Fed: May economic activity shows signs of slowdown

Mixed bag on housing, positive news on unemployment

On Wednesday the final estimate of the first quarter GDP is expected to come in unchanged – a 0.2% contraction – owing to a number of factors including winter weather, the California port strike, and other issues.

In the meanwhile, early reports for the second quarter paint a mixed picture – according to the Chicago Federal Reserve, there was net improvement in May’s run of economic data but not much at least based on the national activity index which comes in at minus 0.17 vs a downward revised minus 0.19 in April.

The 3-month average is telling the same story of weakness, at minus 0.16 vs a revised minus 0.20 in April.
Much stronger payroll growth, at 280,000, was May’s highlight but the gain was offset by a 1 tenth tick higher in the unemployment rate to 5.5% which leaves the month’s total employment contribution to the index unchanged at plus 0.10.

Other readings were also little changed and all soft: production-related indicators at minus 0.17 vs April’s minus 0.19, sales/orders/inventories at zero vs minus 0.1, and personal consumption & housing at minus 0.09.
Housing data has been mixed, with strong news on starts and but a slowing in sales and price growth.

First-time buyers boost existing-home sales 5.1% in May

Strong activity focused in Northeast, all regions see gains

Fueled partly by an increase in the share of sales to first-time buyers, existing-home sales increased in May to their highest pace in nearly six years, according to the National Association of Realtors.

Led by the Northeast, all major regions experienced sales increases in May.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 5.1% to a seasonally adjusted annual rate of 5.35 million in May from an upwardly revised 5.09 million in April. Sales have now increased year-over-year for eight consecutive months and are 9.2% above a year ago (4.90 million).

Last month, existing-home sales dropped 3.3% on a monthly basis.

“The overall economy is improving, and consumers are becoming increasingly aware that low rates won’t be around forever,” said Bill Banfield, vice president atQuicken Loans. “While this month’s report is encouraging for the housing market, bidding wars will continue to drive up prices if inventory doesn’t increase to a more healthy supply level in the coming months.”

Lawrence Yun, NAR chief economist, says May home sales rebounded strongly following April’s decline and are now at their highest pace since November 2009 (5.44 million).

“Solid sales gains were seen throughout the country in May as more homeowners listed their home for sale and therefore provided greater choices for buyers,” he said. “However, overall supply still remains tight, homes are selling fast and price growth in many markets continues to teeter at or near double-digit appreciation. Without solid gains in new home construction, prices will likely stay elevated — even with higher mortgage rates above 4%.”

Total housing inventory at the end of May increased 3.2% to 2.29 million existing homes available for sale, and is 1.8% higher than a year ago (2.25 million). Unsold inventory is at a 5.1-month supply at the current sales pace, down from 5.2 months in April.

The median existing-home price for all housing types in May was $228,700, which is 7.9% above May 2014. This marks the 39th consecutive month of year-over-year price gains.

The percent share of first-time buyers rose to 32% in May, up from 30% in April and matching the highest share since September 2012. A year ago, first-time buyers represented 27% of all buyers.

“The return of first-time buyers in May is an encouraging sign and is the result of multiple factors, including strong job gains among young adults, less expensive mortgage insurance and lenders offering low downpayment programs,” said Yun. “More first-time buyers are expected to enter the market in coming months, but the overall share climbing higher will depend on how fast rates and prices rise.”

According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage climbed in May to 3.84% from 3.67% in April but remained below 4.00% for the sixth straight month.”

With demand continuing to far exceed supply, properties typically stayed on the market for 40 days in May, up from April (39 days) but the third shortest time since NAR began tracking in May 2011. Short sales were on the market the longest at a median of 131 days in May, while foreclosures sold in 56 days and non-distressed homes took 38 days. Forty-five percent of homes sold in May were on the market for less than a month.

All-cash sales were 24% of transactions in May for the third straight month and are down considerably from a year ago (32%). Individual investors, who account for many cash sales, purchased 14% of homes in May, unchanged from last month and down from 16% in May 2014. Sixty-seven% of investors paid cash in May.

Distressed sales — foreclosures and short sales — remained at 10% for the third consecutive month in May and are below the 11% share a year ago. Seven% of May sales were foreclosures and 3% were short sales. Foreclosures sold for an average discount of 15% below market value in May (20% in April), while short sales were also discounted 16% (14% in April).

Single-family home sales jumped 5.6% to a seasonally adjusted annual rate of 4.73 million in May from 4.48 million in April, and are and now 9.7% above the 4.31 million pace a year ago. The median existing single-family home price was $230,300 in May, up 8.6% from May 2014.

Existing condominium and co-op sales increased 1.6% to a seasonally adjusted annual rate of 620,000 units in May from 610,000 units in April, and are 5.1% higher than May 2014 (590,000 units). The median existing condo price was $216,400 in May, which is 1.9% higher than a year ago.

May existing-home sales in the Northeast jumped 11.3% to an annual rate of 690,000, and are now 11.3% above a year ago. The median price in the Northeast was $269,000, which is 4.8% higher than May 2014.

In the Midwest, existing-home sales rose 4.1% to an annual rate of 1.27 million in May, and are 12.4% above May 2014. The median price in the Midwest was $181,900, up 9.4% from a year ago.

Existing-home sales in the South increased 4.3% to an annual rate of 2.18 million in May, and are 6.9% above May 2014. The median price in the South was $198,300, up 8.2% from a year ago.

Existing-home sales in the West climbed 4.3% to an annual rate of 1.21 million in May, and are 9.0% above a year ago. The median price in the West was $324,000, which is 10.2% above May 2014.

Monday Morning Cup of Coffee: CFPB under the gun again

Plus disparate impact, what the Fed is doing, #FannieGate and more

Monday Morning Cup of Coffee takes a look at news coming across HousingWire’s weekend desk, with more coverage to come on bigger issues.

Quick heads up to start – by shortly after 9 a.m. we should know whether the Supreme Court will have a ruling on whether housing policy is subject to the onerous burdens of “disparate impact.”

How big are the stakes? Pretty darn big.

It’s hard to read the tea leaves on what the Federal Reserve will be doing with interest rates. Goldman Sachshas this to say.

“We are pushing back our forecast for the first Fed rate hike from September to December 2015. In large part this reflects the fact that seven FOMC participants are now projecting zero or one rate hike this year, a group that we believe includes Fed Chair Janet Yellen. We had viewed a clear signal for a September hike at the June meeting as close to a necessary condition for the FOMC to actually hike in September, but the committee did not lay that groundwork.”

But Wells Fargo analysts think otherwise.

“The FOMC’s fed funds expectations indicate that the Fed is set for two rate hikes in 2015 probably at the September and December meetings, which have press conferences. The Fed seems similarly inclined to hike rates four times in 2016.

“The market’s Fed funds expectations in the near and intermediate term seem to be significantly at odds with the FOMC. In the long run, the difference is within reasonable proximity, we think.”

Bank of America/Merrill Lynch lead analyst Chris Flanagan has this to say on rates, and the outlook for mortgage-backed securities.

“…(T)he financial stability system that has been constructed in the post-crisis era, including Dodd-Frank, Volker, Basel III, etc, will make it very difficult for the Fed to actually move away from ZIRP and QE. That theme was on full display the past few weeks as credit spreads moved sharply wider in anticipation (fear) of a hawkish outcome from the FOMC meeting. Investors rightly understand that the new regulatory regime means liquidity is not what it used to be; if monetary accommodation is going to be reduced significantly (big if), it makes sense to try be the first one out the door and wait for the dust to settle on spread widening…The economic weakness could change in 2H 2015, but the Fed’s lowering of the 2015 GDP forecast and the Fed Funds ‘dot plot’ for 2016 and 2017 acknowledged that less tightening, not more, is probably needed; the direction of their shift, lower, was key, as it shows them moving back to a more dovish position.

“All of this ends up as another bad news is good news story for securitized products, at least for the near term. The cloud of unjustified (by the economic data) monetary policy tightening has been lifted, and risk assets are now far better positioned to perform. The fact that much of the securitized products market, particularly credit, which tracked or exceeded spread trends in the corporate bond market, widened into the Fed meeting created good short term opportunity for investors,” Flanagan says in a client note.

Time will tell.

On Thursday the Consumer Financial Protection Bureau will be under the gun at a hearing in front of the House Financial Services Committee for its troubled history of discrimination and retaliation.

With any luck, the scope will go beyond that, possibly even addressing last week’s boondoggle of having to delay TRID owing to the embarrassing failure to deliver a simple, two-page report to Congress.

The CFPB has come under fire in recent months for instituting a program to acquire and monitor the purchase of more than 500 million credit cards of American consumers. A new U.S. Consumer Coalition–Zogby Analytics poll finds a majority of Americans oppose the Consumer Financial Protection Bureau’s monitoring of Americans’ spending and also showed that an overwhelming majority of Americans want to see the CFPB subject to congressional oversight through the appropriations process.

Other findings include:

  • A majority (55%) of respondents believe the CFPB’s data collection program is similar or worse than the controversial NSA monitoring program.
  • Only 20% of those polled believed that the CFPB should be able to collect and review Americans’ credit card statements without their knowledge.
  • 78% of respondents believe the CFPB should have to seek Congressional approval for its budget like other agencies.
  • Nearly 70% of those polled believe that the government should not be able to tell consumers how to spend their money or make financial decisions for their families.
  • 71% agreed that it is the consumer’s responsibility to determine whether or not to take out loans and mortgages with unfavorable terms as long as they are presented clearly.

GSE shareholders aren’t happy with Treasury Secretary Jack Lew, which isn’t surprising.

During a House Financial Services Committee hearing last week on the Financial Stability Oversight Council, U.S. Rep Ed Royce, in an exchange with Treasury Secretary Jack Lew, showed what FannieGate supporters say is a distinct anti-shareholder bias and also demonstrated, let’s be honest, lack of understanding of basic math.

“One of my colleagues asked if the GSEs have repaid the money that they have borrowed from the American taxpayer. The simple answer that my colleague tried to illicit, I think, is that the payments they have made to the government now exceed the rescued funds that they received. But, Mr. Secretary, I think you agree here, this is not the real answer nor the real question. The real question is have they repaid their debt to the American taxpayer, and for that answer I think we can go to the Federal Reserve Bank of New York… The New York Fed said that taxpayers are entitled to substantial risk premium…The false narrative that is perpetuated is that the taxpayers have been repaid, it’s time to end conservatorship, and return the GSEs to the control of shareholders. From your comment earlier, I assume you disagree with this narrative…”

The shareholders suing Treasury certainly agree that taxpayers entitled to significant compensation for the risk borne in the $187 billion bailout of Fannie and Freddie, just as they are entitled to recompense for the $426 billion dollars in bailouts of the big banks and auto industry authorized under the TARP program. But what Royce fails to mention, however, is that the GSEs are already far and away America’s most profitable bailout,having returned over $40 billion to date in profit on top of what the Treasury invested.

What shareholders – and anyone honestly invested in some kind of justice here should be asking – is why does the government continue to let taxpayers bear all of risk at the point of first-loss under the guise of repayment?

A new Loan Delivery application will be released on Dec. 1, 2015, by Fannie Mae, providing enhanced functionality, as well as improved transparency and edit management capabilities, to make delivering to the GSE easier and more efficient. To give an early opportunity to experience the enhancements, a new Loan Delivery Test Environment will be released on Sept. 1, along with a self-paced eLearning tutorial. Click here for more info on the announcement for additional details about the upcoming changes in Fannie’s Loan Delivery.

On Monday, the National Association of Realtors existing home sales numbers will be released. Existing home sales have been lagging new home sales but a big bounce is expected for May, to a 5.25 million annual rate vs April’s 5.04 million rate. Strength in this report would underscore the fundamental strength of the consumer and could put the housing sector in a leadership position of the economy.

Mark Fleming, chief economist at First American, notes that the housing market continues to underperform given current market fundamentals.

“The market’s capacity for existing-home sales increased very modestly in May compared to the gains made in recent months. Our Existing-Home Sales Capacity model is showing the cooling effect that rising interest rates and a modest increase in unemployment have on demand, which are countering the equity-enhancing benefit of continued price appreciation,” he said. “In all, the housing market in May experienced supply tailwinds and demand headwinds as increased home values prompt sales, thus increasing supply, but affordability and economic uncertainty reduced demand. The conflict in the housing market is apparent in the interaction of supply and demand in the market today.”

On Tuesday, the FHFA house price index is coming out. It has been lagging other readings on home prices but has still been moving in the right direction. The expected gain of 0.4% isn’t spectacular but is respectable.

We also get new home sales Tuesday. New home sales may be one of the brightest spots for economy. They jumped sharply in April and permit data for May were very strong.

No banks were closed the week ending June 19, according to the FDIC.

TILA-RESPA Integrated Disclosure will add a week or more to closings

Rule gives all-cash buyers advantage in home sales

The bottom line effect of the TILA-RESPA Integrated Disclosure requirements that go into effect Aug.1 will be to add at least a week to closings, say industry experts.

The TRID rule, which was brought forth by the CFPB, has a sweeping impact on the real estate market through the implementation and compliance costs it requires.

Industry observers say the effect on individual home sales will be that it adds a week to closings. Marketwatch has the story:

Benjamin Niernberg, executive vice president of business development with Proper Title LLC, a title insurance company in Northbrook, Ill., said he expects closings this summer to take a week more than usual, which could hurt homebuyers who are depending on financing to come through quickly to have a chance against all-cash buyers.

“It can push the closing six days out, but we’re talking about business days, so if it falls on a weekend, it could be even longer.” Niernberg said the new rules, which have been in the works since November 2013, could widen the advantage all-cash buyers currently have over those dependent on bank financing when it comes to closing quickly in this red-hot real-estate market.

Here’s what’s happening. The changes the federal government is requiring that loan disclosure documents starting Aug. 1 combine the information required in the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). Now, under the new rule change, known as the “Know Before You Owe” rule, or the TILA-RESPA Integrated Disclosure (TRID) regulation, consumers must be given the new combined Loan Estimate (LE) with all the charges, fees and line items three days before the closing, rather than at the closing on the HUD-1 form, which itself will disappear.

Realtor.com: Waiting to buy a home could cost tens of thousands

Almost $20K lost for waiting just one year, far more in hottest markets

With interest rates and home prices expected to climb in the next year, the financial penalties of delaying or forgoing a home purchase in today’s market have become very steep, according to the inaugural Opportunity Cost Report released today by realtor.com.

The report examines a wide range of factors, including the long-term financial impact of owning versus renting a home, the likely monetary gain renters forego in waiting to buy and the financial benefits of homeownership by market.

“Current market conditions give buyers the opportunity to build substantial wealth in the long-term, compared with renters and later buyers, in advance of the projected increase in mortgage rates and continuing price appreciation,” said Jonathan Smoke, chief economist for realtor.com.  “The problem is inventory is low, which has many would-be home buyers –especially first timers – standing on the sidelines and missing out on potentially material financial gains.”

Nationally, the estimated wealth an average buyer would accumulate over a 30-year period based on today’s dollars totals $217,726.

Although some markets are more buyer-friendly than others, national data shows homeowners see significant financial benefits as compared to lifetime renters. In 88 percent of MSAs, buying a home produces a financial benefit of at least $100,000 over 30 years.

Click to enlarge

(Source: realtor.com)

Ten markets offer an especially considerable upside to owning, with estimated 30-year financial gains above $500,000, and opportunity costs of waiting three years as high as $200,000.

These MSAs, in California and other Western states, are relatively expensive markets with strong housing demand and limited supply. The potential long-term wealth in these areas is the greatest nationwide, and likewise, the long-term financial penalty for delaying ownership is substantial, due to price appreciation, escalating rents, and higher mortgage rates on the horizon.

Click to enlarge

(Source: realtor.com)

“This analysis looks solely at the financial reasons to buy a home, based on assumptions about rising mortgage rates and changes in home values,” Smoke said. “It’s important to remember that a home purchase decision is deeply personal. Potential buyers need to consider factors such as upcoming life events, job security and potential relocation, in addition to financial benefits, because they too can have a significant impact on ownership.”

Pending home sales rise to highest in nine years in April

Index rises for all four major regions

Pending home sales rose in April for the fourth straight month and reached their highest level in nine years, according to the National Association of Realtors.

Led by the Northeast and Midwest, all four major regions saw increases in April.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, increased 3.4% to 112.4 in April from a slight upward revision of 108.7 in March and is now 14.0% above April 2014 (98.6) — the largest annual increase since September 2012 (15.1%).

The index has now increased year-over-year for eight consecutive months and is at its highest level since May 2006 (112.5).

“The only time since then that we’ve come close to this level of home contracts written was in April 2010 when the new home tax credit expired (part of the stimulus program),” says Jonathan Smoke, chief economist forrealtor.com. “This level of demand is no surprise to us. Our realtor.com activity this spring has been predicting strong sales. And we are seeing the trend continue solidly into May.

“Sales would be even higher if inventory was growing as quickly as demand, but instead we’ve had 32 straight months of the supply of existing homes on the market under 6 months,” he said. “That’s why we’re seeing higher levels of price appreciation this year. That higher level of price appreciation is encouraging more people to consider buying and/or selling and levels of reported foot traffic by Realtors reinforce that.  All this bodes well for continued momentum into May and June.”

Lawrence Yun, NAR chief economist, says the steady gains in contract activity each month this year highlight the fact that buyer demand is strong.

“Realtors are saying foot traffic1 remains elevated this spring despite limited — and in some cases severe — inventory shortages in many metro areas,” he said. “Homeowners looking to sell this spring appear to be in the driver’s seat, as there are more buyers competing for a limited number of homes available for sale.”

Following April’s decline in existing-home sales, Yun expects a rebound heading into the summer, but the likelihood of meaningful gains will depend on a much-needed boost in inventory and evidence of moderating price growth now that interest rates have started to rise.

“The housing market can handle interest rates well above 4% as long as inventory improves to slow price growth and underwriting standards ease to normal levels so that qualified buyers — especially first-time buyers — are able to obtain a mortgage,” he said.

After falling four straight months, the PHSI in the Northeast bounced back solidly (10.1%) to 88.3 in April, and is now 9.4% above a year ago. In the Midwest the index increased 5.0% to 113.0 in April, and is 13.3% above April 2014.

Pending home sales in the South rose 2.3% to an index of 129.4 in April and are 14.8% above last April. The index in the West inched 0.1% in April to 103.8, and is 16.4% above a year ago.

Total existing-home sales in 2015 are forecast to be around 5.24 million, an increase of 6.1% from 2014. The national median existing-home price for all of this year is expected to increase around 6.7%. In 2014, existing-home sales declined 2.9% and prices rose 5.7%.

Auction.com: Are investors growing wary of flipping?

“Buy and hold” strategy becoming more prevalent


Real estate investors interested in making money on a home are becoming less likely to flip the home and more likely to hold the property and rent it out, according to a new report from Auction.com.

Auction.com’s 2015 Real Estate Investor Activity Report for April found that the gap between investors who are flipping a home and investors who are holding a property to rent is shrinking.

In Auction.com’s Real Estate Investor Activity Report for the first quarter, 53.5% of investors were looking to flip their purchase, while 44.8% were planning on renting the home out.

But in April, the share of investors looking to flip a home fell to 50.4%, while the share of investors planning to rent grew to 48.3%.

Auction.com Executive Vice President Rick Sharga said that the shift in the national numbers may be due in large part to Texas.

“Most of the country and most investor segments performed in a manner very consistent with what we’ve seen over the past year, but investment strategies in Texas appear to have shifted pretty dramatically,” Sharga said. “Investors probably realize that without oil fueling Texas’ growth, it’s unlikely that home prices will continue to appreciate rapidly, and it’s very likely that home purchase demand will weaken. Given those considerations, a buy-and-hold strategy may suddenly be much more attractive.”

However, investor intent varies considerably by the type of auction (live event versus online auction) and by investor profile.

Investors bidding at live events appear to be more likely to flip the properties they purchase based on survey responses collected in April, Auction.com’s report showed.

According to the report, respondents indicated a “strong preference” toward flipping over holding to rent in nearly every state where Auction.com conducted live events, with the exception of Texas, where lower oil prices have resulted in fewer energy related jobs in four of the past five months.

“It will be interesting to see if this trend spreads to other states where energy-related jobs have generated economic gains, or whether we’ll begin to see a boom in home purchases stimulated by these lower energy prices across the country,” Sharga said.

On the other hand, investors at online auctions in April continued to say that they are more likely to hold the properties they purchase – except in the West, where the pendulum has swung toward flipping. This shift, while slight, is likely due to the region’s higher purchase prices negatively impacting rental property returns, Auction.com said.