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Released Jan. 4th 2014

David Olson and Christine Clifford

SUMMARY

The economy as reported this past week continued to recover at a moderate pace. Initial claims for unemployment fell for the week, but were essentially flat since June when using a moving average. U.S. stocks rose 30% for the year, the strongest increase since 1997. Construction rose. Consumer confidence rose. The ISM index for manufacturers remained positive. Pending home sales rose. Housing prices rose. All of the Eurozone is out of recession but Greece. On the negative side, the rate of population growth continued to slow down to the lowest level since the 1930s. The Eurozone is expected to expand only 1% this year. The Chicago PMI fell in December. The median income adjusted for inflation remained lower for a man than 25 years ago, but the median income for a woman rose 16%. For the week there were 11 positive trends offset by only 5 negative trends. The DJIA fell slightly from 16,478 to 16,470.

MORTGAGE MARKET

In 2014, two of the largest industries in the U.S., financial services and healthcare, will be reshaped by the largest amount of new regulation and legislation to ever hit any industry in the history of the country. Next week, many Dodd Frank regulations go into effect for the mortgage industry. It is clear that costs to the consumer will rise in both industries due to the new rules, but it is still unclear the degree to which the new regulations will harm the overall economy and the mortgage industry specifically. However, interest rates are still low from a historic standpoint, a 30-year fixed-rate mortgage averaged 4.53% with an average 0.8 point for the week ending January 2, 2014, according to Freddie Mac. Housing values continue to improve. The S&P/Case-Shiller® 20-city composite house price index [PDF] rose 13.6% over the 12-months ending in October 2013. According to Zillow, the overall cumulative value of all homes in the U.S. at the end of 2013 is approximately $25.7 trillion, up 7.9% since 2012. Zillow and National Association of Realtors economists project home values in the U.S. will continue to appreciate in 2014 at a 5% rate. The Realtors reported this week that they believe 5.1 million existing homes were sold in 2013 and expect a similar number to be sold in 2014, despite their concerns about a still recovering economy and declining affordability.

POSITIVE TRENDS

  • Initial claims for unemployment for the week ending Dec. 28 fell to 339,000, down from an upwardly revised 341,000 the prior week. But the four-week moving average rose to 357,000, up from 349,000 the prior week and up for the past five weeks in a row. Continuing claims for unemployment fell to 2,833,000 for the week ending Dec. 21, down from 2,875,000 the prior week. But the four-week moving average rose to 2,893,000, up from 2,882,000 and was basically flat since June. Since June, there has been little change in the four-week moving average for both measures showing a slow recovery in employment. On Dec. 28, extended unemployment benefits expired for 1.3 million people.
  • U.S. stocks rose 30% in 2013 measured by the S&P 500, the highest increase since 1997.  They rose 27% measured by the DJIA, the highest increase since 1995.  The average annual gain over the past 87 years (when measurements began) was 10.1%.  The consensus estimate for 2014 is an 8% to 10% gain.
  • The Conference Board’s measure of consumer confidence rose to 78.1 in December, up from 72.0 in November.
  • Construction spending rose 1% in November, after rising 0.9% in October.  Public construction spending fell 1.8% while private construction spending rose 2.2%.  Residential construction rose 1.9%.  Year-over-year, nonresidential spending was flat while residential was up around 17%.
  • The ISM index for manufacturers hit 57 in December, down slightly from 57.3 in November.  Since readings above 50 signify expansion, the report is positive and experts foresee a promising year for the industry. Manufacturing has expanded for the past seven months, according to the ISM surveys.
  • Total nonfarm payrolls reached 137 million in November 2013, slightly below their peak of 138 million reached in January 2008 reported the Labor Department.  Economists surveyed in the U.S. believe this number will grow to 139 million in 2014 as employers add 198,000 jobs a month throughout the year. In 2013 employers created an average of 189,000 positions a month.  This means the unemployment rate may fall as far as 6.0% at the end of 2014, down from 7.0% in November 2013.  Still the ranks of the long-term unemployed are still 4 million and 1.3 million of them received federal jobless benefits which ended this past weekend.
  • Pending home sales rose 0.2% in November, up from downwardly revised -1.2% in October.  This was lower than expected and was the first gain in six months.  Higher borrowing costs are holding back a recovery in housing.
  • Home prices measured by the Case-Shiller Home Price Index of 20 cities rose 13.6% in October, up from the prior year.  This is the fastest 12 month rate of growth since February 2006.  In September, the rate of growth in the prior 12 months was 13.3%.  This means consumer wealth has risen.  There was a 1% increase in prices from the prior month adjusted for seasonality.  Prices in all 20 cities rose.  The biggest rate of growth over the prior year was in Las Vegas (27%) and the least growth was in Cleveland and New York (4.9%).  The average rate for a 30 year fixed rate mortgage was 4.48% for the week ending Dec. 28 according to Freddie Mac. This is up from 3.35% a year earlier. With tapering having begun by the Fed, it is widely expected that mortgage rates will continue to rise in 2014. The MBA projects the 30 year fixed rate mortgages will rise to 5.1% by the end of the year.
  • Nearly 10% of cities have seen prices reach new highs this year. Values in 34% (1,500) of these cities are still at least 25% below their previous highs. Prices in Palo Alto are now up 40% above their prior 2007 peak. There is a big variation in home prices across the U.S. and also a big variation in the degree of recovery from the trough price reached in 2011.Nationally, home prices fell 23.8% from their peak in 2007 to their trough in 2011 according to Zillow.  The average price is now down 16.3% from the former 2007 peak after rebounding 9.9% from the 2011 bottom. Zillow maintains home price data on 4,400 U.S. cities.
  • All of the Eurozone has come out of recession except Greece which is expected to return to growth in 2014.  Deutsche Bank forecasts the Eurozone’s GDP will grow 1% in 2014 after contracting 0.4% in 2013. The unemployment rate is currently 12.1% in the euro area and is 20% in Spain and Greece.
  • Latvia became the 18th member of the euro area today, with half the former Soviet republic’s citizens opposing the currency switch and expectations of rising prices at a seven-year high.

NEGATIVE TRENDS

  • U.S. population grew by 0.72% in July from a year earlier according to the Census Bureau.  This was the slowest rate of growth since the 1930s. The Census projects the growth in December from a year earlier will be 0.70%.  From 2011 to 2012, population grew 0.74%.  The average rate of growth in the 1990s was 1.2%.  In the 1950s it was 1.8%. Both birth rates and immigration are down.
  • Fiat SpA agreed to buy the remaining stake in Chrysler Group LLC owned by a United Auto Workers retiree health-care trust in a $4.35 billion deal, the last step needed before the Italian and U.S. carmakers can merge.  Fiat already owned 58.5% of Chrysler. That leaves two American owned car manufacturers—GM and Ford—plus a startup firm, Tesla.  Another startup, Fisker, closed down in November 2013.
  • The typical man earned 1.5% less in cash income in 2012 than in 1987 adjusted for inflation.  The typical woman earned 16% more as women became better educated and attained better-paying jobs according to the Census Bureau. Family income has been essentially flat for the last 25 years.  This reflects the slowdown in economic growth in the U.S. over this period. Growth in output per capita fell by half of what was attained in the prior quarter century.
  • Growth in the Eurozone is expected to be 1% in 2014.  This is too little to bring down unemployment from its current 12% level.  Inflation is also expected to remain unchanged at 1%, which is too low to bring down the current high debt levels.
  • The Chicago PMI fell to 59.1 in December, down from 63.0 in November and lower than expected.

FORECAST 2014

  • We believe the economy will continue on an upswing throughout the year. GDP might grow as much as 2.5% despite several big challenges. The biggest challenge is rising interest rates that could slowdown housing significantly, especially for first time homebuyers. The second is the health industry where insufficient younger and healthier people have signed up for Obamacare making the cost of covering sick and older people more expensive than estimated and sending insurance premiums up very high. This could cripple other forms of consumer spending. The third is slow growth in Europe and a slowdown in China which could hold down exports. The fourth is unforeseen implications from ending bond buying by the Fed. This could cause inflation to rise out of hand. It will be hard to duplicate the 30% rise in the stock market (measured by the S&P 500) again, so there may be a slowdown in the rate of recovery of household wealth. Nonetheless, the greatest likelihood is that we avoid all these problems and have an improved economy.

CONCLUSION

Growth continued during the week and most forecasters see an improved 2014. However, economic challenges remain especially for Obamacare.

OUR FIRM

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161. We are selling some customized news blogs if you are interested in reaching your customers better. We are also helping our clients position themselves for a successful 2014 by providing tools to manage operational risk and increase purchase money production.

 

Posted by cclifford | in Economic Newsletter | No Comments »
Released Dec. 27th 2013

David Olson and Christine Clifford

SUMMARY

For the third week in a row, there was more good economic news than bad indicating a continuing economic upturn. Personal income and spending rose in November. Inflation was very low. Consumer sentiment was unchanged in December from November but up from earlier months. Durable goods orders rose. New home sales were down from October but October had just been massively revised upward. Retail sales grew over the holiday period. The negatives included a continued fall in mortgage applications. Obamacare missed its targets and still has many technical difficulties. The interest rate on the ten-year Treasury surpassed 3%. Mortgage rates for the 30 YFRM are expected to reach 5% within a few months, up from 3.5% a year ago. This means home sales will remain close to 5 million units in the coming year and refinances will decline by more than $600 billion. Annualized GDP should continue to rise in 2014 and the unemployment rate continue to decline. For the week there were 9 positive trends offset by 6 negative trends. The DJIA rose from 16,240 to 16,478.

MORTGAGE MARKET

Are the aftershocks from the financial crisis finally over? Delinquencies and foreclosures, though still high from a historic perspective, have fallen considerably. The big challenges in 2014 are lack of housing inventory and weak buying capacity from American consumers due to slow improvements in employment and income growth. Economists are uniformly bullish on the purchase market and expect it to return to historically normal levels, while most expect the overall size of the mortgage origination market to decline. The declines are predicted from a reduction in the refinance market. The purchase-refi origination mix will go from about 60%-40% on average for this year currently to 40%-60% on average for next year, according to Freddie’s forecast. Fannie has a similar forecast with refinances falling from 62% to 39%. Despite rising rates, ongoing tightening of underwriting guidelines and lack of inventory, the belief generally is that based on the small size of the market in 2013 relative to historic demand, there is deferred demand for homes, which therefore is poised to generate home purchase activity in 2014. Interest rates for 30 year fixed rate mortgages are 1% higher than a year ago and predicted by all the economists we follow to rise further in 2014. Rising rates are predicted to continue to reduce demand for refinances. Fannie projects the overall size of mortgage originations to decline to around $1.3 trillion in 2014 from $1.8 trillion, Freddie estimates a decline to around $1.1 trillion from $1.5 trillion and the Mortgage Bankers Association before the taper plan had forecast a 32% drop to $1.2 trillion. Freddie’s 2012 to 2013 estimated decline is just 10%.

The MBA index for mortgage applications fell 6.3% for the week ending Dec. 21, down from the decline of 5.5% the prior week.

POSITIVE TRENDS

  • On Dec. 26, President Obama signed the 2014 budget into law.
  • Personal income rose 0.2% in November after declining 0.1% in October. This was lower than expected. Personal spending rose 0.5% in November, above the 0.4% in October. This means consumers dipped into their savings to maintain their spending. A Commerce report last week showed consumer spending rose at a 2% annual rate in third quarter.
  • Core PCE inflation rose 0.1% in November, the same increase as in the prior 4 months. It was up 1.1% from a year earlier. This rate was unchanged from October. The price index for PCE inflation rose 0.9% in November from a year earlier.
  • The University of Michigan index of consumer sentiment was 82.5 in December, unchanged from October. This was the highest rate since 2006.
  • Durable goods orders rose 3.5% in November, up from a decline of 0.7% in October. This was higher than expected and shows strength in the economy.
  • New home sales were at a 464,000 annual level in November, down from an upwardly revised 474,000 level in October. This was considerably higher than expected but down a bit from the revised October sales rate. There was a massive upward revision in October sales.
  • Initial claims for unemployment for the week ending Dec. 21 fell to 338,000, down from 380,000 the prior week. This was lower than expected. The four-week moving average rose to 348,000 from 344,000 the prior week. Initial claims have been basically flat since June. Continuing claims were 2,923,000 for the ending Dec. 14, up from 2,850,000 the prior week. The four-week moving average was 2,836,000, down from 2,871,000 the prior week but basically flat since June. So although the unemployment rate fell last week, there is still weakness in the unemployment claims.
  • U.S. Representative Mel Watt, who will leave Congress to become regulator of Fannie Mae and Freddie Mac, said he will delay a planned increase in the fees the U.S.-owned companies charge to guarantee mortgages.
  • Holiday retail sales rose 3.5% this year over last year according to Master Card Advisors Spending Pulse. For the period, Nov. 1 to Dec. 24, total retail sales rose 2.3% according to Purchase, a New York research firm.

NEGATIVE TRENDS

  • The enrollment deadline for Obamacare is Dec. 31. On Dec. 27, HHS suspended the individual mandate for many individuals. Individuals whose health plans were canceled will now automatically qualify for a “hardship exemption” from the mandate. If they can’t or don’t sign up for a new plan, they don’t have to pay the tax. They can also get a special category of Obamacare insurance designed for people under age 30. This is the latest of many changes being made to the law. Earlier in December the President ordered insurers to backdate policies to compensate for the federal exchange meltdown. Before that HHS declared that it would not enforce for a year the mandates responsible for policy cancellations. They also abandoned the small-business exchanges, delayed the employer mandate and scaled back income verification. As of now, not enough young people have signed up to cover the high cost of older people who have applied for the insurance. This suggests that the law is failing. At least six million Americans with private insurance have lost their insurance. The Wall Street Journal observed that insurance terminations and rollout fiasco could leave more people uninsured in 2014 than in 2013.
  • Germany’s proposal to make binding contracts with the EU over economic policy floundered reported the Wall Street Journal. That means there is no strategy to make the euro survive.
  • There is still no agreement in Congress for reforming Fannie Mae and Freddie Mac. There are currently two options before Congress: the Path Act which would phase out the two entities and the Corker-Warner bill which would wind them down but establish a new government guarantee for mortgage-backed securities. At present the Fed continues to buy and monetizes $35 billion a month in MBS. Alex Pollock (former president of the Federal Home Loan Bank of Chicago) proposed the two agencies pay a deposit insurance premium of 0.17% similar to that charged banks to pay for the risk the government is taking.
  • The yield on the ten-year Treasury rose to 3.01% on Dec. 27.
  • The number of beneficiaries of disability insurance is now close to 11 million and the annual cost in 2012 was $137 billion. Judges have started to tighten up approvals of this form of subsidy. In 2013, they approved only 56% of requests for benefits, down from 67% in 2010.
  • Due to growing scarcity of land for homes on the coasts, the share of attached homes built for single families rose to 12.5% in 2012, up from 10% in 2000 reported the Census Bureau. The scarcity is greatest in southern California.

CONCLUSION

The economy continued to improve despite the announced start of tapering in the Fed’s bond buying policy. Interest rates rose and refinances slumped. We should have a better economy in 2014 but not much better. Annualized GDP should grow from 2.0% to 2.5%. Over the next several weeks Congress has to pass spending bills and raise the debt ceiling, We don’t know yet how much damage will come from the tapering of bond buying, raising tax rates, and raising interest rates. It all depends on how fast these trends occur and how well the economy continues to grow.

OUR FIRM

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161. We are selling some customized news blogs if you are interested in reaching your customers better. We are also helping our clients position themselves for a successful 2014 by providing tools to manage operational risk and increase purchase money production.

 

 

Posted by cclifford | in Economic Newsletter | No Comments »
Released Dec. 20th 2013

David Olson and Christine Clifford

SUMMARY

As we approach the end of 2013, it was another positive week for economic news. Congress actually agreed on a budget that features some modest slowing of the government deficits and doesn’t shut down the government. The Fed announced the start of tapering down its bond buying without shaking up the bond market. Industrial production rose more than expected. Housing starts had the biggest increase in five years. Angela Merkel started her third term in office with the Eurozone still intact and starting to exhibit recovery in its overall economy although some of the southern countries are still in recession. There is no danger from inflation. Rather monetary authorities think inflation is too low. The main negatives are from the mortgage market. Interest rates are ratcheting upward driving down refinances and mortgage demand overall. Existing home sales fell to the lowest level in a year. Changes in government lending rules and rising house prices are reducing affordability. Initial claims for unemployment rose. Still we see GDP rising to about 2.5% for 2014 as the rest of our economy expands. Third quarter GDP was revised up to 4.1% from its earlier estimate of 3.6%. For the week, there were 14 positive trends and 4 negative trends. The DJIA rose from 15,759 to 16,221.

MORTGAGE MARKET

Surprisingly strong economic growth figures and an improving job market should help the housing industry continue to grow despite the impact of rising interest rates. The mortgage market is facing a number of headwinds, a shortage of homes for sale, falling demand for refinances and uncertainty due to numerous federal policies aimed at reducing the government’s support of the industry and future taxpayer liability. For the past four quarters, the number of refinances done using the Obama administration’s Home Affordable Refinance Program has fallen. From second quarter to third quarter they declined 27%. The MBA reported that last week their refinance index measuring refinance application activity declined 4% from the prior week. Application activity overall is at its lowest level since 2001. Refinance volume exploded the past two years due to the Federal Reserve’s Quantitative Easing, now that they are beginning to reduce their purchases of mortgage-backed securities and thus interest rates start to rise, will the industry be strong enough to stand on its own.

Purchase money volume will grow slowly in 2014, in part, due to tighter government lending guidelines and an extremely low number of homes for sale. The National Association of Realtors reported Thursday that existing home sales fell 4% in November following a 2% decline in October. Existing single-family home sales fell to a 4.9 million seasonally adjusted annual rate in November from a 5.1 million rate in August. Re/Max chief executive Margaret Kelly, noted in her firm’s National Housing Report that the limited number of homes is impacting sales. “This November, we’ve seen more than seasonality at play.”

The federal government is hoping that the private lenders will pick up an increased share of the market. There is some reason to be optimistic that this will begin to happen. According to Census data released this week, new housing starts rose 21% in November as builders broke ground on the highest number of new homes since March 2008. Overall, single-family starts are up 26% from a year ago. The increase in new homes for sale should help meet the demand for housing, which is not meeting the needs of our population, even though the growth is small from a historic standpoint, less than 1% a year. Home builder optimism is improving according to a recent survey conducted by the National Association of Home Builders, so hopefully they will continue to break ground on an increasing number of homes and reduce the likelihood of the development of another housing bubble from excessively rapid home appreciation. The low supply of homes for sale is driving home appreciation in many parts of the country. According to research done by DataQuick on housing values in 42 counties, in the group of counties where the number of sales fell the most, 14.2% housing unit prices increased by 23.1%. In the county where the number of sales increased 30.5% over the last year property values only rose 12.3%. Home appreciation is required for a healthy housing and mortgage industry so despite the impact on affordability it will help encourage those who would financially benefit from owning a home to do so.

POSITIVE TRENDS

  • The Federal Reserve Board of Governors met on Dec. 17-18 and announced it will start tapering its $85 billion monthly bond buying policy by $10 billion in January. It will reduce its purchase of government bonds by $5 billion and mortgage backed securities by $5 billion. Stock and bond markets were muted in responding to the announcement. The ten year Treasury yield rose modestly to 2.92% from 2.85% the prior week. It may rise to 3.0% by the end of the year.
  • The Senate voted 64 to 36 to approve the government budget on Wednesday, Dec. 18, approved by the House last week. President Obama said he would sign the measure. This agreement shows government can still work cooperatively in the U.S. and maybe progress can be made on other measures, such as tapering down the explosive growth in government debt. The biggest need is slowing down the growth of the three big entitlements—Social Security, Medicare, and Medicaid. Congress still needs to pass spending bills and suspend the debt ceiling but it looks like both will occur.
  • Industrial production rose 1.1% in November from October, the biggest jump in the year and higher than expected. In October the index only rose 0.1%. Most of the increase was from utilities due to the cold weather. The index is now finally above the prerecession peak set in December 2007. Capacity utilization rose from 78.2% to 79.0% in November.
  • The Empire Manufacturing index rose 1.0% in December after declining 2.2% in November.
  • Productivity in third quarter was revised up to 3.0% from its originally reported 1.9% gain. Productivity is now up 0.3% from a year ago, up from 0.2% in second quarter year-over-year. Unit labor costs fell 1.4% in third quarter and rose 2.1% from a year ago.
  • The consumer price index (CPI) was flat in November after falling 0.1% in October. It is up 1.2% from the prior year. The core CPI rose 0.2% in November, up from 0.1% in October. This index is up 1.7% year-over-year and unchanged for the past three months. There is little danger from inflation. The annual inflation rate for the euro zone was 0.9% in November, which is even lower than the U.S. rate of inflation. Using the Fed’s preferred inflationary measure—the price index for personal consumption expenditures, the measure was 0.7% in October over the prior year. This suggests the Fed will keep short term interest rates near zero for years to come.
  • The PBS Newshour announced that nearly 30% of U.S. households are single persons and they are moving into micro-apartments that are growing in major coastal cities costing around $1,000/month. The Census reported that single-person households were 27.8% of all U.S. households in 2012, up from 25.8% in 2000. These apartments range in size from 260 to 400 square feet. Part of the reason for the growth in single person households it the steady growth in divorces, delayed marriage, and people never marry. Mayor Bloomberg has been encouraging the construction of micro-apartments in New York City with rents ranging from $940 to $1,800/month. These cheaper apartments meet the needs of more people needing an affordable place to live. Some of the demand for these units comes from homeowners with long commutes who don’t want to make the long trip home every night. In Cleveland, a 300 square foot unit rents for $600/month, compared to $800 to $1,500 for one-bedroom apartments. Students are often the target market.
  • The National Home Builders Housing Market Index rose to 58 in December, up from 54 in November and higher than expected. This measures builders’ confidence in the industry. An index of 50 means an equal number of builders with positive and negative expectations for the market.
  • Housing starts were revised for the past three months and show a big increase in November. The numbers were 883,000 in August, 873,000 in September, 889,000 in October, and 1,091,000 in November. This was the highest level in five years. The market was basically flat from April to October. But the figures are still way down from the 1,600,000 to 2,100,000 annual pace experienced form 1997 to 2005. Building permits declined in November to a 1,007,000 rate, down from 1,039,000 in October. The increase in November was approximately equal for both single family and multifamily homes.
  • The economy of the Eurozone is recovering at a very modest pace. On Dec. 18. Eurozone finance ministers sealed a deal that will centralize decisions on shuttering or downsizing failing lenders and build up a multinational fund to back up such decisions.
  • The Philadelphia Fed index of manufacturing rose 7.0% in December, up from 6.5% in November.
  • Leading indicators in November rose 0.8% after rising 0.1% in October. This shows an overall upward trend in the economy.
  • Gold prices fell 29% year-to-date to their lowest level since 2010. This signals that inflation expectations have declined and interest rates are rising.
  • The third estimate of GDP in third quarter rose to 4.1%, up from 3.6% in its second estimate. Real final sales were revised up to 2.5%, up from 1.9% in the prior estimate. This shows stronger real growth than previously measured.
  • A recent ruling from the New York state Supreme Court’s Appellate Division, gives the mortgage industry some hope that they are finally moving beyond the mortgage repurchase requests from the mortgage crisis. The court barred a case brought against a unit of Deutsche Bank AG regarding $330 million of mortgage securities because it ruled that the six-year statue of limitations had run out. The court overturned an earlier ruling which had set the date at which the six-year period started at a more recent date. The case is entitled “ACE Securities Corp v. DB Structured Products Inc.”

NEGATIVE TRENDS

  • Initial claims for unemployment rose to 379,000 for the week ending Dec. 14, up from 369,000 the prior week. The four week moving average rose from 330,000 to 340,000 and is now up for two weeks in a row and the highest in at least two months. Continuing claims for unemployment for the week ending Dec. 7 rose modestly as did the four week moving average for this indicator. This shows problems continue to exist in the labor market despite the sharp rise in new jobs announced last week.
  • Existing home sales fell to a 4.9 million annual rate in November, down from 5.12 million in October. This was lower than expected and was the lowest level since Dec. 2012. It indicates a slowing of the housing market as home prices continue to rise and mortgage applications slow down with the current tight underwriting. Sales in November were down 1.2% from November last year.
  • In November, the Fed bought about 90% of new, eligible mortgage-bond issuance, up from two-thirds earlier this year according to data from J.P. Morgan Chase. So although the Federal Reserve Bank says it will reduce its purchases, its market share has been rising, The yield on the ten-year Treasury rose to 2.92% on Dec. 20. Even though tapering is now beginning, the fall in the overall mortgage market means it will have little impact at first.
  • Fannie and Freddie raised their front end fees for new mortgages with less than a 10% down payment to 2%, up from 0.75%, for a 30 year fixed rate mortgage with a 735 credit score.

CONCLUSION

The economy is showing a growing upswing. Congress cooperated on a budget and the Fed began a very modest tapering with little negative impact on interest rates. A slow housing market will keep GDP growth modest.

OUR FIRM

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161. We are selling some customized news blogs if you are interested in reaching your customers better. We are also helping our clients position themselves for a successful 2014 by providing tools to manage operational risk and increase purchase money production.

 

Posted by cclifford | in Economic Newsletter | No Comments »
Released Dec. 13th 2013

David Olson and Christine Clifford

SUMMARY

More data this week indicates the economy is finally recovering at a moderate pace. Retail sales figures for November show that holiday sales were not as bad as first reported. The biggest source of strength is still sales of autos and homes. Congress is in the process of passing a budget and will not likely shut down again. Inflation is close to zero. The government deficit is declining. Household net worth rose and is almost back to its prior high point in 2007. This recovery is giving high income consumers confidence to increase their spending. The main negative indicator was a sharp increase in initial claims for unemployment but that is blamed more on defects in the seasonal adjustment and is expected to disappear soon. For the week there were 11 positive trends and only 4 negative trends. Congress still has to pass its 2014 budget, deal with the rising taxes and, most importantly, deal with a huge increase in health care costs which will burden our economy and slow down GDP. For the week, the DJIA fell from 15,977 to 15,755. With the improving economy, investors are concerned about the end of the bond buying program of the Fed which will begin soon, probably in a month or two.

MORTGAGE MARKET

Data released this week showed that the rate of foreclosures has fallen in all but the states with the longest foreclosure timelines. As the negative fallout from the financial crisis dissipates and government support of low rates declines, the question arises to what extent will America’s housing industry return to pre-crisis norms. Since 2008, American households have increasingly turned to the rental market for their housing. According to a recent study released by the Joint Center for Housing Studies of Harvard, the percentage of renters climbed from 31% in 2004 to 35% in 2012, bringing the total number to 43 million by early 2013. Attitudes toward renting have shifted somewhat as a result of the Great Recession. For example, slightly more than half (54 percent) of the households surveyed by Hart Research Associates in early 2013 stated that renting had become more appealing given the country’s economic situation. Is the increased desire to rent something that will change as the economy improves? Is getting a mortgage too much of a hassle for some? For example, retirees without a pension are having difficulty getting approved for a loan despite the amount of assets they may have. The result is the proportion of people buying homes for cash keeps increasing. Perhaps once lenders come to terms with the ability to repay rules in the Dodd-Frank legislation this will change. According to research done by Harvard, the largest share of households renting was the aging baby-boom generation.

The increases in the percentage of the population renting came during a period when rents rose faster than inflation and housing affordability for purchasers was at record lows. As of the second quarter of 2013, 90 of the 93 metro areas tracked by MPF Research reported annual rent increases, about the same number as at the end of 2012. Of this group, 20 metros posted gains of 3.5% or more, outstripping overall inflation by more than 2.0 percentage points. In 27 other metros, rents rose somewhat more slowly but were still up by at least 2.5%, or 1.0–2.0 percentage points above inflation. The rollout of the qualified mortgage rules in January is expected to result in tightening underwriting, at least initially and the improving economy is expected to cause interest rates to rise making it more difficult to qualify for a mortgage. There have been sharp increases in the number of people under 40 renting in all income categories. Will these people begin to think about buying as the economy improves and incomes rise or will homeownership rates continue to decline? Historically, increasing income has been the biggest driver of increasing home purchases. We suspect this will be the case again and home sales will not return to more historically normal levels until the employment situation has improved further.

POSITIVE TRENDS

  • Retail sales rose 0.7% in November, up from an upwardly revised 0.6% increase in October. Excluding auto sales, retail sales only rose 0.4% in November, down from 0.5% in October. This shows some slowdown in non-auto retail sales, but more importantly adds evidence that the economy is finally recovering.
  • The U.S. government’s deficit for October and November fell 22% from the same period last year. This was due to rising tax revenue in a rising economy.
  • The wholesale price index (PPI) fell 0.1% in November, after falling 0.2% in October. This was the third decline in a row. The core PPI rose 0.1%. Year-over-year, both indicators are running under 2% and indicate no danger from inflation.
  • Jumbo loans, both adjustable and fixed-rate, increased by 34% to $216 billion in the first nine months of this year, with ARMs comprising the majority of the gain, said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication in Bethesda, Maryland. Cash-rich banks, including Wells Fargo & Co. and Bank of America Corp., are using ARMs as a hedge: the loans’ longer-term payments will move in tandem with the lenders’ expected increases in borrowing costs as interest rates rise, said Greg McBride, a senior analyst at mortgage-data firm Bankrate Inc.
  • Starting in the new year FHA loan limits will drop to $625,500 from $729,750 in the areas of the country with the biggest cap. Limits will be set lower in about 650 counties as a result, FHA said. Many of these counties are in California. FHA Commissioner Carol Galante said the new changes are “an important and appropriate step as private capital returns to portions of the market and enables FHA to concentrate on those borrowers that are still underserved.”
  • Senate Budget Chairman Patty Murray and House Budget Chairman Paul Ryan struck a compromise deal on the budget amounting to spending around $1 trillion in both of the next two years. This will avert another government shutdown. It will allow more spending for domestic and defense programs while adopting deficit-reduction measures over a decade to offset the costs. An extension of long-term jobless benefits wasn’t included. No cuts were made on the three biggest components of the budget—Medicaid, Medicare and Social Security. The House of Representatives passed the measure 332-94 on Dec. 12. The Senate is expected to pass the measure next week.
  • Net worth for households and non-profit groups rose by $1.92 trillion in the third quarter, or 2.6% from the previous three months, to $77.3 trillion, the Federal Reserve said. Household net worth is $8.23 trillion above its pre-recession peak of $69 trillion reached in the third quarter of 2007. It was $75.3 trillion in the three months ended June. In constant dollars household net worth is still 1% below its prior peak using the consumer price index.
  • The Bureau of Labor Statistics announced there are 3,925,000 job openings in the U.S. in October, up from 3,883,000 in September according to its JOLTS (job openings and labor turnover) survey. This shows evidence of a growing economy.
  • Outstanding mortgage debt rose by an annualized 0.9% in third quarter, the first rise since mid-2009. Other types of consumer credit grew 6%. Consumers held more credit card debt in October than they have in more than the past three years. This shows consumers are confident enough to increase their spending.
  • Owners’ equity as a share of the value of real estate holdings rose to 50.8% in third quarter, up from 49.7% in the prior quarter reported the Federal Reserve. Back in 2009, owners’ equity was 38.4% which means consumers have a growing capacity to take on more mortgage debt. This means there is a growing opportunity for home equity lending.
  • Italy’s GDP was flat in the third quarter from the previous quarter, after an earlier estimate had a decline. This was the best reading since spring 2011 and suggests they have exited their recession.

NEGATIVE TRENDS

  • “In 1960, about one in four renters paid more than 30% of income for housing. Today, one in two are cost burdened,” according to the study, America’s Rental Housing. “Cost-burdened” means you’re paying more than 30% of income for housing and “severely cost-burdened” means you’re paying more than half. “By 2011, 28% of renters paid more than half their incomes for housing, bringing the number with severe cost burdens up by 2.5 million in just four years, to 11.3 million,” according to the Harvard study.
  • The U.S. labor force participation ratio fell 1% during the year November 2012 to November 2013. The civilian non-institutional population rose 1% over this period but the labor force didn’t change reported the Bureau of Labor Statistics. From 1996 to 2004 U.S. labor productivity rose at an average annual rate of 1.36% vs. 2.33% from 1891 to 1972 reported a study by economist Robert Gordon. This suggests slower growth in GDP in the future.
  • Sales of high end homes by Toll Brothers fell 10% in recent weeks. They blame the decline on the 21% increase over the past year in prices of their new homes.
  • Initial claims for unemployment jumped to 368,000 for the week ending Dec. 7. This is up considerably from 300,000 the prior week. The four-week moving average rose to 329,000, up from 323,000 the prior week. Continuing benefits for the week ending Nov. 30, rose to 2,791,000, up from 2,751,000 the prior week. The four-week moving average for this measure fell to 2,794,000, down from 2,798,000 the prior week. The Labor Department is having difficulties with its seasonal adjustments so watching the four week moving average is a better indicator than the weekly figures. Overall, the Labor Department believes the labor market is still improving and we shouldn’t take this week’s figure too seriously.

CONCLUSION

The pace of the economic recovery quickened this past week. However, the economy faces many future challenges which may slow down this recovery. The country is facing higher tax rates and fees, higher health insurance premiums, higher deficits, increased Dodd Frank regulations, and rising interest rates from the tapering of bond buying by the Fed.

OUR FIRM

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161. We are selling some customized news blogs if you are interested in reaching your customers better. We are also helping our clients position themselves for a successful 2014 by providing tools to manage operational risk and increase purchase money production.

 

 

Posted by cclifford | in Economic Newsletter | No Comments »
Released Dec. 6th 2013

David Olson and Christine Clifford

SUMMARY

It was a strong week for the economy with nonfarm payrolls rising more than expected and the unemployment rate plunging to 7.0% from 7.3%. Home and car sales were strong but retail sales were weak. Third quarter GDP was revised upward to 3.6% but was really 2.9% when corrected for inventory buildup. Among the other positive trends for week were: rising hourly wages, a longer average workweek, lower initial claims for unemployment, evidence that oil prices are about to drop, and progress being made on the Congressional budget. On the negative side, the ISM index for services fell, retail sales for the Thanksgiving weekend were weak, factory orders fell in October, there was more bad news for Obamacare (falling public approval) although most of the website problems were reported fixed, and the yield on the ten-year Treasury rose to 2.89% heading for 3.0%. With this strong economic report for the week, incoming chairman Yellen will likely start tapering of bond buying by the Fed in a few months. Challenges the economy is facing are: passing the government budget for 2014, addressing the federal debt ceiling, and the Fed tapering its $85 billion/month purchasing of government debt. As of Dec. 5, Congressional negotiators were reported to be close to an agreement on the 2014 budget with proposed discretionary spending of around $1trillion. For the week there were 19 positive trends offset by only 8 negative trends. The DJIA fell from 16,086 to 15,977 mostly on the expectation of rising interest rates and the start of tapering by the Fed.

MORTGAGE MARKET

The strong economic data this week bodes well for the long-term stability of the housing market since housing values can’t continue to rise if incomes don’t continue to rise and unemployment rates don’t continue to fall. However, in the short-run the strong economic data served to slow an already slower market due to continued increases in interest rates. According to Freddie Mac’s survey the 30 year fixed rate mortgage increased this week to an average of 4.46$% with an average 0.5 point, up from last week when it averaged 4.29 percent. A year ago at this time, the 30-year FRM averaged 3.34%. The expectation is that rates will continue to rise and application volume will remain weak throughout the rest of the year. Application volume has been dropping on a weekly and a monthly rate since earlier in the year. This is a typical trend for this time of year. The MBA reported that application volume last week was down 18% from the prior week. The good news is that the decline is lower than last year. According to Refin’s latest survey, the decline in the number of people looking to buy in November dropped off less from October than in 2012.

New homes sales were surprisingly strong, but many analysts don’t believe sales increased more than 25% from September to October as reported by the Census Bureau. They are expecting the data may be restated. However, they do expect that the national rate of new-home sales will increase next year from its current rate of 440,000 to closer to the normal average rate of roughly 800,000.

Improving consumer sentiment and moderation in housing appreciation should help strengthen the home purchase environment next spring. According to the Thomson Reuters/University of Michigan’s preliminary reading, consumer sentiment jumped to 82.5 for December, up from a final reading of 75.1 in November. This was the highest reading for the index since July, and topped analyst forecasts for a reading of 76. Data released this week from Corelogic and Clear Capital show that home appreciation has slowed this fall. CoreLogic said its Home Price Index showed increases of just 0.2% in October from September. Year-over-year, home prices nationwide, including distressed sales, increased by 12.5% in October compared to a year ago. This represents the 20th consecutive monthly year-over-year increase in home prices nationally. CoreLogic’s chief economist said. “The slowdown in price appreciation is positive for the housing market as almost half the states are now within 10% of their respective historical price peaks.” Clear Capital, reportedly pulled back to 10.8% year-over-year growth in home appreciation, a slight tapering over the previous quarter’s 11.0% yearly growth. On a quarterly basis, the November national quarterly growth of 1.8% represented just half of the second quarter’s 3.3% growth in home prices.

POSITIVE TRENDS

  • Nonfarm payrolls rose by 203,000 in November, up slightly from a downwardly revised 200,000 in October. This made the unemployment rate to plummet to 7.0% from 7.3%. Average hourly earnings rose 0.2%, up from 0.1% in the prior month. The average workweek rose to 34.5 hours, from 34.4 hours. The overall report was stronger than expected. Labor force participation rose to 63.0% in November, up from a very low 62.8% in October—the lowest rate since 1978.
  • ADP employment change rose to 215,000 in November, up from an upwardly revised 184,000 in October. This was much higher than expected.
  • GDP for third quarter was revised up to 3.6%, up from its prior estimate of 2.8%. The increase was mainly due to a huge increase in inventories. Consumer spending slowed down. Final sales, which exclude inventories, increased 1.9% in the third quarter after a 2.1% gain the prior three months.  Housing and car sales remain the bright spots in the economy. Residential construction grew at a 13% annual rate. Auto sales remain at their highest pace since 2007. Macroeconomic Advisors expects fourth quarter GDP to rise 1.4%. The overall growth for 2013 will be 1.9%-2.0%.
  • Disposable income adjusted for inflation increased at a 2.9 percent annualized rate from July through September after a 4.1 percent advance in the second quarter.
  • New homes sales were at an annual rate of 354,000 in September and 444,000 in October. The September figure was a one-year low and much lower than expected but the October figure was much higher than expected. Still the figures were lower than experienced in June and the more than one million rate that existed before the financial crash.
  • The Federal Reserve reported in its Beige Book report that gains in manufacturing, technology and housing fueled “modest to moderate” economic growth from early October through mid-November. “Hiring showed a modest increase or was unchanged.” Consumer spending increased in most of the country, with retailers expressing optimism about holiday sales.
  • Initial claims for unemployment for the week ending Nov. 30 fell to 298,000, down from an upwardly revised 316,000 the prior week. This was lower than expected and the lowest in the past two months. It is getting close to the lowest level since 2005. The four-week moving average was 322,000. The continuing claims for unemployment fell also to 2,744,000, down from a downwardly revised, 2,765,000 the prior week. The four-week moving average for this measure also dropped to 2,797,000. But this measure is not yet down to the 2,500,000 level it reached in 2005.
  • The ISM index of manufacturing rose to 57.3 in November, up from 56.4 in October. This was higher than expected.
  • The Census Bureau reported that construction spending fell 0.3% in September, down from a downwardly revised 0.1% in August. This was lower than expected. However, construction spending in October rose 0.8%, which was higher than expected.
  • Auto sales in November rose to a 16.4 million rate reported Autodata Corp., up from 15.2 million in October and up from 15.3 million in November 2012. This means that sales for the year 2013 will be well above 15 million cars. This was the strongest monthly pace since February 2007. Before the financial crash, auto sales were routinely around a 16 million pace. Sales in 2012 were 14.5 million cars and light trucks. The average price paid for a new vehicle fell about $200 from the same month year earlier, the first such drop in nearly three years, according to website TrueCar.com.
  • The consumer sentiment index by the U. of Michigan jumped to 82.5 in December, up from 75.1 in November. Current levels are back to where they were in August and July and indicate consumers have recovered from the government shutdown.
  • There is a boom in condo sales in several major U.S. cities, particularly in New York, San Francisco, and Miami. This was evident in the surge of multifamily permits issued in October. Much of the new demand is coming from abroad. In Miami, much of the financing is cash driven, with buyers putting down 50% to buy a unit. For several years after the financial collapse there was a glut. But now all that glut is gone and construction is booming.
  • Wells Fargo Bank said it will make some loans that don’t meet the definition of a qualified mortgage. Chase, BofA and Citi are also likely to make some non-QM loans. Such mortgages are much less salable on the secondary market and face greater legal liability.
  • Detroit can remain under bankruptcy court protection, where it’s shielded from lawsuits or other actions that might interfere with its attempts to reduce debt and cut employee benefits announced bankruptcy Judge Rhodes on Dec. 3. With Judge Rhodes’s ruling, the city can now focus on writing a plan to cut the debt. Pension benefits are not entitled to any heightened protection in bankruptcy, he said. Judge Rhodes said Detroit has no obligation to sell assets such as its great art collection before filing for bankruptcy. This huge municipal bankruptcy (with $18 billion in debt) will have an impact on several other cities and states, including Illinois and Chicago. An evaluation of the value of the art collection in Detroit was $866 million which is not nearly enough to pay off the $18 billion in debt if it were entirely sold as some pensioners thought.
  • By banning filibusters over executive branch nominations, it is now likely that Mel Watt will be approved by the Senate to run the FHFA which manages Fannie and Freddie. He is a liberal and will likely encourage more low quality loans be purchased by Fannie and Freddie.
  • Illinois legislators passed an overhaul of the state’s public-employee retirement system on Dec. 3, cutting benefits for workers and retirees. Illinois is struggling to address a gap in its pension funds that is nearing $100 billion.
  • In third quarter, smaller mortgage firms held a 60% market share of the U.S. origination market, up from 39% in 2009, reported Inside Mortgage Finance. The top banks have dropped in their market share mainly due to their decision to stop buying loans from other lenders or mortgage brokers, due to costly capital rules and new regulations. Bank of America, Citigroup and Wells have cut more than 10,000 mortgage-related jobs across the U.S. Bank of America’s market share fell to 5.2% in the first half of 2013 down from 21.6% in 2009. Some of the smaller firms that have grown in market share are Quicken Loans, Nationstar Mortgage, Freedom Mortgage M&T Bank, and Plaza Home. The top five mortgage originators as of June 2013 were Wells Fargo, JP Morgan Chase, BofA, Quicken Loans, and US Bancorp with a combined 47.7% market share.
  • Congressional negotiators are talking about a minimum of $30 billion and a maximum of $60 billion in sequester relief for both this year and next, sufficient not only to save the Pentagon from the coming round of cuts but to allow some domestic priorities to be reordered as well. This is a long way from the $4 trillion “grand bargain” so heavily touted not all that long ago but suggests there will not be another government shutdown soon.
  • The average price for a gallon of regular gasoline at retail was $3.25 on Dec. 4, down from $3.28 a week ago but back to the same price a month ago. This is down from $3.38 a year ago reported AAA. On Dec. 6 a glut was reported in the Gulf Coast. Deutsche Bank expects West Texas Intermediate crude prices to fall below $80/barrel, down from $97 currently.

NEGATIVE TRENDS

  • Retail sales over Thanksgiving weekend were down 2.7% from a year ago, according to the National Retail Federation. This was the first decline over this holiday weekend in at least seven years according to the Federation despite earlier opening hours. Several major retailers were even open on Thanksgiving Day.
  • The yield on the ten-year Treasury rose 8 points to 2.88% this week based on the high employment report issued by ADP, high nonfarm payroll increase, and low initial claims for unemployment report. If employment rises sharply, it is likely the Fed will start tapering their bond buying program by March if not sooner. Many forecasters are predicting the yield on the ten-year Treasury will hit 3% soon.
  • Factory orders in October fell 0.9% after rising 1.8% in September. This suggests weakness in manufacturing.
  • The ISM index of services fell to 53.9 in November, down from 55.4 in October. This was lower than expected and shows a slow pace of economic growth.
  • Congress faces a long to-do list before year’s end. Congress enacted only 52 new laws this year, down from 284 laws enacted by the prior Congress from early 2011 to early 2013, according to GovTrack. On the to-do list is a deal on an overall spending cap for the rest of fiscal 2014, that would replace some of the scheduled across-the-board cuts, known as the sequester. If that is done now, spending will drop from $986 billion now to $967 billion in mid-January, with most of the cuts coming from the military. The top order of business is to agree on a plan to finance the government beyond Jan. 15. At month’s end, emergency benefits for the long-term unemployed expire. Other issues to be addressed are farm programs, food stamps, and a scheduled reduction in payment for doctors under Medicare.
  • The self-imposed deadline for fixing Obamacare by Dec. 1 was not met, although Obama claims “we believe we have met the goal of having a system that will work smoothly for the vast majority of users.” However, one HHS official said 30% top 40% of the exchanges are still unfinished.
  • The number of commercial banks in the U.S. fell to 6,891 in third quarter, falling below 7,000 for the first time since the FDIC began counting in 1934. Most of the decline was of smaller banks (under $100 million in assets) and occurred since 1984. According to industry experts, the main reason for the decline in number of banks is the rising capital requirement to be a bank due to regulatory and technology requirements. One downside in the decline of small banks is that such banks specialize in lending to small businesses and now they are lost. But larger banks are more profitable.
  • Obamacare has more bad news. More than half of those 18 to 29 years old say they disapprove of Obamacare and expect it will increase their health-care costs, and 4 in 10 say they anticipate the quality of their coverage will get worse because of it, a survey by Harvard University’s Institute of Politics shows. In a finding perhaps more troubling for the White House, almost half in that age group, say they’re unlikely to enroll in insurance through a government exchange, even if eligible. That could put at risk the economics of the Patient Protection and Affordable Care Act, which needs young, healthy people to enroll in large numbers to offset the costs of caring for older, sicker Americans.

CONCLUSION

At last the economy showed some strength but will that continue given all the challenges we are facing? The U.S. must now deal with rising interest rates, the tapering of bond buying by the Fed, increased federal regulations, and cutting federal expenses to reduce the federal deficit.

OUR FIRM

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161. We are selling some customized news blogs if you are interested in reaching your customers better. We are also helping our clients position themselves for a successful 2014 by providing tools to manage operational risk and increase purchase money production.

 

 

Posted by cclifford | in Economic Newsletter | No Comments »
Released Nov. 30th 2013

David Olson and Christine Clifford

SUMMARY

It was another week of mixed economic reports. On the positive side, initial claims for unemployment fell and were now close to a new low level for the year. Building permits rose. Home prices continued to rise. Gas and oil prices continued to decline. There were slightly more positive than negative trends. Among the negative trends, housing affordability fell to a five year low. Pending home sales fell to a five month low. Durable goods orders fell. The Fed announced it was lowering its long run forecast for GDP growth because of low labor productivity and formation of new jobs. Two measures of consumer confidence went into opposite directions in November probably due to complications with the government shutdown. For the week there were 9 positive trends and 7 negative trends. For the week ending as of Nov. 27, the DJIA rose from 16,016 to 16,086.

MORTGAGE MARKET

Rising homes values and lack of consumer confidence about potential income growth appears to be slowing the improvement of the housing market. Confidence among U.S. consumers declined in November to a seven-month low as Americans grew more pessimistic about the labor-market outlook. The National Association of Realtors reported this week that their index of pending home sales declined for the fifth consecutive month. The Realtors attribute it to a decline in affordability caused mostly by rising home prices but also attributable to an increase in interest rates since the spring. Mortgage applications fell for the fourth consecutive week, due mostly to a decline in purchase applications according to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending November 22.

While building permits were up to the highest level in five years according to Commerce Department data, the rate of single-family home construction was still far below the historic average rate. More sales of new homes would really help kick start the economy, but consumers appear reluctant to sell their homes and move up despite the historically low interest rates driven by huge volumes of bond buying by the Federal Reserve. The government’s efforts to spur housing so far have had only tepid impact. The increase in new home sales was largely due to increases in the number of permits for apartment buildings which will be rentals. Rents have risen 2.99% so far this year according to Axiometrics, October Apartment Market Summary. The increase in the number of new apartment buildings coming to the market is likely to slow the rate of increase in rents next year.

According to data released from Case Shiller and the FHFA, housing values have continued to increase. Case-Shiller’s 20 city index was up 13.3% year-over-year. FHFA’s index, based on values of homes with government-backed loans, was up 8.5% from a year earlier. The lack of sufficient numbers of homes for sale to meet the demand has been the primary cause of rising home prices. Incomes are not expected to increase much due to high rates of unemployment so demand for homes is expected to remain weak next year and the pace of home appreciation is expected to diminish. However, as the economy improves and incomes rise, it is likely that demand for homes will increase because surveys consistently show that homeownership is still an important element of the American dream. Neighbor Works recently conducted a survey that showed that 88% of Americans believed this. Both current home buyers and renters believed that the home buying process is complicated, at 80% and 73%. The respondents reported lack of job security and a downpayment as major obstacles to homeownership.

POSITIVE TRENDS

  • Initial claims for unemployment fell to 316,000 for the week ending Nov. 23, down from an upwardly revised 326,000 the prior week. This was lower than expected. The four week moving average fell to 332,000, down from 339,000 the prior week and is now down for several weeks in a row, although this summer it was down as low as 310,000. Continuing claims for unemployment for the week ending Nov. 16 fell to 2,776,000, down from 2,867,000. The four-week moving average fell to 2,832,000, down from 2,855,000 the prior week.
  • Building permits rose in recent months. In August, building permits were upwardly revised to a 926,000 annual rate. Permits rose to 974,000 in September and 1,034,000 in October. This is the highest rate since June 2008, but is still far down from the prior peak of 2,200,000 back in 2007. From 1997 to 2007, the average was 1,600,000. This does show growing strength in new home construction, but most of the increase was for multifamily construction. Single family permits rose 0.8% in October whereas multifamily permits rose 15.3%.
  • In September, the average price of a single-family home rose 0.7% from August and 13.3% from a year ago reported S&P/Case-Shiller. In August, the average price has risen 12.8% from a year earlier. The average price is now down 19.8% from its prior peak in July 2006. The increase in September was slightly higher than expected by market forecasters. It had fallen 33.4% to a trough in March 2001 and is now up 20.4% from that market bottom. So prices have recovered almost half the decline. All of the 20 cities in the index showed an increase in year-over-year prices, led by gains of 29.1% in Las Vegas and 25.7% in San Francisco. The smallest gain was in New York City, which showed a 4.3% advance.
  • The FHFA home price index rose 0.3% in September, after an upwardly revised 0.4% increase in August. This index only reflects prices of homes insured by Fannie and Freddie.
  • A deal was struck with Iran over the production of nuclear weapons. Iran agreed not to produce them in return for stopping sanctions. This will permit Iran to sell more oil on the world market and bring down oil prices further. This, in turn, will further bring down the rate of overall inflation. The price of crude oil on Nymex has fallen to $94/barrel on Nov. 25, down from $108 three months ago. Prices of oil futures fell 1.3% on Nov. 25 with the Iran deal, meaning further declines are expected. On Nov. 27 oil futures on Nymex fell to $92.74/barrel because of a report of excess inventories. Retail gasoline prices on Nov. 27 were unchanged from a month ago, but down from a year ago at $3.287/gallon according to AAA. On Nov. 27 crude oil inventories jumped to 3 billion barrels, up from 0.3 million barrels a week earlier.
  • The USDA forecasts that net farm income will rise 15.1% this year to $131 billion, the highest level since 1973 on an inflation-adjusted basis.
  • The University of Michigan consumer sentiment index for November rose to 75.1, up from 72.0 in October. This was higher than expected.
  • Leading indicators reported by the Conference Board rose 0.2% in October, a slower increase than the 0.9% increase reported in September. This was higher than expected.
  • Residential property sales, including single-family homes, condominiums and townhomes, continue to rise, increasing to an estimated annualized pace of 5.649 million in October, a 2% hike from a month ago and an increase of 13% from October 2012, the latest RealtyTrac Residential and Foreclosure Sales Report revealed.

NEGATIVE TRENDS

  • Housing affordability is at a five year low reported the National Association of Realtors.
  • Residential home sales in 2012 and early 2013 were 57% paid for in cash according to Goldman Sachs compared with 19% in 2005. This must reflect a lot of sales of distressed properties, including REOs and short sales. Other reporters have smaller numbers.
  • Pending home sales fell 0.6% in September for a fifth consecutive monthly decline to the lowest level since last December reported the National Association of Realtors. The NAR forecasts home sales remaining flat in 2014 despite mortgage rates rising one percentage point. In September there was a 4.6% decline.
  • The index for consumer confidence by the Conference Board fell in November to 70.4, down from an upwardly revised 72.4 in October. This was lower than expected and is the lowest in the past seven months.
  • The Fed scaled back its estimates of the economy’s potential to expand. Central bankers now peg the underlying growth rate at 2.1% to 2.5%, according to projections released Sept. 18, 2013. According to Ben Bernanke, “Slower growth in productivity might have become the norm,” the central bankers noted at their Oct. 29-30 meeting, in their minutes released last week. A combination of forces may be at work. Chastened by the deep economic slump, corporate executives have reduced spending plans for factories, equipment, research and development. Startup businesses have been held back as would-be entrepreneurs find it harder to get financing from still-cautious lenders. And out-of-work Americans have seen their skills atrophy the longer they’re without jobs.
  • Durable goods orders for October fell 2.0%, down from an upwardly revised 4.1% increase in September. The decline was close to what was expected. Excluding transportation, durable goods orders fell 0.l% in October, down from a 0.2% increase in September.
  • The U.S.’s six largest banks have accumulated legal costs of $103B so far since the financial crisis, Bloomberg calculates, noting that the figure is greater than the amount they’ve paid in dividends in the past five years. Legal fees and litigation costs account for $56B and the rest is for payments to mortgage investors.

 

CONCLUSION

The economy moved ahead modestly this week with better employment numbers but housing and durable goods were running into head winds. These head winds include the end of the Bush tax cuts scheduled in 2014, taxes levied for Obamacare, and likely spending cuts in the sequester.

OUR FIRM

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161. We are selling some customized news blogs if you are interested in reaching your customers better. We are also helping our clients position themselves for a successful 2014 by providing tools to manage operational risk and increase purchase money production.

 

Posted by cclifford | in Economic Newsletter | No Comments »
Released Nov. 22nd 2013

David Olson and Christine Clifford

SUMMARY

It was another mediocre week for the economy. Initial claims for unemployment fell but continuing unemployment claims rose. Initial claims have changed very little in the past nine months and continuing claims haven’t changed much for the past two months. Retail sales were barely up and retail chain stores fear a weak Christmas season. Home builder optimism was static. Inflation rates for consumers and producers continued to drop. On the negative side, existing home sales fell. The University of Michigan index of consumer sentiment fell to its lowest level in nearly two years. The OECD lowered its forecast of global economic growth for 2014 substantially. More problems with Obamacare continued to surface and voters lost further confidence in the President. It wasn’t clear at all how Congress would handle the sequester, the federal budget, or plans for raising taxes as federal debt levels continued to skyrocket. For the week, there were 11 positive trends and 8 negative trends. The DJIA continued to soar from 15,961 to 16,065.

MORTGAGE MARKET

The mortgage industry in the United States is clearly seen as a driving factor in the mortgage melt down and ensuing financial crisis. Much has been done since the crisis to prevent another such event. Are Americans really looking for a fix or do they just want blood? The $13 billion settlement with Chase this week was an enormous penalty. However, many of the allegations cited by the government in the case were caused by the management teams at the firms Chase acquired, Washington Mutual and Bear Stearns. These people never worked for the existing Chase management team and did things that were never done at Chase.

This week the CFPB announced they were issuing a new rule to replace existing federal mortgage disclosures with new ones that are easier to understand. The new mortgage forms are designed to help consumers understand their options, better choose the deal that’s best for them, and avoid costly surprises at the closing table. The CFPB has received over 83,000 complaints about mortgages according to their consumer complaint database since December 2011. However, only 11% of the complaints involved the application process, the loan originator or the settlement process and settlement costs. The vast majority of the complaints were regarding loan servicing complaints, modifications, collections and foreclosures. How many of these problems were due to unclear disclosures? Will fixing the disclosures address much of the problem? To what degree is it driven by a poor economic climate? In 2009, the Department of Housing and Urban Development wrote a report to Congress entitled “Root Causes of the Foreclosure Crisis”, which said “most borrowers become delinquent due to a change in their financial circumstances that make them no longer able to meet their monthly mortgage obligations. These so called “trigger events” commonly include job loss or other income curtailment, health problems, or divorce.” It appears that the punitive focus of regulators and the lack of clarity due to the slow rule making process driven by the complexities of Dodd Frank are slowing our economic growth by making lenders extra cautious and less willing to lend to marginal borrowers. Perhaps this will make the country stronger in the long run, however, the cost and pain associated with mortgage origination has definitely increased and will continue to grow until at least 2015, when the mortgage industry has figured out how to implement all the rule makings coming from Dodd Frank.

POSITIVE TRENDS

  • Initial claims for unemployment fell to a rate of 323,000 for the week ending Nov. 16, down from an upwardly revised 344,000 rate the prior week. The four-week moving average fell to 339,000, down from 345,000 the prior week. This was lower than expected and shows growing strength in employment. Back in September the rate was down as low as 294,000. It was 343,000 back in January. Continuing claims for unemployment rose to 2,876,000 for the week ending Nov. 9, up from 2,810,000 the prior week and the four-week moving average rose slightly to 2,857,000 from 2,850,000. It was 2,800,000 back in August. But this is down from earlier weeks. There appear to be some errors in the seasonal adjustment for Veteran’s Day this fall which made the numbers decline so much this past week. The Labor Department believes the true rate of initial claims is probably around 340,000 where it has been in general since January.
  • Retail sales rose 0.4% in October after no growth in September reported the Census Bureau. This was higher than expected and is pretty strong considering the lack of growth in incomes. It was up 3.9% from a year earlier. Auto dealers were up 11.9% from a year ago. Excluding the auto sector, retail sales were up only 2.4% from a year ago. One chain of department stores, Stage Stores, foresees Christmas sales up only 2%-3% this year. Wal-Mart reported disappointing earnings and said its customers don’t seem in the mood to splurge.
  • The index of home builder optimism by the National Association of Home Builders remained at 54 in November, unchanged from October. An index number of 50 means there as many builders expanding as contracting. So this index shows some upward expansion.
  • The consumer price index (CPI) fell 0.1% in October after rising 0.2% in September. It rose 1% from a year ago, down from 1.2% in September from a year earlier. The core CPI rose 0.1%. It rose 1.7% from a year ago. This was the same annual rate as achieved in September. Both these figures were lower than expected and show very low levels of inflation.
  • The producer’s price index (PPI) fell 0.2% in October as expected, down further from the 0.1% decline in September. Year-over-year, the PPI is up 0.3%, unchanged from the PPI in September. Most of this decline stemmed from energy, animal feeds, and other raw materials. The core PPI rose 0.2% in October, up from the 0.1% increase in September. This shows there is little danger from inflation.
  • About 1.4 million homeowners regained positive equity from the second quarter to the third quarter, which is the biggest quarterly drop ever recorded by Zillow.
  • Manufacturing activity softened in November as the Philadelphia Fed’s Business Outlook dropped to 6.5 from 19.8 in October. Economists expected the index to fall to 11.9. An index of zero means no growth.
  • Federal Reserve officials said they might reduce their $85 billion in monthly bond purchases “in coming months” as the economy improves, according to the minutes of their last meeting.
  • Janet Yellen was confirmed by the Senate Banking Committee to the position of chairman of the Federal Reserve Bank replacing Ben Bernanke. The Senate is expected to approve her soon.
  • William Ackman’s Pershing Square Capital Management LP disclosed a 10% stake in Fannie Mae and Freddie Mac. This came days after Bruce Berkowitz of Fairholme Capital proposed a restructuring and privatization of the two GSEs. But the White House said a restructuring alone wouldn’t put the $10 trillion U.S. home-loan market on sounder footing.
  • The U.S. Treasury plans to sell its remaining 31.1 million shares in GM by year-end, the final step in winding down its 61% stake in the firm. The government has so far recouped $38 billion of the $50 billion initially invested.

NEGATIVE TRENDS

  • Existing home sales fell to a 5.12 million annual rate in October, down from 5.29 million in September. This was slightly lower than expected.
  • The OECD has lowered its global economic growth rate for 2014 to 3.6%, down from its forecast of 5.8% published six months ago. However, the OECD estimates U.S. GDP as 1.7% in 2013 and 2.9% in 2014.
  • The University of Michigan index of consumer sentiment dropped in November to its lowest point in nearly two years suggesting weak Christmas sales. Morgan Stanley predicts tepid spending growth will make 2013 the weakest holiday season since 2008.
  • The unemployment rate in October for women was 6.9% and 7.6% for men. If the labor force share of population has remained constant since 2007, these women would hold an additional 3.8 million jobs today and men would have 5.5 million more jobs reported the Institute for Women’s Policy Research.
  • The consulting firm, McKinsey Inc., warned the government as early as March of a risk of failure of Obamacare unless a single leader was named and all requirements were nailed down by April 30. This was not done until much later. The website is still unlikely to be completed by the end of November.
  • J.P.Morgan/Chase agreed to pay $4.5 billion to investors seeking to recover losses from mortgage-backed securities sold before the financial crisis. The group of 21 investors had previously received an $8.5 billion settlement from BofA.
  • The yield on the ten-year Treasury rose to 2.75% on Nov. 22 from 2.71% last week.
  • Highway construction employment remains far below its peak in 2007, more than four years after the recession ended. The industry has shed more than two million workers from the start of the recession in Dec. 2007 to reach a low in Jan. 2011. But highway construction employment remains 22% below prerecession levels based on data from the Commerce Department and Labor Department.

CONCLUSION

The economy continued to inch forward despite many challenges. Lack of leadership in Washington has caused too much uncertainty which is inhibiting sufficient capital investment for economic growth.

OUR FIRM

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161. We are selling some customized news blogs if you are interested in reaching your customers better. We are also helping our clients position themselves for a successful 2014 by providing tools to manage operational risk and increase purchase money production.

 

 

Posted by cclifford | in Economic Newsletter | No Comments »
Released Nov. 16th 2013

David Olson and Christine Clifford

SUMMARY

This week there were fewer economic reports published than the prior week when we had the strong news on GDP and nonfarm payrolls. On the positive side, labor productivity rose, gas and oil prices tumbled further, and remodeling spending rose. The negative trends included more bad news for the Obamacare rollout, a decline in October industrial production, a mediocre report on claims for unemployment, a decline in the proportion of middle-income households, and more penalties levied against banks for bad mortgage loans. There were a total of 11 positive trends and 15 negative trends. Obama’s popularity among voters sank to a new low as more bad news on the health care website was reported and more people had their existing health insurance plans canceled than were able to sign up on the more expensive new health insurance plans. At the last minute Obama announced a one year reprieve for people having their policies canceled, but it wasn’t clear whether the insurance industry had the ability to change course. As we approach the year-end, we have to deal with raising the debt ceiling and sequestration. Tax rates are scheduled to rise in the face of a weak economy. At best, GDP is likely to grow at a 2% to 2 1/2% rate. Europe remains in the doldrums. Tapering of the Fed’s bond buying is likely to be delayed to March since the inflation rate fell further than desired. The DJIA continued to skyrocket from 15,701 to 15,961.

MORTGAGE MARKET

Interest rates are rising and so are home prices but median income has stayed flat. The result is fewer moderate income families are able to buy homes. According to Freddie Mac’s weekly survey of average interest rates interest rates rose for the second consecutive week, the 30-year fixed-rate mortgage averaged 4.35% with an average 0.7 point for the week ending November 14, 2013. The NAR reported that affordability while still strong from a long-term perspective has fallen to a five-year low. The National Association of Home Builder’s affordability index showed a similar decline. They found that 64.5% of new and existing homes sold between the beginning of July and end of September were affordable to families earning the nationwide median income of $64,400, a drop from 69.3% in the second quarter, and the largest index drop since the second quarter of 2004.

Median income in the United States is flat and according to Pew Research the number of middle income households has fallen to 51% from 64% since 1971. Median incomes of younger and middle-aged households have declined since the beginning of the recession. The nation’s upper income households have received a growing share of a growing aggregate household income pie. In 1967 the top 5% received 17% of the income pie, compared to 22% in 2012. The increase in income for wealthier Americans has resulting in an increasing number of home sales of homes priced at $750,000 or more from 9% a year ago to 12% so far this year, according to the NAR.

Rising home values are reducing the number of homes with mortgages larger than the value of the home and is helping to encourage people who have been thinking of selling their homes to do so. More than 2.5 million homes saw positive equity return in the second quarter. The result is an increase in homes for sale in many markets and a move away from the number of multiple offers and escalation clauses for the limited number of available homes that occurred in the spring. The National Association of REALTORS® reported that inventory levels of unsold homes rose in September from a year earlier – the first time since 2011.

While affordability levels have declined, they are still strong and likely to decline at a slower rate and the housing market is expected to continue to strengthen. Mortgage delinquency rates fell in the third quarter, making it the seventh consecutive quarter for such a decrease, according to TransUnion data. “We looked at all 52 million installment-based mortgages in the U.S., and the trend is clear — the percentage of borrowers willing and able to make their mortgage payments continues to improve,” says Tim Martin, a TransUnion executive.

POSITIVE TRENDS

  • Labor productivity in third quarter rose 1.9%, up from a 1.8% increase the prior quarter. Unit labor costs fell 0.6%. This is further evidence of a slowdown in the inflation rate.
  • On Nov. 14 President Obama gave citizens who had their health care canceled a one year reprieve before they had to get a new policy. This last minute reversal of his Obamacare regulations for a year caught the insurance industry off guard. It wasn’t clear whether many insurance firms had the capacity to change back since it takes many months to manage such a change. Also, at least two states weren’t going to allow such a change nor was it clear that Obama had the authority to reverse course. This admission by Obama that he failed to manage his signature legislation seemed calculated to prevent Democrats in Congress from abandoning his plan. The Republicans would like to scrap the entire Obamacare system and start over.
  • Janet Yellen appeared before a Senate Committeee and is likely to be approved as the next chairman of the Fed. She said she would stick to plans to wind down the central bank’s $85 billion bond buying program if the economy continues to pick up. The Fed is likely under her leadership to keep short-term interest rates at near-zero for a long time.
  • In third quarter, household debt rose to $11.2 trillion outstanding, up by $127 billion from the second quarter. This increase was comprised of mortgages up $56 billion, student loans up $33 billion, auto loans up 31 billion, and credit cards up $4 billion. The rate of serious delinquency on these forms of debt fell for all but student loans which rose to a new high and is now higher than for credit cards.
  • The average retail price for regular gasoline fell to $3.20/gallon on Nov. 13, down from $3.44/gal a year ago and is the lowest price since Feb. 22, 2011 when it was $3.17 reported AAA. The price of crude oil fell to $93.04/barrel, the lowest price in five months. The decline was due to high production and rising inventories.
  • An index of remodeling activity maintained by the National Association of Realtors hit the highest level since 2004.
  • Pending home sales fell sharply over the summer from a three-year high. The number of single family homes sold in August was just a third of the bubble-era level eight years ago.
  • Zillow housing economist responders to their survey predict home prices in the U.S. will slow to 4% in 2014 and even lower in the following four years. They estimate the increase in 2013 was 7%.
  • Freddie Mac chose a reinsurer to offset some of the losses on the loans it guarantees, expanding the risks with private investors. It bought an insurance policy from Arch Capital Group. In October, Fannie Mae did a similar transaction with National Mortgage Insurance Corp.
  • Fairholme Capital Management offered to buy parts of Fannie and Freddie from the government in a recapitalization valued at $52 billion.
  • Total foreign college students enrolled in the U.S. rose 7.2% to 819,644 in 2013, a new high. They now comprise 3.9% of all U.S. college students. By far, the largest number—235,597–come from China.

NEGATIVE TRENDS

  • Industrial production in October fell 0.1% after rising an upwardly revised 0.7% in September. This was lower than expected and suggests that fourth quarter GDP will be weak, especially when looking at the weak retail sales figures. The decline in industrial production stemmed from declines in utilities and mining. Factory output rose 0.3%, up from 0.1% in September and higher than expected. Capacity utilization for the quarter fell to 78.1% in October, down from 78.3%.
  • Initial claims for unemployment for the week ending Nov. 9 fell to 339,000, down from an upwardly revised 341,000 the prior week. This was higher than expected. The four-week moving average fell to 344,000 which is lower than the week before, but still higher than on October 8 when it was 338,000. Continuing claims rose from 2,862,000 to 2,874,000 and was also higher than expected. These measures of unemployment remain weak.
  • The strong growth in nonfarm payrolls in October has caused the interest rate for the ten-year Treasury to rise. There is an inconsistency in the two surveys that comprise the employment report—the household survey and the establishment survey. The household survey showed a big drop in labor force participation, an increase in the unemployment rate to 7.3% and the broader measure of unemployment that includes discouraged worked and those working part time who want full employment rose to 13.8% from 13.6%.
  • The gap between youth and adults unemployment continues to remain very wide despite the fact that 52 months have passed since the end of the last recession. For workers aged 25 to 54, the rate of unemployment in September 2013 was 6% but for workers 16 to 24 it was 14.8%. In the 2001 recession, it took only six months for this gap to end. Total employment remains roughly 1.5 million beneath its prerecession peak. Wage growth was only 2.2% from a year ago October, which is barely more than inflation. Median household income was flat in 2012 from 2011. Consumer spending rose 0.1% in September after adjusting for inflation.
  • During Obama’s administration the increase in the federal deficit was $5.7 trillion. This was more than the entire federal debt in 2000. In fiscal 2013, the deficit fell to $680 billion. But Obama is proposing a tax increase of $1 trillion beginning next January and a deficit reduction of $2.5 trillion.
  • Japan’s GDP slowed to a 1.9% rate of growth in third quarter, down from 4.1% in second quarter. The Eurozone’s annualized rate of growth for the same period fell to 0.4%, down from 1.2% in second quarter. Germany only grew 1.3%. The biggest contractions were in France, Greece, and Italy.
  • The head of the Fed’s mortgage-backed security purchase program admits that it has not increased economic growth very much. The Fed spent over $4 trillion for a total return of as little as 0.25 of GDP—a mere $40 billion bump. Instead of helping GDP, it produced a bonanza profit for banks.
  • Preliminary data for third quarter shows weak retail sales in the U.S. It was the third straight quarter of weakness at Wal-Mart. Weakness was also reported at Kohl and Cisco. This suggests there will be a weak Christmas season.
  • The U.S. government is seeking $864 million in penalties from Bank of America over a mortgage-loan program called the “Hustle.” A jury found BofA’s Countrywide unit committed fraud in a mortgage program. The total cost of court cases against the mortgage industry now total nearly $100 billion since the 2007 recession.
  • The rate of inflation in the Eurozone fell to 0.7% in October, down from 1.1% in September and 2.5% a year earlier. Economists are worried that the Eurozone is heading toward deflation. The inflation rate of the G7 economies fell to 1.3% in October, down from 1.8% a year ago.
  • A recent survey on Obamacare by Public Opinion Strategies indicated that 64% of small business franchise owners think it is bad for their businesses while only 5% think it is good. For non-franchise business owners 53% think the act is having a negative impact on their business and only 12% think it is positive. Many of them have already replaced fulltime with part-time employees in anticipation of the law’s employer mandate. For firms with 40 to 70 employees, over half are making personnel decision to keep their workforce below 50 full-time employees.
  • About 106,000 people in the U.S. signed up for private health insurance through Obamacare in October, and 396,261 for Medicaid plans, according to federal data. That puts the U.S. government well behind its enrollment goals. While the government had an early target of about 500,000 sign-ups in October and 800,000 sign-ups in private plans for the first two months, it has scaled back expectations as delays and software flaws plagued the online federal exchange
  • As of Nov. 11 only 30% of independent voters approve of the Obamacare law, according to a poll by Quinnipiac. Obama’s approval on health care in the Pew Research poll declined four percentage points to 37%. The president’s overall job approval dropped to 41% from 44% in early November. On Nov. 14, the House passed a bill, 261 to 157, that lets insurers sell for another year health policies that don’t meet the requirements of the Affordable Care Act. Supporters of the bill included 39 Democrats. This bill won’t pass the Senate but was symbolic of the eroding support among Democrats for Obamacare.
  • The Empire Manufacturing Index for November fell 2.2%, after rising 1.5% in October. This index represents manufacturing in the New York state region and is lower than expected.
  • Top economists at the Fed now estimate that the U.S. economy is growing $1 trillion less per year than it is capable of. The Fed is strengthening its commitment to keep short term interest rates near zero to boost the slow-growing economy. It won’t raise short-term interest rates from near zero until the unemployment rate falls below 6.5% as long as inflation doesn’t move above 2.5%. It is now considering lowering the unemployment threshold to as low at 5.5% before raising interest rates.

CONCLUSION

Democratic politicians are overwhelmed with disappointing news on the Obamacare rollout and have little time to focus on other issues than saving their necks. Now they face lifting the federal debt ceiling and handling sequestration. Tax rates are scheduled to rise substantially in 2014.

OUR FIRM

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161. We are selling some customized news blogs if you are interested in reaching your customers better. We are also helping our clients position themselves for a successful 2014 by providing tools to manage operational risk and increase purchase money production.

 

Posted by cclifford | in Economic Newsletter | No Comments »
Released Nov. 8th 2013

David Olson and Christine Clifford

SUMMARY

There were several positive surprises in the economic data this week. GDP grew 2.8% but only 2.0% when unplanned inventories were removed. Nonfarm payrolls rose an astounding 202,000 in October indicating the economy is stronger than most economists were estimating. Yet, the unemployment rate reverted back to 7.3% and the labor force participation rate fell to the lowest level since 1978. The October shutdown of the government obviously didn’t hurt the economy. Factory orders rose a little, ISM services rose a little, personal income rose 0.5%, and the core CPE remained very low. On the negative side, median household income is still 10% below its peak in 1999, the number of household continues to grow at a very slow pace, the Eurozone is still growing very slowly, China is having problems, Obamacare is a disaster and is likely to be modified, and mortgage lenders are cutting thousands of jobs. For the week, there were 16 positive trends vs. 8 negatives. The DJIA rose from 15,603 to 15,701.

MORTGAGE MARKET

According to Census Data, in 1984 there were 50 million married couples and 23 million nonfamily households (singles and those living with non-relatives). In 2011, there were 58 million married couples down from 59.1 million in 2009. Meanwhile, nonfamily households increased from 38.3 million in 2009 to 40.1 million in 2011. According to data collected by the National Association of Realtors for their 2013 profile of home buyers, sixty-six percent of recent home buyers were married couples—the highest share since 2001. The report also showed that the market share of single buyers declined from 32 percent in 2010 to 25 percent in both 2012 and 2013. NAR’s chief economist Lawrence Yun attributes the decline to “restrictive mortgage lending standards, which favor dual-income households who are more likely to have higher credit scores.” We have found in our anecdotal surveys that young singles are nervous about their long-term job prospects and therefore prefer to rent even when they could afford to buy and could potentially reduce their monthly housing expense by buying. There has been an overall decline in household formation. Young people are choosing to live with their parents longer and when they do finally move out they are having trouble saving for a down payment. According to the Census Bureau, median income in the United States has fallen since 1999. The mortgage industry is facing a long-term structural challenge of a falling share of consumers with the capacity and willingness to buy. According to the MBA’s weekly mortgage application survey, applications fell 7.0% last week and the purchase index, a leading indicator of home sales, fell 5.2 percent. Application volume is likely to fall again this week since rates are up. Freddie Mac reported that the 30-year fixed-rate mortgage averaged 4.16% with an average 0.8 point for the week ending November 7, 2013, up from last week when it averaged 4.10%. Affordability is still at a high point relative from a historical perspective and owning is more affordable than renting in much of the country. The industry needs to find ways to more successfully explain the benefits of homeownership. Loan officers and real estate agents tell us that this message has been challenging to deliver when consumers are skittish due to the political climate and weak economy.

  Key Economic Numbers Show Weak Economy

+       Falling CPI (Sept 2013 over the past year)—1.2%

+       Growth in home prices over past year as of Sept 2013—10%

+       Falling Government deficit (year ending 9/2013) —$680 billion down from $1 trillion

+       Rising Average monthly growth in nonfarm payrolls during past 4 months—158,000

+       Rising growth in consumer wealth in past year as of 2Q 2013—10%

+       Rising Dow Jones Industrial Average in past year—26%

-       Weak GDP—2.8% in 3Q13 and 1.6% over the past 4 quarters

-       Rising Unemployment rate in October—7.3%

-       Growing Federal Debt/GDP in 2013—103%

-       Falling population growth in 2012—0.8% down from 1%

-       Falling growth in household income in 2012—0% but down 10% from 1999 in real terms

-       Rising interest on the ten-year Treasury —2.74%, COB 11/8/13

POSITIVE TRENDS

  • Nonfarm payrolls rose by 202,000 in October, up from an upwardly revised 163,000 in September. This was much higher than expected. The prior two months were revised up by 60,000. The unemployment rate rose to 7.3%, from 7.2%. Average hourly earnings rose 0.1%, the same increase as in September. The average workweek fell to 34.4 hours, down from 34.5 hours in October. The labor force participation rate, which indicates the share of working-age people in the labor force, decreased to 62.8%, the lowest since March 1978, from 63.2% a month earlier.
  • GDP for third quarter was a surprising 2.8%, up from 2.5% in second quarter. This was much higher than expected and was due to a big increase in inventories. Inventories added 0.8 percentage point to the GDP figure. The underlying growth rate was 2.0%. Household purchases and business investment slowed down. First quarter GDP growth was 1.1%. The government is expecting a soft figure for GDP in fourth quarter as inventories are drawn down.
  • Factory orders rose 1.7% in September after declining 0.1% in August and declining 2.8% in July. Orders were up 2.5% from a year ago. Orders for the first nine months of 2013 were up 1.7% from the same period in 2012. Since the current inflation rate is about 1.7%, this means in real terms there has been no growth in new orders in 2013. Shipments for manufactured goods rose in four of the past five months. Unfilled orders were up seven of the past eight months. Inventories were up nine of the past ten months. Manufacturing is on an upswing.
  • Initial claims for unemployment for the week ending Nov. 2 were 336,000, down from 340,000 the prior week. This was as expected. The four-week moving average fell to 347,000, down from 356,000 the prior week. This was still higher than the level of 305,000 reached in September. This is high enough to keep the unemployment rate steady, but not bring it down. Continuing claims for unemployment were 2,868,000 up from 2,863,000 the prior week. The four-week moving average was 2,870,000. This is still higher than the rate in September.
  • The ISM services index rose to 55.4 in October, up from 54.4 in September. This is higher than expected, but lower than in August and July.
  • The Conference Board’s index of leading economic indicators rose 0.7% in September for the second month in a row. This suggests modest economic growth for this period.
  • In 2012, 5.8% of new single-family homes were built as rentals, up from 4.8% in 2011 and the highest share since 1974, according to the National Association of Homebuilders. This may reflect tight underwriting requirements for new home buyers. Investors in rentals see strong demand and rising rents. According to Zelman & Associates, there are 15 million single-family homes that are rented, up from 10.8 million in 2005.
  • A wave of mergers of home builders is occurring because traditional sources of financing are tight. Builders have to resort to mergers, acquisitions and accessing capital through public markets in order to expand.
  • The share of Americans who own their homes was 65.3% in the third quarter, up from 65% in the previous three months, the Census Bureau reported. The prior level was the lowest since the third quarter of 1995.
  • The average retail price for a gallon of regular gasoline fell to $3.22, down from $3.35 a month ago and $3.46 a year ago reported AAA. This should boost consumer confidence.
  • October was the busiest month for U.S.-listed IPOs since 2007. Some 33 companies raised more than $12 billion. Capital markets are booming. The DJIA is up 26% from a year ago.
  • President Obama apologized over canceled health insurance plans and signaled he was open to some kind of relief, probably an administrative fix.
  • The ECB cut the interest rate at which it lends to banks to 0.25% from 0.5%. It said it would make unlimited loans available to banks until mid-2015, a year longer than before. The reason for the decline was low inflation rates. In addition, Germany reported a decline of 0.9% in industrial production in September.
  • Freddie Mac declared a $30.5 billion third-quarter profit and said it would repay $30.4 billion to the Treasury. Fannie reported an $8.7 billion third-quarter profit and will repay $8.6 billion. The two GSEs have now repaid almost all the funds lent by the government.
  • The Bureau of Economic Analysis reported that personal income rose 0.5% in September, up from 0.4% in August while personal spending rose 0.2%, down from 0.2% in August. This report suggests consumers are cutting back on spending from their income.
  • The PCE deflator for September on a year-over-year basis rose 1.2%, unchanged from August. This is the Fed’s favored measure of inflation and indicates there is no danger from inflation and the Fed is not under pressure to taper its bond buying policy.

NEGATIVE TRENDS

  • According to the latest data from the Census Bureau, only 380,000 households were created over the past four quarters through September 2013. That is far below the average of 1.5 million households per year that occurred from 2000 to 2007. Household formation has slowed since the credit crisis of 2008, as more young adults have chosen to live with their parents in the midst of a sluggish job market. From 2008 to 2012, average growth in households has been around 562,000. Online real estate company Trulia estimates that nearly 2.4 million households have gone “missing” since the crisis. Housing bulls believe that as the economy recovers, there will be a jump in household formation, unleashing pent-up demand that will drive home prices and the demand for rental units higher. But we are yet to see household formation catch up with its normal pace.
  • Cars and light trucks sold at a 15.23 million annual pace in October, down from an 15.28 million rate in September and 16.09 million rate in August reported Autodata. This was up from a 14.40 million rate a year earlier but was the lowest rate since April 2013. The decline was with imports. Domestic sales were up. This signifies a slowdown from what had been a hot market which peaked in August.
  • Median household income was $51,017 in 2012, unchanged from the prior year but down 10% (measured in 2012 dollars) from 1999 according to the Census Bureau. The median income in 2012 is unchanged from its level in 1989. It is this decline in income for the past 14 years that keeps the economy growing so slowly and retail sales weak.
  • Detroit isn’t the only city with problems today. The Wall Street Journal reported that more than half the top 250 U.S. cities have reserves below their 2007 levels. 114 cities saw overall debt loads increase from 2007 to 2012. The real estate markets in 100 cities are still worse than they were in 2007. State aid to municipalities fell 6.2% in 2010 and 2011. It fell 3.7% in 2011. Eight cities had large population declines from 2002 to 2012 which took away taxpayers. Detroit lost 24.5% of its population. The next biggest losers were: New Orleans, Cleveland, Birmingham, Buffalo, St. Louis, Pittsburgh and Chicago.
  • Early reports from Obamacare indicate that young customers are avoiding the new health plans. The average age of those signing up is around 51 and not 40 as was hoped to make the plans economically viable reports the Wall Street Journal.
  • Mortgage lenders are reducing tens of thousands of jobs because of a slowdown in origination volume. The sector announced 49,000 layoffs the first nine months of 2013, most among all industries, outplacement firm Challenger Gray & Christmas said in a report
  • The European Union said subdued growth will likely keep the bloc’s unemployment rate near record highs through 2015, as private sector debt-cutting and government austerity continue to weigh on consumer spending and business investment. They predict Eurozone growth of 1.1% in 2014 and 1.7% in 2015.
  • Growth in China’s GDP rose to 7.8% in third quarter, up from 7.5% in the second. This is down from the average of 10% growth experienced in 2009-2011. Back in 2007 growth reached 14.2%. From 2009 to 2012, the Chinese created a huge amount of new credit and now suffers from a debt overhang with a credit-to-GDP ratio of 69% of GDP. There is now talk of hard budget constraints. The leadership in Beijing wants to rein in credit which would slow down growth in the rest of the world.

CONCLUSION

The federal government is showing no clear direction in dealing with our serious economic problems.

OUR FIRM

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161. We are selling some customized news blogs if you are interested in reaching your customers better. We are also helping our clients position themselves for a successful 2014 by providing tools to manage operational risk and increase purchase money production.

 

Posted by cclifford | in Economic Newsletter | No Comments »
Released Nov. 1st 2013

David Olson and Christine Clifford

SUMMARY

The biggest news of the week was the obvious fiasco of the Obamacare rollout and evidence that up to 10 million Americans will lose their health care insurance. This caused the president’s approval ratings to fall to a new low. The positive news was a rise in industrial production, a rise in home prices, a rise in the Chicago PMI, and a fall in oil and gas prices. The negative news included a fall in pending home sales, a fall in retail sales, weak initial claims for unemployment, a weak ADP report on new jobs, a decline in consumer confidence, and an increase in unemployment in Europe. Both the CPI and PPI indices showed little inflation. The Fed admitted we have a slow growing economy and refused to announce when it would begin to taper its bond buying program. For the week there were 9 positive trends and 13 negative trends. The DJIA rose from 15,570 to 15,603.

MORTGAGE MARKET

This week was the annual meeting of the Mortgage Bankers Association of America as they celebrated their 100th anniversary. The main message at the meeting was compliance. The big bank lenders who in years past had huge booths at their marketplace had none this year. Fannie and Freddie who dominate the industry had none. The subprime lenders (who once dominated booth space) had none. The dominant vendors this year were companies that sell regulation compliance packages to lenders. Attendance was rumored to be 4,000 which is up from 2,000 at the lowest point in 2001 in Toronto when the world Trade Center crashed. The gossip was about how many more suits would be filed against the top lenders, especially Chase and BofA. The big lenders were laying off people as refis decline. The best guess was originations would be $1 trillion (or less) in 2014, down from $2.1 trillion in 2012 and $1.6 trillion in 2013. The industry has to shift to purchase money mortgage but consumer confidence is down. Can house prices continue to rise while unemployment remains high and incomes remain flat for most people? Only high income people are benefiting from rising stock prices and rising incomes. Home building is flourishing in Washington, DC with the expansion of government spending. The mortgage industry is bracing itself for the rollout of QM at the beginning of the year. It is still too soon to know quite what the impact will be. There will likely be redistribution of MSRs due to implementation of Basel. The difficulty caused by unclear regulation will weaken a declining mortgage market next year.

POSITIVE TRENDS

  • Industrial production rose 0.6% in September, up from 0.4% in August and larger than expected. Capacity utilization rose 78.3% in September, up from 77.9% in August and larger than expected. Almost all the increase came from utilities as the nation’s temperature fell and people turned up their furnaces. Manufacturing grew only 0.1%, lower than 0.5% in August and reflected more the malaise within the economy. Motor vehicle production rose 2.0% in September after increasing 5.2% in August. Without this increase in motor vehicle production, manufacturing would have been flat.
  • Case-Shiller reported its index of home prices rose 12.8% in August from a year earlier which is a bit higher than expected. In July the index rose 12.3%. Denver and Dallas again set new highs. All the other cities remain below their peaks. Boston and Charlotte are the two MSAs closest to their peaks with only 89% left to go. Las Vegas is still down 47.1% from its peak level. Detroit remains the only city below its 2000 index level. The composite home price index for the 20 large cities still remains 20.3% down from the peak reached in July 2006. But it has risen 22.7% from its trough in March 2012 and thus has recovered almost half its decline. The 20 city composite index is now back to where it was in June 2004.
  • The PMI for October rose to 56.4, up from 56.2 in September. This was higher than expected and shows some growth in the economy.
  • The Federal Reserve Bank held a two-day policy meeting this week and published no clear signal about whether they would pull back their bond buying policy in December or continue into 2014. They stuck to their assessment that we have a “slow-growing economy” and decided to keep their $85 billion a month bond buying program in place for now. They said, “The housing sector has slowed somewhat in recent months” but the economy is expanding “at a moderate pace” and exhibits growing underlying strength. Officials chose to “await more evidence that progress will be sustained” before adjusting the bond-buying program.
  • The price of a barrel of crude on the Nymex to fall to $96.77/barrel, the lowest price since June 28. This was caused by a sharp rise in the amount of oil in storage in the U.S. to 4.1 million barrels last week, up from forecasts of 2.2 million barrels. The average retail price of a gallon of regular gasoline slipped to $3.28 on Oct. 31, down from $3.33 a week ago and $3.52 a year ago. This is yet another indication of declining inflation and a weak economy.
  • In the early 1960s, labor force participation among men ages 25 to 64 began a slow steady decline from 95% to about 84% today, a trend masked by the surge of women into the labor force. The participation of women peaked in 2000 and has declined by two percentage points today. Unless men re-enter the job market, prospects for the resumption of vigorous growth in the U.S. labor force are dim said William Galston in the Wall Street Journal.
  • Investors are rapidly buying debt issued by Fannie and Freddie this month. The price on one $250 million class of risk-sharing securities that Freddie Mac sold in July jumped to 17% above face value, sending yields tumbling. The prices of other riskier mortgage bonds, including subprime and commercial mortgage debt, have also risen in recent weeks amid growing expectations that the Fed will maintain its monetary stimulus program through at least March.
  • The Treasury Department announced the budget deficit was $680 billion this past fiscal year, down from $1,089 billion the prior fiscal year.
  • The Greek recession shows signs of easing after the Mediterranean country cut wages and pensions and increased taxes to meet targets linked to its two bailouts from the European Union and the International Monetary Fund. Prime Minister Antonis Samaras plans to trim the budget deficit to 2.4 percent next year, down from 9 percent in 2012 and a peak of 15.7 percent in 2009. The government forecast on Oct. 7 that gross domestic product will increase 0.6 percent next year, the first annual expansion since 2007.

NEGATIVE TRENDS

  • Pending home sales fell 5.6% in September after declining 1.6% in August. This was lower than expected reported the National Association of Realtors. The decline was mostly blamed on rising mortgage rates. This the fourth straight monthly decline and the biggest percentage decline in more than three years. Part of the decline is probably due to strong seasonality in spring and a normal decline in the fall.
  • The ADP Employment Change for October was 130,000 jobs, down from 145,000 in September. This was the smallest increase in the past six months. This isn’t sufficient to boost the economy above its current low growth rate of 1.5% to 2.0%.
  • Retail sales in September fell 0.1% after rising 0.2% in August. This decline was expected. Much of the decline was due to the auto sector which declined due to the fact that the Labor Day weekend fell in August and made August auto sales stronger than otherwise. Excluding auto sales, retail sales rose 0.4% which was strong than expected.
  • Initial claims for unemployment fell to 340,000 for the week ending October 26, down from 350,000 the prior week. But the four-week moving average continued to rise to 356,000, up from 348,000 a week earlier. Continued benefits rose to 2,881,000, up from 2,850,000 a week earlier. The four-week moving average fell to 2,879,000, down from 2,889,000 a week earlier. The initial claims data has been rising over the past several months and the Labor Department reports that layoffs are not low enough to drive payroll gains above 200,000.
  • The PPI (producer price index) fell 0.1% in September. This is down from 0.3% in August and lower than expected. The decline was in due to food prices. Core producer prices rose 0.1% in September, up from no change in August. Core crude prices fell 1.0% in September and was the fifth monthly decline in such prices. The PPI was up just 0.3% year-over-year in September and shows a decline in the inflation rate. In August the decline was 1.4%. This decline in inflation is another indication of the weakness of the economy.
  • The Consumer Confidence Index of the Conference Board fell to 71.2 in October, down from 80.2 in September. This was lower than expected and was mainly due to the government shutdown.
  • The CPI rose 0.2% in October, up from 0.1% in September and was a little higher than expected. The core CPI rose only 0.1%. There is very little inflation.
  • The Eurozone’s statistical reported that the rate of unemployment in the area in October rose to a record 12.2% and their rate of inflation declined to 0.7% from 1.1% in September. This is putting pressure on the European Central Bank to reduce interest rates soon. The bank is concerned over the strong euro and a credit crunch which may cut retail spending.
  • A recent study by the International Monetary Fund shows that excessive sovereign debt reduces growth in GDP only when household and corporate sectors are heavily indebted too. Total debt is the real problem, not just sovereign debt. This becomes apparent when busts follow credit-driven booms. Households then reduce their spending, the main component of GDP. Firms avoid investing and concentrate on shrinking their balance sheets by paying off loans. These adverse trends reinforce each other increasing the overall drag on growth. The European Commission uses a figure for private debt of 160% of GDP when problems begin. The nations with the highest ratio of private debt to GDP are: Luxembourg, Ireland, Cyprus, Portugal, Belgium, Netherlands, Malta, and Spain. The ratio in the U.S. is 160% with 103% government debt. The Euro area is nearly identical with 160% private debt and 91% government debt to GDP. Germany is low with 120% private debt and 81% government debt as a share of GDP. For some reason, this study omits the figures for Greece which must have the worst ratios. This study helps explain the recent slow rates of growth for Europe and the U.S. and suggests growth won’t pick up much until this debt levels come back down. There is not a single case of a highly indebted nation having high economic growth.
  • A report by the government’s Special Inspector General showed that fewer people than originally anticipated were helped by the HARP program. In early 2011, the program was expected to help 546,562 homeowners but now that figures has dropped to 367,000. The Treasury set aside $7.6 billion in federal funds on this program.
  • A recent Wall Street Journal/NBC poll showed a record low share of American voters approve Obama’s presidency. His job approval fell to 42% with 51% of respondents disapproving of his performance as president. This approval share is down from 47% in October and 53% a year ago. This is the first time since Obama was a presidential candidate that more voters viewed him negatively than positively. The Real Clear Politics poll average of 8 different polls showed 51.6% of voters disapproved of him vs. 43.9% approved, a new record and very similar to the WSJ/NBC poll. No single poll of the 8 major polls had Obama’s approval share ahead of his disapproval share. The fiasco over the crippled launch of Obamacare is the most recent problem to afflict the president. It now appears that up to ten million people will lose their health care insurance despite Obama’s promise to the contrary. This comes on top erasing red lines in Syria, the terrorist attack in Benghazi, the IRS targeting of conservatives, and the overall weakness of the economy due to the massive increase in government regulations.
  • The U.S. plans to sue Bank of American as much as $5.1 billion over soured mortgage-backed securities in yet the latest suit against banks in the U.S. over bad mortgages.
  • Lot prices rose 7% in first quarter 2013 compared to the prior quarter. In second quarter they rose 6%, and rose 4% in third quarter according to housing firm Zelman & Associates. The rapid trend stands to slow the rise of new-home prices which average more than $300,000 according to the Census Bureau. Land typically accounts for 40% of the cost to build a home. Some builders are now renegotiating land deals or walking away because the price of new homes are now back to the 2008 peak prices.

CONCLUSION

The economy continued to grow at a mediocre pace and the Fed refused to say when they would begin tapering their bond buying program.

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Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161. We are selling some customized news blogs if you are interested in reaching your customers better. We are also helping our clients position themselves for a successful 2014 by providing tools to manage operational risk and increase purchase money production.

 

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