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.

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

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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.

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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.

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

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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.

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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.

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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.

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

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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.

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US Q3 GDP Grows At 3.0% Despite 2nd Consecutive Quarter of Negative Residential Investment Growth (Lowest Since 2010)

Q3 GDP was released this morning and QoQ Real GDP (annualized) grew at a 3% pace. This follows a 3.1% QoQ growth rate in Q2.

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But Q3 represents the 2nd consecutive quarter of negative growth in Gross Private Domestic Investment: Residential. The worst growth rate since 2010.

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Yes, the lowest growth rate in residential Gross Private Domestic Investment since 2010.

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New Home Sales Rise 18.9% In September, Largest Increase Since 1992 (25 Years)

New home sales surged 18.9% in September, the largest monthly gain since 1992.

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New home sales rose sharply in the northeast and the south.

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Homebuilders are doing quite well compared to the S&P 500 index.

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The two natural disasters (Harvey and Irma) certainly destroyed a substantial amount of the housing stock and caused population displacement.

Trump’s Tax Proposal And Housing: Did The Middle Class Just Get Jammed? (Largest Plunge in Renter Occupied Housing YoY Since 2003)

The Trump/Republican tax proposal sketch is out. 360061522-Republican-Tax-Plan

While the hope is that lowering marginal tax rates will stimulate the economy (creating more jobs and tax revenue for Uncle Sam), the impact on housing and the mortgage market is ambiguous at best.

Let’s run through the numbers, that we know about.

Currently, the standard deduction for an individual is $6,350 and $12,700 for a couple. So, the first $12,700 of mortgage interest and property taxes is essentially thrown away. On top of the standard  deduction, however, a of four can also claim personal exemptions of $4,050 per person for a total of $16,200. That puts that break point at $28,700 for a family of four. Below that point, the family of four would prefer to rent since they would literally be throwing away their mortgage interest and property tax deductions (assuming that the mortgage interest deduction is $8,000 and the property tax deduction is $4,000 for illustrative purposes). So, $12,000 in mortgage interest and property tax deductions is below the standard deduction for a couple for $12,700.

Under the proposed tax reform plan, the standard deduction would be raised to $12,000 for individuals and $24,000 for a couple. At the same time personal exemptions and property tax deductions would be eliminated. This will lead to more households renting rather than owning, holding all else constant.

But President Trump’s tax reform framework calls for collapsing the current seven tax brackets into three, with marginal tax rates of 12 percent, 25 percent and 35 percent. A decline in the marginal tax bracket lowers the value of the mortgage interest deduction resulting in fewer households having an incentive to buy home.

Depending on how the marginal tax brackets are finally decided, renters (generally in the lowest marginal tax bracket) could actually see a lower tax bill (say, tax savings of $500). It becomes muddled for the middle class since the loss of itemized deductions (other than mortgage interest deductions) could actually overwhelm the lowest marginal tax rate resulting in HIGHER taxes for the middle class (say, +$500-$1,000).

There are lots of moving parts on the mortgage side, including future interest rate hikes and housing finance reform. So I hope that Congress carefully weights its options in determing the slashing of deductions in exchange for low marginal tax brackets.

Remember, the US homeownership rate has fallen back to level where it began with President Clinton’s National Homeownership Strategy from 1995.

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But here is some food for thought. The inventory of renter occupied housing units as of Q2 2017 experienced the largest YoY plunge since the mid-2000s while owner-occupied inventory experienced the largest YoY gain since the mid-2000s.

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I am just hoping that the passable version of tax reform doesn’t result in a Jeremy Jamm moment for middle-class homeowners and taxpayers.

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