Declining Oil Prices And Withering Fed Stimulus Slowing US Pending Home Sales

Pending US home sales rose slower than expected in October, up 0.2% MoM. They also increased by 2.1% YoY, also less than expected.

The culprits? Falling oil prices and withering monetary stimulus from The Federal Reserve.


Boomtown to gloomtown for housing?

1928 Thomas Hart Benton (American regionalist artist, 1889–1975)  Boomtown, 1928,

Chinese Pull Back From U.S. Property Investments (Big Trouble In Little China [California])?

The Wall Street Journal recently reported that Chinese investors are starting to pull back from U.S. property investments.

the downturn in the Shanghai Stock Index coupled with China’s currency devaluation is putting a crimp on the outflow of funds from China to the USA.


China’s investments in the US property market have been explosive, helping maintain health home price growth in select areas of the US.

foreign buyers_0

Like San Francisco and Los Angeles where home prices have been rising despite median family incomes dropping.



The subprime boom in mortgage financing ended a while ago, with Chinese investors picking up the slack (particularly in the luxury segment of the markets). Central bank monetary easing across the globe has helped to facilitate higher housing costs in California relative to incomes.


So, will this mean “Big Trouble In Little China” (aka, California) for home prices?


2016 Maximum Conforming Loan Limits Increase For Only 39 Countries (California Wine Country Cooler)

The Federal Housing Finance Agency announced that the maximum conforming loan limits for 2016 have been raised … for 39 High-Cost Areas. the National Baseline Loan Limit remained unchanged.

The 39 countries? Mostly Boston, Nashville TN and Denver. But the Wine Country counties of Napa, Sonoma and Moneterey of Califnrnia as well as San Diego were the only California counties to be increased.


The Housing and Economic Recovery Act of 2008 (HERA) established the baseline loan limit at $417,000 and mandated that, after a period of price declines, the baseline loan limit cannot rise again until home prices return to pre-decline levels. The $417,000 loan limit will stay the same for 2016 because FHFA has determined that the average U.S. home value in the third quarter of this year remained below its level in the third quarter of 2007.

San Francisco and Los Angeles, already unaffordable, did not see an increase in the maximum conforming loan limit.


But Denver and Boston made the list of high-cost areas worthy of an increase in maximum conforming loan limit.



You may wonder why California’s elite wine growing counties qualify for higher conforming loan limits than other counties with severe affordability issues? Blame the mechanical nature of HERA (The Housing and Economic Recovery Act of 2008). Or The Greek Goddess of Housing Bubbles and Un-affordability.

Suffice it to say most of California’s wine growing counties are tickled pink.


New Home Sales Rise 10.74% In October As Median Price Falls -5.2%

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.



The New Low Multiplier: Mortgage Purchase Applications Down 56% Since 2004 (The Subprime Effect)

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.


Will Fed Raise Rates With Zero Inflation? The Zero Velocity Economy

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.


Then there is the CRB Foodstuffs index.


Inflation? What inflation??


Case-Shiller Home Prices Rise 5.45% YoY, Over Twice Wage Growth (Miami Fast Rising City MoM)

With US GDP growth at 2.3% for Q4, it looks like The Fed will raise rates in December. In the meantime, housing still remains unaffordable for thousand of households.

What about home prices?

The Case-Shiller 20 metro home price index rose 5.45% in September. Unfortunately, that is over 2x average wage growth.


Of course, CoreLogic’s Loan Performance Index came out earlier and said the same thing.


The big winner for September MoM? Miami/. The biggest loser? Chicago. On a YoY basis, San Francisco reigns supreme in terms of home price growth. In last place? Chicago.


Both Case-Shiller and Loan Performance are at odds with the National Association of Realtors Median price index.


What effect will an increase in the Fed Funds Target Rate have on home prices? Stay tuned!

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