What Happens When % Rates Go Even Lower?

The Mortgage Corner

FRED

The NAR’s pending home sales index was softer than expected in July, thereby reversing nearly all of its June increase.  That left the index with a slight YOY decline of 0.3 percent.  Those results probably mean at least part of the July rebound in existing home sales will be reversed in August, though any drop in August resales may be milder than the July decline in the pending index, says market observer ICAP, a Reuters subsidiary.

Interest rates are down and they may go even lower, if no recession looms due to other factors (trade war?). Harvard economics Professor Kenneth Rogoff said recently that it isn’t out of realm of possibility that more Central Banks might introduce negative interest rate yields to prevent another recession as is already the case in the EU and Japan.

But lower interest rates also boost the value of housing, increasing the demand for housing because more borrowers become eligible to buy; unless builders are able to increase production. But that isn’t certain with the 25 percent increase in the Canadian lumber tariff, which has increased construction costs $8,000, according to estimates, and the severe construction labor shortage.

The Guardian reports Jyske Bank, Denmark’s third largest, has begun offering borrowers a 10-year deal at -0.5 percent, while another Danish bank, Nordea, says it will begin offering 20-year fixed-rate deals at 0 percent and a 30-year mortgage at 0.5 percent.

There’s also another effect of lower rates. Barron’s economist Matthew Klein states the precipitous drop in interest rates “should have a big impact on refinancing activity. U.S. households owe roughly $9.4 trillion in mortgage debt, and a bit more than half of that takes the form of conventional home loans that conform to standards set by Fannie Mae and Freddie Mac. More than 90 percent of those 30-year mortgages have an interest rate above the current market rate.”

Not all will choose to refinance, of course. Black Knight, a mortgage research firm, calculates about 10 million mortgages would be candidates for refinancing, based on today’s market rate (3.6 percent), interest rates on existing mortgages (at least 4.25 percent), credit score (above 720), and loan-to-value ratios (below 80 percent).

Should market rates drop to 3.4 percent, Klein quotes Black Knight estimates that the number of potential refinancing candidates would jump to 13 million. Mortgage rates of 3 percent, which would represent a sharp decline from current levels, would translate into 20 million refi candidates.

This is now looking like a real possibility. We know what happened the last time there was a precipitous drop in interest rates; the housing bubble. Rates had dropped sharply after the 2001 recession, and then Fed Chair Alan Greenspan labored to keep interest rates too far below existing inflation rates to finance the War on Terror that frittered away 4 years of budget surpluses inherited by GW Bush.

It led to double-digit home price increases for several years, hence the housing bubble; which in turn led to immense overbuilding and the liar-loans pushed by lenders to sell as many homes as possible.

Today the biggest difference is that we don’t have inflation rates of 3-5 percent that existed in the early 2000s, therefore not as much fuel to boost housing prices. Values are currently on the down trend and in the 3 percent range, per the Case-Shiller Index as we speak.

“The economic impact would be noticeable under any of these scenarios,” says Klein. “According to Freddie Mac, households that refinanced in April through June, when mortgage rates averaged 4%, already have saved about $140 each month, or roughly $1,700 a year. For perspective, the typical U.S. homeowner with a mortgage spends $5,000 per year on groceries. Evercore estimates that the average borrower could save about $4,560 annually by refinancing into a new mortgage at 3.5%.”

Lower interest rates could give a big boost to the longest economic recovery on record, putting more money in consumers’ pockets, should the downward interest rate spiral that Professor Rogoff predicts become a reality. It could also create another housing bubble; take your pick!

Harlan Green © 2019

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

How Strong is 2019 Housing Market--Part II?

The Mortgage Corner

FRED

We asked just how strong is the housing market last month with interest rates beginning to fall again. Lawrence Yun, NAR’s chief economist, said he is not overly concerned about the trending drop in existing-home sales reported in May.

“First, we are seeing historically low mortgage rates combined with a pent-up demand to buy, so buyers will look to take advantage of these conditions,” he said. “Also, job creation is improving, causing wage growth to align with home price growth, which helps affordability and will help spur more home sales.”

So-called ‘house-flipping’ (homes sold that are owned less than 2 years) is becoming a significant trend, meaning housing prices have risen enough that home buyers are beginning to buy homes they intend to sell in less than 2 years; which also happened in early 2000s when the housing bubble took off. Speculators are hoping to make a quick buck, in other words, as there is a rather severe lack of available inventory in the affordable and mid-price ranges.

That has left a big market for rehab specialists who can get their hands on physically distressed or out-of-date properties for peanuts. The median sales price of flipped homes during the first quarter was $215,000, according to Attom Data Solutions, a real-estate information firm.
ATTOM Data Solutions just released its Q1 2019 Home Flipping report and found that 7.2 percent of all home sales during the first quarter reached a new high flipping rate, the highest since Q1 2010.

The 7.2 percent flipping rate is up from 5.9 percent in the previous quarter and up from 6.7 percent a year ago. However, while flippers are flipping, gross profits are stumbling.

“Homes flipped in Q1 2019 sold at an average gross profit of $60,000, down from an average gross flipping profit of $62,000 in the previous quarter and down from $68,000 in Q1 2018 to the lowest average gross flipping profit since Q1 2016’” said the report.

 

attomdata.com

This is further evidence of the lack of affordable housing inventory, even though sales of previously-owned homes have fallen in three out of four months this year. However new-home sales are running about 7 percent higher than last year’s pace, says MarketWatch’s Andrea Riquier. This is while home prices accelerated in April for the first time in a year.

Mortgage applications increased 26.8 percent from one week earlier. Refinance applications are up 48 percent and purchase applications up 20 percent without seasonal adjustments, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending June 7, 2019.

"Mortgage rates for all loan types fell by a sizeable margin for the second straight week, pulled down by trade tensions with China and Mexico, the financial markets reacting to more bearish communication from several Fed officials, and weaker than expected hiring in May," said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting. "Despite the less positive outlook, both purchase and refinance applications surged, driven mainly by these lower rates. The refinance index jumped 47 percent to its highest level since 2016."

No wonder, as the 30-year conforming fixed rate is holding at 3.50 percent for less than a 1 pt. origination fee, as interest rates are back to historic lows last seen during the Fed’s QE programs, as I said. The super-conforming fixed rate with loan amounts to $625,500 also now available at 3.50 percent.

Harlan Green © 2019

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

Why Such Restrictive Mortgage Lending?

The Mortgage Corner

Earlier this month, researchers at the Urban Institute’s Housing Finance Policy Center published some of their research on lending standards. Drawing on data from the Home Mortgage Disclosure Act, they found that lower-credit applicants accounted for only 33 percent of all applicants in 2015. That compares to 62 percent in 2006, at the height of the bubble, and 50 percent in 2000, when market conditions were generally considered balanced.

Graph: Urban Institute

What determines a “lower-credit applicant’, according to the Urban Institute? A FICO score below 700, a loan-to-value ratio less than 78 percent, and debt to income ratio less than 30 percent. That means prospective homeowners and borrowers are either easily discouraged, or other factors that tighter credit criteria are at play, since 700 is still a good credit score and even a 10 percent down payment with 45 to 50 percent debt to income ratios usually mean a credit-worthy borrower in today’s housing markets.

Of course it makes sense that borrowers with “less than perfect credit” would have a more difficult time qualifying for a mortgage. But why 7 years into this recovery would so many lower credit applicants still have problems qualifying?

There are a number of factors, including higher home prices, of course. And incomes are not rising as they should even with this low inflation environment, while mortgage rates remain historically low—still below 4 percent for conforming 30-year fixed rates—an incredible boon for prospective homebuyers given the low inflation environment..

In fact, it’s not so much that lending standards are stricter. Rather, thanks to the government ownership of conventional mortgage giants Fannie Mae and Freddie Mac, mortgages have become more expensive because of so-called fee addon’s with “less than perfect” credit scores below 700, which Fannie Mae and Freddie Mac have tacked on more recently.

Why discourage what are very credit-worthy borrowers in normal times? Costs go up exponentially with credit scores below 720 for Fannie Mae and Freddie Mac guaranteed mortgages—as much as 2.5 points, which translates to an equivalent 0.625 percent rate increase.

It seems that the US Treasury has been trying to discourage all but the most credit-worthy borrowers, all in the name of down-sizing the GSEs. In fact the Obama Treasury Department has made no secret of wanting to close down Fannie and Freddie, which is why it has been taking all of its profits since a 2012 modification to Treasury’s conservation agreement, rather than allowing them to build up their capital base.

Graph: Calculated Risk

Yet delinquency rates are almost back to historical levels. Fannie Mae reported that the Single-Family Serious Delinquency rate barely increased to 1.23 percent in November, up from 1.21 percent in October. Big Deal! The serious delinquency rate is down from 1.58 percent in November 2015. But that is close to the long term delinquency rate that is just under 1 percent. The definition of serious delinquency is mortgage loans that are "three monthly payments or more past due or in foreclosure".  

The Urban Institute’s Laurie Goodman, co-director of the Housing Finance Policy Center, sees the decline in lower-credit applicants as clearly problematic, and symptomatic of an overly-tight mortgage market, although it’s not clear whether would-be applicants are holding back because they are aware they may not qualify, or for some other reason, such as not having enough money for a down payment or losing interest in homeownership.

Earlier Urban analysis suggested that tight lending meant that 1.1 million mortgages that would have been made in 2001 were “killed” – never written – in 2015. The real answer to this problem of what is really a defacto denial of credit to lower income homebuyers is to pry Fannie Mae and Freddie Mac from the greedy grasp of Treasury and return them to the private marketplace.

There are many forms that could take, but it means Congress and the Trump Administration has to show some initiative.

Harlan Green © 2017

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

Home Sales, Consumer Confidence Still Rising

The Mortgage Corner

Sales of newly built, single-family homes rose 3.5 percent in June from an upwardly revised May reading to a seasonally adjusted annual rate of 592,000 units, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. New home sales are up a huge 9.3 percent in the second quarter of 2016 from the first quarter.

And the National Association of Realtors’ pending home sales index rose to 111.0 from 110.8 in May. The index is 1.0 percent higher than a year ago, due mostly to record low mortgage rates and the loosening of conventional qualification requirements by Fannie Mae and Freddie Mac. That was probably an inevitable correction following a massive three-month increase totaling 9 percent from February through April, said Reuters.

And this is severely crimping supply, pushing down housing inventories into the 4 month range, which in turn should push housing construction to new highs. But that should five another boost to growth, and consumer confidence.

“The fact that new home sales reached their highest pace in over eight years shows the housing market is gaining momentum,” said NAHB Chief Economist Robert Dietz. “The market should continue to firm throughout the year, propelled by low mortgage interest rates and solid growth in employment.” 

Graph: Econoday

Consumer confidence is also near post-recession highs, at 97.3 in July and nearly holding onto June’s 5 point jump. “Consumer confidence held steady in July, after improving in June,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers were slightly more positive about current business and labor market conditions, suggesting the economy will continue to expand at a moderate pace.”

The main reason for their optimism is real, after tax incomes are now rising some 2.5 percent, which is enough that consumers are able to pay down their debt. Morgan Stanley in a recent research note says the amount of debt relative disposable income has fallen sharply. It currently stands at about 106 percent, down from 135 percent in 2008. And the ratio of payments to after-tax income has slipped near the lowest levels of the past three decades.

But Morgan Stanley expects the ratio of capital spending-to-sales at S&P 1,500 companies to slip to 4.6 percent by the end of 2016, excluding energy and utilities. That metric stood at 6 and 9 percent before the last two recessions, not a good sign for future robust growth. If so, it means slow, steady growth for the foreseeable future. Capital spending declined in key sectors like energy, materials, telecom and consumer staples during the third quarter, which means corporations aren’t investing much in these areas. And nonfinancial companies in the S&P 1500 are now sitting on some $1.7 trillion in cash, with nowhere to put it but into more stock buybacks and higher CEO salaries.

Jobs-hard-to-get, a subcomponent of the present situation index for consumer confidence, hints at a better July employment report, falling to 22.3 percent from 23.7 percent in June which was already a very strong month for the labor market. And readings on future employment, which is a subcomponent of the expectations index, also show improvement with slightly more seeing more jobs opening up and fewer seeing fewer jobs ahead, said the Conference Board report.

Fannie and Freddie’s conforming and non-conforming Hi-Balance loan terms are also more accommodating, with mortgages now obtainable up to 95 percent loan to values even for Hi-Balance maximum loan amounts of $625,500. They have also removed some of the additional charges for credit scores below 720, which will help to make those mortgages more affordable.

There is of course the slim possibility that the Federal Reserve will raise interest rates sometime later this year, which could ultimately slow down consumer spending and this housing recovery. In just released minutes from its latest FOMC meeting, Fed Governors said “Near-term risks to the economic outlook have diminished,” which some pundits believe could hint at a possible rate hike in upcoming FOMC meetings.

This could hurt Morgan Stanley’s prediction of future growth, as well. So stay tuned!

Harlan Green © 2016

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

Pending Home Sales, Mortgage Applications Soar

The Mortgage Corner

Pending home sales continued to rise in May and are now at their highest level in over nine years, according to the National Association of Realtors. Gains in the Northeast and West were offset by small decreases in the Midwest and South. This is why we expect both existing and new-home sales to be the best since 2006 at the height of the housing bubble.

And mortgage activity is soaring, thanks to ultra-low interest rates, with total mortgage origination balances reaching $466 billion in the first quarter -- nearly a 75 percent increase from the same time a year ago, according to the Equifax National Consumer Credit Trends Report.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, climbed 0.9 percent to 112.6 in May and is now 10.4 percent above May 2014. The index has now increased year-over-year for nine consecutive months and is at its highest level since April 2006.

Graph: Econoday

Pending sales were strongest in the West, up 2.2 percent in May for a 13.0 percent year-on-year gain. Pending sales in the South, up 10.6 percent year-on-year, have also been strong though the region though lower by 0.8 percent in the latest month. The Midwest was down 0.6 percent for a year-on-year plus 7.8 percent, but were up sharply in the Northeast where housing came back strongly from the severe winter, up 6.3 percent in this report for a year-on-year again of 10.6 percent.

NAR chief economist Lawrence Yun says contract activity rose again in May for the fifth straight month, increasing the likelihood that home sales are off to their best year since the downturn. "The steady pace of solid job creation seen now for over a year has given the housing market a boost this spring," said Yun. "It's very encouraging to now see a broad based recovery with all four major regions showing solid gains from a year ago and new home sales also coming alive."

Equifax said the bulk of mortgage growth has been to first mortgages, which zoomed nearly 80 percent compared to the first quarter of 2014 to $430 billion. The number of first mortgages originated in the first three months of the year was 1.78 million -- a 55 percent increase over the same time a year ago and 14 percent higher than in the fourth quarter of 2014. Originations of home equity lines of credit (HELOCs) rose 30 percent to $30.9 billion and new home equity installment loans climbed 13.6 percent to $5.0 billion.

• Average first-lien mortgage loan amounts rose to $232,547 in March, an 11.5% increase over March 2014;
• The number of first mortgages originated in the first three months of the year was 1.78 million, a 54.9% increase over the same time a year ago and 13.6% higher than in the fourth quarter of 2014;
• The share of first mortgage accounts originated in the first quarter that went to consumers with an Equifax Risk Score below 620 (generally considered subprime) was 4.5%;
• 3.1% of newly originated balances in the first quarter went to borrowers with subprime credit scores. For the same time a year ago, the share was 3.5%; and
• The average loan amount for a first mortgage originated to a borrower with a subprime credit score in March 2015 was $152,260, up 9.9% from March 2014.

"The drop in mortgage rates that began in the fourth quarter of last year kicked off a refinance boomlet that accelerated in the first quarter, as rates fell further, averaging just 3.7 percent for the first three months of this year," said Amy Crews Cutts, Chief Economist at Equifax. "While rates have recently reversed that trend and are back up to about 4 percent, they remain extremely low historically. These rates, coupled with a housing market that is showing signs of vigor, should carry the mortgage business over the summer."

So we are seeing the housing sector back to normal growth. Existing-home sales also rose 5.1 percent in May to a 5.35 million annual rate. Home sales were plus 9.2 percent which, outside of the March 11.9 percent, is the strongest rate in nearly two years. And prices are rising, up 7.9 percent year-on-year at a median $228,700.

But, "Housing affordability remains a pressing issue with home-price growth increasing around four times the pace of wages," adds Yun. "Without meaningful gains in new and existing supply, there's no question the goalpost will move further away for many renters wanting to become homeowners."

Harlan Green © 2015

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

March New-Home Sales A Dud

"Sales of new single-family houses in March 2015 were at a seasonally adjusted annual rate of 481,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.4 percent below the revised February rate of 543,000, but is 19.4 percent above the March 2014 estimate of 403,000."

Graph: Calculated Risk

The March result was a disappointment, mainly in the south, where sales fell 15.8 percent. And because builders continue to build—housing starts are close to the million unit mark again—housing inventories are rising and prices are falling. The supply of new homes rose to 5.3 months, while the median price fell to 1.5 percent to $277,400. Year-on-year, the median price to down 1.7 percent while sales are up 19.4 percent, a discrepancy that points to price discounting by builders, says Calculated Risk.

What is behind the up and down gyration in sales? Winter is still with us, for one thing. And many of the southern and Midwest states are being pounded by tornadoes, as well as torrential rains. Lower oil prices could also be hurting an area heavily dependent on the oil and gas industries.

We will know next week if job creation will resume from February’s low numbers, and so consumer confidence remains high. Mortgage activity is high, highest level in years, what with interest rates still at record lows. (The 10-year Treasury yield is back down to 1.91 percent, and Eurozone bonds now have negative interest rates, meaning banks have to pay their clients to borrow money, because there is so little demand for loans.)

Mortgage applications increased 2.3 percent from one week earlier, according to data from the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending April 17, 2015.  The Market Composite Index, a measure of mortgage loan application volume, increased 2.3 percent on a seasonally adjusted basis from one week earlier.  The seasonally adjusted Purchase Index increased 5 percent from one week earlier to its highest level since June 2013.  The unadjusted Purchase Index increased 6 percent compared with the previous week and was 16 percent higher than the same week one year ago.

"Purchase applications increased for the fourth time in five weeks as we proceed further into the spring home buying season. Despite mortgage rates below four percent, refinance activity increased less than one percent from the previous week," said Mike Fratantoni, MBA's Chief Economist.  

The fact that purchase mortgage applications now comprise 44 percent of all applications, the highest in years, as we said, means the Fed’s policy of keeping interest rates as low as possible until household incomes begin to rise again is the right policy to kick start the housing market, and bring in those first time homebuyers who have been renting until know.

It also means some overbuilding of new homes is necessary to build up housing inventories for sale, and thus keep home prices in the affordable range.

Harlan Green © 2015

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

Mortgage Delinquencies Close to Pre-Recession Lows.

The Mortgage Corner

Calculated Risk reports Black Knight Financial Services (BKFS) released their Mortgage Monitor report for February on Monday. According to BKFS, 5.36 percent of mortgages were delinquent in February, down from 5.56 percent in January. BKFS reported that 1.58 percent of mortgages were in the foreclosure process, down from 2.22 percent in February 2014. This is approaching historical lows for delinquencies, and should mean a very good year for housing.

Graph: Calculated Risk

February’s delinquency rate, while still 17 percent above the pre-crisis norm of 4.6 percent, was down 49 percent from its January 2010 peak of 10.6 percent. And at 1.58 percent, the foreclosure rate remained 175 percent above precrisis norms, but was still down 63 percent from its October 2011 peak, reports Black Knight.

This breaks down as:

· 1,646,000 properties less than 90 days past due, but not in foreclosure.

· 1,067,000 properties that are 90 or more days delinquent, but not in foreclosure.

· 800,000 loans in foreclosure process.

It also means last week’s jump in Pending Home Sales was no fluke, as lower delinquency rates mean more homes with positive equity are increasing housing inventories. The National Association of Realtors Pending Sales Index is at its highest level since June 2013 (109.4), has increased year-over-year for six consecutive months and is above 100 – considered an average level of activity – for the 10th consecutive month.

So what will happen in 2015? Mortgage applications have also jumped, particularly purchase applications, as we said last week. "There was a broad based increase in mortgage applications last week (April 1) relative to the week prior. The increase in purchase volume was led by a nearly 6 percent increase in both conventional and government markets, perhaps signaling that households are finally ready to begin the home-buying season," said Lynn Fisher, MBA's Vice President of Research and Economics.

But that is largely because of still record low interest rates. The Fed wants to begin to raise interest rates sometime this year, but growth has slowed recently, due to the another severe winter, and a soaring dollar value that hurts exports. So the latest words from the Fed Governors are that low interest rates should be around for a while longer.

New York Fed Governor William Dudley said as much recently. “…as Chair Yellen remarked in her most recent press conference, removal of “patient” from the statement does not indicate that we will be “impatient” to begin to normalize monetary policy.  Rather, the timing of normalization will be data dependent and remains uncertain because the future evolution of the economy cannot be fully anticipated.”

The housing market will have a very good year, according to Core Logic’s 2015 housing forecast. “The U.S. economy is poised to grow by close to 3 percent in 2015, generating a 3- to 3.5-million-person gain in employment,” said Core Logic chief economist Frank Nothaft. “This job growth, coupled with very low mortgage interest rates and some easing in credit access, is expected to propel both owner-occupant and rental housing activity this year. This heightened level of housing demand should translate to the best home sales market in eight years.”

Let us hope the Fed remains patient for first-time homebuyers that require affordable loan rates, in particular, and are just now entering the housing market.

Harlan Green © 2015

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

Housing In Recovery-Pending Home Sales Soar

The Mortgage Corner

February Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 3.1 percent to 106.9 in February from a slight downward revision of 103.7 in January and is now 12.0 percent above February 2014 (95.4). The index is at its highest level since June 2013 (109.4), has increased year-over-year for six consecutive months and is above 100 – considered an average level of activity – for the 10th consecutive month.

This is while new U.S. homes sold at an annual rate of 539,000 in February to mark the best month of sales in seven years, the government reported Tuesday. The pace of sales for January was also revised up sharply to 500,000. It's the first time annualized sales have hit 500,000 or more for two straight months since early 2008, as we said last week.

NAR chief economist Lawrence Yun, says demand appears to be strengthening as we head into the spring buying season. “Pending sales showed solid gains last month, driven by a steadily-improving labor market, mortgage rates hovering around 4 percent and the likelihood of more renters looking to hedge against increasing rents,” he said. “These factors bode well for the prospect of an uptick in sales in coming months. However, the underlying obstacle – especially for first-time buyers – continues to be the depressed level of homes available for sale.”

In fact, the 30-year conforming fixed rate is in the mid-3 percent range today in California, and hovering near its all-time low.  Even better news is, according to NAR’s monthly Realtors^® Confidence Index, the percent share of first-time buyers increased slightly for the first time in February since November 2014, up to 29 percent from 28 percent in January. But such good news may not last, as the depressed level of inventories is continuing to boost home prices, making homes less affordable for those first-timers.

Graph: Calculated Risk

The Case-Shiller Home Price Index reports that home prices are firming as the Case-Shiller composite-20 index rose 0.9 percent in January following a 0.9 percent gain in December and a 0.8 percent rise in November. This is the strongest streak for this report since late 2013, and gives us more evidence of the need for more inventory. Year-on-year, however, prices are still on the soft side, up only 4.6 in January and only fractionally higher than the prior two months.

The increase in mortgage applications is another sign that home sales may be increasing this selling season, probably due to the low interest rates. The seasonally adjusted Purchase Index increased 6 percent from one week earlier. ... The unadjusted Purchase Index ... was 8 percent higher than the same week one year ago.

Graph: Calculated Risk

“There was a broad based increase in mortgage applications last week relative to the week prior. The increase in purchase volume was led by a nearly 6 percent increase in both conventional and government markets, perhaps signaling that households are finally ready to begin the home-buying season,” said Lynn Fisher, MBA’s Vice President of Research and Economics.

The rise in the share of first time home buyers is not a huge change but may predict more millennials of the Generation Y cohort aged 18-36 years, entering the housing market that have been renting until now. “Several markets remain highly-competitive due to supply pressures, and Realtors are reporting severe shortages of move-in ready and available properties in lower price ranges,” adds Yun. “The return of first-time buyers this year will depend on how quickly inventory shows up in the market.”

So still record low interest rates have to be a major reason both refinance and purchase loan activity has picked up. Conforming 30-year fixed rates are as low as 3.375 percent in California for 1 origination point. This is the rate that prevailed during the Fed’s QE purchase program more than one year ago. It has to be thanks to Fed Chairwoman Janet Yellen who has been unrelenting in her opposition to any interest rate increases until she sees sustainable growth and rising wages.

Harlan Green © 2015

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

January Existing Home Sales, Mortgage Applications Dip

The Mortgage Corner

Oh, the winter freeze! It seems to put the housing market into a deep freeze, as well. Total existing-home sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 4.9 percent to a seasonally adjusted annual rate of 4.82 million in January (lowest since last April at 4.75 million) from an upwardly-revised 5.07 million in December, said the NAR. Despite January’s decline, sales are higher by 3.2 percent than a year ago.

Lawrence Yun, NAR chief economist, says the housing market got off to a somewhat disappointing start to begin the year with January closings down throughout the country. “January housing data can be volatile because of seasonal influences, but low housing supply and the ongoing rise in home prices above the pace of inflation appeared to slow sales despite interest rates remaining near historic lows,” he said. “Realtors® are reporting that low rates are attracting potential buyers, but the lack of new and affordable listings is leading some to delay decisions.”

Graph: Calculated Risk

Better news was that the Chicago Fed National Activity Index (CFNAI) edged up to +0.13 in January from –0.07 in December, with industrial production up. Three of the four broad categories of indicators that make up the index increased from December, and only one of the four categories made a negative contribution to the index in January.

The index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

Total existing-home inventory at the end of January increased 0.5 percent to 1.87 million existing homes available for sale, but is 0.5 percent lower than a year ago (1.88 million). Unsold inventory is at a 4.7-month supply at the current sales pace – up from 4.4 months in December. The median existing-home price for all housing types in January was $199,600, which is 6.2 percent above January 2014. This marks the 35^th consecutive month of year-over-year price gains.

This follows the Conference Board’s LEI, which slowed to a not-so-strong plus 0.2 percent versus a slightly downward revised plus 0.4 percent in December. Once again the yield spread is the biggest positive for the index reflecting the Fed's near zero rate policy. Consumer expectations are the 2nd largest positive in the month, though one that may reverse in the next report given last week's plunge in the consumer sentiment index. Credit indications, which continue to be very positive in this report, are the 3rd largest positive.

Both indexes show increased employment in 2015, which should mean home sales will pick up with the selling season and better weather in the spring. “Although sales cooled in January, home prices continued solid year-over-year growth,” adds Yun. “The labor market and economy are markedly improved compared to a year ago, which supports stronger buyer demand. The big test for housing will be the impact on affordability once rates rise.”

Real estate is showing more signs of life, with the Case-Shiller Home Price Index rising again. Data released for December 2014 shows a slight uptick in home prices across the country. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 4.6 percent annual gain in December 2014 versus 4.7 percent in November.

Graph: Calculated Risk

Nine cities reported monthly increases in prices ... Both the 10-City and 20-City Composites saw year-over-year increases in December compared to November. The 10-City Composite gained 4.3 percent year-over-year, up from 4.2 percent in November. The 20-City Composite gained 4.5 percent year-over-year, compared to a 4.3 percent increase in November.

Graph: US Census Bureau

And lastly, January new-home sales were unchanged, but prices rose. Sales of new single-family houses in January 2015 were at a seasonally adjusted annual rate of 481,000, which is not enough product to keep prices in the affordable range. This is 0.2 percent below the revised December rate of 482,000, but is 5.3 percent above the January 2014 estimate of 457,000.

“In a promising sign, new home sales have been trending at post-recession highs for the past two months,” said NAHB Chief Economist David Crowe. “As the economy strengthens and mortgage rates remain low, we can expect continued upward movement in the housing market this year.”

So still record low interest rates (i.e., 3.50 percent conforming fixed rates) are keeping homebuyer and refinancers interested, but not enthusiastic.   And we believe mortgage rates will remain low, as evidenced by Fed Chairwoman Janet Yellen’s latest congressional testimony, which hinted that said rates could remain low for much of this year.

Harlan Green © 2015

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Mortgage Refinancings Surging in 2015

The Mortgage Corner

The still record-low interest rates are making a difference. Refinancings jumped 66 percent in January’s first two weeks, according to the MBA. And borrowers who refinanced during the fourth quarter of 2014 were able to reduce their interest rate, on average, by about 1.3 percentage points – a savings of about 23 percent, according to a recent Freddie Macs report. On a $200,000 loan that translates into saving of about $2,500 interest during the next 12 months.

Graph: Calculated Risk

Why? Conforming 30-yr fixed rates now are as low as 3.375 percent, and high-balance fixed rate conforming amounts can be found at 3.50 percent for 1 origination point.

"Our latest refinance report shows the refinance boom continued to wind down as the pool of potential borrowers declined over the course of 2014,” says Len Kiefer, Freddie Mac deputy chief economist. “However, because mortgage rates fell in the fourth quarter of last year, we actually saw the share of refinance originations tick up a bit despite volumes being down, a similar trend we expect to see for the first quarter of 2015 as mortgage rates have moved even lower.”

One popular program that in many cases doesn’t even require an appraisal for loan amounts up to 125 percent of value is the HARP II programs for conforming loans originated before June, 2009. Borrowers can reduce their interest rate to today’s market rates. But normal conforming qualification debt ratios and decent credit are required for HARP refinancings.

Home owners who refinanced through the government’s HARP program during the fourth quarter of 2014 saw an average reduction in their interest rate of 1.6 percentage points, according to Freddie Mac, amounting to an average savings of $3,300 in interest during the first 12 months – or about $275 in savings every month.

About 71 percent of those who refinanced their first-lien mortgage maintained about the same loan amount or lowered their principal balance by paying additional money at closing, according to the report.

But 34 percent of refinancers were able to shorten their loan terms, according to the report. This is when the conforming 15-yr fixed rate today is 2.50 percent. Overall, borrowers who refinanced in 2014 saved about $5 billion in interest over the next 12 months.

This has to spur home construction as well, since it enables the reduction of so much debt.

Graph: Calculated Risk

And sure enough, the U.S. Census Bureau of the Department of Commerce said that construction spending during October 2014 was estimated at a seasonally adjusted annual rate of $971.0 billion, 1.1 percent above the revised September estimate of $960.3 billion.

The latest NAR survey also showed more optimism for 2015 housing sales. An improving job market, low mortgage rates, and recent moves by the government to loosen up mortgage credit is fueling increased optimism among REALTORS®. In particular, real estate professionals are growing more confident about the housing market’s outlook for the next six months, according to the December 2014 REALTORS® Confidence Index, a survey of more than 4,000 Realtors.

So stay tuned, as winter wanes and interest rates stay low. Of course it will be up to the Federal Reserve as well, to maintain low interest rates for the rest of 2015.

Harlan Green © 2015

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

Mortgage Applications Increase Incredible 49 percent in January

The Mortgage Corner

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

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

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

Graph: Calculated Risk

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

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

Graph: Marketwatch

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

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

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

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

Harlan Green © 2015

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

CFPB Releases Borrower Guidelines

The Mortgage Corner

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

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

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

Graph: The Housing Wire

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

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

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

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

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

Graph: Calculated Risk

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

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

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

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

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

Harlan Green © 2014

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

Good Pending Sales, Home Prices in 2015

The Mortgage Corner

Pending home sales are rising again. Sales picked up steam in November, to 104.8 from a revised 104.0 in October for a better-than-expected gain of 0.8 percent. It is a sign, along with the Case-Shiller Home Price Index, that the housing market will pick up in 2015.

Graph: Econoday

Pending sales had been declining since last September, and only began to rise again this January. But they are still below post-recession highs. Rising prices may be the culprit, as the Case-Shiller Home Price Index rose 13.5 percent in 2014, but has now settled back to moderate 4.5 percent annual increases in recent months.

"The consistent economic growth and steady hiring we've seen the second half of this year is giving buyers enough assurance to consider purchasing a home before year's end," said NAR chief economist Lawrence Yun. "With rents now rising at a seven-year high, historically low rates and moderating price growth are likely to entice more buyers to enter the market in upcoming months."

Graph: Econoday

Where are those new buyers coming from? The main reason could be fresh data that show those 18 to 25 year-olds are finally leaving home, or school, when the lack of first-time homebuyers has kept existing-home sales from breaking out of a narrow range since 2009 and the end of the Great Recession. This is while housing prices have moderated their double-digit climb in 2014, making housing more affordable to those now able to find jobs.

Case-Shiller's 20 city year-on-year index for October (both adjusted and unadjusted) came in soft, at plus 4.5 percent, says Econoday, down 3 tenths from September. This is the lowest rate since October 2012 and follows a full year of low double digit gains through much of 2013 and into April this year.

So ‘the times they are a changin’. Household formation is increasing again, and history says at least 50 percent of those new householders will purchase a home. Fortune Magazine has just cited Neil Dutta, head of economics at Renaissance Macro Research, who pointed out in a note to clients that household formation in 2014 through September is already at its highest rate since 2005.

Graph: Fortune.com

The employment rate for folks aged 25 to 34 has grown 2.8 percent over the past year, about 29 percent faster than the overall employment rate, and they make up the largest generation ready to enter the housing market, larger than their baby boomer parents.

And don’t forget those record low interest rates, now back to last year’s pre-April rates, before Fed Chair Bernanke announcement that QE3 would end. The 30-year fixed conforming rate is now down to 3.50 percent with 0 origination points in California, for those with the best credit scores.

Harlan Green © 2014

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

Employment Up, Interest Rates Falling Again

Popular Economics Weekly

We are still in the Goldilocks economy—it’s not too hot or too cold. In fact, there is enough geopolitical unrest (now it’s the Hong Kong youth protests against China’s hardliners) to drive down interest rates, and boost U.S. growth. We seem to be the island of calm in a world of storms, where investors are looking for safe havens.

The Automatic Data Processing (ADP) report just out showed private sector payroll employment increased by 213,000 jobs from August to September according to the August ADP National Employment Report. This is the precursor to this Friday’s Bureau of Labor Statistics ‘official’ September unemployment report for both private and public employment, which is expected to be in the same range.

Mark Zandi, chief economist of Moody’s Analytics that puts out the report, said, "Job gains remain strong and steady. The pace of job growth has been remarkably similar for the past several years. Especially encouraging most recently is the increasingly broad base nature of those gains. Nearly all industries and companies of all sizes are adding consistently to payrolls.”

And initial jobless claims continue downward, another sign that the unemployment rate should fall further tomorrow. There are fewer and fewer workers drawing unemployment benefits which points solidly at improvement underway in the labor market. Initial claims fell 8,000 in the September 27 week to 287,000, pulling down the 4-week average by a sizable 4,250 to 294,750 which is nearly 10,000 below the month-ago comparison.

Graph: Econoday

This is while interest rates are plunging due to investor flight-to-quality from the worldwide unrest. Conforming 30-year fixed rates are back down to 3.625 percent for a 1 pt. origination fee, 3.75 percent for 0 pts. in origination fees.

It may bring more of the record millennial generation of echo boomers (i.e., children of baby boomers) that outnumber their baby boomer parents into the housing market.

Marketwatch’s Amy Hoak, for one, believes this will happen sooner. Reporting on a National Association of Business Economist conference, she said,“In August 2014, only 29 percent of all buyers of existing homes were first-timers, according to National Association of Realtors data. For comparison, between October 2008 and October 2010, an average 41 percent of all buyers of existing homes were first-timers, David Crowe, chief economist for the National Association of Home Builders, pointed out during the panel discussion.

Still, the purchase activity of home buyers younger than 30 who bought with a mortgage (with the intent to live in the home) rose 8 percent, year over year, in 2012, according to a Zelman & Associates analysis. Purchase activity for this group rose 10 percent, year over year, in 2013. And purchase activity rose 19 percent, year over year, in both 2012 and 2013 for those between the ages of 30 and 39.

The key will be an improving rate of household formation for the millennials.

Graph: Business Insider

The improving labor market is helping U.S. household formation among young adults, according to Michael Gapen at Barclays. The employment-to-population ratio for 16-24-year-olds has climbed to 47.7 percent in May, from an average of 46.5 percent in 2013.

In particular, data from the Current Population Survey, which includes extensive information on both the number and characteristics of US households over time, suggest that more young adults are now finding it feasible to move out, said Gapen.

While the employment-to-population ratio for those in the 25-34 bracket has also ticked up, they are already less likely to live at home with their parents. "Only 18.8 percent and 8.9 percent of 25-29 year olds and 30-34 year olds, respectively, live with parents," writes Gapen.

In 2013, 55.3 percent of 18-24-year-olds lived at home, compared with 56.2 percent in 2012. Since there were estimated to be 30 million 18-24-year-olds in the U.S. last year, according to Current Population Survey estimates, the one percentage point decline suggests that 300,000 young adults were looking to move out.

Tomorrow’s BLS unemployment report should tell us more, but the youngest adults look like they are ready to be on their own.

Harlan Green © 2014

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

Restricted Credit Will Impede Housing Recovery

Financial FAQs

As if we need more evidence that the Consumer Protection Finance Bureau and government regulators have listened to the wrong people when drafting their Qualified Mortgage requirements (that lowers the maximum debt-to-income ratio to 43 percent for non-agency mortgages, disallows interest only options and 40-yr amortization for starters), while Fannie Mae and Freddie Mac add huge fees and stricter underwriting criteria to anyone below a 700 credit score (which is almost perfect in today’s trying markets), the latest new-home sales should convince us.

Graph: Calculated Risk

The Census Bureau reports New Home Sales in June were at a seasonally adjusted annual rate (SAAR) of 406 thousand, while May sales were revised down from 504 thousand to 442 thousand, and April sales were revised down from 425 thousand to 408 thousand. Inventories rose to a 5.8-month level from 5.2 months in May.

The National Association of Home Builders tried to put a good face on the numbers. "With continued job creation and economic growth, we are cautiously optimistic about the home building industry in the second half of 2014," said NAHB Chief Economist David Crowe. "The increase in existing home sales also bodes well for builders, as it is a signal that trade-up buyers can move up to new construction." Regionally, new-home sales were down across the board. Sales fell 20 percent in the Northeast, 9.5 percent in the South, 8.2 percent in the Midwest and 1.9 percent in the West.

But this is not good news for housing advocates so late in the recovery. For one thing, government regulators and the Obama administration are way behind the housing curve in choosing to tighten credit standards long after the problem of too easy credit was solved. The Federal Reserve and regulators have outright banned low teaser rate, negatively amortized,‘liar’ loans, and loans that don’t require income and asset verification. Mortgages delinquencies are down, existing-home sales are back to a 5 million annual sales rate, and record low interest rates should make it easier to qualify.

So why are regulators still chasing phantoms, and continue to punish lenders five years after the housing bubble burst? Instead, it’s time to encourage them to lend some of their record $1 trillion in excess reserves held by the Federal Reserves in MZM accounts (i.e, at zero interest). Without a housing recovery, there will be no substantial economic recovery, say many major economists.

For instance, former Fed Chair Bernanke has said too-tight credit conditions have squeezed both prospective homebuyers and builders. "Why has the recovery in housing been so slow? One important factor is restraints on mortgage credit," Bernanke said in 2012, adding that total outstanding mortgage credit has shrunk by about 13 percent since its peak in 2007.

Just how weak are home sales? Five years after the end of the recession, sales of new single-family homes still remain far below an annual average of more than 770,000 over the 20 years leading up to a 2005 peak, government data show.

Fannie Mae is growing more optimistic this month about U.S. sales of new single-family homes, and now sees 2014 hitting the highest level in seven years. Fannie’s  FNMA July housing-market forecast estimates that sales of new single-family homes will reach 486,000 this year — the most since 2007 — a bit higher than June’s estimate of 478,000, which would have been the greatest since 2008.

However, despite the uptick in the July forecast, over the past year Fannie has slashed its outlook for new-home sales, showing just how disappointing the market’s been in 2014. Back in July 2013, federally controlled Fannie had expected 2014 sales of new single-family homes to hit 588,000.

Rising mortgage rates, a low supply of new homes and unusually poor winter weather each took a bite out of residential sales this year. It’s also been tough for many borrowers to meet lenders’ strict credit standards, as we said. But it is home sales, and new-home sales in particular that has to improve to boost inventory and keep housing prices in the affordable range.

Harlan Green © 2014

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

Why Such Low Interest Rates?

The Mortgage Corner

Fixed 30-year conforming interest rates have once again dropped slightly below 4 percent for a 1 pt. origination fee in California, after being as high as 4.50 percent earlier this year. Why the drop when most economic indicators show the economy recovering from the harsh winter? The unemployment rate has dropped to 6.1 percent. And both the service and manufacturing sector Institute for Supply Management indicators show strong growth.

Graph: Tim Duy

The easy answer is the lack of inflation, which is still below 2 percent overall. Interest rates follow inflation trends in general, since inflation cheapens the value of bonds. But less obvious is the fact that 2014 housing sales have slowed, putting less pressure on mortgage rates even though home prices continue to rise.

Graph: Calculated Risk

It’s easy to see from the graph that 2013 mortgage rates (blue line) rose after June, as housing sales rose, and began to decline in 2014 (red line) due in part to the winter deep freeze and geopolitical unrest. Paradoxically, even with the decline in the Fed’s QE3 bond purchases, rates have continued to decline this year.

That could also be because of the horrible -2.9 percent decline in Q1 GDP growth, probably a sign that 2014 growth overall will not be all that great. Hence investors tend to leave the stock market and flee to bonds as a safe haven.

Whatever the reason, it doesn’t look like interest rates will rise anytime soon. The US housing market would have to pick up, as NAR chief economist Lawrence Yun keeps repeating. But there is little likelihood that will happen, unless market conditions improve.

“Sales should exceed an annual pace of five million homes in some of the upcoming months behind favorable mortgage rates, more inventory and improved job creation,” said Yun. “However, second-half sales growth won’t be enough to compensate for the sluggish first quarter and will likely fall below last year’s total.”  

Also, since there is little or no inflation on the horizon, new Fed Chairperson Janet Yellen has vowed to keep interest rates as low as possible in her latest speeches and testimony before Congress. “For the moment, I don’t see any trade-off whatsoever in achieving our two objectives (growth with stable inflation). They both call for the same policy, namely, a highly accommodative monetary policy.”

Harlan Green © 2014

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

Why the Growth Slowdown—It’s Housing, Stupid

Popular Economics Weekly

Dean Baker, a noted economist with the Center for Economic Policy and Research (NEPR), has probably given the best and most understandable reason for the Great Recession and ultra-slow recovery—it’s the lousy housing market. The economy is growing at slightly over 2 percent, when we would expect 3 percent growth 5 years after the end of the Great Recession.

“The basic story of the Great Recession is about as simple as they come,” says Baker. “The economy was being driven by a housing bubble and the bubble burst. The combination of the loss of housing construction, due to the enormous overbuilding of the bubble years, and the loss of the consumption that had been driven by bubble generated housing wealth, created a gap in annual demand of more than $1 trillion. That's all simple and easy.”

So the weak housing market, even with the Fed doing all it can do to keep interest rates at rock bottom, hasn’t boosted US growth sufficiently to approach full employment. Why? The housing market would be recovering sooner if government was allowed to do more, because of austerity policies prevalent both here and in Europe. And the results are easy to see in this Paul Krugman graph.

Graph: Paul Krugman

Those countries with the lowest growth rates have the most stringent austerity measures—i.e., most drastic budget cuts and highest interest rates when government should be keeping interest rates as low as possible. And they are the United Kingdom, Spain, Portugal and Greece, of course. But the US isn’t far behind, in line with France that is having its own budget problems.

What should be done? We know the government has to help, either with mortgage relief (buy up the bad mortgages and hold them until the market improves), or buying the underwater housing as was done during the Great Depression, and selling them back when conditions improved.

The Home Owners’ Loan Corporation was set up in 1933 under the New Deal. It made more than one million loans to homeowners, sometimes bought the underwater homes, and otherwise supported homeowners who were behind on their payments. Sound familiar?

Graph: FHFA

The HARP and HAMP loan programs were current attempts to do the same and they have refinanced 3 million of the 16 million homes guaranteed by Fannie Mae and Freddie, according to The Housing Wire and FHFA, the Federal Housing Finance Authority that supervises Fannie and Freddie.

“…what did economists think would fill a trillion dollar gap in annual spending?” laments Baker. “Of course the government could do it with more spending and/or tax cuts, but since we have a religious cult in Washington that says it is better to keep millions out of work than to run deficits, this was a political impossibility.”

So 8 million more homes are eligible, according to the FHFA, and the White House has done little to promote HARP 3.0, a newer version that would loosen qualification standards to increase eligibility for those behind on their payments, which would allow more homes to be refinanced. It doesn’t look like another New Deal for housing is in the offing.

Harlan Green © 2014

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