US New Home Sales For July Decline 9.4% MoM, 8.9% YoY (Biggest Decline Since 2014 As Household Formations Decline To Lowest Level Since 2010)

July wasn’t a very good month for US New Home Sales.  New home sales fell 9.37% MoM.


On a YoY basis, new home sales fell 9%, the worst since 2014 as The Fed has been raising their target rate.


One of the culprits? The lowest Household formations since 2010.


America’s Vanishing Middle Class, Housing and Mortgage Markets (In One Chart)

The problem of America’s vanishing middle class is well-known: fallling income growth, changing demographics, etc. America’s mortgage lenders are scratching their heads about what to do.

Well, mortgage purchase applications (courtesy of the Mortgage Bankers Association) rose rapidly from 1995 to 2005, slowed and then crashed only to finally start recovering again in 2015-2017. This peaking of the mortgage purchase applications roughly coincided with a local peak in home prices and homeownership (the housing bubble). Then the wheels came off (home prices crashed and homeownership fell). Home prices are rising again while homeownership is at early 1990s levels.

The question is … how can the US get its homeownership rate increasing again (assuming that this is what is the appropriate housing policy goal). The usual remedy is “lower credit standards.”  Hmm. We tried that before and nearly crashed the banking system. See the pink line in the following chart.

True, credit standards are tighter today than they were in the 2000s, but also the mortgage products have changed. Gone are the NINJA (no income, no job) loans as well as adjustable-rate mortgages with “teaser” rates (leading to a spike in interest rates for the borrower). We are now back in a one-size-fits-all mortgage economy with the 30-year fixed-rate mortgage with over 90% market share.

Can lenders as well as Fannie Mae and Freddie Mac lower credit standards to increase homeownership? And do it in a fiscally safe manner? A little bit. This reminds me of the following scene from “There’s Something About Mary.”

The real problem is the decline in income growth for the majority of the population, particularly since the last recession, the major cultprit in the decline of the middle class.

But also confounding matters are local zoning laws prohibiting construction of new supply, lack of inventory and a hyperactive Federal Reserve.  Now we have tons of money chasing after relatively few properties causing home prices to rise.

Lowering credit standards a little may be fine, but returning to credit standards from the mid 2000s is a fool’s errand despite what data manipulation can show.


Crazy Train: Norway’s Wealth Fund Ordered To Increase Its Stock Holdings

All aboard the Central Bank Crazy Train!

(Bloomberg) — As many investors question a global stock-market rally that’s now in its eighth year, the world’s biggest wealth fund is prepared to splurge.

Norway’s $970 billion wealth fund has been ordered to raise its stock holdings to 70 percent from 60 percent in an effort to boost returns and safeguard the country’s oil riches for future generations. Any short-term view on growing risks will play little part, according to Trond Grande, the fund’s deputy chief executive.

“We don’t have any views on whether the market is priced high or low, whether bonds and stocks are expensive or cheap,” he said in an interview after presenting second-quarter returns in Oslo on Tuesday. The decision to add stocks “was made at a strategic level, on a long-term expected excess return that we’re willing to take risk to achieve. And parliament has said that they wish to spend some time to phase in that increase.”

The fund has doubled in value over the past five years and is continually adding risk to its portfolio. It returned 202 billion ($26 billion) kroner in the second quarter, and 499 billion kroner in the first half, the best on record for the period.


Owning 1.3 percent of global stocks, the Norwegian fund largely follows indexes but is allowed some active management of its portfolio. It has been expanding more into emerging markets and recently got permission to raise its stock holdings after Norway last year started withdrawing cash from the fund for the first time.

While the investor can look beyond short-term, or even medium-term volatility, it does see potential risks. Chief Executive Officer Yngve Slyngstad in April said that the fund had turned a bit “cautious” on stocks. But in practical terms, that means very little.

“It doesn’t lead to anything in concrete terms, other than the fact that we’re keeping a close eye on the indicators that could indicate whether there’s a risk there, and what they’re saying,” Grande said. “Some risk indicators have actually not shown underlying risk — take growth for example. So you should be a little cautious when the skies are all blue.”

The fund held 65.1 percent in stocks in the quarter, 32.4 percent in bonds and 2.5 percent in properties. Its mandate is now to keep about 70 percent in stocks, 30 percent in bonds, with about 7 percent in real estate that’s now separate from the main portfolio.
The Finance Ministry is currently working on a plan on how to move the portfolio to 70 percent and the fund will stick to that, Grande said.

The fund also indicated it can withstand pressure on its balance sheet from government withdrawals. Norway started taking money out of the fund last year for the first time to cover budget shortfalls after oil revenue slumped. The government withdrew 16 billion kroner in the second quarter, reaching about 36 billion kroner so far. It has flagged it will take out just a little bit above 70 billion kroner.

Norges Bank Deputy Governor Egil Matsen, who’s in charge of oversight of the fund, says it’s liquid and can finance new real estate purchases from a steady income stream.

Of course they can, with the costs of funds from Norway’s Central Bank at 50 basis points.


Between the various Central Banks, only the US Federal Reserve has raised their target rate recently. But the ECB, Bank of England and Norway’s Norge Bank are all at 50 basis points or lower.

All aboard the Central Bank Crazy Train!!



FHFA Purchase-only Home Price Index For June Slows To +0.1% MoM (Still Over 2X Wage Growth)

Home prices using the FHFA Purchase-only index slowed to +0.1% in June.

On a year-over-year (YoY), home price growth slowed to 6.5%.

Home prices are still growing over twice as fast as hourly earnings for the majority of the population and twice as fast as “owners equivalent rent.”

So, home price growth keeps moving towards being more and more unafforable.


Fintech Fry-up: UK’s Subprime Lender Provident Declines 70% Overnight As Move To iPads For Door-to-door Sales Force Founders

UK subprime lender Provident experienced a 70% decline in their stock price overnight as earnings plummet and an investigation in launched.  Their CEO Peter Crook (no kidding) has resigned. Crook, who was CEO for a decade, said in June that many of its 4,500 salesmen and debt collectors quit or stopped working as hard when they were informed they would be replaced by a smaller number of iPad-toting full-time staff.

Here is Provident’s earnings-per-share plunge (red line) and the crash in their stock price. The company now expects a “pre-exceptional” loss for the home credit business of between 80 million pounds ($103 million) and 120 million pounds. It predicted a 60 million-pound profit as recently as June, when it issued a profit warning as loan sales and debt collections plunged. Wolstenholme said in the statement that it will take “an elongated period of time” to turn the division around.


And here is Provident’s stock price compared to Royal Bank of Scotland’s  stock price to highlight RBS’s decline around the global financial crisis and Provident’s rise then decline.


Provident is similar in spirit to the Netflix show “White Gold” about British door–to-door vinyl window and door replacement sales in the 1980s. Yes, the UK still has door-to-door subprime lenders, now using FINTECH (sort of) in the form of iPads.

From Provident’s webpage: “Representative example: £270 loan over 26 weeks. 26 payments of £16.20 per week. Rate of interest 112% p.a. fixed. Representative 535.3% APR. Total amount payable £421.20.”

Yes, Provident really does sound like Netflix’s White Gold except for personal loans from  £100 – £1,000.



M2 Money Velocity Continues To Collapse Since Monetary Change of 1995

M2 Money Velocity (better known as GDP/M2 Money Stock) continues to collapse. In fact, M2 Money Velocity hit its peak in Q2 1997 under President Bill Clinton. And it has been mostly downhill since then.


One interesting aspect of monetary policy during the Clinton years, specifically in 1995. Proir to 1995, real GDP growth YoY actually exceeded M2 Money growth YoY.  Ever since 1995, M2 Money growth has almost always exceeded real GDP growth.


As of Q2, the ratio of M2 money growth to real GDP growth is over 2x.

Given that Federal government current expenditures is currently around 2x Federal government tax receipts, it seems that The Federal Reserve is following a 2x rule.


Yes, things have really gone off the rails since 1995 when you have a combination of President Bill Clinton, Fed Chair Alan “Maestro” Greenspan and Treasury Secretary Robert Rubin (CEO of Citi) running the show.



C&I Lending in July Falls Below 2% YoY For First Time Since April 2011 (RE Lending Falls Below 5% YoY)

Commercial and Industrial lending at commercial banks dropped below 2% in July.


The last time C&I lending was less than 2% was in April 2011.


The percentage of lenders reporting stronger demand for C&I loans (large and medium firms) fell 11.80% in July.


Real estate lending YoY at commercial banks? Down below 5% growth, consistent with the rise of non-bank lenders since the financial crisis.


These are two good reasons why The Fed is anticipated to keep rates constant until the March 2018 FOMC meeting.


Meanwhile, smoothing sailing on the USS Janet Yellen?