Quantitative easing housing legacy

quantitative easing
Fed Balance Sheet (infographic from raymondjames.com)

The Fed stopped purchasing mortgage backed securities and other assets through quantitative easing a few years ago.  But the  Fed still maintains the estimated $4.5 trillion of assets it has accumulated by extending asset maturity and reinvesting in the securities.  The result has been historically low interest rates, and bubble-esque home price spikes.  But that may change rapidly over the next six months.

Quantitative easing was a name for the Fed’s “large scale asset purchases” (LSAP) from mid-2008 to 2014.  The purpose of the LSAP was to keep boost the economy and housing markets by keeping interest rates low.  According to the Fed (federalreserve.gov):

In December 2008, as evidence of a dramatic slowdown in the U.S. economy mounted, the Federal Reserve reduced its target for the federal funds rate–the interest rate that depository institutions charge each other for borrowing funds overnight–to nearly zero, in order to provide stimulus to household and business spending and so support economic recovery. With short-term interest rates at nearly zero, the Federal Reserve made a series of large-scale asset purchases (LSAPs) between late 2008 and October 2014.

In conducting LSAPs, the Fed purchased longer-term securities issued by the U.S. government and longer-term securities issued or guaranteed by government-sponsored agencies such as Fannie Mae or Freddie Mac. The Fed purchased the securities in the private market through a competitive process; the Fed does not purchase government securities directly from the U.S. Treasury. The Fed’s purchases reduced the available supply of securities in the market, leading to an increase in the prices of those securities and a reduction in their yields. Lower yields on mortgage-backed securities reduced mortgage rates as well. Moreover, private investors responded to lower yields on U.S. Treasury securities and agency-guaranteed mortgage-backed securities by seeking to acquire assets with higher yields–assets such as corporate bonds and other privately issued securities. Investors’ purchases raised the prices of those securities and reduced their yields. Thus, the overall effect of the Fed’s LSAPs was to put downward pressure on yields of a wide range of longer-term securities, support mortgage markets, and promote a stronger economic recovery.

In the June Open Market Committee press release, the Fed signaled that it would begin unwinding quantitative easing later in 2017 through “balance sheet normalization.”  Of course, the proviso was that the economy would “evolve broadly.”  The normalizing the balance sheet would “gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities.”

There is little doubt that the 3.1 percent real Second Quarter 2017 GDP (bea.gov), along with a record breaking housing market during the first half of 2017 was a large part in the decision to move forward with the balance sheet normalization program.  At the very end of September’s Open Market Committee press release, the Fed stated that balance sheet normalization will begin in October.

How will unwinding quantitative easing affect the housing market?

Since the Fed’s announcement last week to unwind quantitative easing, there has been a lot of speculation as to how the housing market will respond.  Lawrence Yun, chief economist for the National Association of Realtors, issued a statement saying that he believes the Fed’s unwinding pace will be “in slow motion” and “mortgage rates would rise up only modestly over time.”  He expects that the 30-year fixed rate would only reach about 4.7 percent by the end of 2018 (nar.realtor).

But a sober 2013 article written by Edward Pinto, a former Fannie Mae executive, pointed out the immediate impact and consequences of quantitative easing (Is the Fed blowing a new housing bubble? wsj.com, April 9, 2013).  Pinto asserted that the home price surge of 2013 was due to the Fed’s LSAP rather than the often cited “broad based improvements in the economy’s fundamentals.”  Pinto stated, “The average mortgage rate during the first nine years of the 2000s was 6.3% compared with today’s [2013] rate of less than 3.5%. If mortgage rates were to increase to a moderate 6% in three years, say, some combination of three things would have to happen to keep the same level of homeownership affordability. Incomes would need to increase by a third, house prices would need to decline by a quarter, or lending standards would need to be loosened even further.”

Maybe the unwinding of quantitative easing is past due.  Home sale prices have since surged past 2006 home prices in some areas, and has considerably reduced the affordability of homeownership for many Americans.  Average wages have not increased significantly (if at all) since quantitative easing began.  Lending has loosened some, but not enough to make up for missing home buyer sectors (such as the move-up home buyer).

Home sellers may be in for a shock in 2018.  Rising interest rates will certainly moderate home prices.  However, rising mortgage rates would likely mean a return to stable housing market.  Mortgage interest rates will rise as sharply as they were reduced when the LSAP began, most likely rising above 5 percent by the end of 2018.

By Dan Krell
Copyright© 2017

Original published at https://dankrell.com/blog/2017/10/01/quantitative-easing-housing-legacy/

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

It’s Mr. Trump’s housing market now

Trump's housing market
Dodd-Frank regulation (from uschamber.com)

Change is not always easy.  Sometimes we choose to change and other times we are forced to change.  The Great Recession forced massive change to many aspects of our lives – mostly financial.  Many found themselves out of work because of the recession, and many home owners lost their homes to foreclosure; while the rest of us searched for ways to cope.  It’s Mr. Trump’s housing market now.

As a result, the Dodd–Frank Wall Street Reform and Consumer Protection Act was quickly pieced together and signed into law in 2010.  “Dodd-Frank”, contained over two-thousand pages of regulations and rules, many of which were to be created at a later time by many agencies and unelected bureaucrats.  Dodd-Frank also created the Consumer Financial Protection Bureau, which took over RESPA, lending and consumer finance markets enforcement responsibilities.  The CFPB created the “Qualified Residential Mortgage” and “Know Before You Owe” rules that significantly impacted the mortgage and housing industries.

The purpose of Dodd-Frank and the CFPB was well intentioned as Congress sought a solution to prohibit future crises.  In the uncertain financial atmosphere that ensued, consumers wanted accountability from Wall Street and mortgage lenders.  While some continue to generally blame Wall Street and the mortgage industry for the financial crisis, the reality is that the dynamics that created the financial crises were complex.  And one can surmise from the many hearings, books, dissertations, and working papers that the crux of the financial crisis was widespread fraud that took advantage of a hot real estate market and easy money.

Six years after Dodd-Frank, the rules and regulations keep coming.  Writing for the US Chamber of Commerce’s “Above the Fold,” J.D. Harrison pointed out that Dodd-Frank has created over 27,000 new federal regulations by thirty-two federal agencies impacting many industries (Dodd-Frank’s Regulatory Nightmare in One Rather Mesmerizing Illustration; uschamber.com).  Compared to the previous Wall Street reform in 2002, which had two agencies issuing regulations to only five industries.  Harrison stated that the Sarbanes-Oxley Act “basically sought more corporate transparency and accountability.”

Many have associated Dodd-Frank with the ongoing slow economic recovery, citing increased consumer costs and restricted lending – which effects the housing market, home buyers and sellers.

An example of increasing consumer costs is the CFPB’s TILA-RESPA Integrated Disclosure.  The Mortgage Bankers Association (mba.org) recently reported that compliance with TRID costs on average $210 per mortgage, some of which is recouped from the consumer.  The rule is also responsible for “slower application to closing times.”

A recent appellate case highlighted some of these Dodd-Frank outcomes.  The CFPB sought fines against a mortgage lender for their years of compliance with HUD’s interpretation of a rule; the fines were imposed retroactively for not complying with a new CFPB reinterpretation of the same rule. Additionally, the court focused on the CFPB’s unilateral ability to impose rules and fines without oversight.

It’s Mr. Trump’s housing market now.

Repeal and Replace is a talking point that is not exclusively for the Affordable Care Act.  Shortly after Donald Trump’s election as the forty-fifth President of the United States, many industry insiders and pundits are already anticipating the future of Dodd-Frank and the CFPB.  Mr. Trump’s plan for financial services is posted to the President-Elect’s site (greatagain.gov) stating: “The Dodd-Frank economy does not work for working people.  Bureaucratic red tape and Washington mandates are not the answer.  The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.

Copyright © Dan Krell

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Housing bubble countdown

The March S&P/Case-Shiller U.S. National Home Price Index (spindices.com) was announced May 31st to reveal a 5.2% increase in home prices.  Although down from last March’s 5.3% increase, home prices seem to be appreciating at a regular pace, with the metro areas of Portland, Seattle, and Denver leading the way with double digit gains (year-over-year price increases of 12.3%, 10.8%, 10.0% respectively).  As home prices climb, so too are the claims that we are experiencing a housing bubble.

Those concerned about the next bubble have been ringing the alarm bells since last fall, when the combination of limited inventory, multiple offers, and rising prices created an environment in some regions that was reminiscent of the go-go market just prior to the last market bust.  And like the broken watch that is correct twice a day, those naysayers may eventually be correct – but it may not be for another eight years.

How to predict a housing bubble

According to Ted Nicolais, the real estate cycle has been steady since 1800 (How to Use Real Estate Trends to Predict the Next Housing Bubble; dce.harvard.edu; February 20, 2014).  Writing for the Harvard University’s Department of Continuing Education’s The Language of Business blog, Nicolais maps out Homer Hoyt’s cycles and found a regular 18-year cycle to the bubble and bust housing market (albeit two exceptions).

The 18-year cycle, as it turns out can be observed by analyzing trends.  An applying Henry George’s four phases of the real estate cycle (as modernized by Glenn R. Mueller), Nicolais can determine how and when the next housing bubble will occur.  (Henry George was a nineteenth century economist who studied the boom-bust cycle of the economy).

The first phase is the “recovery.”  Home prices are at the bottom, and demand increases.  Real estate vacancies decrease as economic activity increases, which fuels the economy.

real estate bubbleThe second phase is the “expansion.”  Housing inventories dwindle, there is little is available to buy, and finding a rental becomes difficult.  Nicolais explains that an issue with real estate is that once demand increases, filling inventory takes a long time.  New development can take two to five years.  Until new inventory is added, price growth accelerates; and rather than valued at market conditions, real estate becomes priced to future gains.  During a real estate boom, people buy into the prospect of “future growth” and believe the escalating prices are reasonable.

Phase three is “hyper supply.”  When the completion of new development begins to satisfy demand, inventories fist stabilizes and then swells.  Price growth begins to slow.  Nicolais stated that the amount of continued development will determine the severity of the impending recession; while demand is satiated, new inventory comes to market and vacancies increase.  He asserted that “wise” developers stop building during this phase.

Phase four is the “recession.”  New development is stopped, while projects coming to completion add to a growing inventory.  Occupancy rates and prices fall; property values and profits dwindle.  Developments in mid-construction may not be completed because they are no longer financially feasible.

Following the four phases and the 18-year cycle; Nicolais stated that the great recession was not caused by external forces, but rather occurred on schedule!  He figures that the current housing market is transitioning from recovery to an expansion phase.  And with the exception of the occasional slow down, he predicts that the next housing bubble will be in 2024.

Original published at https://dankrell.com/blog/2016/06/03/housing-bubble-countdown/

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Housing recovery is cliché

real estate

The word “recovery” has been used a lot over the last five years.  So much so, it seems as if the term is automatically associated with anything written about real estate and housing.  But, maybe it’s time for a shift in our perception and expectations.

If you look up the definition of recovery, you might find: “re·cov·erynoun \ri-ˈkə-və-rē,\ : the act or process of returning to a normal state (after a period of difficulty).”  It might make sense to refer to the housing market as still recovering, and in the process of returning to normal; but then again, who’s to say that the home price and market activity peaks realized during 2005 – 2006 was normal?

A number of research papers (such as Reinhart & Rogoff’s The Aftermath of Financial Crises) were produced to discuss how the recovery from the Great Recession would take shape.  Although there is not a clear consensus, many concluded that a recovery after a financial crisis is much longer in duration than recoveries from non-crisis recessions.  However, some claim that may not be the case because the comparisons to other financial crises around the globe are not analogous the U.S. financial system.

Regardless, maybe the use of the term “recovery” is, after five years, cliché.  Niraj Chokshi seemed to allude to this in his November 2013 article on Washingtonpost.com, “What housing recovery? Home values and ownership are down post-recession.”  Chokshi pointed out that home ownership and home values have not even recovered to the levels of the three years during the recession (2007-2009).

But then again, it could be that there is a journalistic license to use “recovery” when referring to housing; because there is an expectation for the real estate market to return to the peaks it experienced in the last decade.  An April 7th National Association of Home Builders (nahb.org) press release of the NAHB/First American Leading Markets Index was titled, “Latest NAHB Index Reading Shows Recovery Continues to Spread;” highlighted that there are 59 of 350 metro areas that “returned to or exceeded” their normal market levels.  However, “market levels” are based on a metro area’s employment, home prices, and single family home permits (it is unclear if the labor participation rate, which is the labor force as a percent of the civilian noninstitutional population, is included in the employment data).

Talking about a recovery is no longer acceptable for home buyers and sellers planning their futures; rather it is more appropriate to again talk about relative market conditions.  Considering that references to a recovery that is extending into a fifth year seems distant and confusing; the dramatic changes that the industry underwent after the recession makes it almost inconceivable for the marketplace to return to the exact state that existed prior to 2007.  Relative market conditions are more meaningful to home buyers and sellers, specifically when they are deciding listing and offer prices.

Although the National Association of Reltors® Existing Home-Sales stats are due out April 22nd, and Pending Home Sales Index due April 28th; Wells Fargo Housing Chartbook: March 2014 (April 9, 2014) states, “Although we still see conditions improving in 2014 and 2015, the road back to normal will, in all likelihood, remain a long one…” and outlines a “Brave New Housing World.”

With that in mind, a look at local market conditions; March 2014 year-over-year Montgomery County MD home sale statistics for single family homes as reported by the Greater Capital Association of Realtors® (gcaar.com) indicated: total active listings increased 27.5%; contracts (e.g., pending sales) decreased 7.4%; and settlements (e.g., sales) decreased 12.6%.  Additionally, the March 2014 county average single family home sale price of $562,157 is less than the county average SFH price of $573,281 reported for March 2013.

by Dan Krell
©2014

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Real estate, climate change, and data-porn

winter home sales

The National Association of Realtors® (realtor.org) March 20th news release reported that February home sales remained subdued because of rising home prices and severe winter weather.  The decline in existing home sales was just 0.4% from January, but was 7.1% lower than last February’s figures.  NAR chief economist Lawrence Yun stated that home sales declines were due to “weather disruptions, limited inventory, increasingly restrictive mortgage underwriting, and decreasing housing affordability.”  And although it may sound bad, Yun actually has a rosy outlook saying, “…Some transactions are simply being delayed, so there should be some improvement in the months ahead. With an expected pickup in job creation, home sales should trend up modestly over the course of the year.”

So, if a snow filled and cold February is to blame for poor home sales, was Snowmagedden and Snowzilla the reason for increased home sales during February 2010?  Of course not.   And although home sales increased 5.1% year-over-year here in Montgomery County MD during February 2010, it was mostly due to increased home buyer demand that some speculate was due in part to the availability of first time home buyer tax credits.  Additionally, RealtorMag reported that Southern California December home sales dropped about 21% month-over-month, and were down about 9% in compared to the same period in 2012.

As home sales are trending lower, it’s reasonable to look for reasons why demand is soft; but can weather be the main reason to keep potential home buyers at home?  Probably not.  Consumer demand is a robust force that is multifaceted, and can even prevail over seemingly difficult circumstances.  Consumer demand can even trump weather, as was the case during the winter of 2010.

winter home sales

Consumer demand can even be resilient in the face of the speculative effects of global warming.  A November 2013 RealtyToday article (The Looming Global Warming Catastrophe and its Effect on Real Estate; realtytoday.com) discusses how home buyer demand for coastal property has remained strong even as increased claims that climate change will make these areas uninhabitable.

Housing data cause and effect is only conjecture unless it is directly observed.  To make sense of the “data-porn” that is excessively presented in the media, often without proper or erroneous explanation; economic writer Ben Casselman offers three rules to figure out what the media is saying (Three Rules to Make Sure Economic Data Aren’t Bunk; fivethirtyeight.com): Question the data; Know what is measured; and Look outside the data.  Casselman states, “The first two rules have to do with questioning the numbers — what they’re measuring, how they’re measuring it, and how reliable those measurements are. But when a claim passes both those tests, it’s worth looking beyond the data for confirmation.”

Keeping these rules in mind, could the winter slowdown be the result of cold weather, or is it something else?  Sure, cold weather may have marginal effects on home buyer behavior and demand; however, weather does not typically affect extended periods of consumer behavior unless weather events are catastrophic.  The current data may be indicative of a housing market that is returning to the distinct seasonal activity that we have been used to for many years prior to the “go-go” market and subsequent recovery years.

However, other factors referenced by Dr. Yun, such as increased home prices and tougher mortgage standards, are more likely to be the reasons for subdued home sales.  And as the year progresses, these factors may emerge to be significant issues for home buyers.

by Dan Krell
© 2014

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.