Monday, January 26, 2015

Housing Sales-Construction Continue to Expand

The Mortgage Corner

The NAR reports total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 2.4 percent to a seasonally adjusted annual rate of 5.04 million in December from a downwardly-revised 4.92 million in November. And December’s sales were 3.5 percent higher by 3.5 percent from last year are now above year-over-year levels for the third straight month.

But existing-home inventories at this rather slow sales rate still dropped to 4 months, back to 1980 levels, indicating not enough homes are available for sale. Why, at this stage of the recovery are so few homes on the market?

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Graph: Calculated Risk

Despite low inventory conditions, existing-home sales bounced back in December and climbed above an annual pace of 5 million sales for the sixth time in seven months, said the National Association of Realtors®. Median home prices for 2014 rose to their highest level since 2007, but total sales fell 3.1 percent from 2013. But for sale inventories have now dropped to 4.4 months, too low to sustain higher sales in 2015.

That means more new-home construction is in the works, much of it probably rentals to meet the demand of rising new household formation. But many of the newer generations can afford to buy a home with rising the employment prospects, as their jobs numbers improve.

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Graph: Calculated Risk

The Census Bureau reports there were 1.006 million total housing starts during 2014, up 8.7 percent from the 925 thousand in 2013.  Single family starts were up 4.9 percent, and multifamily starts up 17.1%.

Calculated Risk is optimistic that new-home construction will continue to uptick in 2015: “Single family starts were at 728 thousand in December, the highest level since early 2008.  If single family starts just hold that level in 2015, annual single family starts would be up about 12 percent over 2014.  With more growth, 20 percent would seem possible. However I think 20 percent is too optimistic (based on lots and pricing), and just like in 2013, we shouldn't let one month of data influence us too much,” said Calculated Risk’s Bill McBride.

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Graph: Calculated Risk

But it will take more than new homes to improve availability. There are still some 5 million homes in the so-called shadow inventory of homes with negativity equity, or whose mortgages are in outright default. This graph shows inventory bottomed in January 2013 (on a seasonally adjusted basis), and inventory is now up about 5.5 percent from the bottom. On a seasonally adjusted basis, inventory was down 2.2 percent in December compared to November (meaning below what is normal for the season).

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Graph: Calculated Risk

Fannie Mae, the guarantor of the majority of home mortgages, reported that the Single-Family Serious Delinquency rate declined slightly in November to 1.91 percent from 1.92 percent in October. The serious delinquency rate is down from 2.44 percent in November 2013, and this is the lowest level since October 2008. Freddie Mac’s results were similar. With foreclosure rates approaching the historical level of 1 percent, and housing values continuing to increase this year, more for sale inventory should become available this year.

“A drop in housing supply in December raises some affordability concerns in the months ahead as minimal selection and the potential for faster price appreciation could offset the demand from buyers encouraged by a stronger economy and sub-4 percent interest rates,” says NAR economist Lawrence Yun. “Housing costs – both rents and home prices – continue to outpace wages and are burdensome for potential buyers trying to save for a down payment while looking for available homes in their price range.”

Harlan Green © 2015

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Friday, January 23, 2015

The Bully Mentality—Part II

Financial FAQs

NOAA, the National Oceanic and Atmospheric Administration, just announced 2014 the warmest year in recorded history, and 14 of the last 15 years as the warmest in recorded history.

Yet Paul Krugman in his latest NYTimes Oped still seems mystified by conservatives’ opposition to Good Government—such as denying the results of NOAA, the government organization mandated to track global warming (or maybe he isn’t, really):

“And why this hatred of government in the public interest? he writes. Krugman cites political scientist Corey Robin’s explanation that conservatives in particular are “…reactionaries. That is, they’re defenders of traditional hierarchy--the kind of hierarchy that is threatened by any expansion of government, especially when that expansion makes lives of ordinary citizens better and more secure.”

That, of course is the definition of a conservative—preserving the status quo. I would posit there is another, deeper reason for the denial of scientific results—whether it’s climate-related, or the record income inequality that almost all economists agree is real.

It’s called the bully mentality that has been discussed in prior columns. Bullies are those who want to dominate others without regard to reason or even common sense. And they appear periodically when prevailing cultures or societies lack strong leadership—positive leadership, that is.

Wikipedia defines it as, “Bullying is the use of force, threat, or coercion to abuse, intimidate, or aggressively dominate others. The behavior is often repeated and habitual.”

For instance, school bullying is at an all-time high, and has been the reason for many of the school shootings by those who have felt bullied. The NRA is a classic institutional bully—demonizing opponents with falsehoods, such as its campaign of “guns don’t kill people, people kill people,” in wanting to remove all gun controls, even though assault rifles with expanded magazines have been used in all the mass shootings to slaughter dozens, even hundreds before they were stopped.

Political bullying is another example. Republican bullying, particularly the Tea Party types that called compromise a dirty word, began when a very inexperienced Barack Obama became President who had no apparent experience in dealing with bullies.

And that is the point. Bullies have a wholesale disregard for scientific truth, or any other, and only stop bullying when they are opposed. America’s bullies can only be stopped with equal and opposing force, and where are the leaders capable of that?

Senator Elizabeth Warren is popular because she has been willing and able to stand up to the financial bullies. She sees Wall Street and the financial industry as classic bullies that need to be opposed at every turn to reverse the record income inequality. Hence her opposition to the just-passed $1.1 trillion federal budget authorization that extended the deadline for Wall Street institutions to divest themselves of the riskiest derivatives.

"Pretty much the whole Republican Party—and, if we're going to be honest, too many Democrats—talked about the evils of 'big government' and called for deregulation," Warren said at the recent AFL-CIO National Summit on Raising Wages. "It sounded good, but it was really about tying the hands of regulators and turning loose big banks and giant international corporations to do whatever they wanted to do."

“These families are working harder than ever, but they can’t get ahead. Opportunity is slipping away. Many feel like the game is rigged against them—and they are right,” Warren said. “The game is rigged against them…. The world has changed beneath the feet of America’s working families.”

Maybe President Obama finally understands that it’s not in the nature of bullies to compromise as he proposes policies on immigration and reducing carbon emissions (such as rising CO2 levels that even the Pentagon has foretold could result in future wars) that require executive action only, which will benefit all Americans. It doesn’t look like the new Republican Congress wants to compromise, which means they don’t want government to work at all if it will benefit Main Street, rather than Wall Street.

Harlan Green © 2015

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

Wednesday, January 21, 2015

Europe on Verge of Recession

Popular Economics Weekly

Oil prices are plunging below $50 per barrel, and the European Central Bank is about to announce whether it will begin its own Quantitative Easing program, similar to the Fed’s purchase of government securities that is designed to pump more money into Europe’s lagging economies. So economists are wondering whether this will have a net plus effect on growth, since the oil industry and countries like Norway that depend on oil revenues will lose profits, while the EU is slipping into outright recession.

A Saudi oil Prince has said oil prices will stay down for a long period—years, of necessary to support their market share. “If supply stays where it is, and demand remains weak, you better believe [the price of oil] is gonna go down more. But if some supply is taken off the market, and there’s some growth in demand, prices may go up. But I’m sure we’re never going to see $100 anymore,” said Prince Alwaleed bin Talal, the billionaire Saudi businessman, in an interview with Maria Bartiromo of Fox Business News published in USA Today.

The initial result seems to be that U.S. consumer confidence is soaring as gas prices have fallen more than $1 per gallon in a year, even below $2 per gallon in many regions. But other prices are falling as well, which is worrying economists, who see it as a sign of weakening demand. Weak demand may be elsewhere in the world, such as Europe, but it affects the U.S. economy as well.

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Graph: Econoday

Such weakness is difficult to reverse as the Japan’s two decade example of outright deflation proved. It knocked them down from second to fourth largest world economy.

Europe is having the same problem, mainly due to its austerity policies that have cut back government spending, and so demand for its goods and services. Switzerland just rang the alarm bells when it very suddenly removed its 1.2 euros to Swiss Franc exchange rate cap, thus causing the SF value to skyrocket. Why did it take the cap off? There is lots of conjecture. The Swiss had been protecting their currency exchange value from rising too rapidly by buying euros, in order to protect their export industry.

But allowing the Swiss Franc to rise as much as 20 percent against the euro also raised the danger of a deflationary spiral such as happened in Japan. Why? A more expensive SF will counteract the upcoming QE purchases of the European Central Bank that are designed to put more euros into circulation in order to ease credit conditions! .

Nobelist Paul Krugman said in a recent blog, “By throwing in the towel on the peg to the euro, the SNB (Swiss National Bank) immediately convinced markets that its previous apparent commitment to do whatever it takes to avoid deflation is null and void. And this expectations effect trumped the concrete, immediate policy of drastically negative interest rates on reserves. It will continue to feed the deflationary trap Europe is falling into.”

European deflation is happening in a big way. Eurozone annual inflation rate was recorded at -0.2 percent in December, matching preliminary estimates. It is the first fall in consumer prices since September of 2009, due to a drop in energy costs.

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Graph: Trading Economics

In December 2014, negative annual rates were observed in sixteen Member States. The lowest annual rates were registered in Greece (-2.5 percent), Bulgaria (-2.0 percent), Spain (-1.1 percent) and Cyprus (-1.0 percent). The highest annual rates were recorded in Romania (1.0 percent), Austria (0.8 percent) and Finland (0.6 percent). Compared with November 2014, annual inflation fell in twenty-six Member States, remained stable in Sweden and rose in Estonia.

The U.S. inflation rate is still 1.3 percent, but this month’s Consumer Price Index for retail prices was unchanged, which is hovering very close to deflation. Oil prices are the main culprit here as well.

There is a counterbalancing effect from lower energy costs, of course. Consumers have more to spend and production costs are reduced. So prices could begin to rise again as more jobs are created. But that means no more austerity that has damaged growth in the U.S. as well, and congressional opposition to spending measures that will create more jobs. Who is willing to bet that will happen?

Paul Krugman had the last word yesterday. “So the (EU) market is saying both that there are very few good investment opportunities out there — few enough that paying the German government to protect the real value of your wealth is a good move — and that inflation over the next five years will be around 0.4 percent, not the target of 2 percent.”

Look out below for more falling prices and slowing growth, if Draghi and the ECB can’t stimulate some EU growth with its upcoming QE purchases of sovereign debt.

Harlan Green © 2015

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Sunday, January 18, 2015

Mortgage Applications Increase Incredible 49 percent in January

The Mortgage Corner

Mortgage applications increased 49.1 percent from one week earlier, said the just released Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending January 9, 2015. It was the largest increase since 2008 at the start of the Great Recession, mostly due to record-low interest rates. Some of the increase may also be because rental rates are soaring, making renting more expensive than paying for a mortgage in many areas with such low rates.

The Refinance Index increased 66 percent from the previous week to the highest level since July 2013. The seasonally adjusted Purchase Index increased 24 percent from one week earlier to the highest level since September 2013.

“The US economy and job market continued to show signs of strength, but weakness abroad and tumbling oil prices have led to further declines in longer-term interest rates,” said Mike Fratantoni, MBA’s chief economist.

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Graph: Calculated Risk

This is while the 30-yr conforming fixed rate dropped ¼ percent in one day to 3.25 percent for a 1.25 pt. origination cost. “Mortgage rates reached their lowest level since May of 2013, and refinance application volume soared, more than doubling on an unadjusted basis, and up 66 percent after adjusting for the fact that the previous week included the New Year’s holiday,” said Fratantoni.

Applications for larger refinance loans increased more than 4 times relative to the previous week. The average conventional refinance application increased to $298,700 from $233,500 the prior week. Although there was a somewhat smaller increase for government refinance volume, VA refinance applications increased by 50 percent. VA loans tend to be larger than FHA and USDA loans, and hence are more responsive to a given rate change.

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Graph: Marketwatch

And the price to keep a roof over millennials’ heads rushed ahead of overall consumer inflation in 2014 as rents spiked up, according to just released data. The U.S. Labor Department’s gauge of prices for shelter—a broad category that includes items such as apartment rent and hotel stays—showed inflation of 2.9 percent in 2014, the fastest calendar-year result since 2007. Rent inflation reached 3.4 percent, the largest calendar-year growth since 2008.

It may be due to better job prospects, said the the MBA.

“In addition to the drop in rates, and news of improvement in the job market, there was additional positive news for prospective homebuyers with evidence that credit availability has increased somewhat, and with FHA’s announcement of a decrease in their mortgage insurance premiums,” Fratantoni said.

Purchase application volume increased by almost 24 percent, with stronger growth for conventional applications than for government loans. Purchase application volume was at its highest level since September 2013, increased on a year over year basis in the aggregate, and notably increased across most loan size categories, particularly for the conforming, middle of the market loan segments that had been weak for much of the past year. FHA purchase application volume was up by 17 percent for the week on a seasonally adjusted basis.

Harlan Green © 2015

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Thursday, January 15, 2015

CFPB Releases Borrower Guidelines

The Mortgage Corner

The Consumer Protection Financial Bureau, set up as part of the Dodd-Frank Wall Street and Consumer Protection Act, has just published guidelines for mortgage borrowers to help them get the best possible terms.

Knowing mortgage guidelines and regulations may seem a no-brainer for borrowers, but most don’t research their mortgage options with various direct lenders or brokers, according to the CFPB.

Based on new data in the National Survey of Mortgage Borrowers, a voluntary survey jointly conducted by the CFPB and the Federal Housing Finance Agency, almost half of consumers who take out a mortgage don’t shop prior to filling out an application for a mortgage. Three out of four consumers only apply with one lender or broker. CPFB contends most consumers only get their information from lenders or brokers, who have a stake in the outcome. But many such leads come from referrals by satisfied borrowers. That’s why it’s important to get other opinions.

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Graph: The Housing Wire

“Most consumers put substantial effort into considering their differing housing needs,” CFPB Director Richard Cordray said in a speech at The Brookings Institute. “But they do not seem to be as careful or as confident in weighing the economic aspects of the mortgage decision, such as what down payment they can afford or what mortgage terms fit their unique financial needs.”

There are many reasons for this, including convenience. It is now much easier to shop online for mortgage rates and terms than in the past, as sources such as bankrate.com offer comparisons.

There are also the complexities in applying for a mortgage. So-called conforming mortgages that ‘conform’ to Fannie Mae and Freddie Mac qualification guidelines have the best rates and terms, but the most rigorous qualification standards. That is why their default and foreclosure rates are now close to long term historical trends.

Fannie Mae reported that the Single-Family Serious Delinquency rate declined slightly in November to 1.91 percent. The serious delinquency rate is down from 2.44 percent in November 2013, and this is the lowest level since October 2008, says Calculated Risk. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59 percent.

Freddie Mac, the other conforming mortgage guarantor, also reported that the Single-Family serious delinquency rate was unchanged in November at 1.91 percent. Freddie's rate is down from 2.43 percent in November 2013, and is at the lowest level since December 2008. Freddie's serious delinquency rate peaked in February 2010 at 4.20 percent.

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Graph: Calculated Risk

The Fannie Mae serious delinquency rate has fallen 0.53 percentage points over the last year, and at that pace the serious delinquency rate will be under 1 percent in late 2016, the long term trend, as we said—although the rate of decline has slowed recently.

So how do we know where, or how to shop for the best possible terms? Alas, some homework is involved. Because interest rates have declined so low, most prospective borrowers will opt for the 30-year fixed rate, which makes it easy to compare rates and terms. And 30-year conforming fixed rates have dropped to 3.50 percent with 0 points in origination fees in California, for the best credit scores.

Credit scores are extremely important to lenders in today’s post-housing bubble m environment. It has to be at or above a so-called mid-score of 740 (that is, the middle score from the 3 major credit agencies—Equifax, TransUnion, and Experian.)

And stable income is a major requirement, which can be difficult to verify for self-employed borrowers, since it requires 2 years’ federal tax returns, which will be cross-checked with the IRS for accuracy.

But this is the best time to buy or borrow. Home prices are still recovering from the housing bubble, and optimism from major surveys, such as Case-Shiller, is rising. Surveys are now showing that consumers believe they will see housing values continue to rise in 2015.

Harlan Green © 2014

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Tuesday, January 13, 2015

Republicans Are the Real Socialists

Popular Economics Weekly

The new Republican Congress is exposing a not surprising fact. Its first actions are attempts to water down The Dodd-Frank Wall Street and Consumer Protection Act, and repealing Obamacare—which will pass the risks of financial meltdowns and medical catastrophes back to us, the taxpayers.

In economic parlance, it is socializing the costs of doing business in order to maximize the profits of business. The attempts to weaken financial regulations are “Kicking Dodd-Frank In the Teeth”, said Gretchen Morgenson in her most recent New York Times Sunday Oped.

“The 114th Congress has been at work for less than a week, but a goal for many of its members is already evident: a further rollback of regulations put in place to keep markets and Main Street safe from reckless Wall Street practices.”

The story of Republicans opposition to Obamacare is no different. By attempting to roll back the eligibility of millions of uninsured Americans with the Repubs various challenges to the federal health exchange, Republicans will return the cost of maintaining health care once again to taxpayers; by putting those sickest Americans back in hospital emergency rooms, or on government welfare rolls, thus maximizing health costs (which have been declining since Obamacare kicked in). This is even though medical bankruptcies now outnumber all other bankruptcies.

Why don’t Republicans get that this flies in the face of their own ideals of self-sufficiency? Even more egregious for working Americans are their attempts to lower wages and salaries by weakening unions and the collective bargaining of government employees in states like Wisconsin. The result of Wisconsin Governor Scott Walker’s efforts has been slower growth, a larger budget deficit, and less incentives for government employees to increase productivity.

Even California Republican Ron Unz knew this with his initiative to raise the California minimum wage to $12 per hour, which would take many minimum wage-earners off the welfare rolls, yet California Republicans have even opposed that!

It is socialism in a big way that Republicans have always accused Democrats of—putting the cost of running the U.S. on government, rather than individuals and private industry.

It’s something President Roosevelt knew and voiced during the Great Depression. “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.”

And until Republicans understand this, they will continue to be the minority party.

Harlan Green © 2014

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

Friday, January 9, 2015

December Unemployment Report Sets Record

Financial FAQs

Friday’s Labor Dept. nonfarm payrolls report has just set a record for annual job creation. The U.S. added 252,000 new jobs in December to extend the strongest streak of hiring since the mid-1990s, but wages fell and more people dropped out of the labor force to slightly tarnish an otherwise excellent employment report.

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Graph: WSJ

The economy has added at least 200,000 jobs for 11 straight months, the longest streak in almost 20 years. In 2014, the U.S. created 2.95 million new jobs to mark the largest gain since a 3.18 million increase in 1999.

In December, President Obama noted that the economy had created 10.9 million jobs over the past 57 months. The number is now 11.2 million with December added in plus an additional 50,000 jobs added to the past 2 months. This streak of growth is improving the net job creation over which Mr. Obama has presided, which now puts him in fourth place among the last 10 presidents in terms of job creation.

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Graph: WSJ

The economy has 6.1 million more jobs today than when Mr. Obama took office in January of 2009. That puts his total job creation ahead of presidents John Kennedy, Gerald Ford, and George H.W. Bush, who each served one term or less. It also puts him well ahead of President George W. Bush, whose final year in office also comprised the beginning to the longest and deepest recession since the Great Depression.

The nation’s unemployment rate also continued to tumble, falling to 5.6 percent from 5.8 percent and hitting the lowest level since June 2008, the Labor Department said Friday. The fall in the jobless rate stemmed partly from the increase in the number of people working, but more Americans also dropped out of the labor force. As a result, the percentage of working-age Americans 16 or older fell again to match a postrecession low of 62.7 percent — a level last seen in 1978.

That may be why wages aren’t rising above 2 percent annually, when 3 to 4 percent annual wage increases are the norm during economic recoveries. Wage gains have ranged from 1.7 percent to 2.1 percent since 2010, just two-third as fast as they normally grow. Economists predict a tightening labor market will spur higher wages but so far earnings haven’t budged much.

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Graph: WSJ

And Chicago Fed President Charles Evans has speculated that the Fed won’t have to raise interest rates until 2016, if inflation doesn’t pick up to the 2 percent target of stated Fed policy.

Private payrolls increased 240,000 after rising 345,000 in November. Goods-producing jobs jumped in December, led by construction which advanced 67,000 in December after a 20,000 increase the month before. Manufacturing employment increased 17,000, following a jump of 29,000 in November. Mining rose 3,000 in December, following a 1,000 boost the prior month.

Private service-providing jobs gained 173,000 after a 294,000 jump in October. The latest increase was led by professional & business services. Government jobs increased 12,000 after rising 8,000 in November.

Harlan Green © 2014

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