Category Archives: Mortgage

Will Millennials Ever Become A Generation Of Homeowners?

BofA Has A Troubling Answer

America’s biggest as of 2016 generation, the Millennials, has a heavy burden on its collective 150 million shoulders: its task is to not only step in as a buyer of stocks once the baby boomers begin selling in bulk, but to also provide the much needed support pillar for the recovery of the US housing market. In fact, there have been countless “bullish” housing market theories built upon the premise that sooner or later tens of millions of young American adults will emerge from their parents’ basements, start a household, and buy a house.

So far that theory has not been validated. One simple reason is that Millennials simply can’t afford to buy a house. As we reported last week, a study from Apartment List showed that nearly 70% of young American adults, those aged 18 to 34 years old, said they have saved less than $1,000 for a down payment. This is similar to what a recent GoBanking Survey found last year, according to which 72% of “young millennials”- those between 18 and 24 years old – had $1,000 in their savings accounts and 31% have $0; a sliver (8%) have over $10,000 saved. Of the “older millennials”, those between 25 and 34, 67% had less than $1,000 in their savings accounts, 33% have nothing at all, and 15% had over $10,000.

So does that mean that Millennials can simply be written off as a potential generation of homeowners, and if so, what are the implications for the broader housing market?

That’s the question BofA economist Michelle Meyer asked on Friday, although she phrased it in the proper context: “Is it [still] cool to buy a home.

To our surprise, Meyer found that while the home ownership rate among young adults has plunged to a record low, helping to explain the slow recovery in single family home building, and confirming empirical observations that Millennials have largely been a ‘renter’ generation, by Bank of America’s calculations, the Millennial generation can afford to buy a home – at least in terms of making the monthly payments. While we – and many others would dispute that – BofA does make some other interesting observations, namely that lifestyle changes, including delayed marriage and child rearing, have led to fewer homeowners and a tendency to live close to city centers. Well, if it’s not money it’s clearly something else. Let’s dig in.

First, here is BofA on a rather trivial, if critical topic: “the importance of the youth”

In order to understand the future of the housing stock, it helps to get a grasp on the growth in population, which is a function of immigration and the rate of births/deaths. The Census Bureau is projecting population growth of 0.8% annually over the next decade and 0.7%, on average, through 2036, showing continued slowing from the 0.9% average last decade. Perhaps even more important, however, is the age composition, with a particular focus on young adults who are the drivers of household formation. There are currently 75 million individuals considered to be Millennials, making up the largest generation. The average age is 27.5, implying that there is a large cohort of young adults coming to age (Chart 1). In theory, this should underpin growth in home ownership. But, it is complicated – we have to understand the ability of Millennials to afford housing and the desire to become homeowners vs. renters.

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Can they afford to buy?

The first question to ask is whether the younger generation can afford to buy a home. We turn to the National Association of Realtors (NAR) affordability index which is a ratio between median family income and the qualifying income for a mortgage as a function of median existing single-family home prices and mortgage rates. According to this measure, homeownership is still very affordable relative to history. What about for young adults? Following the NAR’s methodology, we compute an affordability measure for the 25-34 year old age cohort using median household income data from the Census Bureau. Our computed index only goes to 2015 given data limitations, but we extrapolate forward (Chart 2). We find that housing is still affordable for young adults, although not to the extent it is for the overall population. The gap in affordability between the overall population and young adults has widened over the years. That said, the affordability index for young adults is still above the historical average for the aggregate, implying that housing is generally affordable.

So what seems to be the problem? One obstacle is being able to make the downpayment. The NAR measure assumes a 20% down payment, which is a high hurdle for young adults– remember that the bulk of the current 25-34 year old cohort started their careers during the financial crisis and early stages of the recovery, when the economy and labor market were fragile. Plugging in a lower down payment of 10% and the situation looks worse due to increased principal and interest payments. With a 10% downpayment, the index would be at 125.2 in 2015, which is 11% lower than the standard 25-34 year old index and 25% lower than the broad NAR index.

Another challenge is the ability to take on a mortgage loan given high student debt. According to the NY Fed’s credit panel, total outstanding student debt has reached $1.3 trillion, a substantial increase from the $260bn level in 2004. According to the NAR’s Generational Report, nearly 50% of homebuyers under the age of 36 noted that student debt delayed their home purchase, making it harder to afford the downpayment. And, of course, there is the challenge from tighter credit standards which has made it more difficult to achieve homeownership.

But do they want to buy?

Addressing whether Millennials can afford to buy is only one part of the story. We need to understand if they actually want to buy. The homeownership rate has tumbled at a faster rate for 25-34 year olds than for other generations which we do not think can be explained by affordability metrics (Chart 3). We think it also owes to lifestyle changes. Maybe there is something to the stories about Millennials preferring to spend money on avocado toast instead of their home?

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The shopping cart of young adults

Using data from the Consumer Expenditure Survey, we can look at the evolution of the consumer basket over time for those aged 24-35 (Table 1). Relative to the peak of the housing bubble in 2004, there has been a decline in the share of dollars spent on owned shelter and an increase in spending on renting. It also seems that this age group is spending more on healthcare and household operations, which include services paid to keep their household running efficiently (think cleaning). This has come at the expense of spending on apparel, transportation and groceries. The young adult in 2004 has a difference shopping cart than one today.

The single life

The change in spending patterns could reflect the fact that young adults are not only less likely to be homeowners, but they are less likely to be married or even live independently. Instead, this age group is living with parents or other relatives more than in the past (Chart 4). This adjustment in living arrangements has been ongoing for years but the Great Recession seemed to have speed up the trend. Today only 55% of those aged 25-34 live with a spouse/partner compared to over 80% in 1967. Life events such as getting married or having children are typical triggers to buying a home. The longer this age group lives with parents or independently, the more home ownership will be delayed.

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City slickers

We have also seen a shift toward urban centers and away from rural areas over the years. This goes hand-in-hand with a decline in home ownership for young adults. Interestingly the share of young adults living in the suburbs has been fairly steady at around 41% (Chart 5). Moreover, it appears that there is a flocking toward the major cities, specifically in the city centers which are close to transit, workplaces and restaurants. City centers typically have more rental properties than the suburbs. But we also see greater home sales close to city centers than in the past. According to BuildZoom, new home sales within 5 miles of the centers of the 10 most densely cities have exceeded 2000 levels but if you go another 10 miles out, sales are about 50% below 2000 levels.

There are both cyclical and secular forces behind the drop in the home ownership rate for young adults. While young adults can generally afford housing, there are other constraints including the ability to make a large enough down payment and tighter credit standards. Lifestyle changes are partly to blame.

BofA’ troubling conclusion: “These dynamics won’t change in the medium-term which should translate to a lower equilibrium pace for single family housing starts.”

Source: ZeroHedge

 

 

Yields Acting Like Economy Is Heading Into Recession

Treasury Yields and Rate Hike Odds Sink: Investigating the Yield Curve

The futures market is starting to question the June rate hike thesis. For its part, the bond market is behaving as if the Fed is hiking the economy into a recession. Here are some pictures.

June Rate Hike Odds

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No Hike in June Odds

  • Month ago – 51%
  • Week Ago – 12.3%
  • Yesterday – 21.5%
  • Today – 35.4%

10-Year Treasury Note Yield

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The yield on the 10-year treasury note doubled from the low of 1.32% during the week of July 2, 2016, to the high 2.64% during the week of December 10, 2016.

Since March 11, 2017, the yield on the 10-year treasury note declined 40 basis points to 2.24%.

30-Year Long Bond

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The yield on the 30-year treasury bond rose from the low of 2.09% during the week of July 2, 2016, to the high of 3.21% during the week of March 11, 2017.

Since March 11, 2017, the yield on the 30-year treasury bond declined 29 basis points to 2.92%

1-Year Treasury Note Yield

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The yield on the 1-year treasury more than doubled from the low of 0.43% during the week of July 2, 2016, to the high 1.14% during the week of May 6, 2017.

Since March 11, 2017, the yield curve has flattened considerably.

Action in the treasury yields is just what one would expect if the economy was headed into recession.

By Mike “Mish” Shedlock | MishTalk

A Look At Our Older Population, Higher Interest Rate Trend

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The United States of America, 2047: The population bumps up against 400 million people, with a full 22 percent of folks aged 65 and older — or 85.8 million seniors. The national debt rises so high that the country spends more money on interest payments than all of its discretionary programs combined, a scenario that’s never been seen in a half-century of tracking such metrics. And that’s all assuming that elected officials even find a way to keep Social Security and Medicare funded at their current levels.

This stark vision comes courtesy of the Congressional Budget Office and its most recent Long-Term Budget Outlook. The nonpartisan CBO looks into its crystal ball and predicts the economic picture for the next 30 years, and the results could prove fascinating for folks who work in financial planning and lending — or, perhaps, send them screaming into the night.

Interest Rates Creep Higher, But Not Historically So

For instance, the CBO joins the chorus of other financial analysts by projecting steady increases in interest rates over the coming decades as the economy improves and the Federal Reserve moves away from the historically low federal funds rates instituted during the depths of the Great Recession. But mirroring the attitudes of many in the reverse mortgage industry after the Fed last hiked its interest rate target back in March, the office also puts these trends in the larger context of recent history, 

“CBO anticipates that interest rates will rise as the economy grows but will still be lower than the average of the past few decades,” the report notes. “Over the long term, interest rates are projected to be consistent with factors such as labor force growth, productivity growth, the demand for investment, and federal deficit.”

As RMD reported at the time, rising interest rates have diverse effects on Home Equity Conversion Mortgage originators and lenders, potentially hampering needs-based borrowers with lower principal limits, but also providing opportunities to market the growing HECM line of credit and strengthening the HECM-backed securities market. 

Though the CBO doesn’t address specific numbers for federal funds rate targets, the office offers projections for the interest rate on 10-year Treasury notes, predicting a rise from 2.1% at the end of last year to 3.6% in 2027 and 4.7% in 2047. That’s still a percentage point below the average of 5.8% recorded between 1990 and 2007, a period that the CBO notes was free of major fiscal crises or spikes in inflation.

The current federal funds rate target of 0.75% to 1% still falls on the historically low side of the spectrum; prior to the economic collapse in the late 2000s, the number sat at 5.25%, and it climbed as 20% during the inflationary malaise days of the Carter and early Reagan administrations.

Rising interest rates could spell bad news for the federal government, however, as they also determine the amount of money that Uncle Sam must pay on his debts. According to the CBO’s estimates, the amount of federal debt held by the public will balloon to 150% of the gross domestic product, up from 77% now — reaching figures never seen in the history of the United States. For reference, the national debt has only ever exceeded GDP during and after World War II, when the government embarked on an unprecedented defense spending spree.

A Changing Population

In the CBO’s estimate, a variety of factors will conspire to expand the American population to about 390 million as compared to around 320 million today — while simultaneously making it grayer.

The net immigration rate, which balances out the amount of people leaving and entering the U.S., is expected to rise ever-so-slightly from 3.2 per 1,000 in 2017 to 3.3 per 1,000 in 2047, while the fertility rate for folks already in America will sit at an average of 1.9 births per woman for the next 30 years, down from the pre-recession level of 2.1.

Couple that with declines in mortality rates and gains in life expectancy, and you’ve got the recipe for an older America: A baby born in 2047 can expect to live an average of 82.8 years according to the CBO’s estimates, compared with 79.2 for children born this year. And good news for readers born in 1982: You can expect an average of 21.5 more years on this mortal coil once you turn 65 in 2047, as compared to 19.4 more years for those celebrating their 65th birthdays by the end of 2017.

The Takeaway

Interestingly, the CBO notes that it bases its entire report on the assumption that the two key pillars of Social Security and Medicare will remain funded “even if their trust funds are exhausted” — a formidable “if” given political realities and the general pitfalls of making assumptions about the future of government from 30 years out.

As Jamie Hopkins, an associate professor of taxation at the American College of Financial Services, recently told a HECM industry event, Social Security and Medicare will remain funded through 2034, and any attempts to make unpopular decisions that could benefit their long-term health — such as raising the retirement age — would spell political disaster for those who attempt a change.

Perhaps none of this comes as a surprise to originators, lenders, and others who work in the reverse mortgage space: Americans as a unit are getting older, the economic outlook remains uncertain, and no one’s really sure what’s going to become of the social safety net. Meanwhile, down on the micro level, this growing crop of seniors will need to figure out ways to remain comfortable and safe in their retirement years.

By Alex Spanko | Reverse Mortgage Daily

Are Bonds Headed Back To Extraordinarily Low Rate Regime?

The U.S. 10-Year Treasury Yield has dropped back below the line containing the past decade’s “extraordinarily low-rate” regime.

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Among the many significant moves in financial markets last fall in the aftermath of the U.S. presidential election was a spike higher in U.S. bond yields. This spike included a jump in the 10-Year Treasury Yield (TNX) above its post-2007 Down trendline. Now, this was not your ordinary trendline break. Here is the background, as we noted in a post in January when the TNX subsequently tested the breakout point:

“As many observers may know, bond yields topped in 1981 and have been in a secular decline since. And, in fact, they had been in a very well-defined falling channel for 26 years (in blue on the chart below). In 2007, at the onset of the financial crisis, yields entered a new regime.

Spawned by the Fed’s “extraordinarily low-rate” campaign, the secular decline in yields began a steeper descent.  This new channel (shown in red) would lead the TNX to its all-time lows in the 1.30%’s in 2012 and 2016.

The top of this new channel is that post-2007 Down trendline. Thus, recent price action has 10-Year Yields threatening to break out of this post-2007 technical regime. That’s why we consider the level to be so important.”

We bring up this topic again today because, unlike January’s successful hold of the post-2007 “low-rate regime” line, the TNX has dropped back below it in recent days. Here is the long-term chart alluded to above.

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And here is a close-up version.

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As can be seen on the 2nd chart, the TNX has just broken below several key Fibonacci Retracement levels near the 2.30% level – not to mention the post-2007 Down trendline which currently lies in the same vicinity. Does this meant the extraordinarily low-rate environment is back?

Well, first of all, the Federal Reserve only sets the overnight “Fed Funds” rate – not longer-term bond yields (at least not directly). So this is not the Fed’s direct doing (and besides, they’re in the middle of a rate hiking cycle). Therefore, the official “extraordinarily low-rate” environment that the Fed maintained for the better part of a decade is not coming back – at least not imminently. But how about these longer rates?

Outside of some unmistakable influence resulting from Fed policy, longer-term Treasury Yields are decided by free market forces. Thus, this return to the realm of the TNX’s ultra low-rate regime is market-driven, whatever the reason. Is there a softer underlying economic current than what is generally accepted at the present time? Is the Trump administration pivoting to a more dovish posture than seen in campaign rhetoric? Are the geopolitical risks playing a part in suppressing yields back below the ultra low-rate “line of demarcation”?

Some or all of those explanations may be contributing to the return of the TNX to its ultra low-rate regime. We don’t know and, frankly, we don’t really care. All we care about, as it pertains to bond yields, is being on the right side of their path. And currently, the easier path for yields is to the downside as a result of the break of major support near 2.30%.

Source: ZeroHedge

Fed Announced They’re Ready To Start Shrinking Their 4.5T Balance Sheet ― Prepare For Higher Mortgage Rates

Federal Reserve Shocker! What It Means For Housing

The Federal Reserve has announced it will be shrinking its balance sheet. During the last housing meltdown in 2008, it bought the underwater assets of big banks.  It has more than two trillion dollars in mortgage-backed securities that are now worth something because of the latest housing boom.  Gregory Mannarino of TradersChoice.net says the Fed is signaling a market top in housing.  It pumped up the mortgage-backed securities it bought by inflating another housing bubble.  Now, the Fed is going to dump the securities on the market.  Mannarino predicts housing prices will fall and interest rates will rise.

Whistleblower Files Charges Against Looting Of Freddie Mac Scheme

Obama administration looted investors to fund Obamacare

WASHINGTON, D.C. – A whistleblower who filed last week a formal complaint with the Federal Housing Finance Authority (FHFA) Office of Inspector General (OIG) provided Infowars.com with a document leaked from Freddie Mac that proves both Freddie Mac and Fannie Mae are currently out-of-compliance with Security and Exchange Commission (SEC) filing requirements.

The whistleblower – a CPA who worked in risk management for Freddie Mac from 2014 to 2016 – explained to Infowars.com the leaked internal document was created by Freddie Mac auditors in the preparation of Freddie Mac’s 2015 filing with the SEC of the Government Sponsored Entities (GSEs) Form 10-Q and 10-K – two SEC forms that require auditors to review and management to submit a comprehensive financial summary of the entity’s performance.

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“Freddie Mac management was and is aware that the GSEs equity shares have no value due to the Net Worth Sweep (NSW) but have not disclosed this in any public filing, including not in their 10-Q and 10-K filings,” the whistleblower told Infowars.com.

“At a minimum, Freddie Mac management is complicit with FHFA in the erosion of the property rights of shareholders and likely complicit in securities fraud with FHFA, as Freddie Mac’s management has not disclosed to the public that they are aware Freddie Mac equity has zero value.”

The NWS traces to Aug. 17, 2012, the Federal Housing Financial Agency and the Department of Treasury engineered an amendment to the Senior Preferred Stock Purchase Agreements through which Treasury had invested in Fannie and Freddie to allow the U.S. Treasury to grab ALL Fannie and Freddie earnings, regardless how large Fannie and Freddie’s profits might be.

“The document leaked from Freddie Mac is an internal memo prepared by the auditors (either internal or external) to management discussing their thresholds for materiality for their testing,” the whistleblower explained. “This document was prepared for a ‘review’ (the level below an audit in terms of assurance) and is done in conjunction of filing quarterly SEC filings like the 10-Q.”

“The auditors would have met with management for interviews to allow the auditors to gain an understanding of the organization itself, its operations, financial reporting, and known fraud or error.”

On Page 8 of the leaked report, the Freddie Mac auditors and management write: “We see no value in the common shares or the junior preferred shares as the Net Worth Sweep dividend effectively prohibits Freddie Mac from rebuilding capital despite the return to operating profitability.”

No similar statement from the auditors and management of the GSE effectively considered Freddie Mac as headed toward a situation where the Treasury had robbed Freddie Mac of all shareholder value by confiscating some $260 billion from Freddie Mac and Fannie Mae since 2012 by sweeping all earnings under the NWS from the GSEs into the Treasury’s general fund.

“This is shocking because SEC regulations required the auditors and management of Freddie Mac, when reporting the GSEs audited financial statements (including 10-K and 10-Q Forms) to report their financials not as a ‘going concern,’ but as a liquidation,” the Whistleblower stressed. “Additionally, Freddie Mac management states in the report, ‘The Treasury, which holds a warrant to purchase nearly eighty percent of our common stock, has recommended that our company be wound down.”

“FHFA, as an independent agency, has a fiduciary responsibility to Freddie Mac as it ‘has all rights of stockholders’ and therefore, FHFA as an independent agency, should not be taking direction from another agency,” the Whistleblower emphasized.

“Freddie Mac management was and is aware that the equity shares have no value due to the net worth sweep but have not disclosed this in any public filing,” the Whistleblower concluded.

“At a minimum, Freddie Mac management is complicit with FHFA in the erosion of the property rights of shareholders and likely complicit in securities fraud with FHFA as Freddie Mac’s management has not disclosed that they are aware the equity has zero value.”

By Gerome Corsi | Infowars

Used Home Sales Fall From 10-Year Yigh

U.S. home resales fell more than expected in February amid a persistent shortage of houses on the market that is pushing up prices and sidelining potential buyers.

The National Association of Realtors said on Wednesday existing home sales declined 3.7 percent to a seasonally adjusted annual rate of 5.48 million units last month.

January’s sales pace was un-revised at 5.69 million units, which was the highest level since February 2007. Economists polled by Reuters had forecast sales decreasing 2.0 percent to a pace of 5.57 million units last month.

“Realtors are reporting stronger foot traffic from a year ago, but low supply in the affordable price range continues to be the pest that’s pushing up price growth and pressuring the budgets of prospective buyers,” said Lawrence Yun, the NAR’s chief economist.

Sales were up 5.4 percent from February 2016, underscoring the sustainability of the housing market recovery despite rising mortgage rates. In February, houses typically stayed on the market for 45 days, down from 50 days in January.

U.S. financial markets were little moved by the data as investors increasingly worried whether President Donald Trump would be able to push ahead with his pro-growth policies. The dollar fell against a basket of currencies and U.S. stocks were trading mostly lower. Prices for U.S. government bonds fell.

The 30-year fixed mortgage rate is hovering at 4.30 percent.

Home loans could cost more after the Federal Reserve last week raised its benchmark overnight interest rate by 25 basis points to a range of 0.75 percent to 1.00 percent. The U.S. central bank has forecast two more rate hikes for 2017.

BUOYANT LABOR MARKET

Demand for housing is being buoyed by a labor market that is near full employment. But home sales remain constrained by the dearth of properties available for sale, which is keeping prices elevated.

While the number of homes on the market increased 4.2 percent to 1.75 million units last month, housing inventory remained close to the all-time low of 1.65 million units hit in December. Supply was down 6.4 percent from a year ago.

Housing inventory has dropped for 21 straight months on a year-on-year basis. With supply remaining tight, the median house price surged 7.7 percent from a year ago to $228,400 in February. That marked the 60th consecutive month of year-on-year price gains.

Builders have been unable to fill the housing inventory gap, citing rising prices for materials, higher borrowing costs, and shortages of lots and labor.

Lennar Corp, the second-largest U.S. homebuilder, reported on Tuesday a drop in quarterly gross margin as the company struggled with higher land and construction costs.

The Florida-based builder, however, sold 5,453 homes in the first quarter ended Feb. 28, up from 4,832 homes in the year-earlier period, and reported a 12 percent jump in orders.

The NAR estimates housing starts and completions should be in a range of 1.5 million to 1.6 million units to alleviate the chronic shortage. Housing starts are running above a rate of 1.2 million units and completions around a pace of 1 million units.

At February’s sales pace, it would take 3.8 months to clear the stock of houses on the market, up from 3.5 months in January. A six-month supply is viewed as a healthy balance between supply and demand. Though higher prices are increasing equity for homeowners and might encourage some to put their homes on the market, they could be sidelining first-time buyers from the market. First-time buyers accounted for 32 percent of transactionslast month, well below the 40 percent share that economists and realtors say is needed for a robust housing market.

That was down from 33 percent in January but up from 30 percent a year ago.

Source: Crusader Journal