Good News! Household Net Worth Hits Record $81.5 Trillion In Q2! Bad News! It May Be All Air! (Few Applying For Mortgage Loans)

Earlier today, the Federal Reserve released its latest Z.1 (Flow of Funds) report for the second quarter. The record new worth was driven largely by the growth in stock market prices.


The bad news? The stock market may simply be a bubble inflated by hot air from The Fed via quantitative easing.


If there really is record net worth (and people believe it), why are so few households applying for mortgage loans?


Income growth has stagnated, but the stock market is roaring along. Yet, no Hindenburg Omen.


Yet we do have Fed Chair Janet Yellen pumping all the air into the stock market blimp that she can.



Recovery Summer? Housing Starts Fall 14.4% In August (Down 25% In West), Back To Near Lowest Level Since 1958

So much for another recovery summer. Housing starts declined by 14.4% in August.


Housing starts are near the lows since 1958.


5+ (multifamily) starts are down 31.5% while single unit starts only fell 2.43%.

Of course, housing starts are not skyrocketing because …. household income and wages are not skyrocketing. Quite the contrary.


I wonder if Homebuilders are a little overconfident?



Is US Housing 12% Overpriced? House Prices Rising Faster Than Real Median Household Income (What If Interest Rates Rise??)

Former Goldman Sachs Head of Housing Research says that “House prices are 12% overvalued today. They have already started to decline. Today’s misvaluation matches the excess of 2006-07, just before the Great Recession.

House prices are 12% overvalued today. They have already started to decline. Today’s misvaluation matches the excess of 2006-07, just before the Great Recession. Since World War II home prices have been tightly correlated to income and mortgage rates (R2 = 96%). Investors/cash purchasers, which make up 50% of home sales, have driven real estate volatility to unrivaled levels in trackable history. As public policy makers debate seminal decisions on “forward guidance” and unconventional monetary stimulus we note that each 1% increase in rates drops home valuations by another 4%; at a 2% fed funds rate, where fed officials and investors expect to be by the end of 2016, the overvaluation equals 20%. Respectfully, the United States can not afford another housing driven recession. The facts and correlations – the tenets of probabilities – suggest it is more likely than not that home prices fall 15% in the next three years.

We do know that house prices are rising rapidly (though slowing) and that increase is not associated with a rise in real median household income (which is stagnant).


What is bubbling house prices is lower interest rates that benefit investors more so than the traditional middle class homebuyer. But The Federal Reserve is forecasting a rise in The Fed Funds Rate!

Sept. 17 (Bloomberg) — Federal Reserve officials raised their median estimate for the federal funds rate at the end of 2015 to 1.375 percent, compared with 1.125 percent in June.

The rate will be at 3.75 percent at the end of 2017, the Fed said today for the first time as it included that year in its Summary of Economic Projections. That is the same as Fed officials’ longer-run estimate. The median estimate in June for the long-run fed funds rate was also 3.75 percent.

So, what if The Fed Funds Rate rises to 3.75% at the end of 2017? If wages remain stagnant, there could be “Trouble In River City.” Or Potomac City (aka, Washington DC).


We MAY have Trouble In River City if real wages don’t start rising in a serious fashion.



Got Rent? Homebuilder Confidence Rises To 9 Year High Despite Stagnant Wages And Declining Labor Force Participation

Homebuilders are the most confident than they have been in 9 years, likely because of the prospects for growth in rental demand (spurred by stagnant incomes and declining labor force participation).

Sept. 17 (Bloomberg) — Confidence among U.S. homebuilders rose in September to a nine-year high, showing the industry is gaining ground and will be a source of momentum for the economy.

The National Association of Home Builders/Wells Fargo sentiment measure climbed to 59, exceeding the highest estimate in a Bloomberg survey of economists, from 55 in August, the Washington-based group reported today. Readings above 50 mean more respondents said conditions were good.

Improvement in the job market and low interest rates spurred buying interest this month, as the group’s index of foot traffic through model homes jumped to the highest level since October 2005. Faster wage gains would provide extra momentum for residential real estate, which has seen lackluster demand from first-time buyers.

Improvement in the job market? Are they kidding us? How about declining labor force participation and stagnant wage and income growth? Not to mention flat-lined mortgage purchase applications.


I would say that the enthusiasm is more about providing RENTAL housing than single-family detached housing.


Got rent?


Flatlined! Mortgage Applications Repeat Post Labor Day Surge, But Purchase Applications Remain Down 10% From 2013

Mortgage purchase applications rose 7.9% from the previous week, but it is simply a repeat of the post-Labor Day surge we experienced last year … and the year before … and … Be careful of pundits that proclaim this is the turning point. It isn’t!

Mortgage applications increased 7.9 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 12, 2014. The previous week’s results included an adjustment for the Labor Day holiday.


The NON seasonally adjusted Purchase Index increased 14 percent from one week earlier! But this jump is a repeat of last year’s post Labor Day surge. Mortgage purchase applications remain down 10% from last year at the same time.


The seasonally adjusted Purchase Index increased 5 percent from one week earlier and remain in hibernation. Notice the slow increase in real median household income in 2013 and the decline in average wage earnings growth (YoY) which is down 50% since 2007. It is difficult for many borrowers to quality for debt-to-income (DTI) under these circumstances.


And there is a Loan-to-Income (LTI) problem with rapidly rising home prices … again. Note that real median household income is below where it was during the housing bubble.


The Refinance Index increased 10 percent from the previous week. Do I detect a trend??


The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.36 percent, the highest level since June 2014, from 4.27 percent, with points decreasing to 0.20 from 0.25 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Face it. Mortgage applications have flatlined. The economy is not improving fast enough in terms of wages and income to support a middle-class housing recovery.


China Goes “Full Fed” With $81.4 Billion of Liquidity – U.S. Stocks Up 0.8%

China, worried about credit and economic growth, going “Full Fed” and providing $81.4 billion of liquidity to their banks.

Sept. 16 (Bloomberg) — U.S. stocks rose and commodities rallied on a report that China’s central bank is boosting stimulus measures. The dollar fell on bets the Federal Reserve won’t be in a hurry to raise rates.

The Standard & Poor’s 500 Index rose 0.8 percent at 4 p.m. in New York, the biggest gain in a month.


Copper rallied the most in 13 months and U.S. crude surged 2.1 percent. The Stoxx Europe 600 dropped 0.3 percent, while emerging-market equities advanced after eight declines. Treasury 10-year note yields were little changed at 2.59 percent. The Bloomberg Dollar Spot Index slid 0.3 percent.

China provided 500 billion yuan ($81.4 billion) of liquidity to the country’s five biggest banks as Premier Li Keqiang steps up stimulus to support economic growth, reported. Wall Street Journal reporter Jon Hilsenrath said in a Web video that he thinks Fed policy makers will maintain the pledge to keep benchmark overnight rates low for a “considerable time” after the bank ends its bond purchases known as quantitative easing.

So, China has gone “Full Fed.”

Never go “Full Fed.”


Building Wealth Through A 15 Year Mortgage (For Those Who Can Afford It)

One of the advantages of a shorter maturity residential mortgage such as the 15 year mortgage is that the loan is paid off more quickly than with the venerable 30 year mortgage. This allows borrowers to potentially build wealth more rapidly.

The 15 year fixed-rate mortgage is already in existence. Here are the TBA (to-be-announced) prices for Fannie Mae and Freddie Mac 15 year TBAs.


And the good news is that the 15 year mortgage usually carries a lower interest rate than a 30 year mortgage. In fact, the spread is currently almost 100 basis points (or 1%) meaning that the 15 year mortgage is less expensive for borrowers.


And here is the spread between the 30 year and 15 year fixed rate.


The rub, of course, is that American household income and wage growth has declined and/or stagnated since 2007 along with mortgage purchase applications. In other words, the potential growth for the 15 year mortgage product is more limited than it has been prior to 2008.


And despite the lower interest rate on the 15 year mortgage, the monthly mortgage payment is considerably higher in order to pay down the principal over 15 years. Which also means that it is less AFFORDABLE for middle class borrowers both in terms of higher monthly payments (for 15 years rather than 30 years) and lower income growth potential.

So, IF you can afford the higher monthly payment on a 15 year mortgage, it is a tremendous mortgage product for wealth building. Otherwise, you can use a 30 year mortgage and set aside the difference between the 15 year payment and the 30 year payment and invest the difference or use it to pay down the mortgage. Or pay medical bills.

For example, Jeffrey Lebowski would be better off renting than borrowing with a 15 year mortgage.


Even the millionaire Jeffrey Lebowski won’t take out a 15 year mortgage.