Wednesday, July 29, 2015

Case-Shiller Home Prices Up, Ownership Rate Lower

The Mortgage Corner

Home prices have stabilized for a while, after the 2013 double-digit price surge brought on by the Fed’s various QE bond purchases and ultra-low interest rates. And homeownership rates are still dropping due mainly to affordability and lack of supply, but homeownership might improve as more new homes are being built and inventories increasing after several years of skimpy supplies.

The S&P/Case-Shiller U.S. National Home Price Index, covering all nine U.S. census divisions, recorded a 4.4 percent annual increase in May 2015 versus a 4.3 percent increase in April 2015.The 10-City Composite and National indices showed slightly higher year-over-year gains while the 20-City Composite had marginally lower year-over-year gains when compared to last month. The 10-City Composite gained 4.7 percent year-over-year, while the 20-City Composite gained 4.9 percent year-over-year.

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Graph: Calculated Risk

And home ownership rates continue to decline, perhaps because the newer generation of entry-level householders either prefer to rent or cannot yet afford to buy a home. The US Census Bureau reported the second quarter 2015 homeownership rate dropped to 63.4 percent from 64.7 percent in Q2 2014.

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Graph: Census Bureau

We know more people are renting because housing vacancy rates are falling for both rental and homeowner housing; down 0.7 percent to 6.8 percent nationally for rentals, and to 1.8 percent for owned housing. Homeownership rates were highest in the Midwest (68.4 percent) and lowest in the West (58.5 percent). The homeownership rates in the Northeast, Midwest, South and West were lower than the rates in the second quarter 2014.

There is some optimism that homeownership rates will rise, though, as household formation returns to its historical 1 million plus per year rate. The Harvard Joint Center for Housing Studies predicts some 1.2 million households per year will be formed over the next ten years, up from the current low levels spawned mostly by the Great Recession.

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Graph: Calculated Risk

One obstacle to greater homeownership will be affordability, however, until inventories are replenished. This Calculated Risk Price-to-Rent ratio graph shows how prices are rising again in relation to rents. And when price rises outdistance rent increases over an extended period, a housing bubble ensues, as can be seen from the peak formed just before the Great Recession (large gray bar on graph).

But the Price-to-Rent ration seems to be leveling off, in part because rents are rising as well. And as rents continue to rise, it will motivate more renters to buy. And the recent increase in building permits and housing construction should help keep more homes affordable for those first-time homebuyers that want to buy.

Harlan Green © 2015

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Thursday, July 23, 2015

Will Fannie and Freddie’s Investors Finally Succeed?

Financial FAQs

It is welcome news for Fannie Mae and Freddie Mac investors that Judge Margaret Sweeney in the Federal Claims Court in Washington Tuesday granted a motion that will force the U.S. Treasury to release all discovery document materials in its possession that pertain to the decision to take Fannie Mae and Freddie Mac into conservatorship.

Why? Because the White House, US Treasury, and Federal Housing Finance Authority have been stonewalling discovery requests by investors who want to know exactly why the GSEs were put into conservatorship in the first place.

This is important for several reasons—not least is the reputed $36 billion in preferred Fannie stock alone that was ‘taken’ by the government when it claimed Fannie and Freddie were in danger of collapse, and so had to be recapitalized with government support to the tune of $186 billion.

But that has been paid back in spades, and the GSEs are not being allowed to recapitalize. This is when commercial banks that were granted some $350 billion in TARP funds by the same Republican Treasury Secretary under GW Bush (Henry Paulson, former Chairman of Goldman Sachs) were allowed to be recapitalized. So Wall Street benefited, but not Main Street homeowners that for the most part still depend on Fannie and Freddie to guarantee most home loans.

Instead, due to a last minute (2012) ‘tweak’ to the original conservatorship order, all profits go into the Treasury’s General Fund, which has raised suspicions that Treasury is behind the move to capture all profits for its own uses, rather than returning value to preferred stockholders, at least. How is that fair when the GSEs weren’t responsible for the bubble, or subprime loans, or the Great Recession, at all?

We know this because some $14 billion in settlements have already been recovered from those commercial banks and Wall Street entities that submitted fraudulently underwritten mortgages misrepresenting their loan quality to Fannie and Freddie.

The request, made by Fairholme Funds, is a big win for them in the battle to review federally sealed documents in its case against the United States government. Fairholme is one of several former investors in the government-sponsored enterprises who say their ownership stake was illegally taken from them by the federal government during conservatorship. They are fighting in court to get that stake returned.

The more than ten thousand discovery documents will be available to the United States District Court of Appeals in Washington D.C. and the United States District Court.

There is plenty of evidence that Fannie and Freddie were still solvent at the time. Even Treasury Secretary Henry Paulson reassured Congress of their solvency, while Bear Stearns was going under in 2007.

"Fannie Mae and Freddie Mac play an important role in our housing markets today and need to continue to play an important role in the future," Secretary Treasury Henry Paulson told the House Financial Services Committee at a hearing on financial regulation. "Their regulator has made clear that they are adequately capitalized."

And mortgage delinquency rates are almost back to historical levels. For instance, June’s existing-home sales report showed just 8 percent of sales were comprised of forecloses homes, lowest since 2007 and the housing bust.

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Graph: Seeking Alpha

The profits have been enormous for US Treasury. “Taxpayers have been paid back and the companies are now left with little capital due to the net worth sweep,” says Seeking Alpha in its latest article on the issue. “Based on Judge Lamberth's ruling (of last year dismissing Fairholmes suit), the government could be sued for a taking if the companies are liquidated. Reform must include adequate compensation to shareholders, as well as a method to bring capital back onto the balance sheet. After 2010, solvency was never a problem.”

And now we have Judge Sweeney ruling in favor of discovery that will enable investors to untangle the ‘rest of the story’.

Harlan Green © 2015

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Wednesday, July 22, 2015

Existing-Home Sales at 8-Year High

The Mortgage Corner

It had to happen.  Why did June existing-home sales jump to an 8-year high? Fewer foreclosures is the short answer, hence more available for sale at market prices. But soaring consumer optimism due to an even better jobs market has to be the driving force causing families to build their nests.

Also, prices are rising to multi-year highs due to supply scarcities. And then there are the demographics, as the new generation is pushing older generations to move up or down, with even baby boomers wanting more retirement living.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 3.2 percent to a seasonally adjusted annual rate of 5.49 million in June from a downwardly revised 5.32 million in May. Sales are now at their highest pace since February 2007 (5.79 million), have increased year-over-year for nine consecutive months and are 9.6 percent above a year ago (5.01 million).

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Graph: Calculated Risk

Lawrence Yun, NAR chief economist, says backed by June's solid gain in closings, this year's spring buying season has been the strongest since the downturn. "Buyers have come back in force, leading to the strongest past two months in sales since early 2007," he said. "This wave of demand is being fueled by a year-plus of steady job growth and an improving economy that's giving more households the financial wherewithal and incentive to buy."

Inventories have dropped to 5 months, which is driving up prices. The median price, up 3.3 percent in the month to $236,400, is already a record. Part of the rise in prices is tied to a lack of distressed sales, at only 8 percent of June's total which is a record low, according to Econoday.

Adds Yun, "June sales were also likely propelled by the spring's initial phase of rising mortgage rates, which usually prods some prospective buyers to buy now rather than wait until later when borrowing costs could be higher."

And that may be an additional factor. Interest rates, though still low, have risen approximately ¼ percent since their most recent lows, with 30-year fixed conforming rates now 3.75 percent for a 1 point origination fee in California.

Total housing inventory3 at the end of June inched 0.9 percent to 2.30 million existing homes available for sale, and is 0.4 percent higher than a year ago (2.29 million). Unsold inventory is at a 5.0-month supply at the current sales pace, down from 5.1 months in May.

"Limited inventory amidst strong demand continues to push home prices higher, leading to declining affordability for prospective buyers," said Yun. "Local officials in recent years have rightly authorized permits for new apartment construction, but more needs to be done for condominiums and single-family homes."

The percent share of first-time buyers fell to 30 percent in June from 32 percent in May, but remained at or above 30 percent for the fourth consecutive month. A year ago, first-time buyers represented 28 percent of all buyers.

This is why housing starts surged nearly 10 percent last month to an annual rate of 1.17 million, just a touch below a post- recession high. Builders were especially active in the Northeast and South that suffered so much from last winter. We need more housing, in other words, as jobs and families continue to grow.

Harlan Green © 2015

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Saturday, July 18, 2015

Housing Starts, Builder Optimism at Recovery Highs

The Mortgage Corner

Privately-owned housing starts in June were at a seasonally adjusted annual rate of 1,174,000. This is 9.8 percent above the revised May estimate of 1,069,000 and is 26.6 percent above the June 2014 rate of 927,000. This tells us the real estate recovery is beginning to contribute to economic growth as it has in past recoveries.

So-called housing starts surged nearly 10 percent last month to an annual rate of 1.17 million, just a touch below a post- recession high. Builders were especially active in the Northeast and South that suffered so much from last winter.

And single-family housing starts in June were at a rate of 685,000; this is 0.9 percent below the revised May figure of 691,000. The June rate for units in buildings with five units or more was 476,000.

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Graph: Calculated Risk

“While builders are reporting overall confidence in the housing market, they continue to note difficulties accessing land and labor,” said NAHB Chief Economist David Crowe. “These headwinds appear to be affecting production gains in the single-family sector.”

Builder confidence was also the highest since 2005, according to the National Association of Home Builders. Builder confidence in the market for newly built, single-family homes in July hit a level of 60 on the just released National Association of Home Builders/Wells Fargo Housing Market Index (HMI) while the June reading was revised upward one point to 60 as well. The last time the HMI reached this level was in November 2005.

“This month’s reading is in line with recent data showing stronger sales in both the new and existing home markets as well as continued job growth,” said NAHB Chief Economist David Crowe. “However, builders still face a number of challenges, including shortages of lots and labor.”

Construction on multi-dwelling projects with five units or more soared to the highest level since 1987. Builders have devoted more effort to these kinds of projects instead of their traditional focus on single-family homes because of a growing trend toward renting, especially among younger millennials, children of the baby boomers. Greater difficulty in obtaining mortgages has also compelled some people to rent.

Yet rising demand for rental units has also forced up the cost of housing, especially amid a shortage of new units available. A separate government report on Friday showed another sizable increase in the cost of shelter in June, with housing expenses up 3 percent in the past year.

It all points to rising demand for shelter for the millennial generation that is seeing better jobs and has to begin to pay off their huge educational loans. It’s a negative sum game for both student-borrowers and the economy. According to the Consumer Financial Protection Bureau, student loan debt has reached a new milestone, crossing the $1.2 trillion mark — $1 trillion of that in federal student loan debt, says Forbes Magazine.

According to The Institute for College Access and Success (TICAS) Project on Student Debt, the average borrower will graduate $26,600 in the red.  While there are lots of stories of graduates with crippling debt of $100,000 or more, this is the case for only about 1 percent of graduates.  Yet 10 percent of college graduates accumulate more than $40,000.

That is the reason so many millennials can only afford to rent at the moment, and why rental housing construction will be the priority for builders, at least until 2020 when most of the so-called echo boomers (now aged 16 to 35) have matured into adults and begin to form their own families.

Harlan Green © 2015

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Thursday, July 16, 2015

Iran Agreement Means Low Inflation, Higher Growth

Financial FAQs

Although economists haven’t yet begun to crunch the numbers, Iran’s agreement not to produce atomic weapons or weapon-grade plutonium for at least 10 years will result in much lower oil prices, thus keeping inflation in check and interest rates at their current lows for some time to come, if not years.

This is if Congress approves the deal, of course. But lifting the economic sanctions will enable Iran to begin to sell its oil internationally sometime next year, into a world already flooded with oil products, though there is some uncertainty when this will happen.

Barron's, for instance, believes it will happen slowly, which might not affect oil prices in the short term, at least. When and if sanctions are lifted, Iran's oil production has to be ramped up, facilities upgraded, so that its products will only gradually reach international markets.

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Graph: TradingEconomics

This is when retail inflation via the Consumer Price Index is already zero—i.e., retail prices aren’t rising at all. So it will give Janet Yellen’s Federal Reserve room to keep interest rates lower longer, thus boosting consumer spending and housing, which is beginning to show more robust growth with builder confidence at its highest level since 2005.

It will also boost consumer incomes, which are already profiting from the low interest rate environment that has reduced borrowing costs for consumers. Real (after inflation) consumer incomes are now rising at 4 percent.

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Graph: Econoday

Wages & salaries rose 0.5 percent in the month. Both proprietors' income and rental income show especially strong gains. Spending was higher for durables, especially to autos, and also strong gains for non-durables, partly because of higher gas prices.

This in turn is boosting consumer spirits, with both the Conference Board and U. of Michigan surveys now at pre-recession levels.

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Graph: Econoday

Optimism in the closely watched consumer sentiment report from the University of Michigan is as strong as it can get, according to Econoday. The overall index is up sharply this month and well beyond Econoday's high-end forecast. The report's expectations component, reflecting strong optimism for the jobs market, is an absolute standout at 97.8 for a 12-year high and a 13.6 point surge from May. The 13.6 point spread is the largest monthly gain since March 1991 (that's right, 1991).

There is a downside to the agreement, of course. Russia and China will benefit from doing more business with Iran, and Iran could backslide on the agreement. But there is general agreement that Iran's nuclear weapons ban will boost growth throughout developed countries with consumer-driven economies that require low inflation and cheap energy to maintain sustainable economic growth.

Harlan Green © 2015

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Wednesday, July 15, 2015

Three % Plus YoY Economic Growth Is Here

Popular Economics Weekly

We are finally back to 3 percent plus GDP growth on an annual basis. And it is largely fueled by consumer spending that has been increasing as more jobs are created.

Retail and Food service sales ex-gasoline increased by 3.5 percent on a YoY basis—though overall retail sales were up just 1.4 percent. This wasn’t a particularly strong report, but it will improve over time with increased consumer confidence and continued employment growth.

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Graph: Calculated Risk

Personal Consumption Expenditures are the better measure of growth, and they are increasing at more than 3 percent annually. The consumer came to life in May, boosted by a 0.5 percent rise in personal income, helping to support a 0.9 percent surge in personal outlays that reflects heavy spending on autos and retail goods. And gains are not inflationary, at least yet, based on the very closely watched core PCE price index which edged only 0.1 tenth higher in May and is at a very low 1.2 percent year-on-year rate which is actually down a tenth from an upward revised April.

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Graph: Econoday

The reason for my optimism is that incomes are finally increasing faster than inflation. Both proprietors' income and rental income show especially strong gains, said Econoday. Spending components show special strength for durables, again tied especially to autos, and also strong gains for non-durables, here tied to higher pump prices. Spending on services once again shows an incremental gain.

However the PCE Index was for May, and with weaker June retail sales, PC Expenditures could drop in the June report. But not consumer incomes, which is the main reason for the high readings in consumer confidence.

Even Fed Chair Janet Yellen is upbeat in her latest congressional testimony, and says the Fed on track to raise interest rates sometime this year. When? I believe it will be a single token raise to show the Fed means business though both wholesale and retail inflation are still too low, and the job market is still “slack”, so let’s get it over with in September.

“Other measures of job market health are also trending in the right direction, with noticeable declines over the past year in the number of people suffering long-term unemployment and in the numbers working part time who would prefer full-time employment. However, these measures--as well as the unemployment rate--continue to indicate that there is still some slack in labor markets.”

And that slack with continued low inflation should keep interest rates low as well through next year, which is in keeping with the Fed’s mandate of “maximum employment with 2 percent inflation.”

Harlan Green © 2015

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Monday, July 13, 2015

Home Prices Increase With Jobs

The Mortgage Corner

The S&P Case-Shiller Home Price Index is the bell weather for real estate and home prices these days. It not only reports housing prices, but what affects those prices, and jobs have to be the most important indicator of housing health. So it’s probably not surprising that cities in the Case-Shiller 20-city index that have the fastest job growth also have the highest price growth.

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Graph: S&P

For instance, Dallas, San Francisco, Tampa and Denver all had approximately 9-10 percent annual price increases and 3 percent plus annual job growth. Before seasonal adjustment, the 10-City and 20-City Composites posted gains of 1.0 percent and 1.1 percent month-over-month, respectively.

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Graph: Calculated Risk

But after seasonal adjustment, the 10- and 20-city composites were up just 0.3 percent and 0.4 percent. This is a far less meaningful statistic, as the ‘seasonal adjustment’ means above what is normal for that time of year. So prices actually rose 1 to 1.1 percent on average, a huge increase and why housing in cities such as San Francisco is becoming so expensive. That’s why all 20 cities reported increases in April before seasonal adjustment; but after seasonal adjustment, 12 were up and eight were down, said Calculated Risk.

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Graph: Econoday

Bottom line is that all depends on the job market, which is still growing robustly. The Labor Department’s JOLTS report said job openings are up and employers are holding onto the employees that they have. Job openings rose 0.5 percent in May to a record 5.363 million vs 5.334 million in April. The separations rate dipped 2 tenths to 3.3 percent with the quits rate unchanged at 1.9 percent but with the layoff rate down slightly.

The hiring rate also dipped 1 tenth to 3.5 percent perhaps reflecting the increasing difficulty of finding qualified employees. The unemployment rate is down to 5.3 percent, but that’s because more workers stopped looking for work than were added to payrolls.

So where is the housing market this selling season? Pending-home sales are booming at the highest rate in 9 years, which means good sales for the rest of 2015, since we believe interest rates can’t climb much more this year. Why? The Fed’s Janet Yellen said so in her most recent press conference. The 30-year fixed conforming rate even dropped briefly to 3.625 percent for 1 origination Pt. last week.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen