The Great Recovery (NOT)! Real Median Household Income Soars … To 1996 Levels

The post-Great Recession recovery is here! Real Median Household Income for 2014 was just released and it rose … to 1996 levels!


If that isn’t enough to get you excited (or depressed), mortgage purchase applications are at 1997 levels while labor force participation keeps dropping. Average hourly wage growth remains stagnant.


Time to party! … NOT!


Fed Policies And Mortgage Rates: What Will Happen Next? (Mortgage Rates WILL Rise)

The Federal Reserve undertook two types of stimulus since August 31, 2007. The first was a lowering of The Fed Funds target rate of interest.


Well, lowering the Fed Funds target rate to near zero by December 2008 didn’t do the trick of stimulating the economy, so The Fed launched their second wave of stimulus known as Quantitative Easing (QE). Essentially, The Fed decided to purchase Treasury bonds (and Agency Mortgage-backed securitie (MBS) to help drive down interest rates.

Below are three different yield curves. One of June 29, 2007 BEFORE The Fed started lowering The Fed Funds Target rate. The second one is for late November 2008 when The Fed announced QE1. The third yield curve is today’s yield curve.


Notice how flat the yield curve was on June 29, 2007. The Fed helped steepen the yield curve by lowering The Fed Funds Target rate. You can see the steepness of the curve as of November 25,2008 with the near zero rates at the short end. Today’s yield curve is about 100 basis points lower at the 10 year.

The spread between the 30 year fixed-rate mortgage and the 10 year Treasury yield is about 164 basis points (or 1.64%).


An increase in The Fed Funds Target rate will raise the short end of the yield curve. The mid and long sections of the yield curve may not be impacted, unless The Fed decides to terminate QE and start selling their bond and MBS holdings. But according to the expectations hypothesis of the term structure, a rise in the Fed Funds target rate should cause the rest of the yield curve to rise, including the 10 year yield.


Of course, the 10 year Treasury 10 is also impacted by economic expectations, both domestic and foreign. Worsening conditions in China and Europe can push the 10 year Treasury yield down … again and mortgage rates as well.

Pension funds and investors holding Treasuries and agency MBS are not looking forward to interest rate increases. The red boxes show the decline in MBS prices with local increases in the 10 year Treasury yield.


While The Fed may hold steady on a September rate increase, there is a good chance that there will be a December rate increase.

Perhaps Janet Yellen will announce a rate increase with the help of a dummy to deflect any attacks if the yield curve rises and markets tank.


Almost Half of Homes in New York and D.C. Are Now Losing Value (Bubble Bursting?)

Since 2007, wage growth has been slow while home prices have soared particularly after 2012.


Homeownership rates have fallen to a 50 year low.


Something has to give. You can’t have skyrocketing home prices with abysmal wage growth. At least for long.

So it is not surprising that Bloomberg reported that Almost Half of Homes in New York and D.C. Are Now Losing Value


Please note that this does not include Manhattan. There are not a plethora of single-family detached homes on the island.

Does this mean that The Fed’s housing bubble has finally burst?


Undone: US Homeownership Falls To 50 Year Low (Despite Mortgage Purchase Apps Up 25 Percent YoY)

The U.S. Census Bureau recently released the U.S. homeownership rate figure. It has fallen to 63.4%, a 50 year low.


Mortgage purchase applications are up 25% YoY (orange line) even as the homeownership rate continues to decline. And homeownership continues to decline despite a Fed Funds Target rate of 0.25% (which likely will be raised soon).


A new 50 year low signals that US housing policy for homeownership has become undone.

Fannie Mae’s HomeReady Affordable Mortgage – Will It Be A Success?

Fannie Mae has announced their new affordable mortgage product called the HomeReady Mortgage.

Under the new guidelines, borrowers will have to complete an online education course which will prepare them for the home buying process and for sustaining their home after purchase. Additionally, income from a non-borrower household member can be used to decide the debt-to-income ratio for the loan, a development which will help multi-generational and extended households obtain affordable mortgages.

Further innovations are that income from non-occupant borrowers will be allowed to increase a borrower’s qualifying income, and first-time and repeat homebuyers can use HomeReady to buy a home with a down payment as low as 3 percent.

Who qualifies for a HomeReady Mortgage? HomeReady will be available to borrowers at any income level for properties in designated low-income census tracts, and to borrowers at or below 100% of area median income (AMI) for properties in high-minority census tracts or designated natural disaster areas. For properties in remaining census tracts, HomeReady borrowers must have an income at or below 80% of AMI. Approximately half of census tracts will be subject to the 100% AMI limit or have no income limit.

But will HomeReady be a success?

According to Zillow, mortgage availability is approaching the pre-housing bubble level (2003).


The problem is not the supply of credit, it is the lack of demand. Since 2007, real median household income and average wage growth have dropped. And the regulation of the mortgage market has made certain types of mortgage more difficult to obtain. Mortgage purchase applications, while up this year, remain at 2013 levels.


Homeownership keeps declining despite The Fed’s zero interest rate policy.


So, it is really a lack of demand problem rather than a mortgage availability.

Fannie’s HomeReady mortgage product may be a success, if enough borrowers show up to lenders. Even with someone else helping to make the mortgage payment, there may still be insufficient interest. But Fannie has lowered the hurdles for potential borrowers.

Near zero deposit rates and lackluster mortgage demand is a recipe for …

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Single Family Mortgage Growth FINALLY In Positive Territory As Fed Contemplates A Rate Hike

The Federal Reserve hasn’t raised its Fed Funds target rate since the latter half of 2006. Even with near zero Fed Funds effective rates, US 1-4 family mortgages outstanding (red line) have only just turned positive in YoY growth.


Here is a chart of 1-4 family mortgages outstanding and The Fed Funds Effective Rate. Zero rate policies haven’t really helped the 1-4 family residential mortgage market (partly because a number of the mortgage products during the last decade have been curtailed such as pay option ARMs and NINJA (no income, no job) loans.


Even bank credit in general is still growing more slowly than during the last decade. The slow growth is a combination of increased regulation of the banking system (Dodd-Frank, Consumer Financial Protection Bureau) and lower household incomes (and slower wage growth).


The slower growth of bank credit in this decade (coupled with lower household income and tighter consumer lending regulation) has resulted in historically low levels of the M1 Money Multiplier and M2 Money Velocity.


Will The Fed raise the Fed Funds target in September? Vice Chair Stanley Fischer stated in Jackson Hole Wyoming that The Fed shouldn’t wait for the economy to hit 2% inflation.

Great. Now that 1-4 family mortgages outstanding growth has FINALLY become positive, The Fed wants to raise rates.

It is indeed a wild ride!


Existing Home Sales Rise To Highest Since Feb 2007 (Despite Mortgage Purchase Apps Being 49 Percent Lower)

Existing home sales for July are out and … they are at the highest since February 2007.


However, mortgage purchase applications, average wage growth and real median household income are all lower than in February 2007. In fact, mortgage purchase applications are 49% lower than in February 2007 and average wage growth is 42% lower than in March 2007.


Talk about divergence! If traditional borrowers aren’t driving the rise in existing home sales, who is? Not owner-occupants. As RealtyTrac points out, the share of homes sold to owner-occupants dropped to a new low in Q1 2015.


Low interest rates courtesy of The Fed have certainly helped investors!!

So, will The Fed raise rates in September, despite all the negative economic news? According to Fed Funds Futures data, there is only a 36% of a rate increase to 0.50%. Although there is only a 10% chance of that.


Where have I seen this graph before?