Mortgage Delinquencies Lowest Since 2008

The Mortgage Corner

The delinquency rate for mortgage loans on one-to-four-unit residential properties fell to a seasonally adjusted rate of 7.09 percent of all loans outstanding at the end of the fourth quarter of 2012, the lowest level since 2008, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

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

“We are seeing large improvements in mortgage performance nationally and in almost every state.  The 30 day delinquency rate decreased 21 basis points to its lowest level since mid-2007. With fewer new delinquencies, the foreclosure start rate and foreclosure inventory rates continue to fall and are at their lowest levels since 2007 and 2008 respectively,”   said Jay Brinkmann, MBA’s Chief Economist and Senior Vice President of Research.

The foreclosure starts rate decreased by the largest amount ever in the MBA survey and now stands at half of its peak in 2009. Similarly, the 33 basis point drop in the foreclosure inventory rate is also the largest in the history of the survey.   

Brinkman said the two biggest factors impacting the number of loans in the foreclosure process still are the magnitude of the problem in Florida and the judicial foreclosure systems in some states.  12 percent of the mortgages in Florida are in the process of foreclosure, down from a peak of 14.5 percent last year but still an extraordinarily high rate that is impacting the national rate.  In addition, while the percentages of loans in foreclosure dropped in almost all states, the average rate for judicial states was 6.2 percent, triple the average rate of 2.1 percent for nonjudicial states.

And RealtyTrac reported foreclosure-related sales accounted for 21 percent of all U.S. residential sales during 2012, down from 23 percent of all sales in 2011 and down from 28 percent of all sales in 2010.

Graph: RealtyTrac

Properties not in foreclosure that sold as short sales in 2012 accounted for an estimated 22 percent of all residential sales — bringing the total share of distressed sales to 43 percent including both foreclosure-related sales and non-foreclosure short sales.

California, Georgia, Nevada posted highest percentage of foreclosure sales in 2012. Foreclosure sales accounted for more than 38 percent of all residential sales in California in 2012, the highest percentage of any state but down from 44 percent of all sales in 2011 and down from 49 percent of all sales in 2010. California pre-foreclosure sales in 2012 increased 12 percent from 2011 while California REO sales decreased 27 percent over the same time period.

Home prices continue to recover, rising gradually. The FHFA price index for December for homes with Fannie Mae and Freddie Mac conventional mortgages gained 0.6 percent, following a rise of 0.4 percent the prior month. The December advance was led by the East South Central region, increasing 2.3 percent, with the Middle Atlantic region down 0.1 percent.

Graph: Econoday

The year-on-year rate posted at plus 5.8 percent versus 5.4 percent in November.
The FHFA report combined this morning with a favorable Case-Shiller report, point to further progress in restoring home prices toward pre-recession levels. Much of the price rise comes from the decline in for sale inventories to a low 4 month supply at current sales rates for both new and existing-home sales.

And as the number of foreclosure and short sale transactions continue to decline, prices could rise even faster, further boosting the real estate recovery.

Harlan Green © 2013

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Bernanke’s Fed Growing U.S. Economy

Popular Economics Weekly

Right now, the Federal Reserve seems to be the only government agency focused on growing the economy. Washington has otherwise been focused on the sequester agreement, or how to further cut government spending. But such austerity measures don’t grow economies, as the current European experience shows. Europe is in its second year of a repeat recession. Great Britain is in its third recession since its Conservative Party began its own austerity cuts.

That is why Fed Chairman Ben Bernanke’s testimony this week is so important. The Federal Reserve has to continue holding down interest rates for the foreseeable future. He has specifically said that the unemployment rate has to fall to 6.5 percent from its present 7.8 percent before the Fed will begin to raise interest rates.

It won’t be easy, as the so-called deficit hawks on the Fed’s Board of Governors have been sounding off on the dangers of inflation if the Fed keeps buying some $85 Billion per month in bonds and mortgage backed securities that are holding interest rates at historical lows. But there isn’t any inflation. There hasn’t been inflation since the busting of the housing bubble.

“We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation,” he said in his prepared testimony.

Graph: Econoday

Year-on-year, overall CPI inflation fell to 1.6 percent in January from 1.8 percent in December (seasonally adjusted). The core rate posted at 1.9 percent in January, matching December’s rate.  This isn’t incipient inflation. It’s incipient deflation, which depresses wages as well as prices. Incipient deflation—or disinflation in this case where pricing aren’t rising as fast—companies can’t raise their prices. So they can’t increase profits and hire more employees. It’s the simplest of equations lost on deficit hawks and those advocating an additional $85 Billion cut in sequester spending.

Housing seems to be the one sector outside of manufacturing that the Fed is having the most effect. Especially with new-home construction. New home sales surged in January, rising 16 percent to a 4-1/2-year high of 437,000, with all regions reporting increases. On a year over year basis, January sales are reported to have risen 29 percent, the same as the increase in single-family building permits over that period.

Graph: Calculated Risk

And the Case-Shiller Home Price Index showed prices will continue to rise this year. Data through December 2012 reported that all three headline composites ended the year with strong gains. The national composite posted an increase of 7.3 percent for 2012. The 10- and 20-City Composites reported annual returns of 5.9 percent and 6.8 percent in 2012. In addition to the three composites, nineteen of the 20 MSAs posted positive year-over-year growth – only New York fell.

Graph: Calculated Risk

“Home prices ended 2012 with solid gains, said David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices.

“Housing and residential construction led the economy in the 2012 fourth quarter. In December’s report all three headline composites and 19 of the 20 cities gained over their levels of a year ago. Month-over-month, 9 cities and both Composites posted positive monthly gains. Seasonally adjusted, there were no monthly declines across all 20 cities.”

So we have to thank Ben Bernanke for keeping his word. We also know from both the Japanese and European experience that austerity kills growth rather than boosting it. Europe is back in recession, while Japan just elected a pro-growth administration that wants to spend more to promote growth.

Harlan Green © 2013

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The Sequester Dilemma—How Much Is Too Much Austerity?

Financial FAQs

Come March 1, we will begin to see how much damage the sequester agreement causes. A recent CNBC column by Larry Kudlow illustrates both the misconceptions and reason for the gridlock on avoiding across-the-board spending cuts of some $85 Billion to the federal budget..

Kudlow says “Looking at the sequester in this light (only half of sequester cuts take place immediately), it's clear that it won't result in economic Armageddon. In fact, I'll make the case that any spending relief is actually pro-growth. That's right. When the government spending share of GDP declines, so does the true tax burden on the economy. As a result, more resources are left in the free-market private sector, which will promote real growth.”

In fact, GW Bush’s program of huge tax cuts that lessened the “true tax burden” while continuing government spending proved just the opposite. Pumping all that money into the private sector resulted in the slowest post-WWII growth in history, plus the Great Recession, the worst recession since the Great Depression.

Taxpayers paid for those tax cuts and wars, in other words, pushing corporations to record profits and the top 1 percent of income-earners to 121 percent of all income earned from 2009-2011. This is while incomes of the 99 percent that do most of the spending actually shrank 0.4 percent during that time, per economist Emmanuel Saez. So “real growth” wasn’t promoted, because the 1 percent hoarded their profits and paid themselves higher salaries, rather than reinvesting in the economy.

The Congressional Budget Office predicts that allowing the sequester cuts to kick in on March 1 will ultimately result in 750,000 lost jobs and subtract 0.6 percent from GDP growth. Why? Because when both the private sector and government cuts spending, there is no investment in future growth, period.

Graph: Calculated Risk

It’s actually worse than that, because unused production capacity will remain unused, which is the real casualty of a further cut in government spending. It has already been reduced some $2.35 trillion from existing legislation. Policymakers have enacted nearly $1.5 trillion in spending cuts for appropriated programs (mainly through the annual caps enacted in the 2011 Budget Control Act) and nearly $600 billion in revenue increases in ATRA, the American Tax Relief Act agreement reached in December.

The Congressional Budget Office expects the deficit to shrink from 8.7 percent of GDP in fiscal 2011 to 5.3 percent in fiscal 2013 if the sequester takes effect and to 5.5 percent if it doesn't. Either way, the two-year deficit reduction — equal to 3.4 percent of the economy if automatic budget cuts are triggered and 3.2 percent if not—would stand far above any other fiscal tightening since World War II, and could lead to another recession. For without rising household incomes, with private sector businesses that aren’t reinvesting, only the government can boost the demand for goods and services.

Harlan Green © 2013

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

Housing Affordability Up, Inventories Still Shrinking

The Mortgage Corner

The National Association of Home Builders (NAHB) reported exceptionally low interest rates helped ensure a slight gain in nationwide housing affordability amid relatively stable house prices in the final quarter of 2012, according to the just released National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI).

In all, 74.9 percent of homes sold between the beginning of October and end of December were affordable to families earning the U.S. median income of $65,000. This was up nearly a percentage point from the 74.1 percent of homes sold that were affordable to median-income earners in last year’s third quarter.

Interest rates have risen about one-quarter percent from their recent lows, to average 3.50 percent for 30-year fixed rate conforming loan amounts in California with zero points origination fees. Even so-called High-Balance 30-year fixed conforming amounts are averaging 3.75 percent with zero points origination fees, still phenomenally low, thanks to the Federal Reserve’s QE buying programs.

“The most recent housing affordability data should be encouraging to many prospective home buyers, because it shows that homeownership remains within reach of median-income consumers even as most local markets appear to be on a recovery path,” said NAHB Chairman Rick Judson.  He noted that the most recent reading of the NAHB/First American Improving Markets Index found that 259 out of 361 metros currently qualify as improving, including representatives from all 50 states and the District of Columbia.

This is while Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased to a seasonally adjusted annual rate of 4.92 million in January from a downwardly revised 4.90 million in December, and are 9.1 percent above the 4.51 million-unit pace in January 2012. The graph shows sales’ levels are almost back to 2000 levels, the beginning of the fastest rise in housing prices.

Graph: Calculated Risk

NAR chief economist Lawrence Yun said tight inventory is a major factor in the market. "Buyer traffic is continuing to pick up, while seller traffic is holding steady," he said. "In fact, buyer traffic is 40 percent above a year ago, so there is plenty of demand but insufficient inventory to improve sales more strongly. We've transitioned into a seller's market in much of the country."

Total housing inventory at the end of January fell 4.9 percent to 1.74 million existing homes available for sale, which represents a 4.2-month supply at the current sales pace, down from 4.5 months in December, and is the lowest housing supply since April 2005 when it was also 4.2 months, but also close to 2000 levels.

Graph: Calculated Risk

Listed inventory is 25.3 percent below a year ago when there was a 6.2-month supply. Raw unsold inventory is at the lowest level since December 1999 when there were 1.71 million homes on the market.

"We expect a seasonal rise of inventory this spring, but it may be insufficient to avoid more frequent incidences of multiple bidding and faster-than-normal price growth," said Yun.

The question yet to be answered is whether the declining prices of foreclosure sales discussed in my last blog will increase the housing supply in months to come.

Harlan Green © 2013

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

No Double Dip Recession—Why Worry?

Popular Economics Weekly

Goldman Sachs chief economist Jan Hatzius has joined the chorus that says 2013 should be a good year for growth, in spite of the so-called ‘fiscal headwinds’ of a gridlocked Congress and White House.

Why? Because both domestic and worldwide demand is picking up. U.S. exports have risen some 50 percent just since the end of the recession, while employment was given a boost with the December unemployment report that showed an additional 335,000 jobs were created in 2012 than originally prognosticated.

And real estate in 2013 may finally be rid of the drag from foreclosure sales. Calculated Risk has put up an interesting report by FNC, a real estate research firm, which says foreclosure prices have bottomed out over several months.

Graph: FNC

FNC’s report shows that foreclosure price discounts, which compare a foreclosed home’s estimated market value to its final sales price, have dropped to pre-mortgage crisis levels at about 12.2 percent in Q4 2012. At the height of the mortgage crisis in 2008 and 2009, foreclosed homes were typically sold at more than 25 percent below their estimated market value. Additionally, the report indicates that the typical size of foreclosed homes is also approaching pre-crisis levels.

Calculated Risk also reports on the 4 economic indicators used by the National Bureau of Economic Research (NBER) that determine business cycle troughs and peaks. So far just two—real GDP and personal income less transfer payments have reached their pre-recession levels. Industrial production and employment have yet to reach their previous peaks.

This tells us there is still unused potential, among other things. For instance, real GDP returned to the pre-recession peak in Q4 2011, and hit new post-recession highs for four consecutive quarters until dipping slightly in Q4 2012. (Gray areas are recessions.) But Q4 may be revised up from new data on increased exports and higher inventory levels released after the “advance” Q4 estimate. It will be followed by 2 revisions as more complete information is available to the Commerce Department’s Bureau of Economic Research.

Graph: Calculated Risk

A note about consumer confidence is in order here. Deficit hawks and austerity advocates want to continue to shrink government, their rationale being that businesses will hire more workers and expand if only they had confidence in future growth. But business confidence is really based the whether the demand for their goods and services is increasing or decreasing, not on what governments might or might not do.

Graph: Calculated Risk

And said demand depends in part on whether consumers feel better about their finances, among other things. Confidence levels have been rising, as jobs and housing values have increased, but are nowhere near pre-recession levels. Let us see whether personal income, one of the 4 business cycle indicators, continues to improve.

Harlan Green © 2013

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

State of the Union—Why So Few New Jobs?

Popular Economics Weekly

President Obama's State of the Union address was all about jobs. So why have so few been created since the Great Recession?

Federal Reserve Vice Chair Janet Yellen gave a recent speech entitled: A Painfully Slow Recovery for America's Workers: Causes, Implications, and the Federal Reserve's Response. It is a warning about future job formation. She attributes most of the weak recovery to ‘fiscal headwinds’ (a shrinking of government spending to support growth and jobs), as well as the busted housing market that reduced consumers wealth some 40 percent. And because housing will take years to recover, more government stimulus is needed to bring down unemployment to an acceptable level.

Why do we need the government to continue spending? The reduction in household incomes since the 1970s reached its climax in the Great Recession. Income inequality had risen to the levels of 1929, just before the Great Depression. And Economist Emmanuel Saez has just updated income growth since the Great Recession. From 2009 to 2011 the top 1 percent incomes grew by 11.2 percent while bottom 99 percent incomes shrank by 0.4 percent. Hence, the top 1 percent captured 121 percent of the income gains in the first two years of the recovery.

And expectations of future income growth haven’t improved, as shown in this graph from 1978 presented by Dr. Yellen. Just 25 percent now expect higher incomes since the Great Recession, vs. a historical average of 50 percent since 1978.

Graph: Federal Reserve

So we are in a very tough spot. The fiscal headwinds Dr. Yellen speaks of have to do with the shrinking budget deficit, believe it or not. The Congressional Budget Office expects the deficit to shrink from 8.7 percent of GDP in fiscal 2011 to 5.3 percent in fiscal 2013 if the sequester takes effect and to 5.5 percent if it doesn't. Either way, the two-year deficit reduction — equal to 3.4 percent of the economy if automatic budget cuts are triggered and 3.2 percent if not—would stand far above any other fiscal tightening since World War II, and could lead to another recession. For without rising household incomes, and private sector businesses that aren’t reinvesting, only the government can boost the demand for goods and services.

Graph: Calculated Risk

There is no simpler explanation for the employment picture. There cannot be more private sector growth if the government continues to shrink spending, since household incomes aren’t growing that control most of the aggregate demand (70 percent) for goods and services. Businesses account for approximately 20 percent of total demand, and government spending accounts for the other 10 percent.

Lower taxes can help if they go to the right households, but most tax cuts enacted since 1980 have benefited the wealthiest, or corporations’ record profits, rather than economic growth overall. In fact, corporations have been hoarding their profits—some $2 trillion in cash—rather than reinvest it in the economy. Overall buying power has been significantly reduced, in other words. And the 2 percent payroll tax increase just enacted with further cut consumer spending.

So the problem is how to create enough new jobs to generate more demand for goods and services. And only government is in a position to do that at present. Nothing else will generate the growth we need.

Harlan Green © 2013

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

The Fed Worried About Continued Growth

Popular Economics Weekly

Fourth Quarter Gross Domestic Product growth was a bust. What does that say about 2013? Are consumers tapped out, and capital expenditures (capex) shrinking, the two main drivers of economic growth? It doesn’t seem so, as long as the Federal Reserve keeps interest rates this low.

The Federal Reserve was worried about diminished growth at its January FOMC meeting, and so voted to continue its Quantitative Easing programs.

“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction,” said the FOMC press release of its meeting. “Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”

And Barron’s Magazine recently predicted an increase in capex spending this year, citing Standard and Poor’s estimate of 9.9 percent growth, vs 6.9 percent last year. It also cites ultra-low interest rates that provide a double nudge: punitive returns for companies that continue to hoard cash and alluring rates on equipment loans. Also, the fiscal cliff deal in early January extended a tax perk called accelerated depreciation, which sharply increases the portion of capex that companies can write off against income right away.

And consumers are spending like their recession is over. Consumer debt continues to grow, especially for autos and student loans, while they continue to pay down revolving credit card debts.

Graph: Econoday

The revolving credit component (primarily credit card balances) declined $3.6 billion in December.  Given the healthy retail sales figures for December, consumers are still relying on cash.  This may be due to consumers continuing to mend their credit and/or due to credit card companies keeping credit tight.

Graph: Econoday

The Commerce Department said consumer spending was moderately strong in December.  Retail sales gained 0.5 percent after a 0.4 percent rebound the month before, with automobiles leading the way. That’s 6 percent per year, close to normal sales’ growth. Without autos and gasoline, strength in the core was also broad based.  Gains were led by furniture and home furnishings, food services and drinking places, and health and personal care.  A decline was seen in electronics and appliance stores.

One caveat: The Fed seems to have painted itself into a corner with its stated mandate of 2 to 2.5 percent inflation, as we said last week. It’s a scenario eerily similar to Germany’s fixation on inflation since its 1920s hyperinflation, and the reason Germany is punishing the Mediterranean countries with its austerity demands. Though U.S. inflation is running below 2 percent at the moment, it could rise with short term rises in gas prices and cause the Fed to terminate its QE program.

What about 2013? We think zero growth of Q4 Growth Domestic Product was an aberration and will probably be revised upward in the next estimate. It looks like the fiscal cliff negotiations, and higher payroll taxes aren’t stopping consumers, or companies from spending more than originally anticipated.

Harlan Green © 2013

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