MAY HOUSING STARTS UP

The U.S. Census Bureau and the Department of Housing and Urban Development reported late last week that May Privately-owned housing starts rose 0.2 percent above April figures, to a seasonally adjusted rate of 2,009,000.

Single-family housing starts for May rose a healthy 4.7 percent, to a seasonally adjusted rate of 1,704,000.

Building permits for May, however dipped 4.6 percent to a seasonally adjusted annual rate of 2,050,000. Permits for single family structures also pulled back declining 1.3 percent to 1,619,000.

Housing completions in May hit a seasonlally adjusted rate of 2,071,000, 6.9 percent above April figures.

Existing Home Sales 2nd Highest in History

Sales of existing homes slowed slightly in May but still came in at the second-highest level on record, with home prices hitting an all-time high.

Sales of previously owned homes and condominiums edged down 0.7 percent last month, the National Association of Realtors reported Thursday. The small decline left sales at a seasonally adjusted annual rate of 7.13 million units, down only slightly from the 7.18 million sales pace in April, which had been an all-time high.

Even with the small drop in sales, home prices moved higher, to an all-time record of $207,000 for the median price, the point where half the homes sold for more and half for less.

The new report was likely to do little to lessen concerns that the housing market in some parts of the country is caught in the grip of a speculative fever similar to the stock market bubble of the late 1990s before prices came crashing back to earth.

Federal Reserve Chairman Alan Greenspan, while discounting the possibility of a national housing bubble, has talked of "froth" in local markets that have seen sizable run-ups in prices over the past year. He has also expressed concerns that home buyers are using types of mortgages that let them purchase more expensive homes with less of a downpayment, leaving them vulnerable if prices do fall sharply.

David Lereah, chief economist of the Realtors group, said he too was concerned about the reliance on interest-only mortgages and other types of mortgages offered with low down payments.

"I worry about a high level of questionable loans in those bubble areas. That could make those markets more fragile," Lereah said.

The good news on home sales and jobless claims was ignored on Wall Street, where investors focused instead on a poor earnings report from FedEx Corp. and on surging oil prices, which briefly moved past the psychologically important $60 per barrel mark for the first time.

Housing market to slow this year

The red-hot housing market will slow later this year, hurting U.S. economic growth, but not pushing the nation into recession, at least in the near term, economists at the UCLA Anderson Forecast said Tuesday.

In their quarterly forecast, UCLA economists predict slower economic growth through 2006, though saying there is virtually zero chance of a recession before April 2006, the end of their forecast window. But they add that a drop in spending on homes has been a major part of nine out of 10 downturns since World War II.

"It thus seems highly unlikely that the U.S. will be able to avoid an 11th recession in which housing plays a major role. We just don't know when," Forecast Director Edward Leamer said in the report.

Leamer added that "later is not necessarily better" for a correction in the housing market, as each month of higher prices increases the size of the adjustment ahead.

The UCLA analysis predicts housing starts, now running about 2 million units annually, are outpacing demand and will start to decline late this year, slowing to a 1.6 million rate by the middle of 2006. U.S. economic growth, 3.5% on an annual basis in the first quarter of 2005, is expected to fall to about the 1.5% range by mid-2006.

If interest rates were to spike or home prices plunge, the slowdown could be greater, the report said.

The record housing market has helped propel the economy since the 2001 recession, as consumers have bought houses in record number or borrowed against the increased value of their homes. But the UCLA economists don't see home equity or income gains strong enough to provide a big boost to spending ahead. Higher business spending or stronger exports aren't expected to take up the slack.

The UCLA economists are among a growing chorus warning that the housing market is due for a slowdown or correction. Prices have soared in cities on the East and West coasts, rising 100% in California in the past five years and 80% in Florida and Hawaii. To keep up with higher prices, consumers have been using non-traditional financing such as 100% loans or interest-only mortgages, on which they pay no principal for a set period of time.

In Washington on Tuesday, Federal Reserve Governor Mark Olson said the central bank is concerned.

"Clearly, there are some markets where the increase in valuation is unsustainable," Olson said after a Senate hearing, Reuters reported.

Existing home sales figures for May, to be released Thursday, are expected to show large gains.

Steven Wood of financial services firm Insight Economics said the overvalued housing market is affecting about 60% of the USA. In a report this week, he said prices don't have to fall to significantly affect the economy. In 2004, homeowners extracted $750 billion of home equity, helping spending. That will slow if prices stop rising.

US household debt service ratio at record high-Fed

The U.S. household debt service ratio climbed to a record high in the first quarter of 2005, the Federal Reserve said in a study, but a broader measure of debt was below recent peaks.

The report showed that even though homeowners' mortgage obligations have risen as a share of their financial obligations, homeowners have kept consumer debt in check. The sporadically released survey was posted to the Fed's website late on Wednesday.

Fed officials including Chairman Alan Greenspan have amplified warnings recently that persistently low mortgage interest rates have led to house price gains that are unsustainable in some areas and are spurring risky mortgage lending and speculative buying.

The household debt service ratio -- an estimate of the ratio of debt payments to disposable personal income -- rose to 13.40 percent in the first three months of 2005, eclipsing the previous high of 13.36 percent in the fourth quarter of 2002.

However, the broader financial obligations ratio, which adds auto lease, rental, homeowners insurance and property tax payments to the debt service ratio, edged up to 18.45 percent but was short of the record high of 18.84 percent notched in the last quarter of 2002.

In a reflection of the four-year-old U.S. housing boom, the mortgage component of the financial obligations ratio for homeowners rose to 10.35 percent, the highest since the third quarter of 1991. Homeowners' overall financial obligations ratio edged up to 16.16 percent, the highest since the fourth quarter of 2002.

Regarding consumer debt, even though its share of homeowners' financial obligations edged up to 5.82 percent, it was the first time that ratio was below 6 percent for four consecutive quarters since the last quarter of 1996.

Fannie Mae economist boosts 2005 home sales target

Fannie Mae's chief economist on Thursday said U.S. home sales could strike a fifth consecutive record in 2005 due to low mortgage rates, a growing economy and an increasing number of investors driving demand.

"It's certainly possible that in 2005 we will see a fifth consecutive record year for housing," said David Berson, chief economist at the mortgage finance company. "We're within just a whisper of what a record number would be."

Berson, in his mid-year outlook, boosted his target for sales of existing homes in 2005 to 6.746 million from an earlier estimate of 6.150 million. Sales of new homes should hit 1.199 million, up from Berson's earlier forecast of 1.099 million. The new targets would be just shy of record existing and new home sales last year.

In 2004, existing home sales totaled 6.784 million while new home sales hit 1.200 million.

"At the beginning of the year we did not project home sales to be as strong as they've been," Berson said. "I don't know anybody who predicted home sales would be as strong as they have been. They are running at a record pace."

He also said data due next week should show record levels of existing and new home sales for May.

Stubbornly low long-term mortgage rates and an increasing number of investors putting money into the market have kept the housing sector hot this year, defying economists' predictions six months ago that sales, construction and price appreciation would slow.

So far, that has not happened.

Even though the Federal Reserve has raised its target for short-term interest rates in eight quarter-point steps to 3.0 percent, long-term interest rates have not responded. In fact, average 30-year fixed-rate mortgages remain lower than a year ago, according to finance company Freddie Mac .

In addition to low borrowing costs, demographics are supporting demand as the huge post World War 2 generation begins looking at second homes and retirement property while their children shop for their first houses, economists say.

Investors putting money into housing for financial returns, rather than personal use, are an additional source of demand, and the one posing the greatest risk to a housing market that has begun to make some economists and policymakers concerned.

"Investor demand is more volatile than other demand in the sense that investors can choose to put their money into any investment worldwide," Berson said.

"If they decide that investments in China, or investments in gold or investments in the U.S. stock market are better, that you get a better return, they can redirect funds out of the housing market," he said.

Berson said he had expected investor activity to slow in 2005, but like other housing indicators, it has increased instead. In fact, it has doubled, Berson said.

Some investors are less likely to abandon the housing market, such as people near retirement looking for second homes, Berson said.

Still, there are more investors looking for financial returns than a second property to occupy, according to data from analytics provider LoanPerformance and cited by Fannie Mae.

If investors begin to withdraw from the market, housing activity will slow, Berson said.

He estimated, for example, that a reduction in investor activity could help bring home price appreciation in 2006 down to a range of 3 percent to 3.5 percent from the double-digit rates posted in 2004 and the 7 percent Berson expects this year.

"All you need is some reductions in the growth rate of investor activity to give you fewer home sales next year and lower price gains," he said. "The more investors pull out of the market, the greater the slowdown in home price gains will be."

$360 Billion of Mortgage Debt at Risk of Foreclosure

With mortgage interest rates poised to rise, the U.S. economy teetering between expansion and uncertainty, and American consumer debt still raging, many U.S. homeowners risk foreclosure on their home – but they don’t have to lose their slice of the American dream, says Andrew Housser, co-CEO of Freedom Financial Network.

According to the Mortgage Bankers Association of America, 4 percent of mortgages are in delinquency in early 2005. With $9 trillion in outstanding U.S. mortgage debt, that places $360 billion at risk of foreclosure.

“Homeowners can make choices – ideally, before they purchase a home, but even after problems arise – that will allow them to keep a home or at least minimize the damage a foreclosure could have on their futures,” said Housser, whose company provides debt resolution services for people in serious debt hardship, particularly those who incurred debt because of divorce, job loss, medical problems or other traumatic events.

In many states, foreclosure rates have increased recently. Housser believes the increase stems from consumers incurring too much debt – a national total of $2.1 trillion in revolving debt, plus more than $9 trillion in mortgage debt, according to the Federal Reserve. Here, Housser provides tips for preventing and avoiding foreclosure.

1. Create a budget and don’t stretch yourself too far. The unexpected can and does happen to millions of Americans each year. “For people who live at the far edge of their means, one life event can hijack their lives and lead to defaults on bills and/or mortgage payments,” Housser says. The key is to build a detailed budget of income and expenses, making sure to have some breathing room to weather an unexpected downturn.

2. Be careful with adjustable rate mortgages (ARMs) or interest-only loans. These types of loans let borrowers qualify for more expensive homes – but beware as rates (and payments) climb. “If you can barely afford the payment on your ARM or the interest-only mortgage, you are asking for trouble in a few years,” Housser says. “Give yourself even more budget space with these loans.”

3. Don’t jump to refinance your home to pay off credit card debt. Many people faced with large unsecured debts that they are unable to pay consider refinancing their home to pay down their credit cards. The problem is that this strategy only moves the debt – and puts your home at risk of foreclosure if you are unable to pay. If you are not confident that you can keep up with the higher payments on your home loan going forward, consider debt resolution or another debt relief option.

If foreclosure is already on its way, homeowners still have several options, Housser says:

1. Enter into a forbearance agreement. For a temporary hardship, lenders might grant a forbearance agreement to lower – or eliminate – payments for a limited time.

2. Consider loan modification. A loan modification seeks a permanent change to the loan, such as lowering the payment and extending the loan’s term, or incorporating delinquent back payments (if any) into future payments.

3. Obtain a “deed in lieu” of foreclosure. A “deed in lieu” essentially allows the borrower to return the title or deed of the property – giving the home back – to the mortgage holder to avoid foreclosure.

4. Sell the home. Selling your home may not be ideal, but it is a way to avoid foreclosure proceedings on your house and pay back your lender.

5. Refinance the loan. It may be possible to refinance your mortgage for a lower interest rate and/or lower monthly payment (this is much different than refinancing to take cash out to pay off credit cards). However, if you already have had late payments on your mortgage, the interest rate offered to you may be too high to lower your monthly payment.

“A reputable foreclosure assistance organization, such as a debt resolution firm, can help with these options,” Housser advises. “Check with the Better Business Bureau to make sure your chosen company is on the up-and-up.”

Housser suggests that people facing foreclosure be wary of so-called equity skimmers. “If your house is facing foreclosure, you will probably receive solicitations from several people who are looking to ‘help’ you prevent foreclosure by offering to sell your home for you or by taking ownership of your home,” Housser cautions. “In most cases, these solicitations are scams trying to take advantage of people in difficult situations. The perpetrators are trying to take the equity you have built up in your home right out from under you.”

U.S. Housing Starts Rise in April

U.S. housing starts rebounded more than expected in April as mortgage rates near historic lows and rising job growth spurred home sales.

The 11 percent increase brought the annual pace of new construction to 2.038 million, the Commerce Department said today in Washington. Starts fell almost 18 percent to 1.836 million in March, the biggest drop in 14 years, after wet weather and the Easter holiday curbed building. The median forecast called for 2 million starts in April.

Last month's figures are consistent with forecasts that this year may be the best for new-home construction since 1978. The bounceback also reinforces data on jobs and retail sales that the economy was off to a strong start in the second quarter.

``We expect early 2005 to mark the peak in the housing sector, as the mix of underlying fundamentals remain supportive,'' said Mike Englund, chief U.S. economist at Action Economics LLC in Boulder, Colorado, ahead of the report.

The forecast of 2 million was the median from 63 economists surveyed by Bloomberg News. Starts in March were previously reported at 1.837 million.

Building permits, an indicator of future construction, rose 5.3 percent to 2.129 million at an annual rate from 2.021 million.

Housing starts this year may rise to 1.969 million from last year's 1.956 million, the National Association of Realtors said in a May survey. Combined sales of new and existing homes are expected to be 7.874 million after last year's 7.99 million record.

Starts of single-family and multi-family dwellings rose. Starts of single-family homes increased 6.3 percent to 1.635 million units at an annual rate from a four-month low of 1.538 million. Starts of multi-family housing rose 35 percent to an annual rate of 403,000, the highest in two months.

Rising Demand

Starts for all types of housing rose in three of four regions. They increased 25 percent in the South to 1.045 million, the biggest percentage increase since July 1995. Starts rose 6.2 percent in the Midwest to 326,000 and 2.5 percent in the West to 492,000. Starts fell 18 percent in the Northeast to 175,000.

Homebuilders became more optimistic in May, with the National Association of Home Builders/Wells Fargo index rising to 70 from a seven-month low of 67 in April.

The pace of construction and sales isn't keeping up with demand, at least in the South and West where Meritage Homes Corp. operates, John R. Landon, co-chief executive of the Scottsdale, Arizona, homebuilder, said May 10.

``Demand for housing in those markets is extremely strong,'' he said. ``We expect the market to stay very strong.''

Completions

Builders may be having to work off backlogs. Housing units authorized but not started rose to a 19-year high of 224,100 in April, up 22 percent from a year earlier, today's report showed. The figures aren't seasonally adjusted, meaning the most reliable comparisons are with a year earlier.

Housing completions, with are seasonally adjusted, rose 7 percent in April to 1.89 million. Compared with a year earlier, completions were down 3.4 percent.

Homebuilding is helping drive the economy. Construction accounted for 47,000 of the 274,000 jobs that were added in the U.S. last month and 29,000 of the 146,000 jobs added in March.

The April increase in payrolls was higher than expected, and retail sales rose last month by the most in seven months.

The construction industry is also boosting sales at homebuilders and related industries. The Standard & Poor's 500 Homebuilding Index is up 50 percent from a year ago.

Falling Rates

Rinker Group Ltd., an Australian company that is the world's fifth-largest cement maker, said U.S. earnings may surge as much as 25 percent this year as the company raises prices and benefits from building in Florida and Arizona.

``We expect for the next year or two fairly buoyant conditions to continue'' in the U.S. construction market, David Clarke, chief executive of Sydney-based Rinker, which makes 80 percent of its profit in the U.S., said in an interview on May 12.

Mortgage rates are also favoring the industry. The average rate on a 30-year mortgage fell to 5.75 percent in the first week of May from 6.04 percent a month earlier, according to U.S. mortgage purchaser Freddie Mac. The rate, which reached a four- decade low of 5.2 percent in June 2003, rose to 5.77 percent last week.

The median price of previously owned homes in metropolitan areas rose 9.7 percent in the first quarter from a year ago, the Realtors' group said May 12. Gains were greatest in the West, at 16.9 percent, and the Northeast, at 14 percent. Growth was slowest in the South, at 6.6 percent. The median home price rose to $188,800 from $172,100 a year ago.