Archive for the ‘Housing Sector’ Category

Mortgage Delinquencies Point To Trouble Ahead

July 7th, 2010 Michael McDonough Comments off

Many investors hoped a modest decline and a leveling off in mortgage delinquencies the end of last year signaled a top for the index, but those hopes were dashed when delinquencies for all types of mortgage hit a new high during the first quarter.   Fears were further exacerbated yesterday when Lender Processing Services released their ‘Mortgage Monitor’ for May, which showed a 2.3% increase in total delinquencies, indicating the first quarter’s sharp rise may not have been a one off event.  Even more worrisome is the fact the according to LPS the amount of mortgages delinquent by 0 to 30 days rose 10% after showing some improvement during the first quarter.  According to the Mortgage Bankers Association (MBA) the national delinquency rate presently stands at 10.1%.  The rate for prime mortgages is 7.3%, and for subprime 27.2%, all of which rose during the first quarter.  Rising delinquency rates—likely due to significant under employment—means foreclosures will be a lingering issue well into the future.

Source: MBA

As an aside, it has been suggested that up to 31% of total foreclosures are actually strategic defaults, where buyers are underwater on their mortgages and essentially give up their homes to their lenders rather than paying off the mortgage now valued more than their home.  Surprisingly this could actually have a somewhat positive impact on the economy, although not the lenders, as it frees up cash flow for the borrower to consume other products—personal consumption is the largest component of U.S. GDP growth.


Why Homebuilder Stocks Haven’t Plunged

June 23rd, 2010 Michael McDonough Comments off

The amount of new homes for sale in the U.S. reached a multi-decade low in May helping boost U.S. homebuilders.  To find a point in time where fewer new homes were on the market you would have to go all the way back to the early 70’s/late 60’s (see chart).  While the sales pace of new home doesn’t bode well for the very short-term outlook for home builders the miniscule amount of new homes on the market means that as buyers return—once labor markets improve—home builder demand will likely spike.  The low level of inventories also implies short-term homebuilder risk could be somewhat limited, giving them more room to wait out the ongoing soft patch.  While I am in no way a housing bull; the outlook for homebuilders could be worse, and the group will likely continue to trade range bound until a clearly employment picture develops.  To monitor this I will be watching weekly jobless claims and housing starts over the months ahead. 


Source: Bloomberg

The next shoe to fall will be May’s pending home sales, released on July 1st, which measures contract signings for existing home sales during the month.  I expect the decline in pending home sales will likely be at a smaller magnitude than we saw in today’s new home sales release partially due to no shortage in existing homes and much large monthly sales volumes.  Since the onset of the housing crisis buyers have generally preferred existing homes as they provide better value per dollar compared to their new home counterpart; one could compare it to buying a used car vs. new.   


Purchase Aps Hit 13Y Low as Tax Credit Expires

May 26th, 2010 Michael McDonough Comments off

Not since June 2008 has the housing sector been completely devoid of some form of tax incentive to help bolster sales, until now that is and it shows.  MBA purchase applications have taken a precipitous drop over the past two weeks falling to levels not seen since the end of 1997.  The government’s approach of bolstering current sales by borrowing from the future sales appears to have worked, and now it’s time to pay the piper.  Headwinds for the sector remain strong generated by stiff credit conditions, high unemployment, increasing foreclosures, large inventories of vacant homes, and a lack of tax credits; while tailwinds are slowing to a breeze.  A robust recovery in housing during 2010 is extremely unlikely.

  MBA Purchase Applications


Housing Recovery: To Remain a no Show in 2010

May 12th, 2010 Michael McDonough Comments off

Now that the extended first time home buyer credit is history, so is whatever impact it once had on home sales.  The good news is that data indicates the extended program had only a modest impact, especially compared to the original incentive; this however is also the bad news.  A recent, albeit modest, jump in home sales in the program’s 11th hour implies some interest in the program, but at levels only a fraction of the original credit’s impact leading up to its ‘would-be’ expiration in November.  As the chart below illustrates, existing home sales rose from a SAAR of 5.10mn units in August to 6.49mn by the would-be expiration in November, after which sales fell off a cliff.  While sales recovered modestly from February’s recent low of 5.01mn units, the lack of any significant impact is clear.  A spike in March’s pending home sales should help support home sales for at least another month, but beyond that sales will likely remain tepid, despite near record affordability.

Source: Bloomberg

Looking at a more ‘real-time’ housing indicator, MBA purchase applications (released this morning) rose marginally leading up to the expiration of the extended tax credit, but have since begun to recede.  Notice the flatness of purchase applications between November 2009 and March 2010, highlighting the general lack of interest in the new program.

Source: Bloomberg (rebased)

The combined effects of lukewarm demand, and a massive supply of vacant homes in the market will likely continue to be a drag—or at least not add any growth—to residential investment (a GDP component) for the remainder of the year.  This will hamper the strength of the current recovery, which will have to rely heavily on inventory rebuilding and business spending.  Upside risks to this forecast exists if stronger than expected consumption leads to more significant hiring.  However, over the quarters ahead fiscal stimulus will turn fiscal drag stirring up headwinds growth will be forced to overcome.


Mortgage Rates Begin To Climb

April 7th, 2010 Michael McDonough Comments off

As expected mortgage rates have begun to climb.  On March 31st, as planned the Fed terminated its mortgage backed securities (MBS) purchase program after buying $1.25trn of the instruments–keeping mortgage rates artificially low.  According to the Mortgage Bankers Association (MBA), the average rate for a 30Y mortgage already climbed to 5.31%  the week ending 4/2, compared to 5.04% a week earlier.  I expect rates will continue to climb peaking somewhere between 5.5% and 6.0%, before leveling off.  This will of course but a strain on any housing recovery.  The chart below highlights the Fed’s net MBS purchases and 30Y mortgage rates:

Source: Bloomberg


First Portugal, Then New Home Sales, Next…

March 24th, 2010 Michael McDonough Comments off

What a day, I wake up to the news that Fitch has downgraded Portugal, leading to a strong sell-off in Euro–reaching a ten month low against the dollar. This news was not tremendously surprising, and I expect the situation in Europe will get far worse before getting better, especially if Greece doesn’t find a funding source before its first massive debt payment on April 20th.  Aside from Greece I am also very concerned about several of the other so-called ‘PIIGS’ as well as the UK.  Pending how this situation unfolds if risk is rebalanced across Europe (to Germany), other more ’secure’ European nations could come under the scrutiny of worried investors.

Greek Monthly Debt Payment Schedule:

Source: Bloomberg

The day progresses, its then announced new home sales unexpectedly tumbled -2.2% on a monthly basis in February (compared to a consensus forecast of +1.9%).  The sales number was actually the lowest in the series recorded history, which tracks back to 1963.  As I highlighted in a column last month on titled ‘Housing Recovery Starts to Buckle’, I do not believe last year’s budding recovery, fueled by a then effective first time home buyer tax credit, will provide enough force to navigate the headwinds facing the sector. A now impotent stimulus combined with the likelihood of higher mortgage rates over the near-term, as the Fed stops purchasing MBS on March 30th, should prove too much to bear for the sector making any future recovery modest as best.  The sector is still being besieged by foreclosures and now rapidly growing inventories of existing and new homes for sale. 

Inventory of New & Existing Homes:


Source: Bloomberg


Pending Home Sales Point Toward Continued Trouble for Housing

March 4th, 2010 Michael McDonough Comments off

Pending home sales, generally considered a good leading indicator for final home sales fell -7.6% in January, supporting recent weakness in both existing and new home sales.  This result was well below the consensus forecast calling for a monthly increment of 1.8%.  This data reiterates my view that that the housing recovery will face significant headwinds over the months ahead as interest rates begin to rise and the newly extended home buyer tax credit proves to be impotent in bringing new buyers into the market. 


Existing Home Sales Moving Back To Pre-Tax Credit Levels?

February 27th, 2010 Michael McDonough 1 comment

The chart below illustrates how existing home sales appear to be pulling back to levels that would have been expected without a surge in demand stemming from the first time home buyer tax credit, despite the programs extension/expansion.  This could be an indication that housing demand was mostly sopped up by the original tax credit, leaving few buyers in the market to take advantage of the new program.  The sector could face additional strife over the months ahead as mortgage rates are generally expected to rise once the Fed stops purchasing MBS at the end of March.  Whether or not the government’s new tax credit will drive a new set of buyers into the market is yet to be seen, but January’s pending home sales (Thursday 10:00AM EST) could provide some clues toward the strength or weakness in home sales over the next couple months.

Existing Home Sales

Source: Bloomberg


Bumpy Road Ahead For Housing

February 26th, 2010 Michael McDonough Comments off

This morning’s disappointing new home sales release for January reiterates the trend I outlined in my piece published on Real Money this morning titled ‘Housing Recovery Starts to Buckle’. I continue to believe housing will face a number of hurdles this year, and is unlikely to enjoy anything more than a modest, though bumpy, recovery.


A Bad Day for New Home Sales

February 24th, 2010 Michael McDonough Comments off

January’s record low new home sales data has made it fairly obvious the government’s extended/expanded home buyer tax credit has yet to have a significant impact on the sector.  The pace of new home sales plummeted by 11.2% to a level of 309K in January.  The months supply of new homes rose sharply reaching 9.1 months, versus 8.0 months in December. The median new home price in January fell to $203,500 from $215,600 .  (See Charts)

New Home Sales vs. Months Supply

Source: Bloomberg

Median New Home Price vs. Unsold Homes

Source: Bloomberg