The Federal Reserve is dominating the news today as two Fed regional Presidents have resigned (Rosengren [Boston] and Kaplan [Dallas]) for trading irregularities.
Now, it is September 28, so this is a report of happenings two months ago. Well, now you know why The Fed ignores housing despite being the largest asset is most household’s portfolio.
A measure of prices in 20 U.S. cities gained 19.9% in July. Phoenix led the way with a 32.4% surge. New York (17.8%), Boston (18.7%), Dallas (23.7%), Seattle (25.5%) and Denver (21.3%) were among the cities that posted record year-over-year increases.
The housing market is over, under, sideways, down thanks to The Fed pumping trillions into a market with limited available inventory.
Phil Hall of Benzinga wrote a series of excellent articles in four parts for MortgageOrb (although “The Orb” has removed his name). Here are the links to his stories.
After re-reading these excellent articles on the housing bubble and crash, I thought I would take the opportunity to present a few charts to highlight the housing bubble, pre-crash and post-crash.
Here is a graph of Phoenix AZ home prices. Note the bubble that peaked in mid 2006. The Phoenix bubble correlates with the large volume of sub-620 FICO lending and Adjustable-rate mortgage (ARM) lending. Bear in mind, many of the ARMs prior to 2010 were NINJA (no income, no job) ARM loans.
What happened? Serious delinquenices at the national levels spiked as The Great Recession set in and unemployment spiked.
Since the housing bubble burst and surge in serious mortgage delinquencies, The Federal Reserve entered the economy with a vengeance. And have never left, and increased their drowning of markets with liquidity.
The Fed whip-sawing of interest rates in response to the 2001 recession was certainly a problem. They dropped The Fed Funds Target rate like a rock, then homebuilding went wild nationally and home prices soared thanks to Alt-A (NINJA) and ARM lending. But now The Fed is dominating markets like a gigantic T-Rex.
Oddly, then Fed Chair Ben Bernanke never saw the bubble coming. Or the burst.
Speaking of pizza, Donato’s from Columbus Ohio is my favorite. Founder’s Favorite is my favorite, but they do offer the dreaded Hawaiian pizza (ham, pineapple, almonds and … cinnamon?)
New Home Sales beat expectations thanks to the massive monetary stimulus in the system that The “Hawkish” Fed seems to not want to withdraw. Aka, Greenman!
(Bloomberg) — Aug. new home sales rose 1.5% to 740,000 annual rate Forecast range 650k-784k from 60 estimates, median 715k New home sales rose 11k in Aug. from prior month, the Census Bureau said Median new home price rose 20.1% y/y to $390,900; average selling price at $443,200 New home sales on pace for 842k this year compared to a 2020 total of 822k Houses for sale in Aug. rose 3.3% m/m to 378,000 Months’ supply at 6.1 in Aug. compared to 6.0 prior month The Commerce Department is 90 percent confident that new residential sales were between 644,540 and 835,460.
Since Q2 2020, US homeowners have been big winners in terms of home price gains and equity in their homes. Unfortunately, this means that renters are big losers. Once again, The Federal Reserve is benefiting once segment of the population while punishing the other segment.
*Homeownership mortgage source: 2016 American Community Survey.
National Homeowner Equity
In the second quarter of 2021, the average homeowner gained approximately $51,500 in equity during the past year.
California, Washington, and Idaho experienced the largest average equity gains at $116,300, $102,900 and $97,000 respectively. Meanwhile, North Dakota experienced the lowest average equity gain in the second quarter of 2021 at $10,600.
10 Select Metros Change
CoreLogic provides homeowner equity data at the metropolitan level, in this graphic 10 of the largest cities, by housing stock are depicted.
Negative equity has seen a recent decrease across the country. San Francisco-Redwood City-South San Francisco, CA, is the least challenged, with Negative Equity Share of all mortgages at 0.6%.
Loan-to-Value Ratio (LTV)
The graph represents National Homeowner Equity Distribution across multiple LTV Segments.
Since growing home equity lead to lower default risk (or at least losses to the mortgage holder), we are seeing mortgage delinquencies fall after the Covid surge.
This is the Steve Urkel economy where The Federal Reserve and Federal government screw everything up with their policies (or follicies) and say “Whoops! Did I do that?”
(Bloomberg) — U.S. consumer sentiment rose slightly in early September but remained close to a near-decade low, while buying conditions deteriorated to their worst since 1980 because of high prices.
The University of Michigan’s preliminary sentiment index edged up to 71 from 70.3 in August, data released Friday showed. The figure trailed the median estimate of 72 in a Bloomberg survey of economists.
Buying conditions for household durables, homes and motor vehicles all fell to the lowest in decades. The report said the declines were due to complaints about high prices. Consumers expect inflation to rise 4.7% over the coming year, matching the highest since 2008.
September’s UMich Buying Conditions for Houses fell to 60 … thanks to superheated house prices.
I can just picture Fed Chair Jerome Powell channeling Steve Urkel and saying “Whoops!! Did I do that?”
The US Bureau of Labor Statistics released their Real Earnings Report for August yesterday. And is it pretty depressing for US workers.
Real average hourly earnings for all employees increased 0.4 percent from July to August, seasonally adjusted. This result stems from an increase of 0.6 percent in average hourly earnings combined with an increase of 0.3 percent in the Consumer Price Index for All Urban Consumers (CPI-U).
Real average weekly earnings increased 0.3 percent over the month due to the change in real average hourly earnings combined with no change in the average workweek.
If we look at REAL US housing prices versus REAL average hourly earnings for production and nonsupervisory employees, we can see waves of imbalance between the two measures (also known as “bubbles”). Such as today.
But the real horror chart is the following (courtesy of Mish). It shows that real hourly earnings have barely changed since January 1973.
Of course, labor outsourcing to lower labor cost countries is the chief culprit. Karsten Manufacturing, maker of Ping golf clubs, no longer makes their castings in Phoenix AZ thanks, in part, to EPA regulations. Ping clubheads are now made in Asia.
US inflation remained about the same in August as it was in July. CPI YoY fell ever so slightly from 5.4% in July to 5.3% in August. Real hourly earnings remain negative.
The source of consumer inflation? Gasoline prices rose 42.7% YoY while used cars and trucks rose 31.9% YoY.
Shelter rose 2.8% YoY. That is odd since the Case-Shiller national price index is growing at a torrid 18.61% YoY pace and the Zillow Rent Index YoY has recovered to a sizzling 9.24% YoY pace.
The YoY heatmap of inflation.
However, with the exception of home prices and rent, we are seeing a slowing of used car, foodstuffs and regular gas prices over the summer.
The South Florida housing market is sizzling with hot money from the North East, pushing up homes values sky high over the last year. One example of the mania is in Palm Beach, where a private island was bought in July and was relisted months later for a whopping 41% premium, according to WSJ.
One of Miami’s top real estate developers, Todd Michael Glaser, is taking advantage of the bubble, fueled by Wall Street bankers and other elites who have the economic mobility to leave the Northeast for the Sunshine State.
Glaser purchased 10 Tarpon Way, also known as 10 Tarpon Isle, for approximately $85 million in July and has since relisted the tiny 2.5-acre island for $120 million, or $35 million more than he paid a few months ago. The island was created by dredging crews in the 1930s and is only accessible by bridge. Glaser bought the island from private investor William M. Toll and his wife, Eileen, who paid $7.6 million for the property in 1998.
Tarpon Island
The real estate developer said potential buyers have two options: pay the $120 million now or wait ten months for a new renovation for $200 million.
Concept Drawing Of New Renovation
He said with all the hot money flowing into the Palm Beach area, “a $100 million house isn’t that crazy anymore, believe it or not,” adding that in the last 18 months, eight $100 million homes have been sold.
If a potential buyer wants to wait ten months and pay an additional $80 million. The developer will completely redesign the mansion by doubling it to 25,000 sqft, with 14 bedrooms, in addition to a hair salon, gym, and spa. A new pool, octagonal tennis pavilion, and a golf practice area will be installed on the outside.
Some ask how long will this speculation fever last as the Federal Reserve could embark on tapering its extensive bond-buying program later this year or early 2022.
One real estate expert believes the peak of the South Florida housing market could be nearing:
Dr. Ken Johnson, a real estate economist with Florida Atlantic University’s College of Business, told local news WPLG that a peak in the housing cycle could have already arrived, but he believes a crash is not in the mix because demand still outpaces supply.
It remains to be seen if some greater fool will pay the $120 million for the island mansion or $200 million tens months later after renovations.
(Bloomberg) — Orchard, which offers cash to homebuyers upfront so they can purchase a new residence before selling their old one, raised $100 million to fuel growth in an ultra-competitive housing market that’s pushing shoppers to find new ways to stand out.
The fundraising round values the startup at more than $1 billion, making it the latest unicorn company to tackle the challenge of simplifying the process of buying or selling a home. Boston-based Accomplice led the round, with existing investors FirstMark, Revolution, First American and Juxtapose also participating.
“We can say we’re a unicorn, which feels good for about five seconds, and then it’s back to the real world of building a business,” Chief Executive Officer Court Cunningham said in an interview. “We’re trying to create a modern way to buy and sell homes, and that’s capital intensive.”
Cunningham, previously CEO of online marketing company Yodle, started Orchard in 2017 to take on what he viewed as a ripe opportunity: Consumers were frustrated with the traditional way of buying and selling homes, and the $1.7 trillion U.S. housing market was big enough to make tackling the problem worthwhile.
Orchard focuses on people who are trying to buy their next home while selling an existing one, a nerve-wracking process that can cause a transaction to collapse or result in households carrying two mortgages. In addition to offering cash to help clients buy their next home, the New York-based company provides funds to make light repairs before listing the existing home on the market. Orchard seeks to profit by operating as a brokerage and earning commissions.
There have always been services that purchase homes from you. Typically, there firms simply pay off your mortgage, so if you have a higher mortgage balance relative to you home value, you may not like what you are offered. But Orchard is not that model.
If you “List with Orchard,” and your home doesn’t end up selling on the open market, Orchard will buy your home. Sellers in some markets also have the option to sell immediately to the company. Orchard wants you to list for 30 days before selling to them for their backup cash offer price. If you sell directly to Orchard, you’ll also pay an additional 1% convenience fee on top of the 6% you’re already paying commission.
When home prices have been rising at a 17-18% YoY pace, this seems like a good model. But what if The Federal Reserve removes it massive monetary stimulus and/or The Federal Government slows down it fiscal stimulus? Then Orchard, if they purchase your home, will likely lose considerable amounts. Being aware of this possibility, Orchard is likely to buy homes at a considerable discount.
But there is still worries about inflation. Here is the Citi Inflation Surprise index.
Publicly traded companies known as iBuyers are pioneering a high-tech approach to home-flipping intended to make selling properties easier. Those firms include Opendoor Technologies Inc., Redfin Corp., and Offerpad Solutions Inc. A fourth, Zillow Group Inc., recently raised $450 million by issuing bonds, backed by the homes it buys and sells.
The jump is the largest 12-month gain in the index since the series began 45 years ago. On a month-over-month basis, home prices increased by 1.8% in July from June.
“Home price appreciation continues to escalate as millennials entering their prime home buying years, renters looking to escape skyrocketing rents and deep pocketed investors drive demand,” said Frank Martell, president and CEO of CoreLogic, a global property-information firm.
The rush of home buyers — amid extremely low mortgage rates — has caused a lack of supply, which is unlikely to be resolved over the next five to 10 years “without more aggressive incentives for builders to add new units,” he said in a statement.
But it is the forecast for July 2022 that is interesting. A slowdown in home price growth across the board.
Lets see what happens to wage growth are three out of four Americans lose their Covid benefits as of today.
Confounded Interest - Anthony B. Sanders 
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