How Do We Solve It?

 The Mortgage Corner

I speak of the housing shortage, as much as 2 million residential units—owner-occupied and rental units—according to housing economists. What is to be done with mortgage rates at historic highs and material shortages everywhere?

Much of it was the result of the busted housing bubble, and the overbuilding of some one million housing units in the early 2000s. The Great Recession followed, when millions more lost their homes. Construction activity ground to a halt and we are still playing catchup.

 Calculated Risk

Sales of previously owned homes in May fell 0.7% to a seasonally adjusted annual rate of 4.11 million. The stronger-than-anticipated result was still the lowest rate since January and about 20% below the long-term average for May of more than 5 million sales said Calculated Risk. It was the lowest May number since the housing market was recovering from the immediate shock of the Covid-19 pandemic in 2020.

The supply of existing homes for sale is growing slowly. At May’s sales pace, it would take 3.7 months to sell every home on the market. That is the highest in four years, according to Lawrence Yun, the Realtor’s chief economist.

“Eventually, more inventory will help boost home sales and tame home price gains in the upcoming months,” Yun said in a statement. “Increased housing supply spells good news for consumers who want to see more properties before making purchasing decisions.”

Just looking at the existing home sales graph, as many as 7 million homes were sold in early 2000 when the housing bubble peaked. Irrational exuberance reigned, and consumers thought housing prices could never fall. Sales rose again to more than 6 million units in early 2020 when interest rates plunged again during the pandemic.

Zillow the real estate data company, maintains from 2021 to 2022, the U.S. housing shortage grew to 4.5 million homes, up from 4.3 million, while in 2022 the number of U.S. families increased by 1.8 million, while only 1.4 million housing units were built.

It’s the same problem today. Privately‐owned housing starts (i.e., under construction) in May 2024 were at a seasonally adjusted annual rate of just 1,277,000. This is 5.5 percent below the revised April estimate of 1,352,000 and is 19.3 percent below the May 2023 rate of 1,583,000.

Today it is the direct result of the Fed’s inflation fight. High interest rates have

driven up the cost of everything, since real estate is dependent on borrowing large sums of money, as any homebuyer can tell you.

It’s hurting home builders, as Builder confidence in the market for newly built single-family homes was 43 in June, down two points from May, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This is the lowest reading since December 2023.

“We are in an unusual situation because a lack of progress on reducing shelter inflation, which is currently running at a 5.4% year-over-year rate, is making it difficult for the Federal Reserve to achieve its target inflation rate of 2%,” said NAHB Chief Economist Robert Dietz.

The best way to bring down shelter inflation and push the overall inflation rate down to the 2% range is to increase the nation’s housing supply, say the builders. “A more favorable interest rate environment for construction and development loans would help to achieve this aim,” said Dietz.

The Fed can see that inflation has been tamed, as much as possible, given their predictions for strong economic growth the rest of this year. I may be overdoing the bold lettering to make such an obvious truth but what else would boost the housing supply and so reduce inflation?

Harlan Green © 2024

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

Lower Inventory = Fewer Home Sales

The Mortgage Corner

WASHINGTON (February 21, 2018) — Existing-home sales slumped for the second consecutive month in January and experienced their largest decline on an annual basis in over three years, according to the National Association of Realtors. All major regions saw monthly and annual sales declines last month.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, sank 3.2 percent in January to a seasonally adjusted annual rate of 5.38 million from a downwardly revised 5.56 million in December 2017. After last month’s decline, sales are 4.8 percent below a year ago (largest annual decline since August 2014 at 5.5 percent) and at their slowest pace since last September (5.37 million).

Graph: Econoday

Lawrence Yun, NAR chief economist, says January’s retreat in closings highlights the housing market’s glaring inventory shortage to start 2018. “The utter lack of sufficient housing supply and its influence on higher home prices muted overall sales activity in much of the U.S. last month,” he said. “While the good news is that Realtors in most areas are saying buyer traffic is even stronger than the beginning of last year, sales failed to follow course and far lagged last January’s pace. It’s very clear that too many markets right now are becoming less affordable and desperately need more new listings to calm the speedy price growth.”

Total housing inventory at the end of January rose 4.1 percent to 1.52 million existing homes available for sale, but is still 9.5 percent lower than a year ago (1.68 million) and has fallen year-over-year for 32 consecutive months. Unsold inventory is at a 3.4-month supply at the current sales pace (3.6 months a year ago).

Graph: Calculated Risk

“Another month of solid price gains underlines this ongoing trend of strong demand and weak supply. The underproduction of single-family homes over the last decade has played a predominant role in the current inventory crisis that is weighing on affordability,” said Yun. “However, there’s hope that the tide is finally turning. There was a nice jump in new home construction in January and homebuilder confidence is high. These two factors will hopefully lay the foundation for the building industry to meaningfully ramp up production as this year progresses.”

First-time homebuyers are being squeezed because of the housing shortage, as just 29 percent were buyers, down from 32 percent last month.

The median existing-home price for all housing types in January was $240,500, up 5.8 percent from January 2017 ($227,300). January’s price increase marks the 71^st straight month of year-over-year gains, according to the NAR.

New-home sales and construction are beginning to catch up with demand, but interest rates have to remain at their historic lows for this to continue. The 30-year fixed conforming rate is still 4.0 percent for 1 origination point, just 0.50 percent above its historic low. And several Federal Reserve Governors have said the Fed may not hike short term rates anytime soon, if inflation rates don’t move above the current 2 percent target rate.

Harlan Green © 2018

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

Existing-Home Inventory Lowest in 18 years

The Mortgage Corner

There aren’t enough home to sell. Sales of previously-owned homes tumbled in December as an ongoing inventory crunch became more worrisome with few homes to sell in parts of the country. Existing-home sales were down 3.6 percent for the month, though they were up 1.1 percent from a year ago, according to the National Association of Realtors. The NAR said November’s selling pace was revised down to 5.78 million.

The housing market performed remarkably well for the U.S. economy in 2017, said Lawrence Yun, NAR chief economist.

“Existing sales concluded the year on a softer note, but they were guided higher these last 12 months by a multi-year streak of exceptional job growth, which ignited buyer demand,” said Yun. “At the same time, market conditions were far from perfect. New listings struggled to keep up with what was sold very quickly, and buying became less affordable in a large swath of the country. These two factors ultimately muted what should have been a stronger sales pace.”

Graph: Econoday

There are two major reasons for the lack of inventory. Homebuyers are rushing to close deals before interest rates rise further. The 30-year conforming fixed rate is now 3.75 percent for a one point origination fee and climbing, with its maximum single-unit amount raised to $453,100 this January.
And there is a labor shortage with many workers having left the construction industry during the Great Recession, which is slowing the construction of new homes. The lack of inventory has also been driving up home prices, putting many first-time homebuyers out of the market.

“The lack of supply over the past year has been eye-opening and is why, even with strong job creation pushing wages higher, home price gains – at 5.8 percent nationally in 2017 – doubled the pace of income growth and were even swifter in several markets,” said Yun.

Those high-end markets include California, where the median home price now tops $500,000, vs. the new national median price for all housing types at $246,800. So who can afford to live in California these days?

That’s the reason Facebook unveiled plans for the massive new construction project at its Menlo Park, California corporate campus, which is part of Facebook's plans to expand its home base. The 56-acre site, which Facebook bought in 2015 for about $400 million, is located directly across the street from Facebook's headquarters. It will offer 1.6 million square feet of housing, or 1,500 units.

"Facebook is a strong supporter of its local community and consistently recognized as one of the best places in the world to work," said a Facebook spokeswoman. "This project advances both goals, by providing our employees an excellent new housing option within walking distance to campus while investing in new housing opportunities in our local community."

Must any new affordable housing in California and other high cost regions now depend on private corporations? California’s state legislators just passed a bill that would ask voters in November 2018 to approve $4 billion in general obligation bonds to build rental housing for low-income families and fund other existing housing programs. The bond would set aside $1 billion for the state’s veteran home-loan program, which would otherwise run out of money in 2018, according to SF Gate.

But that’s a drop in the bucket for what’s needed to keep up with the state’s population growth. The nonprofit California Housing Partnership estimates that California still needs about 1.5 million more subsidized housing units to meet current demand.

Harlan Green © 2018

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

Motor Vehicles, Housing Will Power 2016 Economy

Popular Economics Weekly

Even though Q1 2016 GDP growth looks weak for a number of reasons (such as lower exports and slumping oil prices that depress energy sector earnings), there are reasons it can go higher in 2016. Oil prices have stabilized, for starters, and exports are rising again as the dollar has weakened against other currencies when the Fed signaled it wouldn’t raise interest rates further until later, if at all this year, due to the worldwide slowdown in growth.

Graph: Trading Economics

 

Firstly, auto sales, a major component of retail sales, should surpass last year’s 17.5 million total, according to industry pundits. Moderate wage growth, declining gasoline prices and continued low interest rates on auto loans will drive new car and light truck sales higher in 2016, said Steven Szakaly, chief economist of the National Automobile Dealers Association, at the Los Angeles Auto Show.

“New light-vehicle sales will rise to 17.71 million units in 2016, a 2.3 percent increase from our forecast of 17.3 million sales in 2015,” Szakaly said. “This would mark the seventh straight year of increasing U.S. new-vehicle sales.”

There is a temporary weakness in motor vehicle production because of a slowdown in current vehicle sales, according to the Fed’s March Industrial Production figures. But production has climbed steadily higher in the last five years and been the strongest component in the Fed’s Manufacturing Index.

And housing sales are picking up, beginning with the just released existing-home sales, up 5.1 percent to a 5.33 million annual rate in March. Existing sales rose in all four major regions last month and are up modestly (1.5 percent) from March 2015. Total housing inventory at the end of March increased 5.9 percent to 1.98 million existing homes available for sale, but is still 1.5 percent lower than a year ago (2.01 million).

 

Graph: Calculated Risk

The above graph shows that existing sales have been rising steadily since 2008 the end of the Great Recession. Unsold inventory is at a 4.5-month supply at the current sales pace, up from 4.4 months in February, but still far too low to stimulate more buying in the lower price ranges, where inventory is most lacking. In fact, inventory has fallen back to 2000 levels, even before the housing bubble that doubled the housing inventory.

Another window into the housing market is the volume of mortgage applications that depend on interest rates, and rates are back to historic lows with the 30-year conforming fixed rate down to 3.25 percent for a 1 point origination fee in California.

Applications increased 1.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 15, 2016. The Refinance Index increased 3 percent from the previous week. The unadjusted Purchase Index increased 1 percent compared with the previous week and is 17 percent higher than the same week one year ago.

Another sign of future growth is the Conference Board Leading Economic Index® (LEI) for the U.S., which increased for the first time in 3 months, up 0.2 percent in March to 123.4 (2010 = 100), following a 0.1 percent decline in February, and a 0.2 percent decline in January.

“With the March gain, the U.S. LEI’s six-month growth rate improved slightly but still points to slow, although not slowing, growth in the coming quarters,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Rebounding stock prices were offset by a decline in housing permits, but nonetheless there were widespread gains among the leading indicators. Financial conditions, as well as expected improvements in manufacturing, should support a modest growth environment in 2016.”

Manufacturer’s new orders, higher stock prices (now above 2015 indexes), and the fact that weekly jobless claims fell to the lowest level since 1973 were the strongest signs of future growth in the Conference Board’s LEI.

Still, it consumer spending that powers most economic activity these days, and consumers will only spend when there’s more market stability, hence certainty in such things as energy prices, which have been fluctuating wildly of late, and an adequate supply of new housing that keeps housing prices within reach of prospective home buyers.

Harlan Green © 2016

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

Huge Jump In Existing-Home Sales

Wow!  Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 0.4 percent to a seasonally adjusted annual rate of 5.47 million in January from a downwardly revised 5.45 million in December. Sales are now 11.0 percent higher than a year ago – the largest year-over-year gain since July 2013 (16.3 percent).

 This is creating a bottle neck for home buyers, as the unsold inventory of homes is down to 4 months, with such a hot sales market.  Yet first-time home buyers are hanging in there with 32 percent of sales, up from 28 percent last year, and below the 40 percent during more normal times.

            The median existing-home price for all housing types in January was $213,800, up 8.2 percent from January 2015 ($197,600). Last month's price increase was the largest since April 2015 (8.5 percent) and marks the 47th consecutive month of year-over-year gains.

            Lawrence Yun, NAR chief economist, says existing sales kicked off 2016 on solid footing, rising slightly to the strongest pace since July 2015 (5.48 million). "The housing market has shown promising resilience in recent months, but home prices are still rising too fast because of ongoing supply constraints," he said. "Despite the global economic slowdown, the housing sector continues to recover and will likely help the U.S. economy avoid a recession."

            The S&P/Case-Shiller U.S. National Home Price Index, a more accurate measure of overall existing-home prices because it uses a 3-month average of same existing-home prices, recorded a slightly higher year-over-year gain with a 5.4 percent annual increase in December 2015 versus a 5.2 percent increase in November 2015.

            Portland, Denver and San Francisco prices continue to rise the fastest, with more than 10 percent annual increases.  But Tampa and Seattle are close behind.  These prices reflect the growing prosperity of high growth regions, and are reflected in a recent survey of cities and regions with the most job creation.

Graph: Marketwatch

           

            This incredible graph captures where job growth is actually happening—on the coasts for the most part.  Marketwatch says cost-estimating website HowMuch.net used data from the Bureau of Labor Statistics to create this three-dimensional representation of the number of jobs added by metro area. It should be no surprise that California with its Silicon Valley led all states with more than 464,000 jobs related.

The Greater New York metropolitan area, which includes Newark and Jersey City, showed the highest increase for any single metro area in the country with 156,400 new jobs. And, the Los Angeles metro area, including Long Beach and Anaheim, was second at 135,100 jobs.

            This means more housing is needed and the construction industry is finally beginning to respond, with housing starts now above a 1 million unit rate, and permits for new housing even higher.  Why are first-timers able to buy?  The medium household income has also risen, up 6.5 percent since 2013, and interest rates are back to historical lows, making home buying more affordable.

            But continuing housing recovery is dependent on more and higher paying jobs.  We know the millennial generation, from 18 to 36 years, will be key to this happening.  They now make up 53 percent of the working age work force. 

            However, their pay is still at the low end, according to data from the Minnesota Population Center's 2014 "American Community Survey" in the Integrated Public Use Microdata Series.  The medians ranged between a low of $18,000 per year in Montana and a high of $43,000 in the District of Columbia. It’s because so many are still teenagers or in school.  But that should change in coming years.

Harlan Green © 2016

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

Housing Construction Continues Increase

The Mortgage Corner

Residential investment and housing starts are usually the best leading indicator for economy, and they show continued growth.  This isn’t the only leading indicator, but it suggests the economy will continue to grow over the next couple of years, says Calculated Risk. Housing starts increased 18.3 percent in 2013 (initial estimate). This was another solid year-over-year increase.

After increasing 28 percent in 2012 and 18 percent in 2013, the 923 thousand housing starts in 2013 were the sixth lowest on an annual basis since the Census Bureau started tracking starts in 1959 (the three lowest years were 2008 through 2012).   But Single Family starts have increased by one-third since the end of the Great Recession, as the supply of foreclosed homes and existing-home inventories have sharply declined.

Graph: Calculated Risk

Starts averaged 1.5 million per year from 1959 through 2000.  Demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will probably increase another 50 percent + from the 2013 level, says Calculated Risk.

But there is a caveat to this scenario. Most economists are banking on new Fed Chairwoman Yellen to maintain QE3 at least through this year, while the ‘Taperians’ such as Governors Lacker and Fisher want to end it sooner, which would continue to boost mortgage rates, needless to say.

The latest mortgage origination figures support the slowdown in applications since rates have risen, according to the MBA’s weekly survey. Though there is a growing demand for new homes with inventories of existing homes on the market down to a 5.1 months’ supply, whereas inventories were as high as 8 months post-housing bubble.

Mortgage applications increased 11.9 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 10, 2014.

But it is down to its lowest level during the Great Recession. The MBA’s purchase applications index is also down for the year. This is mainly due to rise in mortgage rates of some 1 percent since April and former Fed Chairman Bernanke’s announcement that QE3 would begin to end sometime this year.

Graph: Calculated Risk

So it is not a given that real estate sales and prices will rise in 2014 as they have in 2013, when the S&P Case-Shiller Home Price Index rose some 13.6 percent. The key will be construction spending, which has been robust in 2013.

Graph: Calculated Risk

The U.S. Census Bureau just announced that privately-owned housing starts in December were at a seasonally adjusted annual rate of 999,000. This is 9.8 percent below

the revised November estimate of 1,107,000, but is 1.6 percent above the December 2012 rate of 983,000. Single-family housing starts in December were at a rate of 667,000; this is 7.0 percent below the revised November figure of 717,000. An estimated 923,400 housing units were started in 2013. This is 18.3 percent above the 2012 figure of 780,600.

Harlan Green © 2013

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

Case-Shiller Home Prices Take Off

The Mortgage Corner

The July S&P Case-Shiller home price index shows home prices are in full recovery mode. Over the last 12 months, prices rose 12.3 percent and 12.4 percent as measured by the 10- and 20-City Composites in the major cities and metro areas, which are a 3-month average of same-home increases. And because the Fed still in full credit easing mode with its September decision to maintain QE3 securities’ purchases at $85 billion per month, interest rates are beginning to decline

Graph: Calculated Risk

Data through July 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices showed increases of 1.9 percent and 1.8 percent from June for the 10- and 20-City Composites. For at least four months in a row, all 20 cities showed monthly gains. Phoenix posted 22 consecutive months of positive returns. Although home prices in all the cities increased, 15 cities and both Composites those increases slowed in July versus June.

“Home prices gains are holding their 12 percent annual rate of gain established by the two Composite indices in April,” says Chairman David M. Blitzer, of the S&P Dow Jones Indices. “The Southwest continues to lead the housing recovery. Las Vegas home prices are up 27.5 percent year-over-year; in California, San Francisco, Los Angeles and San Diego are up 24.8, 20.8 and 20.4 percent, respectively. However, all remain far below their peak levels.”

The result of lower mortgage rates is mortgage applications are also increasing, after falling sharply in May when the Fed first hinted it would begin to tighten credit in the fall. Mortgage applications increased 5.5 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 20, 2013.

The Refinance Index increased 5 percent from the previous week. The seasonally adjusted Purchase Index increased 7 percent from one week earlier. The Purchase Index was at its highest level since July 2013.

Graph: Calculated Risk

The HARP share of refinance applications increased to 41 percent from 40 percent the week before, and is the highest since MBA started tracking this measure in early 2012. So there is the feeling that many home owners with negative home equity are only now taking advantage of refinancing their underwater mortgages at current interest rates. The HARP program allows mortgage holders to refinance when debt can be as much as 150 percent of their home’s value.
So the Federal Housing Finance Authority has stepped up its campaign to encourage more homebuyers to apply for HARP refinancing. Acting FHFA Director Edward J. DeMarco said that 2.8 million homeowners have refinanced through HARP but with mortgage rates still historically low and HARP eligibility requirements expanded, other qualified homeowners could reduce their monthly mortgage payments or build their equity faster with a shorter term mortgage through the program.

DeMarco told Bloomberg News in an interview this weekend that FHFA used focus groups to find out why borrowers with high rates hadn't yet tried to refinance through HARP. They found many didn't realize they were eligible. They thought they had to be delinquent on their mortgages before the government would help them. DeMarco said he hoped the educational outreach would bring in an additional 2 million HARP borrowers.

This is while total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 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, reported the National Association of Realtors.

Harlan Green © 2013

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

Housing Recovery Is For Real

The Mortgage Corner

Those who doubt the real estate recovery aren’t paying attention to the latest sales’ data. We reported last week the Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 0.3 percent to 106.0 in April from 105.7 in March, and is 10.3 percent above April 2012 according to the National Association of Realtors. The data reflect contracts but not closings.

And Southern California home sales were the highest since May 2006, reports DataQuick, The median price paid for all new and resale houses and condos sold in the six-county Southland was $357,000 last month, up 23.1 percent from $290,000 in April 2012, and the highest since June 2008, when the median was $360,000. “What seems obvious is that if prices keep rising fast they’ll cause many more people to list their homes for sale,” said DataQuick President John Walsh, “and that increase in supply should at least slow the rate of price appreciation,” he said.

The doubters are mainly those who believe the Federal Reserve is artificially stimulating home sales by keeping interest rates so low, such as Barron’s conservative economist Gene Epstein. “Why barely one cheer, then (for the housing recovery)? Because this housing recovery has been so stuffed with government steroids, you wonder if it could make it on its own if these drugs were withdrawn.”

But lower interest rates are necessary when consumers buying power has shrunk so badly due to the Great Recession. That is to say, such low interest rates make housing more affordable for the majority of home buyers. Rates will rise of their own accord when incomes (and so inflation) begins to rise, and business activity heats up. Interest rates are really controlled by the demand for money, which increases when spending increases.

Home contract activity is 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.

Graph: Econoday

Lawrence Yun, NAR chief economist, said a familiar pattern has developed.  “The housing market continues to squeak out gains from already very positive conditions.  Pending contracts so far this year easily correspond to higher closed home sales in 2013,” he said.  Total existing-home sales are expected to rise just over 7 percent to about 5 million this year.”

This is huge, and though inventories are rising, it’s not enough to keep prices from continuing to rise. “Because of inventory shortages, higher home sales will push up home values to the highest level in five years,” Yun said.  The national median existing-home price should increase close to 8 percent and exceed $190,000 in 2013.

And the S&P Case-Shiller Home Price Index reports the year-on-year increase of 10.9 percent is the first double-digit gain since May 2006.

Graph: Econoday

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. 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 at 11.0 percent?

Harlan Green © 2013

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

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

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

Dr. Robert Shiller Says No Housing Boom

The Mortgage Corner

Dr. Robert Shiller, Yale Econ Professor, and co-creator of the Case-Shiller Home Price Index, has become very cautious in his latest articles. Don’t expect much in the way of a housing boom in 2013. He isn’t even sure even prices will continue to rise as they have over the past 3 years given all the headwinds, such as tighter mortgage regulations, a declining percentage of homeowners versus renters, and low consumer expectations in general.

This is in spite of the fact that home sales are up some 5 percent, and his own price index is 5.5 percent higher in one year, for the strongest year-over-year growth since August 2006 with increases in 19 of 20 cities..

“On the one hand, there were sharp price increases in 2012, with the S.&P./Case-Shiller 20-City Index, said Dr. Shiller, “which I helped devise, up a total of 9 percent over the six months from March to September. That comes after what was generally a decline in prices for five consecutive years. And while prices dropped very slightly in October, the trend was quite encouraging for the market.”

“But some of these changes were seasonal,” he continues. “Home prices have tended to rise every midyear and to fall slightly every fall and winter. And for some unknown reason, seasonal effects have become more pronounced since the financial crisis.”

Yet he cites a consensus of some 100 economists that real prices will rise 1 to 2 percent over inflation in coming years. Folks, that is the historical norm for housing prices in the 20^th century that Dr. Shiller himself cites in his second edition of Irrational Exuberance.

Why so much pessimism from the Oracle who actually coined the term ‘irrational exuberance’ that Fed Chairman Greenspan used in his famous speech so many years ago?

Graph: Calculated Risk

I believe he is neglecting what is behind the current surge in home buying—pent up demand, and record low interest rates that the Fed has vowed to keep low until the unemployment rate falls to the 6 percent range from the current 7.8 percent. Pent up demand is a powerful driver of home building, for one thing. And household formation is predicted to double to some 1.3 million per year in coming years from a low as 350,000 annually during the Great Recession.

That, and real interest rates make homes the most affordable in history, according to the National Association of Realtors. While this won’t bring us back to boom times, it will at least restore housing to its proper place in the economy.

Even though national existing-home sales declined 1.0 percent to a seasonally adjusted annual rate of 4.94 million in December from a downwardly revised 4.99 million in November, sales are 12.8 percent above the 4.38 million-unit level in December 2011, says the National Association of Realtors.

Graph: Calculated Risk

The result is total housing inventory at the end of December fell 8.5 percent to 1.82 million existing homes available for sale, which represents a 4.4-month supply at the current sales pace, down from 4.8 months in November, and is the lowest housing supply since May of 2005.

This means new-home construction will have to pick up to satisfy the increasing demand for housing, as we have said in past weeks. And the outlook is good, with privately-owned housing starts in December at a seasonally adjusted annual rate of 954,000. This is 12.1 percent above the revised November estimate of 851,000 and is 36.9 percent above the December 2011 rate of 697,000, according to the US Census Bureau.

Graph: Econoday

On a year-over-year basis, private residential construction spending is now up 19 percent. Non-residential spending is up 8 percent year-over-year mostly due to energy spending says Calculated Risk. Public spending is down 3 percent year-over-year, and that is the real problem. Governments should be spending much more on public infrastructure, when and if the economy returns to more normal growth.

Hence we do not share Dr. Shiller’s uncertainty about the direction of home prices. Extremely tight housing inventories mean demand has picked up substantially. It all might depend on one’s definition of a housing ‘boom’. No one expects a return to the bubble years when consumers borrowed more than they earned. Maybe it’s a relief just to return to a more normal housing market?

Harlan Green © 2013

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Household Formation Key To Housing Recovery

Financial FAQs

The formation of new households—young adults leaving the homestead—has always been an important ingredient of home sales. We are talking about 18 to 34 year-olds who have been staying at home during the Great Recession for understandable reasons—whether lack of jobs, or college. And 2011 was the first year that household formation returned to more normal levels, which is why we are seeing housing beginning to recover.

One impact of the Great Recession is that it markedly reduced the rate at which Americans set up households, said a recent Cleveland Federal Reserve report on household formation. But pent up demand from young adults finding jobs will certainly reverse that trend and lead to a stronger sales and price increases.

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, but it has also negatively impacted the housing market, as lower household formation rates reduce housing demand.

Graph: Cleveland Fed

While younger adults between the ages of 18 and 34 make up a relatively small proportion of heads of households, they account for almost three-quarters of the overall shortfall in household formation. The growth in the number of younger households was lower in metropolitan areas that experienced weaker labor and housing markets, though, to be sure, household formation slowed across the United States, consistent with the widespread nature of the shocks to output, labor, and housing markets that occurred during the Great Recession.

From 1997 to 2007, about 1.5 million households were formed on average each year in the United States. Then the Great Recession hit, and in the ensuing three years, the rate fell to 500,000 per year. This decline in household formation occurred even as the U.S. population was expanding at a rate of 2.7 million per year, only slightly below the rate of 2.9 million a year observed between 1997 and 2007. A “modest” rebound has since followed during the economic recovery, with 1.1 million new households being created in 2011.

That is why we predict much better years ahead for housing. The Harvard Joint Center for Housing Studies (JCHS) in a recent blog said, “Given the trends of the last five years, the spurt in household growth to an annual rate of 900,000 through the first three quarters of this year is notable.  If the upward trend in household growth continues, housing should see a sustained recovery in 2013.”

Graph: JCHS

In fact, we are already seeing the rebound in 2012, with both housing construction and new home sales increasing significantly. The Census Bureau reports New Home Sales in October were at a seasonally adjusted annual rate (SAAR) of 368 thousand. This was down from a revised 369 thousand SAAR in September, but up 17 percent from October 2011. Supply, at 4.8 months for the lowest reading since 2005, is very tight and actually is limiting sales, according to Calculated Risk.

Graph: Calculated Risk

And sales of existing homes increased in October, even with some regional impact from Hurricane Sandy, while home prices continued to rise due to lower levels of inventory supply. Total housing inventory at the end of October fell 1.4 percent to 2.14 million existing homes available for sale, according to the National Association of Realtors, which represents a 5.4-month supply at the current sales pace, down from 5.6 months in September, and is the lowest housing supply since February of 2006. It is 21.9 percent below a year ago when there was a 7.6-month supply, a sure sign that housing is already in recovery.

Harlan Green © 2012

New-Home Sales, Mortgages Boosting Growth

The Mortgage Corner

Following the 15 percent housing construction bump in September, new-home sales rose 11.7 percent and are up 27 percent over September 2011, as inventories have shrunk to a meager 4.5 months, especially at the affordable level. The Census Bureau reports New Home Sales in September were at a seasonally adjusted annual rate (SAAR) of 389 thousand. This was up from a revised 368 thousand SAAR in August. This is the highest level since April 2010 and the tax credit related bounce, says Calculated Risk.

Graph: Calculated Risk

The Mortgage Bankers Association (MBA) also expects to see $1.3 trillion in mortgage originations during 2013, largely driven by a spillover of refinances into the first half of the year. This is thanks in large part to the Fed’s QE3 that has pushed 30-year fixed conforming rates to 3.125 percent with 0 points in California at this writing.

The MBA also upwardly revised its estimate of originations for 2012 to $1.7 trillion, approaching levels at the height of the housing boom. MBA expects to see purchase originations climb to $585 billion in 2013, up from a revised estimate of $503 billion for 2012. In contrast, refinances are expected to fall to $785 billion in 2013, down from a revised estimate of $1.2 trillion in 2012, as more new homes are built.

Graph: Calculated Risk

“We expected 2012 originations to be front-loaded in the first half of the year, with refis falling off with rate increases, said Jay Brinkmann, MBA’s Chief Economist. “Instead we saw the refinance market grow during the year due to a combination of low rates, thanks to QE3 and slowing global growth because of continuing problems in Europe, and adjustments in the HARP and FHA refinance programs. We expect 2013 refinance originations to play out like our original expectations for 2012, with a long tail of refis extending through the first half of the year followed by a rapid drop-off in the second half.”

The bottom line is that with banks still holding some 2 million plus of the so-called ‘shadow inventory’ of existing homes, as they work through their homes in default, the demand for new homes should continue to grow. Serious delinquencies, which are the main driver of the shadow inventory, declined the most from April 2012 to July 2012 in Arizona (3.2 percent), Pennsylvania (2.8 percent), New Jersey (2.3 percent), Delaware (2.2 percent) and Maine (2.2 percent).

In the end, an improving jobs picture will be most effective in bringing down serious delinquencies, and so the shadow inventories further—thus increasing the supply of houses available for sale. And employment is improving with 150,000 private sector jobs per month created just over the past year, enough to absorb new entrants.

Harlan Green © 2012

Better Growth and Jobs Ahead?

Popular Economics Weekly

The U.S. economy is now growing faster than the rest of the world. And the Fed just announced it will discuss a possible expansion of the size of its third round of bond buying and “better ways to guide markets about future policy actions” at this Wednesday’s FOMC meeting.

This is huge, and markets rallied on Monday’s announcement prior to the meeting because there is no other stimulus spending in the works with austerity causing recessions in Europe and even China slowing. So it looks like the U.S. will once again be the world’s engine of growth that prevents another worldwide recession.

Even Barron’s is sounding upbeat on future growth—at least according to the Levy Forecast. The U.S. is “improving its manufacturing, competitiveness, containing its depression, cleaning up private balance sheets, developing greater energy independence. (read abundant natural gas)…Furthermore, the people and government of the U.S. have withstood all kinds of military, political, and economic challenges without collapsing or losing their free markets or culture of innovations.”

In the case of the Fed, words can mean as much as actions, since no one wants to bet against our Federal Reserve—and by proxy the U.S. Dollar as the world’s preeminent reserve currency.

The biggest monetary-policy development since the last Fed meeting was that Narayana Kocherlakota, president of the Minneapolis Fed, also came out in support of more accommodative numerical targets. In what one Fed watcher called a plot twist out of an Alfred Hitchcock movie, Kocherlakota called on the Fed to hold interest rates at zero for another four years until the unemployment rate hits 5.5 percent. Only a few months earlier, Kocherlakota, a leading inflation hawk, had advocated a rate hike before the end of this year.

Two signs of greater growth ahead were boosts in retail sales and the Conference Board’s Index of Leading Economic Indicators (LEI). Housing prices are also rising again as inventory shortages are slowing sales.

Graph: Econoday

The consumer was out spending more than expected in September—even after discounting gasoline prices.  Apple also appears to have bumped the numbers up.  Total retail sales in September advanced 1.1 percent after gaining 1.2 percent the month before.  Motor vehicle sales increased 1.3 percent after a 1.8 percent jump in August.

The best known predictor of future growth is the LEI, and the Conference Board’s index of leading indicators jumped in September but with help in August from a downward revision. The leading index increased 0.6 percent in September, following a 0.4 percent decline the prior month—originally down 0.1 percent.

Graph: Econoday

And though existing-home sales are slowing because of falling inventories, the national median existing-home price for all housing types was $183,900 in September, up 11.3 percent from a year ago. The last time there were seven consecutive monthly year-over-year increases was from November 2005 to May 2006, according to the NAR.

Graph: Calculated Risk

The Fed has made what amounts to a promise to not only keep interest rates low for years—maybe up to 4 years, if Fed Governor Kocherlakota is to be believed—until the unemployment rates drop substantially. This is a promise that not only the U.S., but the whole world will listen to given the Fed’s preeminence in supporting growth.

Harlan Green © 2012

Home Prices Up, New-Home Sales Surging

The Mortgage Corner

Sales of newly built, single-family homes rose 7.6 percent to a seasonally adjusted annual rate of 369,000 units in May, according to newly released data from HUD and the U.S. Census Bureau. Why are new-home sales important? Because they indicate lower housing inventories, as fewer distressed homes enter the market. Consequently home prices are beginning to rise with the Case-Shiller Home Price Index the latest to show improving housing values.

The S&P/Case-Shiller 20-city composite existing-home index for same-home sales gained 1.3 percent with 19 out of 20 cities registering gains, to take the year-on-year drop from 2.6 percent to 1.9 percent.

Graph: Calculated Risk

Of the 20 cities measured, only Detroit took a step backward, with a 3.6 percent reversal. Even Atlanta, where prices were 17 percent below year-ago levels, enjoyed a 2.3 percent monthly increase. Where are prices increasing the fastest? In Florida, Arizona, and California, the heart of the housing bubble.

“It’s been a long time since we enjoyed such broad-based gains,” said David Blitzer, chairman of the index committee at S&P. “While one month does not make a trend, particularly during seasonally strong buying months, the combination of rising positive monthly index levels and improving annual returns is a good sign.”

New-home sales are 19.8 percent higher compared to one year ago. Still, the sale of new homes remains far below its pre-recession peak and reflects an industry trying to dig out from its worst slump in modern times, mainly the huge inventory of unsold existing homes. But the good news is that existing-home inventories are declining to more historical levels, which boosts both prices and new-home construction, as we said.

Graph: Calculated Risk

"May's sales report is a welcome sign that the market has returned to a more solid growth path following lackluster reports in March and April, and is in keeping with our expectations for continued, steady improvement through the end of this year," said NAHB Chief Economist David Crowe. "While the current sales rate remains low by historical standards and continues to be constrained by challenges related to credit availability for builders and faulty appraisals, the ongoing decline in the month's supply of new homes will necessitate additional construction in certain markets going forward."

Regionally, new-home sales were mixed in May. While the Northeast and South posted solid gains of 36.7 percent and 12.7 percent, respectively, the Midwest and West showed respective declines of 10.6 percent and 3.5 percent.

Harlan Green © 2012