New Home Sales Slow In June, Still Stuggling To Recover After Housing Bubble

New home sales rose, but modestly disappointed in June (610k vs 615k exp) with a small downward revision to May.

New home sales continue to climb … back to pre-housing bubble levels.of the early 1990s as do mortgage purchase applications.

Although the median price for new home sales fell over 4% in June, they are still up 52.2% since October 2010.

Remember all the cheerleading from the Mortgage Bankers Association (MBA) last week ove the massive surge in mortgage refinancing applications? In reality, refi applications are stuck in a rut since the last increase in mortgage rates.

Yes, we are still picking up the trash from the housing and credit bubble of the last decade.

The Gleaners by Jean-François Millet. Sort of.

Case-Shiller Home Prices Rise 1% In May (5.6% YoY), Seattle Leads At 13.3% YoY

Home prices keep on rising. According to the S&P Case Shiller repeat sales index, home prices rose 1% in May and 5.6% YoY.

But the Case-Shiller home price index continues to grow at over twice that of inflation and wage growth.

The biggest winner? Seattle. The slowest growing? Cleveland, Chicago and Washington DC.

West coast home prices really took after after The Fed’s third round of quanitative easing (QE3).

westcs

Why Fannie Mae’s 50% DTI For Mortgages Won’t Get To 100,000 Loans

The mortgage giant Fannie Mae reecently raised their Debt-to-income (DTI) ratio from 45% to 50%. The Urban Institute, a left-wing think tank, claimed in a study by Ed Golding and Laurie Goodman that this increase in DTI will increase mortgage lending by 100,000 (mostly to minorities). fannie_mae_raises_dti_limit_0

While Golding and Goodman are very intelligent people, they have forgotten one economic rule: lower credit standards can’t compensate for lack of savings and lack of earnings.

Wage growth (average hourly earnings) and personal savings rate are lower today than they were pre-1980. And wage growth never quite recovered from The Great Recession, although the personal savings rate is higher.

Unfortunately, while homeownership has correlated with home prices from 1995 through 2005, home prices have been rising since 2012 while homeownership has declined.

According to the US Census, black alone homeownership in Q1 2017 is estimated to be 42.7% while white alone is 71.8%. Hispanic homeownership rate is 46.6%. A clear gap between races in homeownership.

With low wage growth and low personal savings rates, it will be hard to raise homeownership rates among minorities unless there is a corresponding increase in loan-to-value (LTV) ratios and/or a decline in required credit (FICO) scores.

The Abduction of the Sabine Women

sabinewomen

The 50% Solution: Fannie Mae DTI Increase To 50% Could Add 95K Borrowers Each Year

Fannie Mae has opened the credit floodgates a bit by expanding their Debt-to-income (DTI) hurdle for borrowers from 45% to 50%. According to the Urban Institute, this change could lead to nearly 95,000 new mortgage borrowers.

Here is the story from Originator Times:

As the GSEs seek to ease access to credit and allow more homebuyers into the market, Urban Institute pointed out one change that could allow nearly 100,000 new homebuyers to qualify for a mortgage each year.

Earlier this year, mortgage giant Fannie Mae announced it was raising its debt-to-income ratio to further expand mortgage lending. The GSE raised its limit up to 50%, up from the previous limit of 45%. Even under the only limit, Fannie Mae allowed for flexibility up to 50% DTI for certain case files with strong compensation factors.

However, that flexibility was almost always offered to mortgages with loan-to-value rations lower than 80%. This new increase is significant as increasingly, 3% down payments are becoming the new normal, even on conventional loans.

Urban Institute estimated that 95,000 new loans will be approved each year due to Fannie Mae’s DTI increase, it stated in a report written by Edward Golding, Laurie Goodman and Jun Zhu.

The report also explained a disproportionate share of the new loans will go toward black and Latino families as they are 1.5 times more likely to have DTI ratios above 45%.The new loans will also be riskier as the probability the mortgage will fall into default increased 31% for those with DTI ratios between 45% and 50% when compared with the median DTI level of 35%.

The increase in the DTI ratio will also allow Fannie Mae to purchase 3.4% more loans. Fannie Mae estimated that between 3% and 4% of recent applications were approved by the AUS and held DTI rations between 45% and 50%, but were ineligible due to additional overlays. (From Golding, Goodman and Zhu [2017]).

The Urban Institute has a table showing that Fannie Mae has a history of purchasing high DTI loans (>45%) from originators, although that number has declined after the housing bubble burst (2010-16).

In terms of default risk (90 days and greater late payments), higher DTI loans are more risky as are higher loan-to-value (LTV) ratio loans. The hazard ratio is relative to DTI ratios of 25% or less.

Conclusion? Higher DTI loans are more risky but allow more minority borrowers into homeownership. What is missing from the Urban Institute study is the possible impact of deflating home prices (again) and a rise in unemployment (a repeat of the 2007-2009 housing and financial crisis).

Several lenders around the US are already originating 100% LTV home loans like Navy Federal Credit Union. 

Let us hope that the wave of higher DTI and LTV lending (along with lowering of FICO scores) doesn’t lead to a repeat of the US experience from 1995-2007.

 

The Hangover: US Economy Still Suffers From The Housing Bubble Burst And Bad DC Policies

Bloomberg View has an interesting editorial entitled, “Yes, Financial Crises Do Bring Hangovers.”

In an essay making the rounds this week, four prominent academic economists and former government officials argue that something needs to be done to accelerate the pace of what they call “the weakest economic expansion since World War II.” Their recipe for speeding things up is lower taxes and less entitlement spending, and I’m not going to get into whether that’s really such a good idea, in part because I imagine lots of other people will take up that argument and in part because I just don’t know the answer.

But I was struck by the second paragraph of the piece, written by John F. Cogan, Glenn Hubbard, John B. Taylor and Kevin Warsh, 1 which goes like this:

We do not share the view that the recent period of weak economic growth was simply an inevitable result of the financial crisis. Economic recoveries tend to be stronger after deep recessions, and any residual headwinds from the crisis should have long been remedied had progrowth policies been adopted. Historically, some post-crisis periods are marked by lower economic growth, but we believe that the poor conduct of economic policy bears much of that burden.

It turns out both sides are correct. The housing bubble and subsequent financial crisis contributed to a weak recovery. And then economic policies following the housing bubble collapse focued on financial regulation and a terrible healthcare bill (aka, Obamacare) rather than creating economic growth.

The root cause of the financial crisis was the massive (and unsustainable) expansion of credit, particularly for real estate loans.  Thanks in part to 1) regulations such as Dodd-Frank and the creation of the Consumer Financial Protection Bureau and 2) a hangover from too much credit, real estate lending growth continues to be lower than any other recovery since World War II.

Commercial and industrial lending YoY is approaching recession levels.

And M2 Money Velolcity (GDP/Money Stock) continues to decline to the lowest level in modern times reflecting the stagnant GDP growth coupled with massive expansion of money stock.

Two examples of “The Hangover” are the 1) historically low levels of new homes sold and 2) the worst wage recovery since 1965.

Add into that the repression of bank deposit rates courtesy of Greenspan, Bernanke and Yelle, and we have a dismal recovery.

And lest we forget, the GINI index of income inequality increases after every recession, regardless of President and Congressional majorities.

Yes, the poor recovery of the US economy is a product of 1) hangover from the housing bubble and financial crisis, and 2) poor economic policies eminating from Washington DC.

Oh Canada! Toronto Existing Home Sales Plunge 37% YoY

OTTAWA, July 17 (Reuters) – The resale of Canadian homes fell 6.7 percent in June from May, the largest monthly drop since 2010 and the third straight monthly decline as sales in Toronto plunged, the Canadian Real Estate Association said on Monday.

And they fell 37%, the third straight decline and the most since January 2009. Owners flooded the market with properties, with listings up 16 percent to 19,614.

Average prices dropped 14 percent in the last three months across the Toronto region to C$793,915, reflecting fewer sales of large homes. That compares with a 1 percent rise over the same period last year. Deals for single-family homes in Toronto and its surrounding regions fell 45 percent and average prices dropped 12 percent from April to C$1.06 million.

For all of Canada, YoY existing home sales also declined. But only by 6.7% MoM.

Canada Cry! Canada’s Housing Bubble Will Burst (Too Much Debt, Too Low Wage Growth)

Canada may be in serious trouble thanks to too much household borrowing and too little wage growth.  

And here is a piece from Bloomberg last month on Canada’s housing bubble.

(Bloomberg) Canadian home sales fell the most in five years last month. That didn’t stop an increase in prices, which were up 18 percent nationwide from a year earlier. When you consider that most houses are leveraged assets, this represents huge gains for homeowners.

While leverage can help boost performance on the way up, it becomes very dangerous on the way down. Leverage can turn even the best investments into poor ones when things go wrong, as losses are amplified. Equity can get wiped out pretty quickly on an overleveraged asset.

Canadian real estate has been on fire for years. The housing price data there has made the U.S. real estate market during the boom of the mid-2000s look mild.

The Federal Reserve Bank of Dallas puts out a global housing price index for more than 20 countries every quarter. Using this data, I looked at the real house price index data for Canada and compared it with the same data in the U.S. going back to 1975.

Here’s this relationship from 1975 through the end of 2005:

Although there were some divergences in the early and late 1980s, both housing markets essentially ended up in the same place after 30 years. Now let’s add in the most recent data to see how things have unfolded since:

An enormous divergence occurred in 2006, when U.S. housing prices really began to soften, while Canadian price barely skipped a beat. This makes any differences in the past look like blips. The rise in Canadian real estate prices has been relentless.

The U.S. housing market peaked in late 2006. Since then, based on this index, U.S. housing prices are still down almost 13 percent from their peak through the end of 2016. In that same time frame, Canadian housing prices are up 56 percent.

From the 2006 peak, it took until late 2012 for real estate in the U.S. to bottom. We’ve since witnessed a 19 percent recovery from what was a 27 percent decline nationwide, on average. While the U.S. real estate downturn lasted almost six years, Canada’s housing market experienced just a 7 percent drawdown that lasted less than a year. And house prices in Canada reclaimed those losses in about a year and a half. Canadian housing has also outpaced its neighbors to the south since the 2012 bottom in U.S. real estate, with a 30 percent gain in that time.

To recap: On a real basis, Canadian housing prices experienced a much smaller, shorter decrease in prices during the financial crisis and a much larger, longer increase in prices during the recovery. When you couple this unfathomable rise in housing prices with near-record high household debt-to-income ratios, the Canadian housing bubble starts to look scary should the tide turn.

The reason homeowners in Canada should be worried is because housing is typically not a great long-term investment. Housing expert and historian Robert Shiller explains:

Here is a harsh truth about homeownership: Over the long haul, it’s hard for homes to compete with the stock market in real appreciation. That’s because companies whose shares are traded on a stock exchange retain a good share of their earnings to plow back into the business. The business should grow and its real stock price should also grow through time — unless the company makes poor decisions, as some certainly do.

By contrast, real home prices should decline with time, except to the extent that households shell out some money and plow back some of their incomes into maintenance and improvements, because homes wear out and go out of style.

The problem is that the home-buying experience is fraught with emotion. People rarely think about the characteristics of real estate as an investment when putting down roots and making the biggest purchase of their life. Once the herd mentality sets in these things take on a life of their own. In downtown Toronto, the average sale price of a detached home this spring was $1.2 million.

No one knows when insanity like this will come to an end. Bubbles are like an avalanche. The longer they build up, the worse they will be when they eventually destabilize.

The same is true of financial markets. No one really knows when or why bubbles come to an end, but eventually people come to their senses and the music stops. U.S. homeowners understand all too well what can happen to the economy when the housing market destabilizes. The timing is impossible to predict, but Canadians should be on avalanche alert.

Canadians have been increasiing their household debt as Americans began paring back household debt even before the financial crisis.

Meanwhile, Canadian wage growth has plummeted while US wage growth has been stagnant.

When this housing bubble blows, it will give new meaning to “Oh Canada!”

Will Canada’s bubble burst cross their southern border to the USA?