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.”

The Fed’s Dual Mandate (And The Phillips Milk Of Magnesia Curve) — Why Wage Inflation Isn’t Happening

The Federal Reserve has a dual mandate to 1) promote maximum employment and to 2) keep prices stable.  The Fed has a target rate of core inflation that is 2%; however, it has been unable to achieve this target since the end of The Great Recession even though unemployment has declined.

Yes, the Dallas Fed’s trimmed mean Personal Consumption Expenditures Inflation Rate did exceed 2% back in January 2012, but generally it has been below 2% since June 2009.

But why is inflation so low even when unemployment is so low (as in 4.4% as of April 2017)?

A partial answer lies in the dismal earnings recovery after The Great Recession. Notice in the chart below that the U-3 unemployment rate (blue line) has declined below the natural rate of unemployment (red line) as economic recovery strengthens after each recession. Except for after The Great Recession. Once again, the U-3 unemployment rate has finally dipped below the natural rate of unemployment … yet no wage inflation.

The green line represents the inverse of YoY hourly earnings growth for the majority of the population (Production and Nonsupervisory Employees). You will notice that wage growth accelerates as unemployment declines, particularly when the underemployment rate is below the natural rate of unemployment. Except for the current “recovery.”

Bloomberg has a nice piece of several reasons why the current wage recovery is so low.  Another explanation that Bloomberg did not mention is that the US saw an unprecedented wave of regulations (Affordable Care Act, Dodd-Frank, EPA, the Consumer Financial Protection Bureau, etc.) most of which did nothing to help wage growth for mere mortals. Not to mention increase capital-labor substitution (robots replacing workers). But an easy answer is that the Phillips Curve is seemingly dead (decreased unemployment correlates with higher rates of inflation).

But WHY is the Phillips Curve dead? It makes intuitive sense that wages will rise as labor slack vanishes.  But what are some other explanations for the failure of the Phillips Curve to kick in? Or maybe it is about to kick in?

Clearly, outsourcing of higher-paying jobs overseas is a factor. Or could it also be the poor quality of American education that makes students uncompetitive in the modern economy? Or are US firms not investing in plants and equipment anymore?

But with commercial and industrial lending YoY slowing and the decline in real gross domestic investment (nonresidential equipment), wage growth may still be some time away.

The Fed’s zero interest rate policies (ZIRP) and quantitative easing (QE) ..

have certainly helped pumped up asset prices (like housing and the stock market).

But not wage growth (worst post-recession wage recovery in history … or at least since 1965). In other words, The Fed has not really benefitted wage growth, only asset price growth.

Suffice it to say that have full employment AND increased wage growth would be a blessing to the economy and housing market. I hope so. I am tired of reading research papers that claim that a HUGE Millennial wage of home purchases is going to kick in any quarter. At least I hope their predictions work better than the Phillips curve.

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.

 

The Not-yet Towering Inferno! The Federal Reserve, European Central Bank Race To The Top (In Asset Purchases)

The leading global Central Banks (the US Federal Reserve, the European Central Bank and the Bank of Japan) are in a race .. to see which one can expand their balance sheets the most.  It looks like a tie, but the ECB has taken the lead!! Yes, one more time. The ECB now purchasd more asset than even The Federal Reserve and Bank of Japan.

Here is a different view of the same data, showing the not-yet Towering Inferno of sovereign debt.

And the ECB has the lowest policy rate (as The Fed slowly increases their Fed Funds Target rate).

Check out the excess reserves trapped in The Federal  Reserve system ($2.218 TRILLION).

The real problem is that despite the massive asset purchases and repression of interest rates, it doesn’t seem to have done any good.

But unlike the film “The Towering Inferno,” the fire hasn’t started … yet. Run when someone on CNBC or Fox Business yells “Fire on 81!”