Sales of U.S. Existing Homes Rise to One-Year High – Bloomberg 10-21-14

Salient to Investors:

  • Cash transactions accounted for 24% versus 33% a year ago. Investors, 63% of whom paid cash, were 14% of the market last month versus 19% in September 2013. Foreclosures and short sales were 10% of the total. First-time buyers accounted for 29% versus the historical average of 40%.
  • The average 30-yr, fixed-rate mortgage is at the lowest since June 2013.
  • Brittany Baumann at Credit Agricole sees upward trajectory over the next few months, but said it will take further strengthening in the job market, low mortgage rates, and a special importance on easing of mortgage lending standards.
  • Lawrence Yun at NAR said the market a year from now, 2 years from now, will be better, and the share of first-time buyers will steadily increase with an improving economy and job creation.
  • Robert Stein at First Trust Portfolios said the traditional buyer will continue to grow in strength.
  • Chris Rupkey at Bank of Tokyo-Mitsubishi UJF said unemployment is plummeting in many formerly problem states as the recovery spreads – California and Nevada, most hurt by the meltdown in residential real estate, have had the biggest declines in joblessness over the past year.

Read the full article at http://www.bloomberg.com/news/2014-10-21/sales-of-existing-u-s-homes-rose-in-september-to-one-year-high.html

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Housing to Top Capital Spending in Next U.S. Growth Leg: Economy – Bloomberg 09-23-14

Salient to Investors:

Jan Hatzius at Goldman Sachs said:

  • Home construction will grow 10% to 15% by 2015-2016, while capital spending will fall to 5%, a reminder of how very different this recovery is.
  • It is unusual for a housing recovery to lag a capital-spending recovery.
  • Gains in business investment have helped better align the stock of equipment and structures with the economy’s potential growth rate
  • Long-term, the potential GDP growth rate is 2 to 2.25%.
  • Goldman Sachs analysts see the demand for new houses reaching 1.5 million to 1.6 million a year, in part because millennials will start families and become more open to home-ownership.

Ellen Zentner at Morgan Stanley said:

  • An upturn in homebuilding brings a more viable expansion with a longer life, while capex is more exposed to the ups and downs of global markets and tepid US demand. Zentner said there is a lot of recovery left in housing.
  • Companies lack the urgency to expand much beyond replacing aging equipment and machinery, while outlays on technology have been fairly resilient since the recession, leaving less room for further gains.
  • Business investment will expand 4% to 5%, and companies feel they are meeting aggregate demand with the proper capital and labor.
  •  65% of cash on US corporate balance sheets is held abroad, and companies are directing more money toward mergers and acquisitions or betting on overseas markets.

Michelle Meyer at Bank of America said:

  • Homebuilding – 3% of GDP versus 12% for capex – matters because of its broader linkages that feed back into the economy to spur household spending, wealth, hiring, and confidence.
  • Expect a bumpy but higher housing recovery, fed by tailwinds from improving employment, credit and historically low mortgage costs – we do not have the housing stock to meet demand so housing has not plateaued here
  • The jury is still out in how quickly capex will accelerate.

Joe Carson at AllianceBernstein expects a powerful cycle for business investment, helping stem the productivity slowdown that has restrained growth. He said companies will find reason to invest in the US in the next decade because the spillover from the domestic energy boom is still nascent, state governments have a growing ability to fix aging infrastructure, and companies have to invest to boost profits.

Guy LeBas at Janney Montgomery Scott said the potential negative impact of Fed tightening could be big, so CFOs do not want to embark on long-term projects now.

Read the full article at http://www.bloomberg.com/news/2014-09-23/housing-to-outrun-capital-spending-in-next-leg-of-u-s-growth.html

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Don’t Talk About Record Stock Prices to Owners of These Shares – Bloomberg 08-27-14

Salient to Investors:

  • Analysing what parts of the market have lots of ground to make up to reclaim highs is a good way to gauge how much more the market can rise or fall.
  • The NYSE Arca Airline Index is 59 percent below its peak.
  • The S&P 500 Information Technology Index needs to rise another 49 percent to reach its  March 2000 high. The Nasdaq Composite needs to rise 10 percent, and the Nasdaq 100 Index needs to rise 16 percent to reach previous highs.
  • The KBW Bank Index is 41 percent below its peak. The S&P 500 Financials Index needs a 62 percent gain to reach its previous high.
  • The S&P Supercomposite Homebuilding Index is down 55 percent from its record.

 

Read the full article at http://www.bloomberg.com/news/2014-08-27/don-t-talk-about-record-stock-prices-to-owners-of-these-shares.html

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Slowing Home Sales Show U.S. Market Lacks Momentum: Economy – Bloomberg 08-25-14

Salient to Investors:

  • Thomas Simons at Jefferies said new-home sales have no traction whatsoever but overall housing data is encouraging, with everything moving in the right direction, though a little more slowly.
  • New-home sales are tabulated when contracts are signed, and so are a more timely barometer than transactions on existing homes.
  • The average 30-yr, fixed-rate mortgage is 4.1% versus 4.53% on January 1, 2014.

Read the full article at  http://www.bloomberg.com/news/2014-08-25/sales-of-new-u-s-homes-unexpectedly-fall-to-four-month-low.html

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Construction of New U.S. Homes Declines on Plunge in South – Bloomberg 07-17-14

Salient to Investors:

  • Jay Morelock at FTN Financial said the ‘big recovery’ has turned out not to be, and expects a stabilization but not a crash or acceleration.
  • Brad Hunter at Metrostudy said starts in the South may have been hurt by a shortage of buildable lots as development was held up by the unusually harsh winter.
  • Mark Zandi at Moody’s Analytics said the magnitude of the slump in the South is too bizarre to put any weight on it.
  • Freddie Mac said the average 30-yr fixed mortgage rate is 4.13 percent versus 4.53 percent at the start of 2014. The median price of a new home sold in May increased 6.9 percent from a year prior.
  • Aneta Markowska at Societe Generale said the manufacturing data looks very good and better fits their economic outlook, and the reason businesses are getting more optimistic is because they know that households are getting healthier at the margin.

Read the full article at http://www.bloomberg.com/news/2014-07-17/housing-starts-in-u-s-unexpectedly-fall-on-plunge-in-south.html

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Priced Out: Where Higher Rates Could Hurt Home Buyers Most – Bloomberg 01-09-14

Salient to Investors:

Zillow expects 5 percent mortgages by year-end and the 10 places where the percentage of monthly income will be pushed furthest above the average are, in order:

  1. Stockton, Ca – where the median price of a home will rise 22.8 percent by September.
  2. Honolulu, Ha – where the median price will rise 4.2 percent by the end of September.
  3. Portland – where the median price will rise 4.6 percent by September.
  4. Sacramento, Ca – where the median price will rise 16.7 percent by the end of Q3.
  5. Riverside, Ca – where the median price will rise 23.9 percent by September.
  6. San Jose, Ca – where the median price will rise 7.4 percent gain by the end of Q3.
  7. San Diego, Ca – where the median price will rise 8.4 percent by September.
  8. Santa Rosa, Ca – where the median price will rise 9.5 percent by September.
  9. San Francisco, Ca – where the median price will rise 8.1 percent by September.
  10. Los Angeles, Ca – where the median price will rise 10.6 gain by September.

If mortgage rates rise to 6 percent by year-end, the 10 places where the percentage of monthly income will be pushed furthest above the average are, in order:

  1. Fresno, Ca – where the median price will rise 10.8 percent by September.
  2. Phoenix, Az – where the median price will rise to rise 9 percent by the end of Q3.
  3. Bakersfield, Ca – where the median price will rise 18.2 percent by September.
  4. Visalia, Ca – where the median price will rise 16.4 percent by September.
  5. Miami, Fl – where the median price will rise 2.1 percent by September.
  6. Seattle, Wa – where the median price will rise 8.1 percent by September.
  7. Denver, Co – where the average price will rise 1.3 percent by September.
  8. Sarasota, Fla – where the average price will rise 0.7 percent by the end of September.
  9. Virginia Beach, Va – where the average price will fall slightly by the end of September.
  10. Modesto, Ca – where the average price will rise 23.7 percent by September.

Read the full article at http://www.bloomberg.com/money-gallery/2014-01-09/priced-out-where-higher-rates-could-hurt-home-buyers-most.html

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Drop in Durables Orders Points to Slow Investment: Economy – Bloomberg 11-27-13

Salient to Investors:

Ryan Sweet at Moody’s Analytics said conditions for stronger growth are falling into place for early 2014, and housing will kick in and spur faster growth.

Michelle Girard at RBS Securities expects the shopping season to be OK as employment growth of around 200,000 jobs a month and income growth supports a 2 percent consumer spending pace.

Read the full article at http://www.bloomberg.com/news/2013-11-27/orders-for-u-s-durable-goods-drop-as-shutdown-hurts-confidence.html

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Buffett Says Gains in Housing Fall Short of Equilibrium – Bloomberg 10-24-13

Salient to Investors:

Warren Buffett said the US housing market is coming back but housing starts are not at an equilibrium point, where they match household formation. Buffett said housing will rebound because of increasing population and limited supply. Buffett said the US has made significant progress since 2009 after being hit by something that has never happened since he was one or two years of age.

Freddie Mac said the average rate for a 30-year fixed mortgage is 4.13 percent.

Read the full article at  http://www.bloomberg.com/news/2013-10-24/buffett-says-gains-in-housing-fall-short-of-equilibrium.html

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A Lonely Housing Bear Predicts a Big Tumble – Bloomberg 10-07-13

Salient to Investors:

Mark Hanson at Hanson Advisers, who predicted the 2007 housing crash, said:

  • Housing prices will decline 20 percent in housing prices in the next 12 months due to rising interest rates and less speculative private-equity buyers.
  • Half of the gains since the bottom in 2011 could be erased in the hot areas of Florida, California, Nevada, Arizona and Georgia.
  • A reporting lag makes existing-home sales numbers deeply misleading as they are calculated 30 to 60 days after sales contracts are signed.
  • 58 percent of existing-home sales in 2013 have been made by all-cash investors purchasing large swaths of distressed properties to lease to renters. Private-equity firms caused 50 percent of the price appreciation in cities like Phoenix and Las Vegas, and generally overpaid by 10 percent to 20 percent. With gains of over 35 percent since the crash for properties in Las Vegas, Phoenix and other of the hardest-hit regions, these vultures will begin to lose interest and look for better opportunities in Treasury and high-yield bonds because as house prices rise the yield from renting declines.
  • New-home sales are a better indicator of the health of the housing market than existing-home sales because they are reported as soon as sales contracts are signed, and 85 percent of sales are to traditional buyers with mortgages. New-home sales fell 27.4 percent in July and the only other drop of that size was when the home-buyer tax credit expired in May of 2010.” The number of new homes being sold is at recession levels.
  • Apples-to-apples comparisons of affordability for pre- and post-crisis periods are problematic. While home prices were higher and 30-yr mortgage rates were typically above 6 percent prior to the 2008 crash, when houses were more affordable because of zero-interest teaser loan rates and ARMs with lower rates than today’s fixed ones.
  • He incorrectly turned bearish in 2012 due to not realizing the extent of the private-equity and all-cash buying that is propping up the market.

Stan Humphries at Zillow also see signs of froth but says the mild drop in August existing home sales despite a surge in 30-yr mortgage rates showed there was still buying in the face of rising rates. Humphries said in markets such as Phoenix it costs only 13 percent of the average family’s household income to cover its 30-yr monthly mortgage payments despite the rate increase, versus 20 percent of income before the housing bubble.

John Burns at John Burns Real Estate Consulting said Hanson has zero credibility, and says a 20 percent decline would require a massive US recession.

Read the full article at  http://www.bloomberg.com/news/2013-10-07/a-lonely-housing-bear-predicts-a-big-fall.html

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Bernanke Faith in Housing Seen Shaken in Bonds: Credit Markets – Bloomberg 09-19-13

Salient to Investors:

30-year mortgage rates were at 4.86 percent last week.

Robert Bostrom at Greenberg Traurig said the Fed finally realized that housing is fading in anticipation of the tapering and even higher rates, and could not taper without irreparable damage to the housing recovery.

Anish Lohokare and Timi Ajibola  at BNP Paribas said it is essential for the Fed to convince the market of its commitment to keep rates low because many holders of mortgage bonds use borrowed money in their investing,

The Mortgage Bankers Association said weekly applications to refinance mortgages have dropped 66 percent from a 2013 high, while applications for loans to purchase properties are just 1.3 percent higher than a year ago.

Anthony Hsieh at LoanDepot.com said the era of record low rates is over and rates will rise.

Amherst Securities said the increasing share of Fed buying would pressure it to cut back, but Citigroup said investors shouldn’t conclude the Fed would need to taper to avoid disrupting the market’s liquidity.

Scott Buchta at Brean Capital sees no significant impact on refinancing activity unless mortgage rates fall below 4 percent based on the current mix of existing loan rates and borrower credit profiles.

Walt Schmidt at FTN Financial said mortgage lenders will pass on most of the recent decrease in mortgage bond yields to new borrowers.

Ohmsatya Ravi  et al at Nomura Securities Intl said money managers, banks, overseas investors, REITs and government-sponsored companies such as Fannie Mae have all reduced their holdings during the round of purchases, even as the market grew by $170 billion to $5.3 trillion.

Read the full article at  http://www.bloomberg.com/news/2013-09-19/bernanke-faith-in-housing-seen-shaken-in-bonds-credit-markets.html

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Borrowing costs for U.S. home buyers are poised to extend declines from the highest level in two years after the Federal Reserve unexpectedly refrained from slowing its debt buying and bolstered expectations for how long it will keep short-term interest rates at about zero percent.

A Bloomberg index of Fannie Mae securities that guide 30-year loan rates dropped about 0.2 percentage point yesterday, the most since last September, to 3.39 percent, the least since Aug. 9. Yields, which rose 0.02 percentage point as of 11 a.m. in New York, soared as high as 3.81 percent on Sept. 5 from 2.28 percent in May as speculation mounted that the central bank would pare its $85 billion of monthly bond buyingincluding $40 billion of government-backed mortgage securities.

After signaling his faith that real estate could weather increasing home-loan rates in June, Fed Chairman Ben S. Bernanke opted to exercise caution in reducing support for the economy. He said yesterday at a news conference in Washington that policy makers are seeking more information on how higher borrowing costs are affecting the housing recovery.

“I think they saw tightening financial conditions to be troublesome, especially when seeing the weaker housing data,” said Brad Scott, the head trader of pass-through agency mortgage securities at Bank of America Corp.’s Merrill Lynch unit in New York. “There were very few who were looking for no tapering.”

30-Year Mortgages

Rates on 30-year mortgages reached 4.93 percent in the week ended Sept. 6, the highest since April 2011 and up from a record low 3.57 percent in December, according to Mortgage Bankers Association data. The rate declined to 4.86 percent last week.

Builders began work on fewer U.S. homes than projected in August and applications for future work declined more than forecast, according to Commerce Department data released yesterday that followed reports last month showing falling new and existing home sales and slowing property appreciation.

Fed officials “finally realized that housing is fading in anticipation of the tapering and even higher rates, and that they could not do it without irreparable damage to the housing recovery,” said Robert Bostrom, a former general counsel at Freddie Mac who’s now at law firm Greenberg Traurig LLP.

A report today from the National Association of Realtors showed that sales of previously owned U.S. homes unexpectedly rose in August to the highest level in more than six years as buyers rushed to lock in rates before they rise further.

Default Swaps

With the central bank announcing its policy forecasts and the decision to sustain its bond purchases, futures trading signals a 35 percent probability that the Fed will lift the benchmark overnight rate by at least a quarter-percentage point at its December 2014 policy meeting. That’s down from 49 percent prior to the statement.

“It is essential for the Fed to convince the market of its commitment to keep rates low” because many holders of mortgage bonds use borrowed money in their investing, BNP Paribas SA analysts Anish Lohokare and Timi Ajibola wrote yesterday in a report. Higher financing rates for buyers require steeper yields to maintain returns.

Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. rose, with the Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, increasing 0.3 basis point to a mid-price of 69.8 basis points as of 11:19 a.m. in New York, according to prices compiled by Bloomberg.

Bondholder Protection

The measure typically rises as investor confidence deteriorates and falls as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The U.S. two-year interest-rate swap spread, a measure of debt market stress, was little changed at 15.88 basis points as of 11:17 a.m. in New York. The gauge narrows when investors favor assets such as company debentures and widens when they seek the perceived safety ofgovernment securities.

Bonds of Verizon Communications Inc. are the most actively traded dollar-denominated corporate securities by dealers today, accounting for 12 percent of the volume of dealer trades of $1 million or more as of 11:12 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The New York-based telephone carrier raised $49 billion on Sept. 11 in the largest corporate bond issue ever.

Forecasted Cut

Economists had expected the Federal Open Market Committee to reduce its monthly Treasury purchases by $5 billion to $40 billion, while maintaining buying of mortgage-backed securities, according to a Bloomberg News survey. The FOMC has pledged for more than a year to press on with bond buying until achieving substantial labor market gains.

Among investors polled by JPMorgan Chase & Co. analysts last week, 75 percent expected purchases of home-loan bonds to drop by $1 billion to $5 billion. The mortgage-bond analysts led by Matt Jozoff, who topped this year’s Institutional Investor magazine survey for research on the securities, forecast a $10 billion reduction in Treasury buying and $5 billion decline in mortgages in a Sept. 13 report.

Without a cut, the central bank is set to buy 88 percent of mortgage bonds being issued in the types of securities it’s targeting, a share that’s growing amid a slump in new loans to help homeowner refinance, according to Morgan Stanley analysts including Vipul Jain.

Refinancing Slump

Weekly applications to refinance mortgages have slumped 66 percent from a 2013 high, according to Mortgage Bankers Association data released yesterday. Applications for loans to purchase properties have declined 15 percent on a seasonally adjusted basis since the start of May, and are just 1.3 percent higher than a year ago.

“We do want to see the effects of higher interest rates on the economy, particularly mortgage rates on housing,” Bernanke said yesterday at the news conference.

At a similar event in June, the Fed chairman had said that building optimism about home prices could compensate for slightly higher mortgage rates.

LoanDepot.com, which has been originating about $1.3 billion of mortgages a month, is still anticipating that the era of record low rates is over, Chief Executive Officer Anthony Hsieh said yesterday in a telephone interview.

Liquidity Disruption

“We all know the trend,” he said. “This is just an extra little stop that the mortgage industry will welcome. But make no mistake about it, rates are still going up over time from here.”

With higher rates having already choked off refinancing, monthly issuance of government-backed mortgage bonds is set to fall to $70 billion to $75 billion, down from an average of about $150 billion since last June, according to Morgan Stanley.

Along with the Fed’s $40 billion of new buying in the market, it has also been purchasing $31 billion a month under a program in which it reinvests proceeds from previous purchases, a figure set to fall to $10 billion to $15 billion with lower prepayments, the bank’s analyst estimated in a Sept. 6 report.

While Amherst Securities Group LP analysts had said the increasing share of Fed buying would pressure the central bank to cut back, Citigroup analysts said that investors shouldn’t jump to the conclusion that the central bank would need to taper to avoid disrupting the market’s liquidity.

‘Capacity Constraints’

There’s unlikely to be a “significant impact on refinancing activity” unless mortgage rates fall below 4 percent based on the current mix of existing loan rates and borrower credit profiles, said Scott Buchta, head of fixed-income strategy at New York-based brokerage Brean Capital LLC.

Unlike after the Fed began its latest round of bond purchases a year ago, mortgage lenders probably will pass on most of the recent decrease in mortgage bond yields to new borrowers, said Walt Schmidt, a Chicago-based mortgage strategist at FTN Financial.

“Part of that was capacity constraints” at lenders, which caused the firms to keep rates high to restrain demand, he said. Amid layoffs by lenders including Bank of America and Wells Fargo & Co. “you have fewer employees at originators now but also” even lower refinancing opportunities.

The Fed’s mortgage-bond purchases since September have expanded its holdings to almost $1.3 trillion, surpassing a previous peak of $1.1 trillion in June 2010 after an earlier round of buying initiated during the financial crisis sparked by Lehman Brothers Holdings Inc.’s failure five years ago.

Housing Starts

Money managers, banks, overseas investors, real-estate investment trusts and government-sponsored companies such as Fannie Mae have all reduced their holdings during the round of purchases, even as the market grew by $170 billion to $5.3 trillion, according to Nomura Securities International analysts led by Ohmsatya Ravi.

Housing starts rose 0.9 percent last month to an 891,000 annual rate, the Commerce Department said yesterday. Existing home purchases climbed 1.7 percent to a 5.48 million annual rate, the highest since February 2007, according to Realtors data today.

Purchases of new U.S. homes plunged 13.4 percent in July, the most in more than three years, to a 394,000 annualized pace, according to Commerce Department data released on Aug. 23.

The S&P/Case-Shiller index of property values in 20 cities released Aug. 27 showed prices rising 12.1 percent in June from the same month in 2012 after climbing 12.2 percent in the year ended in May, the biggest gain since 2006.

Fannie Mae

Mortgage securities guaranteed by government-supported Fannie Mae and Freddie Mac or U.S.-owned Ginnie Mae lost 2.8 percent from the end of April through Sept. 17, according to Bank of America Merrill Lynch index data.

Losses among Fannie Mae’s current-coupon securities, or those trading closest to face value and the largest target of the Fed’s buying, have been more extreme, totaling 8.3 percent since April, Bank of America Merrill Lynch index data show.

Expectations for when the Fed’s target for overnight loans will rise have contributed to the slump because yields on longer-term bonds mainly “represent the market’s expectation of short-term rates over time,” said Jim Vogel, a debt analyst at FTN Financial in MemphisTennessee.

Carry Trades

Investors also funded $554 billion of government-backed home loan securities and $86 billion slices of repackaged mortgage bonds through short-term loans in the tri-party repurchase agreement market as of Aug. 9, according to monthly data from the New York Fed. The cost of one-month repo on agency mortgage yesterday was 0.11 percent, down from as high as 4.55 percent in 2008, according to data from ICAP Plc, the world’s largest inter-dealer broker.

Real-estate investment trusts that rely on the borrowing owned $343 billion of the securities on March 31, while commercial banks, whose deposit costs are also tied to the Fed rates, now hold more than $1.3 trillion, central bank data show.

“Ability to fund cheaply remains critical for these levered carry trades,” as well investments often made by hedge funds known as inverse interest-only notes, the BNP analysts wrote.