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.”

“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.

 

How Homeownership Became the Engine of American Inequality (Or NOT!)

The New York Times had an interesting piece recently entitled “How Homeownership Became the Engine of American Inequality.”

The author blames the mortgage interest deduction (MID) in part for inequality. But the MID has been used for decades to stimulate and preserve homeownership, one of platforms of the Democrat Party. Unfortunately, housing is often no longer “affordable.”

One measure of housing affordability is home prices relative to household income or wages. For example, check out YoY earnings growth for 2001-2003 period. Wage growth was declining as YoY home prices grew. As wage growth grew from 2004-2007, home price growth slowed.  The housing bubble is characterized as a period of declining/low wage growth coupled with rapidly rising home prices. (orange box)

Since 2012, home price growth has started to grow rapidly again and has been higher than earnings growth (pink box).

True, the MID does tend to support home purchases in more expensive housing areas like the west coast. And raising the standard deduction will reduce the demand for housing in lower cost areas like the US flyover states. But is the home affordability problem in the more expensive areas of the country as MID problem? Or is it a supply problem? (as in zoning results in higher home prices making housing progressively more unaffordable). And what about The Federal Reserve with its zero interest rate policies (ZIRP) which contributes to income inequality?

But let’s look at the GINI coefficient (a measure of income inequality) and homeownership rate in the US. Despite continued attempts at leveling the playing field, income inequality has just been getting worse and worse. Notice that income inequality was positively correlated with homeownership rates until 2004; after 2004, income inequality has risen as homeownership has fallen.

How has The Fed helped lower income inequality? It hasn’t.

So focusing on the mortgage interest deduction (MID) as the cause of income inequality is misplaced. Again, Democrats have pushed the homeownership (and affordable housing) platform for decade, but it is only now that it is “unfair?”

Here is Phil Hall”s assessment of the NY Times article.

There is little doubt that removing the MID will result is a slowing or decline in home price growth. Not something that mortgage investors are looking forward to.

Q1 2017 US Homeownership Rate Declines To 63.6% (Back To Clinton, Pre-bubble Levels)

According to the US Census Bureau, the US homeownership rate is back to pre-bubble levels.

“The Great Leap Forward (in homeownership)” from various Presidential administrations (most notably Clinton’s with HUD’s “National Homeownership Strategy: Partners in the American Dream”) nhsdream2 helped increased homeownership to unsustainable levels following 1995). Homeownership rates ALMOST reached 70% but then the wheels came off home prices, foreclosures surged and homeownership fell back to pre-NHS levels.

Despite all the monetary stimulus thrown to the banks, homeownership rates continued to fall.

Of course, the amazing disappearance of low credit score mortgage borrowers didn’t help. But there has been a recent uptick in low credit score originations.

Now that mortgage foreclosures are down near pre-bubble lows, we are at stable homeownership levels. That “Great Leap Forward” towards 70% homeownership rates resulted in “The Great Fall Backwards.”

The Taylor Rule (according the the SF Fed’s Rudebusch specification) should be 5.83%. It is currently 1.00%.

Yellen must think that the Taylor Rule is a ham product rather than a guide to monetary policy.

“I could have sworn that incredibly low interest rates would work.”