Nov062015
First-time homebuyer rate falls, Millennial homebuying myth shattered
If Millennials were really coming back to the real estate market, first-time homebuyer percentages would not be near three-decade lows and falling.
Have you noticed that many financial media reporters write stories about what their sponsors want to be true without any facts in support? I understand the urge for self preservation, and even the desire to tell people what they want to hear, but it doesn’t improve the credibility of the financial media when reporters fabricate stories about trends and developments that don’t in fact exist.
MOPE (Management of Perspective Economics) is the false belief that economists and the media can stimulate economic growth and activity by convincing the public the economy is vibrant when it’s really not. This erroneous idea (plus the innate desire to please others) drives most reporting in the financial media.
Some reporters promulgate financial myths because they feel compelled by their employers to pander to advertisers. Some spout nonsense because they believe they must stimulate the economy through managing consumer sentiment. Some simply pander to readers by telling people what they want to hear.
Whatever their motivations, the financial media promoted a variety of completely bogus fantasies as if they were an accurate reflection of reality.
Shame on them.
Deleveraging Myth
In 2012 the financial media promoted the deleveraging myth. When economists think about deleveraging, they envision people who got a little overextended tightening their belts and paying back their loans. This collective belt-tightening causes the economy to suffer because money that people previously spent buying goods and services is instead diverted to interest and repayment of debt.
This conventional understanding may apply to some small sub-group of distressed borrowers, but the housing bubble created a much larger group of Ponzis who couldn’t possibly pay down their debts even if they wanted to. That is the bitter reality of deleveraging that banks, economists, and the federal reserve don’t want to face. Of course, this didn’t stop the financial media from regaling us with stories about Americans digging their way out of a hole.
Foreclosure Recovery Myth
In 2013 the financial media touted the foreclosure recovery myth. The idea here is that Americans prevented foreclosures on their personal residences by catching up on back payments and curing their delinquencies. The motivation for this myth was purely to make people feel good about something they didn’t do. A collective Kumbaya and fake praise based on a lie people want to believe.
Did Ponzis suddenly start making more money during the recession and pay it down with wage income. No. Did anyone liquidate their assets to pay off debt. Not very many. So what is the real source of deleveraging?
Bank write offs.
Nearly all the mortgage debt retired over the last several years was written off by banks.
Boomerang Buyer Myth
In 2014 the financial media fostered false hope of a robust housing recovery with the boomerang buyer myth. The real estate industry pinned their hopes on the appearance of large numbers of boomerang buyers, former owners who qualified for mortgages again. The common narrative was that these buyers would return in large numbers and provide a huge influx of demand that would put homebuilders back to work and generate commissions for realtors. It didn’t happen.
Back in 2012, I wrote that the Pent-up demand from boomerang buyers may not materialize. The federal reserve studied this group in great detail, and they noted that only 10% of borrowers with a prior serious delinquency regain access to the mortgage market within 10 years of their default, yet despite this fact, out of desire for it to be different this time, housing analysts and the financial media promulgated the idea that 50% or more of these buyers would return.
After two straight years of bitter disappointment, it would be logical to assume the financial media would quietly drop this failed meme. Perhaps a few ambitious reporters might even write a story explaining why the idea failed (it failed because only about 10% will ever come back just as the federal reserve study pointed out). A really ambitious reporter might even discuss why the fantasy of the Boomerang buyer appeared when there was absolutely no evidence that these people would come back. A probing exposé that calls out the shoddy reporting of others rarely gets past an editor though (fortunately, I don’t have an editor).
I hold out hope that this meme will finally die — Perhaps three strikes and you’re out.
Millennial Buyer Myth
A parallel false hope of the real estate community is the Millennial buyer myth. For 2015 the false hope and wishful thinking was centered on Millennials, those born approximately between the early 1980s and early 2000s, who will soon become the majority of the workforce and the next generation of homebuyers.
The Millennials currently cope with excessive student loan debt, which is preventing them from buying houses. They are also delaying marriage, and they are not forming new households at the same rate as previous generations.
Most housing market analysts blithely assume Millennials will follow the same path as preceding generations once they have opportunity, but what if Millennials decide not to buy homes? Baby Boomers don’t want to think about that possibility.
Throughout 2015 the financial media has run stories about the resurgence of Millennial homebuying. (See: Are Millennial first-time homebuyers finally active? and Will Millennials be forced to rent for life? and Will Millennials move to the suburbs and buy houses?)
Last November I reported that First-time homebuyer participation hits three-decade low, a clear sign that Millennials were not buying homes. When any indicator hits an extreme value, it’s a safe bet that things are so bad that conditions can only get better; thus with a burst of wishful thinking, the resurging Millennial buyer myth was born.
Perhaps this story will serve to kill it.
First-time homebuyers fall
Diana Olick, November 5, 2015
Housing is recovering in sales and prices, but one segment is stubbornly weak and getting weaker. The share of first-time buyers fell to the lowest level in nearly three decades, just 32 percent of all purchases, according to the National Association of Realtors’ annual profile of buyers and sellers. Investors are not included in the survey. …
Since this is an NAr report, Lawrence Yun seeks to spin the data.
“There are several reasons why there should be more first-time buyers reaching the market, including persistently low mortgage rates, healthy job prospects for those college-educated, and the fact that renting is becoming more unaffordable in many areas,” said Lawrence Yun, the Realtors’ chief economist. “Unfortunately, there are just as many high hurdles slowing first-time buyers down. Increasing rents and home prices are impeding their ability to save for a down payment,
(See: Potential homebuyers can’t save for down payments with high rents)
there’s scarce inventory for new and existing-homes in their price range,
(See: Housing inventory abundant at prices buyers can’t afford)
and it’s still too difficult for some to get a mortgage.”
This is another popular myth that refuses to die. (See: Despite industry spin, mortgage lending standards are not tight)
Millennial / First-time homebuyer participation worse than most realize
Consider just how bad the first-time homebuyer rate really is. If the usual participation rate is 40%, and if the current rate is 32%, that’s 20% below normal. [(40-32) / 40 = 20%] The first-time homebuyer participation rate needs to increase by 25% to get back to where it was [(40-32) / 32 = 25%].
If Millennials were really coming back to the real estate market, would first-time homebuyer percentages be near three-decade lows and falling?
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Chase CEO: ‘Big, Dumb Banks’ Should Be Allowed to Fail
He and his cronies would still petition for a bailout because they aren’t “dumb”
Should banks actually be allowed to fail? Well, the “big, dumb” ones should, according to JPMorgan Chase chairman and CEO Jamie Dimon, who on Wednesday blasted the institutionalized belief that mega-dollar bailouts for badly run banks is good for the economy.
Dimon’s comments that banks should be allowed to fail is the latest in a growing movement among top-tier banking execs who believe that financial institutions earn their own success or failure. In June, Wells Fargo’s former CEO, Dick Kovacevich, called the Troubled Asset Relief Program, or TARP, “an unmitigated disaster” for several reasons, including institutionalizing the concept that there are some banks that can’t be allowed to go under. For Dimon, if a bank can’t keep its house in order, it does not deserve help getting out of the trouble it caused itself.
The call to end bailouts has even become a political campaign issue. In October,
presidential candidate Hillary Clinton stressed to TV host Stephen Colbert the importance of investors knowing that their banks could fail, and that the price of mismanagement should be suitably harsh.
Dimon should know- he’s obviously “smart” enough to get out of being convicted as a felon himself, but somehow pinning a felony on his non-person corporation, hmm…
In a vacuum though, Dimon’s theoretically right. It’s just funny that he spouts the moral opinion on this. He claims he only took $25B in bailout TARP money because he was “forced” to by the govt, so he used it to improve his bank’s investments and then hastily paid it back less than a year later due to the regulations it placed on his own executive pay and the growing public backlash. So his bank benefited well from the basically free (but unnecessary) cash injection the government gave him, but 7 years later has settled over $20B in violations incurred prior to the bailout? So who is to say JPMorgan is “smarter” than these other dumb banks?
I think the translation from Dimon here is:
– “Smart” CEO’s know how to cheat without getting caught.
– “Dumb” CEO’s get caught, then need a bailout to survive.
Agreed. Even if he was forced to accept TARP funds AND it wasn’t need at the time, how can he be certain the failure of every large bank wouldn’t have led to the failure of Chase?
I believe his statements, while true, are completely disingenuous. If Chase got in trouble, he would call every politician in Washington to arrange a bailout. He knows it, and everyone else knows it too. So while big “dumb” banks should be allowed to fail, everyone knows they will never be allowed to fail as long as they are that big.
Ex-Goldman banker barred from banking for leaking confidential Fed info
Crony capitalism business as usual
A former Goldman Sachs (GS) employee will never work in banking again, after pleading guilty to charges of stealing confidential information from the Federal Reserve Bank of New York.
On Thursday, the Fed permanently barred Rohit Bansal, who was able to obtain confidential information from the New York Fed because he was an employee of the New York Fed before going to work at Goldman Sachs, from working in banking as part of his guilty plea for misdemeanor theft of confidential information from the Federal Reserve.
According to the Fed, Bansal agreed to enter into a consent order with the Federal Reserve Board barring him from the banking industry and requiring him to cooperate in the Board’s ongoing investigation.
Bansal’s actions already lead to New York Department of Financial Services fining Goldman Sachs $50 million.
Given the current state of affairs between government and the private sector, Bansal probably didn’t believe he did anything wrong.
MBA: Mortgage credit continues to loosen
Yet first-time homebuyers remain absent
Mortgage credit availability continued its upward trend and increased in October thanks to new conforming loan programs, the most recent Mortgage Credit Availability Index report from the Mortgage Bankers Association found.
The report analyzes data from Ellie Mae’s AllRegs Market Clarity business information tool.
The MCAI jumped 1.5% to 128.4 in October, compared to a 0.3% increase to 126.5 in September. The measure ticked up in August, after recovering in July following a stall-out in June.
The MBA’s own chart refutes their claims that credit is tight:
http://www.housingwire.com/ext/resources/images/editorial/BS_ticker/PDF/Nov2015/MortgageCredit.png
Wells Fargo fined $81.6 million for violating federal bankruptcy rules
Another day, another bank fine for misdeeds
Wells Fargo (WFC) will return $81.6 million to homeowners after reaching a settlement with the Department of Justice’s U.S. Trustee Program over the bank’s “repeated failures” to provide bankrupt homeowners with legally required notices of mortgage payment increases.
According to the DOJ, Wells Fargo’s failure to provide the proper legal notices denied homeowners the opportunity to challenge the accuracy of mortgage payment increases.
By failing to properly notify homeowners, Wells Fargo violated federal bankruptcy rules that took effect in December 2011 that imposed more detailed disclosure requirements to ensure proper accounting of fees and charges on homeowners in bankruptcy, the DOJ said.
According to the DOJ, Bankruptcy Rule 3002.1 requires mortgage creditors to file and serve a notice 21 days before adjusting a Chapter 13 debtor’s monthly mortgage payment.
“Wells Fargo acknowledges that it failed to timely file more than 100,000 payment change notices and failed to timely perform more than 18,000 escrow analyses in cases involving nearly 68,000 accounts of homeowners in bankruptcy between Dec. 1, 2011, and March 31, 2015,” the DOJ said.
Redfin: Housing Demand Falls for Sixth Straight Month
Decline in demand excalates in September
https://www.redfin.com/research/wp-content/uploads/sites/4/2015/10/DI.png
The Redfin Housing Demand Index posted its smallest annual increase so far this year, inching up only 0.3 percent to 93 in September from 92 a year earlier. Fewer people are touring and those who are have less to choose from, but they’re still making offers.
While touring cooled in September, the number of people making offers is up 10 percent compared to a year ago, for the second-straight month in a row. That’s a significant change from August, when we said more people were touring but fewer were making offers. Now offers are holding steady while tours soften.
After three years of unsustainable growth in home values, customers are reaching the limits of what they can or will spend. They’re also stymied by a lack of options, with too few houses to choose from.
The upshot? The healthy pipeline of offers will strengthen sales in November, but price growth will slow to something approaching normalcy.
China property still attracting dumb money
China’s ghost towns may spook retail investors, but big money players are still targeting the mainland’s property sector.
For one, Ivanhoe Cambridge, the property arm of Canada’s second-largest pension fund Caisse de depot et placement du Quebec, is looking to increase its investments there.
While acknowledging that the mainland suffers from “shadow cities” and overbuilding, “we have also seen a lot of opportunity,” said Rita-Rose Gagne, executive vice president for growth markets at Ivanhoe Cambridge, which has more than 48 billion Canadian dollars ($36.48 billion) under management.
“The Chinese economy is shifting towards a more sustainable pace of growth ultimately, but at the end of the day it’s still an important growth,” she told CNBC Thursday, adding that whether the country’s gross domestic product (GDP) growth rate was 4 percent or 6 percent, “it’s still large amounts of growth. We believe in the mid-to-long term story.”
In their defense, if their holding period is decades and not years, they might just see a decent return…
It’s a bet based on the continued willingness of the Chinese government and Central Bank to run a Ponzi scheme. In that regard, it may not be a bad bet.
San Francisco in housing ‘correction’
San Francisco homes are still some of the priciest in the nation, but sales of those houses are showing significant weakness. September sales were down 19.5 percent in the city from a year ago, according to the California Association of Realtors.
“We’re going through a kind of correction, as we have a lot of new developments being built right now. The supply is definitely on the rise,” said Justin Fichelson, an agent at Climb Real Estate Group in San Francisco. “The market is not going to continue going up like we’ve seen in the past two years, because prices are already high.”
The median price of a San Francisco home sold in September was $1.189 million, an 11.6 percent increase from a year ago. That is about five times the national median home price. While single-family homes in the most popular neighborhoods are still selling quickly at above asking price, other parts of the city are slowing, and more people are moving out to the wider Bay Area.
Sales in the Bay Area in September were up 6.9 percent from a year ago to the highest level since 2009, according to CoreLogic. That was when the homebuyer tax credit was in place.
“The ‘spillover’ effect continues in the San Francisco Bay area, with more people looking for affordable homes in the inland counties,” said Andrew LePage, research analyst at CoreLogic. “The year-over-year gain in sales last month was greatest in three of the San Francisco Bay Area’s most affordable, and also inland, counties: Contra Costa, Solano and Napa. Through the first nine months of this year, the combined sales for those three counties jumped about 15 percent — more than twice the year-over-year gain for the overall region.”
Fed’s Williams: Federal Reserve Clueless, Dependant upon Bad Models
San Francisco Federal Reserve President John Williams said on Friday that low neutral interest rates are a warning sign of possible changes in the U.S. economy that the central bank does not fully understand.
“I see this as more of a warning, a red flag that there’s something going on here that isn’t in the models, that we maybe don’t understand as well as we think, and we should dig down deep deeper and try to figure this out better,” he said during a panel discussion at the Brookings Institute in Washington.
He added that the low neutral interest rate had “pretty significant” implications for monetary policy, and put more focus on fiscaly policy as a response.
“If we could come up with better fiscal policy, find a way to have the economy grow faster or have a stronger natural rate of interest, then that takes the pressure off of us to try to come up with other ways to do it, like through a large balance sheet or having a higher inflation target,” Williams said. “It also means we don’t have to turn to quantitive easing and other policies as much.”
He’s right, but he’s asking the impossible. Coming up with a stimulative fiscal policy would entail cutting taxes for the wealthy and cutting spending on the poor. That formula doesn’t win elections.
Excellent article. Excellent site. Thanks so much for running it. I don’t see how it helps you sell real estate but the truth is the truth 🙂
If there is one complaint, it is that So Cal and the national averages aren’t differentiated. Although national trends are similar based on economic conditions, , So Cal is a caricature of the ridiculous manipulation of the real estate market by National policy (one size fits all for many different local markets), wealthy investment (its only natural that wealthy speculators speculate in areas close to home), and foreign nationals (LA is where LAX is, but where the hell is Springfield?).
Just to save you some work, I’ve figured out why LA and San Diego housing values are so much more expensive than Des Moines, Minneapolis, Salt Lake City, Dallas, Houston, Madison, Durham, Philadelphia, and Portland:
http://www.bloomberg.com/news/articles/2015-11-05/these-are-the-20-richest-cities-in-america
All of that Mo’ Money we are raking in. This tells me the median house price should be over a Million!
Thanks again for giving me a forum to help me contribute to the mythical ponzi scheme! Bernie Madoff is all “so why am I in Jail?!!!”!
Some figures for consideration:
US National Debt: $18.5 trillion
US National Debt: per citizen: $57,000
US National Debt per taxpayer: $155,200
Is it realistic that debt will be repaid? NO.
Is it realistic that this debt would be continuously rolled over and re-financed? Maybe. BUT it would be very expensive, too expensive for our leaders’ tastes.
Solution: Financial Repression
Effect: If you buy real estate on a loan today, you will probably pay back less than you borrowed in real terms
Conclusion: forget 401Ks and IRAs, real estate will hold its value much better in the long term
Taking all this into a consideration, is real estate the PONZI right now, or the US Dollar?
Is it realistic that increased efficiencies and population growth will outgrow this defecit: absolutely. How long can we finance a defecit?: as long as we have economic growth. I agree that at some point population growth has to stop, but technological advancements never do.
Your justification to hoarde housing is just as ridiculous as buying gold. The civilized world is not colapsing and if it did both your housing and gold are worthless.
This does help me understand the “buy real estate at any cost” investor philosophy helping perpetuate this bubble though, so thanks for sharing.
The conclusion that 401Ks and IRAs will hold less value than real estate is true with current fundamentals. Not true if rental parity is far exceeded.
Let’s say you buy property at rental parity with 30 year fixed after 20% down, and you live in it so it isn’t even too much extra work you invest. So you invested your 20% down, but your monthly cost of ownership is at rental parity.
If there would be absolutely no inflation, and rent would be constant over 30 years, your initial 20% investment (or ownersip) becomes 100% after 30 years. So your investment after 30 years is 500% of its original value. That equates to a 5.5% real return per year on the 20% down on a home for an owner occupant (0.2 * (1 + 0.055)^30 = 1).
Now if inflation is greater than amortization of the home, the return is even better than 5.5% because you are paying the loan back in nominal dollars that are worth less.
Is it realistic for 401Ks and IRAs to produce an average of 5.5% real return or alternatively 7.5% return with a 2% inflation? It may have been true in the past 30 years, but for the next 30 years it is definitely not the case. There is too much capital chasing too few good investments.
Conclusion, if someone about 30 years or more from retirement is trying to secure a stable income for retirement TODAY, they are likely better off investing in real estate.
Housing prices increase = inflation + undervalued – overvalued
Equity appreciation = inflation + innovation and efficiencies – failures + profit
I can leverage myself in both housing and equities.
Wizard of Oz: “Pay no attention to that historical data behind the curtain”, economic fundamentals have profoundly changed
Toto: ruff ruff
I’m with Toto
EXACTLY! Times and fundamentals are changing.
http://time.com/money/3247321/retirement-401k-no-more-10-returns/
Just as in real-estate, 8-9% yearly increases in equities are unsustainable as well.
Only difference is with equities you have no choice but to speculate on further growth. Sound familiar?
Also, how can the S&P 500 maintain the 6.2% annual growth it has averaged over the last 3 decades when at the same time our GDP grew at an average of 2.2%?
The 40 year bull run has to end. You cannot print enough money to get 3 more decades of this without also getting massive inflation.
http://www.newsmax.com/Finance/DavidStockman/stocks-market-Alan-Greenspan-economy/2015/08/05/id/665593/
LA Watch,
Thanks for your astute observations. I hope you come back and comment further.
And BTW, we’ve discovered that truth sells more real estate than realtor bullshit.
The moral of the story is, you can’t keep real estate prices artificially propped up, while at the same time preserving the American Dream for the next generation.
Sorry, it just doesn’t work over the long-run … and as we’re seeing now, it’s not sustainable.
That’s exactly it. By reflating the housing bubble to save the previous generation, they destroy the American Dream for the current one.
Schiff is on record. Despite today’s jobs report, job losses will mount in Nov and Dec and a recession greater than 2008’s will begin. What will Schiff say in the highly unlikely event that he’s wrong, again?
Peter Schiff: It’s going to be a ‘horrible Christmas’
http://www.cnbc.com/id/103144382
When should pundits admit their mistakes?
In his world, never. I wouldn’t be surprised if he believes his own press releases, and he is never wrong.
“Consider just how bad the first-time homebuyer rate really is. If the usual participation rate is 40%, and if the current rate is 32%, that’s 20% below normal. [(40-32) / 40 = 20%] The first-time homebuyer participation rate needs to increase by 25% to get back to where it was [(40-32) / 32 = 25%].
If Millennials were really coming back to the real estate market, would first-time homebuyer percentages be near three-decade lows and falling?”
Another way to look at the data is that the non-first-time-buyer participation rate has been rising above the historic norm. (68-60)/60 = 13% above normal. A rise in homeowner equity and low interest rates might be responsible for a shift in participation.
Rising home prices have a negative effect on first-time-buyer participation. Lower rates equally affect both first-time and move-up buyers, but move-up buyers may have less student debt and assets so they can better take advantage of lower rates.
I would support the alternate view if sales volumes were much higher than normal rather than much lower than normal. If Millennials were buying homes at anywhere close to the rate of previous generations, the first-time homebuyer percentage would be 40%-45% rather than 32% because they are a large generation. The only way one could argue the non-first-time homebuyer percentage was 13% above normal would be if supporting sales volumes were also above normal, which they aren’t.
Rising home prices certainly have had a negative effect on first-time homebuyer participation. Housing is much, much less affordable on a price-to-income ratio than previous generations had to contend with. The current ratio is only somewhat supportable by low mortgage rates.
China allows all couples to have two children
IT HAD been a long time coming. Chinese demographers had been worrying aloud for years about China’s rapidly ageing population and plunging birth rate and the impact these trends would have on the country’s economy. On October 29th the Communist Party finally ended the “one-child policy” that has been widely—often excessively—blamed for exacerbating these problems. Now couples will be allowed to have two. But the party still insists, unlike the government of any other nation, that it has the right to control people’s fertility.