Existing Home Sales Rise 2.6%, But 2.4% Lower Than Same Time Last Year (And 30.5% Lower Than In 2005)

Sales of previously owned U.S. homes climbed in June to an eight-month high. Sales increased 2.6% to a 5.04 million annual rate last month.

The bad news? Existing home sales are 2.4% lower than the same time last year. And EHS remain 30.5% below their peak in 2005.


Once again, the culprit is lower real median household income as well as average hourly wage earnings growth (YoY) which is 50% lower than in 2007.


Born To Be In Debt: CBO’s Nauseating Long-term Budget Outlook (Federal Debt Skyrocketing!)

The Congressional Budget Office (CBO) released its July 2014 report on the long-term budget outlook for the USA.

And a nauseating report it is too. Federal spending is projected to grow faster that Federal revenues despite the project increase in individual income taxes as a percentage of GDP.


Federal Spending on the Major Health Care Programs, Social Security and Interest on the Federal debt are expected to crowd-out other non-interest government spending.

According to US Debt Clock, taxpayer share of unfunded liabilities is $1.05 MILLION EACH.


That is why younger people in the USA are “born to be in debt.”

Young Student Loan Borrowers Remained on the Sidelines of the Housing Market in 2013

Liberty Street Economics (aka, New York Federal Reserve) has an interesting study that was just released.

After 2007, the proportion of people between 27 and 30 years old with secured mortgage debt has tumbled. And is worse if they have student loans outstanding.


This trend is similar to the pattern we see in mortgage purchase applications.


As I discussed earlier today, auto loans are on an uptick (but not mortgages).


Here is a fascinating chart from Meta Brown, Sydnee Caldwell, and Sarah Sutherland at the NY Fed. Though not surprising. Credit scores for those with student loans are lower that credit score for those without student loans. Remember, debt burden negatively impacts your credit score.


So, there you have it. The surge in student loans had a negative impact on mortgage lending. And lower real median household income and a 50% decline in hourly wage earnings growth (YoY) isn’t helping.

Subprime Auto Loan Originations Sizzle While Residential Mortgage Loan Originations Fizzle

The US credit markets remind me of the British food dish “Bubble and squeak.” The subprime auto loan market is bubbling (or sizzling). And is above levels seen during 2006.


While the residential mortgage origination market is squeaking (or fizzling) and is well below levels seen during 2006.


The difference? We are not seeing many low FICO loans in the mortgage arena while the auto loan market is seeing a resurgence of subprime auto lending.

As real median household income has declined since 2007 and average hourly wage growth has decline 50%, renting a home and purchasing an auto seems in the cards for many households.


Besides, 90+ days delinquency rates on auto loans are relatively low, particularly when compared to student loans and credit cards.


Renting a home and buying a car. Just like Bubble and Squeak.


UK Leads US And Europe In Expected GDP Growth (US Decline Explains Drop In Global GDP Forecast)

Yesterday, I discussed how the global GDP forecast plunged in July.


And how declining global GDP forecast is likely to keep the 10 year Treasury yield subdued.


But which country is largely responsible for the decline in global GDP? Hint: it isn’t Japan, India or China.

Nor is it Europe, although a few countries are sagging, like France and Italy.

It is the USA which experienced a large decline in expected GDP. The biggest winner? The UK.


Yes, the UK is the new economic powerhouse. The land of Jellied eels, Marmite, Stargazy pie (a Cornish dish made from pilchards, eggs and potatoes baked within a pastry crust), Scotch eggs, Spotted dick, Haggis, Chip butty, Black pudding and Liver and onions.

Fish heads peeking out of a delicious Cornish Stargazy pie.


Why US Treasury Yields And Mortgage Rates May Remain Low: Global GDP Slowdown

Everybody keeps talking about the inevitable rise in the 10 year US Treasury yield and 30 year residential mortgage rates. But as I have said repeatedly in class, Treasury and mortgage rates are determined globally because of the “flight to quality” nature of the Treasury market. As Europe, Japan, China and other countries experience economic slowdowns, money pours into the Treasury market driving up prices and down yields.

Here is a chart of global consensus GDP forecasts for 2014. Do you notice anything?


2014 has been a rough year for the US economy, allegedly dues to “Snowmaggedon,” the dreadful winter on the eastern seaboard and the Midwest (although the West coast was basking in sunshine). But is the US economy THAT powerful that it can drag the rest of the world into declining GDP forecasts?

Let’s look at the same chart of global consensus GDP forecasts plotted against the 30 year Treasury yield. As global GDP forecasts have been declining, so have the 10 year Treasury yield.


Notice that global GDP forecasts have declined more in Q2 2014 than in Q1. This does not give one comfort as to a global GDP recovery.

We have a continuation of the European banking crisis (Banco Espirito Santo, Austria’s Erste Bank, Argentina’s recession and debt default, France’s economic malaise that seems impervious to any change in policy, and Japan’s continuing struggles despite (or because of) Abenomics.

Of course, Ukraine is suffering negative GDP growth, but it is difficult to prosper when in conflict with Russia.


The global economy is slowing and that generally means a decline in Treasury yields and mortgage rates. Of course, once the global economy gets back on track, we should see an increase in Treasury and mortgage rates.

In the words of Tugg Speedman from the movie Tropic Thunder, “Who Left The Fridge Open?”


Initial Jobless Claims Fall to 1999 Levels! Too Bad Real Income, Wage Growth and Labor Force Participation Are So Much Lower!

Initial jobless claims fell 302,000, more than the expected 310,000! The US economy is finally back to 1999 levels.

Too bad that real median household income, labor force participation, and average hourly wage earnings are so much lower beginning in 2009.


Labor’s share of nonfarm productivity continues to decline, driving down wage rates.


Again, some recovery.


Some Recovery. Housing Starts Fall 9.3% MoM, Remains Below Any Year Prior To Housing Bubble Burst

According to the U.S. Census Bureau, privately-owned housing starts in June were at a seasonally adjusted annual rate of 893,000. This is 9.3 percent below the revised May estimate of 985,000, but is 7.5 percent above the June 2013 rate of 831,000.

Single-family housing starts in June were at a rate of 575,000; this is 9.0 percent below the revised May figure of 632,000. The June rate for units in buildings with five units or more was 305,000.


Housing starts remain below any year prior to the housing bubble burst in 2008.


Housing starts in the South declined 29.64%. But housing starts in the Midwest rose 28.07%, undoubtedly a harbinger of the Cleveland Cavaliers signing of Lebron James. It would also explain why housing starts collapsed in the South.


1 unit housing starts (aka, single-family detached homes) fell 9% from the previous month. 1 unit starts remain below the housing bubble years because of lower real median household income, stagnant average hourly wage earnings and lower employment to population ratio.


Some recovery.


Homebuilder Sentiment Rises ALMOST To Housing Bubble Lows!

The NAHB/Wells Fargo Homebuilder Sentiment rose … ALMOST to housing bubble lows!


The reason why so pitiful? Pitiful economic and labor force recovery.


Trulia’s Jed Kolko correctly observes that homeownership rates for Millennials was declining BEFORE the great recession. However, that does not explain the overall fundamental drivers of the economy like declining/stagnant wage growth.



Bank of America Q2 Earnings, Mortgage Originations DOWN 49% YoY: “Welcome to the Party, Pal!”

Bank of America reported their quarterly earnings this morning. 234099776-BofA-Q2-2014-Presentation

In the report, you will find that will mortgage originations rose in Q2 2014 over Q1 2014, but Year-over-year (YoY) “growth” in mortgage originations grew at a rate of -49%.


Bank of America joins the party of large banks with falling mortgage originations, such as Citi


And Wells Fargo.


If we look at today’s mortgage purchase application numbers, they don’t paint a rosy picture, unless the labor recovery turns real instead of low growth with part-time jobs.


Why are wages so crushed after 2007? A housing bubble exploded, the Affordable Care Act (aka, Obamacare) was enacted shifting jobs from full-time to part-time, jobs have continuously moved off shore (as the US becomes more of a service economy), etc. Throw in increased regulatory oversight of Dodd-Frank and the Consumer Financial Protection Bureau … and we have a party! But not a party that is good for middle class America and the residential mortgage market.

Sadly, it’s “Welcome to the Party, Pal!”


Low Velocity “Recovery”: Mortgage Purchase Applications DOWN 17.2% YoY, Refi Applications Flat

Mortgage applications returned to their annual post-June pattern of decline last week.

Mortgage applications decreased 3.62% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 11, 2014. The previous week’s results included an adjustment for the July 4th holiday.


The non-seasonally adjusted Purchase Index INCREASED 15.63% from the previous 4th of July shortened week. But the Purchase Index NSA is down 17.2% from this time last year.


The seasonally adjusted Purchase Index decreased 7.65% percent from one week earlier to the lowest level since February 2014. The low money velocity economic recovery continues unabated.


The Refinance Index decreased 0.11% from the previous week.


The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.33% from 4.32%, with points increasing to 0.20 from 0.16 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.


I wish someone in the US Senate like Elizabeth Warren (D-MA) had shown Fed Chair Janet Yellen this chart and asked her to comment on it. Rapidly rising house prices, declining/stagnant wages and real household income.


Yellen repeated the famous Leslie Nielsen line from the movie Naked Gun, “Nothing to see here. Please disperse!”


Welcome to Zombieland! JPMChase Mortgage Applications Drop 54% YoY (Like Wells Fargo and Citi)

JPMorgan, the second largest U.S. mortgage lender after Wells Fargo & Co said its profit from mortgage lending fell 38 percent to $709 million, while mortgage application volumes dropped 54 percent to $30.1 billion.

Overall U.S. mortgage demand has fallen for more than a year as mortgage rates have risen. Demand for loans was also hit by a weaker spring selling season compared with last year.


Wells Fargo has the same problem.


As does Citi.


Once again, there are too few qualified borrowers that can qualify for a mortgage.

Welcome to Zombieland, residential mortgage style!


The Departed: Citi Q2 Retail Banking Revenues Down 28% YoY (Mainly Mortgage Origination)

Wells Fargo started the bank earnings ball rolling last week with a 39% YoY decline in mortgage originations. This morning, Citi reported that Q2 retail banking revenues were down 28% YoY.

Citi mortgage refi_0

Like Wells Fargo, however, Citi’s retail banking revenues were up in Q2.

Citi’s Residential Mortgage Originations are actually up in Q2 compared to Q1, but are down 64% on a YoY basis.


As I have discussed before, mortgage purchase applications are stuck in “Death Valley” since 2010.


Mortgage refinancing applications have been declining ever since the surge in Treasury rates on May 1, 2013.


Residential mortgages have “departed” the premises. And it isn’t tight lending standards. It is the fact the fewer households can qualify for a loan given lower real family incomes and slower wage growth.


The residential mortgage market, snuffed by a rotten economic recovery after The Great Recession.


US Dollar Decay: Dollar Falls The Most Versus The Yen In 13 Weeks (US Economy Still Weak)

The US dollar fell the most versus the Japanese Yen in 13 weeks. Why? Yellen and The Fed are keeping rates low until the economy can stand on its own two feet.

July 12 (Bloomberg) — The dollar fell the most versus the yen in 13 weeks as the Federal Reserve signaled willingness to keep borrowing costs at unprecedented lows even as the U.S. labor market improves.

Japan’s currency climbed against most of its 16 major peers and U.S. Treasuries gained as concern stress in Portugal’s banking sector may spread prompted demand for safer assets. The dollar fell versus most major counterparts after minutes of the Federal Open Market Committee’s June meeting failed to provide additional insight on the pace of rate increases. Central bank Chair Janet Yellen testifies before Congress July 15-16.

“Slightly dovish FOMC minutes was the first trigger,” said Masafumi Takada, a New York-based director at BNP Paribas SA. “Declining U.S. yields as well as ongoing geopolitical risk aversion are putting pressure on dollar-yen.”

The dollar fell 0.7 percent on the week to 101.30 yen in New York, the biggest drop since the period ended April 11. The U.S. currency weakened 0.1 percent to $1.3608 per euro. The yen rallied 0.6 percent to 137.90 per euro after appreciating to 137.50, the strongest since Feb. 6.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major counterparts, fell 0.1 percent to 1,006.89, its fourth drop in five weeks.

The benchmark U.S. Treasury 10-year note yield touched 2.49 percent, the lowest level since June 2, and fell 12 basis points this week, the most since March 14.

Is the labor market really improving? Well, sort of. U6 (full and partial) unemployment still remains higher than anytime since the U6 measure was created. Real median household income is back to 1995 levels, and average hourly wage growth (YoY) is roughly half of what it was in June 2007.


The US dollar has been having that sinking feeling since early January.


Here is the option volatility surface for the EURUSD.


Here is the option volatility surface for the JPYUSD.


The US dollar looks like a grim remnant of its former self. Here is the purchasing power of the US dollar since the creation of The Federal Reserve System.




Pony Depress: Wells Fargo Reports a 39% In Mortgage Revenue As Lending Volume Dropped In Q2

Its a tough year for mortgage lenders. As Reuters’ PETER RUDEGEAIR AND TANYA AGRAWAL wrote today, Wells Fargo & Co, the fourth-largest U.S. bank, reported a 39 percent drop in mortgage revenue for the second quarter as lending volume dropped.

Actually, mortgage originations increased for Q2, but they have been steadily declining since Q3 of 2012. So, the year-over-year (YoY) mortgage originations are down. REALLY down.


Chief Financial Officer John Shrewsberry told investors on a conference call that “The purchase market is softer than we thought it would be.”

Apparently Mr. Shrewsberry hasn’t been listening to Irvine area mortgage banker Logan Mohtashami and me. We have been saying this for a long time.


Its tough out there with the failure of the labor market to fully recover, despite banner headlines of near full employment. Of part-time workers.

Maybe Wells Fargo should open a branch in River City, Iowa since they have a lot of prosperous borrowers that could qualify.


MBA President Dave Stevens’ Daughter Doesn’t Buy Dad’s Cheering of U.S. Homeownership

Another great article by Bloomberg’s Lorraine Woellert: “Daughter Doesn’t Buy Dad’s Cheering of U.S. Homeownership.”

Dave Stevens, the current President of the Mortgage Bankers Association in Washington DC, is the former FHA Commissioner and has worked at Long and Foster Realty, Wells Fargo and Freddie Mac over his long career. Of course, he is going to cheer homeownership. That is his job. It would be very strange if he suddenly came out and and said “Housing is in a bubble in parts of the country. Don’t buy, rent.”

The article, which uses odd headers like “Early Indoctrination” (but perhaps appropriate for a gung-ho affordable housing wonk like Dave), focuses on why his 27 year old daughter doesn’t share her father’s enthusiasm for purchasing a home. She rents.

Bloomberg has a nice graphic about what has changed since Dave Stevens bought his first home in 1984 and today.


At least Dave’s daughter and her fiance aren’t living in Dave’s basement (although they might actually be paying rent to Dave). Bit I doubt it.


Here is an additional chart that helps explain the lack of enthusiasm by his daughter for homeownership. Labor force participation for the 25-34 age cohort has been declining since it peaked in 2000. Along with declining labor force participation for the 25-34 age cohort, real median household income has decreased and average hourly wage earnings growth rate has dropped to 2& per year. Not good when food prices (CRB Foodstuffs Price) are rising at 20% per year.


Millennials did see house prices get smashed during 2008 and are less enthusiastic about buying a house than before the bubble burst. Remember, the US wasn’t the only country with a housing bubble. So, I expect that there is a global dearth of enthusiasm for homeownership by millenials (unless they are millenial investors).


Yes, this is not the same economy that it was in 1984 when Dave Stevens bought his first house or even mid 2007. It is more difficult to purchase a house with a low-paying part-time job (and foodstamps) than with a high-paying full-time time.



Boondock Bank: Portugal’s Espirito Santo Bank Has Trading Suspended After Missing Bond Payment

Trading in stock for Portugal’s Banco Espirito Santo has been suspended following a missed bond payment.

July 10 (Bloomberg) — Central bank assurances that Portugal’s Banco Espirito Santo SA bank is protected after a parent company missed short-term debt payments are failing to ease creditor concern they may also suffer losses.

The bank’s shares were suspended after tumbling more than 17 percent as its bonds dropped to record lows. Portuguese government debt led declines in securities from Europe’s most indebted nations, while banks dragged stocks in the region down more than 1 percent.

The selloff is reawakening concern that the financial system remains vulnerable to shocks as the euro region emerges from the sovereign debt crisis. While the Portuguese government said the nation’s second-biggest lender is isolated from losses in group holding companies, lack of transparency in the corporate structure is disturbing investors.


The 5 Year CDS for Banco Espirito Santo SA is (once again) zooming upwards.


Yes, it is difficult to survive a crash in the housing market when nonperforming loans keep rising.


I can’t help of thinking of the movie “The Boondock Saints” and their “Spiritus Sancti” tattoos when I hear Banco Espirito Santo. The official bank of “The Boondock Saints?”


Here is a video of Espirito Santo Bank officers meeting with leaders of The European Parliament.

And here is a photo of Herman van Rompuy, President of the European Council and bartender.


Broken Arrow: Initial Jobless Claims Fall To 304k, But Incomes, Wage Growth Still Low

Initial jobless claims beat expectations and fell to 304k. This print just shy of the record low for the cycle!


Unfortunately, we are in a “broken arrow” recovery. While jobless claims have been falling since March 2009, real median household income, average hourly wage growth, labor force participation and M2 Money Velocity are also falling and/or stagnant.

Broken Arrow is a military distress signal used to call in all available close air support in order to prevent an area from becoming overrun. Unfortunately, Congress and The Obama Administration seem hell-bent on doing nothing or making matters worse.

Actually, I fear the Federal government DOING something. Because they will make matters worse since they are driven by political agendas, not economic reality. In fact, I wish the Federal government would try to do LESS and shrink.


Vacancy Rates for Invitation Homes’ Rental-backed Security Spike To 8.3% (Same as National Average)

Like the Dos Equis Beer commercial, I don’t always read Salon, but when I do it is an interesting article. Like the one pointed out to me by Jill, “One percent’s rental nightmare: How Wall Street scheme blew up in its face.”

I’ve followed the Wall Street rental scheme for some time. You know the basics by now: Big Money investors decided to buy up all the foreclosed properties their pals at the banks created during the financial crisis, and rent them out to many of the same people who lost their homes. Then, they started selling securities backed by the rental revenue, just like the mortgage-backed securities from the crisis. Profiting off their own failure: It was Wall Street’s perfect plan.

There was just one problem: turns out that institutional investors have no idea how to manage rental properties.

That has become clear through a series of new statistics from early investors, who regarded themselves as the trailblazers of a hot new asset class. For example, nobody has purchased more properties and converted them into rentals than Blackstone, holders of roughly 45,000 nationwide. Invitation Homes, a Blackstone subsidiary, issued the first rental-backed security last November, and just released its first of this year, 2014-SFR1, worth $1 billion and based on 6,537 properties in selected markets, including Phoenix, Atlanta, Sacramento, California, several parts of Florida and Riverside County, California. Yet while these areas have tight housing inventory, vacancies at the Invitation Homes properties have surged.

As of May 31, the vacancy rate for the homes in 2014-SFR1 stood at 7.3 percent, a 33 percent increase over the previous month. It’s not a fluke: Vacancy rates for Invitation Homes’ initial rental-backed security from last year have spiked to a higher-than-expected 8.3 percent.

From Morningstar:

Cash-flow vacancy for Invitation Homes 2014-SFR1, a $993.7 million securitization of 6,473 single-family rental properties in ten states, increased in the latest data period, however the net cash flow based on total rent collected remains sufficient to cover the bond obligations. Cash-flow vacancy increased to 7.0%, compared with 5.4% in the previous period. By property count, month-end vacancy rose to 7.3%, compared with 5.5% at the end of the previous month. The delinquency rate was 0.4%.

Here is the rental vacancy rate for the US. It currently stands at 8.3%, just like Invitations Homes vacancy rate.


Hyperbole aside about the 1%, it does point to chink in the armor of the foreclosure recovery. And it gets back to the point that I have been discussing ad nauseum.

In order to have a recovery in housing (both owner and rental), the US needs household income and wage growth higher than it is currently experiencing.


Once again, we have an economy that has NOT recovered from the demolition of household income and average wage growth since 2007. THAT is the real problem.




Rigor Mortgage: Mortgage Purchase Applications Drop 17% From Previous Week (And Down 9.8% YoY)

The residential mortgage market continues to remain in a state of rigor mortis (or rigor mortgage), despite a good report on a seasonally adjusted basis.

On a seasonally adjusted basis (SA), mortgage applications increased 1.9% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 4, 2014. This week’s result included an adjustment for the July 4th holiday. Without the seasonal adjustment, mortgage applications FELL 18.5%.


Let’s begin with the Non-seasonally adjusted (NSA) Purchase Index. They fell 17% from the previous week, and 9.8% YoY. Compared with last week, the YoY Purchase Index is an improvement (hence the SA increase).


The seasonally adjusted Purchase Index increased 3.71% from one week earlier. While this sounds impressive, it is still in Death Valley. because of stagnant income and wage growth. I added the labor force participation rate for 25-34 year olds to illustrate the first time home buyer (and basement living) problem.



The Refinance Index increased 0.38% from the previous week. Despite an almost 50 basis point decline in the MBA FRM effective rate since early January, the Refinance Index is still declining.


The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.32% from 4.28%, with points increasing to 0.16 from 0.14 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

On a seasonally adjusted basis, this was a good week for Purchase Applications. We will have to wait for next week to see if there is actually a rebound in purchase applications. We are in the season where it isn’t typically merry for purchase applications.


Yup, rigor mortgage has set in.