Reading Rates: MBA Application Survey – March 12 2008

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages, 1 year ARMs as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage increased 39 basis points since last week to 6.37% while the purchase application volume increased slightly by 1.6% and the refinance application volume decreased 4.7% compared to last week’s results.

The average 30 year fixed mortgage rate has increased significantly since last week and is now within the mean seen during 2007 and nearing the peak level seen during the initial stages of the ongoing mortgage-credit debacle.

It’s important to note that all application volume values reflect only “initial” applications NOT approved applications… i.e. originations… I will post on originations on the coming weeks.

Also note that the interest rate for an 80% LTV 1 year ARM jumped significantly and now rests 35 basis points above the rate of an average 80% LTV 30 year fixed rate loan.

It’s important to note that the data is reported (and charted) weekly and that the rate data represents average interest rates, and the index data represents mortgage loan application volume for home purchases, home refinances and a composite of all loans.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).


The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).

The Almost Daily 2¢ - Capitol Appeal (A Slight Return)

The following is a sequential exchange between Representative Barney Frank (D-MA), Chairman of the House Committee on Financial Services, and yours truly.

Hopefully the dialog will continue…

>>

January 24, 2008

Representative Frank,

I'm writing to voice my concern over the recently announced homeowner bailout initiative.

Although the cash refunds and other business investment components of the proposal may qualify as a sound fiscal response to the current economic turmoil, the increasing of the GSE conforming loan limits to $730K is a gross misapplication federal regulatory powers and will continue to perpetuate and even exacerbate the unsustainable conditions that have come about in many of our nation's metro housing markets.

It's important to keep in mind that the majority of the housing bubble conditions occurred in metro areas where the now well known era of dangerously lax lending standards resulted in home prices that are completely disconnected from the basic market fundamentals that guided and regulated affordability for many decades as well as a large cohort of homeowners that cannot afford their homes even under the best conditions.

This is NOT a subprime issue. Understand that "prime" Jumbo homeowners are almost as significantly over-leveraged as the now vilified subprime borrower.

By increasing the conforming loan limits so substantially the federal government is merely perpetuating this unsustainable situation and prohibiting the orderly deflating of the nation's home price bubbles.

If this feature of the proposal is allowed to become law it will unquestionably result in continued speculative behavior and inevitably a harder and more substantial housing price crash in the near future.

.

<<

March 5, 2008

We disagree on the question of raising the loan limit for Fannie Mae and Freddie Mac. First, I should note that the loan limit does not go to $730K across the board. In fact, the major problem, in my judgment, intellectually as well as economically with the current limit is that it sets one maximum price for the whole country, when in fact house prices vary greatly geographically. If we have a maximum limit for loans that make sense in Nebraska, it cannot be sensible for parts of California, Massachusetts, Illinois and New York. For Massachusetts, the limit will be $516K- hardly a luxury price in much of Massachusetts. I do agree that we should be welcoming some deflation of house prices, but the pace at which this happens is very important, and having a very rapid decline exacerbated by a freeze in the credit markets for houses in the $400K to $516K range seems to me unwise.

I agree that this is not a subprime issue. But it is an issue that was brought about by the subprime crisis, and by an excessive reaction to it. Your assertion that people who own homes in Eastern Massachusetts that are worth between $417K and $516K are as over-leveraged as subprime borrowers is not accurate according to any of the data I've seen.

BARNEY FRANK

>>

March 11, 2008

Representative Frank,

Thank you for responding to my initial protest of the Government Sponsored Enterprise (GSE) conforming loan limit increase provision of the recently enacted economic stimulus package but I would like to respectfully challenge some elements of your response.

First, although under prior regulation the Office of Federal Housing Enterprise Oversight (OFHEO) set $417,000 as the maximum sized loan a GSE could purchase for a single family home located in all states and regions except Alaska, Hawaii, Guam and the U.S. Virgin Islands, your assertion that a single limit poses a regulatory dilemma for the nation’s diverse housing markets is incorrect.

It’s important to remember that this limit was intended not to satisfy a sense of fairness for participants in any particular local housing market but rather to ensure the security of the GSEs and prevent unsafe and unsound practices that would run contrary to their statutory charters.

In states and regions where the prior limit of $417,000 was far greater than the typical median single family home price (i.e. Nebraska in your example) homes would still have to meet basic appraisal and other loan qualifying guidelines (also set out by existing statute) thus prohibiting the wholesale distribution of the maximum principal amount.

In states and regions where the prior limit was less than the typical median home price, the $417,000 combined with a healthy 20% down-payment provided for a significant $520,000 home purchase and homebuyers who needed more would be expected to be of the means not requiring affordable housing assistance.

Keep in mind that, as a basic guide, only 12 of the 145 metro area home markets tracked by the National Association of Realtors (NAR) has EVER recorded median home values in excess of $417,000.

Next, it’s important to consider that under the strict interpretation of prior regulatory guidelines the conforming loan limit should have, in fact, decreased for 2007 and again for 2008 as the Federal Housing Finance Boards (FHFB) national average house price declined on a year-over-year basis for both preceding October results.

In the face of the national price declines though, OFHEO took it upon itself to devise a new and substantially more complex strategy for determining the conforming loan limit that sought to mitigate any potential market instability that could arise from an abrupt decrease.

But even under the new guidelines the limit IS scheduled to decrease for 2009 and in all likelihood will continue to require a downward adjustment as the FHABs October average home price continues to decline.

How does Congress intend on accounting for this phenomenon?

Aside from the folly of maintaining a regulatory guideline that only gets amended up and never down, Congress has created a scenario whereby 125% of a greatly decreased median home price may in fact soon be materially LESS than the original $417,000.

Lastly, what I believe Congress and the President have done by enacting this provision is to introduce a substantial amount of uncertainty into an already wounded and fragile marketplace for agency securities.

Investors in agency securities not only know that the changes that have been enacted are unsound, they are now beginning to recognize the significant credit losses that will inevitably be associated to securities produced under even the prior, more restrictive, regulatory environment.

This recognition of instability has already affected GSE operations resulting in the highest yields on agency securities seen in 22 years thus driving up costs for all home-borrowers.

Although Congressional and Executive mandate apparently provide a dynamic and flexible environment for generating regulatory statute that suits the perceived whim of constituents (particularly in an election year), the “law of unintended consequences” remains largely rigid as it appears now quite clear that the main focus of Congress and the Administration later this year will be the federal bailout of Fannie Mae and Freddie Mac.

.

P.S. As for $417,000 to $516,000 being suitable for eastern Massachusetts remember that the conforming loan limit was $300,700 in 2000 and $359,650 in 2005 and that GSE loans combined with “piggyback” second liens provided plenty of stimulus for our local market bubble.

Massachusetts is not immune and in fact will undergo substantial socio-economic stress in the coming years as home prices don’t deflate slowly as you suggest but in fact continue to re-price sharply downward.

<<

Mid-Cycle Meltdown?: Jobless Claims February 14 2008

Today, the Department of Labor released their latest read of Joblessness showing that seasonally adjusted “initial” unemployment claims decreased 9,000 and “continued” claims declining 9,000 resulting in an “insured” unemployment rate of 2.1%.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

As you can see, acceleration to claims generally precedes recessions.


Also, acceleration and deceleration of unemployment claims has generally preceded comparable movements to the unemployment rate by 3 – 8 months (click for larger version).


In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a “flattening” period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the “mid-cycle slowdown” where for various reasons growth has generally slowed but then resumed with even stronger growth.

So, looking at the post-“dot-com” recession period we can see the telltale signs of a potential “mid-cycle” slowdown and if we were to simply reflect on the history of employment as an indicator of the health and potential outlook for the wider economy, it would not be irrational to conclude that times may be brighter in the very near future.

But, adding a little more data I think shows that we may in fact be experiencing a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing “initial” and “continued” unemployment claims, the ratio of non-farm payrolls to non-institutional population and single family building permits since 1967.

One notable feature of the post-“dot-com” recession era that is, unlike other recent post-recession eras, job growth has been very weak, not succeeding to reach trend growth as had minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

I think there is enough evidence to suggest that our potential “mid-cycle” slowdown, having been traded for a less severe downturn in the aftermath of the “dot-com” recession, may now be turning into a mid-cycle meltdown.

Economic Jolt: Job Openings and Labor Turnover December 2007

This week the Bureau of Labor Statistics released their latest monthly read of job availability and turnover (JOLT) showing that, on a year-over-year basis, private non-farm job “openings” declined 8.27%, job “hires” declined 9.80%, and “separations” declined 5.06% led by a 11.20% drop in job“quits”, the largest year-over-year decline to voluntary “quitting” activity seen since August 2003.

Job “openings” (click chart below for larger version), the reports most leading “demand side” indicator, has now declined on a year-over-year basis for five consecutive months strongly suggesting that the private sector is planning to curtail future hiring activity.

Sliding down that slope of the Beveridge curve, the decline in the job vacancy rate is clearly corresponding with an equal but inverse movement up in the general unemployment rate as can be plainly seen in the following chart (click chart for larger version).

Job “hiring” activity (click chart for larger version) has also been declining significantly with December’s results posting the eighth straight decline on a year-over-year basis further confirming the recent weakness seen in the job market.

Job “separations”, whereby workers and their employers go their separate ways by one means or another (layoffs, retirement, termination, quitting, etc.), are also declining primarily due to the inclusion of “quitting” activity.

It’s important to understand that job “quits” are included as a component of the “separations” data series as “quitting” is a valid means of workers “separating” from employers but their inclusion tends to create an overall procyclical trend in what would otherwise be logically thought of as a countercyclical process (i.e. downturn leads to increase in separations not decrease).

As the economy slides into recession and the employment situation worsens workers tend to reduce quitting activity presumably for fear that they could risk a long bout of unemployment and the latest results (click chart for larger version) confirm this with the sharpest decline on a year-over-year basis seen since August of 2003.

Construction Spending: November 2007

Yesterday, the U.S. Census Bureau released their November read of construction spending again demonstrated the significant extent to which private residential construction is contracting particularly for single family structures.

With the tremendous weakening trend continuing, total residential construction spending fell 17.81% as compared to November 2006 and 30.33% from the peak set in February 2006.

Worse off though was private single family residential construction spending which declined 28.15% as compared to November 2006 and a truly grotesque 43.98% from the peak also set in February 2006.

Non-residential construction spending, currently accounting for just under half of all private spending, remains the only pillar of strength gaining a solid 19.49% as compared to November 2006.

As was noted in prior posts, commercial real estate (CRE) appears to be coming under some pressure with increasing vacancy rates and falling prices so keep your eye on the last three charts in the months to come for a clear indication of an ensuing pullback.

The following charts (click for larger versions) show private residential construction spending, private residential single family construction spending and private non-residential construction spending broken out and plotted since 1993 along with the monthly percent change to each since 1994 and 2000 – 2005.

Conspicuous Correlation: November 2007

In light of yesterday’s results for Producer Prices, and Retail Sales and Today’s results for Consumer Prices, I’m reworking my analysis of the possible correlation between falling home values and declining consumption of the most “discretionary” retail items.

On a “nominal” basis, there appeared to be “rough correlation” between strong home value appreciation and strong retail spending preceding the housing bust and an even stronger correlation when home values started to decline.

The following charts show the initial analysis plotting the year-over-year change to an aggregate series consisting of the primary discretionary retail sales categories that I termed the “discretionary” retail sales series and the year-over-year change to the S&P/Case-Shiller Composite home price index since 1993 and since 2000.


As you can see there was, at the very least, a coincidental change to home values and consumer spending during the boom and then the bust, but as home values have continued to decline, retail spending has remained low but has not continued to consistently contract.

One problem with this initial analysis is that both retail sales and the S&P/Case-Shiller Composite index are reported in “nominal” (i.e. non-inflation adjusted) terms and thus result in a somewhat skewed view especially for the retail sales data.

In fact, the year-over-year change to “nominal” discretionary retail sales has been positive for the last seven months while the year-over-year change to “real” discretionary retail sales has been negative for twelve straight months (see the following chart).

The key point here is that although inflation (as reported by the CPI) has been relatively stable in recent years it is always a factor and in light of the latest surprise increases to the PPI and CPI results as well as many anecdotal reports of producers now passing through increasing energy prices to the consumer, it’s important to adjust retail sales (and home values) in order to fully understand its direction.


As you can see from the above charts (click for larger version), adjusted for inflation (CPI for retail sales, CPI less shelter for S&P/Case-Shiller Composite) the “rough correlation” between the year-over-year change to the “discretionary” retail sales series and the year-over-year S&P/Case-Shiller Composite series seems now even more significant.

Given the anecdotal accounts of homeowners drawing equity out of their homes with refi’s and HELOCs and using the proceeds to buy consumer goods, it could be interesting to attempt to “shift” the retail spending in time as the decline to home values would surely precede a pullback in consumer spending but for now I’ll leave it aligned and work on the shifting in a later post.

To make the analysis even a bit more formal (at the prompting of reader Deejayoh) I also plotted the year-over-year changes an overlaid a 12 month moving Pearson’s correlation in order to see the “exact” correlation between the two data series (click for larger chart).

As you can see, although there was a significant correlation of the declines of these series starting in August 2006, this relationship has been falling away as real home values consistently contract and real retail sales remain negative but not falling as consistently.

This is probably a reasonable conclusion as expecting perfectly correlated changes in home values and consumer spending seems unlikely BUT it is probably important to note that home values and the level of consumer spending on discretionary items are in fact both consistently contracting.

A Closer Look at New Home Sales: October 2007

As I had noted before, in 2004 new home sales exhibited an interesting phenomena whereby the distribution of home sales, grouped by several nominal price ranges, effectively flipped from what one might conclude to be logical and from the historical norm.

Prior to 2004, in general, the least expensive new homes sold the most numbers of units while the most expensive new homes sold the least numbers of units.

Not a very surprising result as one might easily conclude that the majority of new home buyers cannot, in general, afford the most expensive homes.

After 2004 though, the scenario exactly flipped in that the most expensive new homes easily outsold the least expensive homes.

Now, this could either be explained by the inflating of home prices during the boom, easy availability of bloated loans, home buying patterns, or a little bit of all of these events but no matter what the cause, it appears that the scenario is now in the process of flipping yet again.

Since the peak in 2005 new home sales have been falling among all price ranges but more recently there have been relative strength in the sales of lower priced home and a marked weakness in sales of the highest priced homes.

The interesting point here is that the “flip” that occurred in 2004 was likely an anomaly made possible by the boom which is likely to completely reverse in the coming years as the environment for home building settles back to a more historically normal scenario.

This “re-flipping” of new home sales may serve as a good indicator of the unwinding of the boom.

The first chart shows new home sales for the highest priced new homes, i.e. homes priced above $300,000 (click for larger version). Notice that since 2005 sales have been declining sharply.

The following chart shows the 6 month moving average of new homes sold for four different price ranges (click for larger). Notice the trend leading up to the convergence in 2004 and that currently price ranges appear to be converging yet again but in reverse.

Another way to visualize this issue is to view each price ranges “market share” of all new homes sold (click for larger version). Notice that back in 1999, over 40% of new homes were priced under $200,000 whereas now, new home sales for homes in this price range total less than 20%.

Existing Home Sales Report: October 2007

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for October again confirming, perfectly clearly, that demand for residential real estate, for both single family and condos, has now taken a new and substantial leg down uniformly across the nation’s housing markets likely as a direct result of the momentous and ongoing structural changes in the credit-mortgage markets.

Terming the latest home sales results as “stable”, NAR senior economist Lawrence Yun steps up his preposterous attempts to persuade readers that, although the changes in the mortgage market have been significant and are having an impact on sales, this is merely a temporary situation.

“As noted last month, temporary mortgage problems were peaking back in August when many of the sales closed in October were being negotiated. We continue to see the biggest impact in high-cost markets that rely on jumbo loans, … Mortgage availability has improved as evidenced by much lower mortgage interest rates and a sharp jump in FHA endorsements for home purchases.”

Additionally, the new NAR president Richard Gaylord initiates his tenure without breaking the beat of his recent predecessors adding that some areas are seeing “strong” price gains.

“Keep in mind that home prices are up in 93 out of 150 metro areas, and there is a lot of confusion in the market from reports about national data. Broadly speaking, home prices in most areas are up modestly or fairly stable, … Areas with population or job growth are seeing the strongest home price gains.”

Today’s report provides, yet again, truly stark and total confirmation that the nation’s housing markets have now taken a new leg down with EVERY region showing significant double digit declines to sales of BOTH single family and condos as well as large increases to inventory and a continued explosion in monthly supply as a result of the collapsing pace of sales.

Keep in mind that these declines are coming “on the back” of last year’s dramatic declines further indicating that the housing markets are truly in the process of a tremendous correction.

Below is a chart consolidating all the year-over-year changes reported by NAR in their October 2007 report.

Particularly notable are the following:

• Sales are down significantly in EVERY region and for BOTH single family and condo.
• Prices for single family homes declined for EVERY region.
• ALL Inventory and Months Supply show significant increases on a year-over-year basis.
  

Realtor’s New Reality: Existing Home Sales Q3 2007

This week the National Association of Realtors (NAR) released their existing home sales report for the third quarter of 2007 showing, in truly stark terms, the tremendously broad nature of the housing downturn.

Single family home sales, on a year-over-year basis, are now falling in every state except for Vermont and North Dakota (see chart below and click for larger version and note that NH and Idaho don’t report sales data) and even those states sales growth are anemic.

Amazingly, even given the obvious completeness of the housing downturn shown by their own data, the NAR’s newly appointed president, Richard Gaylord, blatantly continues the tradition of shameless self interested spin established by his predecessors.

“There is no such thing as a national housing market – it doesn’t perform like the equities markets, … What’s really important for consumers is to make informed decisions based on individual needs, desires and timelines in a given area. Most people plan to stay in a home for 10 years, and for buyers with a long-term view, housing is an excellent investment. … Even in most of the places that are undergoing a large price decline, long-term increases are quite respectable.”

More troubling, perhaps, is the Realtors inability to accurately portray the trend especially when comparing the current quarter’s home sales volume to that of the respective peak sales per state.

In most states, the number of single family home sales, on an annualized basis, peaked either in 2005 or 2006 with a few states peaking as late as Q1 or Q2 2007.

But as you can see from the charts (click for much larger versions) below, all states have peaked in their respective volume of single family home sales and are now declining with the most substantial decline coming from Nevada at 59.92% and the least coming from Mississippi at 3.29%.


As for median selling prices, the NAR’s data (see chart below) also shows widespread weakness among the statistical regions they track.

Given that the majority of price declines have just begun to show in 2007, look for this price chart to continue to deteriorate in coming quarters.

Also, keep in mind that the NAR data only includes sales for MLS listed properties and given this limitation, the S&P/Case-Shiller index for each respective major metro should be considered a far more accurate price reference.

New Residential Construction Report: October 2007

Today’s New Residential Construction Report continues to firmly indicate a new leg down in the decline to the nation’s housing markets and for new residential construction showing substantial declines on a year-over-year and month-to-month basis to single family permits both nationally and across every region.

Single family housing permits, the most leading of indicators, again suggests extensive weakness in future construction activity dropping a staggering 31.0% nationally as compared to October 2006.

Moreover, every region showed significant double digit declines to permits with the West declining 30.9%, the South declining 35.6%, the Midwest declining 22.5% and the Northeast declining 17.9%.

Keep in mind that these declines are coming on the back of last year’s record declines.

To illustrate the extent to which permits and starts have declined, I have created the following charts (click for larger versions) that show the percentage changes of the current values compared to the peak years of 2004 and 2005.

Notice that on each chart the line is essentially combining the year-over-year changes seen in 2005, 2006 and 2007 showing virtually every measure trending down precipitously.

Although year-over-year declines to permits, for example, have not accelerated measurably from their peak YOY declines, the fact that they continue to decline roughly 20%-30% should provide a solid indication that they are by no means stabilizing.





Remember that permits, starts, and completions are not simply independent measures but are, in fact, three logically related and dependent measures.

In the process of a building project, first you get the “permit”, next you “start” building, and finally you “complete” the project.

For this reason, one must adjust expectations prior to reading a newly released Census Department report to account for the true nature of the data published simultaneously each month.

As in past months, I have “smoothed” out the unadjusted data and aligned the three data series (i.e. moved starts ahead a month and completions ahead six months) to make more obvious their trend.


Here are the statistics outlined in today’s report:

Housing Permits

Nationally

• Single family housing permits down 30.1% as compared to October 2006

Regionally

• For the Northeast, single family housing down 17.8% as compared to October 2006.
• For the West, single family housing permits down 30.9% as compared to October 2006.
• For the Midwest, single family housing permits down 22.5% as compared to October 2006.
• For the South, single family housing permits down 35.6% compared to October 2006.

Housing Starts

Nationally

• Single family housing starts down 25.1% as compared to October 2006.

Regionally

• For the Northeast, single family housing starts down 4.7% as compared to October 2006.
• For the West, single family housing starts down 30.2% as compared to October 2006.
• For the Midwest, single family housing starts down 9.8% as compared to October 2006.
• For the South, single family housing starts down 31.4% as compared to October 2006.

Housing Completions

Nationally

• Single family housing completions down 25.8% as compared to October 2006.

Regionally

• For the Northeast, single family housing completions up 5.8% as compared to October 2006.
• For the West, single family housing completions down 37.4% as compared to October 2006.
• For the Midwest, single family housing completions down 33.5% as compared to October 2006.
• For the South, single family housing completions down 22.0% as compared to October 2006.

Keep in mind that this particular report does NOT factor in the cancellations that have been widely reported to be occurring in new construction.