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

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

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

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

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

Home Sizes Ballooning Again

The Mortgage Corner

Housing sizes are ballooning, after a slight pause due to the Great Recession, reports the U.S. Census Bureau and Marketwatch. In 2013 the median floor area of new single-family homes sold in the U.S. rose 4 percent to hit almost 2,500 square feet, according to recently released data from the U.S. Census Bureau.

That compares to the median 1,800-square-foot size of a single detached home, as reported in the 2011 American Housing Survey, when 40 percent of homes were 1-2,000 square feet in size.

Graph: WSJ Marketwatch

The biggest new single-family homes of all were sold in the South, hitting a median of 2,534 square feet in 2013, up 1 percent from the prior year. Homes in the Northeast reached 2,456 square feet, up 3 percent. Homes in the Midwest measured 2,405 square feet, up 9 percent from 2012, and homes in the West hit 2,394 square feet, up 5 percent.

And prices continue to rise. The Case-Shiller Home Price Index of same-home sales has risen 12.4 percent in a year, and buyers are paying more for these larger homes. The median sales price of new single-family homes rose to $268,900 last year, up 10 percent from 2012.

What does that say? Those with the money are moving the various markets. The fastest growing segment are homes from 3,000 to 3,999 square feet, says the Census Bureau. Last year 9 percent of new single-family homes sold in the U.S. were at least 4,000 square feet, up from 8 percent in 2012. Meanwhile, the share of homes under 1,800 square feet fell to 17 percent in 2013, down from 22 percent in 2012 and 33 percent a decade earlier.

Existing-home sales are following the same trend. April’s sales of existing homes that cost at least $1 million grew more than 5 percent from a year earlier, while sales of homes under $250,000 fell more than 5 percent, according to the National Association of Realtors.

What will bring more buyers into the housing market? Even lower mortgage rates, it seems. Purchase mortgage applications are still declining since January, even though mortgage rates have plunged on late, with the 30-year conforming fixed rate falling to 3.875 percent, and Hi-Balance conforming fixed rates at 4.00 percent for 1 origination point.

Graph: WSJ Marketwatch

So the big question remains whether middle class families will be able to afford those middle class homes anymore? That has as much to do with households starting up, or new household formation. And with so many of the 25 to 55 year-olds out of work, it may take years for households formation to pick up to the 1.2m per year average that prevailed before the Great Recession, from the current 600,000 new annual households being formed.

Graph: Zero Hedge

For instance, in the April unemployment report, one of the most important age group for jobs, those workers aged 25-54 which represent the bulk of the US labor force and are also the best and most productive group, the total number of jobs tumbled from 95,360K to 95,151K, a drop of 209K, reports Zero Hedge.

Seniors were the winners. According to the establishment survey, the only beneficiary of whatever this jobs "recovery" is, were workers aged 55-69, that have gained 174,000 jobs to date.

Harlan Green © 2014

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

New Fannie, Freddie Regulator Won’t Cut Loan Limits

The Mortgage Corner

WASHINGTON (MarketWatch) — This headline just out.  Mortgage-finance giants Fannie Mae and Freddie Mac won’t be directed to lower the limits for mortgages that they back, the new head of their federal regulator said Tuesday. In a departure from his predecessor, Mel Watt, director of the Federal Housing Finance Agency, is generally seen as favoring efforts to maintain borrowers’ access to credit, rather than focusing on winding down the government sponsored enterprises.

This is terrific news for the housing market, needless to say. One of the first actions by President Obama’s appointee to run the Federal Housing Finance Authority (FHFA) is to make it easier for home borrowers and buyers to obtain conforming mortgages—mortgages that are guaranteed by Fannie Mae and Freddie Mac, and which comprise more than 60 percent of mortgages issued these days.

The conforming limits will therefore still be $417,000 for the best conforming rates—3.875 percent with 1 origination point for 30-year fixed rates in California today—and $625,500 for so-called Hi-Balance conforming loans—now at 4.125 percent for 0 points origination in California.

“This decision is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market,” Watt said Tuesday at a Brookings Institution event.

This is while Congress and the White House work on housing-finance reform, with the Obama administration still trying to shut down Fannie and Freddie, even though they are the only agencies willing to guarantee 30-year fixed rate mortgages for middle class homeowners and buyers, and thus are the reason housing is recovering at all.

It is the misguided belief that allowing Fannie Mae to disappear—the Federal National Mortgage Association formed during the New Deal—and Freddie Mac, or the Federal Home Loan Mortgage Corporation, formed in the 1970s to further affordable housing—will no longer make the government responsible for keeping a viable housing market for most Americans.

Graph: Calculated Risk

But that is flatly wrong. Without some kind of federal ‘backstop’ that guarantees both mortgage quality and assurance that banks will continue to lend mortgages, we would not have the housing market and a homeownership rate of today. The early 1980s were the best example of banks and lenders refusing or unable to issue new mortgages when then Fed Chairman Volcker raised interest rates above 16 percent to combat inflation.

The foreclosure rate for conforming loans has always been the lowest of any conventional loans. Fannie Mae reported recently that the Single-Family Serious Delinquency rate declined in March to 2.19 percent from 2.27 percent in February. The serious delinquency rate is down from 3.02 percent in March 2013, and this is the lowest level since November 2008.
And Freddie Mac also reported that the Single-Family serious delinquency rate declined in March to 2.20 percent from 2.29 percent in February. Freddie's rate is down from 3.03 percent in March 2013, and is at the lowest level since February 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20 percent.

So their foreclosure rates are close to the historical average of 1 percent, whereas other ‘private label’ mortgages (those mostly portfolio loan issued and held by banks) have remained above 4 percent.

The FHFA is looking at making sure that the companies operate safely in the current environment, Watt said. Watt, who has been noticeably absent until now from the debate over how to reform the U.S. housing market, said Tuesday that the FHFA has three goals: maintain, reduce and build.

“Since any stumbles along the way could have ripple effects in the $10 trillion housing finance market, there’s a lot at stake in getting this right,” Watt said. But getting it right doesn’t mean the federal government shouldn’t have the responsibility to maintain the viability of homeownership, a responsibility it has kept since the 1930s.

Harlan Green © 2014

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

Q1 Wage Growth Highest in 4 Years

Popular Economics Weekly

This may finally be the year when jobs and the economic recovery are for real for most Americans. Median weekly wages grew at the fastest pace in the first quarter in more than four years, according to data released by the Labor Department on Thursday.

Why? Because unemployment rates are falling, and that pushes up wages, needless to say. And almost no wage growth since 2008 has kept consumers from spending more. Unemployment rates in all states had dropped below 9 percent for the first time since 2008. Twenty-one states have unemployment rate decreases, 17 states and the District of Columbia had increases, and 12 states had no change, the U.S. Bureau of Labor Statistics reported today.

Graph: Calculated Risk

Rhode Island had the highest unemployment rate among the states in March, 8.7 percent. The next highest rates were in Nevada and Illinois, 8.5 percent and 8.4 percent, respectively. North Dakota again had the lowest jobless rate, 2.6 percent. California still has the 4^th highest unemployment rate at 7.9 percent.

Graph: WSJ Marketwatch

The 2.7 percent median wage growth in the first quarter was the strongest since the fourth quarter of 2009, when wages grew 2.8 percent. Importantly, the wage growth was faster than the 1.4 percent increase in seasonally adjusted consumer prices over the same period. Without adjusting for seasonality, median weekly wages were $796 in the first quarter.

It is important that wages are rising faster than inflation for the first time in 4 years. It means consumer purchasing power is increasing again. Household incomes have actually been stagnant for more than 30 years, only keeping up with inflation, so that most consumers had just enough income for necessities.

Graph: Econoday

Year-on-year, overall CPI inflation was 1.5 percent in March, compared to 1.1 percent in February (seasonally adjusted). The core rate increased 1.6 percent year-on-year, matching the rate for February. For March, not seasonally adjusted year-ago percent changes for total and core CPI were 1.5 percent and 1.7 percent, respectively.

Consumer price inflation firmed in March, but it was for just one month—not yet setting a trend. Within the Fed, the hawks likely will point to the stronger numbers while the doves will say it is too early to say that inflation is up to the 2 percent goal. This means driving is cheaper and eating is more expensive.

But Janet Yellen has been saying that interest rates will stay down much longer, even if inflation rises above their 2 percent target. And that can only hearten consumers and homebuyers who don’t want the Federal Reserve raising rates until they see a real jobs recovery and sustained wage increases.

Harlan Green © 2014

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

Consumer Debts Returning to ‘Normal’

Popular Economics Weekly

The NY Fed released their 2013 Q4 Household Debt and Credit Report. The report showed that total household debt is 9.1 percent below the Q3 2008 peak. Mortgage debt is down 13.4 percent from the peak, and Home Equity revolving debt is down 25.9 percent.

This is even though aggregate consumer debt increased by $241 billion in the fourth quarter, the largest quarter-to-quarter increase since 2007, said the NY Fed report. More importantly, between 2012:Q4 and 2013:Q4, total household debt rose $180 billion, marking the first four-quarter increase in outstanding debt since 2008.

Calculated Risk

Does this mean the household deleveraging of debt that has held down consumer spending since the Great Recession is over? Are consumers opening up their wallets finally, and will this drive increased consumer spending and so GDP growth this year?

Barron’s Gene Epstein and Applied Global Macro Research (AGMR) economists believe so. AGMR projects 4 percent in economic output this year and next, arguing that future demand for housing will also boost consumer spending by creating jobs in the many ancillary industries that service housing. This is far above the Fed’s FOMC prediction of 2.8 to 3.4 percent GDP growth through 2015. It also means unemployment has to fall below 6 percent, and the Fed will begin to raise their overnight rate to 0.25 percent from its current 0 percent.

But AGMR’s report doesn’t take into account the sharp decline in federal and local government spending, which has been a drag on growth since 2009. It would have to pick up as well, in my opinion. This is happening in states like California, whose budget is now in surplus, but not at the federal level, in spite of the $1.1 trillion budget agreement for the rest of this fiscal year.

As net household borrowing resumes, it is interesting to see who is driving these balance changes, and to compare some of today’s patterns with those of the boom period. This will help to determine how sustainable is such consumer spending, and so economic growth and job creation.

Auto and student loans have led the way and been growing for some time, while overall debt continued to fall. But in 2013, the increased credit card and mortgage debt among the young and the riskless has led to a turnaround in the trajectory of overall debt. This was the case in the comparison in debt with 2005, and is still the case today. It is the under 30-year olds that are borrowing and spending the most.

 

Graph: NY Federal Reserve

And we believe it is the below-30 cohort that will comprise most of the increased demand for housing, as household formation is predicted to pick up above 1 million per year for the rest of this decade, according to the 2013 Harvard Joint Center for Housing Studies’ State of the Nation’s Housing report.

“With rising home prices helping to revive household balance sheets and expanding residential construction adding to job growth, the housing sector is finally providing a much needed boost to the economy,” says Eric S. Belsky, Managing Director of the Joint Center for Housing Studies. “But long-term vacancies are at elevated levels in a number of places, millions of owners are still struggling to make their mortgage payments, and credit conditions for homebuyers remain extremely tight.”

So as always, the key will be pent-up demand for housing and consumer goods that has been constrained since 2009, due mainly to the mountain of debt that has now been reduced to more manageable levels. But government has to be included in any growth projections, and any boost in government spending is still in question.

Harlan Green © 2014

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2013 Home Sales Highest Since 2006

The Mortgage Corner

The National Association of Realtors (NAR) just reported that for all of 2013, there were 5.09 million sales, which is 9.1 percent higher than 2012. It was the strongest performance since 2006 when sales reached an unsustainably high 6.48 million at the close of the housing boom, and is now back to the 2000 sales rate at the beginning of the housing bubble.

Graph: Calculated Risk

Lawrence Yun, NAR chief economist, said housing has experienced a healthy recovery over the past two years. “Existing-home sales have risen nearly 20 percent since 2011, with job growth, record low mortgage interest rates and a large pent-up demand driving the market,” he said. “We lost some momentum toward the end of 2013 from disappointing job growth and limited inventory, but we ended with a year that was close to normal given the size of our population.”

But for sale inventories have declined and are putting upward pressure home prices. The national median existing-home price for all of 2013 was $197,100, which is 11.5 percent above the 2012 median of $176,800, and was the strongest gain since 2005 when it rose 12.4 percent.

The is in large part because total housing inventory at the end of December fell 9.3 percent to 1.86 million existing homes available for sale, which represents a 4.6-month supply at the current sales pace, down from 5.1 months in November. Unsold inventory is 1.6 percent above a year ago, when there was a 4.5-month supply.

The median existing-home price for all housing types in December was $198,000, up 9.9 percent from December 2012. Distressed homes – foreclosures and short sales – accounted for 14 percent of December sales, unchanged from November; they were 24 percent in December 2012. The shrinking share of distressed sales accounts for some of the price growth.

Ten percent of December sales were foreclosures, and 4 percent were short sales. Foreclosures sold for an average discount of 18 percent below market value in December, while short sales were discounted 13 percent.

Interest rates will play a big part on home sales this year, needless to say, but will probably not rise much above current rates, even with higher economic growth. This is because of the tremendous cash hoard of businesses that obviates their need to borrow, as well as consumers that are borrowing much less than in the past. The 30-year conforming fixed rate is averaging 4.0 percent in California for a 0.5 point origination fee, and high-balance 30-year conforming is averaging 4.125 percent for a 1 point origination fee.

Harlan Green © 2013

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Home Equity Increasing

The Mortgage Corner

CoreLogic, a real estate analytics firm, today released new analysis showing approximately 791,000 more residential properties returned to a state of positive equity during the third quarter of 2013, and the total number of mortgaged residential properties with equity currently stands at 42.6 million.

This is helping November home sales in the South Coast, with closed transactions holding strong and huge price increases year-over-year, reports Gary Woods for MLS.

“Year over year sales are up just slightly from 2012 with the median sales price up to about $940,000 for approximately a 19 percent rise. The average sales price is also up going from about $1.36 million in 2012 to approximately $1.43 million in 2013 for a 5 percent rise while the numbers of escrows are down with 1,203 in ’12 to 1,168 in ‘13 with the median list price on those escrows up about 15 percent to approximately $960,000.”

The CoreLogic analysis indicates that nearly 6.4 million homes, or 13 percent of all residential properties with a mortgage, were still in negative equity at the end of the third quarter of 2013. This figure is down from 7.2 million homes, or 14.7 percent of all residential properties with a mortgage, at the end of the second quarter of 2013.

Graph: Calculated Risk

This is a result of the sharp rise in housing values this year. Of the 42.6 million residential properties with positive equity, 10 million have less than 20 percent equity. Borrowers with less than 20 percent equity, referred to as “under-equitied,” may have a more difficult time obtaining new financing for their homes due to underwriting constraints.

Under-equitied mortgages accounted for 20.4 percent of all residential properties with a mortgage nationwide in the third quarter of 2013, with more than 1.5 million residential properties at less than 5 percent equity, referred to as near-negative equity. Properties that are near negative equity are considered at risk should home prices fall.

“Rising home prices continued to help homeowners regain their lost equity in the third quarter of 2013,” said Mark Fleming, chief economist for CoreLogic. “Fewer than 7 million homeowners are underwater, with a total mortgage debt of $1.6 trillion. Negative equity will decline even further in the coming quarters as the housing market continues to improve.”

California has the twelfth worst negative equity with 13.2 percent of those homes holding mortgages. Nevada had the highest percentage of mortgaged properties in negative equity at 32.2 percent, followed by Florida (28.8 percent), Arizona (22.5 percent), Ohio (18.0 percent) and Georgia (17.8 percent). These top five states combined accounted for 36.4 percent of negative equity in the U.S.

Harlan Green © 2013

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

Mortgage Delinquencies Continue to Decline

The Mortgage Corner

The good news is that foreclosure rates continue to fall, though delinquencies more than 90 days late are fluctuating with the season, according to Lender Processing Services (LPS) in their Mortgage Monitor report for September. According to LPS, 6.46 percent of mortgages were delinquent in September, up from 6.20 percent in August. But LPS reported that 2.63 percent of mortgages were in the foreclosure process, down from 3.86 percent in September 2012, in this graph that begins in June 1995.

This is great news, and due mainly to the increase in housing values that has allowed many homeowners to either refinance or sell their homes.

Graph: Calculated Risk

This gives a total of 9.03 percent delinquent or in foreclosure. It breaks down as, according to Calculated Risk:
• 1,935,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,331,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,328,000 loans in foreclosure process.

Meanwhile, CoreLogic reports that home prices nationwide, including distressed sales, increased 12 percent on a year-over-year basis in September 2013 year over year. This change represents the 19th consecutive monthly year-over-year increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 0.2 percent in September 2013 compared to August 2013.

Graph: Calculated Risk

Excluding distressed sales, home prices increased on a year-over-year basis by 10.8 percent in September 2013 compared to September 2012. On a month-over-month basis, excluding distressed sales, home prices increased 0.3 percent in September 2013 compared to August 2013. Distressed sales include short sales and real estate owned (REO) transactions.

The bottom line is that housing values should continue to increase, in spite of the shutdown, because overall business activity continues to improve in both the manufacturing and non-manufacturing (service industries) sectors. The October Purchasing Managers’ Non-Manufacturing Business Activity Index increased to 59.7 percent, which is 4.6 percentage points higher than the 55.1 percent reported in September, reflecting growth for the 51st consecutive month. Though the New Orders Index decreased by 2.8 percentage points to 56.8 percent (maybe because of the government shutdown), the Employment Index increased 3.5 percentage points to 56.2 percent, indicating growth in employment for the 15th consecutive month.

Harlan Green © 2013

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

Government Shutdown Dims Builder Optimism

Financial FAQs

New-home construction is already a casualty of the government shutdown, and even sequestration agreement that has cut government hiring and spending more than $1.6 trillion to date. But its effect would be mitigated if interest rates remain low, and lenders continue to ease qualification criteria, such as lowering their super-high credit score requirement.

The National Association of Home Builders/Wells Fargo housing-market index fell to 55 in October from 57 in September. A prior September estimate pegged the level at 58, which matched the highest reading since 2005. Results above 50 signal that builders, generally, are optimistic about sales trends.

 

“Interest rates remain near historic lows and we don’t expect the level of rates to have a major impact on sales and starts going forward,” said David Crowe, NAHB’s chief economist. “Once this government impasse is resolved, we expect builder and consumer optimism will bounce back.”

Despite the recent decline, pent-up demand is supporting builder sentiment, which has increased 34 percent over the past year, outpacing home-construction growth.

"A spike in mortgage interest rates along with the paralysis in Washington that led to the government shutdown and uncertainty regarding the nation's debt limit have caused builders and consumers to take pause," said NAHB Chief Economist David Crowe. "However, interest rates remain near historic lows and we don't expect the level of rates to have a major impact on sales and starts going forward. Once this government impasse is resolved, we expect builder and consumer optimism will bounce back."

Interest have declined slightly from their recent highs, so that the 30-year conforming fixed rate today is approximately 4.25 percent with 0 origination points in California.

There is some good news. The average credit score among borrowers who received a mortgage in September was 732, down from a peak of 750 a year prior, according to new data released today by Ellie Mae, which provides mortgage lenders with loan origination systems.  And this is a sign both that lenders loosening their heretofore strict qualification standards, and that more eligible homebuyers will be allowed in the market.

“The share of purchase loans continued to grow in September 2013, climbing 1 percent to 58 percent of all loans even in the face of higher interest rates and seasonality,” said Jonathan Corr, president and chief operating officer of Ellie Mae. “This was the eighth consecutive month that the purchase loan percentage has increased or stayed steady. In January 2013, purchases represented only 27 percent of closed loans.

“The credit standards also continued to ease in September with average FICO scores for closed loans dropping to 732 compared to 734 in August. September’s averages were 15 points below where they were at the beginning of the year (January 2013) and the lowest level since we began our tracking in August 2011,” noted Corr. “When you drill down farther, the change is even more apparent. For example, 31 percent of the closed loans in September 2013 had FICO scores under 700 compared to 17.4 percent of closed loans in September 2012.“

That’s also the lowest average credit score since the company started tracking this data in August 2011.

This is important because even a 680 FICO score is a sign of good credit record, though credit balances may be high. But the overall debt-to-income ratio is more important in determining borrowers’ ability-to-pay in this case.

Lenders pulled back on giving mortgages to borrowers with less-than-perfect credit in 2008 as the number of borrowers who foreclosed on their homes spiked. That’s left millions of would-be home buyers shut out of the housing market. The findings suggest that some borrowers who were unable to gain financing as recently as a year ago could get mortgage approval now.

To be sure, the bar to getting a mortgage remains high. Applicants who were denied a mortgage in September had an average FICO score of 696, according to Ellie Mae—a score that’s relatively stellar by most counts. FICO scores range from 300 to 850. Before the recession it was common for borrowers with credit scores in the 600 range and below to get mortgages.

Harlan Green © 2013

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

Housing Starts, Builder Confidence Improve

Popular Economics Weekly

Housing made somewhat of a comeback in July and taking into account wet weather on the East coast should be taken as stronger than face value.  Housing starts in July rebounded 5.9 percent after falling 7.9 percent in June, according to the National Association of Home Builders.  The July starts annualized level of 0.896 million units was up 20.9 percent on a year-ago basis.

And builder confidence in the market for newly built, single-family homes rose three points to 59 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for August, released today. This fourth consecutive monthly gain brings the index to its highest level in nearly eight years.

Graph: Econoday

“Builders are seeing more motivated buyers walk through their doors than they have in quite some time,” said NAHB Chairman Rick Judson. “What’s more, firming home prices and thinning inventories of homes for sale are contributing to an increased sense of urgency among those who are in the market.”

“Builder confidence continues to strengthen along with rising demand for a limited supply of new and existing homes in most local markets,” noted NAHB Chief Economist David Crowe. “However, this positive momentum is being slowed by the ongoing headwinds of tight credit and low supplies of finished lots and labor.”

Nationwide housing starts rose 5.9 percent to a seasonally adjusted annual rate of 896,000 units in July as multifamily construction rebounded from a dip in the previous month, according to newly released figures from HUD and the U.S. Census Bureau. Meanwhile, single-family construction recorded a modest decline from a rate that was upwardly revised for the previous month.

“Builders are making every effort to keep up with the rising demand for new homes and apartments, and construction in both sectors is running well ahead of the pace we saw at this time last year,” noted Rick Judson. “However, ongoing issues with accessing credit and limited supplies of finished lots and labor are making it tough to do that, particularly for single-family builders.”

“Today’s report is in line with our forecast for continued, gradual strengthening of housing starts and permit activity through the rest of the year,” said NAHB Chief Economist David Crowe. “The double-digit bounce-back on the multifamily side was in keeping with typical month-to-month volatility in that sector,” he noted, “while the sideways movement in single-family was a result of unusually wet weather in the South and West.”

Regionally, combined housing starts activity posted solid gains of 40.2 percent in the Northeast, 25.4 percent in the Midwest and 7.2 percent in the West, respectively, in July, while the South posted a 7 percent decline.

Issuance of building permits, which can be an indicator of future building activity, rose 2.7 percent to a seasonally adjusted annual rate of 943,000 units in July. Single-family permits dipped 1.9 percent to 613,000 units from a strong pace in the previous month, while multifamily permits gained 12.6 percent to 330,000 units.

Interest rates will help determine if home construction continues to improve, however. They are up more than 1 percent, with 30-year fixed rate mortgage rates now 4.25 percent with a 1 point origination fee, and 30-year fixed High Balance conforming rates at 4.375 percent for 1 point.

Harlan Green © 2013

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

Shadow Inventory of Bad Loans Still Too High

Financial FAQs

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

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

Graph: WSJ Marketwatch

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

Graph: WSJ Marketwatch

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

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

Harlan Green © 2013

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

Whither Mortgage Rates?

The Mortgage Corner

Ok, the fats in the fire now with the Fed saying it will begin to taper its QE3 purchases that have been holding down mortgage rates by the end of 2013. Rates have been surging since then. The 30-year conforming fixed rate guaranteed by Fannie Mae and Freddie Mac is up almost 1 percent in 1 month.

So how much will this crimp the housing recovery, just now gathering steam? The all important single-family housing starts in May (that helps to determine whether the homeownership rate will increase) was at a rate of 599,000, according to the National Association of Home Builders and has been rising since January 2011, up some 33 percent from its most recent low.

This is why builder confidence in new-home construction has increased, as we said. But with 30-year conforming fixed rates now 4.25 percent, up from 3.50 percent as recently as the week before Bernanke’s first pronouncement that QE3 would be on the wane by year end, the rising costs will hit those in the lower income brackets.

For instance at the $208,000 national median home price the monthly payment would increase just $49/mo with a 20 percent down payment, a 6 percent increase. But the result is magnified in the debt to income ratio requirement for qualification, which is 43 percent. The qualification income would have to be approximately 5 percent higher, or housing price 5 percent lower, equal to $197,600, a $10,400 reduction in buying power, assuming other debts are equal.

So this would affect entry-level, first time homebuyers for the most part. But that is about 40 percent of home purchases during normal times. So in effect the Federal Reserve is cutting loose first-time homebuyers from the possibility of purchasing anything but so-called “affordable” housing with mandated price controls. And we know how few affordable units are built even during normal times.

Of course should Fannie Mae and Freddie Mac return to the private sector from government conservatorship, entry-level home buying could continue, since their interest rates have historically been lower than that of commercial banks. Critics have said this is because of the “implicit” government guaranteed to bail them out, and their thin market capitalization.

But their profits have been boosted by record-low interest rates, a booming housing market, and Fannie and Freddie’s very low default rates; the result of strict underwriting guidelines that require excellent credit, adequate income and assets.

There is in fact no reason banks can’t return to the mortgage market on their own, rather than rely on Fannie and Freddie, who now guarantee some 90 percent of mortgages originated. Renown banking analyst Richard Bove predicts banks are at the beginning of a record run in profits that could last 14 years.

“"What I'm suggesting is for the next 14 years — you'll have some setbacks, some recessions — (but) bank earnings will do what they did from 1992 to 2006," he said. "They're going to go straight up."

Even better news is that inventories of existing homes continue to increase from record lows as banks continue to decrease their holdings of distressed homes. So far in 2013, inventory is up 14.9 percent, according to Housing Tracker. But inventory is still very low, down 15.8 percent from the same week last year according to Housing Tracker. 

Graph: Calculated Risk

Calculated Risk’s Bill McBride opines that inventory is well above the peak percentage increases for 2011 and 2012, which suggests that inventory is near the bottom. I believe it can only go up from now, as I said last week. The reason is housing values continue to increase, up as much as 25 percent from their lows in Florida, California, and Nevada, states hardest hit by the housing bust.

The bottom line is activity in the housing sector is heating up with existing-home sales rising 4.2 percent to a seasonally adjusted annual rate of 5.18 million in May from 4.97 million in April, and is 12.9 percent above the 4.59 million-unit pace in May 2012.

Graph: Calculated Risk

Total housing inventory at the end of May rose 3.3 percent to 2.22 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace, down from 5.2 months in April. Listed inventory is 10.1 percent below a year ago, when there was a 6.5-month supply.

The only fly in this ointment is whether mortgage rates will continue to rise. This might also slow price increases as borrowers find it harder to qualify for larger loan amounts.

But rates can’t go much higher for the moment, unless and until we approach fuller employment and economic growth really takes off. It would trigger the end of QE3 altogether and perhaps the Fed beginning to raise shorter term rates. But that is the best of all worlds and means a return to more normal times, at last. For rising rates means a greater demand for money, due to a faster growing economy, something we all want.

Harlan Green © 2013

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

Fannie Mae/Freddie Mac Dilemma Won’t End Soon

Popular Economics Weekly

The U.S. Treasury is in a bind. Everyone seems to agree that Fannie and Freddie, wards of the government should be downsized, but how to do it without damaging the housing recovery? Extreme conservatives even want to abolish them, along with the Federal Reserve, Departments of Commerce, Education, etc., etc. That isn’t practical, of course—especially abolishing Fannie and Freddie because they currently supply more than 90 percent of all mortgages!

That is one reason even a hint by Fed Chairman Bernanke and others that the Fed might “taper” QE purchases has caused interest rates to rise sharply. Because former Goldman Sachs chief economist Jim O’Neill and others have trumpeted that bond interest rates could reach 4 percent, if and when the Fed slows its QE purchases, returning to “more normal valuations” when the economy does recover.

This in turn means that mortgage rates would return to their recent 6 percent range for conforming 30-year fixed rates, from today’s 4 percent. But that would be devastating to a recovering housing market. Household incomes are still stagnant—in fact have been for the past 30 year, when accounting for inflation.

Keeping interest rates so low has made housing more affordable at these lower income levels. That is the major reason for the Fed’s QE3 buying program.

The Fed has also said unemployment has to fall further, as we have said, and there are few signs that GDP growth will be more than 2 percent this year.

Bond investors also watch inflation, and right now inflation is falling. The Personal Consumption Expenditure Index favored by the Fed is currently 1 percent, which is 1 percent below the Fed’s target of 2 percent. So why would the Fed even begin to “taper” their $85 billion per month in security purchases when neither is happening; and real estate is at the beginning of its recovery?

And sure enough, the Fed has just hinted in a recent Wall Street Journal Op-ed by John Hilsenrath that they aren’t in a hurry to taper their QE3 purchases—just yet. “The Fed, he (Bernanke) said in his March press conference and again at testimony to Congress last month, expects a “considerable” amount of time to pass between ending the bond-buying program and raising short-term rates. He seems likely to press that point at his press conference next week, given that the markets are telling him they don’t believe it.”

“In recent years, the search for yield has gone wider and deeper,” said O’Neill in the same Op-ed. “The resulting deviation from normal valuations has been amplified by the shift of pension funds and insurance companies out of equities into fashionable bonds, and by the lingering effects of the great financial crisis of 2008 and 2009. It seems inevitable that some version of the shock of 1994 is going to happen again.”

What “shock of 1994”? That was when Orange County went bankrupt because then Fed Chairman Greenspan boosted interest rates abruptly in the spring of 1994, after holding them at record lows in 1992-93, to cure the 1991 recession. But Greenspan did it without any warning, which is why Orange County lost so much money betting that interest rates would continue to fall.

So, really the panicked selling of stocks and bonds, and recent rise in interest rates are a sign that economic growth is still fragile, so that even a hint of credit tightening will depress markets. It is the Federal Reserve that is goosing growth, after all, especially in the real estate sector.

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

But that can’t happen if interest rates continue to rise as quickly—and certainly not if they return to more “normal valuations”. So government shouldn’t be in a hurry to downsize Fannie and Freddie, either, since it doesn’t look like Wall Street or the banks are willing to support the housing market without Fannie and Freddie’s help.

Harlan Green © 2013

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