10-15 Associates

A Piece of the Pie – April 2015 Monthly Market Commentary

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By Deborah DeMatteo
Managing Director & Chief Investment Officer

The month of March continued with the volatility that has been so characteristic of 2015. We closed the first quarter with markets relatively flat for the year, but traveling a lot if distance in between. The global, as well as domestic, economic and geopolitical news has driven investors in either direction on any given day. Oil continues to dominate the headlines, as we try to determine if the negative impact from job losses in the oil industry and the oil producing states will outweigh the benefit to consumers as a whole. We heard from the Fed again this month and tried to connect the dots of a Fed still in emergency mode with the economy continuing to show signs of recovery. We now wait for the beginning of 1st Quarter earnings season to evaluate the impact of the extreme weather, lower oil prices, sub 6 percent unemployment, and continued low interest rates.

March also marks the beginning of the spring selling season for the housing market; making it is a great time to look at some of the statistics and trends that will impact the real estate market. Housing is a significant piece of the economy and its health or weakness will have a direct impact on growth and production for the year. With interest rates remaining well below normal and long term rates declining over the last year, it could provide a stimulus to the housing market. During the month of March, the 15-year average mortgage rate was just 2.82 percent more than 11 percent below the average rate one year ago of 3.19 percent. The decline in the 30-year mortgage has been even more dramatic. Homebuyers could have locked in a 30-year mortgage during the month of March of just 3.55 percent, 16 percent below the rates just a year ago of 4.24 percent.

Lower rates may have something to do with the surge in mortgage applications. In the most recent numbers report, weekly mortgage applications were up 4.6 percent. This was represented by a 6 percent increase in purchase applications and a 4 percent rise in refinance applications. New home purchases are significant to the housing recovery, and refinances can lead to an uptick in spending both housing and non-housing related. Consumers are also learning ways to get around the extremely tight lending standards that still exist in the traditional banking market, leading to non-bank lenders more than doubling their market share. Places like Quicken, Loan Depot, and Penny Mac are cutting into the market share of their big bank competitors such as Wells Fargo and JP Morgan. The availability of credit has curtailed the recovery for a large part of the prospective home buyers over the last 5 years but the availability of nontraditional lending facilities may help to aid the recovery.

The lack of accessibility of affordable rental properties may be helping to push the younger generation to own a home. According to Bill Smead, CEO of Capital Management, homebuyers currently pay 15 percent of their gross income toward housing, while renters pay 30 percent of gross income on rent. With approximately 86 million millennials, representing a large population of future households, and renters that could become homebuyers, the recovery could have a long way to go. The combination of pent up demand with lack of supply is helping to push prices higher. Although existing home sales increased by only 1.2 percent in the most recent report, during the same period the average selling price increased 3.7 percent from a year ago to $245,900.

According to the 2015 National Association of Realtors Home Buyer and Seller Generational Trends study, despite the economic and financial challenges young adults have experienced since the recession, the millennial generation represented the largest share of recent buyers. This market is represented by buyers who are 34 and younger, and for the second consecutive year were the largest percentage of the buyers at 32 percent. Generation X, ages 35-49, were closely behind at 27 percent. With millennials now entering the peak buying period and expected to soon surpass the boomers in total population, demand for housing could be in the early stages of a long rebound.

As we enter earnings season at the end of the week, close attention will be paid to the sectors that are showing strength. The extreme weather of the first quarter will distort many sectors and very predominately anything housing related. We will be looking to the CEO’s for guidance on the second quarter and what businesses looked like late in the first quarter. Names like Masco and Weyerhaeuser will give some insight into the housing market. It will also be important to get the perspective from companies like Key Corp and PNC Financial that are at the front line every day with consumer loan demand. The oil markets will also feed into both GDP and housing if the consumer gains some confidence that they have more discretionary income that will last for a considerable period of time.

With the economic data still mixed, the Fed ready to move on rates, and unrest around the world we remain positioned a little cautiously. Earnings and some hope for stability in the energy markets will give us more visibility on how we want to reposition in the coming weeks. The second quarter is likely to bring more volatility as all eyes focus on the Fed and the timing for raising rates. More importantly, will the fundamentals of the economy continue to improve, or are the signs of improvement only temporary? We will be looking for what opportunities emerge as the market digests the news every day.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from 10-15 Associates. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.
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