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.

 

M2 Money Growth Declines To 20 Month Low (What Happens To Wage Growth?)

Real median household income, one measure of American household prosperity, peaked in 1999, fell slightly in 2000, then declined in the early 2000s only to hit decade-peak in 2007. RMINC continued to fall again until 2012 when it finally started to rise.

What is notable is that the rise in real median household income in the 1990s corresponded with a rapid rise in the M2 money supply.from 1995 to 1999. That represented a 33% in M2 money supply.

m2rminc.png

The rapid increase in M2 Money Supply also corresponds to the high in M2 Money Velocity in 1997, as if Fed Chair Alan Greenspan expended all the M2 fuel in one massive attempt to stimulate the economy.  M2 velocity (GDP/Money Supply) has been falling ever since. Along with real median household income. EXCEPT FOR 2013 AND AFTER WHEN REAL MEDIAN HOUSEHOLD INCOME ROSE EVEN AS M2 MONEY VELOCITY WAS SINKING LIKE A ROCK.

One possible explanation lies with the redesign of the income question in 2013 and onwards.

Starting in 2013 with a partial phase-in, which was fully implemented in 2014, Census changed the questions and the methods in calculating household income.

For example, Census, starting in 2014, began to “collect the value of assets that generate income if the respondent is unsure of the income generated.”

Also, the government started to use “income ranges” as a follow-up for “don’t know” or “refused” answers on income-amount questions.

So, that is a partial explanation for the anomoly of rising real median household income with crashing M2 Money Velocity. THEY CHANGED THE HOUSEHOLD INCOME DEFINTION.

M2 Money growth has fallen to a 20 month low  while an alternative measure of money supply, the Austrian money supply, just fell to a 105 month low. 

The “Austrian” measure of the money supply differs from M2 in that it includes treasury deposits at the Fed (and excludes short time deposits, traveler’s checks, and retail money funds).

Well, M2 Money supply increases hasn’t done much for Average Hourly Earnings of Production and Nonsupervisory Employees, particularly since 2008.

Whether we are using the decline in M2 growth or Austrian money growth, neither one have benefitted the majority of Americans.

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.

ECB’s Balance Sheet Almost The Size of Japan’s Entire GDP (While Japan’s Inflation Rate Is ZERO)

And you think Janet Yellen and The Fed have an inflation problem!

Japan is currently experiencing ZERO inflation.

But the European Central Bank’s balance sheet is nearly as large as Japan’s entire GDP!

20170718_gdp

Japan’s sovereign yield curve is negative for maturities of less than 8 years. And a yield on their 40 year bond of just above 1%??

Like Puerto Rico and the State of Illinois, Japan is experiencing a decline in their working age population while its share of population over 65 is over 25%.