• Foot traffic and future home sales have a strong correlation.  SentriLock, LLC. provides NAR Research with monthly data on the number of showings.
• Foot traffic in the area covered by the Metropolitan Indianapolis Board of REALTORS® has consistently outperformed levels from a year earlier for 12 consecutive months.
• Growth in foot traffic surged in February when levels were 63% higher than in February of 2011.  The 12-month gap in traffic has come down to 14%, a solid figure.
• Traffic and sales across the Midwest lead the national sales index through the early spring.

*Source: Real Capital Analytics

• Foot traffic can give a strong indication of future home sales.  SentriLock, LLC. provides NAR Research with monthly data on the number of showings.
• Foot traffic in the area covered by the Upstate Alliance of REALTORS® (Indiana) rose 18% in April of this year compared to April of 2011.
• While this figure is strong, it is down from February when foot traffic was 57% stronger than a year earlier.
• Traffic and sales typically rise through the spring and summer, so if traffic remains strong, it will be a robust year for traffic and sales in Northern Indiana.

While the share of short sales fell to 11% in March from 13% a month earlier, according to the  REALTOR® Confidence Index, the share of short sales is following the typical seasonal pattern where non-distressed sales rise through the summer reducing the share of distressed sales.  However, the share of short sales for all of 2012 is expected to remain roughly the same at 12.1%.  The total number of short sales, though, will rise with the national trend, reaching 546,500 in 2012.

Demand for short sales increased over the last year as the timelines for foreclosures in process continued to rise in both judicial and non-judicial states.  Banks accrue additional costs on maintenance and forgone interest or investments as properties sit in foreclosure.  Consequently, it is to their advantage to prevent properties from reaching foreclosure.  While the number of new delinquent loans has fallen in recent months, there remain a large number of underwater borrowers, more than 11 million by some estimates, who are at risk of falling behind on their payments.  As these properties come to market, they will need to be liquidated below their mortgage amount.

The states with the highest number of short sales in 2012 will remain those that experienced the largest price increases during the boom: California, Florida, Arizona, and Nevada.  However, Texas, Illinois, and Georgia will each have large volumes at 22,000, 19,000, and 15,900, respectively.

There is potential for a surprise on the upside to our estimates for 2012.  Both Bank of America and the Federal Housing Finance Agency have announced new programs in the past few weeks that are aimed to streamline the short sale process, reducing the time for buyers to hear back about offers and improving the communications between sellers/buyers and the bank or Fannie Mae/Freddie Mac.  Improvements in the short sale process could have important impacts on the market.  Buyers often wait months to hear back about offers on short sales.  If response times decline or if the uncertainty to the consumer is reduced by having a finite timeline, demand for short sales could rise, reducing their price discount to the market.  Stronger prices would make short sales even more attractive to the banks.  A virtuous cycle like this would help to stem the flow of properties into foreclosure.

Short sales have increased steadily in 2012 and are expected to continue to rise in 2012.  While still distressed sales, a shift toward short sales is a sign of improvement in how the market handles distressed properties and is a trend that is in the best interest of homebuyers, homeowners, and the communities that they live in.

• The number of people filing for unemployment checks declined modestly in the latest week.  The latest figure of 367,000 new first-time filers is close to being normal in a dynamic economic economy like the U.S. where there are lay-offs and firings even during good economic times.  However, the pool of people on the unemployment dole (not the first-timers, but continuing filers) still remains high.
• In separate data news, imports and exports both increased in March.  However, slightly faster growth in purchases of foreign products by U.S. consumers compared to sales growth of U.S. goods to foreigners widened the trade deficit.  Imports shot up 8.4% from one year ago, while exports grew by 7.3%.
• The increase in international trade activity is good news for commercial practitioners, particularly affiliated with SIOR.  Leasing and purchasing demand for industrial and warehouse spaces will be rising.  Rising international trade is also good news for REALTORS® selling homes to foreign nationals.  For example, there are increasingly more German homebuyers in Greenville, South Carolina because of the expanding BMW factory nearby.
• Though the widening trade deficit will hold back current economic growth by a few decimal points, the broad increases in international trade is critical to a long-term rise in standard of living.  Extra international competition always forces companies to shape up and drive towards efficiency while consumers are exposed to better products.
• The falling international trade in 2008 and 2009 were due to the harsh economic recession, when the U.S. economy lost 8 million jobs and the number of people filing for unemployment checks skyrocketed.  The Great Depression of the 1930s was also associated with a major collapse in international trade.  Many European countries after the First World War sunk into terrible economic hardship as many newly created small-sized countries started to impose foreign tariffs (say between Croatia and Austria) which previously had not existed as part of the Austrian-Hungarian Empire.  The disintegration of Soviet Union and its equivalent of the Great Depression in the 1990s was also associated the sudden collapse in border trade, say between Ukraine and Russia.  In a more recent example, North Korea today is one of the poorest countries in the world because it believes principally in domestic production without foreign competition.

Qualifying Income
When a home buyer seeks a mortgage for a home purchase, the lender will review the amount of income the potential buyer earns. Total gross income will be compared to the total housing payment to ensure that the home buyer is not spending more than a prudent percent of their income on housing. This should help ensure that lending is responsible and home ownership is sustainable (1).

What’s prudent? In its guidelines, the Department of Housing and Urban Development (HUD) suggests that total house payment not exceed 31 percent of gross income . HUD’s total house payment includes principle and interest but also includes payments for things such as mortgage insurance and homeowner’s insurance.

Because NAR’s analysis will exclude some factors that HUD includes in the total house payment, we use a more conservative ratio of 25 percent to create the metro area qualifying income. In other words, qualifying income is set to equal four times the calculated annual mortgage principal and interest payments (2).

Other Criteria Needed to Qualify
Having enough income relative to total house payment is just one factor that will be considered in a home buyer’s application for a mortgage. A lender will also consider a borrower’s other debts and the total paid to service those debts relative to income, as well as credit history, demonstrated ability to pay, financial reserves, and other factors.

All of these factors will be considered in the analysis done by a lender before approving a home buyer’s request for a mortgage.

However, the qualifying income analysis provides a rough snapshot of how affordable some markets are. Here are some highlights:

The full list of metro areas and qualifying incomes is available here.

(1) HUD Mortgage Credit Analysis: In its total house payment calculation, HUD includes many payments that are not included by NAR in the analysis such as real estate tax escrow payments, hazard or mortgage insurance, among others. Also HUD allows the payment to income ratio to exceed 31 percent if compensating factors are present. See the document for details, particularly section 4155.1 4.F.2.b Mortgage Payment Expense to Effective Income Ratio.

(2) At this time, prevailing mortgage rates are near and often under 4 percent, thus a 4 percent mortgage interest rate figure was used in calculations as a conservative estimate. Mortgage payments are estimated assuming a fully amortizing 30-year fixed rate mortgage. Down payment assumptions vary and are explicit in the analysis.

Let’s review more in-depth what has happened and what we can expect regarding the economy. Economists define recession as prolonged period of output decline. Two consecutive declines in GDP normally qualifies as a recession. The fact of the matter is that the U.S. GDP has expanded by 11 straight quarters. The latest growth rate of 2.2% in the first quarter is nothing to get excited about since it is below the 3% historical average growth rate, but the economy is nonetheless producing more. As for jobs, the low point was in early 2010 when there were 8 million fewer people working compared to just two years prior. But since the low point, the U.S. economy has added almost 4 million net new jobs. We are still down from the peak, but well off the bottom and continuing to add jobs with each passing month.

As to the forecast, it is very hard to see how the economy could sink back into a recession. Each of the major components suggests further economic expansion. The equation for Gross Domestic Product (all the stuff we produced) is defined by this simple equation:

GDP = Consumer spending + Investment spending by businesses + Government spending + Net international trade.

Consumer spending will be positive for the simple reason that aggregate income has been rising because of job creations and because of wealth gains in the stock market. Housing wealth is still not yet definitively positive, but it will no longer be negative. By year end, home prices will have shown some modest gains, and therefore, a higher housing wealth effect will help consumers to open their wallets. The home price increase projection is based on a diminishing rate of distress property sales as the year progresses and from the declining levels of distressed homes in the pipeline, the so-called shadow inventory. Also home sales have been rising and visible inventory levels have been falling.

Business investment spending will be positive due to the simple reason that corporations have an abundance of cash on their balance sheets. Banks also have plenty of cash reserves. Housing or residential investments, which had been negative for most of the past 5 years, have been growing solidly because of rising home sales. The only holdback is small businesses, who are still struggling to accumulate profit and tap borrowing. But this condition has been persistent so that small business spending cannot possibly turn lower from already low levels. The only direction for small business spending to go is up.

Government spending, meanwhile, has turn negative. State and local governments in particular have been shedding spending for the past 3 years. The federal government has also begun to cut, primarily in defense. In the short-run, declines in government spending mean lower economic activity. Fired government workers and defense contractors cannot spend money as they used to. But the improvements to budget deficit may raise the confidence of bond investors and thereby help assure attractive low interest rates for those private consumers and businesses in need of borrowing.

As to the final component, the international picture has been fairly neutral. Both import and export growth rates have been about the same and this is not expected to change all that much. A slight fall-off in exports to Europe may occur be compensated by rise in exports to Asia.

Of the main components above, the two big players are consumers and businesses. And as said above, it is hard to foresee how consumers and businesses can retrench. Therefore, U.S. GDP will continue to expand, albeit at the somewhat subpar rate of 2% to 2.5%, this year.  Job gains will likely be around 2 million. We are in a recovery phase and clearly out of the recession, but the slow recovery is sure making people believe that the economy is not normal and still lingering in the recession.

The only caveat to the forecast is that a new federal budget needs to be agreed upon by Congress and the White House before the end of the year. If no new budget passes, then there will be sizable automatic government spending cuts to domestic and defense programs. Taxes will go up sharply. The dollar amount taken out of the economy will be equivalent to 3% of GDP. All this happens suddenly on January 1, 2013, if no new budget is passed. A potential 3% GDP subtraction on an economy that is now growing at 2% will then put the economy into a recession.

• Mortgage applications to buy a home rose for the third straight week after accounting for the normal seasonal patterns. However, this data point implies no measurable pick up in home sales over the past 12 months, contrary to actual rising home sales figures from MLSes. The reason is due to the fact that mortgage applications data has no information about  approval rates and it misses out completely on all-cash deals, which have represented about one-third of home sales in the past year.
• Even though the mortgage data should be taken with a grain of salt, the rising weekly trend is encouraging in that owner-occupant buyers (as opposed to all-cash investors) may be steadily returning to the market.
• Refinancing activity held steady over the past week and is comfortably above last year’s figures. However, mortgage bankers may need to mindful of a possible near collapse in the refinancing business by the year-end or early next year when mortgage rates rise. The only source of mortgage business will be from home purchases. Banks, therefore, will need to think of reallocating staff time to focus on home purchase mortgages rather than refinance applications.