Housing/Mortgage/Real Estate

[DougMacG]

California Leads Housing Slowdown As Case-Shiller Home Prices Decline For 4 Months In A Row

Case-Shiller data for August confirmed once again that US housing is rapidly slowing down, when the Top 20 Composite Index (Seasonally Adjusted) posted another decline in August, its fourth in a row, declining by -0.15% and missing expectations of a modest 0.2% rebound (following last month's -0.5%) decline.

S&P's David Blitzer: "The deceleration in home prices continues... The Sun Belt region reported its worst annual returns since 2012, led by weakness in all three California cities -- Los Angeles, San Francisco and San Diego."

  - But who cares what the birth (and death) place of every housing bubble is doing, right?
http://www.zerohedge.com/news/2014-10-28/california-leads-housing-slowdown-case-shiller-home-prices-decline-4-months-row

[Crafty_Dog]

Housing Starts Declined 2.8% in October To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/19/2014

Housing starts declined 2.8% in October to a 1.009 million annual rate, coming in below the consensus expected 1.025 million annual rate. Starts are up 7.8% versus a year ago.

The decline in starts in October was all due to a sharp 15.4% drop in multi-family units; single family starts rose 4.2%. In the past year, single-family starts are up 15.4% while multi-family starts are down 6.0%.

Starts in October declined in the Midwest, Northeast and West, but were up in the South.

New building permits rose 4.8% in October to a 1.080 million annual rate, coming in above the consensus expected 1.040 million. Compared to a year ago, permits for single-units are up 2.4% while permits for multi-family homes are down 0.5%.

Implications: Home building has been very volatile over the past few months but the underlying trend remains upward and we expect that to continue. The best news from today’s report was that building permits rose 4.8% in October, as single-family and multi-family permits rose 1.4% and 10% respectively. Permits now stand at the highest level since June 2008, signaling future gains in home building in the months to come. October’s drop of 2.8% for home building was all due to multi-family units, which were down 15.4% in October and have caused large swings in overall housing starts over the past few months. Single-family starts have been steadily rising over the past three months. So, the multi-family volatility over the past few months has masked slow underlying improvement in the housing sector. To smooth out the volatility we look at the 12-month moving average. This is now at the highest level since September 2008. The total number of homes under construction, (started, but not yet finished) increased 1.4% in October and are up 20.1% versus a year ago. No wonder residential construction jobs are up 131,000 in the past year. Although multi-family construction has slowed over the past few months, it has still taken the clear lead in the housing recovery. Single-family starts have been in a tight range for the past two years, while the trend in multi-family units has been up steeply. In the past year, 36% of all housing starts have been for multi-unit buildings, the most since the mid-1980s, when the last wave of Baby Boomers was leaving college. From a direct GDP perspective, the construction of multi-family homes adds less, per unit, to the economy than single-family homes. However, home building is still a positive for real GDP growth and we expect that trend to continue. Based on population growth and “scrappage,” housing starts will rise to about 1.5 million units per year over the next couple of years.

[ppulatie]

New home sales are so great per Wesbury and others .............this really shows the truth.

[Crafty_Dog]

Pat:

A question:  The previous peak is a bubble yes?  So, by what measuring stick should we evaluate how well things are doing?

[DougMacG]

Pat:
A question:  The previous peak is a bubble yes?  So, by what measuring stick should we evaluate how well things are doing?

450,000 today compares with an average of 700,000 over the last 50 years.  So if we grow 3 - 4% per year, we will back to where we were ... almost never.



http://static.seekingalpha.com/uploads/2008/5/29/newhomesales527_1.png

[Crafty_Dog]

So, for 30 plus years we were essentially flat and around '97, the time of the Clinton Gingrich cap gains tax rate cut we went onto a new trajectory, but at present we are above the lows of '66, '70, '75, and '82?  Yes?

"Down 42% year over year" includes the numbers from the bubble years, yes?

[DougMacG]

So, for 30 plus years we were essentially flat and around '97, the time of the Clinton Gingrich cap gains tax rate cut we went onto a new trajectory, but at present we are above the lows of '66, '70, '75, and '82?  Yes?

"Down 42% year over year" includes the numbers from the bubble years, yes?

The chart I posted shows new home sales only through 2008, an extreme year.  PP's chart overlaps this covering 2005 to the present.  Agreed that the comment 'down 42% year over year' mostly tells us the peak values were artificially high.  If you want to ignore the peaks of the bubble, what years should we ignore?  Not all the way back to 1997, IMHO.  It seems to me the excessive push of easy money began in the aftermath of 9/11/2001, not showing up until the recovery kicked in during 2003.  Nonetheless, even if you go all the way back to 1997, it looks like the average, historic, new home sales figure is still over 600k compared with 450k now.  Hardly a full recovery, we are still running short by about 33%.

It begs the question, is the Obama economy with workforce participation at a 40 year low and food stamp and disability participation at all time highs the new normal?

The answer to that is a matter of opinion or conjecture.  My view is that we could put the growth and greater participation back into this economy any time we choose that.  Home affordability varies artificially with CRAp, QE, and mortgage rates, etc., but otherwise is a pretty simple function of family income.  Under Obama, family income is not up.  The income and GDP growth has been largely concentrated in the top 1% of earners, equities investors and S&P 500 type companies. 

[Crafty_Dog]

Well, the cap gains tax rate cut ('97?) would seem to justify a secular change, but IIRC there was big concern over computers having a giant brain fart on 1/1/2000 and so the Fed pumped pre-emptively- to be followed by the 9/12/01 flood of money so perhaps '99 should be our SWAG baseline?

[ppulatie]

Just a few comments:

Where the housing pundits miss the boat is that they just look at charts and graphs and then make assumptions. There is no underlying analysis of the factors that contribute to the housing "recovery" nor analysis of factors that will affect it in the future.

1.   With DougMacG’s graph, notice that about 1991 the beginning of the upward trend. Coincidently, that is when Bush 41 began the idea of increasing homeownership from about 64% to 70% or more.  Clinton then followed that up with programs designed to get maximum ownership.

2.   1993 saw a huge push by the GSE’s to begin to control the mortgage market. Banks, especially after the S&L crisis were considered risker for loans than the GSE’s.

3.   1991 saw the first real successful MBS issuance since about 1985 with Ameriquest securitizing a $61m offering.  By 1993, other Wall Street firms and Mortgage Bankers began to approach the MBS market. The target loans were those that the GSE’s would not buy.

4.   1993 saw the creation of a “working group” to create the methodologies that would be needed for future lending. The Banks, Wall Street, GSE’s and Mortgage Banker Associations were the major part of the working group. In 1995, its findings were complete and led to the creation of MERS. 1996 saw the first loan registered under MERS.  The beginning of large scale securitizations was set in place.

5.   About 1993 and later began the loosening of Leverage Ratios for Wall Street firms.

6.   1998 saw the repeal of Glass Steagall and now commercial banks could now engage in Wall Street type actions.

7.   Mid 1990’s saw greater emphasis on the Community Reinvestment Act. DOJ and other regulatory actions to promote “Fair Lending”.

8.     With the 2000 Market Crash and then 9-11, the Fed actions to loosen credit which promoted greater housing sales.

9.     Jun 22, 30 year interest rates hit 4.25% for one day, and the following day the Fed announces that they will begin to increase rates again. Jul 2005 saw the market top in "sales activity" with values falling in many areas and in some areas, continuing to increase at about a 5% yearly increase until the summer of 2006, when things went "dead".

10.   Dec 2006, the first Mortgage Bankers begin to fail. "Say goodnight to housing and hello to foreclosures."

When you look at the combined history of what occurred to facilitate the Housing Boom, then it becomes readily evident that what the Fed and the government has done since has been a total failure.

Fed actions have not been about stimulating a recovery. It has been about keeping the banks afloat with QE, getting the toxic assets off the books of the banks and out of Investor hands.  Right now, 75% of all Private MBS have been retired or else foreclosed. What is left is probably mostly held by the Fed.

Much of the hot money used to provide investors the ability to buy foreclosures and at risk homes was a deliberate action to prop up values. The reason is that Negative Equity was a key determinate in foreclosures when it hit 120% LTV or greater. At 120%, stressed homeowners began to look at home ownership as a negative. Why be finally stressed if values would not recover for years? As the stresses mounted, a homeowner was more likely to default.

At 140%, default became much more likely for stressed homeowners. Additionally, 140 saw a new motivation for default to occur. Homeowners who could make the payments began to buy more desirable homes, paying less than what they owned on their "smaller" and "less desirable" home. After the purchase, they moved into the new home and let the old home go into default.

At 160%, wholesale strategic defaults occurred.

The Fed needed to prop up values, so they have lowered rates, engaged in QE and attempted many other things to prop up values by stimulating housing. It has not worked.

Now, the GSE's and FHA are going to 97% LTV and lowering credit requirements. They are also allowing  more down payment assistant programs. At 97% LTV, default rates are 15.96% from the 2002 to 2008 years. They know that defaults will increase, but at one banker told me, if 85% of the loans do not default, then they are ahead of the game. 15% is not a big deal if they have reserves for losses.  (BTW, 81% LTV is the "break even point" for foreclosures. Above 81% and lenders begin to lose money on foreclosure sales.

What happens when rates increase? Payments go up, so to offset the payments, home values will drop.  Oops, that means more Negative Equity which will lead to more defaults. Also, credit lines increase in payments, living expenses increase, and disposable income goes negative. More defaults follow.

Currently 4m loans are delinquent. 800k plus loans have been modified by HAMP and the payments are beginning to increase. (400k other HAMP have already re-defaulted.)  2.5m lines of credit are now "resetting" with higher payments. ARM loans will have payment increases again when interest rates increase. More delinquencies and foreclosures to follow.

How is the Fed going to counter this?

BTW, I am no longer involved with the people I had been working with to bring to market new Underwriting and Ability to Pay evaluations. What happened is that we were told by Mortgage Bankers and Banks that using my model, they would have to either decline loans, or else the sellers would have to accept less of a sales price to sell the home, or else the buyer would have to find cheaper homes to buy.  Additionally, they did not want to know the risk of default with borrowers because it increased their liability if borrowers defaulted under the new Dodd Frank.

The solution for my "partners" was to take the system and "hide" the risk. Risk evaluations would be done and the lender could turn them on or off as desired. However, our system would still record it.  At this point I left them. They are now marketing the system as they revised it, and apparently have a couple of trial clients.

What the idiots do not realize is that by hiding the risk and allowing it to be turned or off by the lender, for every loan that is funded and sold to the GSE's or FHA, or any other party, they and the lenders are now "engaging in a conspiracy to commit fraud". These fools never learn........

[Crafty_Dog]

Very interesting Pat.  Thank you.

[DougMacG]

Yes, great history and analysis!  What a meddled market!  The Fed is still propping things up with money and the government still has too many intervention programs.  As PP suggests, what happens to values when mortgage rates go up (and incomes are flat)?  It won't be pretty.  And the only reason rates aren't going up is because demand is so soft in the economy.  The policy makers have not allowed housing to correct (proven in pp's figures).  

The financial crisis is over, stop the emergency programs.  Cut back on these efforts to get people to buy a home without saving for the down payment.  3% down is not a commitment or security against value fluctuation.  Allow interest rates to right-size.  People need to save, not just borrow.  There is no balance to it.  Most of all, housing affordability is a function of income, not about houses.  We need to grow the economy and grow incomes if we want people to afford homes.
 
I agree with PP that they are "engaging in a conspiracy to commit fraud".  We still have too big to fail and live in a bailout world.  Values are still inflated. If knowing about risk causes them to lose out on a profit, then covering their eyes works just fine, from their point of view.  If they miscalculate, fail, and collapse, it won't be the first time.  It's not like they will lose their house.  They might not even lose their bonus. 

[Crafty_Dog]

Building Toward Another Mortgage Meltdown
In the name of ‘affordable’ loans, the White House is creating the conditions for a replay of the housing disaster
By Edward Pinto
WSJ

The Obama administration’s troubling flirtation with another mortgage meltdown took an unsettling turn on Tuesday with Federal Housing Finance Agency Director Mel Watt ’s testimony before the House Financial Services Committee.

Mr. Watt told the committee that, having received “feedback from stakeholders,” he expects to release by the end of March new guidance on the “guarantee fee” charged by Fannie Mae and Freddie Mac to cover the credit risk on loans the federal mortgage agencies guarantee.

Here we go again. In the Obama administration, new guidance on housing policy invariably means lowering standards to get mortgages into the hands of people who may not be able to afford them.

Earlier this month, President Obama announced that the Federal Housing Administration (FHA) will begin lowering annual mortgage-insurance premiums “to make mortgages more affordable and accessible.” While that sounds good in the abstract, the decision is a bad one with serious consequences for the housing market.

Government programs to make mortgages more widely available to low- and moderate-income families have consistently offered overleveraged, high-risk loans that set up too many homeowners to fail. In the long run-up to the 2008 financial crisis, for example, federal mortgage agencies and their regulators cajoled and wheedled private lenders to loosen credit standards. They have been doing so again. When the next housing crash arrives, private lenders will be blamed—and homeowners and taxpayers will once again pay dearly.

Lowering annual mortgage-insurance premiums is part of a new affordable-lending effort by the Obama administration. More specifically, it is the latest salvo in a price war between two government mortgage giants to meet government mandates.

Fannie Mae fired the first shot in December when it relaunched the 30-year, 97% loan-to-value, or LTV, mortgage (a type of loan that was suspended in 2013). Fannie revived these 3% down-payment mortgages at the behest of its federal regulator, the Federal Housing Finance Agency (FHFA)—which has run Fannie Mae and Freddie Mac since 2008, when both government-sponsored enterprises (GSEs) went belly up and were put into conservatorship. The FHA’s mortgage-premium price rollback was a counteroffensive.

Déjà vu: Fannie launched its first price war against the FHA in 1994 by introducing the 30-year, 3% down-payment mortgage. It did so at the behest of its then-regulator, the Department of Housing and Urban Development. This and other actions led HUD in 2004 to credit Fannie Mae’s “substantial part in the ‘revolution’ ” in “affordable lending” to “historically underserved households.”

Fannie’s goal in 1994 and today is to take market share from the FHA, the main competitor for loans it and Freddie Mac need to meet mandates set by Congress since 1992 to increase loans to low- and moderate-income homeowners. The weapons in this war are familiar—lower pricing and progressively looser credit as competing federal agencies fight over existing high-risk lending and seek to expand such lending.

Mortgage price wars between government agencies are particularly dangerous, since access to low-cost capital and minimal capital requirements gives them the ability to continue for many years—all at great risk to the taxpayers. Government agencies also charge low-risk consumers more than necessary to cover the risk of default, using the overage to lower fees on loans to high-risk consumers.

Starting in 2009 the FHFA released annual studies documenting the widespread nature of these cross-subsidies. The reports showed that low down payment, 30-year loans to individuals with low FICO scores were consistently subsidized by less-risky loans.

Unfortunately, special interests such as the National Association of Realtors—always eager to sell more houses and reap the commissions—and the left-leaning Urban Institute were cheerleaders for loose credit. In 1997, for example, HUD commissioned the Urban Institute to study Fannie and Freddie’s single-family underwriting standards. The Urban Institute’s 1999 report found that “the GSEs’ guidelines, designed to identify creditworthy applicants, are more likely to disqualify borrowers with low incomes, limited wealth, and poor credit histories; applicants with these characteristics are disproportionately minorities.” By 2000 Fannie and Freddie did away with down payments and raised debt-to-income ratios. HUD encouraged them to more aggressively enter the subprime market, and the GSEs decided to re-enter the “liar loan” (low doc or no doc) market, partly in a desire to meet higher HUD low- and moderate-income lending mandates.

On Jan. 6, the Urban Institute announced in a blog post: “FHA: Time to stop overcharging today’s borrowers for yesterday’s mistakes.” The institute endorsed an immediate cut of 0.40% in mortgage-insurance premiums charged by the FHA. But once the agency cuts premiums, Fannie and Freddie will inevitably reduce the guarantee fees charged to cover the credit risk on the loans they guarantee.

Now the other shoe appears poised to drop, given Mr. Watt’s promise on Tuesday to issue new guidance on guarantee fees.

This is happening despite Congress’s 2011 mandate that Fannie’s regulator adjust the prices of mortgages and guarantee fees to make sure they reflect the actual risk of loss—that is, to eliminate dangerous and distortive pricing by the two GSEs. Ed DeMarco, acting director of the FHFA since March 2009, worked hard to do so but left office in January 2014. Mr. Watt, his successor, suspended Mr. DeMarc o’s efforts to comply with Congress’s mandate. Now that Fannie will once again offer heavily subsidized 3%-down mortgages, massive new cross-subsidies will return, and the congressional mandate will be ignored.

The law stipulates that the FHA maintain a loss-absorbing capital buffer equal to 2% of the value of its outstanding mortgages. The agency obtains this capital from profits earned on mortgages and future premiums. It hasn’t met its capital obligation since 2009 and will not reach compliance until the fall of 2016, according to the FHA’s latest actuarial report. But if the economy runs into another rough patch, this projection will go out the window.

Congress should put an end to this price war before it does real damage to the economy. It should terminate the ill-conceived GSE affordable-housing mandates and impose strong capital standards on the FHA that can’t be ignored as they have been for five years and counting.

Mr. Pinto, former chief credit officer of Fannie Mae, is co-director and chief risk officer of the International Center on Housing Risk at the American Enterprise Institute.

[ppulatie]

Ed Pinto is a sharp guy. He nails it with this article.  For a timeline of events with the GSEs leading to their fall, check out the following link to a pdf.

http://www.aei.org/wp-content/uploads/2013/08/-pinto-bailout-america-timeline-government-mortgage-complex_1305029805.pdf

Pinto also does a Monthly National Mortgage Risk Index where he evaluates the Risk of loans defaulting. The methodology was similar to what I have developed in Phase 1 of my work, using FICO, LTV and DTI to determine default but he used 180 days late as the default measure. Using these measures, he finds that default risk for GSE 2014 originations is at 11%, and for FHA, about 23%.

http://www.housingrisk.org/wp-content/uploads/2015/01/Housing-Risk-NMRI-methodology-1-8-15.pdf  (This is the pdf link to describe how he does it.

This is the link to the current report. http://www.housingrisk.org/wp-content/uploads/2015/01/01.26.15-NMRI-data-download.xlsx

I do have problems with his methodology.

1. He uses 180 day delinquency for his measure, a Basel 3 designation. I would use 90 days. The reason is that 90 days is the standard for a loan being considered and in default. Once a loan goes 90 days late, the cure rate without any type of modification is less than 5%. So, using 180 days results in rates that are much less severe than 90 days, and in my opinion, are misleading.

2.  He used DTI for the income portion of the risk measurement. I used it initially and found problems with DTI when I started to consider actual cash flow and ability to pay/residual income measures.

What happens with DTI is that borrowers who have larger loan amounts have a greater residual income that lessens default risk. For example, a $400k loan, 43% DTI,  would feature a guy with much greater income and ultimately larger residual income after all debt service and living expenses, than those who have a 43% DTI on a loan amount of $200k or less. In fact, the guy who has the $200k loan amount or less, dependent upon family size, could have a negative residual income. And if your are talking about a family of 4, with 43% DTI and a loan amount of $150k or less, negative cash flow becomes an almost certainty.

The problem for Pinto calculating Residual Income is that the  available data did not have the data needed, so assumptions on income, debt and living expenses had to be calculated. I did so, and then ran the statistical analysis and found that the use of Residual Income for default was much more effective as a default indicator than using DTI.
Of course as I mentioned previously, lenders would have to deny loans using my methodology, so they did not want it.

The great part is that the new QM loans have ability to pay determination requirements. They can use either DTI or ability to pay, and will jump on using DTI so they do not have to deny doing loans and earning that profit. Meanwhile, I sit waiting for the defaults to mount, especially with FHA. Then I hit them hard.

[ppulatie]

Make that 5 - 6% defaults on the GSE loans based upon 180 day defaults.

BTW, the reason that Basel went 180 days is that when a loan defaults, the lender has to carry greater amounts of regulatory capital and loan loss reserves. So using 180 instead of 90, the lender reduces reserves on these type loans by about 50%.

[DougMacG]

There's a standard and widely shared explanation of what caused the bubble. The villains were greed, dishonesty and (at times) criminality, the story goes. Wall Street, through a maze of mortgage brokers and securitizations, channeled too much money into home buying and building. Credit standards fell. Loan applications often overstated incomes or lacked proper documentation of creditworthiness (so-called no-doc loans).

The poor were the main victims of this campaign. Scholars who studied the geography of mortgage lending found loans skewed toward low-income neighborhoods. Subprime borrowers were plied with too much debt. All this fattened the revenue of Wall Street firms or Fannie Mae and Freddie Mac, the government-sponsored housing finance enterprises. When home prices reached unsustainable levels, the bubble did what bubbles do. It burst.

Now comes a study that rejects or qualifies much of this received wisdom. Conducted by economists Manuel Adelino of Duke University, Antoinette Schoar of the Massachusetts Institute of Technology and Felipe Severino of Dartmouth College, the study — recently published by the National Bureau of Economic Research — reached three central conclusions.

First, mortgage lending wasn't aimed mainly at the poor. Earlier research studied lending by Zip codes and found sharp growth in poorer neighborhoods. Borrowers were assumed to reflect the average characteristics of residents in these neighborhoods. But the new study examined the actual borrowers and found this wasn't true. They were much richer than average residents. In 2002, home buyers in these poor neighborhoods had average incomes of $63,000, double the neighborhoods' average of $31,000.

Second, borrowers were not saddled with progressively larger mortgage debt burdens. One way of measuring this is the debt-to-income ratio: Someone with a $100,000 mortgage and $50,000 of income has a debt-to-income ratio of 2. In 2002, the mortgage-debt-to-income ratio of the poorest borrowers was 2; in 2006, it was still 2. Ratios for wealthier borrowers also remained stable during the housing boom. The essence of the boom was not that typical debt burdens shot through the roof; it was that more and more people were borrowing.

Third, the bulk of mortgage lending and losses — measured by dollar volume — occurred among middle-class and high-income borrowers. In 2006, the wealthiest 40 percent of borrowers represented 55 percent of new loans and nearly 60 percent of delinquencies (defined as payments at least 90 days overdue) in the next three years.

If these findings hold up to scrutiny by other scholars, they alter our picture of the housing bubble. Specifically, they question the notion that the main engine of the bubble was the abusive peddling of mortgages to the uninformed poor. In 2006, the poorest 30 percent of borrowers accounted for only 17 percent of new mortgage debt. This seems too small to explain the financial crisis that actually happened.

It is not that shoddy, misleading and fraudulent merchandising didn't occur. It did. But it wasn't confined to the poor and was caused, at least in part, by a larger delusion that was the bubble's root source.

During the housing boom, there was a widespread belief that home prices could go in only one direction: up. If this were so, the risks of borrowing and lending against housing were negligible. Home buyers could enjoy spacious new digs as their wealth grew. Lenders were protected. The collateral would always be worth more tomorrow than today. Borrowers who couldn't make their payments could refinance on better terms or sell.

This mind-set fanned the demand for ever bigger homes, creating a permissive mortgage market that — for some — crossed the line into unethical or illegal behavior. Countless mistakes followed. One example: The Washington Post recently reported that, in the early 2000s, many middle-class black families took out huge mortgages, sometimes of $1 million, to buy homes now worth much less. These are upper-middle-class households, not the poor.

It's tempting to blame misfortune on someone else's greed or dishonesty. If Wall Street's bad behavior was the only problem, the cure would be stricter regulatory policing that would catch dangerous characters and practices before they do too much damage. This seems to be the view of the public and many "experts."

But the matter is harder if the deeper cause was bubble psychology. It arose from years of economic expansion, beginning in the 1980s, that lulled people into faith in a placid future. They imagined what they wanted: perpetual prosperity. After the brutal Great Recession, this won't soon repeat itself. But are we forever insulated from bubble psychology? Doubtful.

http://www.jewishworldreview.com/0215/samuelson020215.php3#ijGVxZpIZFR66jOi.99
http://www.nber.org/papers/w18868 (?)

[ppulatie]

DougMacG,

I have problems with this analysis.  Here is why:

1. The authors cite Debt to Income being a 2 and use the formula of Gross Debt to Gross Income. This alone shows that they know not what they speak. Debt to Income is Monthly Debt Payments to Monthly Gross Income. This is the standard calculation for mortgages. Under traditional guidelines DTI would be no more than 28%  for housing and for total 36%. During the Housing Boom, it became 45% and then up to 55% or more.

2. There was another method that was always considered optimal and was similar to what the authors said, and that was a 3.5 ratio, Price to Income. Using that formula, everyone under bought in their scenario.

3. They write that "First, mortgage lending wasn't aimed mainly at the poor". True, but it was aimed at non qualified borrowers after 2003. By late 03, qualified borrowers no longer existed that loans could be sold to. So lenders dropped standards, issued state income loans, and if you had a detectable breath in the last 24 hours, you were qualified.

4. Borrowers were assumed to reflect the average characteristics of residents in these neighborhoods. But the new study examined the actual borrowers and found this wasn't true. Comparing borrowers to residents.....did they account for the fact that in poorer neighborhoods investors were heavily buying?

5. Third, the bulk of mortgage lending and losses — measured by dollar volume — occurred among middle-class and high-income borrowers. True, but they are looking at people buying much more expensive homes. The reality is that homes in the Midwest, South and most areas were far less expensive than in the Sand States. So this would distort things measurably.

6. Specifically, they question the notion that the main engine of the bubble was the abusive peddling of mortgages to the uninformed poor. In 2006, the poorest 30 percent of borrowers accounted for only 17 percent of new mortgage debt.  At this point, I get totally pissed off. The reason is that the homes they bought were far less expensive than in Ca and elsewhere.

I have reviewed over 5000 defaulted mortgages in depth. I have also done statistical analysis on over 10 million GSE loans. I can tell you that lower middle and lower income people bore the brunt of the damage (think $50k or less). They were targeted with products that they did not understand, and could not afford.

As I learned in the past two years with people I was working with, statistical analysis is only as good as the assumptions you make. And when you go into a project with preconceived ideas, the work you do will have a bias towards the conclusions that you are trying to determine.

Damned academics should go back to their ivory towers and hide. They should not be seen or heard.




 

[ppulatie]

I am now heavily involved in a False Claims FHA action regarding  HAMP modification issues. We are looking for people who have:

1. Been in active modification processing or an actual modification or trial modification and who were foreclosed upon.

2. People who have been in active modification efforts for over 2 years and keep getting denied.

3. People who were given Trial Modifications and after making the payments, were denied for modification.

4. People who were given modifications, but began missing payments shortly after because the terms were so bad.

All applicable cases will go to the Department of Justice to be used as evidence of wrongdoing. The DOJ is targeting the largest servicers, including Nationstar, Ocwen,  B of A,  Chase, Wells, IndyMac, SPS, SLS, HMSI. I will be personally reviewing the facts and documents of each case to determine whether it meets the parameters of what we are looking for.

There is no guarantee that it will benefit the specific homeowner. However, each case sent to DOJ by me will show evidence of wrongdoing. Worst case, a homeowner could use the DOJ having the case to influence the servicer to consider modifying the loan.

This evaluation is of no cost to the homeowner. If you know of anyone that could be applicable, they can email me at patrick@lfianalytics.com for more details.

[DougMacG]

Regarding the academic authors and analysis, Pat, I agree with you on all those points. 

In addition to all of the policy blunders, fraud, deception, and monetary flooding, etc. I would agree with Samuelson that there was a bubble mentality at work.  People were buying, selling, lending, borrowing and appraising things for more than they were worth. 

I was buying in Mpls after the crash for 15 cents on the dollar of what they sold for in the peak years.  The previous sales weren't homeowner or investors.  They were what we used to call pigeons.  People just doing transactions, borrowing up to false value (criminally IMO) with no intent of ever living there or holding the property.

[ppulatie]

Absolutely Bubble Mentality at work.

BTW, see the Housing Starts for Jan and also the Existing Home Sales.  Certainly there is no Housing Recovery ongoing, contrary to what people think.  Looks like a downward trend from Jun on. And looks like levels are equal to 1999 activity.  (Don't forget, these are seasonally adjusted.)

[ppulatie]

Wow.........I am impressed with the New Home Sales Recovery

[Crafty_Dog]

Existing Home Sales Increased 6.1% in March To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 4/22/2015

Existing home sales increased 6.1% in March to a 5.19 million annual rate, coming in above the consensus expected 5.03 million annual rate. Sales are up 10.4% versus a year ago.
Sales rose in all major regions of the country. The increase in sales was due to gains in both single-family homes as well as sales of condos/coops.
The median price of an existing home rose to $212,100 in March (not seasonally adjusted) and is up 7.8% versus a year ago. Average prices are up 5.1% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) declined to 4.6 months in March from 4.7 months in February. The faster selling pace more than offset an increase in inventories.

Implications: Sales of existing homes rebounded nicely in March, coming in at a 5.19 million annual rate, the best level since September 2013. Sales are up 10.4% from a year ago, and the underlying trend suggests more solid gains in the year ahead. Sales of distressed homes (foreclosures and short sales) now account for only 10% of total sales, down from 14% a year ago. All-cash buyers are down to 24% of sales from 33% a year ago. As a result, even though total sales are up 10.4% from a year ago, non-cash sales (where the buyer uses a mortgage loan) are up 25.3%. What this means is that when distressed and all-cash sales eventually bottom out, total sales will start rising at a more rapid pace. So even though credit (but, not liquidity) remains relatively tight, we see evidence of a thaw, which suggests overall sales will climb at a faster pace in the year ahead. What’s interesting is that the percentage of buyers using credit has increased as the Fed tapered and then ended QE. Those predicting a housing crash without more QE were completely wrong. Another good sign is that the inventory of existing homes increased 100,000 in March, the largest for any March since 2006. More supply should help sales growth in the months ahead. The median sales price of an existing home rose to $212,100 in March, up 7.8% from a year ago. In other housing news this morning, the FHFA price index, which measures homes financed with conforming mortgages, increased 0.7% in February and is up 5.4% from a year ago. That’s a mild deceleration from the 7.1% price gain in the year ended in February 2014. Expect more of the same in the year ahead, with price gains continuing at a slower pace as more home building increases supply.

[Crafty_Dog]

Data Watch
________________________________________
Existing Home Sales Declined 3.3% in April To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 5/21/2015

Existing home sales declined 3.3% in April to a 5.04 million annual rate, coming in below the consensus expected 5.22 million annual rate. Sales are up 6.1% versus a year ago.

Sales declined in all major regions of the country except the Midwest. The decrease in sales was due a drop in single-family homes while sales of condos/coops remained unchanged in April.

The median price of an existing home rose to $219,400 in April (not seasonally adjusted) and is up 8.9% versus a year ago. Average prices are up 5.5% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) increased to 5.3 months in April from 4.6 months in March. This was due to an increase in inventories as well as a decline in the pace of sales.

Implications: Lets hold off on housing for a moment. The most exciting news today was that initial claims for unemployment insurance came in at 274,000, bringing the four-week moving average to 266,000, the lowest level since April 2000. This, paired with a decline in continuing claims to the lowest level since November 2000, signals greater strength in the labor market and further supports the Fed raising rates sooner rather than later. Sales of existing homes took a breather in April; however this marks the second consecutive month of sales above an annual rate of 5 million units. Sales have now increased year over year for seven months, showing that demand continues to grow. Sales are up 6.1% from a year ago, and the underlying trend suggests more solid gains in the year ahead. Sales of distressed homes (foreclosures and short sales) now account for only 10% of total sales, down from 15% a year ago. All-cash buyers are down to 24% of sales from 32% a year ago. As a result, while total sales are up a moderate 6.1% from a year ago, non-cash sales (where the buyer uses a mortgage loan) are up a more robust 18.6%. What this means is that when distressed and all-cash sales eventually bottom out, total sales will start rising at a more rapid pace. So even though credit (but, not liquidity) remains relatively tight, we see evidence of a thaw, which suggests overall sales will climb at a faster pace in the year ahead. What’s interesting is that the percentage of buyers using credit has increased as the Fed tapered and then ended QE. Those predicting a housing crash without more QE were completely wrong. The inventory of existing homes increased 10% in April, however it remains 0.9% lower than a year ago. Lack of supply is one of the main drivers behind continuing price increases and houses on the market selling faster in April (39 days) than at any time since July 2013 (32 days). The median sales price of an existing home rose to $219,400 in April, up 8.9% from a year ago. In other news this morning, the Philadelphia Fed index, a measure of strength in East Coast manufacturing, declined to 6.7 in May versus 7.5 in April, signaling continued Plow Horse growth in that sector.

[G M]

Listen to Wesbury, the economy is back! Yes!

[Crafty_Dog]

Existing Home Sales Increased 3.2% in June To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/22/2015

Existing home sales increased 3.2% in June to a 5.49 million annual rate, beating the consensus expected 5.40 million. Sales are up 9.6% versus a year ago.
Sales rose in all major regions of the country. The increase in sales in June was mostly due to single-family homes, but sales of condos/coops were also up in June.
The median price of an existing home rose to $236,400 in June (not seasonally adjusted) and is up 6.5% versus a year ago. Average prices rose 4.6% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) declined to 5.0 months in June from 5.1 in May, as a faster sales pace more than offset an increase in inventories.

Implications: The market for existing homes continued to heat up in June, hitting the fastest sales pace in over 8 years despite tight supply and record high prices. Sales of previously owned homes increased to a 5.49 million annual rate in June, beating consensus expectations and representing the fastest sales pace since February 2007. Sales were up in every major region of the country and should continue to trend upward. All-cash buyers accounted for 22% of sales in June, down from 32% a year ago. As a result, while total sales are up a healthy 9.6% from a year ago, non-cash sales (where the buyer uses a mortgage loan) are up a more robust 25.7%. So when all-cash sales eventually bottom out, total sales will start rising at a more rapid pace. The gain in mortgage-financed sales suggests a long-overdue thaw in lending. What’s interesting is that the percentage of buyers using credit has increased as the Fed tapered and then ended QE. Those predicting a housing crash without more QE were completely wrong. In fact, rising rates appear to be increasing the pace of sales, as buyers look to lock in terms before the looming fed rate hikes push borrowing costs higher. The details of today’s report were solid as well. Rising prices are bringing sellers to market (inventories rose for a fifth consecutive month in June), but supply hasn’t been able to keep pace with demand. In fact, the average time it took to sell a home in June decreased to 34 days from 40 in May, the fastest pace since recording began in 2011. Look for more inventory to come to market in the year ahead as “on-the-fence” sellers move to take advantage of higher prices. In other housing news this morning, the FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.4% in May and was up 5.7% from a year ago.

[G M]

Hopefully Pat will drop by to correct the distortions.

[Crafty_Dog]

By
Art Patnaude and
Peter Grant
Updated Aug. 12, 2015 8:00 p.m. ET
13 COMMENTS

Investors are pushing commercial real-estate prices to record levels in cities around the world, fueling concerns that the global property market is overheating.

The valuations of office buildings sold in London, Hong Kong, Osaka and Chicago hit record highs in the second quarter of this year, on a price per square foot basis, and reached post-2009 highs in New York, Los Angeles, Berlin and Sydney, according to industry tracker Real Capital Analytics.

Deal activity is soaring as well. The value of U.S. commercial real-estate transactions in the first half of 2015 jumped 36% from a year earlier to $225.1 billion, ahead of the pace set in 2006, according to Real Capital. In Europe, transaction values shot up 37% to €135 billion ($148 billion), the strongest start to a year since 2007.

Low interest rates and a flood of cash being pumped into economies by central banks have made commercial real estate look attractive compared with bonds and other assets. Big U.S. investors have bulked up their real-estate holdings, just as buyers from Asia and the Middle East have become more regular fixtures in the market.

The surging demand for commercial property has drawn comparisons to the delirious boom of the mid-2000s, which ended in busts that sunk developers from Florida to Ireland. The recovery, which started in 2010, has gained considerable strength in the past year, with growth accelerating at a potentially worrisome rate, analysts said.
China’s Anbang Insurance Group in February paid $1.95 billion for New York’s Waldorf-Astoria, a record price for a U.S. hotel. ENLARGE
China’s Anbang Insurance Group in February paid $1.95 billion for New York’s Waldorf-Astoria, a record price for a U.S. hotel. Photo: Brendan McDermid/Reuters

“We’re calling it a late-cycle market now,” said Jacques Gordon, head of research and strategy at Chicago-based LaSalle Investment Management, which oversees $56 billion of property assets.

While it isn’t time to panic, Mr. Gordon said, “if too much capital comes into any asset class, generally not-so-good things tend to follow.”

Regulators are watching the market closely. In its semiannual report to Congress last month, the Federal Reserve pointed out that “valuation pressures in commercial real estate are rising as commercial property prices continue to increase rapidly.”

Historically low interest rates have buoyed the appeal of commercial real estate, especially in major cities where economies are growing strongly. A 10-year Treasury note is yielding about 2.2%. By contrast, New York commercial real estate has an average capitalization rate—a measure of yield—of 5.7%, according to Real Capital.

By keeping interest rates low, central banks around the world have nudged income-minded investors into a broad range of riskier assets, from high-yield or “junk” bonds to dividend-paying stocks and real estate.

Lately money has been pouring into commercial property from all directions. U.S. pension funds, which got clobbered in the aftermath of the crash, now have 7.7% of their assets invested in property, up from 6.3% in 2011, according to alternative-assets tracker Preqin.

Foreign investors also have been stepping on the gas. China’s Anbang Insurance Group in February paid $1.95 billion for New York’s Waldorf-Astoria, a record price for a U.S. hotel. Another Chinese insurer, Sunshine Insurance Group Co., in May purchased New York’s glitzy Baccarat Hotel for more than $230 million, or a record $2 million per room. China Life Insurance Group Co. and Ping An Insurance Co. in April bought a majority stake in a $500 million development project in Boston.

China is looking to other markets as well. Last month, its sovereign-wealth fund bought nine office towers in Sydney and Melbourne, as well as 10 shopping centers in France and Belgium.

“What has been fascinating has been their speed of deployment,” said Iryna Pylypchuk, director of global research at global real-estate services firm CBRE Group Inc.

In Europe, buyers are venturing into markets like Madrid and Dublin, where property values haven’t regained precrisis peaks. U.K. firm M&G Real Estate last month made its first investment in Spain, paying €90 million for a vacant 35,000 square meter (376,740 square feet) office building in central Madrid that it will refurbish and rent to U.K. advertising agency WPP PLC.

“We’re still buying at the low point in Spain,” said Simon Ellis, manager of M&G’s European core property fund, which has spent €360 million in Denmark, Italy, Germany and France since March.

The turbocharged activity is a far cry from the depths of the bust. Commercial real-estate prices and sales volume plummeted after the 2008 crash. They began to rebound in a few office markets like New York City and Washington, D.C. in 2010. Investors also began buying multifamily buildings on the correct assumption that the carnage in the housing market would result in surging demand for rental apartments.

RXR Realty, which began buying Manhattan office buildings in 2009, earlier this year sold a roughly half of its stake in six buildings to Blackstone Group LP in a deal that valued the buildings at $4 billion, more than twice what RXR paid for them.

A valuation index compiled by Green Street Advisors fell to 61.2 in 2009 from 100 in 2007. It crossed 100 again in 2013. Last week it was at a record 118.

Analysts warn that property values could fall if interest rates rise sharply. The Federal Reserve has signaled it’s moving toward interest-rate increases later this year. A surge in rates could have repercussions throughout global financial markets, especially if falling prices trigger a wave of defaults on mortgages.

But bulls counter that even if interest rates rise, property values might not necessarily be hurt if higher interest rates are accompanied by higher inflation, which typically allows landlords to raise rents. They also point out that so far this cycle hasn’t seen the kind of overbuilding that has destabilized real-estate markets in the past.

The Fed and others have noted that banks have been loosening their lending standards. In all, banks had $1.7 trillion worth of commercial real-estate loans outstanding at the end of the first quarter of this year, just 2.6% shy of the record hit in the first quarter of 2009, according to Trepp LLC, a real estate data service.

New issues of commercial mortgage backed securities are on pace to clock in at about $110 billion this year, a postcrash high and a 17% jump from 2014, according to Commercial Mortgage Alert, an industry publication.

Moody’s Investors Service also has sounded the alarm about loosening credit standards.

“We would have hoped the lessons from the financial crisis would have been more durable,” said Tad Philipp, Moody’s director of commercial real-estate research.

Write to Art Patnaude at art.patnaude@wsj.com and Peter Grant at peter.grant@wsj.com

Corrections & Amplifications:

The value of U.S. commercial real-estate transactions in the first half of 2015 totaled $225.1 billion. An earlier version of this article misstated the amount. Also, valuations of office buildings reached post-2009 highs in New York, Los Angeles, Berlin and Sydney. An earlier version of this article incorrectly said post-1999 highs. (Aug. 15, 2015)

[DougMacG]

"Low interest rates and a flood of cash being pumped into economies by central banks..."

That's right, self inflicted wounds and unintended consequences.  Who has been warning about that??  (All of us here.)  How about quit doing that which is harming us instead of worrying about the value of real estate.

More dollars (or euros, yuan) chasing a stagnant amount of goods and services...  they have a term for that...  Maybe the real estate that hasn't changed didn't go up in value.  Maybe the currency we measure it with went down in value.  

“if too much capital comes into any asset class, generally not-so-good things tend to follow.”

A bubble means that values are too high and will come down.  But if you believed in free market dynamism, who cares if values go up or come back down as they seek their correct level.  

"Regulators are watching the market closely..."

And who is watching the 'regulators'?

Of course we are afraid of the consequences of weening ourselves (and other countries) off of QE, deficit spending, welfare abuse, corporate welfare, and everything else.  Someone is going to get hurt.

[ppulatie]

Hi GM,

Finally “dropping by”. Been engaged in several projects of late that are taking considerable time, not including the normal attorney consulting business on foreclosures that I do.
I can’t tell you just how “tired” I have grown of trying to correct the idiots like Wesbury. I just cannot believe that they write the crap that they do and in fact believe what they write.

For Wesbury, his comments on the Jun Existing Sales is just plain taken out of context. To cite that Existing Sales are up without consideration of what the May and Jun markets have done in Pending Sales is just plain irresponsible.

Existing sales are home resales that have closed for the month cited, in this case Jun. Yes, they were up 3.2% over the previous month and 9.6% year over year, but that is not representative of the issue.

Existing Sales is a lagging indicator of Pending Sales. Pending Sales are when the contracts are written and Existing Sales are when they close. So in this case, Existing Sales reflect contracts written in Apr and May, with most being in Apr and fewer in May. (A few Feb or Mar contracts might be included and some Jun contract cash sales as well.) Since Apr & May Pending Sales were up, then Jun Existing Sales were going to be up. But to see the trend, we have to look at Pending Sales for Jun.

After 5 months of increases during the hottest part of the selling season, Jun Pending Sales dropped 1.2% over May. And the drop can be expected to continue in Jul and Aug, then really falling off in the autumn and winter months.

Additionally, the rate of Existing Sales is at 5.49 million per year, seasonally adjusted. Pray tell, how is it possible that with such improvements, we are still under 6 million Existing Sales per year when the normal prior to the crash was over 1 m, and at times 1.5m? These numbers continue with interest rates at record lows, and sales have not reached a breakout point.  So if the Fed increases rates, then sales will again drop. (BTW, an increase in interest rates will cause less affordability issues, leading to more potential buyers being priced out of the market. Then values will again fall, from 10 to 15% after about a 1% to 1.25% interest rate increase. That means more negative equity and less sellers.)
We having been hearing regularly from Wesbury and others about how the market continues to improve with new home starts. Why are Housing Starts still stumbling along with most of the increases in multi-unit and apartments and not Single Family homes? Why haven’t they reached a breakout point as well? They remain at historical lows like Existing Sales do. (When there are “rapid” increases in monthly Housing Starts, you have to look at the area where the increases have occurred. Each time, you find that the month before has shown some type of event and reduction in starts that has then caused the following month to be greater than normal which caused the “increased”.

Here is something that is very telling and is occurring with Home Sales each month, yet no one is bringing it up:

21% of all home sales are vacation/second home sales.   These are levels last seen in 2006. And during that period of time, the vacation homes were largely fraudulent. They were investment property purchases which were claimed to be second homes for the lower interest rates and add ons. (The percentage growth over the past three years is 21%, 57%, and 140%, unheard of before.) In other words, occupancy fraud has returned again.

To understand this, one looks at two criteria. The first is the all cash sales in vacation homes. It has dropped from 50% to 30% in just 4 years. Why pay cash when you can finance, just like from 2002 to 2007?

By itself, an argument can be made that this is not relevant, but then one must look at the mileage difference in vacation homes from the owner occupied property. With this, we see that the Median Distance in 2014 has plunged in three years from 435 miles to 200 miles. (In 2006, median distance was 200 miles, down from 390 miles in 2003.)
Next, we look at the Median Price of vacation homes. In 2014, it was $150,000, down from $168,700 in 2013. This was at a time when home prices were rising 5% or greater nationally.

The NAR is making excuses for these numbers and the drop in prices of vacation homes, but they are the same excuses as in 2006, and we saw what happened there.
I could get into the real technicals at this point, but the bottom line is that once again, the small time homeowner is buying investment properties cloaked as second homes. This will not end well for them.

Wesbury and others fail to look at the inside numbers to make a true evaluation of what is going on in the industry. Maybe they don’t have the time to spend in truly evaluating the situation, or they just don’t understand housing with its many components that affect its.  When one dwells down into the many factors, all is not well and no improvement is really going on.

One of the projects that I have been working on is the writing of a book on the Housing Crash and what caused it. I am trying to take into account the significant factors that contributed to the Crash, not just blaming it on lenders, sub-prime borrowers or the Community Reinvestment Act. Someone must tell the story of why things occurred as it did, and why it was inevitable that such would occur.

Also, I am trying to present the causes of why the Foreclosure Crisis remains, the failure of HAMP and other programs, and why Housing is not recovering and why it won’t for another decade at the very least and likely two decades. (A major reason is that the move up buyers no longer exists. With HARP and the low interest rates, the majority of people now have loans from 3 to 4% and are happy to remain in the homes that they currently own. Who the hell would buy a home with the inflated prices again occurring and expecting another fall in values, and if the Fed increases rates, with interest rates that will be substantially higher than what they have now?)

Finally, I will end with what needs to be done to revitalize the housing and lending industry, beginning with the repeal or reform of Dodd Frank.

Just more fun and more things to do........

[ppulatie]

DougMacG,

The Fed "had" to worry about the value of real estate from their wrong headed perspective. Here are the reasons why:

1. Homeowners underwater by 125% or greater had higher rates of default. Over 140%, strategic defaults became the norm.

2. Banks who held the loans in portfolio lost money on underwater foreclosures. To break even, Loan to Values had to be under 80%.

3. Using Mark to Market, banks were insolvent as long as values remained depressed.

4. Without Equity in the homes, there was no Move Up Market, which is the key factor in resales.

5. Without Equity, PMI groups would lose more money on foreclosures.

6. No refinance market existed for underwater homes until HARP.

7. The loans and properties that supported MBS were held by Wall Street and Investors. Underwater loan foreclosures resulted in greater losses to those entities.

8. Positive Equity provides hope to homeowners that housing will recover, so they try to keep the home payments current.

Pundits are proclaiming about how great it is that home values are almost back to 2007 values. What a bunch of crap! Home values are once again outstripping the ability of the middle class to buy in the Sand States and the West. As well, the increased values drive up rental rates which makes the lower income groups that much more disposable income restrained.

Keep a watch out. After the 2016 election, Foreclosure Crisis 2.0 begins. Defaults, recession, job loss,  dropping values, increased interest rates on adjustable rate 1st and 2nds, credit cards and lines of equity, modification re-defaults, increased living expenses, inflation for food and utilities, obamacare and medical and who knows what else is going to return us to 2008 and 2009.

[ppulatie]

Let's see...........Existing Home Sales were the "highest" since Feb 2007. Up 2% at an annualized rate of 5.59m. Am I supposed to be impressed by this?

For cripes sake...........interest rates are still the lowest on record and sales cannot get above 5.59m or cannot get higher prior to the Crash?  (The Crash actually began in 2007 with the collapse of subprime lending in Jan 2007 and then with Alt A in Mar 2007.)  Also, most of the contracts for Jul were written in May, a high month for pending sales, with the NAR reporting that the "Index" was at 112.3, up from Apr at 111.6.  Since the Jun Index was 110.3, think that Aug will show a significant decline? I do......


U.S. Existing Home Sales Hit Prerecession Pace
Sales rose 2% in July, highest since February 2007, National Association of Realtors says

WASHINGTON—Existing home sales in July climbed for the third straight month to hit their highest pace since before the recession, buoyed by strong sales in single-family properties.

The pace of existing home sales increased 2% last month from June to a seasonally adjusted rate of 5.59 million, the National Association of Realtors said Thursday. Last month’s sales pace was the highest since February 2007, and 10.3% higher than a year earlier.

Sales for June were slightly revised down to 5.48 million from an initially reported 5.49 million.

Economists surveyed by The Wall Street Journal had expected July sales would dip 0.7% to a pace of 5.45 million.

Tight inventories have driven prices up, keeping some buyers out of the market. Lawrence Yun, NAR’s chief economist, noted that first-time buyers declined to 28% of all buyers, the lowest share since January. Rising rents across the country are also eating into the savings that people might put toward a down payment.

“We have to recognize that we have a broad-based housing shortage,” said Mr. Yun. “Home builders have been essentially out of the game or underproducing for the past decade.”

According to mortgage company Freddie Mac, the average rate for a 30-year fixed-rate mortgage rose in July to 4.05% from 3.98% in June.

Mortgage rates are still low by historical standards, but could rise in the fall if the Federal Reserve raises interest rates.

Sales of existing homes account for roughly 90% of all purchases in the U.S. At the current pace of sales it would take 4.8 months to exhaust the supply of homes on the market, down from 5.6 months a year ago, the NAR said Thursday. Total housing inventory fell 0.4% at the end of July to 2.24 million existing homes available for sale, 4.7% lower than a year ago.

The median sale price for a previously owned home slipped slightly to $234,000 from June’s $236,300, but it is still 5.6% higher than a year earlier. July’s prices mark the 41st straight month of year-over-year price gains.

Distressed property sales fell to their lowest share of the market since October 2008, when the NAR started tracking them. They comprised 7% of the market, a fall from 8% in June.

[ppulatie]

BTW,

Notice that the NAR never reports actual Pending Sales numbers? They only do it on an Index. That is because they do not want to report how many Pending Sales cancel, or how long the sales take to close. This way, they can continue to manipulate the numbers.

[ppulatie]

See the GREAT NEWS about New Home Sales?  Up 5.4% over Jun and 25.8% Year over Year!!!!

507k yearly vs 480k in Jun.  And 507k vs 403k Year over year!!!!

These are Seasonally Adjusted Numbers. Let's see what the non-manipulated numbers say.


43k Sales in Jul 15 vs 45k in Jun 15.  (Can't be right!  If so, then there were less sales in Jul than in Jun. Where did the 5.4% increase come from?  Common Core Math?)

43k in Jul 15 vs 35k in Jul 2014.  (That is "better". 23% up.)


Fun with Seasonally Adjusted Numbers. But let's take a look at a couple of graphs from Calculated Risk......





Doesn't look like much of a recovery to me.  Now let's look at the Non Seasonally Adjusted Monthly numbers from 2005 on.




This did not impress me either.  Maybe I don't know how to read graphs..........

[ppulatie]

Before anyone posts Wesbury and Pending Home Sales, I thought that I would get this in.

 Seasonally Adjusted Index                     Non Seasonally Adjusted Index

Jun 2015   110.04                                               136.8

Jul 2015    110.09                                               121.0

Increase         0.5%                                            -11.5%

Let's manipulate the data with Seasonal Adjustments so that it looks better than what it is.

It will be "fun" to see what Existing Sales for Aug & Sep show. Pending for Jul will show up in those months.

[ppulatie]

HOPE NOW is the government program for "stopping" foreclosures. Every month, they put out the current "statistics" of Home Retention.  Key points:

1. Since 2007, 24m workout plans and 6m proprietary mods. Another 6m in foreclosures occurred.  Here is the problem with this.  In 2007, there were 51m homes in the US with 1st mortgages. That would be 70% of all homes with mortgages in the country.  Being really conservative, lets assume that 50% of the plans were on 2nd mortgages. That is still 35% of all homes with mortgages. Oops.......

2. There have been about 1.5m HAMP mods. Add this to the 6m proprietary mods, that is 7.5m.  Already, HAMP has had about half of all mods re-default, and this is before the Mod Interest Rates begin to increase after 5 years. So of the almost 900k HAMP mods still in effect, how many are going to re-default?  Most expect that more than 75% will do so.  Another oops...

3.  The proprietary mods, 6m, have already had at least 40% to re-default. The rest are going to fail when Interest Rates increase also.

4.  Non-foreclosure solutions of 411k v 89k in foreclosures. 137k were short sales or mods. The rest, except for a handful of "repayment plans" were homes that were "lost" and the homeowners ended up losing the home.  Most distortion.

(BTW, repayment plans are a joke. I have two that are going to litigation done by WF. The first plan required that the homeowner pay $78k the first month, and then $5k for the 2nd and 3rd month of which both were equal to the regular monthly payment. The borrower had only $26k in his business account, most of which would cover business expenses. There was $500 in personal accounts. He had no ability to make the $78k first payment since he did not have the income or savings, yet Wells made this offer. What a joke. And this is typical of repayment plans.)

I could go on and on about all the issues involved in the full report, but this gives you an idea of how the government HOPE data is manipulated to make things look better than what is actual. Just like what the NAR and Census Bureau do in reporting Sales and Start numbers.

HOPE NOW: Mortgage industry achieves 24M solutions and 6M loan mods
411,000 non-foreclosure solutions for homeowners during 2Q

In the second quarter of 2015, approximately 411,000 homeowners received non-foreclosure solutions from mortgage servicers, according to HOPE NOW, the voluntary, private sector alliance of mortgage servicers, investors, mortgage insurers and non-profit counselors.

Since 2007 the mortgage industry has completed a total of 24 million workout plans and six million proprietary loan modifications for homeowners — reaching another milestone in its efforts to assist families with troubled mortgages.

This compares to just over six million foreclosure sales completed in the same time period.

From April through June 2015, non-foreclosure solutions outpaced completed foreclosure sales by a margin of more than four to one (411,000 solutions, vs. 89,000 foreclosure sales). For every one foreclosure sale, mortgage servicers offered 4.6 solutions.

This is due to the fact that there are several long term and short term solutions available to at-risk homeowners when facing delinquency or foreclosure.

Permanent loan modifications in the second quarter of 2015 totaled approximately 113,000 and short sales totaled 24,000. Other non-foreclosure solutions (including repayment plans, deeds in lieu, other retention plans and liquidation plans) made up the rest of the total number. When homeowners do not qualify for long term permanent loan modifications, mortgage servicers continue to look for short term options that, in many cases, lead to a permanent solution.

Of the 113,000 loan modifications completed for the second quarter of 2015, about 78,000 homeowners received proprietary loan modifications and 35,738 homeowners received loan modifications completed under the Home Affordable Modification Program.

      Q2 2015 vs. Q1 2015 – Loan Mods Decrease 2%, Serious Delinquencies Decrease 6%, Foreclosure Sales Decrease 7%
 
      During the second quarter of 2015, there were an estimated 113,000 loan modifications completed, compared to 116,000 during the previous quarter – a slight decrease of   
      2%.
 
      Serious delinquencies of 60 days or more declined from 1.85 million in Q1 2015 to 1.74 million in Q2 2015 – a 6% decline. (Delinquency data is extrapolated from data
      received by the Mortgage Bankers Association for the Q2 2015)
 
      Foreclosure sales also decreased from the previous quarter – 89,000 in Q2 2015 vs. 96,000 in Q1 2015, a decrease of 7%.

Comparing the second quarter to the first quarter of 2015:

      Total non-foreclosure solutions were approximately 411,000 in Q2 2015, compared to 444,000 in Q1 2015 – a decrease of 7%.
 
      Foreclosure starts were approximately 176,000 in Q2 2015, compared to 212,000 in Q1 2015, a decrease of approximately 17%. ?Q2 2015 vs. Q2 2014.

The 89,000 foreclosure sales in the second quarter of 2015 compares to an estimated 117,000 completed during the second quarter of 2014, representing a significant decline
year over year.?Here are some other key metrics for Q2 2015 vs. Q2 2014:

     Total solutions for Q2 2015 were approximately 411,000 vs. 456,000 for Q2 2014 - a decline of 10%. ?
 
     Loan mods for Q2 2015 were approximately 113,000 vs. 125,000 for Q2 2014 – a decline of 10%. ?
 
     Foreclosure starts for Q2 2015 were approximately 176,000 vs. 203,000 for Q2 2014 – a decrease of 13%. ?
 
     Short sales completed for Q2 2015 were approximately 24,000 vs. 35,000 for Q2 2014 – a decrease of 31%. ?
 
     Deeds in lieu for Q2 2015 were approximately 5,400 – a decrease of 28% from Q2 2014 (7,500). ?
 
     Delinquencies of 60+ days were approximately 1.74 million for Q2 2015, compared to 1.98 million for Q2 2014 – a decline of 12%. ?

[Crafty_Dog]

Great to have you back with us Pat!

BTW, for the record, often I post Wesbury and Grannis because we need to make sure that we do not become an echo chamber.  IMHO, agree or disagree, I think both Grannis and Wesbury are excellent economists; they give data and pose questions we need to consider.

[ppulatie]

CD,

Of course you do!! We know better.....every time Webury writes, you read and then do a purchase on Ameritrade....lol.

Some of the things that I will be posting will be done so as to formulate my own thoughts for the book. I can use this as a sounding board to either make things clearer, or to refine my ideas and statements.

There is just so much going on in the industry that people would be shocked. Now that the crisis has "passed", things have returned to business as usual. For example:

http://www.wsj.com/articles/fannie-mae-unveils-mortgage-program-to-help-minority-borrowers-1440522064?mod=rss_Politics_And_Policy

Fannie is going to allow non-occupant co-borrowers on high Loan to Value loans. And also income from "boarders". I can see it now. The new fraud is going to be rampant. There will be people "renting" rooms for $1000 per month, and Fannie will approve the loans.  Yet, there will be no real people boarding. 

These will be some of the highest default risk loans made.

[Crafty_Dog]

Hey!  For the record I no longer do much of anything in the market.   

[G M]

Hey!  For the record I no longer do much of anything in the market.   

You should put your house on the market and gtfo of California while you can. Pocket the equity and own something nice free and clear.

[ppulatie]

So you are buying homes as rental properties because home values always go up? Correct rents and appreciation?   

[DougMacG]

So you are buying homes as rental properties because home values always go up? Correct rents and appreciation?   

That was aimed at Crafty I think, but I always bought rental property assuming they would never go up in value and the government would take the tax benefit away.  In some cases, I was right.

[ppulatie]

Yep, I am yanking CD's chain for the fun of it..

Had two cases today that I have been working on, trying to bail an attorney and a homeowner out of trouble.

1. Borrower is given a modification. The attorney files a lawsuit that alleges violations in CA Homeowner Bill of Rights and other allegations for processing the modification. The problem is that once the modification was given, all violations no longer applied. Even worse, he missed that 3 months after the mod was given, the servicerr changes the terms, entailing a breach of contract.

2. A homeowner with three properties contacted me two months ago. He has not made payments in 5 years on one property. Now he is engaged in a lawsuit with his brother and a known scammer. Allegations include Elder Abuse. Anyway, he got his Notice of Trustee Sale this week. Now he wants me to come to the rescue, but he wanted to set up a payment plan. Screw him, all upfront or nothing. And being a rush job, it is even more money.

Homeowners are their own worst enemies.....

[Crafty_Dog]

Hey, I can take it , , , and dish it out too 

[ppulatie]

Like Jeb Bush?   

[Crafty_Dog]

Look everyone, this forum needs to remember all the times we have been wrong, even though they are far less than we have been right.

For example,

a) for years we have predicted mass inflation;
b) we missed a near tripling of the Dow, even as most of us rag on Wesbury and Grannis who essentially got it right

and, ahem,

c) though the predictions of doom may well ultimately prove to be right, years of price growth have been missed.

The search for Truth to which this forum is dedicated requires that we too continuously re-examine our premises and consider worthy points of view other than only ones with which we already agree.

[ppulatie]

Agreed CD. But if not for the massive manipulation of Interest Rate, QE and other Fed programs, where would we be?

Sure, the Stock Market is up, but only because of the Fed actions. Yet, the middle class is not getting better.

The Housing Market is "up" only after massive amounts of QE buying MBS, both Private Label pre-existing toxic loans, and then most of the new GSE originations. Add in the low interest rates and this is all it got?

Home values have "increased" but this is only the result of a housing market that is on life support. Values have increased solely because of the lack of inventory and "hot money" buying up inventory. Now that the hot money has gone, values are increasing at a much lower rate. (Hmmm, something else to add to the "recovery" chapter. That money is replaced by private investors, often engaging in occupancy fraud.

What happens when Interest Rates increase? Home values fall. Loans become more expensive. The ARMs being taken out now and the legacy ARMs will go nuts and drive more foreclosures. Home Sales will fall because of the higher payments needed.

BTW, why is inventory so low in many of the hardest hit foreclosure states? It is because lenders are still not foreclosing. Loans are being modified with terms that will cause re-default within a year or two. Lenders are not listing their foreclosure inventory because it would be like China dumping products in the US. Lower prices, hence more losses.

Sorry, but I don't "buy" artificial manipulation of market factors as being a "meaningful" recovery of either Housing, the Market, or other parts of the economy.

[Crafty_Dog]

Here we get into David Gordon's distinction between making a profit and being a prophet.

I suspect and fear we will be proven right over time, but in the meantime we have left a lot of profit on the table.  Missing a near tripling of the DOW and NAZ is no small thing.  Looking in the rear view mirror, we see the near zero interest rate policies of the Fed puffing up the markets-- why did we not see this in advance?

Also, we were dead wrong about the Fed's injection of reserves into the banking system causing inflation.  Scott Grannis was right.

[ppulatie]

CD,

My only remark to inflation is this....

Does anyone really know how to calculate inflation? The government uses an  inflation measure designed to show low inflation so as to keep down Cost in Living raises, SS increases and much else.

Ask any middle class person who has to work for a living and worries about where the money will come from to meet costs and expenses monthly whether they believe that inflation is under 2%. Ask them about food costs, utility costs, health care and all the other things that they have to buy. They certainly have another viewpoint that is NEVER considered by anyone.

[Crafty_Dog]

I agree.

That said, whatever is the true level, it is far less than the runaway inflation regularly predicted here for years.

[ppulatie]

One of the key issues facing Mortgage Lending is the risk of new Mortgage Loans defaulting. The CFPB and Dodd Frank took action to "reduce" risk by approving new Mortgage Lending rules.

Ed Pinto of the American Enterprise Institute and formerly Credit Risk Officer of Fannie Mae, created a Mortgage Risk Index for new loans being approved. The Index rates the risk of default of both GSE and FHA/VA loans. The methodology he used was similar to what I used with my former partners, though ours was much more "advanced" in metrics. However, the results were similar in nature.

The most recent look at Mortgage Risk for new loans originated in Jul 2014. I have highlighted in bold key points. (The percentages quoted are the percentage of High Risk Default loans for the month.)

National mortgage risk index up slightly in July
Risk has increased every month since January 2014

The composite National Mortgage Risk Index for Agency purchase loans stood at 12.09% in July, down 0.2 percentage point from the average for the prior three months, but up 0.6 percentage point from a year earlier.

The monthly composite, produced by the American Enterprise Institute’s International Center on Housing Risk, has increased year-over-year in every month since January 2014.

Agency loan originations continued to migrate from large banks to nonbanks in July.

This shift in market share has accounted for much of the upward trend in the composite NMRI, as nonbank lending is substantially riskier than the large bank business it replaces.   

“Historically low mortgage rates, an improving labor market, and loose credit standards especially for first time buyers, combined with a 35-month-long seller’s market for existing homes, continue to drive up home prices faster than income growth,” said Edward Pinto, codirector of the Center.

Increasing leverage in a seller’s market is pushing up real home prices, now 12.5% above the trough reached in the second quarter of 2012, moving the goal post further away for many aspiring low- and middle-income homebuyers.

The NMRI results are based on nearly the universe of home purchase loans with a government guarantee.

In July, the NMRI data included 264,000 such purchase loans, up 12% from a year earlier. With the addition of these loans, the total number of loans that have been risk rated in the NMRI since November 2012 increased to 6.7 million.

Other takeaways from the July NMRI include:

The NMRI for first-time buyers hit 15.40%, up 0.9 percentage point from a year earlier, and well above the Repeat Buyer NMRI of 9.68%.
 
The Spring homebuying season has been very strong, buoyed by robust first-time buyer volume driven by an improving job market and increasing leverage.
 
About 140,000 purchase loans for first-time buyers were added in July, up almost 16% from a year earlier, bringing the total number of first-time home buyer loans in the NMRI to 3.0 million (April 2013 – July 2015).
 
A non-stop seller’s market since September 2012 has been fueled by historically low mortgage rates and high, growing leverage. As a result, real home prices have been increasing since 2012:Q3, far outstripping income growth and crimping affordability.
 
Credit standards for first-time home buyers are not tight.
In July, 71% had down payments of 5% or less, 25% had DTIs greater than the QM limit of 43%, and the median FICO score was 709, a bit below the median for all individuals in the U.S.
 
20.7% of first-time buyers in July had subprime credit (a FICO score below 660), up from 18.9% in July 2014
 
The reduction in FHA’s mortgage insurance premium cut has boosted its market share to 29.1% in July from 23.7% in July 2014.
This increase has come at the expense of its most direct competitors: Fannie Mae (July market share at 33.5% down from 36.7% in July 2014) and the Rural Housing Service (July market share at 3.3% down from 5.1% in July 2014).
 
Riskier FHA loans have been used to purchase higher priced homes.
 
The collapse in large-bank market share continued in July, offset by nonbanks, which have a much higher MRI.

“FHA’s premium cut does not appear to have achieved its goal of increasing access to homeownership,” said Stephen Oliner, codirector of the Center.  “Rather, FHA largely has stolen business from other government agencies and has enabled borrowers to buy more expensive homes.”

My comments:

The percentages represent all of the loans. Broken down:

Fannie Mae High Risk Loans were 14.49%
Freddie Mac High Risk Loans were 9.83%
FHA High Risk Loans were 86.77%  (No, that is not a mistake)
VA High Risk Loans were 40.85%

(Medium Risk loans add another 27% to Fannie/Freddie, 32% to VA, and 10% to FHA.)

High Risk loans are based upon three factors
Loan to Value
Credit Score
Debt to Income Ratio

These numbers are frightening to say the least. Yet they are consistent month over month and year over year. That is not to say that all of these loans will default, but given another financial crisis, one could expect that most would do so.  (VA is different. Though high risk, VA loans default in record loan numbers. It is likely because VA underwriters using actual Disposable Income and likely also represents the "discipline" that military service installs in a person."

These numbers are generated using comparable loans originated in 2007. What must be remembered is that the first part of 2007 saw lending standards beginning to be tightened, but were still similar to 2006 loans originated.

Given another financial crisis, recession, or other economic event, it is expected that these loans would default in high numbers. That is why, besides the Modification and Delinquent loan data information I post explaining why the crisis has not been alleviated, i expect things to crash again. This is a view shared with many others in the industry. 

[Crafty_Dog]

Very good post Pat.  Thank you.