Multifamily Starts Rise 37.4% In October, Largest Increase In 2017 (West Declines 3.70% As Lonzo Ball Forgets How To Shoot)

Housing starts rose 13.7% MoM in October to 1,290K units SAAR (or 1.29 million). However, the largest share of housing starts were in the 5+ unit (multifamily) category. Multifamily units grew at a rate of 37.4% MoM.


October was the highest growth in 5+ unit starts in 2017.


1-unit (detached) housing starts grew at 5.28% MoM, also the best month in 2017. You can clearly see the housing construction bubble that peaked in early 2006.


The biggest gainer? The Northeast US at 42.16% MoM. The South grew at only 17.17% while the West actually declined at -3.70%.

This is the Lonzo Ball Effect. This is where your starting point guard goes 1 for 9 from the floor, 0 for 6 from the 3-point line for a dismal 2 points and the opponent doesn’t even bother the foul him.  A clear sign of stagnation in the West.


Perhaps Lonzo Ball should consider changing the name of his basketball shoe company name from Big Baller to Small Baller.



Trapped! Dodd-Frank And The Demise Of Bank Real Estate Lending

Nothing has been the same since the financial crisis and the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into federal law by President Barack Obama on July 21, 2010. Dodd-Frank created the Consumer Financial Protection Bureau (CFPB).

Whether you like more regulation or not, Dodd-Frank and the CFPB have had a chilling effect on the mortgage market. Note that before The Great Recession, real estate loan growth at commercial banks YoY regularly exceeded M2 Money Stock growth YoY. Not so starting in late 2008. With the exception of a brief respite in 2016, M2 Money Stock growth YoY has exceeded Real Estate Loan growth YoY.


An alternative explanation of the slowdown in Real Estate Lending YoY since 2008 is the growth of excess reserves of depository institutions.

To deal with the 2008 financial crisis, the Federal Reserve pumped large amounts of reserves into the banking system and introduced new programs that altered the terms of the trade-off banks make when deciding their level of excess reserves. In short, the marginal benefit of holding additional reserves has increased, whereas the marginal cost has decreased. As a result of these new Federal Reserve policies, holding reserves is now much more attractive to banks. It is more attractive because the cost of holding excess reserves—in the form of forgone interest—is significantly lower than it was before the crisis.


So, the US still has excess reserves trapped in the Federal Reserve system. Between excess regulatory burden (Dodd-Frank, CFPB) and slow wage growth, we have a problem with the banking industry. It is not generating sufficient lending growth to stimulate the economy.

Will The Federal Reserve raise the interest rate on excess deposits that will encourage commercial banks to jump back into the residential mortgage market? Currently, a number of non-bank lenders are leading the mortgage market, such as Quicken Loans and PennyMac.


An alternative to the traditional depository institution lending model is represented by Quicken Loans. These loans are NOT kept on Quicken’s balance sheet, but sold to other market plays and can be securitized.

So, we continue to have a mortgage lending hangover thanks to the excesses of the subprime and ALT-A markets of the last decade. It resulted in the predictable regulatory overreach which has discouraged traditional banks from making residential mortgage loans (except Wells Fargo, of course).


Here is CFPB Director Richard Cordray!


UMichigan House Buying Conditions Continues Downward Trend (Interest Rate Fears)

The University of Michigan Consumer Survey was released this morning … and it wasn’t good news for housing.  Their index for housing buying condtions declined.


One of causes of confidence loss? The fear that The Fed will raise rates and unwind too quickly.


Not to worry with The Fed only unwinding $300 last week.


Instead of “Give Me Three Steps,” The Fed is singing “Give Me One Itsy-Bitsy Step” to raise rates.

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Treasury’s Surprise Debt-Maturity Move Eases Sting of Fed Unwind (Treasury Will No Longer Seek Extending Debt Maturity)

Since Congress shows little interest in fiscal responsibility, one way Treasury can deal with the staggering fiscal deficits is to extend the maturity of US debt (aka, strectching out those debt payments).

(Bloomberg) — As the rest of Washington fixated on tax reform and a new Federal Reserve chair last week, the Treasury Department unveiled a borrowing strategy lacking fanfare but having potentially big implications for the bond market and the U.S. economy.

In a step that could limit upward pressure on long-term interest rates from bigger budget deficits and a reduced Fed balance sheet, the Treasury will break from a policy in place since 2009 and stop attempting to lengthen the maturity of the government’s debt.


“The Treasury is trying to avoid making the mistake of throwing out long-maturity debt where there isn’t sufficient demand, which could really steepen the yield curve,” said Gene Tannuzzo, a money manager at Columbia Threadneedle Investments, which oversees $484 billion. It “seems to be making an effort to avoid a yield shock.”

That’s important for the health of the economy. Yields on longer-term Treasury debt serve as benchmarks for everyone from home buyers to corporate treasurers. A “steepening is where we could get into problems with the housing market,” Tannuzzo said.

It’s probably also welcome at the Fed, which has begun to slowly reduce its balance sheet by not rolling over some of the maturing Treasury and mortgage-backed securities in its portfolio. Fed policy makers have gone out of their way to make the unwind as painless as possible for the bond market — and the Treasury’s new approach will help in that regard.

The shift comes as a surprise. It wasn’t that long ago that Treasury Secretary Steven Mnuchin was talking about issuing an ultra-long bond with a maturity of more than 30 years. While Mnuchin signaled he was backing away from that idea in a Bloomberg interview late last month, Treasury officials went further in the department’s quarterly refunding announcement last week.

“We’re looking at kind of a stabilization from here” in the weighted average maturity (WAM) of Treasury debt, acting Assistant Secretary for Financial Markets Monique Rollins said at a press briefing in Washington on Nov. 1.

Rising Maturities
The average maturity of the $14 trillion-plus in marketable Treasury debt outstanding was at a near multi-decade high of more than 70 months on Sept. 30. That’s up from 49 months in December 2008 and is above the 60-month historical average dating back to 1980. It’s still, though, about a year less than the average of the Group of Seven industrial nations, according to data compiled by the International Monetary Fund.

The Treasury maintained its longer-term debt sales at $62 billion this quarter for the seventh straight time, opting to meet any increased financing needs from run-offs by the Fed through the sale of bills. The yield curve flattened in response as the attraction of holding longer-term Treasuries grew.

The department’s decision means that “at least initially, the Treasury is completely offsetting the impact of the Fed unwind” on long-term interest rates, said Seth Carpenter, chief U.S. economist at UBS Securities LLC in New York and a former Fed and Treasury wonk. 

The central bank began reducing its holdings of Treasury and mortgage-backed securities in October, initially limiting the monthly draw-down to $6 billion of the former and $4 billion of the latter. The caps will be gradually increased to an eventual $30 billion for Treasuries and $20 billion for housing debt. [In fact, the unwind is so slow that you can barely see it compared to the $4.456 trillion left to unwind].


The alteration in the Treasury’s approach doesn’t mean the bond market will be spared from having to digest extra supply as the Fed unwind continues and budget deficits increase on the back of potential tax cuts.

Indeed, Treasury officials last week flagged the likelihood of stepped-up sales in future refundings. The department will “look at raising auction sizes,” Rollins said.


With The Federal government on a path of uncontrolled acceleration in spending,


Particularly with M2 growth outpacing real GDP growth YoY.


But at least the US Treasury 10Y-2Y keeps declining putting less pressure of debt refunding (and helping the housing market with lower 10 year Treasury yields).


But with skyrocketing Federal spending and widening budget deficits, “We’re gonna need a bigger boat.”



Sustainable Housing Finance And Stigler’s Regulatory Capture: November 7, 2017 Hearing in Washington DC

On Tuesday, November 7, 2017, at 10:00 a.m. in Room 2128 of the Rayburn
House Office Building, the Housing and Insurance Subcommittee will hold a
hearing entitled “Sustainable Housing Finance, Part III.” 

That is correct, yet another hearing in Congress on what to do with mortgage giants Fannie Mae  and  Freddie Mac and the Federal government guarantee.

Here is the witness list:

  • Mr. Peter Wallison, Senior Fellow and Arthur F. Burns Fellow in Financial
    Policy Studies, AEI
  • Dr. Mark Zandi, Chief Economist, Moody’s Analytics
  •  Dr. Michael Lea, Cardiff Consulting Services
  • Ms. Alanna McCargo, Co-director, Housing Finance Policy Center, Urban
  • The Honorable Theodore “Ted” Tozer, Senior Fellow, Center for Financial
    Markets, Milken Institute

To understand what will be said, it is best to look at the hearing through the lens of Nobel Laureate George Stigler’s Theory of Regulatory Capture. Regulatory capture is a form of government failure that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating.

So, let’s look at the witnesses to glean what they will say and who they likely represent.

Peter Wallison is the grand daddy of shutting down Fannie Mae and Freddie Mac. Who benefits? The TBTF banks like Bank of America, Citi, JPMorgan Chase and Wells Fargo since they will inherit the securitization business. Unless another way is found.

Mark Zandi is a coauthor of “A More Promising Road to GSE Reform”L with Jim Parrott (a nonresident fellow at the Urban Institute) , Lewis Ranieri (of “The Big Short” fame), Gene Sperling (economist for Clinton and Obama),  Mark Zandi and Barry Zigas (Senior Vice President at Fannie Mae from 1995-2006).  Like Wallison, Zandi advocates shuttering Fannie Mae and Freddie Mac. But he favors creating a NEW Federal government insurance corporation.  Essentially, shutting down two corporations and replacing it with one gigantic corporation.  Only in Washington DC would Congress consider creating one humongous TBTF corporation. Who benefits? Not taxpayers.

Michael Lea is a former Chief Economist for HUD and Freddie Mac. He will likely opine on the notion that housing finance systems are often Federally guaranteed around the globe. He will also likely opine that foreign countries generally use adjustable-rate mortgages (ARMs) rather than the high duration risk 30 year fixed-rate mortgage. 

Alanna McCargo is at the left-leaning Urban Institute with Laurie Goodman.  With a united front from the Urban Institute, McCargo will likely be in favor of shutting down Fannie Mae and Freddie Mac and greatly expanding credit to borrowers (under the assumption that mortgage credit is too tight). Who wins? The affordable housing contingent.

The Honorable Theodore Tozer is former President and CEO of Ginnie Mae. And now at the Milken Institute. Ed DeMarco, the former FHFA head honcho, and also at the Miken Institute, recommends

  • Wind down Fannie Mae and Freddie Mac,
  • Build a common securitization infrastructure to serve as the backbone for mortgage securitization in a post-conservatorship world, and
  • Shift mortgage credit risk from taxpayers back to market participants

My guess is that this is what Tozer will recommend.

So, every panelist (or witness) will likely call for the shutdown of Fannie Mae and Freddie Mac.

Some of the panelists will call for easing of credit restrictions in order to increase homeownership. This can be achieved by reducing transparency and making the housing finance system more like HUD/FHFA.


It is all about the Federal government guaranteeing the 30 year fixed-rate mortgage

Do not be confused. This hearing is all about how the Federal government can guarantee the 30 year fixed-rate mortgage which accounts for 93.2% of single-family mortgages in the USA. Adjustable-rate mortgages (ARMs) account for only 6.8%.


The ARMs that blew up in the financial crisis were not “plain vanilla” ARMs, but exotic ARMs like teaser-rate ARMs and Pick’a’pay ARMs.  But what will NOT be mentioned in the hearing is that the 30-year Fixed Rate Mortgage is an implicit entitlement.

But let us remember some important facts. Much of the housing bubble (and burst) was due primarily to the rapid expansion of credit from 1992-2006. And most of that credit expansion was due to Federal government policies such bank deregulation under President Bill Clinton such as the Housing and Community Development Act of 1992 (P.L. 102-550, 106 STAT. 3672), Riegle Community Development and Regulatory Improvement Act of 1994 (P.L. 103-325, 108 STAT. 2160), Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (P.L. 103-328, 108 STAT. 2338), Gramm-Leach-Bliley Act of 1999 (P.L. 106-102, 113 STAT 1338) 


Not to mention HUD’s National Homeownership Strategy: Partners in the American Dream. Also under President Clinton which calls for streamlining of underwriting among other things.

So while is convenient to blame Fannie Mae and Freddie Mac for the housing bubble, it was actually the Federal government that created the housing bubble and burst through regulatory changes and activist HUD policies. So, get real Congress.

Be careful what you wish for. It could be worse than the existing equilibrium. Shutting down Fannie Mae and Freddie Mac will definetly benefit the TBTF banks and affordable housing groups to the detriment of taxpayers.

There is an alternative: covered bonds. Covered bonds are debt securities issued by a bank or mortgage institution and collateralized against a pool of assets that, in case of failure of the issuer, can cover claims at any point of time. A good example are the Danish covered bonds.

I will be waiting for some member of Congress to say “Psych!!! You just got jammed!”

But like many regulatory exercises in Washington DC, the finished product will be a hodgepodge of carveouts for special interests, not what is in the best interest of the public.



Home Price Growth Gains Momentum, Over 2X Wage Growth (Seattle Fastest, Washington DC Slowest)

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 6.1% annual gain in August, up from 5.9% in the previous month. The 10-City Composite annual increase came in at 5.3%, up from 5.2% the previous month. The 20-City Composite posted a 5.9% year-over-year gain, up from 5.8% the previous month.


Seattle, Las Vegas, and San Diego reported the highest year-over-year gains among the 20 cities. In August, Seattle led the way with a 13.2% year-over-year price increase, followed by Las Vegas with an 8.6% increase, and San Diego with a 7.8% increase. Nine cities reported greater price increases in the year ending August 2017 versus the year ending July 2017.


And yes, Washington DC is once again the slowest growing metropolitan area in the USA in terms of home price growth.

Just like during the infamous housing bubble of the late 1990s and 2000s, home price growth (6.07% YoY) is over 2X wage growth (2.41% YoY).


The rapid rise in home prices relative to wage growth followed a flurry of banking deregulation starting in 1992 and the Presidency of William Jefferson Clinton.

  • Housing and Community Development Act of 1992 (P.L. 102-550, 106 STAT. 3672).Established regulatory structure for government-sponsored enterprises (GSEs), combated money laundering, and provided regulatory relief to financial institutions.
  • RTC Completion Act (P.L. 103-204, 107 STAT. 2369).Required the RTC to adopt a series of management reforms and to implement provisions designed to improve the agency’s record in providing business opportunities to minorities and women when issuing RTC contracts or selling assets. Expands the existing affordable housing programs of the RTC and the FDIC by broadening the potential affordable housing stock of the two agencies.

    Increased the statute of limitations on RTC civil lawsuits from three years to five, or to the period provided in state law, whichever is longer. Provided final funding for the RTC and established a transition plan for transfer of RTC resources to the FDIC. The RTC’s sunset date is set at Dec. 31, 1995, at which time the FDIC assumed its conservatorship and receivership functions.

  • Riegle Community Development and Regulatory Improvement Act of 1994 (P.L. 103-325, 108 STAT. 2160).Established a Community Development Financial Institutions Fund, a wholly owned government corporation that would provide financial and technical assistance to CDFIs.

    Contains several provisions aimed at curbing the practice of “reverse redlining” in which non-bank lenders target low and moderate income homeowners, minorities and the elderly for home equity loans on abusive terms. Requires the Treasury Department to develop ways to substantially reduce the number of currency transactions filed by financial institutions. Contains provisions aimed at shoring up the National Flood Insurance Program.

  • Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (P.L. 103-328, 108 STAT. 2338).Permits adequately capitalized and managed bank holding companies to acquire banks in any state one year after enactment. Concentration limits apply and CRA evaluations by the Federal Reserve are required before acquisitions are approved. Beginning June 1, 1997, allowed interstate mergers between adequately capitalized and managed banks, subject to concentration limits, state laws and CRA evaluations. Extends the statute of limitations to permit the FDIC and RTC to revive lawsuits that had expired under state statutes of limitations.
  • Gramm-Leach-Bliley Act of 1999 (P.L. 106-102, 113 STAT 1338).
  • Repeals last vestiges of the Glass Steagall Act of 1933. Modifies portions of the Bank Holding Company Act to allow affiliations between banks and insurance underwriters. While preserving authority of states to regulate insurance, the Act prohibits state actions that have the effect of preventing bank-affiliated firms from selling insurance on an equal basis with other insurance agents. Law creates a new financial holding company under section 4 of the BHCA, authorized to engage in: underwriting and selling insurance and securities, conducting both commercial and merchant banking, investing in and developing real estate and other “complimentary activities.” There are limits on the kinds of non-financial activities these new entities may engage in.


Is The US Housing Market In A Bubble? Hot, Hot, Hot or Not, Not, Not?

One of the more interesting questions is whether the US housing market is in a bubble or not. The answer is (drum roll) …. it depends.

Consider the S&P CoreLogic Case-Shiller 20 Metro Home price index as a ratio of US median  family income. As you can see, the US have reached a price-to-income ratio that is higher than the peak of the housing bubble around 2005. So, it looks like the US housing market is in a broad-based bubble.


But in real terms (extracting inflation), the US housing market is below the housing bubble peak indicating that the US housing market is NOT in a bubble.


While the San Francisco housing market is feeling hot, hot, hot, the Case-Shiller index for San Francisco home prices as a ratio of median household income is rising but well below the housing bubble peak. Credit the rising income to flourishing tech companies like Apple, Google, Nvidia and many others.


Even Washington DC home prices (as a ratio of Arlington, Virginia has no evidence of a housing bubble.


This is not to say that housing prices in San Francisco, Washington DC and other cities are “affordable.”  It is just that most indicators, when adjusted by median income for the area, don’t indicate a house price bubble.

So rising home prices in the US doesn’t mean that home prices are hot, hot, hot.  But it sure feels that way.