Housing Nearing Bubble

Home prices are rising rapidly — so much so that industry participants are warning that housing is entering another national bubble, according to the New York Times.
While the market is not in a bubble quite yet, there are troubling signs that housing is heading down that path.
Many homeowners anticipate housing prices will increase 5.7% next year, a dramatic hike when compared to the 4% expectation for 2013, Yale professor Robert Shiller explained.
"People who are now inclined to buy a home are most often just thinking that we are gradually recovering from a recession and that this is a good time to buy," Shiller wrote in the article.
He concluded, "The mental framing still seems to be about economic recovery and the likelihood that interest rates will rise. People mostly don’t seem to be prompted by the anticipation of another housing boom."

Government Shut Down WILL affect Real Estate

In the event of a government shutdown, most Federal employees are required to stop working because no funds would be available to pay staff, ultimately ceasing most housing agency’s functions.
Consequently, the Federal Housing Administration will be unable to endorse any single-family loans and staff will be unavailable to underwrite and approve new loans, according to a Department of Housing and Urban Development’s latest report.
If an application for an FHA-insured loan is not approved by the time of the government shutdown, it will not make it through the system, impacting affordability opportunities for homeowners.
Given that government-backed mortgages account for more than 90% of loans, the shrinkage in volume flow would critically hit the housing market.
When put into perspective, more than 9,000 HUD employees, only 3.8%, or 350 employees, will be able to work, according to HUD.
Currently, FHA endorsements currently represent 15% of the market, with 80% of loans endorsed by lenders with delegated authority.
In the event of a government shutdown, the Office of Single Family Housing will maintain the minimum operations necessary to support FHA’s existing portfolio.
These functions include operating both the FHA call center, servicing Secretary-held notes and mortgages, as well as ensuring the continuity of FHA’s real estate-owned properties disposition process — addressing REO health and safety violations and paying related contractor invoices.
Work during an appropriations hiatus includes the performance of functions that are funded through multiyear appropriations or where the failure to perform those functions could result in an imminent threat to the safety of homeowners and their property.
Furthermore, these activities are associated with FHA’s portfolio of insured mortgages, including multifamily, sing family and project-based rental assistance.
Nonetheless, it’s important to note that there are a few number of activities deemed excepted in order to preserve life and property, including Ginnie Mae.
"An interruption in the operations would create immediate and significant market disruption that would lead to financial losses for investors and increased mortgage rates for government-insured mortgage loans," HUD stated.
As a result Ginnie Mae would continue operations, specifically the government-owned enterprise’s ability to issue mortgage-backed securities and ability to receive and process monthly loans.
Additionally, government-backed home loans that are purchased and securitized by Fannie Mae and Freddie Mac will be unaffected by a shutdown since both enterprises operated autonomously.
"Will continue our day-to-day operations are a as private company in the market so there will be no change, no effect and will continue to operate as normal," stated Fannie Mae spokesperson Andy Wilson.
On a similar note, Freddie Mac would continue normal operations without interruption.
"Although we are currently in conservatorship and regulated by the Federal Housing Finance Agency, we are a privately held company and a temporary shutdown would have no direct impact on us," Freddie Mac spokesperson Brad German said.

3 OUT OF 10 BORROWERS CAN'T QUALIFY FOR MORTGAGE

Three out of 10 Americans are unlikely to qualify for a mortgage, despite historically low interest rates and levels of affordability not seen in years, data from Zillow (Z) revealed.
Zillow looked at 13 million loan quotes and more than 225,000 purchase loan requests on Zillow Mortgage Marketplace in September, comparing them to a similar study conducted in September 2010.
What Zillow found was discouraging for borrowers looking to buy a home — especially those affected by the recent financial crisis.
Borrowers who have FICO credit scores under 620 who requested purchase loan quotes for 30-year fixed, conventional loans were unlikely to receive even one loan quote in September. This was unchanged from three years ago, even if they offered a relatively high downpayment of 15%-25%.
According to data provided by myFICO.com, nearly 28.4% of Americans have a credit score of 620 or lower.
At the same time, the bar has been set higher for those looking to get the lowest available mortgage rates. Typically, the best mortgage rates are reserved for borrowers with credit scores of 740 or higher, compared to 720 in 2010. Data revealed that 40.3% of Americans currently fall into this category.
Three years ago, 47% of Americans had credit scores over 720 and were able to get the best rates. Borrowers with credit scores above 740 did not receive significantly better mortgage rates.
In the September study, borrowers with credit scores of 740 or above got an average low annual percentage rate of 4.42% for conventional 30-year fixed mortgages.
Borrowers with mid-range credit scores between 620 and 739 received APRs, on average, between 5.09%-4.47%, with the APR rising as the credit score drops. Those with credit scores below 620 received too few loan quotes to calculate the average low APR.
"Despite all-time high levels of affordability in the housing market, tightened lending standards mean that nearly one-third of Americans are unlikely to be able to achieve the American Dream of homeownership because they can’t qualify for a mortgage due to a low credit score," said Erin Lantz, director of mortgages at Zillow.
"Your credit score is the single most important factor in determining your mortgage interest rate and monthly payment. To avoid any surprises when buying a home, check your credit score and report at least six months before you intend to buy to see if there are any costly inaccuracies, pay down high-balance lines of credit and make sure your bills are always paid on time," he added.

Home Prices Are Up, but Gains are Peaking

Home prices in 20 U.S. cities rose in the 12 months through July by the most in more than seven years, helping boost owner equity.
The S&P/Case-Shiller index of property values in 20 cities increased 12.4 percent from July 2012, matching the median projection of 31 economists surveyed by Bloomberg and the biggest year-to-year advance since February 2006, a report from the group showed today in New York. On a month-to-month basis, price appreciation slowed.

Enlarge image

Home Prices in U.S. Cities Increase by Most in Seven Years

Andrew Harrer/Bloomberg

A potential homebuyer walks through a house for sale in the Logan Circle neighborhood of Washington, D.C.

A potential homebuyer walks through a house for sale in the Logan Circle neighborhood of Washington, D.C. Photographer: Andrew Harrer/Bloomberg

4:41

Sept 24 (Bloomberg) -- Jonathan Miller, president of Miller Samuel Inc., talks about the outlook for housing prices and market strategy. He speaks with Tom Keene, Sara Eisen and Scarlet Fu on Bloomberg Television's "Surveillance." Jim O'Neill, Bloomberg View columnist and former chairman of Goldman Sachs Asset Management, also speaks. (Source: Bloomberg)

7:42

Sept. 24 (Bloomberg) -- Daniel Arbess, a partner at Perella Weinberg Partners LP, talks about Federal Reserve policy and the impact on the U.S. housing market. He speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Audio Download: Shiller Says Boom in Housing Prices May Be Ending

Gains in home and stock values are contributing to increases in household wealth that are helping bolster consumer spending, the biggest part of the economy. Nonetheless, the appreciation in property values may cool over the rest of the year as mortgage rates close to a two-year high temper demand.
Price increases “will start to slow down to a fairly sustainable pace,” said Brian Jones, a senior U.S. economist at Societe Generale in New York and the best home-price forecaster over the past two years, according to data compiled by Bloomberg. “The increase in mortgage rates will slow things down a bit at the margin. As the economy does better, people will be in a better position to weather the higher rates.”
Another home-price gauge also showed improvement. Values climbed 1 percent in July from the prior month after a 0.7 percent increase in June, according to figures from the Federal Housing Finance Agency.

Confidence Dips

Consumer confidence in September dropped to a four-month low, another report showed. The Conference Board’s sentiment index decreased to 79.7, the weakest since May, from a revised 81.8 in August, according to data from the New York-based private research group. The measure averaged 53.7 during the recession that ended in June 2009.
Stocks fell as investors weighed the data for signs on the economy’s strength. The Standard & Poor’s 500 Index declined 0.3 percent to 1,696.99 at 10:05 a.m. in New York.
Estimates in the Bloomberg survey for home prices ranged from gains of 10 percent to 13 percent. The S&P/Case-Shiller index is based on a three-month average, which means the July figure was also influenced by transactions in June and May.
The July reading compared with June’s 12.1 percent year-over-year advance.
Home prices adjusted for seasonal variations rose 0.6 percent in July from the prior month, less than the Bloomberg survey median, which called for a 0.8 percent increase. Monthly advances over the past three months have averaged 0.8 percent, the least over similar periods so for this year.

Gains Peaking

“More cities are experiencing slow gains each month than the previous month, suggesting that the rate of increase may have peaked,” David Blitzer, chairman of the S&P index committee, said in a statement.
The month-over-month gains were led by a 2.5 percent jump in Las Vegas. Property values fell in Minneapolis and Cleveland.
Unadjusted prices climbed 1.8 percent in July from the previous month.
The year-over-year gauge provides better indications of trends in prices, the group has said. The panel includes Karl Case and Robert Shiller, the economists who created the index. Year-over-year records began in 2001.
All 20 cities in the index showed a year-over-year gain, led by a 27.5 percent surge in Las Vegas. San Francisco, Los Angeles and San Diego also showed gains in excess of 20 percent.

Southwest Rebounds

“The Southwest continues to lead the housing recovery,” said Blitzer. Nonetheless, values in all cities still remain below their prior peaks, he said.
Sales of previously owned properties rose 1.7 percent in August to a 5.48 million annual rate, the most since February 2007, as buyers rushed to lock in interest rates that were starting to climb from near record-low levels, data from the National Association of Realtors showed last week. The number of existing houses on the market was 2.25 million at the end of August, the fewest for that month since 2002.
Lawrence Yun, chief economist at the Realtors group, said the surge in sales in August was probably the “last hurrah” for the next year to 18 months as higher prices and the jump in mortgage rates hurts affordability for some buyers.
The rate on 30-year home loans averaged 4.50 percent in the week ended Sept. 19, close to the highest level since July 2011, according to data from McLean, Virginia-based Freddie Mac. The rate, which was as low as 3.81 percent at the end of May, began rising since Fed Chairman Ben S. Bernanke that month indicated the central bank may slow asset purchases.

Builder Sales

Lennar Corp. the third-largest U.S. homebuilder by revenue, said today that its fiscal third-quarter earnings rose as the company sold more houses and raised prices.
“We continue to see long-term fundamental demand in the market driven by the significant shortfall of new single-family and multifamily homes built over the last five years,” Stuart Miller, chief executive officer of the Miami-based builder, said in a statement. “While there may be bumps along the road that may impact the short-term pace of the recovery, the long-term outlook for our business remains extremely bright.”
Lennar’s sales rose to $1.6 billion in the three months through August from $1.1 billion a year earlier as the number of homes delivered increased to 4,990 from 3,655. The average selling price increased to $291,000 from $258,000, and orders jumped 14 percent.
The Fed last week maintained its $85 billion monthly pace of bond buying, saying it needs additional evidence of sustained improvement in the economy. “The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement,” policy makers said in a statement after their meeting.

Apparently it was a close call on whether not to raise rates- But What About October???

Apparently it was a close call on whether not to raise rates.  However, St. Louis President James Bullard says to expect a taper in the October Meeting-  What does this mean?  We are only weeks away from The Taper.

Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year who has backed record stimulus, said a small tapering of bond buying is possible next month after the Fed made a close call this week in deciding not to slow purchases.

“That was a borderline decision” after “weaker data came in,” Bullard said today on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene. “The committee came down on the side of, ‘Let’s wait.’”
Bullard called October a “live meeting,” because “it’s possible you could get some data that change the complexion of the outlook and could make the committee be comfortable with a small taper in October.”
The Fed this week unexpectedly refrained from reducing its $85 billion in monthly asset purchases, saying it needs to see more signs of sustained labor market gains. Chairman Ben Bernanke said Sept. 18 the central bank would decide on whether to taper purchases based on “what’s needed for the economy.”
Markets shouldn’t have been surprised by the decision because Federal Open Market Committee members have repeatedly said the decision to slow, or taper, would be “data dependent,” Bullard said.
“I’m a little dismayed at those in markets that are saying they’re surprised by this,” Bullard said. The Fed said that, “if the economy was going to improve in the second half of the year, and if we saw that improvement, we would taper.”
Bernanke’s remarks earlier this year on the prospect for tapering sent bond yields as much as a percentage point higher. Yields on the benchmark 10-year Treasury note climbed as high as 2.99 percent on Sept. 5 from 1.93% on May 21, the day before Bernanke first outlined a possible timetable for a reduction in the asset purchases.
This week’s FOMC decision not to taper helped reverse that rise and pushed back expectations for a tightening of monetary policy. The yield on the benchmark 10-year Treasury note was little changed at 2.75 percent as of 9:15 a.m. in New York, according to Bloomberg Bond Trader prices.
Investors see a 43% chance policy makers will increase the federal funds rate target to 0.5% or more by January 2015, based on data compiled by Bloomberg from futures contracts. The odds were 68 percent two weeks ago.
“Rates went up a lot over the summer” and “for many on the committee that was a surprise,” Bullard said. It wasn’t a “surprise for me because I’ve said the flow of QE matters a lot.”
So “when we threatened to pull that back, markets naturally” sent yields higher, he said. Bullard during the past two months has urged the Fed to hold off on adjusting so-called quantitative easing, saying any change should depend on whether inflation moves toward the Fed’s 2% target. Policy shouldn’t rely on central bank forecasts for the economy that have proven too optimistic in the past three years, he said.
“We got some weaker data, so that put the committee in a position where we could delay,” he said. With inflation low, Bullard said “we can afford to be patient.”
Bullard dissented from the FOMC’s June 19 policy statement, saying the panel should “signal more strongly its willingness to defend its inflation goal.” He dropped the dissent at the following meeting when the FOMC added language saying persistently low inflation posed risks to the economic outlook

Premier Nationwide unveils Lock and Shop borrower interest rate protection

This program aims to lock in interest rates for buyers, so that while they are shopping for a home, their interest rates are either locked, or will go down if the market goes down.

This is very interesting for several reasons:

1) This is a throwback to the housing boom- these type of programs were very similar
2) This is an admission by a lender that higher interest rates are truly hurting their purchase business (as opposed to what the National Association of Home Builders Says)
3) The happy days of the previous year and a half are not so happy

The one piece of good news for the lenders is that there is still purchase business to be had.  However, given that rates are going up, the buyers are qualifying for a lot less, which means their buying power lower.

Let me know your thoughts.

GSE Reform Update-

House Leadership Puts GSE Reform on Backburner
The House Majority Leader's failure to include mortgage finance reform in his legislative agenda for the fall has sparked more questions about whether Rep. Jeb Hensarling, Patrick McHenry and others can advance his legislation to the floor this year.

Mortgage application filings tumble 13.5%-

Mortgage application filings fell 13.5% from a week earlier during the survey period ending Sept. 6, the Mortgage Bankers Association reported Wednesday.
Mirroring this downward trend, the MBA refinance index also dropped 20% from the previous week, reaching its lowest level since June 2009.
Overall, the refinance share of mortgage activity dropped to 57% of all mortgage applications, down from 61% a week earlier. The refinance index alone has fallen 71% from its recent peak in early May, and is now at its lowest level since June 2009.
The average contract interest rate for a 30-year, fixed-rate mortgage with a conforming loan limit increased to 4.80% from 4.73%.
Furthermore, the 30-year, FRM jumbo grew to 4.84% from 4.71%.
The average 30-year, FRM backed by the FHA rose to 4.56% from 4.48% a week ago.
Additionally, the 15-year, FRM increased to 3.83% from 3.75%, and the 5/1 ARM rose to 3.59% from 3.49% last week.

Conforming Mortgage Loan Limits To Be Reduced To $400,000

Speculation is growing that the GSE regulator is considering a reduction in Fannie Mae and Freddie Mac’s base loan limit to $400,000 from $417,000.

When asked about such a reduction, the Federal Housing Finance Agency declined to comment.
However, the FHFA with the backing of the Obama administration is working on a proposal to reduce the GSE loan limits.
“The Federal Housing Finance Agency shares the administration’s view that a gradual reduction in loan limits is an appropriate and effective approach to reducing taxpayers’ mortgage risk exposure,” a FHFA spokesperson said.
Fannie and Freddie’s base limit (or national conforming limit) is currently $417,000. Several sources indicated that a reduction to $400,000 is being considered, which would reduce the maximum loan limit (150% of the base limit) to $600,000. The current maximum limit is $625,500.
One observer noted that the $400,000 loan limit makes sense from an operational standpoint because it would be easy for lenders to implement.
But such a reduction in the national conforming limit could also affect the loan limits on FHA-insured loans. And it would reduce the floor on Federal Housing Administration loans to $260,000 from $271,050. (The floor would become 65% of $400,000.)
The White House and FHFA want to shrink the government’s market share and make more room for private capital to enter the mortgage market.
But some industry groups are concerned that it could disrupt the purchase market and make it more difficult for first-time buyers and others to get financing.
“It would be counterproductive to make changes to the loan limits before private capital is fully engaged,” said Gary Thomas, president of the National Association of Realtors.

Bank of America Said to Cut 2,100 Jobs in Mortgage Slump

                   

Bank of America Corp., the second-largest U.S. lender, will eliminate about 2,100 jobs and shutter 16 mortgage offices as rising interest rates weaken loan demand, said two people with direct knowledge of the plans.
About 1,500 of the workers helped process home loans, said one of the people, who asked for anonymity because while affected employees were notified on Aug. 29, the scope of the plans hadn’t been publicly announced. About 400 worked in a suburban Cleveland call center, and 200 dealt with overdue mortgages, the person said. The reductions are scheduled to be completed by Oct. 31, the people said.

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Bank of America ATM

Davis Turner/Bloomberg

The staff reductions by Bank of America Corp. are scheduled to be completed by Oct. 31, said two people with direct knowledge of the plans.

The staff reductions by Bank of America Corp. are scheduled to be completed by Oct. 31, said two people with direct knowledge of the plans. Photographer: Davis Turner/Bloomberg

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Mortgage lenders are paring staff as higher interest rates discourage refinancing and cast doubt on how long the housing market rebound will last. Wells Fargo & Co., the biggest U.S. home lender, plans more than 2,300 job cuts, and JPMorgan Chase& Co. may dismiss 15,000. Bank of America’s pending home loans fell 5 percent at the end of June from the previous quarter.
The changes “reflect our ongoing efforts to streamline our facilities and align our cost structure with market realities,” said Terry Francisco, a spokesman for the Charlotte, North Carolina-based bank.
The lender targeted three offices in California as well as locations in Virginia, Washington, Texas and Ohio, according to employee discussions held last month, said the people. Some will be offered work elsewhere in the firm, the people said. Bank of America’s staff totaled more than 257,000 at mid-year.

Countrywide Cutbacks

Chief Executive Officer Brian T. Moynihan is again scaling back on operations gained in the 2008 takeover of Countrywide Financial Corp., once the biggest U.S. mortgage lender. After shuttering reverse mortgage and correspondent lending units in 2011, the firm targeted smaller ex-Countrywide offices to close or consolidate, said one of the people.
Regulators and lawmakers blamed Countrywide for lax standards and predatory lending that contributed to the housing bubble and the crisis that followed, which has cost Bank of America more than $45 billion. Countrywide was acquired under Moynihan’s predecessor, Kenneth Lewis.
“We’re pretty much through the refi boom, and we don’t know yet what the purchase business will look like,” said Nancy Bush, founder of NAB Research LLC, a bank research firm in New Jersey. “Countrywide was everywhere, so Bank of America’s particular challenge is to go from this hot-mess mortgage company to a rational one.”
The cuts will leave about 25 mortgage offices, said one of the people. The single biggest site affected is in suburban Cleveland and had 1,000 employees, said the person. That part of the reduction was reported last month by the Plain Dealer.

Rate Impact

Most of the dismissals are in addition to the 30,000 announced in 2011 as part of Project New BAC, Moynihan’s plan to reduce expenses, said one of the people.
“We do anticipate some slowdown in mortgage production resulting from recent increases in interest rates,” Bruce Thompson, Bank of America’s chief financial officer, said in a July 17 conference call.
The cost of a 30-year fixed home loan rose to 4.57 percent last week from 3.35 percent in May.
Refinancing made up 70 percent of the mortgage market during the first half, slid to about 50 percent recently and could fall further in coming months, Franklin Codel, head of mortgage production for San Francisco-based Wells Fargo, said last month in a staff memo.
Tim Sloan, Wells Fargo’s finance chief, told an investor conference today that rising interest rates probably won’t mean an end to the housing market’s rebound because new families are being created and homes are still affordable.

Real Estate Credit Availability Declines

A decline in the number of interest-only loan products available in the marketplace has contributed to the first drop in four months in the Mortgage Credit Availability Index, with a Mortgage Bankers Association economist noting this could be lenders starting to pare down offerings to meet the qualified mortgage rule.

There was a 0.7% drop in the MCAI for August, to 111.5. The index, introduced earlier this year by the MBA, is calculated using data from AllRegs’ Market Clarity product. In July, the index was 112.27.
When the MCAI drops, that indicates a tightening in lending standards. Besides the decline in IO products, some lenders also have dropped loan products whose terms are greater than 30 years.
“As these loan features are outside of the qualified mortgage definition, these changes may reflect the beginning of QM implementation, and the fact that Fannie Mae and Freddie Mac are limited to acquiring loans that meet the QM definition,” said Mike Fratantoni, MBA’s vice president of research and economics.
The MBA added that shifting borrower eligibility requirements on jumbo loans (tighter and looser) offset each other in affecting the August MCAI.

How Asset Bubbles Form and Pop

Fed's Dove Policy Causes Asset Bubbles

San Francisco Fed head John Williams - known for his extremely dovish views on monetary policy (and support of record accomodation)  - appears to have taken some uncomfortable truth serum this morning. In a speech reminiscent of previous "froth" discussions and "irrational exuberance" admissions, Williams explained:

• *WILLIAMS SAYS POLICY MAY YIELD ASSET BUBBLES, UNINTENDED RESULT
• *WILLIAMS: ASSET-PRICE BUBBLES AND CRASHES 'ARE HERE TO STAY'
• *WILLIAMS: ASSET-PRICE BUBBLES ARE 'CONSEQUENCE OF HUMAN NATURE'

His words appear to reflect heavily on the Fed's Advisory Letter (from the banks) from 3 months ago - warning of exactly this "unintended consequence." This, on the heels of Plosser's recent admission that the Fed was responsible for the last housing bubble, suggests with the black-out period before September's FOMC about to begin, the Fed is sending us a message that Taper is coming - as we know they are cornered for four reasons (sentiment, deficits, technicals, and international resentment).

Unemployment Falling For Wrong Reasons Creates Fed Predicament

Unemployment Falling for Wrong Reason Creates Fed Predicament

The good news may be bad news for the Federal Reserve as it considers when to begin scaling back its stimulus.

While unemployment dropped last month to 7.3 percent, the lowest level since December 2008, the decline occurred because of contraction in the workforce, not because more people got jobs. Labor-force participation -- the share of working-age people either holding a job or looking for one -- stands at a 35-year low.

The reduced workforce “poses a problem for the Fed,” said Roberto Perli, a former central bank official who is now a partner at Cornerstone Macro LP in Washington. “The unemployment rate is coming down faster than the Fed thought, but it’s not declining for the right reason.”

The jobless rate is important because Chairman Ben S. Bernanke and his colleagues have established it as the lodestar for policy. Bernanke has said he expects the Fed to complete its asset-purchase program in the middle of next year when unemployment is around 7 percent.

So long as inflation remains contained, the central bank has said it won’t even consider raising its benchmark interest rate until unemployment falls to 6.5 percent. The Fed cut its target for the overnight interbank rate effectively to zero in December 2008 and has held it at that record low.

A key question facing policy makers is how much of the decline in the participation rate is structural and long-lasting and how much is cyclical and temporary.

Boomers Retiring

If the drop is mainly driven by demographics -- aging baby boomers retiring -- then the lower unemployment rate gives a true picture of the amount of slack left in the labor market. If the contraction instead is caused by discouraged job-seekers giving up their search, then the jobless rate doesn’t reflect the true state of the market.

Both alternatives have implications for bond investors. A quicker swing from stimulus to austerity by the Fed would push up yields on Treasury securities. John Herrmann, director of U.S. rate strategy at Mitsubishi UFJ Securities USA Inc. in New York, forecasts the yield on the 10-year Treasury note will rise to 3.25 percent by the end of this year as the jobs market strengthens. It was 2.93 percent at 4 p.m. in New York on Sept. 6, according to Bloomberg Bond Trader data.

Since hitting a 26-year high of 10 percent in October 2009, the unemployment rate has fallen 2.7 percentage points, according to the Labor Department in Washington. A big portion of that decline -- 1.8 points -- was because of a drop in labor-force participation to 63.2 percent.

Divided Economists

Central bank economists are divided over how much of the fall in the workforce is structural and thus not likely to be reversed.

“There is disagreement within the system,” said Geoffrey Tootell, senior vice president and director of research at the Federal Reserve Bank of Boston.

A July 2013 paper by Boston Fed economists Michelle Barnes, Fabia Gumbau-Brisa and Giovanni Olivei concluded that a significant portion of the drop since the start of the last recession results from demographic and other developments that probably will persist.

“About two-thirds of the decline has been trend” due to secular forces, Olivei said. He reckons the participation rate now is about three-quarters of a percentage point below where it otherwise would be because of temporary forces stemming from the 2007-09 recession and the muted recovery since then.

His estimate contrasts with research by Julie Hotchkiss, a senior adviser at the Atlanta Fed. In a paper with Georgia State University’s Fernando Rios-Avila that was published in March, she argues that cyclical influences are all-important in explaining the shrinkage in the labor force.

Fed’s Forecast

If the labor market recovers to pre-recession levels, the participation rate over the years 2015 to 2017 will average a about third of a percentage point more than it did from 2010 through 2012, they found. That would put it at 64.5 percent.

At that level, payrolls would have to rise close to 425,000 per month for the Fed to achieve its forecast of 7 percent unemployment by the middle of next year, according to a jobs-calculation formula developed by Atlanta Fed economists.

If participation held steady at its current level, payrolls would have to increase about 142,000 a month. The average so far this year has been 180,250.

The continued contraction in the number of workers, even as the job market improves, is raising questions at the Fed about how much of the shrinkage is temporary and will be unwound, said Michael Feroli, a former central-bank researcher who is now chief U.S. economist at JPMorgan Chase & Co. in New York.

Shifting Consensus

He said the consensus within the central bank seems to be shifting toward seeing the fall as more long-lasting and structural than cyclical.

“More and more, that seems to be the way they’re going,” he said.

The central bank’s policy-making Federal Open Market Committee will decide to begin reducing its monthly asset purchases at its next meeting on Sept. 17-18, according to economists surveyed by Bloomberg News.

Mary Daly, group vice president and associate director of research at the Federal Reserve Bank of San Francisco, said she now estimates that about 60 percent of the fall in participation since 2008 is because of structural forces, including the aging population. Previously, she had put that share at 50 percent.

More people than she expected are leaving the workforce because they’ve become permanently disabled, while fewer spouses of working Americans are rejoining.

Lower Payrolls

Even so, she anticipates many Americans will resume looking for work as the expansion proceeds -- it’s just that the jobs market will need to be much stronger. Payrolls, in particular, remain 1.9 million lower than their January 2008 peak.

“This is not a sea change in how we think about this,” she said.

Daly played down the differences within the Fed on the issue. She now reckons that participation is anywhere from three-quarters of a percentage point to 1.25 points below where it would be if not for the cyclical forces at work.

Representative Kevin Brady, chairman of Congress’s Joint Economic Committee, highlighted the shrinking workforce in a Sept. 6 statement criticizing President Barack Obama’s handling of the economy.

“The labor-force participation rate fell to 63.2 percent, a level not seen since Jimmy Carter was president,” the Texas Republican said. The “failure of President Obama’s policies are becoming clearer day by day.”

Defending Obama

Jason Furman, chairman of the White House Council of Economic Advisers, defended Obama’s economic record, pointing out that private-sector payrolls have risen for 42 consecutive months.

The experience of 53-year-old Richard Freitas underscores how difficult it can be for economists to sort out what’s going on in the labor market.

Three years after he was let go from his information-technology post at Duracell Inc. in Bethel, Connecticut, Freitas said he deleted a folder on his computer desktop that held his resumes. He dropped out of the labor force in July to focus on applying for disability insurance -- “stress is a silent killer,” he said -- that could help him pay expenses such as rent and child support.

Freitas was employed for 34 years, half of them as an aircraft mechanic at Stratford, Connecticut-based Sikorsky Aircraft Corp. He said he hopes to resume his job search in about three to six months if he’s able to retain financial security and avoid being evicted.

When it comes to the fall in participation, “it’s very hard to say what is cycle and what is trend” the Boston Fed’s Olivei said. “Whatever study you pick, there is quite a bit of uncertainty around the estimates.”

Breakdown of July Jobs Numbers

Of the 169K jobs added, the vast majority, some 144K or 85% of the entire August gain, consisted of the lowest paying jobs possible:

• +44K jobs added in Retail Trade
• +43K added in Education and Health
• +27K added in Leisure and Hospitality
• +17K added in Government (looks like sequester effect has finally "tapered")
• +13K added in Temp Help services

But at least they are full-time "lowest paying jobs" possible. If there was one silver lining in today's jobs report it is that Full Time jobs added finally surpassed the Part-Time jobs, which actually declined.

Elsewhere, for those still confused by the Beige Book's idiotic proclamation that there are construction worker shortages, don't tell the BLS: the number of jobs added in the Construction secotr: 0. Narrowing it down to just construction jobs of residential buildings, the number was down 3.9K. So much for that lie.

As for the two highest paying job categories: Financial Services and Information? -5,000 and -18,000 respectively.

Some recovery.

Average:

Black Homeownership Collapses

President Obama's speech last during the 50th anniversary of MLK may seem sadly ironic now. As he noted, "Dr. King explained that the goals of African-Americans were identical to working people of all races: decent wages, fair working conditions, livable housing..." but the facts are that, as Bloomberg reports, while, for most Americans, the real estate crash is finally behind them and personal wealth is back where it was in the boom; For blacks in the U.S., 18 years of economic progress has vanished, with a rebound in housing slipping further out of reach and the unemployment rate almost twice that of whites.

The homeownership rate for blacks fell from 50% during the housing bubble to 43% in the second quarter, the lowest since 1995. The rate for whites stopped falling two years ago, settling at about 73%, only 3 percentage points below the 2004 peak.

As Rev. Alvin Love, who knew Obama in the 80s notes, "it's going to take a generation to get back to the point where homeownership can build wealth in this community."



Via Bloomberg,

...

Congress passed the Fair Housing Act in 1968 and the Equal Credit Opportunity Act in 1974, which banned discrimination in lending and home sales based on race and national origin. Lawmakers followed in 1977 with the Community Reinvestment Act, to ensure banks were actively lending to credit-worthy borrowers in low-income areas.

The housing boom of the last decade, spurred on by the successive Clinton and Bush administrations that unleashed ambitious programs to widen buying, also brought about a practice known as “reverse redlining” or steering residents of minority neighborhoods into high-cost mortgages, which led to a flood of foreclosures when the market crashed. Many of the minority borrowers who were given subprime loans would have qualified for prime loans with better terms, according to the U.S. Justice Department.

...

“Given that African Americans and Latinos were particularly hard hit by the crisis, and even in some cases targeted for the worst loan products, we must hold financial institutions who made those loans accountable,” Housing and Urban Development Secretary Shaun Donovan said in a telephone interview. We “must make sure we’re doing everything we can to help responsible families recover and become future homeowners.”

...

The Rev. Alvin Love remembers the day in the mid-1980s that a young community organizer named Barack Obama rang the doorbell at his Lilydale First Baptist Church Roseland. ... The area’s history of mortgage discrimination mirrors that of urban enclaves from Boston to Los Angeles. The practice of “redlining” began eight decades ago when the Federal Housing Administration drew up maps using red ink to delineate inner-city neighborhoods considered too risky for lending. ...  “It’s going to take a generation to get back to the point where homeownership can build wealth in this community,” Love said.

...

“The President remains deeply concerned about the uneven recovery,” according to a White House statement.

...

The administration is also cracking down on discriminatory lending and trying to expand homeownership at a time when banks’ underwriting standards are tightest for those rebuilding from the recession. Lenders have raised down payment and credit score requirements and debt-to-income thresholds, which has had a disproportionate impact on minority communities, said Cowan at Woodstock.

“This is a new form of redlining,” Cowan said. “The same communities that bore the initial brunt of the foreclosure crisis, targets of the toxic lending, are now finding it more difficult to access credit as the economy starts to improve.”

...

“Places facing a longer road back from the crisis should have their country’s help to get there,” Obama said during a speech on housing in Phoenix last month.

...

The median wealth of white households was 20 times that of blacks and 18 times the Hispanic rate, a record gap in data going back three decades that is twice the pre-recession size, according to a 2011 Pew study.

...

“African Americans are starting way behind into this recovery,” Cowan said. “Because African American buyers were last into the market and bought at the most inflated prices, when the market deteriorated, they were the ones who lost the most.”

And the plunge in housing affordability will not do anything to help that...

Home price appreciation begins to weaken- reports show a price moderation trend in the making

Home data reports from both CoreLogic (CLGX) and Clear Capital released Tuesday project continued home price growth, despite the recent increase in mortgage rates.

According to the CoreLogic report, home prices throughout the country rose 12.4% year-over-year in July, marking the 17th consecutive month of annual growth in home prices. Clear Capital’s report posted a 10.2% increase in home prices year-over-year; however, this report was for August, not July.
Nonetheless, both reports point toward strong home price appreciation. According to Clear Capital, the last time double-digit yearly price growth was reported was mid-2006, the height of the bubble.
On a monthly basis, home prices, including distressed sales, increased by 1.8% in July, CoreLogic reported. In its home price index, CoreLogic analysts predict that home prices will rise by 12.3% year-over-year in August, with a 0.4% monthly increase — implying a slowing in price gains.

"Home prices continued to surge in July,” said Mark Fleming, chief economist for CoreLogic.

"Looking ahead to the second half of the year, price growth is expected to slow as seasonal demand wanes and higher mortgage rates have a marginal impact on home purchase demand."

Clear Capital’s August report claimed the low-tier price segment of the housing market posted a quarterly gain of 2.0%, the lowest since April 2012. This indicates the sector that kickstarted the recovery is already starting to see moderation in its prices.

"Considering the low tier price segment of the housing market led the recovery, the cooling in this segment will likely transfer through to the broader housing market," said Alex Villacorta, vice president of research and analytics at Clear Capital.

"And cyclically, we are heading out of the busy buying season and into the slower fall and winter months. That’s not to say the recovery is slated to stall, rather growth patterns are likely to return to more historical rates of growth, between 4.0% to 5.0%, rather than align with bubble-like growth," he added.

Harp Refinances Dip In Second Quarter

Higher mortgage rates caused refinance volumes to edge down in the second quarter as fewer homeowners filed refi applications.

When compared to the two prior periods, 2Q refinance volumes fell slightly, according to the latest housing agency refinance data from the Federal Housing Finance Agency.
In the second quarter, 279,933 Fannie Mae and Freddie Mac mortgages refinanced through the government's Home Affordable Refinance Program (HARP), representing 22% of total refinance volume.

The slight drop in refi volumes occurred as mortgage rates rose sharply to 4.07% in June, up from 3.57% in March.

The total number of HARP refinances from the inception of the program to now totals 2.65 million.
Market analysts expect the trend to continue, as mortgage rates are likely to trend higher once the Federal Reserve begins scaling back its monetary stimulus.

"I think once rates begin their return to normalcy as the Fed starts to taper, refinance demand is likely to further decline," explained Royal Bank of Scotland (RBS) markets and international banking analyst Sarah Hu.

She added, "The tapering of refinance activity may have already occurred as evidenced in this week's refinance index (< 2000), the lowest since Jan 2011."

On a similar note, Compass Point Research & Trade analyst Kevin Barker noted that HARP refinance volumes will remain under pressure given the higher rates.

"If borrowers have less of incentive to refinance at higher levels, it’s going to effect volumes and how aggressively originators will target HARP borrowers," Barker stated.

He continued, "I would point out that the drop in refi activity compared to HARP volumes will be relatively less because they’ll be more resilient to rates."

Of the loans that refinanced through HARP in the second quarter, 19% had a loan-to-value ratio greater than 125%.

While taking a look at year-to-date figures through June, 18% of HARP refinances for underwater borrowers were for shorter-term 15- and 20-year mortgages, building equity faster than traditional 30-year mortgages.

In Nevada and Florida, markets that analysts have been keeping an eye on since the recovery began, HARP refinances represented 59% and 50% of total refinances, respectively. This is more than double the 21% of total refinances throughout the country over the same time period.
Underwater borrowers accounted for a large portion of HARP refinances in a number states, representing more than 61% of HARP volume in Nevada, Arizona and Florida.

From the program’s inception through June, 2.34 million loans refinanced through HARP were for primary residences, 78,756 were for second homes and 307,272 were tied to investment properties.

States Divert Foreclosure Prevention Funds To Demolitions.

The Treasury Department has changed the rules on a program meant to help people hit by the housing crisis stay in their homes, allowing states to use some money from the $7.6 billion foreclosure prevention program to demolish homes instead.
The first five houses came down last week, in the Marygrove neighborhood of Detroit.
“It’s a prayer being answered,” says Velma Lewis, who moved to the neighborhood almost 30 years ago. Back then, the streets weren’t dotted with abandoned homes. No one kicked in her door if she left town, like they do now.
“When I moved here, it was a beautiful neighborhood. I never thought that I would retire to this here. So I am elated,” she says.
Michigan and Ohio have changed their contracts with the Treasury Department so they can use foreclosure prevention funds for home demolition. Michigan has diverted a $100 million into demolition. That’s a fifth of its money from the Hardest Hit program, part of the Toxic Asset Relief Program, or TARP. The money will be used to tear down 7,000 vacant homes.
“Here we were assisting homeowners to stay in their homes, but then, many of these communities had so many blighted properties that homeowners would throw their arms up and say, ‘I’m never gonna get value out of this house, why am I doing this?’” says Mary Townley, director of homeownership at the Michigan State Housing Development Authority.
Michigan officials say blight leads to abandonment. It invites crime and drives down property values in neighborhoods where the 13,000 homeowners they’ve already helped are trying to hold on. They say demolishing derelict homes is foreclosure prevention.
But demolition wasn’t the intent of the Hardest Hit program, says housing activist Bruce Marks of the Neighborhood Assistance Corporation of America.
“It is a matter of priorities,” he says. “And the first priority is to save the many tens of thousands, hundreds of thousands of homeowners who want to keep their homes, who want to stay in their homes, who do not want to be foreclosed on and to be forced out.”
Over at the Treasury Department -- the gateway to TARP -- the chief of the Homeownership Preservation Office, Mark McArdle, has a different take.
McArdle says most of the Hardest Hit Fund will still go to keeping people in their homes.  Only $160 million is slated for demolitions so far (maybe more if Indiana follows suit).
“If you do one without the other, you might be making a short-term investment,” McArdle says. “You want to make sure that you make a long-term investment in these communities and these homeowners so not only is that one family able to stay in their home, but they long term can stay in their neighborhood.”                
McArdle says about $2.5 billion has been claimed from the fund so far. The states have through 2017 to get the other $5 billion to struggling homeowners before it disappears.

Luxury Homebuilders Better Positioned In Rising Rate Environment

Market analysts remain confident in homebuilders, with luxury builders expected to lead as rising interest rates freeze out entry-level buyers, analysts say.
Sterne Agee analyst Jay McCanless believes investors should be looking to move-up and luxury homebuilders since households operating on modest incomes are generally the first to bail on housing when mortgage rates rise.
McCanless specifically highlighted the stocks of Ryland Homes (RYL) and Meritage Homes Corp. (MTH) as solid picks. “Our takeaway from this month's data is to continue buying these names because the fundamental backdrop remains positive,” McCanless said of the two stocks.
The 30-year mortgage reached 4.80% this past week, the highest level obtained since April 2011, and more proof that overly competitive rates are slowly becoming a thing of the past.  
Homebuilder stocks overall fell Friday after experiencing a positive run on the HW 30—HousingWire’s exclusive index for mortgage finance and housing stocks.
The dip in share prices followed a strong week for builders – many of which closed in positive territory on Thursday afternoon, only to fall a day later. On Thursday, D.R. Horton (DHI), Lennar Corp. (LEN) and Toll Brothers (TOL), saw their stock prices shoot up on positive gross domestic product and jobless claims data.
D.R. Horton alone rose 3.55% by close on Thursday, only to fall more than 2% by Friday afternoon. Lennar Corp. also fell more than 2% by market close, with Toll Brothers also down 1.86% by market close on Friday.
Despite a weaker close on the HW 30 index for the week, analysts still see homebuilders in a position to benefit from the nascent housing recovery.
"Average sales and inventory trends in the Top 25 markets we monitor continue to improve sequentially and month over month, and we view these indicators as the best barometers of housing demand in our builders' collective footprints," McCanless said.

Update: Eminent Domain and Richmond

Attorneys for banking institutions pushed back against Mortgage Resolution Partners and the City of Richmond in court records this week to prevent the launch of a controversial eminent domain plan.
One of the more shocking allegations they put forth in court documents is that many of the targeted 624 loans are not even underwater.
If enacted, the city of Richmond would use its powers of eminent domain to seize underwater mortgages from investors, restructuring the underlying debt for borrowers.
The legal sparring between the two parties and the banking industry escalated this week, with Wells Fargo (WFC) and Deutsche Bank (DB) defending their right to obtain an injunction against the city and MRP to prevent the program from derailing the housing economy.
First, MRP and Richmond tried to get the banks' preliminary injunction request thrown out of court. As part of their pushback plan, Richmond and MRP filed documents with the court, claiming the banks' case is not ripe for litigation since the proposal has yet to take effect. Furthermore, they argued the banks failed to meet all the required elements of a preliminary injunction.
The banks stepped in for round two this week, filing court documents claiming not only is the case ripe, it's necessary to stave off a proposal that would shake the very foundation of the US mortgage finance system. The two banks cited an investments and structured finance expert in their filing.
"The eminent domain seizure of mortgage loans by the City of Richmond will cause a serious and immediate threat to the U.S. mortgage market…," wrote Phillip Burnaman, co-founder and principal of Murry & Burnaman in a court declaration. "The seizure program will cause injury to PLS (private label securitization) trusts and consequently their certificate holders, who include individual savers and investors in pension and retirement plans."

He added, "The injury to citizens of Richmond and the State of California who are employed in the housing and mortgage industry is equally significant and is potentially severe."
Burnaman went on to claim that 31% of the targeted loans have loan-to-value ratios below 100%. In addition, he says, 43% of the loans are underwater, but stil current. And when analyzing that performing group, he estimates 45% of those borrowers will reach a positive equity position within the next two years.
The documents show that the actions of MRP and Richmond are well underway and put homeowners at risk, said lawyers from Ropes & Gray, the firm filing the case on the banks' behalf.
"MRP already has taken substantial steps in implementing its loan seizure scheme in accordance with a pre-determined plan — it has targeted specific loans, made offers to acquire those loans under threat of eminent domain seizure, and is now preparing to effectuate such seizures by initiating state court condemnation proceedings," said John Ertman, a partner at Ropes & Gray.
He continued, "MRP and Richmond have flatly rejected all requests to suspend activity until the court reviews the significant constitutional challenges. The law is well-settled that injunctive relief can be considered before millions of savers suffer irreparable harm."
Richmond is attempting to put eminent domain into action, which poses an automatic threat to investors and the mortgage market because once the program is implemented it cannot be carved back easily, an industry lawyer added.
As a result, opponents are filing suit early to prevent the plan's enactment.
"The servicers are working to keep homeowners in their homes and to find a way to provide affordable housing options to these homeowners," concluded an industry lawyer. "MRP and Richmond can try, but they can’t deny this."