Thus, consumers are borrowing again for durable goods.

The Institute for Supply Management’s index of non-manufacturing activity grew in October to 54.2. A reading of 50 or more indicates expansion in that sector. October was the 34th month of continuous growth.

According to the National Association of Realtors, growth in metropolitan area median home prices increased in the third quarter. According to NAR, 120 out of 149 metro areas had growth in prices in the third quarter. This is up 7.6% from a year ago. Greater Phoenix had an increase of 34.9% and Tucson was up 15.5%. This will allow more homeowners to escape from being underwater (more debt than value). ASU’s monthly report on the Greater Phoenix housing market shows that new home prices were actually down 3.5% over the past year (as of September). Median prices of normal resales were up 8.2%. Distressed properties had the largest gains. For example, bank owned sales prices were up 45.0% over the past year.

Arizona retail sales for September were up 2.6%% from a year ago. While not great, it is at least moving in the right direction. Motor vehicle dealer sales were up 21.5% from a year ago. Retail sales in Maricopa County were up 3.1% for the same period.

Office: (480) 213-5251

National Economic Update ~ Has Housing Finally Turned Around?

The S&P/Case-Shiller national home price index, which tracks more than 80% of the housing market in the United States, climbed 6.9% in Q2 compared to Q1 of 2012.

“We seem to be witnessing exactly what we needed for a sustained recovery; monthly increases coupled with improving annual rates of change,” said David Blitzer, a spokesman for S&P, in a statement. “The market may have finally turned around.”

Here is some supporting data:

• Two other key indexes covered in the S&P/Case-Shiller report also show gains. The 20-city index was up 6% for the quarter and the 10-city index rose 5.8%.

• National prices were up 1.2% compared with a year earlier, and the 20-city and 10-city indexes also gained y/y. It was the first time all three measures showed positive annual growth rates since the summer of 2010, when generous tax credits for homebuyers were in place.

• In July, new home sales were 25% better than a year earlier; existing home sales gained 10% y/y; and developers applied for 30% more residential building permits.

• The steep increase in home prices “feels really good after six years of straight down,” said Mark Zandi, chief economist of Moody’s Analytics.

• He cautioned about overstate the case for the housing recovery. The mix of homes being sold has changed lately, with fewer repossessed homes on the market, noting that those discounted sales of had driven down prices.

• Zandi believes the positive news on housing will carry over to the rest of the economy saying, “Housing is beginning to act as a tailwind for the recovery.”

• The home price improvement will likely have a positive impact on foreclosure rates, according to Michael Fratantoni, vice president for research and economics for the Mortgage Bankers Association.

• Foreclosures have already been falling and could drop more should the upswing in home prices continue.

• Rising home values means rising equity, resulting in fewer borrowers underwater. Plus an improving housing market will also give homeowners more confidence in their home investment.

• “There has also been a lot of concern about strategic defaults,” said Fratantoni. “That should ease now. When home prices go up, people have a financial incentive to hold onto their homes and they’re less likely to walk away.”

• Rising prices are likely to push potential homebuyers off the fence, where many have been waiting out the price decline, according to Doug Duncan, chief economist for Fannie Mae.

• “Their perception that we hit the bottom takes out the risk of buying into a falling market,” he said. “That should increase demand…if they also believe that mortgage rates have reached a bottom as well.”

Arizona and National Economic Update

Consumer credit was the major newsmaker last week, with April consumer borrowing increasing at an annual rate of 3 percent to hit $2.55 trillion for the month, the Federal Reserve reported. Revolving credit, such as credit cards, decreased at an annual rate of 4.8 percent, ticking down to $862.3 billion. Non-revolving credit, such as car loans and student loans, increased at an annual rate of 7.1 percent to $1.68 trillion.

Much of the gains in non-revolving debt were due to student loans, according to Dana Saporta, director of U.S. economics research at Credit Suisse.

Unit labor costs in non-farm businesses increased 1.3 percent in the first quarter of 2012, while hourly compensation increased 0.4 percent. Unit labor costs rose 0.9 percent over the last four quarters.

In the week ending June 2, initial claims for jobless benefits dropped to 377,000, a decrease of 12,000 from the previous week’s revised figure of 389,000. The four-week moving average was 377,750, an increase of 1,750 from the previous week’s revised average of 376,000.

The total number of insured unemployed workers during the week ending May 26 hit 3,293,000, an increase of 34,000 from the preceding week’s revised level of 3,259,000. The four-week moving average was 3,279,500, an increase of 11,500 from the preceding week’s revised average of 3,268,000.

The U.S. economy is still growing but slowly, and there appears to be a little more risk than earlier in the spring. Credit is cheap but consumers will remain cautious due to the excessive publicity of the bad economic data and the exclusion of the good. This is also impacting business hiring decisions. Hopefully growth will accelerate to a more respectable rate by the end of the year, maybe by the end of fall. No doubt this will be wholly due to the re-election of President Obama or the election of Presidential Candidate Romney. Well, at least that’s what MSNBC and Fox News will be telling us.

State of The Economy Update ~ National and Arizona

Americans are borrowing more, with consumer credit shooting up in March to an annual rate of 10.2 percent, the Federal Reserve reported last week. Total consumer borrowing amounted to $2.54 trillion for the month, representing a $21.36 billion gain over the previous month.

Revolving debt, such as credit card debt, amounted to $803.6 trillion in comparison to February’s $798.5 trillion, and grew by an annual rate of 7.8 percent. Non-revolving debt, such as student loans and car loans, totaled $1.738 trillion, in comparison to February’s $1.722 trillion, and grew by an annual rate of 11.3 percent for the month.

The question is whether or not the gains represented increased economic activity and confidence.

“The optimistic read is that consumers’ improved outlook on the economy and employment prospects led them to feel comfortable spending on credit, while a more downbeat interpretation is that credit is needed for consumers to keep up,” analysts at Nomura Global Economics remarked in a public statement regarding the Fed’s data.

In employment news, initial jobless claims for the week ending May 5 dipped to 367,000, a decrease of 1,000 from the previous week’s revised figure of 368,000, the Employment and Training Administration reported last week. The four-week moving average was 379,000, a decrease of 5,250 from the previous week’s revised average of 384,250.

The Administration also reported that the total number of unemployed workers covered by insurance during the week ending April 28 dropped to 3,229,000, a decrease of 61,000 from the preceding week’s revised level of 3,290,000. The four-week moving average was 3,290,000, a decrease of 10,500 from the preceding week’s revised average of 3,300,500.

In the Arizona Economy, the outlook is a bit more favorable. Employment gains in Arizona should continue at a pace of around 2.0% for now. Sales tax collections will improve moderately as the year progresses as will other government tax revenues.

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