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CR: Housing bubble: The “Wealth” is Gone, but the Debt Remains

Housing bubble: The “Wealth” is Gone, but the Debt Remains

by Bill McBride on 6/14/2013 02:00:00 PM

THE total wealth of American households has recovered from the financial crisis and Great Recession, according to the Federal Reserve Board. But … many Americans, particularly younger adults who took on heavy debt to acquire homes before the housing bubble collapsed, are lagging.

During the housing boom, said William R. Emmons, the chief economist of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis, “exactly the people you would think need to act conservatively were doing the opposite.” Homeownership rates, and mortgage debt levels, rose for younger households, as well as for less educated and minority ones. Those groups suffered more during the crisis, he said, and have been slower to recover.Mr. Emmons compiled average wealth figures for different groups from the triennial surveys … older households are down just 3 percent on average, while those headed by middle-age people are down about 10 percent. But the decline is nearly 40 percent for the younger group.

During the housing boom, households ended up with more of their wealth in real estate than before, and mortgage debt rose to record levels relative to the size of the economy. The proportion of wealth in homes is now back to close to the level of the 1990s, but the debt levels remain high by historical standards.
emphasis added

Household Real Estate Assets Percent GDPClick on graph for larger image.

This graph based on the Fed’s Flow of Funds report shows household real estate assets and mortgage debt as a percent of GDP.

As Norris noted, the bubble wealth is gone, but the debt remains (still high on a historical basis). This was especially hard on younger households since they bought during the housing bubble.

Read more at http://www.calculatedriskblog.com/2013/06/housing-bubble-wealth-is-gone-but-debt.html#5ebCmySFJbleFrzC.99

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DrHousing: The Good, the Bad, and the Ugly aspects of the American housing market

The Good, the Bad, and the Ugly aspects of the American housing market: Key indicators of the 2013 real estate market.

The US housing market is massive.  You would expect this from a nation of 315,000,000+ people spanning over 50 states.  So it is important to understand the various dynamics occurring over many states.  In regards to single family home buyers, in most of the United States home prices are very reasonable.  This is hard for some in the coastal regions to digest or even comprehend.  When you look at certain markets in high priced areas, many people have a hard time penciling out the financial details.  Yet with such a large number of investors purchasing with cash, a new market has been created.  But if we are to take the US market and make a wide-eyed observation, we will find some good, bad, and ugly aspects of the current housing market.  Whereas in 2008 through 2010, the market was dominated by the bad, ugly, and grotesque.  What can we say about the current US housing market?

The Good

One good aspect of the market is overall, affordability is back in line to historical trends:

housing affordable

Price-to-rent ratios are back in line in many parts of the country.  In fact, this is the big push from the all cash buyers in places like Arizona, Nevada, and Florida.  The one thing I would be cautious about is in places like Arizona, you have over 50 percent of buyers coming from the investment bunch and when you look at rental prices, they are weak and vacancies are very common.  But with such a high number of investors buying, you basically have investors selling to other investors thinking they will produce higher yields.  However, for non-investors in most US markets prices are now affordable thanks to the big drop in prices but also the Fed’s tantalizingly low interest rates.  Sure, the Fed’s balance sheet is well over $3 trillion but that is an issue for another day.

If you follow the mainstream press and use this as a barometer of what most Americans see as their primary source of information, then the Federal Reserve might as well be nuclear physics because it is never discussed or even explained.  So most people are driven by the monthly nut psychology.  Low rates have boosted affordability dramatically.  Americans are horrible savers.  Something like 50 percent of Americans do not have a retirement account.

I was having a conversation with someone and their mentality is similar to many coastal folks.  “Good luck finding a property in the US for less than $300,000 in a safe area!”  Of course, it is hard for some to understand that in many states, homes can be had for $100,000 in good areas and a $200,000 home will buy you a very nice spot.  Heck, even in the Inland Empire in California you can find a great place for $300,000.  Of course this person is obsessed with buying in prime Pasadena so good luck on that one when you have limited inventory and many other clones with similar thinking.

The Bad

While not as good as it should be, household formation is now picking back up:

household formation

Funny how in 2005 when all you needed was a pulse for credit, household formation was up to a blistering 1.8 million per year.  The crash brought on the “move in with mom, dad, or friends” trend and you can see this in 2008 where household formation was at a stunningly low 400,000.  This is also another reason why the housing market is now picking up nationwide.  From 2011 to 2012 household formation went from around 600,000 to a healthier 1,000,000.  That is a big jump.

The one element I see getting in the way of this is the massive student debt in the market now above $1 trillion.  Many younger Americans are still financially strapped so it is hard to see this improving anytime soon.  Although we are nowhere close to the boom days, household formation does seem to be on an upward trend and this is a positive for housing in general.

The Ugly

The housing market is still a mess when it comes to distressed properties:

bad loans

Over 5,000,000+ Americans are in one of the following:

1,927,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.

1,483,000 properties that are 90 or more days delinquent, but not in foreclosure.

1,694,000 loans in foreclosure process.

The market is full of bad loans but the number is going down.  Many investors buying in bulk have connections that allow them to purchase many of these properties at auction before they even hit the MLS for the regular Joe and Jane.  So the low inventory is simply a manifestation of banks leaking out properties at their own pace and to select individuals.

In most parts of the US, the housing market is fairly normal based on price and financing options.  However, in places like California good luck buying a home when many in the industry think prices will keep going up and bidding wars are now fairly common.  Get your PowerPoint presentation ready and your heart wrenching story (and wallet out) to make a bid in many prime markets.  California is a boom and bust market and we’re currently in the boom phase.  It is interesting how many e-mails I get where the person is actually sad and emotionally troubled that they got out bid on an $800,000 or even $1,000,000 home.  Obviously you can only get so much from an e-mail but some people seem miserable because they can’t spend $1 million on a home!  I got an e-mail like this from someone in San Francisco.  You know what my recommendation was?  Go ahead and buy because you seem absolutely miserable!

For most Americans, the decision to buy is fairly simple in today’s market.  In other markets, there are definite manic like behaviors.  We’re seeing some mania in California.  Buying a home is a big decision yet some are willing to drop $700,000 (i.e., finance 80+ percent of the purchase) and treat this as if they were buying a car. Buying a home is a 30 year commitment for most.  Many sell within 7 to 10 years but that is assuming prices keep going up.  Some that bought in 2005 are still underwater today (8 years later).  You want to know what was going on 30 years ago?  Ronald Reagan was President, we were in the Cold War, The Red Hot Chili Peppers launched their first self-titled album, and a fixed rate mortgage was 13.4 percent.

There are good, bad, and ugly things in today’s housing market.  The scope of each of these really depends on where you live in the US.

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CR: Housing Starts and the Unemployment Rate

Housing Starts and the Unemployment Rate

by Bill McBride on 3/24/2013 

By request, here is an update to a graph that I’ve been posting for several years.  This shows single family housing starts (through February 2013) and the unemployment rate (inverted) also through February. Note: there are many other factors impacting unemployment, but housing is a key sector.

You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn’t hold.

Housing starts (blue) increased a little in 2009 with the homebuyer tax credit – and then declined again – but mostly starts moved sideways for two and a half years and only started increasing steadily near the end of 2011. This was one of the reasons the unemployment rate remained elevated.

Housing Starts and Unemployment RateClick on graph for larger image.

Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This leads to job creation and also additional household formation – and that leads to even more demand for housing units – and more jobs, and more households – a virtuous cycle that usually helps the economy recover.  However this time, with the huge overhang of existing housing units, this key sector didn’t participate for an extended period.

The good news is single family starts have been increasing steadily for over a year, and that should mean more construction employment this year, and that the unemployment rate should decline further in 2013.

Read more at http://www.calculatedriskblog.com/2013/03/housing-starts-and-unemployment-rate.html#1S1MrI1OOd6JMEeC.99

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CR: Fed’s Beige Book: Economic activity expanded at “modest to moderate” pace

Fed’s Beige Book: Economic activity expanded at “modest to moderate” pace

by Bill McBride on 3/06/2013 

Fed’s Beige Book “Prepared at the Federal Reserve Bank of Kansas City and based on information collected on or before February 22, 2013”

Reports from the twelve Federal Reserve Districts indicated that economic activity generally expanded at a modest to moderate pace since the previous Beige Book. …

Most Districts reported expansion in consumer spending, although retail sales slowed in several Districts. Automobile sales were strong or solid most Districts, and tourism strengthened in a number of Districts. The demand for services was generally positive across Districts, most notably for technology and logistics firms. … Many Districts noted rising gasoline prices and fiscal policy as having a negative effect on consumer sales, and contacts in the Boston, New York, and Minneapolis Districts said severe weather depressed sales somewhat.

And on real estate:

Residential real estate activity continued to strengthen in most Districts, although the pace of growth varied. Contacts in the Boston, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco Districts noted strong growth in home sales, while New York and Chicago reported slight improvements. A realtor in the Richmond District indicated that low interest rates continued to motivate home buyers, and potential buyers in the Philadelphia District expressed greater confidence, including entry-level purchasers who had been increasingly opting to rent since mid-summer. Contacts in the Cleveland and Atlanta Districts said sales were higher than a year ago. Home construction increased in most Districts, with the exception of the Kansas City District where it was reported as unchanged. Several Districts noted ongoing strength in multifamily construction, although contacts in the Atlanta and Cleveland Districts mentioned continued financing difficulties for builders. Home prices edged higher in the majority of Districts, with lower inventories generally cited as the primary cause. Richmond and Atlanta Realtors observed multiple offers on many homes. Philadelphia real estate contacts continued to report low-end home prices as firm or rising slightly, while high-end home prices were still falling. Inventories declined in nearly all Districts, with Realtors in several Districts concerned about the impact on future sales volume.

Overall commercial real estate conditions were mixed or slightly improved in most Districts.

This suggests sluggish growth overall, with some negative impact from “fiscal policy” … and with mostly “strong” growth for residential real estate.

Read more at http://www.calculatedriskblog.com/2013/03/feds-beige-book-economic-activity.html#uIJKG0Xm8lqPRcC2.99

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What constitutes a healthy housing market? — Dr. Housing Bubble

What constitutes a healthy housing market? 7 charts Examining where we are today in the housing market. Will the current housing rebound continue into 2013?

Perceptions are guided by recent events.  History is easily forgotten and our hardwiring makes us prone to trend following.  The housing boom that started in 2012 is still the story today.  In 2012 I noticed on various forums that new housing related shows were on the uptick.  The headlines were largely positive.  It is hard to see how the pace of appreciation can continue without a similar underlying real growth in household wages or a continued flood of investor money.  Yet in markets were investors dominate, local families are outbid by global money and big funds.  What makes up a healthy housing market?  Today we’ll examine seven charts and try to put this current housing market into a longer-term perspective.

Normal housing market

There are many factors to examine when it comes to a normal housing market.  I would argue that it is more important to focus on having a healthy economy and allowing housing to follow instead of focusing on housing and expecting the economy to follow.  For over a decade the focus has been on housing and the Fed with QE3 is not disrupting that trend.  Trulia has an interesting barometer on a few key housing metrics:

normal housng market

Source:  Trulia

According to the above barometer, a normal market would have 1.5 million construction starts.  We are at 861k.  We’re making progress here but still a good distance from 1.5 million.  The next item is existing home sales.  We’re at 5.04 million whereas a more normal market would be at 5.5 million.  On this metric we are inching closer to a more normal market.  The number of mortgages in some sort of distress is up to 10.63 percent.  This is still very high compared to the normal rate of 5.25 percent.

Low inventory

The number of homes for sales is extremely low:

national housing inventory

While existing home sales are still short from a more normal level (not by much) housing inventory on the other hand is down by record levels.  At a certain point you would expect this to carry over into housing starts and we are seeing this occur.

Housing starts

Housing starts are definitely on their way up.  This should be expected given the very low inventory.  Yet as we have discussed in previous articles, many younger Americans are saddled with high levels of college debt and are looking for lower priced housing options.  In 2012 31 percent of housing starts were for multi-unit properties.  Stronger rental demand but also, the new clientele base is likely pushing this trend.

30 year fixed rate mortgage

The drop in interest rates is truly historical:

30 year mortgage rate

People calmly talk about this as if we have a historical reference point for this.  We do not.  The Fed now has a balance sheet that is well over $3 trillion.  This is not normal either:

Fed total balance sheet

Fed’s balance sheet as of 1/16/13 (source: FRB)

Prior to the recession, the Fed balance sheet was well under $1 trillion.  We are a very long way from that and the Fed with QE3 is basically eating up MBS from the market.  It is interesting that some would like to discount this activity yet the Fed is dictating interest rates and is the major player in the mortgage market.  In other words, the Fed is the housing market.

Construction jobs

Now this is a trend that I found interesting.  While housing starts are up, construction jobs are still lagging:

construction jobs

What is going on here?  Is it because multi-unit properties require less labor?  I doubt it.  Are construction crews making due with less?  That could be one reason.  This is probably one of the more interesting trends here.  In this category we are also very far away from a normal market.

China wages

In a global system inflation can be exported.  While US wage growth is anemic and inflation adjusted household income is now back to levels last seen in the 1990s, wage growth in China is definitely occurring:

china and us wages

It should come as no surprise then that money is rushing back into places like California and Canadapropping up prices in select areas.  Foreign demand is incredibly strong as the wealthy class rises abroad.  In an open market, money can travel as it sees fit.  Inflationary pressure is charging back in.

Part-time workers

Another trend we are facing is the growth of a permanent part-time workforce.  Many workers now work under contracts or projects.  This is another reason why we have seen the U6 unemployment figure remain high:

us part-time and U6

This is unlikely to be positive for wage growth but does help companies earn more as they slash costs.  It also makes a tougher case for sustained home value growth.  The last few years have seen a large amount of buying come from investors.  Nearly one third of all sales were investor based.  This is incredibly high.  It is hard to find historical data on a normal figure here but I would venture to guess that it is around the 10 percent range for the nation.  In California, foreign demand makes up this portion alone:

“(OC Register) The National Association of Realtors estimated that foreign buyers accounted for 11 percent of California home sales.

The California Association of Realtors, however, pegged foreign sales at 5.8 percent of the state’s transactions. Of those, 39 percent of the buyers come from China, followed by buyers from Canada (13 percent), and from India and Mexico (8.7 percent each), CAR reported.”

Last month over 33 percent of buyers in Southern California paid all cash for their purchases, tying a previous historical record set a few months ago.  The monthly average since 2000 is closer to 17 percent so we are nearly double that.

The above trends show that we really are in a different housing market today.  Will these trends continue into 2013

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Read of the Day: Housing Conditions and the Economic Impact of Superstorm Sandy on the Region

Just Released: Press Briefing on Housing Conditions and the Economic Impact of Superstorm Sandy on the Region

Jaison R. Abel, Jason Bram, and Claire KramerAt today’s regional economic press briefing, we provided an update on housing conditions as well as an initial assessment of superstorm Sandy’s economic impact on the region.

 

        The housing sector is an important part of the overall economy, and it has played a key role in shaping the Great Recession and the recovery that has followed. While our region was largely spared the worst of the housing bust, many households—particularly in northern New Jersey and areas around New York City—continue to feel its economic consequences. Fortunately,housing conditions here have begun to show signs of steady improvement. Home prices in much of the region have gradually increased throughout the year and other measures of housing-related activity appear to have stabilized, albeit at low levels. In addition, indicators of housing-related financial stress that we monitor appear to have eased somewhat in recent months. Taken together, these trends suggest that many of our region’s housing markets have reached an important point in the recovery process. At the same time, it’s important to recognize that housing conditions in the region’s most depressed markets remain sluggish. In addition, owing in large part to the long foreclosure process in New York and New Jersey, our region faces a large and growing backlog of foreclosures. So, while there have been some encouraging signs in our region’s housing markets this year, going forward there are still some significant challenges to broadening and sustaining the recovery that’s under way.One immediate challenge is rebuilding and recovering from Sandy. Geographically, it appears that the hardest-hit areas were the coastal communities of Queens, Staten Island, Brooklyn, Long Island, Lower Manhattan, and the New Jersey shore. Physical damage to the region was primarily to homes and personal property, commercial property, and infrastructure. An immediate housing priority is the provision of shelter to those whose homes were severely damaged. As such, housing task forces have been formed to identify local housing needs, catalog vacant rental housing units, and investigate temporary housing options. On the business front, the focus has been on securing gap financing for firms to finance short-term cash flow while they restart their operations and await insurance settlements.

In assessing the impact of natural disasters like Sandy, it’s important to recognize that some activity that appears to be lost may in fact only be postponed or shifted elsewhere within the region. Moreover, a surge in economic activity typically follows a natural disaster as the region rebuilds much of the damaged or destroyed property and infrastructure, often with resources from outside the region, like FEMA assistance and private insurance. At the same time, welfare losses resulting from the pain and suffering of people who lost homes or loved ones, as well as inconveniences like extra time spent commuting, are often neglected when assessing the impact of natural disasters such as Sandy.

For more information on housing conditions and Sandy’s economic impact on the region, see the regional economic press briefing webpage.

Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

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Read of the Day: Fed Chairman Bernanke on Mortgage Lending

Fed Chairman Bernanke on Mortgage Lending

by Michael Neal —Eye on Housing

In prepared comments, the Chairman of the Federal Reserve System, Ben Bernanke, addressed the challenges in housing and mortgage markets. Chairman Bernanke’s comments contained a clear message: tight lending standards that emerged after the housing boom are now holding back the housing market recovery and the economy as a whole.

“It seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.”

As part of these remarks, the Chairman noted the central role played by the housing sector within the overall economy. After reaching a low, many housing market indicators including startssales, and prices now indicate that the housing market is beginning to recover. However, the Chairman noted that “while it is encouraging that we are seeing signs of improvement in the housing market in most parts of the country….the housing sector is far from out of the woods”. He highlighted the mortgage market as a key component of housing still showing signs of strain. Addressing frictions in the mortgage market can consolidate gains made elsewhere in the housing sector.

Weakened mortgage demand partly accounts for declines in mortgage lending. The Chairman noted that “the reduction in mortgage originations and home purchases for all groups relative to the pre-crisis period partly reflects weakness in the effective demand for housing.” Analysis of the October Federal Reserve Board’s Senior Loan Officer Opinion Survey illustrate that demand for prime residential mortgages is growing, on net. However, the actual increase has beenslight, implying that growth in sales of single-family residential homes may reflect the growing role played by all-cash sales.

The Chairman noted that “while the decline in the number of willing and qualified potential homebuyers explains some of the contraction in mortgage lending of the past few years…tight credit nevertheless remains an important factor as well.” Analysis of the most recent release of the Federal Reserve Board’s Senior Loan Officer Opinion Survey confirms this point. The October survey continues to illustrate that lending standards affecting the supply of prime residential mortgages remain basically unchanged at still tight levels while demand for prime residential mortgages is strengthening. On net, survey respondents indicated that obtaining a prime residential mortgage has become slightly easier over the past three months. In the October survey, 4.7% of respondents indicated that they had eased their lending standards, while 3.1% of banks reported having tightened them. However, this change was small and the vast majority of firms, 92.2% kept their lending standards basically the same. Although banks may be reluctant to finance residential home purchases, the likelihood that they will extend credit for other consumer loans is growing.

The Federal Open Market Committee, also chaired by Bernanke, has taken extraordinary steps to lower mortgages rates. In his speech, Chairman Bernanke further clarified that “the actions taken by the FOMC to put downward pressure on longer-term interest rates was meant to inspire greater confidence for individuals, families, businesses, and financial markets” and he reiterated the commitment of the Federal Reserve to “promoting a sustainable recovery within the context of price stability until the job market improves substantially.”

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