Feb192015
Job growth won’t stimulate many home sales in 2015
When the economy creates low-paying and part-time jobs, the newly employed don’t qualify for home mortgages, and they don’t buy homes.
The conventional wisdom is that increased job growth inevitably leads to increased household formation and increased home sales, and although the connection is real, increased home sales is not inevitable.
For home sales to increase, the newly employed must have sufficient income (and sufficient desire) to move out of their current circumstances and buy a house. For that to occur, the new job needs to be a good paying one capable of supporting a mortgage payment large enough to finance today’s house prices. Super low mortgage rates help, but it isn’t necessarily enough.
The lack of sales in 2014 cost most housing analysts by surprise, and most don’t fully understand why sales weren’t better: high prices, weak wage growth, and poor quality jobs are a recipe for low sales volumes.
Why new jobs don’t translate to new homeowners
Diana Olick, Wednesday, 11 Feb 2015
Job growth will help housing this year. That’s the prevailing opinion of housing watchers, looking hopefully to the spring selling season. A stellar January jobs report only bolstered that belief. It may not, however, turn out that way.
Employment is increasing, no question, but not in the professions that typically own homes. Researchers at Freddie Mac looked at homeownership rates by profession and correlated them to the professions seeing the most and the least job growth.
“What we find is that many of America’s fastest growing careers (in terms of numbers of workers) have average or below average homeownership rates,” said Leonard Kiefer, deputy chief economist at Freddie Mac. “At the same time, the professions with higher homeownership rates are generally headed for average or subpar growth.”
I have talked about this many times over the last few years, but this is the first report with hard data released on this subject. Unless this trend changes, home ownership will remain in the low 60% range.
Most of the job openings projected by the Bureau of Labor Statistics over the next decade are in retail sales, food preparation and cashiers. Workers in these professions have homeownership rates below the national average.
“Over the long run, it’s not going to be supportive of a big pop in homeownership,” said Kiefer.
Forget about a boost in home ownership: over the long run, it won’t be supportive of the low 60s as an ownership percentage.
Meanwhile, professions with homeownership rates above the national average, like engineers, lawyers, doctors and computer and math professionals, are seeing only average job growth. Some with especially high homeownership rates, like business managers, have subpar growth rates. The glaring exception is nurses, who have both a high homeownership rate and high job growth rate.
This all may be why higher employment is not driving higher mortgage applications for home purchases. These applications fell for the fourth straight month last week, despite the average rate on the 30-year fixed still hovering below 4 percent, a historically low level.
The conventional wisdom is that purchase applications are down for a variety of reasons that don’t reflect underlying demand. Since sales are also down, the lack of demand explanation is more plausible.
Home builders may already be aware of this reality. While historically the best housing markets tend to be those with the lowest unemployment rates, those same markets are not seeing big jumps in housing starts. A study by Moody’s Analytics found that multifamily rental construction is passing prerecession peaks, while single-family continues to lag at about 40 percent of the previous peak.
“If low unemployment were sufficient to turn single-family [homebuying] around, then we should see those permits returning to historical levels in the top 20 percent of metro areas. Instead, we see that multifamily is doing even better, but single family is still struggling as in the rest of the U.S.,” wrote Adam Ozimek, an economist at Moody’s Analytics.
The logic of that statement is inescapable. We worked off the bubble-era inventory years ago, but new home construction still hovers near historic lows.
Younger Americans are getting jobs again, but they were hit the hardest during the recession and are now only halfway back to their prerecession employment rate. Adding to their homeownership headwinds, are sky-high rents, preventing them from saving enough to buy a home.
(See: How restricted for-sale housing inventory saps demand)
“The big thing is the timing. You get a good jobs report, but people are still behind, still catching up. The young age group are just getting jobs, they’re not ready yet. Even if you get the jobs moving, it’s going to be a while before it directly impacts home sales,” said Kiefer.
What lenders want more than anything is to replace their bad bubble-era loans with new stable loans with borrowers who can afford the payments on stable terms. They’ve already lowered mortgage rates to record lows to help this process along, but they are running into major problems with transaction volume and demand, and one of the major limiting factors is the lack of down payment money among potential homebuyers.
During the housing bubble, people had access to 100% financing, so few were saving for a down payment. After the housing bubble, the Great Recession caused many people to dip into savings just to make ends meet. Further, since the federal reserve lowered interest rates to zero, beyond the emotional need for reserves for stress reduction, people had little or no incentive to save.
The end result of these circumstances is that very few potential homebuyers have the necessary down payment, even the paltry 3.5% required by the FHA. And since renters are putting such a larger percentage of their income toward rent, even if they wanted to endure 0.2% savings interest rates, they don’t have the disposable income necessary to save for a down payment. No down payment, no sale.
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http://www.westwoodcapital.com/wp-content/uploads/2015/02/No-Economy-is-an-Island-Alpert-021515.pdf
From the PDF:
The U.S. has experienced increasing polarization and a changing rates of formation of high wage jobs (currently 64% of total private sector; average hourly wage $28.36) and low wage jobs (currently 36% of total private sector; average hourly wage $16.25).
In 2013, only 46% of job creation were in the high wage sectors
. In 2014, we did better with 58% created in high wage sectors. But fewer than 18.5% of jobs created in 2014 were in the goods producing sectors.
A majority of the reported inter-month change in the rate of hourly wage growth is not broad based but, rather, reflects dramatic fluctuations in the wages of the top 17.5% of employees. Since November 2010, hourly wages of such supervisory employees grew at a rate 28% higher (up $4.09/hour cumulatively) than the wages of the lower 82.5% of all employees (up $1.57/hour). The sluggish growth in cumulative labor productivity from 2011 through 2014 is likely related to this trend, among other things.
Even despite allowing weak hands who could not qualify for a mort last year to qualify this year, and much lower 30yr money rates(down 70-80bsp YoY), OC sales volume still can’t beat easy comps from this time last year; sales down -10.10% YoY.
OC January Home Sales
2015: 1982
2014: 2205
Housing market starts 2015 on several weak notes
Construction, confidence, applications all down
Despite optimism in most forecasts, it looks like 2015 is off to a faltering start for the housing industry.
January was a bad month for housing starts, completions and permits, reflecting perhaps the reason for homebuilder confidence to likewise be down for February.
Single-family authorizations in January were at a rate of 654,000; this is 3.1% below the revised December figure of 675,000.
Single-family housing starts in January were at a rate of 678,000; this is 6.7% below the revised December figure of 727,000.
Further, mortgage applications have been spiraling downward in February, giving away most of the gains made in January.
“Coupled with a pullback in homebuilder confidence, this morning’s decline in both starts and permits at the start of the year suggests a further malaise in housing activity,” says Lindsey Piegza, chief economist for Sterne Agee. “Housing has been taking small steps of improvement but demand remains limited, keeping all other elements of housing activity tempered. Without adequate income and job creation, consumers will remain sidelined, unable to afford a home purchase.
“Particularly for the youngest generations strapped with student debt, preferences are already shifting towards smaller owner units such as condos or co-ops, as well as the rental market,” she says.
However, Paul Diggle at Capital Economics was more sanguine about these early January reports.
“With mortgage credit conditions loosening, the labour market on fire and household formation strengthening, January’s decline in housing starts should soon give way to solid gains in homebuilding,” Diggle says in a client note. “Nonetheless, the latest decline was disappointing given that it was entirely driven by a 6.7% m/m fall in single-family starts. Multi-family starts increased by 7.5% m/m. The drop also occurred despite warmer-than-average temperatures and below-average snow cover in January.
“Indeed, the regional breakdown shows that starts fell furthest in the Midwest, where seven states had a top-10 warmest January on record. Clearly, homebuilders weren’t breaking ground while the sun was shining,” he says.
So much for the bad weather excuse.
Last year HousingWire got a lot of mileage out of the poor housing reports from January – April. They were confident that we were on the verge of another recession and that GDP would come in below expectations and get revised downward. Well, they couldn’t have been more wrong. Looks like they want to report in a similar fashion this year, but they’ve tempered their headlines and refrained from making bold, but horribly wrong predictions based on seasonal housing numbers. Kudos to them.
The reported data is more than a minor seasonal fluctuation. 2014’s housing numbers were bad, particularly in the first quarter, and so far 2015’s numbers are worse.
Interesting. If you remember the start to last year, the numbers were awful – but the slowdown was blamed on the polar vortex.
So this year the numbers are more awful? To be fair, the East Coast is getting pummeled right now…
Except that it wasn’t the East Coast where homebuilding slowed down…
Further, we’ve had cold winters in the past, but that never slowed down homebuilding or sales much.
There is a seasonal component to real estate, but these drops are far beyond the normal seasonal patterns.
Good points.
So it’s time for that 25% discount I’ve been waiting for then?
There will be some discounting going on this spring. 25% is probably a stretch though…
FOMC: Economy expands at solid pace
Reaffirms target range for federal funds rate
The economy continues to progress at a solid pace since the Federal Open Market Committee last met in December, the latest meeting minutes said.
“Labor market conditions have improved further, with strong job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power,” the minutes said.
The committee chose to reaffirm its view that the current 0% to .25% target range for the federal funds rate remains appropriate.
The committee will assess progress — both realized and expected — toward its objectives of maximum employment and 2% inflation in order to determine how long to maintain this target range.
Based on its current assessment, the committee said that it can be patient in beginning to normalize the stance of monetary policy.
In addition, the FOMC will maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.
Freddie Mac posts net income of $7.7B for FY2014
Huge cash cow for government; prospects for reform slim
Freddie Mac today reported net income of $7.7 billion for the full-year 2014, compared to $48.7 billion for the full-year 2013.
The company also reported comprehensive income of $9.4 billion for the full-year 2014, compared to $51.6 billion for the full-year 2013.
“2014 marked another year of solid financial and operating performance for Freddie Mac, enabling us to return an additional $20 billion to the nation’s taxpayers,” said Donald Layton, chief executive officer. “We made tremendous progress in materially reducing taxpayer exposure to risk, increasing market share between the GSEs through improved customer focus and service, and making our operations better through innovation and efficiency. At the same time, working with FHFA we helped to further strengthen the housing finance system in America.”
HousingWire’s editor must be on vacation. I would have titled this article: Freddie Mac profits plummet 84%
2014 couldn’t have been that much different than 2013. I wonder if they’ve been playing accounting games to pull profits forward while the government owns the GSEs? They could hollow out the companies, then turn them over to investors who won’t find these the cash cows they were for the government.
Mortgage Applications Endure Enormous Drop as Interest Rates Rise
Purchase apps down 7%, hover at last year’s dismal levels
Mortgage application volumes came down for a second straight reading last week as rising interest rates sent refinance demand spiraling down.
The Mortgage Bankers Association’s (MBA) weekly measure of mortgage application numbers fell a seasonally adjusted 13.2 percent for the week ending February 13, the group reported Wednesday.
Following a 10 percent drop in early February, refinance applications fell another 16 percent last week, reflecting a pause among consumers as mortgage rates moved up to an average 3.93 percent (for a 30-year fixed-rate loan) on news of continuing job growth.
“Mortgage rates increased to their highest level since the beginning of the year last week, and application volume dropped sharply as a result, particularly for refinances,” said MBA Chief Economist Mike Fratantoni. “Refinance volume fell particularly for larger loans, as evidenced by the decline of almost $25,000 in the average loan size for a refinance loan.”
The most recent decline brought the refinance share of mortgage activity down to 66 percent of total applications, a decrease of 3 percentage points from the week prior.
MBA’s seasonally adjusted gauge of home purchase applications also fell, declining 7 percent week-on-week. Unadjusted, purchase loan volumes fell 2% from early February but were up 1 percent compared to the same week last year.
Another Compelling Reason Why Housing Could Soar in 2015
Despite bad data, optimism for 2015 continues unabated
According to a recent report, the Consumer Finance Protection Bureau, or CFPB, is proposing changes intended to increase access to mortgages for borrowers in rural and underserved areas. If successful, it would be yet another way that mortgage financing is becoming much easier to afford and obtain in 2015, and could give the U.S. housing market a nice boost.
What changes are being proposed?
The proposed CFPB changes would make it easier for banks to qualify for “small creditor” status by raising the maximum number of mortgage loans they can make, and would expand the definition of “rural” areas for mortgage purposes. Banks and credit unions that qualify for small creditor status would be able to provide more flexible financing options, including lending to somewhat riskier borrowers and borrowers with a higher debt-to-income ratios than would normally be acceptable.
As it stands now, rural and small creditors have expanded guidelines for what can be considered a “qualified mortgage”. For example, borrowers are normally restricted by the ability-to-repay rule to a maximum debt-to-income ratio of 43%, but small creditors can exceed this limit and still have the loans fall within the realm of qualified mortgages. Mortgages with balloon payments (such as interest-only loans) are also allowed, while they are normally not authorized under qualified mortgage standards. Finally, small creditors are not required to establish escrow accounts as part of qualified mortgage lending, which could save borrowers thousands in closing costs.
[Notice the pressure building to return to the bad lending practices that inflated the housing bubble?]
Russia sold $22.1 billion dollars worth of US Treasuries in December.
China sold $6.1 billion dollars worth of US Treasuries in December.
I wonder what they bought with all those dollars.
MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES
With the collapsing ruble, the Russians are probably buying food.
What if they decide, at a certain point, to pin the ruble to gold?
I don’t know if the Russian Central Bank buys food, but in direct refutation of the MSM’s reporting that Russia was selling it’s gold in December because the ruble was in distress, the RCB reported that it bought 20.7 tonnes of gold in December. It only takes about $820 million to buy 20.7 tonnes.
The central bank would sell treasuries to buy up rubles to increase it’s value so their citizens could buy imported food for less.
Exactly. They have to do something to prevent a collapse of the ruble or food will become so expensive their population will starve.
Then their currency will lose another 50%. Better to stick with oil at this point.
They might as well be pinned to gold with the way both the ruble and gold is becoming less valuable compared to nearly everything else.
As expected
You two are like the Peter Schiff of gold bears, but I always look forward to/appreciate the color commentary.
[…] economy is improving, and although the new jobs aren’t necessarily supportive of housing, increased economic activity generally supports house prices and sales. Further, mortgage interest […]