Feb022015
Most former subprime borrowers are no longer homeowners
Subprime lending temporarily increased the home ownership rate, but now with the rate hitting 20-year lows, all subprime gains are completely wiped out.
Subprime lending as an industry barely existed prior to 1994 because few lenders loaned to people with poor credit, and no secondary mortgage market existed to purchase these loans even if they were originated. By 1995, the fledgling secondary mortgage market began buying subprime loans, so lenders could originate them and sell them off their balance sheets.
Once lenders no longer had responsibility for holding the loans they originated, their incentive was to increase volume; quality meant nothing and quantity meant riches. The easiest way to increase volume was to lower standards, and since lenders didn’t have consequences for loans going bad, the race to the bottom was on. The only thing holding back this race to the bottom today is the “put back” requirements forcing lenders to buy back their bad loans, which is why lenders complain about it.
Subprime and the home ownership rate
For years the political left tried to force lenders to loan to subprime borrowers through GSE mandates, but from 1965 to 1995, thirty years of effort by the political left did little to increase the home ownership rate. Then in the mid 1990s the private market began doing what the politicians couldn’t achieve by mandate: the private market found a way to loan money to subprime borrowers and make money at it. Needless to say, politicians on the political left loved subprime lending.
As subprime lending took off, so did the home ownership rate.
Unfortunately, it didn’t last. As with most things on Wall Street, a little is good, but once a few start making a profit, the herd floods the market with capital and what was once a virtue quickly becomes a vice. The extraordinary influx of capital culminated in the complete abandonment of lending standards and the proliferation of unstable loan products, not just to subprime borrowers, but to the whole spectrum of would-be homeowners.
Home Ownership Rate Collapses
Declines in the home ownership rate were inevitable when the housing bubble popped. Foreclosures pushed people out of their homes and into rentals at an unprecedented rate, and while policymakers have managed to manipulate supply to cause a rise in home prices, demand still hasn’t picked up, and the home ownership rate continues to slide.
The decline in home ownership rates may also reflect a generational shift in attitudes toward home ownership. I believe the current generation won’t have the unbridled enthusiasm of the previous generation — thankfully — and they will be more cautious about buying, which is a natural reaction to the carnage they witnessed, but ownership is primal, and no matter how bad lenders and government officials screw everything up, people will still want to own if it’s advantageous for them to do so, and probably even if it’s not.
Effective home ownership rate is under 50%
Lost in the discussion about home ownership rates is the issue of negative equity. People who don’t have equity in their homes don’t own anything other than their loan. When you consider that 15% of those whose name is on title have no real ownership, you must subtract 15% of the 64% from the home ownership rate. That puts it at about 49%.
The home ownership low is caused by failed housing policy
There is no question that the low home ownership rate is a direct result putting people into homes under circumstances where they couldn’t sustain ownership. It’s not the direct correlation through the GSEs that political right would have us believe, but the connection is just as real. Failure to regulate derivatives caused a massive amount of capital to flow into unregulated toxic loan products. It was a double failure of the Greenspan federal reserve exacerbated by government subsidies and policies that encouraged too many people to buy houses they could not afford.
U.S. Homeownership Rate Falls to 20-Year Low
By Nick Timiraos, Jan 29, 2015
The U.S. homeownership fell to its lowest level in 20 years at the end of 2014—levels last seen when national leaders embarked on a broad push to expand homeownership in the mid-1990s.
This is a key point: it was lenders who pushed up homeownership rates with private subprime loans. It was not the GSEs responding to government mandates.
The Commerce Department’s estimates published Thursday show that, after adjusting for seasonal factors, some 63.9% of U.S. households owned their homes in the fourth quarter, a level last recorded in the third quarter of 1994. The homeownership rate hasn’t fallen below that level since 1988. …
The homeownership bubble is fully deflated.
Thursday’s report offered some signs that the long slide in the homeownership rate may be nearing an end, said Paul Diggle, an economist at Capital Economics. Foreclosures and mortgage delinquencies are near their lowest levels in eight years, and the vacancy rate in the rental market is near a 20-year low.The homeownership rate has fallen steadily since 2005, when it peaked at 69.2%. That followed a decadelong campaign to expand the homeownership rate, launched by President Bill Clinton in 1995 and embraced by President George W. Bush in the early 2000s.
Republicans have been spinning this issue hard with bold-faced lies, but the truth is the failure was a bi-partisan effort.
“Our homeownership strategy will not cost the taxpayers one extra cent. It will not require legislation. It will not add more federal programs or grow federal bureaucracy,” said Mr. Clinton in a White House speech in June 1995, unveiling a “National Homeownership Strategy,” which set a goal of boosting the homeownership rate to 67.5% by 2000 by adding 8 million new homeowners.
The policy enjoyed bipartisan support. In 2004, the Republican Party’s official platform said that down payments presented the “most significant barrier to homeownership” and added, “We support efforts to reduce that barrier.” Mr. Bush set a goal of adding 5.5 million new minority homeowners by the end of that decade.
Clinton was right: the strategy did not require legislation, mandates, or taxpayer money — at least not until the collapse required a $150 billion bailout….
Over the past year, President Barack Obama and other administration officials have voiced alarm that lending has gone from one extreme during the bubble—too loose —to the other—too tight—in the aftermath of the bust.
Officials have walked a fine line in attempting to bar a return of the reckless products and practices that allowed the bubble to inflate 10 years ago while loosening some standards elsewhere to provide broader access to homeowners without perfect credit or big down payments.
The subprime lending experiment was clearly a failure. Rather than permanently boosting the home ownership rate, subprime lending temporarily boosted it, raising the hopes of millions of borrowers, only to see those hopes dashed in millions of foreclosure auctions across the country.
Subprime is coming back. Let’s hope subprime 2.0 won’t be a repeat performance.
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[…] Subprime lending temporarily increased the home ownership rate, but now with the rate hitting 20-year lows, all subprime gains are completely wiped out.Subprime lending as an industry barely existed prior to 1994 because few lenders loaned to people with poor credit, and no secondary mortgage … Most former subprime borrowers are no longer homeowners […]
Black Knight: Can-Kicking Reaps Big Bank Rewards
Black Knight Financial Services’ latest mortgage monitor shows that recent REO sales are grossing a higher recovery of unpaid balances, and that increasing home prices are the driver.
The December report looks at how different liquidation methods for properties facing foreclosure could affect how much of the properties’ gross unpaid balances could be recovered by lenders. According to Trey Barnes, Black Knight’s senior vice president of Loan Data Products, gross REO sales prices over the past two years have made up a higher percentage of corresponding unpaid loan balances due to increasing home prices nationwide.
… on average, REO properties are selling for 71% of the corresponding loans’ defaulted gross unpaid balance, as compared to just 65% for short sales.
Clear Capital: 2015 could be a banner year for lower and mid-tier housing
Delusional Optimism with a hint of euphoria
An optimistic Clear Capital’s Home Data Index market report argues that 2015 could be a transitional year where full buyer momentum in the low and mid tiers reinforce a strong housing recovery.
“We continue to observe the growing price performance gap between the top and bottom segments of the market,” says Alex Villacorta, vice president of research and analytics at Clear Capital. “The rate of appreciation for top tier homes is stalling, which is a more direct reflection of waning fair market demand. While this is a concerning development, there is a silver lining. The moderating upper tier may give traditional buyers a moment to catch their breath, and entice move-up buyers to enter this segment of the market.
“The ripple effect of opening up inventory all the way down the price spectrum could provide opportunity and motivation across all segments, including first-time buyers, to enter the marketplace. The hope is that strength in the low and mid tiers help restore confidence in a stable housing market, and traditional homebuyers re-engage,” he said. “The next phase of the housing recovery is dependent on healthy demand from this segment.”
“The recent rise in home prices continue to bring more homeowners out of negative equity. With more equity to play with, mid tier homeowners could move-up, creating more opportunity and driving healthy demand in the low and mid tiers of the market,” the report says.
[They ignore the lack of equity due to the fact so many were so far underwater, and they ignore the potential impact of rising mortgage rates.]
Perhaps the economy is not doing that well. Unless the Q1 2015 number is 4% or more, I don’t see the federal reserve raising rates in mid 2015.
GDP Hits Speed Bump in Q4 with Annualized 2.6% Growth
U.S. economic growth pumped the brakes in 2014’s final months, falling off by nearly half compared to the quarter prior, according to a government estimate.
In a first-look report, the Bureau of Economic Analysis (BEA) reported that gross domestic product (GDP) expanded at an annualized rate of 2.6 percent in 2014’s fourth quarter, sharply down from 5.0 percent growth in the third quarter.
Economists had projected an annualized increase of 3.2 percent.
According to BEA, the slowdown mostly came from a rise in imports coupled with a decline in exports, a downturn in government spending, and decelerations in nonresidential fixed investment.
Those weaknesses were offset by an upturn in private inventory investment and a pickup in consumer spending as falling gas prices left Americans with more discretionary income. The government estimated that consumer spending—a major portion of U.S. economic activity—increased at a rate of 4.3 percent in Q4 compared to 3.2 percent the months prior.
Residential fixed investment, a partial measure of housing’s contribution to the economy, also grew at a faster pace, advancing 4.1 percent compared to an increase of 3.2 percent in Q3.
The latest government update comes days after Federal Reserve officials released their January policy statement. In their announcement, policymakers described economic growth as “solid,” though a drop in inflation reinforced their view that they can remain “patient” in normalizing monetary policy.
Yield curves are pancaking all over the world = much, much more than a speed bump. Reality is, for anyone ‘leveraged’ …… pain.
Perhaps 2.4% isn’t so bad
Demographics and GDP: 2% is the new 4%
For amusement, I checked out the WSJ opinion page comments on the Q4 GDP report. As usual, the WSJ opinion is pure politics – but it does bring up an excellent point (that the WSJ conveniently ignores).
First, from the WSJ opinion page:
The fourth quarter report means that growth for all of 2014 clocked in at 2.4%, which is the best since 2.5% in 2010. It also means another year, an astonishing ninth in a row, in which the economy did not grow by 3%.
This period of low growth isn’t “astonishing”. First, usually following a recession, there is a brief period of above average growth – but not this time due to the financial crisis and need for households to deleverage. So we didn’t see a strong bounce back (sluggish growth was predict on the blog for the first years of the recovery).
And overall, we should have been expecting slower growth this decade due to demographics – even without the housing bubble-bust and financial crisis (that the WSJ opinion page missed).
One simple way to look at the change in GDP is as the change in the labor force, times the change in productivity. If the labor force is growing quickly, GDP will be higher with the same gains in productivity. And the opposite is true.
So here is a graph of the year-over-year change in the labor force since 1950 (data from the BLS).
http://1.bp.blogspot.com/-ze0vr-J-Cb0/VM1FpCSNgII/AAAAAAAAiJo/qKQKClcFhNI/s1600/GDPLabor1.PNG
The data is noisy – because of changes in population controls and the business cycle – but the pattern is clear as indicated by the dashed red trend line. The labor force has been growing slowly recently after declining for some time.
We could also look at just the prime working age population – I’ve pointed out before the that prime working age population has just started growing again after declining for a few years (see Prime Working-Age Population Growing Again)
Now here is a look at GDP for the same period.
http://4.bp.blogspot.com/-Sf9iVEkYCVc/VM1FqtgDfQI/AAAAAAAAiJw/uRplbdS7jXs/s1600/GDPLabor2.PNG
The GDP data (year-over-year quarterly) is also noisy, and the dashed blue line shows the trend.
GDP was high in the early 50s – and early-to-mid 60s because of government spending (Korean and Vietnam wars). As in example, in 1951, national defense added added 6.5 percentage points to GDP. Of course we don’t want another war …
Now lets put the two graphs together.
http://4.bp.blogspot.com/-AXmP9EpWMFA/VM1FsmFNEoI/AAAAAAAAiJ4/PV5OA7wMmJI/s1600/GDPLabor3.PNG
It isn’t a surprise. Other than the early period with a boost from government spending, the growth in GDP has been tracking the growth in the labor force pretty well. The difference in growth between the dashed blue and red lines is due to gains in productivity.
The good news is that will change going forward (prime working age population will grow faster next decade). The bad news is the political hacks will continue to ignore demographics.
Right now, due to demographics, 2% GDP growth is the new 4%.
Consumer Sentiment Strengthens in January
Consumer sentiment pulled back slightly from an earlier reading but still finished January at its highest level in more than a decade, according to a survey released Friday.
The University of Michigan/Thomson Reuters Index of Consumer Sentiment came to 98.1 in its final January gauge, the group conducting the survey reported. While down slightly from a mid-month reading of 98.2, the index is still higher than it’s been in the last 11 years.
January’s strong reading caps off a growth streak that started around mid-2014 as the job market picked up momentum.
“Consumers expect the renewed economic strength to create more jobs, but the only boost to their discretionary incomes has been due to falling oil prices,” said Richard Curtin, chief economist for Surveys of Consumers and director of the survey. “Consumers have now turned to wages rather than jobs as the primary characteristic they used to judge the performance of the economy.”
According to a report from the group, more consumers reported improvements in their finances in January than any other time in the past decade, and four in 10 cited income gains as the primary reason.
Fixed.
Hope you don’t mind 😉
Rather than boosting home prices permanently, QE temporarily boosted them, raising the hopes of millions of debtors, only to see those hopes dashed when this so-called market ultimately gives-up everything it got from QE, just like Japan did every time.
The Japanese experience with QE is probably a reasonably good precedent. They kept fighting financial gravity by pumping money into their monetary system, yet they had 30+ years of deflation.
US New Home Sales Jump 11.6 Percent in December
Brace for downward revision next month
Sales of new U.S. homes accelerated strongly in December, a sign that home-buying may improve this year after a lackluster 2014.
The Commerce Department said Tuesday that new home sales climbed 11.6 percent last month to a seasonally adjusted annual rate of 481,000. The gains were not enough to offset essentially flat home-buying over the course of 2014. Just 435,000 new homes were bought last year, a modest 1.2 percent improvement from 2013.
The growth in December pointed to rising sales in 2015, buoyed by the combination of strong hiring in recent months and drastically lower mortgage rates. Home values are also rising at a slower pace, improving affordability for would-be buyers.
“We may see continued momentum in new home sales kick off 2015,” said Derek Lindsey, an analyst at the bank BNP Paribas.
Over the past 12 months, median prices for new homes rose 8.2 percent to $298,100. That increase masks the gains on the lower-end of the new construction market. The share of new-homes priced $200,000 to $299,999 increased in December to 32 percent, up from 30 percent in the prior two months.
“This is where the first-timers are likely found, so it is encouraging that they appeared to be enticed into the new home market,” noted Jennifer Lee, a senior economist at BMO Capital Markets.
Last year disappointed in part because builders largely focused on higher-end houses, which limited the number of would-be buyers and kept the pace of construction below historic levels. Roughly 700,000 new homes were sold in the 1990s, nearly a third more than in 2014.
Much of the gains in December came from a 53.6 percent jump in sales in the Northeast and a 17.7 percent increase in the South. The West reported a slight increase in sales, while buying in the Midwest slipped.
The improved health of the U.S. economy should help boost sales in the coming months.
BFD!
The biggest monthly sales jumps ALWAYS produce the biggest same month downward revisions.
Facts are stubborn.
What I found interesting is that we are still only producing about 50% of the houses we normally produce, yet the pace of construction was basically flat from 2013 to 2014.
Apparently, price matters, and builders jacked up prices so much nobody was willing and able to pay it.
Why Home Builders’ Gains Might Not Mean A Robust Market
Yet some analysts are leery, noting much of the builders’ sales gains in recent quarters, including the latest, have come as a result of outward expansion rather than more preferable internal growth. In other words, builders are reaping more of their gains these days by starting construction of entirely new projects, called “communities,” rather than by selling more homes in their existing communities. The latter often is called per-community sales, or absorption.
Why the concern? It’s possible that sales gained from opening new communities represent more a siphoning of sales from other builders than they do an increase in overall demand for new homes.
It’s similar to the retail industry’s focus on same-store sales, which tracks changes in sales volumes only at stores open for at least a year. That reveals how much in incremental sales a retailer is wringing from its existing network of stores, which have relatively fixed costs. In contrast, brand-new stores often generate a portion of their sales by siphoning sales from older stores, both from rivals and from within their own chain.
Why does it matter? Sales growth from opening new communities sometimes isn’t as profitable for builders as generating more sales in existing communities, because the new communities have much greater marketing and sales costs. But, more importantly, it can be argued that sales from opening new communities isn’t as clear a gauge of new-home demand as are sales from existing communities.
“If you believe that demand is relatively flat (nationally), then they’re cannibalizing each other’s sales” by opening large numbers of new communities, said David Goldberg, an analyst with UBS Securities.
Should we see increases in inventory then?
We already are seeing increases in builder inventory. Most OC builders have unsold finished houses right now. This is unusual as builders try to pre-sell all their inventory so they don’t have any standing inventory. I expect to see an increase in incentives to help move their standing inventory, particularly if the spring selling season is weak.
New HCAr president ‘born to be a realtor’
a terrible fate to endure
It isn’t unusual for children to follow in their parents’ footsteps. Pam Vines went further. She followed her mom and dad into their offices.
Thirty years after her mother was appointed the president of the High Country Association of Realtors, Vines recently took over that same role with the association. In December 2014, she was installed as the HCAR president for 2015.
Her mother, Norma Jenkins, served as president of the local board in 1985. Her father, Elmer Jenkins, served as president of the North Carolina Association of Realtors in 1984, and was on the North Carolina Real Estate Commission from 1985 to 1990.
“I think I was born to be a Realtor,” said Vines, who has been active in real estate since 1991.
[…] I noted that most former subprime borrowers are no longer homeowners, but despite enduring most of the negative consequences, it wasn’t subprime borrowers that […]