New Home Sales Need A Strong Total Report

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From  my 2015 Housing Prediction Article

“You get my drift: The bar for housing is so low that some housing bulls might try the predictable tactic of bellowing about exponential growth portending a miraculous recovery when all that is occurring is a bump up from a pitifully low base. I take a more measured (or perhaps jaundiced) view of what the future holds”

If you listen to the marketplace this year, it seems like housing is booming again. New home sales are rising double digits and the Builder Index is smoking hot this year.

While we were due for growth in 2015, for context, recall the  title of my 2015 Housing Prediction Article:

2015 Housing Predictions: The Bar Is So Low We Might Trip On It:     This still holds true.

For new homes, I predicted 8% -12% growth with some upside capacity if median prices fell –which means either home builders discounted to the high end buyer or that the make up shift of sales had some smaller sized homes.

Since we are getting lower revisions, we can assume that the more aggressive sales estimates won’t happen this year.

As you can see from the charts below, the year over year numbers are still strong but only because 2014 was a major whiff– in year 6 of the economic with rates falling and inventory rising.

From Calculated Risk: A must follow
http://www.calculatedriskblog.com/

May Data Line & June Data Line with revisions

NHS20142015May2015

NHS20142015June2015

We heard estimates of 24% – 41% growth in new home sales demand for 2015.   In a “normal economy, this would be a good bet because last year was such a miss.

However, if we get another soft reading in the next report, with more lower revisions, then  expect more revisions lower for total new home sales for 2015.

Austin Kilgore Editor in Chief of @NatMortgageNews reports that Wells Fargo does expect to see a 550K total home sale level. Now, unless we get major positive revisions and strong 2nd half demand that sales number needs to revised lower

WELLS

  On the other hand, tomorrow’s existing home sales report should beat expectations. In the present economy existing homes have at least two major advantages:

1. New Homes sales are 1/10th of all sales but are much more expensive in a 90% mortgage market place. So, price and rates combo matters.

2. Existing home sales which are 90% of the market place but have less economic output than new homes are not only cheaper compared to existing homes but have a geographic advantage than a new home. What I mean by that is that
new homes are clustered in an area of city where exiting inventory can be spread around the map.
This means for a mortgage buyer, there is more value  in a less expensive older home. I do believe this is the reason on the margins  why new home sales, even with it’s very low bar set in this economic cycle, has had trouble gaining traction.

Having said that I expect that we will see better growth in 2015 compared to last year, regardless of what happens in the next new home sales report. I predict 8%- 12% year over year growth and good shot to theupside if median prices fall.

In a nutshell, the market place is telling to us, that if we get a softer new home sales report, look for revisions to total new home sales, making it the 3rd year in a row that new home sales missed sales expectation. What we have to understand better is why is this happening in year 7 of the economic cycle with rates below 4.125% the entire year.

Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1988 and is in a partnership with ZeneHome.com 

FED And The First Rate Hike

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Fed has a dual mandate
1. Control Inflation
2. Facilitate Employment
I like to  joke that they have a DUEL mandate; count the steps to 10, aim to kill and be first to shoot.
So, we are well below their unemployment metric which triggers a rate hike.

Via Doug Short

http://www.advisorperspectives.com/dshort/updates/Employment-Report.php
U RATE

– In an interview with Bloomberg  I said they need to change their metric because unemployment is dropping too fast due to the Labor participation rate  and that wage growth won’t likely come until 2015 based on their data metric of ECI wage inflation metric.
CPI inflation is not  at a comfortable level for them but they don’t seem to mind this as much.

Via Doug Short
http://www.advisorperspectives.com/dshort/updates/CPI-Headline-and-Core.php
CPI-headline-core-since-2000

– Another view I’ve held for years is that they should raise their inflation metric 2.25%-2.50% on CPI.
In any case they haven’t. So in reality keep a close eye on 2’s — it’s itching to break out to an 80 handle.
It appears they are headed toward  their first-rate hike in years.

If you wanted to ask a provocative question ask people what do they believe they will achieve with rate hikes now. You will get some real interesting answers.

I am sticking to my model that 3% FED Funds and 4.7% on 10’s are recessionary rates with some duration after these levels. Those rate metrics would be the lowest rate curve to create a recession post WWII. The best way to counter this call is to get more dollars into labor’s pockets.

Long Term Perspective On Federal Funds Rate, 10 year Yield and Inflation

Via Doug Short
http://www.advisorperspectives.com/dshort/updates/Treasury-Yields-in-Perspective.php

treasuries-FFR-since-1962

Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1988 and is in a partnership with ZeneHome.com 

No Housing Nirvana In This Cycle

Home-Sales-New-population-adjusted (1)

In 2015 I expected  growth in all metrics measuring housing demand, which are:

– Purchase applications    5%-10% growth, rates range 3.5%-4.5%.
– New Home Sales              8%-12% growth, with bigger upside if median price falls.
– Existing Home Sales       5.0 – 5.2 million sales, cash buyer still stay at a high level.

http://loganmohtashami.com/2014/12/22/2015-housing-predictions-the-bar-is-so-low-we-might-trip-on-it/

My reasoning was rooted in the soft metrics all three displayed in 2014.  With such low numbers as comparison, the idea that we would see negative year over year demand seemed unlikely.  

Today new home sales numbers did miss the target number, although still showed double digit growth.  
However, as always context is key to a full understanding of what the numbers mean.

Adjusting to population new home sales are down – 46% compared to 
1963 levels. 

Also of great importance to note is that this weak demand curve is coming at the lowest interest rate
cycle we have seen post world war II.

http://www.advisorperspectives.com/dshort/updates/New-Home-Sales.php

Population Adjusted

2015 I was looking for 5%-10% total growth for purchase applications which we will easily get.

However, again, context is key!

https://confoundedinterest.wordpress.com/2015/07/22/mortgage-applications-flat-purchase-applications-at-2013-levels/

Existing homes sales are showing growth as well,  and we are seeing less cash buyers and more mortgage buyers.   This is a key metric to watch and which I believe will indicate a return to a healthier purchase market. 

However, we are entering one of the longest economic expansions post World War II and this was all 
we have to show for it —  even with a very high historical cash buyer metric in 2015.

http://www.advisorperspectives.com/dshort/updates/Existing-Home-Sales.php

Existing Home Sales Growth

 When I began writing about housing economics in 2010, I had one core thesis:

“We simply don’t have enough qualified home buyers in America once you X-out the cash buyers to have a real recovery
in housing.” 

This is based on my own (Non-Basis) economic observation and work in the financial industry for almost 20 years. This thesis has held up better than most high valued housing pundits.   Math and numbers always win out at the end unless you have an artificial demand driver in play.  It is worth noting that in spite of  triple the usual percent of cash buyers in this cycle, the demand curve remained low.

Housing needs one group before the demand curve gets better, and that is college educated dual income households with children.   My prediction is that this group will not be buying houses in any meaningful numbers until 2020-2024.  

Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1988 and is in a partnership with ZeneHome.com 

Renting Nation Still Has Legs

homeowneret (2)

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Housing starts still have legs to run!

With household formation still rising and rental demand booming in year seven of this economic cycle, the softness of single family construction can be tolerated by the economy.

http://www.calculatedriskblog.com/2015/07/housing-starts-increased-to-1174.html
STARTS RENTIING

Core inflation is soft, but it’s being held up by rent inflation. More supply is needed in the rental market so kudos are due to builders for constructing multifamily rentals instead of single family residences. Some (#NAR) have been screaming for more single family residential construction but the demand for these bigger new homes isn’t as strong as these folks expected.

Core inflation without shelter costs is still very soft, (the blue line below), while rent inflation is booming (yellow line).

A must follow on twitter

Housing inflation versus everything else…


Core Inflation Housing Inflation

Context is key with this cycle and charts below are very telling.  Privately owned housing starts are creeping up from a great recession low.

http://www.advisorperspectives.com/dshort/updates/Housing-Starts.php
jULY hOUSING STARTS

JULY PERMITS

Even with the strong rental demand, total housing starts have been slow. However, since we over built privately owned homes and under built homes to rent in the last cycle, we shouldn’t should be surprised by the low total starts.

The demand for home ownership will increase in years 2020-2024 due to the increase in dual income, college educated households starting families. However, until then, the most urgent issue is to find a way to cool down  housing inflation  in the rental market.
Presently,cash buyers, wealthy foreign buyers and strong income domestic buyers have been holding up housing demand. I don’t see any a change in this dynamic until years 2020-2024.
homeowneret (2)

  Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988

2015 Housing & Economic Update Interview with David Lykken

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We go over housing, U.S. economics, Greece and other economic subjects.

http://www.blogtalkradio.com/lykkenonlending/2015/07/03/7-3-15-special-guest-logan-mohtashami-with-an-economic-forecast-update
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Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988

Existing Home Sales: The Good, The Bad & The Ugly

The Ugly

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If you look at my Twitter post today, before the existing home sales came out, I predicted 5.35 million in existing home sales.  That is exactly what was achieved. However the expected number (NAR and others) was 5.25 million.
For the last two months, pending sales were positive. Also the purchase application numbers from 2 months ago showed growth. Therefore I expected 5.27 million in SAARs last month but we actually achieved only 5.05 in SAARs. Last months
number seemed off to me for those reasons

Irvine, CA

5.35

5.35

So what is the real story on this number

#1  The Good

THE GOOD

NAR Quote: “All-cash sales were 24 percent of transactions in May for the third straight month and are down considerably from a year ago (32 percent).

Finally we have real evidence in 2015 that the cash buyer is falling as a percentage of the market with sales rising year over year. In a real recovery this would have happened years ago. However, in this cycle we didn’t have the right  Incomes, Liquid Assets or  Demographics  for this to happen.  The decrease in cash buyers should be talked about more as this indicates a return to a more normal market.

# 2 The Bad

The BAD
NAR Quote: “The percent share of first-time buyers rose to 32% in May, up from 30% in April and matching the highest share since September 2012.”

Don’t believe the hype…. as Public Enemy once said.  Thirty two percent first time home buyer number is still trending at the worst levels ever recorded as a percentage of first time home buyers in the market place. Add to this fact that this is year 7 of the economic cycle with rates at 4%.

Potential first time home buyers need to Rent, Date, Mate, and Marry before they will be ready to buy.  3.5 to 6 years after marriage with dual incomes, college educated Americans having kids still works.

This model of mine still is in play. However, to get more buyers in this group with the demographic trends we have, we are looking at 2020-2024  time frame.

3. The Ugly
The Ugly

Now back to context of total existing home sales

From Doug Short
http://www.advisorperspectives.com/dshort/updates/Existing-Home-Sales.php

Home-Sales-Existing-Growth (5)

Not much going on here considering population growth of over 40 million since the year 2000 when
Interest rates were at 8%

So, 7 years into the economic cycle, rates below 5% since early 2011 and a high level of cash buyers has gotten us this
headline number of 2.3% SAARS growth and a negative -10.5% adjusted to population number.

So, the reality if you believe in math, facts and data,  this housing cycle on the demand side has been booming from the rich and those renting. When 2020-2024 time frame comes and after the next recession, the demand curve will look so much better due to demographics. However, 7 years into the cycle and all the hype of housing nirvana was really on the renting side of the equation not the ownership side of the equation from main street America.

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988

Yellen Still Needs A Course In Residential Lending

Yellen

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Fed chairwomen Janet Yellen spoke today and as always she is so predictable.

Yellen: “Credit availability remains quite constrained for mortgages.” Those without pristine credit ratings find it quite difficult

Yellen: “housing “remains quite affordable”


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DTI GAP

From Political Calculations (Great Charts Here)

http://politicalcalculations.blogspot.com/

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I made my case recently here that tight lending is a myth. However, for years now, math, facts and data don’t matter to the tight lending crew.

http://loganmohtashami.com/2015/04/09/tight-lending-and-other-urban-legends/

Homes are so affordable that Americans are renting in mass as a response to the Fed’s affordable thesis.
This is happening at the lowest rate curve on 10’s since 1941-1945 time frame

Don’t the let data change your mind Mrs. Yellen

homeowneret (2)

All Fed members should be mandated to take a residential lending course before they say lies to the American public.

My recent interview with bankers to explain in detail why the Fed and many others are spreading lies about tight lending standards.

http://loganmohtashami.com/2015/04/13/interview-with-david-lykken-slaying-the-tight-lending-myth/

Housing is about incomes, liquid assets, debt to income rations, and down payments not a fico score.

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988

10 Year Yield Having A 2nd Taper Moment

10 YEAR JUNE

One of my 2015 Housing Predictions was this:

For mortgage rates – I predict the 10 year note yield will be in a range of 1.60% – 3.04%, which means mortgage rates will be in the 3.50%-4.5% range. Even with stronger economic data from the U.S., other areas around the world such as Japan, Europe, Russia and even China are now experiencing economic slowdowns. My yield range prediction is based on recent history: In May of 2013, the 10 year note yield was 1.6% before it climbed to 3.04% over the next 18 months. If we see an upside break in the yield to over 3.04% this would be a bullish indicator for the economy, but it would also lead to increased mortgage rates. The bottom line is that I see no significant increase in mortgage rates from the 2014 peak which was roughly 4.5%. The short end of rates rising makes it very interesting for 2015 as the Fed dots are set to raise short terms rates in 2015.

http://loganmohtashami.com/2014/12/22/2015-housing-predictions-the-bar-is-so-low-we-might-trip-on-it/

From Doug Short
http://www.advisorperspectives.com/dshort/updates/Treasury-Yields-in-Perspective.php

We didn’t get to 1.60% like I thought we would, but 1.64% is close enough. Now, we are seeing a steady rise in yields from the lows put in by the bond market.

What does this mean for housing

1. Rate & Term refinances are dead outside a few streamline FHA loans.

2. Home purchases soon will see if they can handle the 2nd hand of housing inflation. However, we need to see yields in a range of 2.66% – 3.04% to get a good test on this.

On May 7th, 2013 I warned that the U.S. housing market should be worried about housing inflation.

http://loganmohtashami.com/2013/05/07/housing-mammoth-stuck-in-tar-has-bigger-problems-to-worry-about/

The economic cycle is bit more mature now than it was back in 2013 when people were raving that housing was in Nirvana. However, if we break over 2.66% on 10 year yield we will see how well housing does. This will be the first real test for housing with the second hand of housing inflation in play.

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988.

Bloomberg Business Housing Interview: New Home Sales , Housing Inflation & The Chinese Buyer

BLOOMBERG PHOTO

My segment starts at the 8:05 mark.
As always, I talk about how the housing year over year 2015 demand data has to be put into context.

From Doug Short

http://www.advisorperspectives.com/dshort/updates/New-Home-Sales.php
Click to View
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Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988.

Housing Starts & Permit Reality In This Economic Cycle

PERMITS POP

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Today’s strong housing start numbers sparked  the same rabid fascination from pundits, as a dog jumping into a pool after a tennis ball. We first hear that this is the strongest report we have had in the past few years then  the discussion degrades into that same sad song that tight lending is holding housing back.  The usual refrain of excuses for why housing “isn’t what it could be” is  given by people who don’t understand that main street America simply doesn’t have the income in this cycle to have a Nirvana-like recovery.

The responsible economist feels compelled to remind them how soft this recovery actually is.

Four new charts from Doug Short bring some perspective to the discussion.

Permits

http://www.advisorperspectives.com/dshort/updates/Housing-Permits.php
Click to View

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Starts
http://www.advisorperspectives.com/dshort/updates/Housing-Starts.php
Click to View

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When one considers the epic crash in new home sales and starts that occurred after the housing bubble burst, you might assume that by now we would see more velocity to the upside in total activity.  But this does not account  for the fact that we simply won’t have enough quality home buyers at this point in the  economic cycle to have a real recovery. This  is true for new home sales as well,  which are typically sold to the more well-to-do buyer and make up only 1/10th of all home sales in this cycle, usually 1/6th. Some of those buyers are finding better value in existing homes.

The problem with the builders is simple. New homes are very expensive because they’re big.  The metric of Median Income to Median Price homes has deviated too much for main street to afford the debt of a new home (or any home in most cases) if we are looking for strong housing demand recovery.This is the reason why new home sales trend have been soft in a 90% mortgage marketplace that is tilted to the more wealthy buyer once you adjust it to population growth.

http://loganmohtashami.com/2015/04/28/the-fall-of-homeownership-in-america/
Click to View

Why would the first-time home buyer even look at a new home which is much more expensive than a existing home coming into the market. For a while builders had the advantage of low existing inventory but now more existing homes are cominginto the market, increasing the competition  for housing dollars.

With that said, year over year growth in new homes sales, starts and permits are expected because previous numbers were so soft in 2014. But don’t let growth  from historic lows blind you to the fact that, thus far, this has been the weakest housing recovery in American history. It’s all about incomes and assets, and the lack there of, not tight lending.

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988.