Why I Don't See a Housing Bubble

Rate Watch #881 Why I Don't See a Housing Bubble.

May 31, 2013

by Dick Lepre  

[email protected]
www.loanmine.com

 

 Housing

For someone who does home loans for a living and writes a weekly newsletter I do not often comment on housing. My excuse is that enough other people do it.

In any case this is a good time to look at the present state of the housing market. As always, we start with the notion that housing is local. I live in San Francisco and not only are prices in San Francisco only loosely correlated with prices in Florida, but they are loosely correlated with prices in places 50 miles from San Francisco. The strength of any local housing market has to do with demand, and demand is driven by jobs. Nonetheless there is an overview of the national housing market which is important because it affects the economy. Home building creates jobs, jobs create GDP, and both home building and the sales of existing homes inspire other consumer spending, i.e. furniture, appliances, home improvements, garden supplies, etc.

This Week's Data

Let's look at housing-related fundamentals from this week.

S&P Case-Shiller Home Price Index (March 2013)

- 20-city Seasonally Adjusted - Month/Month +1.1%. Previous was +1.3%.
- 20-city Not Seasonally Adjusted - Month/Month +1.4%. Previous was +0.3%
- 20-city Not Seasonally Adjusted - Year/Year +10.9%. Previous was +9.3%.

This was the largest year/year increase since April 2006. Note that this report actually averages three months worth of data so that it reflects prices for January-March

MBA Home Loan Applications (week ended 5/24/2013)

- Purchase Index Week/Week +3.0%. Previous weeks were -3.0%, -4.0%, +2.0%,-1.4%, +0.3%, and +4.0%.
- Refinance Index Week/Week -12.0%. Previous weeks were -12.0%, -8.0%, +3.0%,+0.3%, +5.0% and +6.0%.
- Composite Index Week/Week -8.8%. Previous was -9.8%, -7.3%, +7.0%, +1.8%,+0.2%, +4.8%, +4.5%.

Pending Home Sales (April 2013)

- Pending Home Sales Index 106.0. Previous was 105.7. This data comes from NAR and should be a leading indicator of existing home sales. A Pending Home Sale exists when there is a ratified contract but the sale has not yet closed.

What received the greatest amount of positive attention (positive for the economy, bad for rates) was the Case-Shiller Year/Year Home Price data. A 10.9% increase in prices sounds almost like the start of a new bubble. It is not.

There are two different sources of sales - distressed (foreclosures and short sales) and non-distressed. A distressed sale happens when the owner has to sell or loses the property to foreclosure. A non-distressed sale happens when the owner wants to sell and is not under pressure. Non-distressed sales are a better indicator of the market. Markets and prices make more sense when neither the buyer nor seller are pressured. As the supply of distressed sales has decreased we have seen an increase in median price as the poorer-quality homes (likely to sell at lower prices) have diminished in number. Also, as that supply decreases, we are also seeing a flattening in sales.

Recently the housing market is more complex than usual because these differing streams of distressed and non-distressed sales have different dynamics. If someone purchases a foreclosure or short-sale, they may rehabilitate the property and sell it for a higher price within a few months. That is not so much evidence that prices of similar things are increasing, but rather the self-evident statement that a home that is in great shape sells for more than one with years of deferred maintenance. People who are not making their home loan payments are not likely to be maintaining their homes to the same extent that people who have been making their home loan payments have.

In the S.F Bay Area 8.5% of the sales in April 2013 were foreclosures as opposed to 21.9% a year previous. Short Sales made up 15% of the sales in April while they were 22.1% a year before. Distressed sales combined were 24% of the market as opposed to 44% a year previous. This data is from Dataquick.

A large part of that big, fat 10.9% increase in prices has to do not with increases in values of similar homes, but with the fact that fewer funky homes are being sold. In fact there may not be a real housing price bubble but rather modest, sustainable gains in prices coupled with a bubble of quality. If I am correct, then this quality difference should be subsiding as the percentage of distressed sales continues to fall and values should increase at a slower pace.

The notion of a bubble is an illusion created by fewer distressed sales.

(I need to thank my son Carson for proofreading this for me.)

 

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Dick Lepre

[email protected]
Web site: www.loanmine.com
Blog: economy.typepad.com
Phone: (415) 244-9383 | Fax: (866) 488-2051
1400 Van Ness Avenue, San Francisco, CA 94109
CA DRE # 01143973 | NMLS # 302379
California Department of Real Estate - Real Estate Broker License #01818035, NMLS #9472. Equal Housing Opportunity.

Rate Watch #880 Rates, Debt, Money Supply.

Rate Watch #880 Rates, Debt, Money Supply.

May 24, 2013

by Dick Lepre  

[email protected]
www.loanmine.com

 

 Unless This is Addressed, Little Else matters.

Treasury and home loan rates have taken a hit in the past week. Some of this may be due to selling by the big players (PIMCO) and some of it by Bernanke's words. Add to this that we indicated at the end of January that we are officially in a secular technical bear market (lower prices, higher yields.) For the next 8 months or so we will see higher yields. It is what happens in the next bear cycle (2 - 2.5 years from now) which concerns me more and which I address below.

What moves interest rates around? In order to understand this you need to think like a wealthy person. A "wealthy person" is someone who has all the money they need for the rest of their life. They have one enemy and that is inflation. If the cost of things goes up at a greater rate then the value of their nest egg than the present value of their wealth will not suffice in the future. A wealthy person is less interested in risking the value of their wealth by investing it in equities because they already have enough. What they are interested in is protecting the purchasing power of their present wealth by investing in fixed income securities (government debt, corporate debt and mortgage debt) and having that return greater that or equal to inflation.

So, historically it is inflation which has driven rates for fixed income securities. The nagging question at present is the following: can Treasury (and other fixed income security) rates spike up without inflation? This was addressed on March 26, 2010 by former Fed Chairman Greenspan when he referred to the spike in the 10 year Treasury as a “canary in the mine" meaning an early warning that bleep was about to happen. If investors are skeptical about Treasuries then there are two possible causes: 1) they fear inflation or 2) they are losing confidence in the dollar.

The key sentence from Greenspan is this: historically, there has been “a large buffer between the level of our federal debt and our capacity to borrow. That’s narrowing. And I’m finding it very difficult to look into the future and not worry about that.” Greenspan opens the discussion that not only inflation moves rates up but, worse yet, would be a lack of confidence in the stability of the value of the dollar.

So why would investors lose confidence in the dollar? They may at some point in the future look at the debt/GDP ratio and wonder how Treasury is going to pay the debt. We have been lulled in the past few years because the price of the massive increase in debt has been low because interest rates have been low. Once the cost of Treasury borrowing increases, the cost of debt service will rise dramatically. The day of the Lehman bankruptcy September 15, 2008 Treasury debt totaled $9,634,090,464,815. This Wednesday it was $16,734,032,974,210.

For the present Treasuries have been protected because things are worse in Europe and Asia but this will eventually bite us. Also, the Treasury and MBS markets have been supported to the tune of $85 billion/month in QE purchasing by the Fed. But while the Fed has, in general, control over short-term interest rates it has created a future difficult situation for itself. At some point the Fed has to draw down money supply (sell Treasuries) without sending Treasury yields spiking. The only real question is this: will the demand for Treasuries keep pace with the supply so as not to send yields up sharply?

It is not at all clear if the recent selloff of Treasury debt is indicative of what was discussed above or if this simply the effect of a few large players reducing their positions to a more comfortable level.

This can be avoided if we can start trying to find fiscal sustainability and not depend on borrowing. Apart from libertarians, Simpson-Bowles, and myself no one seems very interested in fiscal sustainability.


The goal should be to keep flat the ratio of debt to GDP a number which has seen a large spike in the past few years.

 

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Dick Lepre

[email protected]
Web site: www.loanmine.com
Blog: economy.typepad.com
Phone: (415) 244-9383 | Fax: (866) 488-2051
1400 Van Ness Avenue, San Francisco, CA 94109
CA DRE # 01143973 | NMLS # 302379
California Department of Real Estate - Real Estate Broker License #01818035, NMLS #9472. Equal Housing Opportunity.

Markets Cheer Mediocre Jobs Report

Inside the BLS Employment Situation Report

This is my monthly look inside the BLS Employment Situation Report. There are two BLS Surveys: the Establishment and the Household. Establishment surveys about 141,000 businesses and government agencies, representing approximately 486,000 individual worksites. It is taken each month during the week which includes the 12th of the month. Household is a survey of 60,000 households taken each month during the week which included the 12th of the month.

Each item below is suffixed with (H) if it is from the Household Survey, (E) if it is from the Establishment Survey, and (B) if it is from both.

- Nominal Nonfarm jobs was +165,000. (E). The two previous months' gains were revised to +138,000 (March) and +332,000 (February). Those had been +88,000 (March) and +268,000. That is a gain (for March and February) of 114,000 from the previous report making the net gain in jobs since the last report of 279,000.

- Real (population adjusted) job growth in April was 165,000. This accounts for the changes for February and March which were significant.
- the Unemployment Rate was 7.510% down from 7.574% in March 2013(B).
- Average hourly earnings was $23.83 up from $23.82 in March 2013 (E)
- Average work week was 34.6 hours up from 34.5 hours March 2013 (E)
- Private jobs were +176,000. Government jobs were -11,000 (E)

-Good producing jobs were -9,000. The two previous months were revised to +15,000 and +75,000. (E)

-The size of the civilian labor force rose from 155,028,000 to 155,238,000 an increase of 210,000. (H)

- The labor participation rate (percent of adult noninstitutionalized population who are part of the labor force) was flat at 63.3.%. It was 63.6% a year ago (H). This, not the unemployment rate, is the number which should get everyone's attention. It is this 63.3% of the adult noninstitutionalized population who get pay checks and contribute to GDP.

- the size of the civilian noninstitutional adult population increased by 180,000 in April to 245,175,000 (H). With a labor participation rate of 63.3% 113,940 more jobs were necessary to keep pace with population growth. We had 165,000 more jobs added than that including the changes from February and March. (H) The Employment/Population ratio was 58.6% up from 58.5% the previous month.

The civilian noninstitutional population is 2,391,000 (H) more than 12 months ago. With a labor participation rate of 63.5% we require 1,518,000 more jobs in the past 12 months to keep pace with population growth. We had 1,654,000 (H) more folks working. The increase in real (population adjusted) jobs in the past year is 136,000.

According to the 4 week moving average of Initial Jobless Claims, 1,369,000 people lost their jobs in the last 4 weeks. That normalizes to 1,483,000 lost jobs in a calendar month (there are about 13 4-week periods in a 12 month year.) This is down from the previous month's 1,535,000 jobs lost/month.

In April 2013 BLS measured 4 sets of people entering or leaving the jobs market:

- Job losers and persons who completed temporary jobs was 6,410,000 up 81,000 from March's Job Losers and down 470,000 from April 2012. (H)

- Job leavers was 864,000. This includes anyone who retired or voluntarily left working. This down 122,000 from previous month and down 25,000 from April 2012. (H)

-Reentrants was 3,151,000. Reentrants are previously employed people who were looking for a job and found one. This was -25,000 from the previous month and -185000 from April 2012.(H)

-New entrants were 1,280,000. These are people who never worked before and who are entering the labor force for the first time. This was -+30,000 from previous month and -82,000 from April 2012.

The presentation of the total change in jobs is like looking at the final score of a game. The details tell the story:

- 279,000 more people are working

- 210,000 more people are in the civilian labor force

The unemployment rate fell 0.064% despite the labor force increasing. We are +136,000 real (population adjusted) jobs for the past 12 months.

The economy is failing to produce jobs for people entering the labor force for the first time. A sizable piece of the increase in jobs last month (122,000 out of 165.000) was due to fewer people leaving their jobs. While this report looks good on the surface the fact is that we still have underlying serious issues with the jobs market. These issues are structural not cyclical.

Most telling is the fact that markets are cheering a headline of +165,000. If we are cheering +165,000 it is only because expectations are dismal.

The U.S. economy is no longer producing jobs for folks who do not have a college degree or recognized trade skills. Jobs performed by those without education or skills are either being automated or offshored. The very large increases in the cost of college education are making education less affordable as it becomes more necessary.