Existing-Home Sales Drop 2.3 Percent in April As Inventory For Sale Remain Missing

Yet another month of missing for-sale existing home inventory and rising median prices for existing home sales.

WASHINGTON (May 24, 2017) — Stubbornly low supply levels held down existing-home sales in April and also pushed the median number of days a home was on the market to a new low of 29 days, according to the National Association of Realtors®.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, dipped 2.3 percent to a seasonally adjusted annual rate of 5.57 million in April from a downwardly revised 5.70 million in March. Despite last month’s decline, sales are still 1.6 percent above a year ago and at the fourth highest pace over the past year.

For-sale inventory of existing homes remains in the doldrums as the median price of existing homes continues to rise rapidly.

We see the same limited inventory effect in existing home sales MONTHS SUPPLY.  As the months supply collapses, median prices for existing home sales increases rapidly.

I wonder if The Fed was wise to keep The Fed Funds Target Rate at near zero and engage in a third round of quantitative easing (QE3)? Particularly when housing inventory was declining (meaning that low-rate funding was chasing scarce housing)?

As Verbal Kint said in The Usual Suspects, “And like that, (the for-sale inventory) was gone.”

5.5 Million Homes Still in Negative Equity Territory (But 13.7 Million Homes are “Equity Rich” (Limited For-sale Inventory And Fed Policy Error)

According to data vendor Attom, there remains 5.5 million homes that are seriously underwater (slightly less than 10%). On the other hand, there 13.7 million homes that are “equity rich” (around 24% of homes).

Equity rich is defined as the combined loan amount secured by the property is 50 percent or less than the estimated market value of the property. Seriously underwater is defined as the combined loan amount secured by the property was at least 25 percent higher than the property’s estimated market value.

One culprit is limited for-sale inventory. This chart is from Zillow:

The other culprit is The Federal Reserve, who have kept rate depressed for around 10 years.

Yes, limited for-sale housing inventory and Fed-depresssed interest rates for 10 years is helping some but not others.

Now, take a wild quess which states are “equity rich?” If you guessed California and New York, you were correct!!

 

Yes, housing is getting progressively more unaffordable to many households as limited for-sale inventory and insanely low monetary policy have effectively jailed (locked-out) many households from owning a home in California and New York.

“Please Chairman Yellen! Stop driving up home prices with your super-low interest rates when for-sale inventory is so low.”

Have Mortgage Applications Peaked For 2017? Purchase Applications Fall 2.75% WoW (Up 9% YoY), Refi Apps Fall 5.7%

 

Mortgage applications decreased 4.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 12, 2017.

The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. The unadjusted Purchase Index decreased 3 percent compared with the previous week and was 9 percent higher than the same week one year ago.

Typically, applications for a purchase mortgage peak in May (sometimes in April, sometimes in June). So, last week’s mortgage purchase applications print may have been the high water mark for 2017.

The Refinance Index decreased 6 percent from the previous week.  But notice that while mortgage refinancing applications plummeted aroud MayJune rapid the rise in the Freddie Mac 30 year mortgage survey rate (thanks to Fed Chair Bernanke saying that The Fed might end their asset purchase programs), the recent rise in the 30 year mortgage rate has produced decline in refi application.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($424,100 or less) remained unchanged at 4.23 percent, with points increasing to 0.37 from 0.31 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Mortgage originations have not recovered to previous levels due to the amazing disappearance of subprime (sub 620 credit score) lending,

So, we at (or near) the peak for 2017 in terms of mortgage purchase applications. Historically, it will be all down hill until January 2018. But a 9% increase in mortgage purchases applications YoY is pretty impressive!

 

OCC: Citigroups Leads Bank Holding Companies With $22 Trillion In Derivatives Exposure (Mizuho Leads In Derivative-To-Assets of 12,000%!)

The Office of the Comptroller of the Currency (OCC) has released the Derivatives Exposure for bank holding companies.  https://www.occ.gov/topics/capital-markets/financial-markets/derivatives/dq416.pdf

Of the top ten bank holding companies, Citigroup leads in total derivatives exposure (futures, options, forwards, swaps, credit derivatives, etc). Citi is closely followed by JPMorgan Chase, Goldman Sachs, Bank of America and Morgan Stanley.

In terms of derivative exposure to assets, Japan’s Mizuho leads with a whopping 12,136.54%. Followed by Goldman Sachs at 4,792.91% and Morgan Stanley at 3,505.69%. Wells Fargo is has the lowest derivatives to assset ratio of the top ten holding companies.

In terms of credit derivatives, JPMorgan Chase leads, followed by Citi. State Street actually has no credit risk exposure.

Of course, as long as there is no sudden shock (or even slow m0ving disaster … like collapsing home prices and a surge in mortgage defaults), everything is copacetic. But in case of a shock, counter party risk rears its head (such as in ‘The Big Short” where problems occured in shorting  Credit Default Swaps, at least momentarily). Or an insurer like AIG not being to pay off on its Credit Default Swaps claims.

Now that the US banking system is highly concentrated,

we shouldn’t see the same pattern of bank failures that we have seen in previous financial crises, like the financial crisis of 2007-2012.

Did someone mention Stanley? With a derivative-to-asset ratio of 3.505%, (Morgan) Stanley should be happy!

“The Big Short” Revisited: Housing Starts Fall 2.6% In April, Multifamily Starts Fall 9.6%

Tra-la, its May!  And it is time for the April housing construction release from the US Census!!

While total housing starts are down -2.58%, 1 unit starts are actually up slightly.  So where is the big drop off? 5+ unit (multifamily) starts fell 9.6% in April.

1 unit housing starts peaked in January 2006, crashed, and are now back to levels seen at the end of the 1991 recession.

What does this have to do with the book and movie “The Big Short?” Well, there was an enormous housing construction bubble that started building after the 1991 recession culminating in the peak in January 2006. It has taken over 10 years to get back to 1991 levels.

5+ (Multifamily) starts? While they declined nearly 10% in April, they are still generally higher since before The Great Recession.

Multifamily serious delinquency rates have been quite tame for Fannie Mae and Freddie Mac, even during the financial crisis. This chart compares Fannie and Freddie multifamily delinquency rates withe FHA’s overall delinquency rate that includes single family. (Note: the FHA serious delinquency rate is so high that it is on the left axis).

While the book and the film “The Big Short” blamed Collateralized Debt Obligations (CDOs) for the financial crisis, clearly the US went on single-family housing construction boom that fizzled-out in after peaking in January 2006.

Construction loans, funded at the shorter-end of the Treasury curve, dropped dramatically with The Fed’s dropping of their benchmark Fed Funds Target rate.

As the rate remained depressed, home prices started to rise rapidly as construction spending spiked. As The Fed tried to cool off the bubble, it was too late.

Blaming CDOs, CDO^2 and synthetic CDOs was too easy of a target for blame.  How about the US economy was running out of gas and we relied on housing construction to drive GDP growth?

At least The Big Short got part of the over-building fiasco correct in Florida, but then blamed it on mortgage brokers.

 

Retail Bubble Bursts! 8,460 Store Closures Expected in 2017 (Largest In Modern History)

Retail REIT and CMBS investors were pleased with the recovery after The Great Recession when retail commercial real estate prices fell then rebounded. But we are seeing a crucial turn in retail real estate values.

The cause? The 2017 surge in retail store closings.

In terms of square footage, it is anticipated that retail store closings will be the largest in modern history.

Smaller retail footprints like RadioShack lead the announced closures.

Digital (online) shopping took its toll.

And stagnant wage growth for the majority of Americans hasn’t helped. The worst after a recession in modern history.

Retail vacancies are now about 10% again after zooming upwards during The Great Recession.

Retail (mall) REIT Kimco has not had a good time since July 2016.

If life gives you lemons, …

Did someone mention Malls? As in Shauna Malwae-Tweep?

Wells Fargo Mortgage Applications Fall To Lowest Since 2005* (The Wells Fargo Mortgage Wagon ISN’T Coming!)

It is reporting season for American banks and Wells Fargo’s came out today. first-quarter-earnings-supplement

Of particular interest is the decline in residential mortgage applications for Wells Fargo, the lowest since 2005. Because that is the last year for which there is data on Bloomberg for Wells Fargo.*

Mortgage originations? About the same as Q1 2016, but substantially below levels seen in 2012. Q1 2017 is the second lowest level of originations sine 2005.

It just isn’t Wells Fargo. Take Bank of America. But Wells claimed their niche was the residential mortgage market while other banks retreated from the market.

Low wage growth coupled with regulatory overreach by Dodd-Frank and the Consumer Financial Protection Bureau has diminished residential mortgage lending by the banks.

So, the Wells Fargo (mortgage lending) wagon isn’t coming. And it isn’t for other big banks either. But PROFITS increased for mortgage bankers  in 2016.

While Wells Fargo was still the leading mortgage originator in Q3 2016, shadow bank Quicken is challenging Chase for 2nd place with PennyMac challenging US Bank for 4th place in the mortgage origination derby.

Maybe Dan Gilbert, the CEO of Quicken Loans and the owner of the Cleveland Cavaliers basketball team, should adopt the Wells Fargo wagon song for Quicken! Because it seems that Wells Fargo’s wagon isn’t bring the home loans as expected.