Are House Prices In A Bubble (Again)? Lumber, Confidence, Mortgages, Interest Rates
House prices at the national level have rising since February 2012. Here are the Case-Shiller 20 index, the Loan Performance house price index and the FNC RPI 30 index. They all point to rising house prices.
Mortgage rates continue to decline (longer-trend) making housing more “affordable.” Thanks mostly to The Fed’s unorthodox monetary policy.
Other economic indicators are positive as well. The University of Michigan Consumer Confidence index is at its highest level since 2007.
And the Conference Board’s Leading Economic Indicators increased this morning.
The US dollar has been spiking.
And the S&P 500 has been on a roll.
Once again, The Fed can be thanked.
And The Fed thinks that Real GDP will grow above 3% in 2014.
Now for the not-so-good news.
For housing, here is an interesting chart. Lumber futures have been declining since March. Hmmm.
In April 2013, America was 15.9 million full-time equivalent* (FTE) jobs away from full employment. This is actually 1.6 million FTE jobs worse than when the recession ended 46 months earlier, in June 2009. So, from an employment point of view, there has been no recovery at all.
Real household income continues to fall {(blue line).
And the duration (risk) of Fannie Mae 4.0% MBS is growing.
Bubble, economic growth … or both?
Philly Fed’s Steak Isn’t Sizzling – Fed Business Outlook Survey Contracts (World Sov Yields Decline)
The Philadelphia Fed Business Outlook Survey declined to -5.20, according to their latest report.
The current activity index has shown no pattern of sustained growth over the past seven months, generally alternating between positive and negative readings (see Chart). The number of firms reporting decreased activity this month (29 percent) edged out those reporting increased activity (24 percent).
So, Philly’s Steak isn’t sizzling. Rather, it’s getting cold.
Sovereign yields around the globe continue to decline between a rush to safety and Central Bank easing.
More bad economic news will likely keep The Fed involved in the market longer.
And there is nothing more vile than a cold Philly Steak sandwich with coagulated cheese sauce.
Here Comes The Fed? Housing Starts Fall, Jobless Claims Rise And “Inflation” Falls
Yesterday was a bad economic news day … and today continues the trend. Housing starts fell, initial jobless claims rose and “inflation” fell.
May 16 (Bloomberg) — Starts of new homes in the U.S. fell more than forecast in April to a five-month low, indicating a pause in the industry’s progress as builders slowed work on apartments. Building permits surged to an almost five-year high. Housing starts slumped 16.45 percent, the most since February 2011, to an 853,000 annualized rate after a revised 1.02 million pace in March.
The real jolt is the decline in multifamily starts of -37.77% for 5+ units.
But on the other hand, 5+ unit PERMITS rose 40.60%. Building permits overall rose 14.3%.
And the driver of housing – employment – took a turn down this morning. Initial jobless claims rose to 360,000, an increase of 32,000 from the previous week.
And the Consumer Price Index for Urban Dwellers fell 0.4% in April.
Finally, Bloomberg Consumer Comfort fell. It has not been above -20 since the recession started.
Look for The Fed to keep on rolling the dice!
U.S. Treasury Suspends SLUGS To Avoid Debt Ceiling Breach
Actually, it is SLGS standing for State and Local Government Series securities.
May 15 (Bloomberg) — The U.S. Treasury Department said it will suspend sales of State and Local Government Series non-marketable securities to help keep funding the government to stay within the statutory debt limit.
The suspension of the sales until further notice will be effective at 12 p.m. Washington time on May 17, the department’s Bureau of Public Debt said in a statement today. “The suspension will assist Treasury’s management of the debt subject to limit,” it said in the statement.
The move is the first of several possible “extraordinary measures” the Treasury can take to avoid breaching the nation’s debt limit while the Obama administration and Congress negotiate a longer-term solution.
Here is the US government debt limit and US government debt outstanding.
And here is your share of debt.
How much SLGS are outstanding? Just enough to squeeze under the debt limit.
One month SLGS rates are virtually zero, but were above 5% in 2007.
SLGS are a drop in the Federal bucket, so look for additional tricks to avoid breaching the ceiling.
It figures.
Let’s Go Crazy! France Double-Dips, Empire State Goes Negative And Mortgage Apps Fall 7.3%
This is not one of those “everything is beautiful” economic news days.
First, France experienced a double dip in real GDP. This is France’s second recession in four years with a 0.2 percent contraction.
And France is helping to drag down the Euro-area into its sixth quarterly decline.
The Shadow Economy is former Soviet-bloc countries remains high along with Greece, Cyprus and Malta. Hmm. The further away countries are from Brussels and Luxembourg, the greater the Shadow economies (I don’t think this would surprise Nigel Farage!)
Second, the Empire State Manufacturing Survey General Business Conditions SA contracted -1.43%, the first contraction since January.
Industrial production fell 0-5% in April while capacity utilization declined to 77.8%.
We still can’t get to the magic 80% CAPUT reading, last seen in 2008.
Third, according to the Mortgage Bankers Association, the Refinance Index decreased 8 percent from the previous week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier.
After declining for seven weeks straight, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.67 percent from 3.59 percent,with points increasing to 0.41 from 0.33 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. This rate is at its highest level since the week ending April 12, 2013.
But, of course, with the Central Banks on a low rate crusade, …
As Prince sang in Purple Rain, “Let’s Go Crazy!“
A Tale Of Two CBO Forecasts: 2008 Vs. 2013 (Miles And Miles Of Deficits Thanks To Obamacare)
The Congressional Budget Office (CBO) has released its budget forecast from 2013 to 2023. Their forecast? Deficits as far as they eye can see … and then some.
Here is the CBO’s budget forecast from 2008. The budget forecast was actually rosy!
Here is a comparison of the two forecasts:
Why the change from a rosy forecast to a gloomy one? Healthcare and interest costs. Both are expected to rise until 2013 (and beyond).
A recent study by Congress revealed that Obamacare (aka, the Affordable Healthcare Act) will increase healthcare insurance premiums by 100% up to 400%.
And Obamacare will cost $1.8 trillion, twice the original estimate.
“Affordable” health care?
With growing government spending, interest costs will increase even if the rate remains the same. We shall see if interest rates rise when The Fed slows down its asset purchases.
Here is a photo of the Bronze Obamacare plan chasing consumers, the least expensive of the expensive healthcare plans.
NY Fed: Student And Auto Loans UP, DC And Maryland Lead In Student Debt
The Federal Reserve Bank of New York announced that households continued to improve their finances during the first three months of 2013 (for the most part). Outstanding household debt declined approximately $110 billion from the previous quarter, due in large part to a reduction in housing-related debt and credit card balances. Meanwhile, delinquency rates for each form of household debt declined, with about 8.1% of outstanding debt in some stage of delinquency, compared with 8.6% the previous quarter.
Here is the report:
Mortgages, the largest component of household debt, fell in the first quarter of 2013. Mortgage balances shown on consumer credit reports stand at $7.93 trillion, down $101 billion from the level in the fourth quarter of 2012. Balances on home equity lines of credit (HELOC) dropped by $11 billion (2.0%) and now stand at $552 billion. Household non-housing debt balances were roughly flat, with increases in auto and student loans, by $11 billion and $20 billion respectively, offset by decreases in credit card balances ($19 billion) and other consumer loan balances ($10 billion).
About 309,000 consumers had a bankruptcy notation added to their credit reports in 2013Q1, a 16.8% drop from the same quarter last year, and the ninth consecutive drop in bankruptcies on a year-over-year basis.
On the housing front, the combined Real Estate Owned (REO) by Fannie, Freddie and the FHA declined to 189,5291 at the end of Q1 2013, down from 192,720 in Q4 2012, and down 9% from 209,077 in Q1 2012. The peak for the combined REO of the mortgage giants was 295,307 in Q4 2010.
Nevada and Florida are improving in mortgages 90+ days late, but still lead the nation.
Now for student loans. Washington DC and Maryland lead the nation in student debt per borrower. DC leads the league with the average loan balance over $40,000.
Colorado and New Hampshire join DC in the share of consumers with student debt.
And like serious mortgage delinquencies, Florida is once again a leader. The lowest delinquency rate is South Dakota, at just over 6.5 percent, while the highest is in West Virginia, at nearly 18 percent.
Detroit’s Deficit Spending Problem And The Orr Report ($100 Million Deficit)
Since 2008, Detroit’s spending exceeded its budget by about $100 million annually. Detroit also borrowed $80 million last March to avoid running out of money. Clearly, Detroit has a deficit spending problem … much like the US Government (but without the printing press).
Here is the city’s emergency manager, Kevyn Orr’s, “Orr Report.” city-of-detroit-final-financial-operational-plan-45-day-plan5
Orr’s solution? Cut back on pay and restructure the debt (a coy way of say default). On the other hand, “It’s not as bad as what they’re trying to make it out to be,” Edward L. McNeil, a local official for the American Federation of State, County and Municipal Employees, said on Sunday.
“Without a significant restructuring of its debt, the city will be unable to break the cycle of damaging cutbacks in essential municipal services and investments,” according to Orr’s report. He also cited the need for concessions from unions, and revamping the police and fire departments to protect residents beset by crime and arson-inviting blight.
Detroit’s long-term obligations are at least $15.7 billion, including unfunded pension and retirement benefits. The general fund this fiscal year, with revenue of about $1.1 billion, will pay about $461 million for debt and health costs, according to the report.
The municipal bond market is already penalizing city securities after Orr’s report. A tax-exempt Detroit general-obligation bond maturing in April 2015 traded today at an average yield of 8.52 percent. That’s the most investors have demanded to hold the debt since before March 5, according to data compiled by Bloomberg. On May 10, it traded at a 7.27 percent yield.
Detroit has suffered from a declining population, job loss and falling house prices. Until recently.
Foreclosures have been a major problem, particularly since they are clustered.
And crime remains a problem, which is a challenge to the government and Mr. Orr.
I wish Dave Bing (one of my childhood basketball heroes) and Mr Orr all the best. Particularly when they try to cut union wages.
I wonder if Robocop is in the police union?
Welcome To The Party, Pal! Bank of Israel Cuts Interest Rate to 1.5% (512th Central Bank Rate Cut)
Bank of Israel cuts their interest rate to 1.5% in “surprise move.” Its only a surprise if you haven’t been watching Central Banks around the world.
The Bank of Israel, led by Governor Stanley Fischer, lowered the lending rate by a quarter of a percentage point to 1.5 percent, sending the shekel down the most since January. The bank said the steps were “in light of the continued appreciation of the shekel, taking into account the start of natural gas production from the Tamar gas field, interest rate reductions by many central banks — notably the European Central Bank, the quantitative easing in major economies worldwide and the downward revision in global growth forecasts.”
Here is the downward shift in the Israeli sovereign yield curve from one month ago.
Today, we have seen double digit basis point increases in Greece, The Ukraine, Russia, Slovenia and Turkey (dollar denominated). Israel’s 10 year sovereign yield fell only 2 basis points.0
This makes the 512th interest rate cut by a Central Bank since June 2007.
Is The Fed Going Cold Turkey After Going Wild Turkey? Housing And The Stock Market
According to the Wall Street Journal, The Fed is planning to dial back the incredible monetary stimulus. But it won’t go “cold turkey.”
We can always rely on The Dallas Fed’s Richard Fisher for a pithy comment:
“I don’t want to go from wild turkey to cold turkey,” Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an interview Friday. “I think we ought to dial it back.” Mr. Fisher is part of a contingent of Fed hawks who are wary of the central bank’s easy-money policies.
Of course, house prices have risen quite a bit since Q2 of 2012, mostly due to investors.
And of course the stock market has been frothed to dizzying heights by Fed intervention.
If we adjust for inflation, the S&P 500 is still below its previous peak.
Will the stock market or housing “bubble” decline with a slow paring of the asset purchases? That is the $3 trillion dollar question.
“The economic future, like the political future, will be determined by future human behavior and decisions. That is why it is uncertain. And in spite of the enormous and constantly growing literature on business cycles, business forecasting will never, any more than opinion polls, become an exact science.”
The Fed will not go cold turkey, even though they went wild turkey since 2007.
Nervous Bernanke Warns Of Excessive Risk (Dollar Rises, Commodities Plunge)
Fed Chairman Ben Bernanke was nervous as he answered questions at his speech in Chicago today.
“In light of the current low interest rate environment, we are watching particularly closely for instances of ‘reaching for yield’ and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals,” Mr Bernanke said.
I was waiting for questions or hints as to if or when will take their foot off the monetary accelerator, but NADA.
Global sovereign yields rose across the board this morning (except for Greece).
The dollar is rising …
while commodities plunged this morning (look at gold!).
Little reaction in the stock market. M1 money multiplier and M2 money velocity remain at or near historic lows.
Is The 511th Rate Cut Since June 2007 The Charm? Central Banks Struggling to Stimulate Economic Growth
On Fox Business’ Varney and Company today, Stuart Varney asked me about mortgage foreclosures. Are they ending? I said sure, “As long as The Fed doesn’t take away the punch bowl.”
Will The Fed take away the punch bowl? Not likely.
Sputh Korea just reduced their interest rate making it the 511th rate cut by a Central Bank since June 2007.
That’s a whole lot of rate cuts! Sovereign rates are dropping towards the zero barrier.
But the GDP growth rates in Europe are stagnant at best.
At least China and Australia are experiencing above 3% real GDP growth.
In honor of Australia, I am eating at Outback Steakhouse tonight and having a Shrimp on the Barbie. And a Foster’s.
![outbacksteakhousecoupon.org-3[1]](http://confoundedinterest.files.wordpress.com/2013/05/outbacksteakhousecoupon-org-31.jpg)
G’Day Mate!
Fannie Mae Reports Quarterly Net Income Of $58.7 Billion (Higher House Prices, Fewer Defaults)
Like the recent positive earnings report from Freddie Mac, Fannie Mae reported quarterly net income of $58.7 billion.
This is not surprising given the general decline in seriously delinquent mortgages
And rising house prices since March 2012.
• Fannie Mae reported quarterly net income of $58.7 billion following release of a $50.6 billion valuation allowance on its deferred tax assets.
• Beginning this year, pursuant to August 2012 amendments to the terms of Treasury’s bailout, Fannie Mae and Freddie Mac will pay quarterly dividends to Treasury equal to their net worth in excess of a gradually declining capital reserve. The result is that Fannie Mae and Freddie Mac effectively will pay all of their quarterly earnings to Treasury going forward.
• After paying a planned $59.4 billion dividend in June 2013, Fannie Mae will have paid $95.0 billion in dividends to Treasury, leaving the net cost to taxpayers of Fannie Mae’s bailout at $22.1 billion.
• These substantial dividends will help Treasury delay hitting the debt ceiling.
• One open question is whether the CBO will amend its baseline to reflect the expectation of future GSE profitability and, if so, whether PAYGO would require new taxes or spending cuts to offset any GSE reforms that reduce the dividends paid to Treasury.
Right now, Fannie and Freddie are cash cows for Treasury. And with Mel Watt as Obama’s nominee, Fannie and Freddie will likely be “taxed” via principal reductions.
How will things fare once The Fed takes its foot off the accelerator? THAT is the $3 trillion question!
Land Of The Lost: Divergent Forecasts Of Japan’s Currency And Future
The Japanese economy is fighting deflation and a slow economy. On April 4th, the Bank of Japan announced an unprecedented purchase of assets (e.g., Japanese sovereign debt) in an effort to generate inflation.
The Japanese Yen has risen from around 80 in November to 98.89 today. In fact, it was pretty flat from May to October. The Yen spiked on the announcement of the Bank of Japan’s change in monetary policy.
And here is the Dollar/Yen volatility surface.
Will it work? It is too early to tell, but here is a chart of Yen forecasts for 62 banks and other entities.
To highlight the divergence in Yen forecasts, I highlighted the high forecast (Credit Suisse) and the low forecast (RBC Capital). The mass of the forecasts are above 95, but there are those below 95 as well.
That is a pretty large divergence in the Yen forecast. Apparently, the various economists/analyst are having trouble developing a consensus. The same applies to the Euro.
If we look at the Japanese sovereign 10 year yield and the US Treasury 10 year yield, we see a spread compression as both dive for the bottom. As we approach the zero bound, we are truly in the “Land of the Lost.”
Commercial Mortgages Improve, Spreads Continue To Decline, Multifamily Shines (Again)
Commercial real estate prices have been steadily improving since the end of 2009 after a dramatic deflation during 2008 and 2009.
As a result of improving property values and historically low interest rates, commercial mortgage distressed rates have dropped.
May 8 (Bloomberg) — The overall distressed rate (60+ DLQ / SS) decreased this month by 26bps to 12.5%, Deutsche Bank analysts led by Harris Trifon write.
• Marks “one of the largest improvements in recent history”
• Majority of decrease came from 2005, 2006 loans where agg. balance of delinquent loans declined by $1.4b
• “If we were to include the $80b of currently performing deals that have priced since 2008, our headline rate would drop to around 10.6% from nearly 12.5%”
• $4b from ~450 loans paid off without a loss ($1.8b across 245 loans were prepays)
• Of the total loan dispositions, ~87% of loans were resolved by its maturity date
As you can seen, CMBS bond spreads to swaps have been declining over the past year.
And Detroit and Philadelphia lead the US in 60+ days delinquent loans.
Finally, multifamily housing leads commercial real estate in terms of 60+ day delinquencies. Multifamily once again returns to the best performing property type.
Let’s hope this patterns of rising prices and improving mortgage performance continues!
Mortgage Purchase Applications Rise To Highest Level Since May 2010 – Freddie Mac Pays $7B To Treasury
According to the Mortgage Bankers Association, the Refinance Index increased 8 percent from the previous week to the highest level since December 2012. The gain in the Refinance Index was due to increases in both the conventional and government refinance indices of 8.8 percent and 5.7 percent respectively. The seasonally adjusted Purchase Index increased 2 percent from one week earlier to the highest level since May 2010.
Here are mortgage purchase applications over the past 12 months.
On a longer view, you can see that this is the highest level since 2010.
Mortgage refinancing applications continue to rise as well.
Also from the MBA, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.59 percent, the lowest rate since December 2012, from 3.60 percent, with points increasing to 0.33 from 0.30 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
On a related front, the mortgage giant Freddie Mac just posted their second largest quarterly profit in history. And Freddie Mac will pay Treasury $7 Billion on their quarterly profits.
And Bill Gross tweeted that The Fed will have to keep their foot on the gas to sustain this rally.
Is Japan’s Monetary “Shock And Awe” Backfiring? The Case Of Housing And Mortgages
Bloomberg had an interesting story today about the Japanese mortgage market. Essentially, Japanese mortgage rates are up to … 1.81% from a low of 1.80% in April.
Hardly a disastrous increase. In fact, when I saw the increase from 1.80% to 1.81%, I did a double-take. That’s it??
May 8 (Bloomberg) — Bank of Japan Governor Haruhiko Kuroda’s stimulus policies are backfiring in the housing market, where mortgage rates are rising even as the central bank floods the financial system with cash.
Fixed 35-year home-loan costs rose to 1.81 percent this month, the first increase since February and up from an all-time low of 1.8 percent in April, according to data compiled by the Japan Housing Finance Agency. The rate climbed as Japanese government bond yields rose back above levels before Kuroda announced unprecedented monetary easing measures on April 4. Ten-year yields were at 0.595 percent yesterday, 4 1/2 basis points higher than they were on April 3 and compared with 1.76 percent for similar-maturity U.S. Treasuries.
And Japan’s house prices continue to deflate. Not much has worked in stopping Japan’s house price deflation.
Actually when we look at the Japanese sovereign curve change since April 4th (slightly), it has increased MORE than the increase in mortgage rates.
So while the Japanese sovereign curve is rising (slightly) rather than falling, Japanese mortgage rates are staying low and house prices continue to deflate. Let’s see if the Bank of Japan can push down their sovereign and mortgage rates and turn around the economy and housing prices.
Rolling The Dice: Las Vegas, The Fed and Wall Street
A friend of mine is trying to sell a 5 acre lot in Las Vegas and has been trying since 2009. But recently, he has received 3 offers at above the asking price; he has turned all offers down. Why? He thinks The Fed will continue rolling the dice on easy money policies.
Reuters had an interesting piece on the Las Vegas “rebound” entitled “Special Report: Cheap money bankrolls Wall Street’s bet on housing.” According to the Reuters article, The Vegas market has unsteady legs. Statistics compiled by the University of Nevada at Las Vegas show some 40,000 homes are largely vacant – 8 percent of the metropolitan area’s single-family housing stock. Housing research firm RealtyTrac estimates there are 20,000 single-family homes in the metro area either owned by a bank or in some stage of foreclosure.
Some 52 percent of all homeowners still owe more on their mortgages than their residences are worth, more than any other state, according to CoreLogic. It’s even worse in some neighborhoods. An analysis by RealtyTrac for Reuters found that in about half of the zip codes in the Vegas metropolitan area, at least 70 percent of homeowners not in foreclosure were under water on their mortgages.
Economists say with unemployment in Nevada at 9.7 percent, there’s not much real growth underpinning the surge in home prices and new construction.
So, what is fueling the investor housing mania in Las Vegas? The Fed’s Zero Interest Rate Policy (ZIRP).
Low interest rates with The Fed purchasing $88 billion a month in Treasuries and Agency MBS is finally stimulating the real estate market. More on the investor side, but stimulating the market nonetheless.
Where in Las Vegas are the prices the highest (and lowest)? Here is a Trulia heat map for Las Vegas.
The Fed’s ZIRP policy is a blunt instrument and it has benefited the stock market earlier and longer than the housing market.
In fact, the stock market adjusted by The Fed’s Balance Sheet is just limping along … on Fed support!
And Bill Gross wants to know if The Fed will continue its pump priming.
Both the M1 Money Multiplier and M2 Money Velocity are at all-time lows which is not good news. Even so, Las Vegas … and the stock market are booming.
Eventually, The Fed’s QEs and Twists run out of gas and another round has to be undertaken. But what happens to the stock and housing markets if cheap money wears off and The Fed is generating more inflation than desired?
Stay tuned.
FHFA Limiting Fannie Mae and Freddie Mac Loan Purchases to “Qualified Mortgages”
The Federal Housing Finance Agency (FHFA) announced today that it is directing Fannie Mae and Freddie Mac to limit their future mortgage acquisitions to loans that meet the requirements for a qualified mortgage, including those that meet the special or temporary qualified mortgage definition, and loans that are exempt from the “ability to repay” requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). In January, the Consumer Financial Protection Bureau (CFPB) issued a final rule implementing the “ability to repay” provisions of Dodd-Frank, including certain protections from liability for loans that meet the criteria of a qualified mortgage as outlined in the rule.
Beginning January 10, 2014, Fannie Mae and Freddie Mac will no longer purchase a loan that is subject to the “ability to repay” rule if the loan:
is not fully amortizing,
has a term of longer than 30 years, or
includes points and fees in excess of three percent of the total loan amount, or such other limits for low balance loans as set forth in the rule.
Effectively, this means Fannie Mae and Freddie Mac will not purchase interest-only loans, loans with 40-year terms, or those with points and fees exceeding the thresholds established by the rule. Here is Fannie Mae’s letter to single-family sellers.
If President Obama’s nominee to replace Ed DeMarco, Rep. Mel Watt (D-NC), is approved, watch for this to change.
Does Mel Watt know something that we don’t know?
LPS: Problem Mortgages at Lowest Rate Since 2008, Negative Equity Declines
Good news on the mortgage front: problem mortgage loans at lowest rate since 2008. And negative equity continues to decline.
The March Mortgage Monitor report released by Lender Processing Services found that new problem loan rates (seriously delinquent mortgages that were current six months ago) have fallen below 1 percent for the first time since 2007. At 0.84 percent, the March new problem loan rate is approaching pre-crisis levels, and nearing the conditions of 2000-2004 when the rate averaged 0.55 percent.
Non-current loans have fallen below 5 million for the first time since 2008.
Most vintages (year of origination) are improving. The 2005 cohort remains problematic.
In terms of negative equity, it continues to improve.
Of course, house prices rose from 2012 through early 2013, helping improve the negative equity problem.
