Housing Creating More Jobs In 2016

We predict housing in 2016 continuing to grow the economy.  This is mainly because new-home construction should surpass 1 million units again this year, and it is new-home construction (and sales), rather than existing-home sales, that adds to economic growth.

For instance, we see in the December unemployment report that 45,000 new construction jobs were created plus 73,000 jobs in Professional and Business Services, which include attorneys, accountants, insurance agents, architects and designers that work in the real estate industry. 

 

 Graph: Marketwatch

            Much will depend on interest rates this year, of course, but the conforming 30-year fixed rate has barely budged from its record low of 3.50 percent for a one point origination fee.   A 3.375 percent fixed rate is even available in California if a borrower wants to buy down the rate further.

            The best indicator of future sales is the NAR’s Pending Sales Index, which is based on signed contracts, and consistently in 2015 predicted sales in the range of 5 million to 5.5 million, similar to the level in the early 2000s.

            One reason we believe housing has more room to grow is that new-home construction hasn’t fully recovered from the Great Recession, and is the reason for lower sales of new homes. Sales have generally picked up through the year, but are running at half the rate of 2000 and 2001, when nearly 1 million newly built homes were sold. New-home sales rose in November to an annual rate of 490,000, which is far below the peak of around 1.2 million sales in 2005.

            More new-home sales will depend on increased household formation, which economists are predicting will return to 1.2 million new households per year.  Why?  The Millennial generation is beginning to buy as they marry and begin to raise children.

Some 1,071,000 construction jobs have been added since 2011, according to Calculated Risk.  And delinquency rates have returned to pre-recession levels—in fact are the lowest in history, according to Black Knight’s Mortgage Monitor Report, reports Calculated Risk’s Bill McBride.  This is perhaps the most important statistic for the housing recovery, since it means more borrowers are available to buy homes. Black Knight now calculates that approximately 5.2 million borrowers could likely both qualify for and benefit from refinancing at today’s interest rates.

            But if mortgage rates rise by even 50 basis points (i.e., 0.5 percent), some 2.1 million borrowers will no longer be eligible for refinancing, or buying another home, says Black Knight.

            So does the Fed really want to slow down or even kill the housing market, if it continues to raise their interest rates?   That is the real question.  This might not affect mortgage rates all that much, however, as mortgage rates depend on longer term interest rates and the bond market, which follows inflation. 

But we still have almost no inflation.  Higher food prices are balanced by lower gas and commodity prices in general, and which will continue to fall as the oil glut continues this year.  We believe that interest rates will therefore remain low throughout 2016. 

Why?  There is very little growth in the rest of the world, and developing countries like Russia and Brazil are already in recessions, while China’s economy stagnates. That means foreign investors will still flock to the one safe haven in times of uncertainty—U.S. Treasury Bonds—thus keeping our interest rates low.

  

Harlan Green © 2016

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Housing Inventories Continue Increase

The Mortgage Corner

Calculated Risk and Housing Tracker report that existing-home for sale inventories have increased 4.7 percent in February. It is good news for those who worry that the lack of inventory will hold back existing-home sales this year.

Graph: Calculated Risk

The red line denotes 2014 inventory from Housing Tracker’s Department of Numbers. California cities led the increases, with San Francisco inventory up 7.1 percent, San Jose + 8.6 percent, and Sacramento + 8.8 percent. And as of February 10, San Francisco had the highest weekly price increase of 4.9 percent. Thank you, Silicon Valley, as such high-tech startups as Twitter are headquartered in San Francisco.

This should mean price increases will slow, however, as more supply comes on the market, and default ratios continue to decline. The median asking price for homes in the US peaked in June 2006 at $319,459 and is now 21.1 percent lower. From a low of $211,844 in January 2011, the median asking price in the US has increased by $40,327 (19.0 percent), says Housing Tracker.

Tracking total distressed sales is the best way to determine how quickly housing is recovering from the Great Recession. And California’s distressed sales have dropped sharply in a year, down to 22.2 percent of sales in December 2013, vs. 42.5 percent in December 2013, according to Calculated Risk. Sacramento, noted for overbuilding even in good years, had the sharpest drop with total distressed sales down to 22.2 percent of sales in Dec. 2013, vs. 51.5 percent in December 2012.

However, the NAR’s Pending Home Sales Index, a forward-looking indicator based on contract signings, fell 8.7 percent to 92.4 in December from a downwardly revised 101.2 in November, and is 8.8 percent below December 2012, as we said last week. The data reflect contracts but not closings, and are at the lowest level since October 2011, when the index was 92.2.

Graph: NAR

But we believe with the percentage of conventional (vs. distressed) sales’ inventories increasing, existing-home sales will pick up in 2014. And if not, then new-home sales will take up the supply slack, with new-home building permits issued increasing close to 1 million annually.

Sales of newly built, single-family homes fell 7 percent to a seasonally adjusted annual rate of 414,000 units in December, according to newly released figures from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. Despite the monthly drop, home sales in 2013 were up 16.4 percent over the previous year. But several factors seem to be slowing down new-home sales.

Harlan Green © 2014

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Affordable Housing In Decline

The Mortgage Corner

The Harvard Joint Center for Housing Studies has just come out with their rental market report, and it shows very little low rent housing available, due mainly to both increased household formation and those who have lost their homes from the busted housing bubble. Almost all of the 2.7 million abandoned and/or foreclosed homes are gone; most becoming rentals that do not meet the expanding need for rental housing.

Millions of Americans are in precisely that situation, according to a study released today by Harvard’s Joint Center for Housing Studies. The availability of apartments, especially cheaper ones, hasn’t nearly kept up with demand, and the problem has worsened since the 2007-09 recession, the study says.

In 1960, about one in four renters paid more than 30 percent of income for housing. Today, one in two are cost burdened,” according to the study, America’s Rental Housing.

Graph: Harvard Center for Housing Studies

Rick Judson, chairman of the National Association of Home Builders (NAHB), issued the following statement on the rental housing report:

"The report released today by the Harvard Joint Center for Housing Studies highlights serious affordability problems for many of America's renter households, and NAHB supports many of the policy initiatives outlined in the study to meet this ongoing challenge.  Of primary importance, efforts to reform the housing finance system must include a federal backstop to maintain broad liquidity during all economic cycles and ensure that rental housing can continue to be built and preserved.”

Judson and the NAHB have supported maintaining some form of Fannie Mae and Freddie Mac to guaranteed conforming loans that currently cover more than 90 percent of mortgages originated. There have been no viable alternatives proposed to date.

"It is clear that the federal role in ensuring the availability of financing for multifamily rental housing for low- and moderate-income households is critical,” said Judson. “Other ways to reduce the costs of providing affordable housing must be pursued as well, such as strengthening the Low Income Housing Tax Credit program, removing regulatory barriers to construction, providing gap financing to help reduce construction costs, streamlining program rules and allowing agencies to align administrative procedures across programs.”

Graph: Boston Globe

So the real problem is rising housing prices, coupled with very low housing inventories that are putting pressure on affordable housing. The good news is that a lot more rental housing is being constructed with strength in the multifamily component that spiked a monthly 15.3 percent after a 20.1 percent surge in September. The multifamily component is up 22.5 percent on a year-ago basis while the single-family component is up 8.8 percent.

Harlan Green © 2013

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Existing Home Sales Take Off

The Mortgage Corner

Existing-home sales have finally taken off, a sign that real estate might now be leading the economic recovery. Real estate has historically led past recoveries, by employing so many construction workers and professional services, but not this one to date due to the busted housing bubble.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.7 percent to a seasonally adjusted annual rate of 5.48 million in August from 5.39 million in July, and are 13.2 percent higher than the 4.84 million-unit level in August 2012, reports the National Association of Realtors.

Graph: Calculated Risk

And total housing inventory at the end of August increased 0.4 percent to 2.25 million existing homes available for sale, which represents a 4.9-month supply at the current sales pace, down from a 5.0-month supply in July. So the very low inventory is causing housing prices to soar, which will ultimately cure much of the negative home equity still existing. Unsold inventory is 6.3 percent below a year ago, when there was a 6.0-month supply.

Lawrence Yun, NAR chief economist, said the market may be experiencing a temporary peak.  “Rising mortgage interest rates pushed more buyers to close deals, but monthly sales are likely to be uneven in the months ahead from several market frictions,” he said.  “Tight inventory is limiting choices in many areas, higher mortgage interest rates mean affordability isn’t as favorable as it was, and restrictive mortgage lending standards are keeping some otherwise qualified buyers from completing a purchase.”

But that may not be so with the Federal Reserve’s decision to put off tapering QE3 purchases. Conforming 30-year fixed mortgage interest rates plunged one-quarter percent on Wednesday to 4.25 percent for zero points origination fee in California, when the Fed announced its decision to continue the $85 billion in purchases.

The national median existing-home price for all housing types was $212,100 in August, up 14.7 percent from August 2012.  This is the strongest year-over-year price gain since October 2005 when the median rose 16.6 percent, and marks 18 consecutive months of year-over-year price increases, said the NAR.

Even more importantly, distressed homes – foreclosures and short sales – accounted for 12 percent of August sales, down from 15 percent in July, and is the lowest share since monthly tracking began in October 2008. They were 23 percent in August 2012.  Ongoing declines in the share of distressed sales are responsible for some of the growth in median price.

Granted much of the boost in home sales and rising interest rates comes from the fear that QE3 would end. But with interest rates again falling, both home purchases and mortgage refinancing will be boosted. So it looks like the Fed is maintaining it commitment to reviving the housing market, as well as economic growth in general.

Harlan Green © 2013

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Are Home Prices Rising Too Fast?

The Mortgage Corner

No, they are just catching up to 4 years of weak household formation and even weaker income growth. Home prices have been held down from a combination of government austerity policies and private sector hoarding since the Great Recession that has kept most homebuyers on the sidelines until this year.

Trulia chief economist Jeff Kolko estimates home prices are still 7 percent undervalued, as compared to pre-bubble levels.

“We estimate that national home prices are 7 percent undervalued in the second quarter of 2013 (2013 Q2),” said Kolko. “During last decade’s bubble, prices were as high as 39 percent overvalued in 2006 Q1, then during the bust, fell to 15 percent undervalued in 2011 Q4. Therefore, even with the recent price increases, home prices nationally remain undervalued relative to fundamentals and much lower than in the last bubble. That’s why today’s price gains are actually still a rebound, not a bubble.”

Graph: WSJ Marketwatch

But the real culprit is income growth. The combination of Bush tax cuts and 2 recessions resulting in the largest budget deficits since WWII have suppressed employee income growth to the lowest level since WWII.

Graph: WSJ Marketwatch

There has been a huge drop in household formation, so much so that the Cleveland Federal Reserve Bank reports compared to the previous 10 years, the growth rate in the number of households was cut by two-thirds between 2007 and 2010.

“This slowing in household formation reflects the overall weak economy,” says the Cleveland Fed, “but it has also negatively impacted the housing market, as lower household formation rates reduce housing demand.”

So 2013 is finally looking like a recovery year for housing. June existing-home sales are back above 5 million unit annually for only the second month since the 2009 first-time homebuyer tax break. Total existing-home sales, which are completed transactions that include single family, townhomes, condominiums and co-ops, dipped 1.2 percent to a seasonally adjusted annual rate of 5.08 million in June from a downwardly revised 5.14 million in May, but are 15.2 percent higher than the 4.41 million-unit level in June 2012.

Graph: Calculated Risk

And inventory levels are improving, which will slow down price rises in some areas. Total housing inventory at the end of June rose 1.9 percent to 2.19 million existing homes available for sale, which represents a 5.2-month supply at the current sales pace, up from 5.0 months in May. Listed inventory remains 7.6 percent below a year ago, when there was a 6.4-month supply.

An interesting sidelight is that the percentage of distressed California sales is down sharply, reports DataQuick, an RE research company. Of the existing homes sold last month, 10.0 percent were properties that had been foreclosed on during the past year – the lowest level since foreclosure resales were 9.4 percent of the resale market in August 2007. Last month’s figure was down from a revised 11.3 percent in May and 24.9 percent a year earlier. Foreclosure resales peaked at 58.8 percent in February 2009.

And Short sales - transactions where the sale price fell short of what was owed on the property - made up an estimated 16.0 percent of the homes that resold last month. That was down from an estimated 16.8 percent the month before and 24.3 percent a year earlier. The key is the percentage of distressed sales is down significantly – while the number of conventional sales are up about 40 percent year-over-year, per DataQuick

Harlan Green © 2013

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Shadow Inventory of Bad Loans Still Too High

Financial FAQs

The shadow inventory of troubled homes fell to about 2 million in April, down 18 percent from the same period in the prior year, and down 34 percent from a peak of 3 million in early 2010. But that is still too many homes in trouble for the Fed to begin to reduce its asset purchases.

Shadow home inventory includes properties with seriously delinquent mortgages, in foreclosure or held by mortgage servicers, but not yet listed, according to CoreLogic, an Irvine, Calif.-based analysis firm. Bad loans are working their way out of the system, and new mortgages for borrowers with better credit are taking their place. Also, rising home prices and low interest rates are helping troubled owners sell or refinance their homes, reducing the pipeline of foreclosures.

Graph: WSJ Marketwatch

This is when interest rates have risen to 2-year highs. A gauge of mortgage applications has contracted almost every week since mortgage rates started climbing more than two months ago, according to data released Wednesday. For the week that ended July 5, the Mortgage Bankers Association’s barometer of mortgage loan application volume fell 4 percent as rates hit the highest level in two years.

Graph: WSJ Marketwatch

Interest rates have risen some 1 percent since April, which means some consumers will have a tougher time affording monthly mortgage payments. With a $417,000 conforming loan, that 1 percent rise means either a borrower needs 8.6 percent more income, or a home worth 8.6 percent less. With 20 percent down and a $417,000 loan, that would mean a reduction of $41,000 in what a prospective buyer could afford.

This will not encourage middle class buyers who now have to earn some $74,664 per year to afford a home in that price range. This has to slow down housing activity to some extent, which is another reason for the Fed to stand pat at present.

Harlan Green © 2013

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Housing Prices Rise as Foreclosure Rates Fall

The Mortgage Corner

Home prices are continuing to rise, in part because foreclosure rates continue to fall. Fannie Mae reported that the Single-Family Serious Delinquency rate declined in April to 2.93 percent from 3.02 percent in March. The serious delinquency rate, covering loans 90 days or more delinquent or in foreclosure, is the lowest level since January 2009.The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59 percent.

Foreclosed homes tend to sell for 33 percent less than normal market prices, which depresses housing values. So the drop in foreclosures means fewer homes are sold at under market prices.

Freddie Mac reported that the Single-Family serious delinquency rate declined in April to 2.91 percent from 3.03 percent in March. Freddie's rate is down from 3.51 percent in April 2012, and this is the lowest level since June 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20 percent.

This is while CoreLogic reported home prices nationwide, including distressed sales, increased 12.1 percent on a year-over-year basis in April 2013 compared to April 2012. This change represents the biggest year-over-year increase since February 2006 and the 14th consecutive monthly increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 3.2 percent in April 2013 compared to March 2013.

Graph: Calculated Risk

Excluding distressed sales, home prices increased on a year-over-year basis by 11.9 percent in April 2013 compared to April 2012, but longer-term housing prices will rise faster when excluding distressed sales, says CoreLogic. This is because CoreLogic’s distressed sales include short sales and real estate owned (REO) transactions, which could boost overall prices over the short term due to the high demand by investors who are buying up many in bulk.

More evidence that the lack of homes on the market has been driving up prices is pending home sales, or homes under contract but not yet closed, which rose only 0.3 percent in April, following a 1.5 percent boost the month before.

Graph: Econoday

The National Association of Realtors Pending Home Sales Index reports home contract activity was at the highest level since the index hit 110.9 in April 2010, immediately before the deadline for the home buyer tax credit.  Pending sales have been above year-ago levels for the past 24 months.

And Econoday reports “a regional look shows the effect of tight inventory which is most severe in the West and where pending home sales fell 7.6 percent. Price data from the West, in reports such as Case-Shiller, have been showing the very sharpest gains. Home-price appreciation is a very big story right now in the economy and this report points to continued upward pressure.”

The bottom line is activity in the housing sector is heating up with April existing-home sales rising 0.6 percent to an annual rate of 4.97 million, according to the National Association of Realtors. Sales of single-family homes, the most important component in the report, rose 1.2 percent in the month

Supply, which had been very tight, poured into the market during April with 230,000 units added to lift the months supply to 5.2 from 4.7 months. The median time for a house on the market fell dramatically, to 46 days vs 62 days in March.

And sellers are getting their price based on the report's price data. After jumping 6.2 percent in March, the median price rose another 4.8 percent in April to $192,800 which is the highest level of the recovery. We should note that price data in this report, which are not based on repeat transactions, are often volatile. But who can argue with a double digit year-on-year median gain of 11.0 percent?

Harlan Green © 2013

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Consumer Debt Falls to Pre-Recession Level

Financial FAQs

The total amount of debt held by Americans fell again in the first three months of 2013 and stood at the lowest level since the middle of 2006, the New York Federal Reserve said Tuesday. The level of household debt fell by $110 billion, or 1 percent, to $11.23 trillion, mainly because consumers reduced their mortgage obligations and used credit cards less. Household debt is now 11.4 Percent lower vs. a peak of $12.68 trillion in 2008.

Graph: New York Federal Reserve

This is one reason retail sales are holding up. Mortgage debt slid to $7.93 trillion from $8.03 trillion in the fourth quarter to mark the lowest amount since late 2006. Mortgage debt fell in the first quarter even though more home loans were issued than in the prior quarter.

Delinquency rates improved across the board: mortgages (5.4 percent from 5.6 percent), HELOC (3.2 percent from 3.5 percent), auto loans (3.9 percent from 4.0 percent), credit cards (10.2 percent from 10.6 percent) and student loans (11.2 percent from 11.7 percent).  The overall 90+ day delinquency rate dropped from 6.3 percent to 6.0 percent this quarter, below the 8.7 percent peak from three years ago.

“After a temporary deceleration in the previous quarter, the data suggest that household deleveraging has resumed its previous trajectory,” said Wilbert van der Klaauw, senior vice president and economist at the New York Fed. “We’ll look to see if this pace of debt reduction and delinquency improvements will persist in upcoming quarters.”

Retail sales beat expectation in April, up 0.1 percent, 3.75 percent in a year, following a drop of 0.5 percent in March (originally down 0.4 percent). Analysts forecast a 0.3 percent decline. Motor vehicles were unexpectedly up 1.0 percent after a 0.6 percent dip in March. Unit new motor vehicle sales slipped in April but from high levels, according to manufacturers' data. Core strength was in building materials & garden equipment; clothing; nonstore retailers; general merchandise; and food services & drinking places. There may be some seasonality issues but discretionary spending appears to be picking up.

Graph: Econoday

Other positive developments in the Q1 New York Fed report included a rise in the share of 30-60 day delinquent mortgage balances that transitioned to current and a decline in the rate at which current mortgages transition into delinquency.  Nearly 35 percent of 30-60 day delinquent balances became current compared to 28 percent in the previous quarter. Moreover, 1.6 percent of current balances became delinquent compared to 1.8 percent in the previous quarter.   
Highlights from the report include:

• Outstanding student loan debt increased $20 billion to $986 billion.
• Total mortgage debt decreased to $7.93 trillion from $8.03 trillion.   
• Auto loans increased $11 billion to $794 billion.
• Credit card balances decreased $19 billion to $660 billion.
• HELOC balances fell $11 billion to $552 billion. 
• Mortgage originations rose for the sixth consecutive quarter, to $577 billion.

Inflation and energy prices in particular are declining, giving consumers more room to spend, which will boost Q2 economic growth as well.

Harlan Green © 2013

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Saving Fannie and Freddie—Part II

Financial FAQs

The Federal Housing Finance Authority that supervises the so-called Government Supervised Enterprises (GSE), now including Fannie Mae and Freddie Mac, just announced restrictions that not only weaken Fannie and Freddie’s mandate, but the mortgage and housing markets in general. The FHFA just announced that it will no longer allow Fannie and Freddie to purchase or guarantee so-called “non-qualified” mortgages with more than 30 years amortization or that have interest only payments, among other restrictions.

Fannie and Freddie’s mission is to “Ensure that the housing GSEs operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment”. So why has it just made a ruling that will restrict their ability to be the most “reliable source of liquidity and funding”, and so real estate in general?

FHFA’s answer is the “Adoption of these new limitations by Fannie Mae and Freddie Mac is in keeping with FHFA’s goal of gradually contracting their market footprint and protecting borrowers and taxpayers,” said the announcement.

Yet Fannie Mae and Freddie Mac are the gold standard for mortgage underwriting, with the toughest qualification criteria, which is why these GSEs have the lowest default rates—some 3.13 percent vs. 6.7 percent for all private label mortgages, as I said in a past column (Saving Fannie and Freddie). That means first time home buyers and those with lower incomes will have to depend on portfolio lenders for those programs. These lenders therefore tend to use weaker qualification criteria and so either have to keep those mortgages on their books, or who package them as less credit worthy securities.

So Fannie and Freddie are the most “reliable source of liquidity and funding for housing”. There are really no other viable mortgage programs to sustain the housing market, in particular. They now guarantee some 90 percent of mortgage originations precisely because private label lenders have not come back into the market, even as housing prices have risen.

FHFA’s actual announcement said, “Beginning January 10, 2014, Fannie Mae and Freddie Mac will no longer purchase a loan that is subject to the “ability to repay” rule if the loan:

· is not fully amortizing,

· has a term of longer than 30 years, or

·includes points and fees in excess of three percent of the total loan amount, or such

other limits for low balance loans as set forth in the rule.

“Effectively, this means Fannie Mae and Freddie Mac will not purchase interest-only loans, loans with 40-year terms, or those with points and fees exceeding the thresholds established by the rule, said its announcement.”

Yet both interest only and 40-year amortized mortgage lower the payments for first time homebuyers, in particular. It also means shutting out lower-income buyers, even though Fannie and Freddie qualify them at the fully amortized rate.

There is no other way to interpret this ruling, other than another attempt to lower the overall quality of mortgage lending at a time when housing and real estate in general is at the beginning of its recovery.

Fannie Mae just reported pre-tax income of $8.1 billion for the first quarter of 2013, compared with pre-tax income of $2.7 billion in the first quarter of 2012 and pre-tax income of $7.6 billion in the fourth quarter of 2012. Fannie Mae’s pre-tax income for the first quarter of 2013 was the largest quarterly pre-tax income in the company’s history.

Need we say more? A financially sound Fannie Mae and Freddie Mac will continue to be the mainstay of housing finance, unless those who do not want or support a healthy mortgage market for all home buyers succeed in limiting their mission to “serve as a reliable source of liquidity and funding for housing finance and community investment.”

Harlan Green © 2013

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California Foreclosures Plunging, Sales Rising

The Mortgage Corner

The number of California homeowners entering the foreclosure process plunged to the lowest level in more than seven years last quarter, reports DataQuick. The unusually sharp drop in the number of mortgage default notices filed by lenders stems mainly from rising home values, a strengthening economy and government efforts to reduce foreclosures, says DQ.

No wonder, as the median price paid for a California home last quarter was $297,000, up 22.7 percent from a year ago, according to DataQuick. During first-quarter 2013 lenders recorded 18,567 Notices of Default (NODs) on California houses and condos. That was down 51.4 percent from 38,212 during the prior three months, and down 67.0 percent from 56,258 in first-quarter 2012.

Graph: Econoday

Most of the loans going into default are still from the 2005-2007 period, per DQ. The median origination quarter for defaulted loans is still third-quarter 2006. That has been the case for more than three years, indicating that weak underwriting standards peaked then. The most active creditors in the formal foreclosure process last quarter were Wells Fargo (5,546), JP Morgan Chase (3,863) and Bank of America (2,565).

And Calculated Risk’s Bill McBride has become very sanguine about real estate’s role in boosting economic growth. He maintains that new home sales will pick up due to unfilled demand, due to the big jump in household formation—to 1.3 million new households last year and the prediction this level will be maintained over the next decade. He sees the so-called existing-to-new home sales ratio trending back down to its historical average of 6 to 1 from its current heightened ratio, in this very interesting graph. It was the “flood’ of depressed sales from foreclosures that depressed new home sales because of the plunge in housing prices brought on by the foreclosures.

Graph: Econoday

According to the Census Bureau, there were 104 thousand new homes sold in Q1 2013, up about 19.5 percent from the 87 thousand sold in Q1 2012. That is a solid increase in sales, and this was the highest sales for Q1 since 2008, per Calculated Risk.

“Although there has been a large increase in the sales rate, sales are still near the lows for previous recessions” said McBride. “This suggests significant upside over the next few years.  Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years. Also housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future's so bright, I gotta wear shades.”

Harlan Green © 2013

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Saving Fannie and Freddie Mac

The Mortgage Corner

Fannie Mae (FNMA), or Federal National Mortgage Association, reported a record profit for 2012, a good reason to save the mortgage giant from dissolution, as the banking industry in particular has lobbied for. The government-sponsored enterprise had net income of $17.2 billion for 2012, outpacing profits at S&P 500 companies such as Wal-Mart Stores Inc. (WMT), General Electric Co. and Berkshire Hathaway Inc. (BRK/A).

Fannie Mae’s net income for 2012 compared with a loss of $16.9 billion in 2011, the company said in a statement. Profits totaled $7.6 billion for the three months ended Dec. 31 after accounting for a $4.2 billion dividend payment to the Treasury Department for the government’s stake. So it can begin to payoff the $188 billion borrowed from the U.S. Treasury to keep the mortgage industry—and so housing—afloat.

There is another reason to save Fannie Mae and Freddie Mac from complete dissolution. Their underwriting standards are the highest and have resulted in the lowest default rates of all mortgages. Fannie Mae reported that the Single-Family Serious Delinquency rate declined in February to 3.13 percent from 3.18 percent in January. The serious delinquency rate is down from 3.82 percent in February 2012, and this is the lowest level since February 2009. Its serious delinquency rate peaked in February 2010 at 5.59 percent.

Graph: Calculated Risk

Fannie Mae serious delinquencies averaged below 1 percent until 2008, the beginning of the housing bubble bust. Whereas the average delinquency rate for all Private Label Mortgages today is 6.8 percent, as many of them are the so-called liar loans that didn’t require either income for asset verification.

Earlier Freddie Mac (FHLMC), or Federal Home Loan Mortgage Corporation, the other GSE under government conservatorship, reported that the Single-Family serious delinquency rate declined in February to 3.15 percent from 3.20 percent in January. Freddie's rate is down from 3.57 percent in February 2012, and this is the lowest level since July 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20 percent.

Banks have been lobbying for years to either downsize or abolish the government-owned GSEs, as we said. But that would be throwing out the baby with the bathwater. For it was subprime lending that created the housing bubble with it minimal or nonexistent qualifying criteria, such as the ‘stated income’, or ‘no income’ verification requirements of so-called Option ARMs that allowed minimal payments for the first 4 years, before payments rose enough to begin to pay down principal balance.

Their argument has been that Fannie and Freddie are taking business away from private banking. They have claimed that the “implicit” government guarantee against default of the GSEs has given them a profit edge. But without Fannie and Freddie, there would be no viable housing market. We know this because of what banks did in the 1980s, when Fed Chairman Paul Volcker raised interest rates into double digits.

Banks then withdrew almost completely from mortgage lending, so the GSEs stepped in by creating a secondary market that packaged and sold mortgages to investors—either to Wall Street, or Main Street pension funds. That enabled the real estate industry to recover from the 1981 and 1983 Reagan recessions.

So the banking industry has been very fickle when it comes to mortgage lending. In fact, the subprime fiasco resulted from overleveraged banks taking advantage of soaring housing prices at the same time that financial markets were deregulating. Banks created the so-called shadow banking system outside of any regulatory oversight, which is responsible for much of the shadow housing inventory still on their books—an estimated 5 million homes either delinquent or with negative equity in their homes in danger of foreclosure.

There is in fact good reason for banks to lend again with interest rates still at record lows and housing prices beginning to rise again. A mortgage banking industry has grown around the secondary market, and as long as banks will adhere to the same gold standard underwriting as Fannie and Freddie, there is no reason they shouldn’t be generating record profits, as well.

Harlan Green © 2013

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Higher Home Prices Driving Construction

The Mortgage Corner

CoreLogic just reported home prices nationwide, including distressed sales, increased 10.2 percent on a year-over-year basis in February 2013 over February 2012. And it is boosting construction, as for sale inventories are barely increasing in the new selling season. This price change represents the biggest year-over-year increase since March 2006 and the 12th consecutive monthly increase in home prices nationally.

Graph: Calculated Risk

“The rebound in prices is heavily driven by western states. Eight of the top ten highest appreciating large markets are in California, with Phoenix and Las Vegas rounding out the list,” said Dr. Mark Fleming, chief economist for CoreLogic.

And the Department of Commerce U.S. Census Bureau announced that construction spending during February 2013 rose 1.2 percent above the revised January estimate of $874.8 billion, and is 7.9 percent above the February 2012 estimate of $820.7 billion.

Graph: Calculated Risk

This is huge, and will boost employment and Gross Domestic Product growth. Though private residential spending is 55 percent below the peak in early 2006 at the height of the housing bubble, it is up 36 percent from the post-bubble low. Non-residential spending is 25 percent below the peak in January 2008, and up about 37 percent from the recent low, said Calculated Risk.

Meanwhile housing inventories have increased 6.5 percent through April 1 (red line in graph), reports Department of Numbers, a housing tracking service, though not enough to prevent housing prices from soaring. For 2011 and 2012, inventory only increased about 5 percent at the peak and then declined for the remainder of the year.

Graph: Calculated Risk

Let us hope this continues as the so-called shadow inventory of homes in default continue to shrink, thus increasing the housing supply available for sale. According to Lender Processing Services (LPS), the inventory of homes in default decreased in February compared to January and declined about 6.5 percent year-over-year. Also the percent of loans in the foreclosure process declined further in February and were down significantly over the last year.

LPS also reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 6.80 percent from 7.03 percent in January. Note: the normal rate for delinquencies is around 4.5 to 5 percent, as we’ve said in past columns.

Construction employment is coming back, in other words. The construction industry employed some 7.5 million workers in 2006, whereas it is now 5.8 million, according to the Associated General Contractors of America. So we know it will contribute significantly to the 3 million shortfall in payroll jobs still to be made up this year and next to bring us back to normal employment levels as housing and the real estate market in general continue to recover.

Harlan Green © 2013

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

January Housing Prices, Mortgages, Surging

The Mortgage Corner

CoreLogic reported that home prices nationwide, including distressed sales, increased on a year-over-year basis by 9.7 percent in January 2013 compared to January 2012. This change represents the biggest increase since April 2006 and the 11th consecutive monthly increase in home prices nationally.

Excluding distressed sales, home prices increased on a year-over-year basis by 9.0 percent in January 2013 compared to January 2012. On a month-over-month basis excluding distressed sales, home prices increased 1.8 percent in January 2013 compared to December 2012. The five states with the highest home price appreciation, including distressed sales, were: Arizona (+ 20.1 percent), Nevada (+17.4 percent), Idaho (+14.9 percent), California (+14.1 percent) and Hawaii (+14.0 percent).

Graph: Calculated Risk

This is a huge increase, and may mean borrowers and home buyers fear interest rates may rise later this year, as some Federal Reserve Governors are objecting to the sustained purchase of QE3 securities until the unemployment rate drops to 6.5 percent from its current 7.8 percent.

A major reason for the price increases is increased mortgage activity due to still low interest rates, even though stocks are rallying to record highs. The Mortgage Bankers Association reported both the Refinance and Purchase Indexes increased 15 percent from the previous week and were at the highest levels since mid-January to early February.

Graph: Calculated Risk

The 30-year fixed conforming rate is still at 3.50 percent for a 1 point origination fee in California, and the high-balance fixed rate is now 3.75 percent for 0 points origination.

Another reason for such rising prices is the decline in mortgage delinquency and foreclosure rates. These are homes that tend to sell under market prices, which bring down overall values. The delinquency rate for mortgage loans on one-to-four-unit residential properties fell to a seasonally adjusted rate of 7.09 percent of all loans outstanding at the end of the fourth quarter of 2012, the lowest level since 2008, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the fourth quarter was 3.74 percent, the lowest level since the fourth quarter of 2008, down 33 basis points from the third quarter and 64 basis points lower than one year ago.

And lastly, an increase in overall wealth has to be putting consumers in a buying mood. CNBC estimates that $1 trillion of the $4.8 Trillion increase in household wealth since the end of the Great Recession has been from rising housing values, and studies show homeowners tend to spend 10 percent of that increase, more than the additional wealth created by financial markets.

Harlan Green © 2013

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

2013 Will Be Year of Housing Recovery

The Mortgage Corner

Wall Street is jumping on the real estate band wagon. Not only are hedge funds now buying foreclosed homes in bulk, reducing the ‘shadow inventory’ of homes with delinquent mortgages, but the record low interest rates are boosting both refinance and purchase transactions says the Mortgage Bankers Association.

For instance, The Refinance Index increased 8 percent from the previous week and is at its highest level since the week ending October 12, 2012. The seasonally adjusted Purchase Index increased 1 percent from one week earlier.

“Continued uncertainty due to the lack of resolution regarding the fiscal cliff led interest rates lower last week, with mortgage rates reaching a new low in our survey,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “Refinance activity increased, with the refinance index hitting its highest level in two months, and the refinance share reaching its highest level since January 2009. Applications for purchase increased for a fifth consecutive week, and are running almost ten percent above their level at this time last year.”

Graph: Calculated Risk

In fact, the 30-year fixed conforming rate for single unit loan amounts under $417,000 dropped as low as 3.125 percent with zero points in origination fees last week, and has been hovering around 3.25 percent with zero points for several weeks. This is largely because the Federal Reserve is continuing its bond buying program, called QE3. The FOMC will probably announce additional bond buying tomorrow that will start in January after the conclusion of Operation Twist. “I don't expect the Fed to announce tomorrow a change to thresholds (using the unemployment rate and inflation) for the timing of the first Fed Funds rate hike,” said Calculated Risk.

And Merrill Lynch has come out with its 2013 real estate forecast. Merrill believes 2012 will go down in history as a year of transition for the housing market. Housing starts are on track to be up 25 percent and home prices are set to rise 5 percent over 2012. Merrill also believes the recovery will continue into 2013 for several reasons. Most importantly, household formation has started to turn higher, reflecting the shortfall of household creation over the prior five years, as we have discussed in past Popular Economics columns.

In addition, listed inventory is low, owing to extraordinarily slow construction and only a gradual reduction of the distressed pipeline. There has also been a shift toward short sales as a means of disposing distressed properties, which boosts the prices of distressed properties, since banks benefit from higher sale prices than via foreclosures. Moreover, investor demand is strong, particularly for distressed inventory.

Merrill also forecasts housing starts to increase another 25 percent to an average of 975,000 and home prices to increase 3 percent in 2013. “The housing market is turning into an engine of growth once again. Housing construction will likely add to GDP growth in both 2012 and 2013 growth,” said Merrill. “The gain in homebuilding will support related sectors such as furniture, building material sales and financial companies. Moreover, construction jobs will finally come back, allowing some of the 2 million people who lost construction jobs to find employment in the field again.”

There will also be a jolt to the economy from the gain in home prices. An increase in home values lifts household net worth and boosts consumer confidence. If consumers perceive the gain in wealth to be permanent, they will increase their current consumption. But the rise in home prices can do something even more vital for the economy – it can spur credit creation, which then fuels housing demand and reinforces the gain in home prices. We are seeing the very early stages of a positive feedback loop between the housing market, credit market and real economy, which can be quite powerful in time, says Merrill Lynch, as quoted by Calculated Risk.

So we can say 2013 should be a very good year for housing, with population pressures increasing as young adults move out of their parent’s home at the same time that banks are ridding themselves of problem properties at a faster rate, and as the Federal Reserve continues to keep interest rates at historic lows.

Harlan Green © 2012

Southland Home Sales Up, Foreclosures Down

The Mortgage Corner

Southern California home sales rose sharply in October as move-up buyers joined investors, according to San Diego-based DataQuick, shifting the mix of homes selling upward as foreclosure resales hit a five-year low. Southern California's real estate market bucked the typical fall slowdown last month, with buyers snapping up pricier homes and sales roaring up 18 percent over the prior month.

Sales hit a three-year high for an October, rising 25 percent from the same month last year. The median sale price for a Southland house last month was $315,000, equal to September and up 17 percent from October 2011, according to DataQuick.

Sales rose sharply in most mid- to-higher-cost markets. Sales between $300,000 and $800,000 – a range that would include many move-up buyers – jumped 41.5 percent year-over-year. October sales over $500,000 rose 55.2 percent year-over-year, while sales over $800,000 rose 52.4 percent compared with October 2011.

Gary Wood’s analysis of Santa Barbara County’s MLS sales including Carpinteria/Summerland, Montecito, Hope Ranch, downtown Santa Barbara and Goleta through October 2012 were similar. Sales rose to 100 from 83 in September. The median sales price also came up from $750,000 in September to about $815,000 in October with escrows rising from 94 to about 120 for the month. The median list price on those escrows showed the biggest upswing—going from $762,540 to almost $900,000.

Year over year, the numbers of sales are still way up with about 1,050 transactions completed compared to 780 last year. The median sales price is basically unchanged but down just a little from $800,050 in 2011 to about $795,000 now. The escrows are also still way up from 841 last year to about 1,150 this year while the median list price on those escrows has risen a little from about $825,000 last year to approximately $830,000 now.

Graph: RealtyTrac

Foreclosure resales – properties foreclosed on in the prior 12 months – accounted for 16.3 percent of the Southland resale market last month. That was down from 16.6 percent the month before and 32.8 percent a year earlier. Last month’s level was the lowest since it was 16.0 percent in October 2007. The foreclosure resales had hit a high of 56.7 percent in February 2009 during the Great Recession.

The delinquency rate for mortgage loans on one-to-four-unit residential properties fell to a seasonally adjusted rate of 7.40 percent of all loans outstanding as of the end of the third quarter of 2012, a decrease from the second quarter of 2012, and a decrease of 59 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

“Mortgage delinquencies decreased compared to last quarter overall, driven mainly by a decline in loans that are 90 days or more delinquent,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “The 90 day delinquency rate is at its lowest level since 2008, and together with the decline in the percentage of loans in foreclosure, this indicates a significant drop in the shadow inventory of distressed loans-a real positive for the housing market. The 30 day delinquency rate increased slightly, but remains close to the long-term average for this metric.  Given the weak economic and job growth in third quarter, it is not surprising that this metric has not improved. ”

And foreclosures nationwide are declining as well, mostly in the 26 so-called non-judicial states that enable Trust Deed auctions, such as California and Texas. This was the largest decline in foreclosure inventory ever recorded. Judicial states’ foreclosure inventory was at 6.61 percent, and the non-judicial states’ inventory was at 2.42 percent, reports the MBA.

Harlan Green © 2012

Housing Construction, Retail Sales Surge

The Mortgage Corner

Another sign that the economy is finally recovering—new housing starts surged 15 percent, to their highest levels since 2008 and the beginning of the Great Recession. This is boosting construction employment in particular, but also finance, insurance and other related sectors. Construction employment is up 7 percent just this year, for instance.

And privately-owned housing building permits in September were at a seasonally adjusted annual rate of 894,000. This is 11.6 percent above the revised August rate of 801,000 and a huge 45.1 percent above the September 2011 estimate of 616,000. This is an even better indicator that new housing inventories, which have fallen to a 4-month low, will recover.

As Calculated Risk reported, Three-fourths of the way through 2012, single family starts are on pace for about 520 thousand this year, and total starts are on pace for about 750 thousand. That is actually an increase of about 20 percent from 2011, and confirms rising builder optimism in the NAHB sentiment survey.

Graph: Calculated Risk

And The Federal Housing Finance Agency (FHFA) just released its August Refinance Report, which shows that Fannie Mae and Freddie Mac loans refinanced through the Home Affordable Refinance Program (HARP) accounted for nearly one-quarter of all refinances in August.

Nearly 99,000 homeowners refinanced their mortgage in August through the HARP program with more than 618,000 loans refinanced since the beginning of this year. This continues the strong pace of HARP refinancing with the program on target to reach a million borrowers in 2012.

In August, borrowers with loan-to-value (LTV) ratios greater than 105 percent continued to account for more than half the volume of HARP loans as HARP enhancements were fully implemented in the second quarter of 2012.
In August, nearly 18 percent of HARP refinances for underwater borrowers were for shorter-term 15- and 20-year mortgages, which help build equity faster.

But the best sign that consumers are feeling more confident was the surge in retail sales, up a huge 1.1 percent.

Graph: Inside Debt

Retail sales rose in September as Americans stepped up purchases of everything from cars to electronics, a sign that consumer spending is driving faster economic growth. Reuters’ Inside Debt reports consumer spending remains the U.S. economy's biggest engine, and expectations for third-quarter economic growth improved after the Commerce Department reported a 1.1 percent increase in retail sales.

Lastly, three and a half years after peaking, the number of California homes entering the foreclosure process fell last quarter to the lowest level since the early stages of the housing bust. Mortgage default filings hit their lowest point since first-quarter 2007, due in large part to a stronger economy and housing market and more short sales, a real estate information service reported.

All of these factors—especially consumer spending--are the reasons economists are upgrading their estimates of GDP growth for the rest of the year. 

Harlan Green © 2012