Yesterday, I discussed how the median price YoY on existing home sales is almost 2 times average hourly earnings growth, a sign of the growing housing affordability problem in the US.
Of course, housing affordability varies across the country. According to Attom’s Home Affordability Study, the west coast (California, Oregon and Washington) is unaffordable for many households. Florida also is losing affordability compared to historical affordability.
Annual growth in median home prices outpaced average wage growth in 275 of the 432 counties analyzed in the report (64 percent), including Los Angeles County, California; Maricopa County (Phoenix), Arizona; San Diego County, California; Orange County, California; and Miami-Dade County, Florida.
Median home prices not affordable for average wage earners in 75 percent of local markets
An average wage earner would not qualify to buy a median-priced home in 326 of the 432 counties (75 percent) analyzed in the report based on a 3 percent down payment and a maximum front-end debt-to-income ratio of 28 percent.
Counties where an average wage earner could not afford to buy a median-priced home in Q2 2018 included Los Angeles County, California; Cook County (Chicago), Illinois; Maricopa County (Phoenix), Arizona; San Diego County, California; and Orange County, California.
Rather than try to increase the supply of housing (both owner-occupied and rental), the Federal government will push to ease credit standards (now called “widening the credit b box”). While not as “wide” as the housing bubble years of 2004-2007, each indicator has been gradually easing to meet higher home prices.
Deutsche Bank is the poster child of “Too Big To Fail.” Its stock price has plummeted since before The Great Recession and never recovered. (Italian bank Unicredit is even worse!).
Both Deutsche Bank and Unicredit are G-SIBs (Global Systemically Important Banks). But Deutsche Bank has the honor (or horror) of having the highest total asset in percent of GDP of any bank at 45.3%.
Think about that. With a fragile Eurozone, Brexit and … Italy, a Deutsche Bank failure could be disastrous for Germany. And the European banking system.
While Deutsche’s capital ratios seem fine, their net revenue growth of 2018 is projected to be -14.8%.
And Deutsche leads global banks in Q1 trading losses in terms of Value at Risk (VaR). a 12x VaR trading blowup.
In you think a big bank like Deutsche Bank can’t fail and create global shock waves, remember that the Germans thought the WWII battleship Bismarck was unsinkable too.
Affordable housing policy in the US is a mess. As I mentioned at the American Action Forum meeting on the future of the GSEs yesterday, the housing market today reminds me of the housing market from the 2000s … where home price growth was over twice that of earnings growth for most households. The credit market composition is different (e.g., fewer low-doc loans), but the ratio of home price growth to earnings growth is the same.
With local zoning and construction restrictions, it is difficult to provide “affordable” housing. The typical reaction from the Federal government and its agencies/enterprises is to expand the credit box (lower credit standards) to make housing “more affordable.” In reality, it only makes housing “more attainable” while at the same time making housing more costly.
By making home ownership more attainable in a restricted supply area (like Los Angeles), that only serves to make entry-level housing even MORE unattainable.
But enough of that (Washington DC is filled with rent seekers and is not likely to change).
For May, 1-unit starts grew 5% (good, but not good enough). But permits fell by 5% too.
I am speaking today at an American Action Forum event in Washington DC at noon entitled “The Future Of Housing Finance Reform.” Also speaking will be affordable housing guru Laurie Goodman from The Urban Institute with Politico’s Lorraine Woellert moderating.
Meghan Milloy of the American Action Forum penned a nice editorial in advance of the event entitled “Don’t Forget About the GSEs.” Here is a taste:
“It’s been ten years since Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) went into government conservatorship following the height of the financial crisis. After that much time and a number of new policy challenges in the interim, it might be easy to forget about the GSEs and the financial risks they still pose. This would be a mistake. Fannie and Freddie remain actively dangerous systemically important financial institutions (SIFIs), and their policies have started to slip back to where they were before the crisis.”
The problem stems from the government guarantee, whether explicit or implicit. All the proposals flying around Washington DC all carry a government guarantee in one form or another. And with FHFA Director Mel Watt’s term ending in January, it is time to do something.
In short, I will be recommending returning Fannie and Freddie into the market in a privatized form (releasing them from conservatorship). But without a government guarantee or affordable housing goals. And with a twist.
Ed DeMarco, the previous FHFA Director, attempted to move Fannie and Freddie towards privatization (or shut down) by introducing credit risk sharing notes where mortgage default risk is transferred from Fannie and Freddie to private market investors. But that has been slow moving.
Here is my suggestion.
We adopt the Options Clearing Corp (OCC) model. The OCC clears all listed US equity and index options and is owned by the options exchanges. But the OCC is capitalized by the clearing members (banks and broker/dealers), who also post risk-based margin on behalf of their customers. Default risk is mutualized among the members. While a few large firms dominate the risk (e.g., BAML, Goldman, Morgan Stanley), these same large members are posting the largest amount of risk-based margin and default-fund capital. Mutualizing the risk of the GSEs is the key, just as is mutualizing the risk of the members of a central counterparty. I think the OCC model could work well for the GSEs and the lenders. No guarantee and no affordable housing goals.
Wasn’t that simple?
Mel Watt and the FHFA (the regulatory body, not a funk band) have issued a proposed rule on how much capital Fannie Mae and Freddie Mac should have to protect taxpayers from losses.
“The Federal Housing Finance Agency (FHFA or the Agency) is proposing a new regulatory capital framework for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises), which includes a new framework for risk-based capital requirements and two alternatives for an updated minimum leverage capital requirement.
The risk-based framework would provide a granular assessment of credit risk specific to different mortgage loan categories, as well as market risk, operational risk, and going concern buffer components. The proposed rule would maintain the statutory definitions of core capital and total capital.”
The proposed rule is 368 pages long and it is recommending a base 2.5% capital rule. That is a 40x leverage ratio!
§ 1240.50 Minimum leverage capital requirement: 2.5 percent alternative.
Each Enterprise shall maintain at all times core capital in an amount at least equal to 2.5 percent of total assets and off-balance sheet guarantees related to securitization activities, or such higher amount as the Director may require pursuant to part 1225 of this chapter.
§ 1240.51 Minimum leverage capital requirement: Bifurcated alternative.
Each Enterprise shall maintain at all times core capital in an amount at least equal to 4% of non-trust assets and 1.5% of trust assets, or such higher amount as the Director may require pursuant to part 1225 of this chapter.
Given that unemployment rates are near decade lows and home prices are above where they were at the peak of the housing bubble, now is a good time to have this discussion.
Is 2.5% capital big enough? [Of course, capital buffers are only part of the story].
Clearly, Mel Watt wants Fannie Mae and Freddie Mac to stay alive.