Home Sales Disappoint

The Mortgage Corner

Existing-home sales were at a 5.52 million seasonally adjusted annual rate in June, the National Association of Realtors said Monday. That was 0.7 percent above the year-ago rate, but 1.8 percent lower than in May and marked the second-lowest monthly total of 2017.

Graph: Econoday

Why? There’s a severe housing shortage with inventories down to a 4.3-month supply at the current sales rate. It is so bad that Zillow Chief Economist Svenja Gudell in a Marketwatch interview said, “There are about as many homes for sale now as there were in 1994 (1.96m), except there are about 63 million more people in this country now than there were then.”

The supply imbalance continues to push prices higher. The median sales price was $263,800 nationally, a 6.5 percent increase compared with the year-earlier period. The median price in California is now $500,000. That sets a fresh record and marks the 64th consecutive month of yearly price gains, with housing prices growing at roughly double the rate of wage gains.

It’s hard to understand why builders aren’t answering the call with demand so high and interest rates still at record lows. Part of the problem is that there are so few entry-level homes being built.

“Closings were down in most of the country last month because interested buyers are being tripped up by supply that remains stuck at a meager level and price growth that's straining their budget," said NAR economist Lawrence Yun. "The demand for buying a home is as strong as it has been since before the Great Recession. Listings in the affordable price range continue to be scooped up rapidly, but the severe housing shortages inflicting many markets are keeping a large segment of would-be buyers on the sidelines."

First-time buyers were 32 percent of sales in June, which is down from 33 percent both in May and a year ago. The longer-term average is 40 percent for first-timers as a percentage of all buyers, which are mainly younger buyers.

Graph: Apartment List

CNBC reports new data from Apartment List  that shows, although 80 percent of millennials would like to purchase real estate, very few are in a good position to buy, largely because they have nothing saved. According to the report, "68 percent of millennials said they have saved less than $1,000 for a down payment. Almost half, or 44 percent, of millennials said they have not saved anything for a down payment."

That is probably why mortgage lenders are now offering more exotic products, such as a 1 percent down payment for the conforming 30-year fixed rate with the lender chipping in another 2 percent, so that it satisfies the minimum 3 percent minimum down payment requirement for conforming loans.

Lenders are also offering high end buyers a 40-year fixed rate program for super jumbo loan amounts with the first 10 years at interest only payments. Payments then become standard 30 year principal and interest payments for the rest of the 30-year term.

Meanwhile the standard 30-year conforming fixed rate is 3.50 percent for 1 origination point in California, as it has been for months. There are still many buyers out there, in other words, but the most important population segment is the millennials, who marry later and have those student debt problems.

Harlan Green © 2017

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

Why Is Mortgage Lending Still Restricted?

The Mortgage Corner

We can thank the Great Recession for most of it. Banks have become much more conservative, and builders are building approximately 50 percent fewer residences vs. the 2 million housing units at the height of the housing bubble.

And the very Great Recession was in some ways worse than the Great Depression, when FDR’s New Deal created jobs for those that couldn’t find work. Whereas conservative economic ideologies have triumphed since President Reagan under austerity policies (such as the 2011 government shutdown over raising the budget cap), which have restricted government spending at a time when the private sector has refused to reinvest in productive growth, even though corporate profits have soared to record levels as a percentage of GDP.

The Urban Institute has dug even deeper into the causes of tight credit. Since private sector lending dried up after the Great Recession, government GSEs, such as Fannie Mae, Freddie Mac, FHA and VA; all with some form of government guarantee, have had to step in to revive the housing market. So they account for more than 80 percent of all residential lending.

And because the US Treasury completely appropriated all the assets and profits of Fannie and Freddie in 2012, which account for 60 percent of all residential loans, they have imposed additional fees on any but the best credit risks to protect taxpayers. This in effect raised the cost of qualifying, which in turn reduces the pool of eligible home buyers and borrowers.

How much, asks the Urban Institute? “According to our estimates, an additional 1.25 million loans would have been made in 2013 if the cautious standards of 2001, rather than the severe standards of 2013, had been in place. Between 2009 and 2013, the number of “missing” loans grew from 0.50 million to 1.25 million annually, for a total of more than 4 million missing loans over the five years.”

Behind all this data lies another, more sobering fact—the record income inequality that occurred since the 1970s and was the major cause of the Great Recession. Incomes have flowed so fast to the upper income tiers since its end in 2009 that 96 percent of all income gained since then has gone to the top 1 percent.

This is in part because of the stock market rebound and loss of all those homes from the housing bust. It resulted in some $4 trillion in lost housing assets for middle-class homeowners in the main, the main source of their wealth.

It’s a phenomenon named Monopsony by economists, or the increasing monopoly power of Big Business in particular to control labor costs due to marked lack of competition. This is explained in lucid detail by Kate Bahn, an economist at the Center For American Progress, a progressive think tank.

“While overall the labor market looks fairly solid, it’s still lacking on measures of competitiveness that are giving employers outsized ability to set low wages,” says Prof Hahn. “They can reap higher profits by exploiting their workers who don’t feel confident enough to leave their current job in search of a better one. (It’s evidenced) by the historically low rates of people moving across geographies.”

Graph: BLS/Econoday

The Labor Department measures it as the quits rate in their JOLTS report (Job Openings and Labor Turnover Survey) that tabulates the number of Hires and Separations each month. There was a 1 tenth downtick in the quits rate to 2.1 percent, “a subdued reading that points to lack of movement between jobs and lack of wage pull for employees,” said Econoday. The separations rate also fell, down 1 tenth to 3.5 percent.

The gap between openings and hiring first opened up about 2 years ago signaling that employers are having a hard time finding people with the right skills, said Econoday. The current spread between openings and hirings is 429,000, the widest since September. But remember, the US economy is so large that more than 5 million jobs are created and lost per month.

One would think the high number of available jobs means higher wages for all, as employers bid up salaries to attract them, but not so; just for the highly skilled. Those blue collar and service jobs that require less skill don’t have the competitive advantage of higher education and training that would boost their salaries.

And that is why the credit and housing markets have skewed towards the highest income earners, and will remain so, unless more New Deal-type programs (such as promised infrastructure spending, universal health care, stronger labor laws) help to bring back the middle class.

Harlan Green © 2017

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

Why Are Mortgage Rates At Historical Lows?

Mortgage rates continued to tumble over the past week as investors fled to the safety of government bonds, pushing Treasury yields down, mortgage provider Freddie Mac said Thursday. This is no surprise given the geopolitical uncertainties buffeting economies worldwide.

Graph: Marketwatch

The 30-year fixed-rate mortgage averaged 3.72 percent in the Feb. 4 week, down from 3.79 percent from a week earlier and is at the lowest level since April 30, Freddie Mac said. The 15-year fixed-rate mortgage averaged 3.01 percent, down from 3.07 percent. The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 2.85 percent, down 5 basis points.

“These declines are not what the market anticipated when the Fed raised the Federal Funds rate in December,” Freddie’s chief economist, Sean Becketti, noted in a statement. “For now, though, sub-4 percent mortgage rates are providing a longer-than-expected opportunity for mortgage borrowers to buy or refinance.”

In fact, the 30-year conforming fixed rate can currently be bought down to 3.25 percent.  This is a historical low, and causing a rise in mortgage applications.  The Refinance Index increased 0.3 percent from the previous week to its highest level since October 2015, reports the MBA. The seasonally adjusted Purchase Index decreased 7 percent from one week earlier. The unadjusted Purchase Index increased 11 percent compared with the previous week and was 17 percent higher than the same week one year ago.

But for how long can these below-historically-low rates continue?  Too much oil, for one, should help to keep oil prices, and therefore inflation, almost non-existent for this year, at least.  That’s according to Barron’s resident economist Gene Epstein.  “…over the past five years,” says Epstein, “the world has found a trillion extra barrels of oil—the equivalent of 30 years of extra supply—with a third of it coming from shale, a third from deep water, and a third from oil sands. Over the past year, the costs of recovery from these sources has noticeably fallen. A return to triple-digit prices on crude oil is (therefore) unlikely for the foreseeable future.” 

 Graph: Barron’s

            But there’s another reason for such low interest rates.  Growth is slowing worldwide, which is the major reason inflation is so low.  And Janet Yellen is now backtracking on raising the Fed’s rates any higher this year.

            But consumers don’t seem to be listening to the bad news. Consumer spending — the main engine of the U.S. economy — rose 3.1 percent in 2015 to set the fastest pace since 2005. Unless Americans suddenly turn pessimistic, they’ll keep spending at a decent clip this year and give businesses no reason to resort to mass layoffs.

One major bellwether is car sales, says Marketwatch’s Jeffry Bartash. After snapping up a record 17.5 million new vehicles in 2015, Americans were back at it in January. Sales rose last month rose at the same robust 17.5 million pace. “That’s not a sign of an increasingly anxious consumer.”

Harlan Green © 2016

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

Construction, Retail Sales Higher

The Mortgage Corner

The strength of the economy right now is in the housing and construction sectors, again areas insulated from global factors, such as China’s slowdown. Construction spending, next to vehicle sales, is perhaps the week's best surprise, rising 0.7 percent for a second straight month, and 13.7 percent annually. Why? Rents are rising fast, which means many householders will start thinking about whether buying with today’s ultra-low mortgage rates as the better alternative.

Graph: Econoday

The Econoday graph shows the slope has steepened nicely in the spring and summer. The latest gain is centered in the most important component of all, single-family homes where construction spending rose 2.1 percent in the month for a year-on-year gain of 15.8 percent. Multi-family homes slowed in the month but the year-on-year rate, reflecting demand tied to high rents, is still outstanding at 21.2 percent.

Graph: Econoday

And auto sales are up a surprising 1.5 percent to a 17.8 million annual rate, with 14.1 million sales of domestic-made vehicles. The gain points to another strong month for retail sales in what would underscore the insulated strength of the domestic economy. It was outsized strength in the auto sector that supported the factory sector in June and July, though August's sales gain was centered in foreign-made vehicles. Still, sales of domestic-made cars and light trucks, which make up 80 percent of all sales, are at very strong levels.

In fact, retail sales just in this morning show a 2.2 percent annual gain, with strong sales in auto and food service. It could ave been above 3 percent if gas prices hadn’t fallen, but then would consumers be buying as much if gas prices were higher? This should mean Q3 GDP growth will again exceed 3 percent, following a revised Q2 reading of 3.7 percent by the BEA.

Graph: Calculated Risk

Will more renters be buying homes this year? The best way to compare rents to housing prices is the price-to-rent ratio. It is leveling off, which means rents are rising as fast as housing prices—some 5 percent of late. Combine that with conforming 30-year fixed mortgage rates of 3.75 percent, and we will have more renters looking to buy a home this year, at least. And the tax advantages of owning vs. renting really mean it’s more advantageous to buy over the longer term, rather than give the tax advantages to a landlord.

Harlan Green © 2015

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

Higher Birth Rates Are Here

The Mortgage Corner

The mellennial generation, now aged 18 to 36 years, are beginning to drive higher birth rates. And that means more households being formed, which will ultimately create a higher demand for housing. Actually, a 4 million birth rate was breached in 2007, and births then declined due to the Great Recession. But the millennials are back above the 4 million birth rate again.

And housing construction is surging—no coincidence, given the rising demand for housing of any kind—rental as well as for prospective homeowners. Led by a strong jump in single-family production, nationwide housing starts inched up 0.2 percent to a seasonally adjusted annual rate of 1.206 million units in July, according to newly released data from the U.S. Department of Housing and Urban Development and the Commerce Department. This is the highest level since October 2007.

“This month’s drop in the more volatile multifamily side is a return to trend after an unusually high June,” said NAHB Chief Economist David Crowe. “While multifamily production has fully recovered from the downturn, single-family starts are improving at a slow and sometimes intermittent rate as consumer confidence gradually rebounds. Continued job and economic growth will keep single-family housing moving forward.” 

Births had declined for five consecutive years prior to increasing in 2013. They are about 7.7 percent below the peak in 2007 (births in 2007 were at the all-time high - even higher than during the "baby boom"). “I suspect certain segments of the population were under stress before the recession started,” says Calculated Risk’s Bill McBride, “- like construction workers - and even more families were in distress in 2008 through 2012. And this led to fewer babies.”

Graph: Calculated Risk

The above historical graph dates back to 1909, and the largest dip was before and during the Great Depression. It hit bottom in 1933, before beginning to rise again until it hit the baby boomer bulge of the 1950s and 60s.

This has to be the main reason home builder sentiment is at a 10-year high. The new home sector is increasingly a central source of strength for the economy and builders are increasingly optimistic, says the NAHB. The housing market index rose 1 point to a very strong 61 in August with the future sales component leading the way at 70. Current sales are at 66 with traffic continuing to lag but less so, at 45 for a 2 point gain in the month.

“Today’s report is consistent with our forecast for a gradual strengthening of the single-family housing sector in 2015,” said NAHB Chief Economist David Crowe. “Job and economic gains should keep the market moving forward at a modest pace throughout the rest of the year.”

Single-family starts rose 12.8 percent to a seasonally adjusted annual rate of 782,000 units after an upwardly revised June reading while multifamily production fell 17 percent to 424,000 units. And rising single family starts is another sure sign that more families and households are being formed.

What age group is having the most births? It is women in their 30s. The preliminary birth rate for women aged 30–34 in 2014 was 100.8 births per 1,000 women, up 3 percent from the rate in 2013 (98.0). The rate for this group has increased steadily since 2011. The number of births to women in their early 30s also increased in 2014, by 4 percent.

The rate for women aged 35–39 was 50.9 births per 1,000 women, up 3 percent from 2013 (49.3). The rate for this group has increased steadily since 2010. The number of births to women in their late 30s increased 5 percent in 2014.

Need we say more about the rising birth rate? All signs point to another upsurge in new household formation, needless to say, the main driver of real estate sales and the concomitant sectors that aid and drive RE—jobs in construction, insurance, professional fields, and banking, for starters.

Could it be that the real estate industry will drive 3 percent plus GDP growth for the rest of 2015, even if interest rates rise slightly? Rates are still at record lows with the conforming 30-year fixed rate at 3.625 percent for 1 origination point, and purchase mortgage applications still up 19 percent year over year, reports the Mortgage Bankers Association.

Harlan Green © 2015

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

Existing-Home Sales at 8-Year High

The Mortgage Corner

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

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

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

Graph: Calculated Risk

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

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

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

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

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

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

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

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

Harlan Green © 2015

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

Housing Starts, Builder Optimism at Recovery Highs

The Mortgage Corner

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

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

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

Graph: Calculated Risk

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

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

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

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

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

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

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

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

Harlan Green © 2015

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

Home Prices Increase With Jobs

The Mortgage Corner

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

Graph: S&P

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

Graph: Calculated Risk

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

Graph: Econoday

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

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

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

Harlan Green © 2015

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

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

Housing Construction Soars

The Mortgage Corner

Housing construction is taking off, as I predicted two weeks ago. The numbers show actual construction starts accelerating as well as building permits for future construction. It is also boosting builder confidence to a level that signals continued growth in new construction.

As Econoday reported, “Don't let the headline fool you (i.e., slight drop in June), the housing starts & permits report points to solid strength for the housing sector.” Though the Calculated Risk graph shows how far the housing market is from a true recovery. It is only now returning to the lows of the 1990 recession.

Graph: Calculated Risk

Housing starts came in at a 1.036 million rate in May, down 11.1 percent from the April rate but the April rate, which was already one for the record books, is now revised higher to 1.165 million, a 22.1 percent gain from March. Sealing matters is another gigantic surge in permits, up 11.8 percent to 1.275 million following a 9.8 percent gain in April.

And builder confidence in the market for newly built, single-family homes in June rose five points to a level of 59, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the highest reading since September 2014, and in fact returns the index to pre-bubble (2001-02) levels.

Graph: Calculated Risk

“The HMI indices measuring current and future sales expectations are at their highest levels since the last quarter of 2005, indicating a growing optimism among builders that housing will continue to strengthen in the months ahead,” said NAHB Chief Economist David Crowe. “At the same time, builders remain sensitive to consumers’ ability to buy a new home.”

All three HMI components posted healthy gains in June. The component gauging current sales conditions jumped seven points to 65, the index charting sales expectations in the next six months increased six points to 69, and the component measuring buyer traffic rose five points to 44, said the press release.

Why the huge construction increase in June? This is while mortgage rates are rising, up some 0.375 percent since their most recent lows to 3.875 percent for 0 points in origination fees for a 30-year fixed rate conforming loan. Firstly, it means consumers are confident enough in their future to begin to look for housing to support their growing families.

And this is, of course, the millennial generation aged 18 to 36 years that has already surpassed their parents’ baby boomer population size, and will exceed it by 2020, according to demographers.

Graph: CNBC

Also, household formation is finally returning to normal levels of 1 million plus new households being formed per year, as the so-called echo boomers move out of their parents’ homes and or leave college to make their own nests.

Household formation has been unusually low over the past seven years, averaging 577,000 new households. Whereas, there are approximately 15 million new households per decade being formed during normal times.

So, "there's a ton of people living in basements," Tommy Lee of Fundstrat Global Advisors said in an interview with CNBC's "Trading Nation." "Two quarters of pretty decent household formation isn't getting everybody out of the basement. I think this means we have multiple years where household formations are well over 1.3 million, 1.4 million."

Forecasters will be revising their second-quarter GDP estimates higher following today's report, says Econoday, not to mention their estimates for Thursday's index of leading economic indicators where permits are one of the components.

Harlan Green © 2015

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

Fannie and Freddie Didn’t Do It!

Financial FAQs

As if further confirmation was needed that Fannie Mae and Freddie Mac were not even a minor cause of the housing bubble and consequent bust, the latest judgment against Nomura Securities for selling fraudulent mortgages to Fannie and Freddie should be icing on the cake; settlements that now total more than $14 billion in fines for almost all the major banks and lending institutions.

The charge is old. Critics, (mainly those caught selling fraudulent loans to Fannie and Freddie) have long maintained that the GSE’s encouraged too many people to buy homes by offering all manner of payment assistance, and even guaranteeing subprime mortgages from the likes of Countrywide Financial (that was subsequently bought by Bank of America).

A U.S. judge on Monday ruled that two more large financial entities, including Nomura Holdings Inc., made false statements in selling mortgage-backed securities to Fannie Mae and Freddie Mac ahead of the 2008 financial crisis.

U.S. District Judge Denise Cote in Manhattan ruled for the Federal Housing Finance Agency, the conservator for Fannie Mae and Freddie Mac, in a ruling that could allow the U.S. regulator to recover around $450 million.

This is one more example of how almost all of the major financial institutions jumped on the bandwagon that encouraged the housing bubble—lending money to both qualified and unqualified borrowers and then misrepresenting their quality to the main guarantors of US housing finance.

Cote, who presided over a non-jury trial, said the FHFA was entitled to judgment against Nomura and the Royal Bank of Scotland Plc, which underwrote some of the $2 billion in mortgage-backed securities, in light of misstatements they made in offering documents.

Such originators were the real problem. Nomura Securities is just one of a growing list of mortgage lenders that have had to settle fraud charges that the loans submitted to Fannie and Freddie weren’t the quality loans they had certified—16 at last count totaling more than $14 billion in fines, as we said. Their loans had not in fact conformed or even followed Fannie and Freddie’s qualification standards, including verification of income and even whether they held real jobs, when they sought their guarantee insurance.

The result was the demonization of the GSEs as undercapitalized and incapable of fulfilling their mandate to make housing more affordable to Main Street Americans. I have been writing about the resistance of US Treasury—and maybe White House—to any recapitalization of Fannie and Freddie’s corporations to cushion them from another such housing downturn, corporations that were set up in the 1930s and 40s respectively to encourage home owning.

And in successfully fulfilling their mandate, they were a major factor in creating middle class Americans’ wealth, much of which was destroyed during the Great Recession. FDR’s Home Loan Corporation came to the rescue during the Great Depression, and we should be doing the same for housing in order to aid our recovery from the Great Recession.

Then why does Treasury, and even the White House oppose recapitalizing them, in spite of their now record-breaking profits? Because Treasury seems to believe there is a better alternative. However, that is yet to be seen and the GSEs are guaranteeing more than 60 percent of originations these days, while making the Treasury literally $$billions.

The Federal Housing and Finance Authority has just issued an update on their plans to ‘reform’ the GSEs. It is a proposal to form a Common Securitizing Platform (CSP) to replace competing Fannie Mae and Freddie Mac platforms that securitize its mortgage pools.

“The objectives in developing a Single Security are to establish a single, liquid market for the mortgage-backed securities issued by both Enterprises that are backed by fixed-rate loans and to maintain the liquidity of this market over time,” says the FHFA. “Achievement of those objectives would enhance the liquidity of the TBA market and further FHFA’s statutory obligation to ensure the liquidity of the nation’s housing finance markets.”

The question then is what comes next? The Treasury says their overall objective of not recapitalizing Fannie and Freddie is to induce private originators to guarantee a larger majority of mortgages. So will Banks and other private loan originators then step up to the plate and issue pools that can be either purchased or guaranteed by the CSP, which up to now they have been reluctant to do, without the GSEs’ guarantee?

And if the Treasury dissolves the GSEs, as it says it ultimately intends in order to put, “private capital at risk ahead of taxpayers,” can private issuers of said mortgage-backed-securities be the guarantors, without substantially raising their fees and profit margins, which will raise interest rates, as well? There was a reason Fannie and Freddie conforming mortgage rates were so affordable. They had lower capitalization requirements, in part because of the superior quality of their mortgage underwriting standards, and consequent low delinquency rates.

Graph: Calculated Risk

Then who will enforce the very successful underwriting standards now required by Fannie and Freddie that has brought down the default rates close to historical standards? It is the real issue that was exposed in the lawsuits. Who will police the banks and private mortgage originators that the record shows will evade those standards when it suits them?

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