Good news for homebuilders! New home sales rose 10.74% in October.
However, median prices for a new home sale fell -5.2%.
The growing new home sales are look different than the flat-lined mortgage purchase applications index.
The Northeast saw a 135% increase in new home sales while The West saw a 1% decline. I admit, homebuilding in San Francisco and Los Angeles remains a chore when housing is unaffordable in terms of rising home prices and falling family incomes.
Yes, real GDP growth is above 2% and personal income rose 0.4% in October and unemployment is down to 5%. On the other hand, U6 underemployment is at 9.8%, 94.2 million are NOT in the labor force, and The Fed can’t generate inflation to save its life.
So what will Janet Yellen (with cigar) and Stanley Fischer do at the next meeting of the Open Market Committee?
The US residential mortgage market hasn’t been the same since subprime lending (and other assorted innovative mortgage financing products) peaked during the 2004-2007 period. October 2004 was the peak of the mortgage purchase applications index which now dwells at 211.70, nearly a 56% decline.
Here is a chart of mortgage purchase applications since 2000. Note the crash in the M1 Money Multiplier as The Fed massively intervened in the financial markets and subprime lending mostly disappeared. Nothing has been the same since.
But back to the current state of the mortgage applications.
Mortgage applications decreased 3.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending November 20, 2015. The previous week’s results included an adjustment for the Veteran’s Day holiday.
The Refinance Index decreased 5 percent from the previous week. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. The unadjusted Purchase Index increased 5 percent compared with the previous week and was 24 percent higher than the same week one year ago.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.14 percent from 4.18 percent, with points increasing to 0.49 from 0.45 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
So, there you have it turkey day fans! A listless economic recovery combined with mortgage regulations have produced a genuine turkey of a mortgage market.
The Federal Reserve has a target inflation rate of 2%. Whether we use CPI YoY or Personal Consumption Expenditures YoY, the US economy is no where near 2%. Currently, the core personal consumption expenditures YoY are growing at only 1.31%, no where near The Fed’s target rate for inflation.
How can this be, you ask? Look back in 2008 (left hand side of chart) where core inflation was about 2.4% and excess reserves were low. The problem is in 2013-2015. Excess deposits have been growing faster than the funds can be loaned out. This translates into declining inflation.
True, auto and student loans have been growing in recent years, but these are not enough to generate inflation. The excess reserves remain trapped in the Federal Reserve System. This is another reason why mortgage purchase applications are low.
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 2.3 percent on November 18, unchanged from November 13. The forecast of real growth has remained at 2.3 percent after Tuesday’s releases for October data on industrial production from the Federal Reserve Board, consumer prices (CPI) from the U.S. Bureau of Labor Statistics, and this morning’s release of October housing starts from the U.S. Census Bureau.
There was a large change in the reported economic number on November 5 and 6th that jolted the GDP numbers upwards, There were increases in equipment and residential investment (both 1 unit and multifamily construction).
A different view of GDP reporting:
The relative good news on auto sales and residential construction are leading investors to give a 72% probability of a December blastoff.
We shall see if the improved auto sales and housing construction is enough to give the “LAUNCH” command.