Smart Real Estate News & Commentary by Chris McLaughlin May 25, 2011
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New home sales up
The Census Bureau reported an annual sales rate of 323,000 new homes last month. That was up 7.3% from a revised rate of 301,000 in March. Economists had forecast a sales rate of 300,000, according to consensus estimates from Briefing.com. While sales have risen for two months in a row, the April rate was down 23.1% compared with the same month in 2010. In February, new-home sales fell to a revised 278,000, marking the lowest level since the government began tracking the data in 1963. Sales in April rose the most in the West, where the supply of foreclosed homes has been shrinking. But sales remain sluggish in economically challenged states in the Midwest and South. The average price of homes sold in April was $268,900, according to the report. That was up from $250,000 in March, but down about 2.5% from the beginning of the year. There were an estimated 175,000 new homes for sale. That’s the lowest level on record, according to Vitner. At the current sales rate, it would take 6.5 months to sell through that inventory, the report said.
25% of retirees have no savings
One in four Americans age 50 or older said they had exhausted all of their savings during the recession, while 67% at least reduced their retirement savings account balances during the previous three years, according to a report by the AARP Public Policy Institute released Tuesday. More than half, 53%, said they were not confident that they will have enough money to live comfortably in retirement. More than 80% said the economy had impacted their retirement plans. During the recession, nearly one third said their home declined substantially in value and one quarter experienced a job loss. As a result of their struggles in recent years, 44% of those above age 50 said that they would likely work part-time in retirement, while 33% said they expect to delay retirement. Nearly 13% had returned to the labor force and were either working or looking for work. The AARP’s Public Policy Institute polled more than 5,000 Americans — age 50 and over — who were employed, had been employed, or were seeking employment during the recession.
MBA – mortgage applications up
Mortgage applications increased 1.1% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 20, 2011. The Market Composite Index, a measure of mortgage loan application volume, increased 1.1% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 0.9% compared with the previous week. The Refinance Index increased 0.9% to its highest level since December 10, 2010. The seasonally adjusted Purchase Index increased 1.5% from one week earlier. The unadjusted Purchase Index increased 0.8% compared with the previous week and was 3.1% higher than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is up 5.2%. The four week moving average is up 1.2% for the seasonally adjusted Purchase Index, while this average is up 7.1% for the Refinance Index. The refinance share of mortgage activity increased to 66.8% of total applications from 66.7% the previous week. This is the highest refinance share since January 28, 2011. The adjustable-rate mortgage (ARM) share of activity decreased to 5.8% from 6.3% of total applications from the previous week.
Durable goods orders down
The Commerce Department said durable goods orders dropped 3.6% after an upwardly revised 4.4% rise in March, which was previously reported as a 4.1% increase. Economists polled by Reuters had expected orders to decline 2.2% last month. Orders were pulled down by a 30% plunge in volatile aircraft bookings. Boeing took in just two aircraft orders, sharply down from the 98 it received in March, according to information posted on the plane maker’s website. Motor vehicle bookings dropped 4.5%, the largest decline since August, likely tracking an 8.9% dive in auto production during that month. U.S. manufacturing contracted for the first time in 10 months in April as a result of supply chain disruptions in the wake of the March earthquake.
Excluding transportation, durable goods orders unexpectedly fell 1.5% after a revised 2.5% rise in March, previously reported as a 2.3% increase. Economists had expected this category to rise 0.5%. The report showed weakness across the board, with big declines in orders for machinery, capital goods, defense aircraft, communications equipment and computers. However, orders for computers and electronic products rose. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, fell 2.6% last month after an upwardly revised 5.4% increase in March. Economists had expected a 0.2% gain from a previously reported 4.3% rise. Shipments of non-defense capital goods orders excluding aircraft, which go into the calculation of gross domestic product, fell 1.7%.
Olick – home builders hurting
“The best number out of today’s report on sales of newly built homes is not the 7.3% bump up in signed contracts, it’s the drop in inventories to a 6.5 month supply. That number is based on a quicker sales pace and a drop of 5000 in the absolute number of newly built homes on the market. That volume is the lowest since at least 1963, according to Miller Tabak’s Peter Boockvar, who worries that the supply of existing homes is still simply too much for anyone to be touting the builders. ‘The best response on the part of builders is to shoot themselves in the foot for as long as they can financially stand, so the market can more quickly absorb the excess inventory of existing homes which make up most of the overall market,’ writes Boockvar. Aristar’s JT Smith chimes in on the actual April sales number: ‘Unadjusted sales of 32k makes April 2011 tied for the worst April sales number in recorded history.’
My concern is not over the inventory of newly built homes. I think it’s a big positive. My problem is the glut of bargain-priced REO (bank owned) homes against which the builders compete. This does not include homes that the big banks own, and it doesn’t add in the homes with loans that are 90+ days delinquent, which is 1.96 million, according to Lender Processing Services, or the number of properties that are in the foreclosure process, which is 2.18 million. Yes, a lot of these REOs are concentrated in the hardest hit states, but there is plenty to go around the nation. Another couple of roadblocks to the builders are higher commodity prices, which make them unable to lower their prices too far (although they are now building smaller, cheaper homes), and the fact that more potential buyers want to live in or closer to major metropolitan areas thanks to high gas prices. That’s not where most of the big builders do their work or have their land inventories. I’m thrilled the builders sold some homes in April, more than the month before, and I know there is a ton of pent up demand out there; I’m just not so sure that demand is headed toward new construction, at least not in the next few years.”
Warren avoids answers
The political drama surrounding Elizabeth Warren, the force behind the Consumer Financial Protection Bureau (CFPB), played itself out Tuesday when a House subcommittee grilled the CFPB architect on everything from her role in advising other regulators to her departure time from the hearing. The hearing grew contentious at several points with lawmakers probing Warren with specific questions about her role in recommending a $20 billion settlement between state attorneys general and mortgage servicers.
The subcommittee’s chairman Patrick McHenry (R-N.C.) pushed Warren on previous congressional testimony in which she characterized the committee’s involvement in the mortgage servicing settlement proposal to a situation where she gave advice when asked for it. McHenry asked, “If you are so proud and enthusiastic about your advisory role and advice, why didn’t you express that in the settlement issue?” Warren responded saying, “We gave advice when asked.” When further probed about whether she would disclose information from settlement meetings, Warren said, “Congressman, my calendar is an open book.” McHenry shot back, “Are you saying it shows you discussing those items?” Warren stated later in the conversation, “We have provided advice to federal and state officials regarding a potential servicing settlement. We have been sharing our analysis and recommendations in creating a solution that would hold servicers accountable.” Warren also said her office had sent a statement responding to questions brought up on the mortgage servicing issue by lawmakers and never received a response.
Congresswoman Ann Marie Buerkle (R-N.Y.) pointedly asked Warren why starting salaries for posted CFPB positions are 60% to 90% higher than equivalent government positions. Warren responded, “We are following the law set up in Dodd-Frank, the five banking regulators are paid on a different pay scale, and the reason is because they are bank regulators and competition for those jobs includes people who are in the financial services industry.” Buerkle shot back saying, “This is not the private sector. The government needs to be accountable to the people. It just seems like this regulatory body has questions to answer given the huge disparities in salaries.” When asked if the bureau will keep complaints against companies private or if they will be public, Warren never provided a yes or no answer, only stating that “we are trying to work with the industry to find a system that works.”
The heated debate highlighted the contention already surrounding Warren, one of the most controversial figures in the mortgage finance industry. During the meeting, Warren never directly answered McHenry’s question about whether she would accept the director of the CFPB post. Instead, the Harvard professor avoided a “yes” or “no” response to the question, saying only the decision is up to President Obama.
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Chris McLaughlin
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According to the latest monthly reading of the Standard & Poor’s/Case-Shiller index, home prices are showing signs of stability. Analysts say that this is encouraging, given that home values drive consumer confidence. “The key to everything is single-family housing because that’s where consumption comes from,” said Sam Zell, founder and chairman of Equity Group Investments. “If people don’t have confidence in their biggest asset, they won’t have the confidence to spend.” Analysts expect the extent of housing recovery to be different across the country.
The Obama administration wishes to see at least 500,000 loan modifications by November 1 of this year; currently about 200,000 loan modifications are in process. Administration officials held discussions this week with 25 loan servicers participating in the modification program and asked them to do expedite the program. Borrowers have been complaining about administrative delays in processing their loan modification application. “[T]oo many homeowners are at risk of foreclosure right now,” Treasury Secretary Tim Geithner said in a statement after the meeting. “Today’s meeting was an opportunity to identify ways to accelerate the program and bring relief faster.” President Obama has acknowledged that the modification program, which was announced in February this year, has so far not been effective. “Our mortgage program has actually helped to modify mortgages for a lot of our people, but it hasn’t been keeping pace with all the foreclosures that are taking place,” Obama said last month.
The Obama administration introduced the Term Asset-Backed Securities Loan Facility (TALF) last March in order to revive asset-backed securities market. The next TALF window which will open in September this year is likely to see deals worth $3 billion involving Commercial Mortgage Backed Securities (CMBS). More than a dozen real estate investment trusts are expected to participate. The Federal Reserve is likely to lend CMBS buyers up to 85% of the purchase price for TALF securities.
According to The Conference Board, its confidence index dropped to a reading of 46.6 in July, a second consecutive decline, following a reading of 49.3 in June. The Conference Board’s measure of present conditions dropped to 23.4 from 25 the prior month. The gauge of expectations for the next six months declined to 62 from 65.5. The drop in consumer sentiment reflects the unemployment situation. “Folks are still concerned about their jobs,” said Mark Vitner, a senior economist at Wells Fargo Securities. The survey is based on a representative sample of 5,000 U.S. households.
According to the Commerce Department, new-home sales dropped 0.6% in May over April, to an annual pace of 342,000 units. This is below what economists had estimated, and well below the 509,000 annual pace of May 2008. The median home price rose from $212,600 in April to $221,600 in May. Inventories of new homes fell to 292,000 units in May. At the current rate of sales, it would take over 10 months to clear the stock of unsold homes. Economists believe that home prices have to fall further to clear unsold home inventory. Joshua Shapiro, chief economist with MFR, says the inventory of homes for sale “will remain enormous, particularly with increased competition coming from distressed sales of existing homes.” Michael Moran, chief economist at Daiwa Securities America, said homebuyers are seeing more attractive opportunities in the existing-home market than in the new-home market. “Builders are less inclined to offer discounts and throw in amenities now that inventories are better under control,” said Moran.
The government has expressed its commitment to support energy efficient vehicles by announcing an $8 billion loan to Ford, Nissan, and Tesla Motors. The Energy Department will provide the loan out a $25 billion fund, to develop fuel-efficient vehicles. Energy secretary Steven Chu said: “By supporting key technologies and sound business plans, we can jump-start the production of fuel efficient vehicles in America. These investments will come back to our country many times over by creating new jobs, reducing our dependence on oil, and reducing our greenhouse gas emissions.” Ford will receive $5.9 billion to upgrade its 11 factories in the Midwest to produce hybrids and electric vehicles. Nissan will receive $1.6 billion to build advanced vehicles and a battery manufacturing facility, while Tesla would get $465 million to build electric vehicles and electric drive powertrains in California. “This is a tremendous development,” said Alan Mulally, Chief Executive Officer of Ford. Tesla CEO Elon Musk said the Tesla would use the loan “precisely the way that Congress intended — as the capital needed to build sustainable transport.” General Motors and Chrysler failed to qualify for the loan program since they were not considered “financially viable” by the Energy Department.
