Why The Housing Recovery Has Been So Muted: Median US Household Wealth Has Fallen 43% Since 2007

The Federal Reserve’s zero interest rate policies (ZIRP) including quantitative easing (expansion of The Fed’s Balance Sheet of assets) has had a positive effect on asset markets. The S&P500 index continues to soar after QE began in 2008.


House prices have also started to soar since 2012 (a delayed reaction partly due to the staggering inventories of foreclosed houses on the market).


As I pointed out yesterday, real median household income and average hourly earnings growth YoY have not recovered despite The Fed’s intervention.



Now we find out from a Russell Sage Foundation report that median household WEALTH has not recovered either. In fact, median household wealth has declined 43% since 2007.


In fact, all percentiles reported have lost ground since 2007, some more that others.


And despite the chatter on the news channels that the US recovery complete, bear in mind that the unemployment rate (U3 and U6) are still above 2007 levels and labor force participation is far lower.


The US economic and housing recovery is muted (as least SOME analysts are conceding that point) and the reason is the enormous wealth and income destruction following the housing and credit bubble during the last decade.


As Marty Stuart and Travis Tritt sang “This one’s gonna hurt you for a long, long time.”


Reforming the Federal Reserve on its 100-Year Anniversary And The Low Velocity “Recovery” (Fed Policies Aren’t Working For Main Street)

Jeb Hensarling (R-TX) of the House Financial Services Committee held a hearing on July 10th to discuss legislation to reform the Federal Reserve. Or “Defanging The Fed.”

SIFMA had a nice summary of the hearing.

Rules-Based Policy: Taylor argued that the Federal Reserve’s failure to follow a rule-based policy in years past contributed to the financial crisis.
Federal Reserve Independence: Johnson stated that subjecting the Federal Reserve to GAO audits would have a “chilling effect” on the Fed’s independence and expose its processes to partisan influence.
Accountability and Congressional Hearings: Rep. Garrett and Rep. Stivers insisted that it would not be overly burdensome for Chair Yellen to appear before Congress at least quarterly.
Stress Tests: Calabria criticized the over-reliance on stress tests, and advocated for wider use of leverage rations instead.
Cost-Benefit Analysis: Johnson argued that cost-benefit analysis would only slow down the regulatory process and create “procedural stumbling blocks.”
International Negotiations: Rep. Neugebauer expressed concern that decisions by the Financial Stability Aboard impact U.S. policy without Congressional oversight.
Quantitative Easing and Interest Rates: Johnson said that with higher interest rates, unemployment rates would have remained higher and the recession would have been prolonged.

Of course, nothing will happen. Even if the House passes some form of legislation to reform The Fed, the Senate under Harry Reid (D-NV) will never pass any reform bill. Like Federal housing policy, The Fed is a protectorate and tool of Congress and the Administration.

What has NOT mentioned during the hearing was what I call the Low Velocity “Recovery.” So, here are some charts of what The Fed’s massive intervention in the financial system has NOT helped (mostly because of structural problems in the economy that low rate policies can’t fix).

M1 Money Multiplier is below 1. This means that very dollar created by the FED (an increase in the monetary base M0) will result in a <1 dollar increase of the money supply (M1). So, the credit and deposit creation of commercial banks is limited in this case. The banks are still holding on to a lot of excess reserves.


Excess reserves of depository institutions keep on rising.


M2 Money Velocity keeps declining and is the lowest in recorded history.


For an interesting take on money matters, Arthur Cutten has an interesting piece at Jesse’s Cafe Americain called “Green Slime: The Return of Franken-money.”

Despite the low rates induced by The Fed, bank credit growth is no where near it’s levels during the housing and credit bubble.


Mortgages outstanding have finally started growing again (barely).


Homeownership continues to fall despite The Fed’s low rate policies.


Real median household income hasn’t been helped by the massive expansion in The Fed’s Balance Sheet. It is now lower than in 2007, before The Fed’s massive intervention.


Average hourly wage earning growth YoY is almost 50% lower than before The Fed’s dramatic intervention.


The list goes on and on. Basically, The Fed’s actions have helped asset prices zoom (like the S&P500 and house prices), but has done virtually nothing for Main Street USA.



Unless the structural problems facing the USA are fixed (e.g., over-regulation), the economic recovery will likely remain a low velocity recovery for Main Street USA. Particularly with the Environmental Protection Agency on a roll.

It is a bizarro world where Fed policy is seemingly only helping wealthier Americans while Main Street continues to suffer.


Another Brick In The Wall: China Slowing, Luxury Goods Moet Hennessy Louis Vuitton Falls By Most In 3 Years (US Durable Goods Orders Negative YoY)

Yesterday, new home sales fell 8.1% in June and are back to 1982 levels. Of course, housing pundits all chortled “Not to worry. Employment has dramatically improved so new home sales will come back shortly.”

It would help if the main street economy improved and wages actually showed real growth (real average hourly wage earnings are now NEGATIVE YoY).


Throw in the June durable goods orders report that are NEGATIVE YoY (-1.6%) and perhaps the housing pundits should show a little less enthusiasm.


Another brick in the wall to the US economic recovery is the slowdown in it’s trading partner China.

July 25 (Bloomberg) — LVMH Moet Hennessy Louis Vuitton SA, the world’s largest luxury-goods company, fell the most in almost three years, sending shares of peers tumbling, after earnings missed estimates amid weaker consumption in Asia.

The shares plunged as much as 7 percent in Paris, the steepest intraday drop since Sept. 22, 2011. First-half profit from recurring operations fell 5 percent to 2.58 billion euros ($3.5 billion), LVMH said yesterday after European markets closed, less than the 2.76 billion-euro median analyst estimate.

Asian demand weakened “quite significantly” in the second quarter, led by slower Chinese spending at home and abroad, Chief Financial Officer Jean-Jacques Guiony said on a conference call. So-called organic sales slumped 11 percent in Japan, after gaining 32 percent in the first quarter before a 3 percentage- point increase in that country’s value-added tax.


Slowing China spending domestically and abroad is not good news for the US economy, unless it means that more Chinese millionaires will buy more expensive homes in California.

Never fear Moet Hennessy! Mr. Kim Kardashian (aka, Kanye West) will keep on drinking your cognac.


New Home Sales Decline 8.1% In June, Back to 1982 Levels (But Average Price on New Home Sales Rises 3.53%)

New home sales for June declined 8.1% from May and are back to 1982 levels.


Even though MoM new home sales are down 8.1%, the average price of a new home is up 3.53%.


Well, THIS chart isn’t a good sign!


Speaking of bad signs, at the signpost ahead, the next stop is “The Twilight Zone.”


Something Wicked! Initial Jobless Claims Fall To Pre-recession 2006 Levels, But Real Wage Rate Growth Still Depressed (Now Negative)

Ray Bradbury’s masterpiece “Something Wicked This Way Comes” is about a mysterious circus that comes to a small town with evil intent. Much like the vaunted jobs recovery.

Initial jobless claims fell to 302,000, a level not seen since 2006. That is indeed good news!


But the Something Wicked part of the story is that average hourly wage growth YoY is down almost 50% since 2007 (and is currently at an anemic 2% rate, lower than the inflation rate. Average hourly wage earnings YoY are down 50% since 2007. And real median household income is lower than it was in 2007 and is back at 1995 levels.

REAL average hourly earnings YoY is now negative and has not been above 1.3% growth since 2009.


Yes, something wicked has ridden into town.



Dog Days of Summer: Mortgage Purchase Applications Flat, But Down 69% Since May 2005 (Real Average Hourly Wage Growth YoY Is Now Negative)

Mortgage applications increased 2.4% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 18, 2014.


The non-seasonally adjusted Purchase Index increased 0.82% from one week earlier, and remain 15.1% lower than the same time last year.


And the Purchase Index is down 69% since its peak on May 6, 2005.


The seasonally adjusted Purchase Index increased 0.3% from one week earlier. The residential mortgage Purchase Index remains in the black hole because of fewer qualified borrowers who can meet DTI requirements.


And remember that REAL average hourly wage growth has gone negative for the first time since 2012. And real average hourly wage growth hasn’t exceed 1.3% since 2010. This is SLOW growth.


The Refinance Index increased 4% from the previous week. You have to look hard to see it on a chart.


You can see mortgage Refi Waves, usually after The Federal Reserve lowers their Fed Funds Target to stimulate the economy. However, it has seeming run out of gas after such a prolonged period of low rates.


The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) remained unchanged at 4.33%, with points increasing to 0.23 from 0.20 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.


Wells Fargo continues to be the dominant mortgage lender in Q1 2014 with total volume larger than their #2 and #3 competitors combined (Chase and Quicken Loans).


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.