Morning Report – Existing Home Sales fall 2/23/15

Markets are lower this morning in spite of a loan extension for Greece. Bonds and MBS are up small.

Existing home sales fell to a 4.82 million unit pace in January from an upward-revised 5.07 million pace in December, according to the National Association of Realtors. Inventory is still tight at 4.7 months (6.5 is more or less a balanced market), but it is up from 4.4 months in December. The median home price is $199,600, an increase of 6.2% year over year. All cash transactions were 27%, down from 33% a year ago, and distressed sales were 11%, down from 15% a year ago.

Janet Yellen will make her semiannual trek to the Hill to discuss monetary policy in front of Congress. The prepared remarks will undoubtedly be closely parsed, and the sense on the Street is that Yellen wants to lower expectations somewhat for a June rate hike. Aside from that, HH is generally a waste of time for market watchers. These are generally for the benefit of politicians who like to use it as a platform to pontificate on issues important to them.  The left will try to get her to agree with their views on inequality and the minimum wage, while the right will probably go after the long-term risks of ZIRP. It will be interesting to see if someone asks about the “audit the Fed” movement. She testifies in front of the Senate tomorrow at 10:00 am EST, and in front of the House on Wed.

A deal in the servicing field this morning: New Residential is buying subprime servicer Home Loan Servicing Solutions for $1.3 billion. HLSS has been examining strategic alternatives since last November, and the stock is up smartly. The servicing sector as a whole has gotten slammed from the Ocwen mess and the drop in interest rates.

Speaking of servicing, Ocwen is trying to sell a 9.8 billion servicing portfolio to Nationstar.

If the US economy is improving (and all evidence says it is), why are banks still piling into Treasuries?  There are a couple of reasons. First, is Basel III. They were required by the regulators to increase their holdings of Treasuries. Second, if you look at the Bloomberg total return index on US Treasuries over the past year, they returned 8.8% in 2014. That includes periodic interest and capital gains. Compare that to the typical rate on a business development loan, or a line of credit paying LIBOR + 200 or something. Treasuries are working. And given the yields in European bonds, and the strength of the dollar, there is an underlying foreign demand for Treasuries. Yes, at some point Treasuries will become an awful bet, but that won’t happen until inflation kicks in and that isn’t happening at the moment.

Chart: Bloomberg 10 year Treasury total return index:

38 Responses

  1. Do you have any feel for how mortgage lenders are thinking? Are people able to get mortgages?

    Oh, and frist.


  2. VA loans are pretty easy to get – you don’t have to put anything down, and you can get a seller’s concession to help with closing costs.

    As far as credit goes, they are pretty lax…


  3. NYT reports that the likelihood of a DHS shutdown has increased, but actual impact to the public may be minimal.

    “If the agency is shut down, about 15 percent of its 230,000 employees — roughly 30,000 — would be furloughed. The rest, deemed essential, would be expected to continue working, but without receiving their regular biweekly paychecks. Transportation Security Administration officers at airports, Border Patrol agents, front-line law enforcement officials and members of the Coast Guard would be required to report to work.”


  4. VA loans kick ass! Not sure it’s worth risking your life for,but if your lucky enough to serve without having to experience combat its worth the time commitment of an enlistment contract.


  5. I’m still interested in the idea of a home-ownership mindset vs renter. I think it will be telling to see where the 20-somethings come down on this question (once they get out of their parents’ houses). All of the ones I know are more concerned with paying off student loans than getting a mortgage. . . but I think that that’s as much an aspect of where I work/have worked than 20-somethings in general.

    I, personally, don’t plan on buying again unless I find the perfect house in the perfect place.


  6. I think the optics of a shutdown will be different this time. Refusing to fund the government over something symbolic like the debt ceiling versus refusing to fund an agency over blanket amnesty for illegal immigrants…

    Of course the media will frame it the way Democrats want, but still this isn’t going to be the slam dunk it was for Democrats last time, IMO.

    Of course the shutdown didn’t cost the Republicans anything to begin with politically.


  7. Well, the 20 somethings with a large amount of student loan debt probably won’t have the debt to income ratios to qualify in the first place..


  8. Yeah but they have Women’s Studies and Art History degrees!

    I did read that over 50% of those with student loan debt never received a degree. Anybody know if that’s true?


  9. I did read that over 50% of those with student loan debt never received a degree

    I wouldn’t be surprised if a significant percentage of them never received a degree, but I would be surprised if it’s 50%.


  10. @Michigoose: “I, personally, don’t plan on buying again unless I find the perfect house in the perfect place.”

    I buy. Of course, my monthly mortgage is about half what it would cost me to rent a similar place, so that figures into it. Then there’s the whole years-of-residency calculations. I wouldn’t want to buy a new house every 3 years, but if you live in a place 10 years or more, you benefit from the accruing principal. Since I plan to live in this house indefinitely, purchasing makes sense.


  11. This is pretty funny:

    “Called “Rigged,” the ad uses Warren’s voice to criticize Clinton for taking money from foreign governments for her family foundation. “Powerful interests have tried to capture Washington and rig the system in their favor. The power of well-funded special interests tilts our democracy away from the people and toward the powerful,” Warren says, as images of Clinton meeting with Middle Eastern leaders appear on screen. “The power of well-funded special interests tilts our democracy away from the people and toward the powerful.” Ominous music is included, natch.”


  12. “I think the optics of a shutdown will be different this time.”

    That and no actual impact to the voter.


  13. Since I plan to live in this house indefinitely, purchasing makes sense.

    Absolutely. But (1) if I hadn’t been able to relocate across country I’d be far up a creek at this point, and (2) I’m at an age where I can’t see living in a house long enough to pay off the mortgage.

    The price differential between rent and a mortgage payment has always been–and still is–an important point. If I owned my house I’d be paying 50 – 60% of what my rent is. . . but I’d be tied to the house, and right now the freedom to move for work is more important than the difference between rent and a mortgage.


  14. Something I wrote recently about rent vs buy

    The rent versus buy decision:
    If you are a first time homebuyer, you may not feel like you have a grasp of what your actual expenses are going to be. First time homebuyers are understandably nervous about finding themselves in a position where they could not afford the house they bought. Or they think they might not be able to qualify for a loan or need a large down payment. In this article, I will break out the rent versus buy decision.
    Disclaimer: This is for illustrative purposes only. You should discuss your personal financial situation with your financial advisor before making any major financial decisions.
    The median house price in the US is $205,000. The median rent is $1,314. Which is the better deal? Which will cost less? How does one make that decision? Let’s price out a scenario.
    First of all, let’s take a look at the various loan programs out there. If you are a first time homebuyer, the FHA program is specifically suited to you. They require only 3.5% down. A typical FHA rate without points is around 3.75% for someone with typical credit. Of course when you buy a home, there are more fees to pay up front than just the down payment.
    Typical Up-front costs for a home buyer (median house, median income, normal fees)
    Down Payment $ 7186
    Up front Mortgage Insurance Premium (1.75%) $ 3,467
    Property Tax Escrow (US average 1.38%) $ 2,833
    Homeowners Insurance (US average 0.35%) $ 718
    Title Insurance (US average 0.5%) $ 1,027
    Mortgage Origination Fee $ 1,495
    Appraisal $ 360
    Home Inspection $ 400
    Total $17,492

    Now, let’s look at what the monthly payments would be. Here is a breakdown of those:
    Monthly Principal and Interest Payment $917
    Monthly Property Taxes (US average 1.38%) $236
    Monthly Mortgage Insurance (0.85%) $140
    Monthly Homeowners Insurance (US avg. 0.35% $ 60
    Expected Monthly Payment $1,354

    So the expected payment per month of $1,354 is pretty much in line with the median rental payment of $1,314. However there are additional considerations – maintenance and taxes. A good rule of thumb for maintenance is 1% of the home’s value. Renters don’t have to deal with that, so it is an additional expense. On the other hand, mortgage interest and property taxes are deductible from your Federal Taxes. In your first year, you can expect to pay $7,428 in mortgage interest and $2,833 in property taxes. If you earn the median income of $51,000, you are in the 25% tax bracket, and the value of that deduction is $2,565 or about $214 a month. So if you add monthly maintenance of $171, and subtract the tax rebate of $214, you get an effective monthly payment of $1,311 – almost exactly equal to median rent of $1,314.
    One more thing to consider – where you are after one year. This is critical. If you decided to rent, after 1 year, you will probably get a 6% hike in your rent. If you decided to buy, you will have built up an additional $7,500 in equity in your home, and your principal and interest payments will never go up. Right now, the rent versus buy decision is heavily skewed in favor of buying.


  15. I will break out the rent versus buy decision.

    This is a great example with real world numbers. It doesn’t surprise me that the monthly cash flow basis comes out to a wash since the landlord also has to carry a mortgage plus do your maintenance.

    The number that is always frightening is the down payment and fees which are enormous and essentially just vanish since less than half of those closing costs are actually equity. I was always told the buy/rent decision came down to whether you were going to stay five or more years. But I think that rule of thumb was based on historical rates of appreciation that let one cash out with enough money left over for the down payment on the next property.

    Anecdotally based on just my wife’s Facebook (she has a lot of former students and children of friends on it) is that the typical step of milestones nowadays is buy a house together, get married, have kids, usually all within a five year span once the commitment trigger is pulled.


  16. Speaking of anecdotes, over the weekend my wife and I had lunch with a former college classmate of hers who was on track to become a Baptist minister at one time but instead came out of the closet, moved to California, and got married as soon as it was legal. He is now getting divorced and selling their house. He will have to pay several years of spousal support since he was the breadwinner and California is a community property state. At least he is getting custody of the dogs.

    I told my wife we are NEVER moving to California.


  17. Excellent article, Brent! My landlord loves me, so my rent didn’t go up. But given that I’m still trying to find my way into the federal system–which will more than likely involve a move to the other side of Baltimore–I’m still going to stick with renting for a couple more years (at least).


  18. I wonder if that 5 year rule is more relevant when interest rates are higher. Historically, it would take a few years before you would build up any equity, since the first few years are mainly interest. That isn’t the case when rates are super low.


    • The major argument in favor of buying has always been appreciation since housing prices never went down. When I bought my first house in the mid 1980s I had a realtor whine that he sold more houses in the 70s when interest rates were at 17%. As long as the paper appreciation kept pace people could trade up.


  19. And that thinking Yellojkt is how bubbles are born.


    • Perzaktly. I bought my place right before the bubble inflated and it doubled in value in two years but has been flat for the past seven.


      • YJ, Scott, JNC, KW, and George –

        What strikes me is how little we all disagree about America.

        We are the indispensable power in the world. We are the only nation of consequence built on immigrants rather than on closed doors. Others may welcome immigrants now, but we are a nation of immigrants. We are unique in that and it is a good thing for all of us – no one here is a “native American” AFAIK.

        Our national ideals are high and our record as a colonial power was benign compared to everyone else. It is in our collective memory that we saved the rest of the world from destruction twice in the Twentieth Century.

        We are an exceptional nation but not a perfect one – such an entity could not exist.

        I actually think this consensus is widely held by Americans and by many people around the world and by Rudy Giuliani and by Barack Obama. They are lucky to be Americans and I suspect they both know it. I am damned lucky I was born in the USA in 1943 and I have never forgotten it.

        Calling out someone else for not saying all this at every possible occasion or for criticizing our warts as a nation just strikes me as bullshit. Our leaders can cheer us on while conceding imperfection. It is OK to recognize facts.

        WRT BHO, specifically, while it is OK to recognize facts and it is a good thing not to couch fighting Islamic Terrorism as a War against Muslims, he has erred on the side of over-caution by not publicly recognizing the apocalyptic theological and religious visions that Islamic terrorist leaders have espoused. That motivation will not be “cured” in any short run. It should be contained, however, and that will require force, as well as safety valves for the victims.

        edit: WRT Giuliani, I thought he was a successful Mayor, but he really did pull strings not to be drafted for ‘Nam and I give his views on “patriotism” no heed.


        • Mark:

          What strikes me is how little we all disagree about America.

          I wonder how little it really is. To adopt an analogy presented earlier, I think there is quite a lot of space between thinking “Sure my mother has her faults, as we all do, but I still think there is no better mother” and saying “My mother is a drunk, and lots of other mothers are better parents, but I love her anyway.” The latter certainly comes nowhere near capturing what I think.

          I actually think this consensus is widely held by Americans and by many people around the world and by Rudy Giuliani and by Barack Obama.

          Why do you think Barack Obama holds this? Is it just a generic assumption you grant all politicians, or is there some solid reason to think it? For the record, I grant it as a generic assumption, but am willing to consider contrary indications once I become more familiar with the politician. Understanding that a politician who did not at least profess to hold America to be uniquely special/exceptional (whether or not he actually does) would not have any national political viability, is there anything a politician could say/do that would lead you conclude differently about that politician?

          Calling out someone else for not saying all this at every possible occasion or for criticizing our warts as a nation just strikes me as bullshit.

          Perhaps, but I don’t think that was what Giuliani was doing at all.


        • RBG should recuse herself from the SSM case; her prediction has the appearance of an impropriety and we treat those as judicial missteps. “I would be very surprised if the Supreme Court retreats from what it has said about same-sex unions” could be treated as a neutral statement if one were to stretch a point, as the Court has stated more than one position on this and could decide either way without having “retreated” from what it already wrote. This, of course, is true of most any case it hears, at some strained level. So unless her colleagues ask her to recuse herself she probably will not do so.

          Kev, school is often the key reason folks move. I did it twice in my life. Totally understand.


        • Mark:

          So unless her colleagues ask her to recuse herself she probably will not do so.

          Thanks for the thoughts. I suspect that media pressure could also compel her to do so. Imagine what a couple weeks worth of front page stories in the NYT and WaPo would do to promote this issue. But given the MSM’s partisan nature and desire to see a certain result that becomes less likely without her vote, we can be sure that won’t happen, even as it would be highly likely if the offender were, say, Scalia. This is one of the ways in which the partisan 4th estate (or is it a 5th column?) really does have a regrettable impact on the politics of the nation.


  20. Buy real estate! They ain’t making more land!


  21. Nice discussion re the housing market and first time buyers. Thanks for running the numbers Brent on the rent vs buy scenario. Interestingly enough all three of our kids are probably buying homes this year. Two of them will be first time buyers.

    Our son has been sitting on a sizable down payment since moving to CO last year, waiting to decide where exactly they want to settle permanently. Looks like they’ve found the area and I think they might be buying a new home.

    Daughter number 1 and her boyfriend will be buying a home together and getting married some time this year (he finally convinced her). They’re looking at a FHA loan for first time homebuyers and probably moving out a little further east of us, just outside of Riverside, because they’ll get a little more for their money.

    Daughter number 2 is looking right now and probably buying without the help of her boyfriend as she’s still not convinced he’s the one…………LOL. She’s making beaucoup bank so can afford to do it on her own.


  22. Also, our rental property is in an area that has already surpassed the pre bubble prices so we’re considering selling again. It’s a tough decision.


  23. Lulu, we will be getting the FHFA Home Price Index this week and it will probably show that real estate prices nationwide are within 5% of peak levels. CA has always been a strong market, if the increase isn’t major it probably isn’t out of whack yet…


    • We did finally close on a rental duplex in San Antonio. At one point recently – January – I was pretty much absent here. We were busily looking for property in San Antonio, Killeen, and in the Raleigh-Durham-Chapel Hill area.

      Why not Austin?

      From the investment POV there is a wide difference in return in different markets. The rent return we will get from a $180K investment in San Antonio would require investing $250K in Austin. We think we will do even better in Raleigh, but we are not free to go there again until after April 16.

      In San Antonio, we were able to purchase a duplex built in 2007, 1350 sq. ft. on each side, northeast and well situated between Randolph AFB and Fort Sam. Clean, middle class neighborhood. Each unit is a 3-2-1. Rents are $925/side. We were cash purchasers. We moved the money from maturing bonds. We expect to net 7% cash on cash, after all taxes and maintenance. The tax benefit and potential asset value increase are additional to the cash-on-cash income. At our combined 131 years the cash-on-cash income becomes more important than the potential appreciation.

      LMS, we have not looked in CA, at least not seriously. But we checked out Stockton as we passed through last summer. Looked as if rental return there would beat Austin but not by much.


  24. @Brent: “The median house price in the US is $205,000. The median rent is $1,314. ”

    Here, you’d be paying $2000k +, and probably more, to rent a $205k house. But I’m assuming median rent vs median house price is not adjusted for square footage/features? I could rent an efficiency apartment for less than I’m paying for my mortgage, and could rent a 2 bedroom 2 bath house in an iffy neighborhood for less than I’m paying in my mortgage, but I’m losing a lot of benefits for a small savings.


  25. @Brent: “I wonder if that 5 year rule is more relevant when interest rates are higher. ”

    Probably, but I’ve generally had a low (if not lowest possible) interest rate on my mortgages, and I’ve got a 10 year rule. If I want to move up in housing price 20% for the next purchase, and I want to have a 20% down payment, and have the loan fees paid by the sale of my house (and I have to be prepped for market changes to have deflated the value of my house 5% or 10%) then 10 years is the minimum. Even being at over 11 years, I still had to come up with an extra $3k to make it work.

    And I’m glad we moved, but I’m also sad. About 4 months before the move, I had reached a point in my mortgage that I had never reached before . . . I was paying more in principal than interest. It was a beautiful 4 months.


    • Kev – why did you move?


      • @markinaustin:

        2 reasons, primarily. One: to get a house where most of the living space was on one level (the 1st floor) and to get into a different school district, related to the merging and then de-coupling of school districts down here. So, a big motivator was keeping the oldest daughter in her high school, but also wanted a mostly one level house, and wanted to upgrade a little bit. Also we wanted a few other things. Final choice was a compromise, but $184k was about as much as I wanted to spend, and getting something that everything we wanted right away just wasn’t going to happen . . . we had done 10 years worth of upgrading on the old house, and finding a new house that has all the new stuff plus coincidentally all the old stuff just like you customized the old house wasn’t going to happen. So, no deck and no porch yada yada, but it will come. We’ve already had a wall put in for the bonus room, which is now the oldest daughters bedroom. Since it just opened to the stairs. My wife still finds reason that we “made the wrong choice” but given the restrictions on our criteria, we got about the best option available, so I’m satisfied. I try to point out we’re not going to have ever bought a house with a forest in back and a walking park across the street AND was close to urban areas and closer to our respective work places. On the whole, I’m pleased. And the $100 off the electric bill due to better energy efficiency brings the monthly payment down to what the old house was before the refinance. So . . . all told, it works out.

        It’s a 3 year old house. And it mystifies me some of the decisions that make in this modern era when building new houses. Still not enough power outlets, especially outside and in the garage. One frickin’ outlet in the garage! One out back, one out front. Crazy. But lots of new houses I looked at, including brand new houses, were in the $200k range (the kind of houses that go for $500k or $800k in some areas) and they have tall ceilings and open floor plans but tiny kitchens and tiny closets. I don’t get it.

        I’m in the process of re-doing all the years of customizing in the new house. Closets and shelving require a lot of work. Then, eventually, patio expansion, porch and deck. I want that deck, as our backyard is a hill. I want a deck that stretches out a bit and then gives me some stairs down to the low area of the yard, as going up and down that hill is a struggle. It’s steep.

        Finally, we live in a very urban metro area (Memphis) and if you can move away from neighborhoods that routinely feature 20 or so teenage hoodlums walking down the middle of the street and glaring at you when you’re coming home, you do that, too. Back in the day, that was called “white flight” but now it should be called something else, given the demographic makeup of the neighborhoods you move into regarding race doesn’t change, just the income levels and preponderance of college degrees.


  26. @Scottc1: “I wonder how little it really is.”

    I think it’s less than it feels, but a lot of it is how much time we spend focused on differences. Obama is a technocrat and a pedant in this respect, so I’m way more prone to give him a pass than others. I understand the compulsion to say that “but every other country feels it’s exceptional” because it’s true, if pedantic. Because when talking about what makes America great and why we love the country, it’s not relevant that other countries also feel they are awesome.

    And it’s complicated. We want and need a shorthand to discuss or highlight differences, which I think the accusations of lack of patriotism or even discussion of American exceptionalism kind of fall into. When we discuss American exceptionalism, we’re also talking about Western exceptionalism. Which is perfectly reasonably as at least 75% of everything that is objectively awesome springs from Western thought. 😉

    We’re also saying something like: “I feel like you’re saying Saudi Arabia or Ethopia is culturally equivalent of America or the UK, and they just aren’t, for a million reasons.” At least, I think we are. I think Mark touches on that: radical Islam is not culturally or morally equivalent to Western Democracy, and never will be. At some point, the fact that others feel justified about what they are doing and patriotic in regards to their own messed-up countries can’t be a mitigating factor regarding how we deal with them.

    On the reverse, I think many in the left (yello touched on this) think that heartfelt expressions of patriotism sound like jingoism. That is, if “I love this country” isn’t immediately followed by: “except for slavery and killing Native Americans and the Iraq war and every other mistake made by us as a people ever” then your veering into jingoism.

    Which is all to say: We produced Henry Ford and Thomas Edison and Disney World, so America is awesome. End of discussion. 😉


    • KW:

      I understand the compulsion to say that “but every other country feels it’s exceptional” because it’s true, if pedantic.

      I don’t understand the compulsion to say that, even if it is true, except as a means of qualifying and diminishing a stated belief in the “specialness” of one’s own country. If one says “I think my child is an exceptional talent, but of course I know that most parents think that of their kids”, one is essentially acknowledging that one’s view of one’s own child is an ordinary, emotional response, and probably not true in any objective way. That is, it is an implicit admission that, intellectually you can’t really justify the belief. But if I am the father of Tiger Woods or Jack Nicklaus, I am not qualifying praise of my kid’s talent with “…but of course everyone thinks that of their kid” because I know, in an intellectual and objective way, that my kid really is a special talent regardless of how everyone else feels about their own kid.

      That is how I feel about the US, and that is why I am never compelled to qualify my praise of the US with remarks about how everyone feels the same about their country, and why I am highly skeptical of how deeply felt the belief really is in those who are so compelled.

      This is not, of course, to say that the US never does or never has done anything wrong, just as recognizing that a young Tiger Woods or Jack Nicklaus is an exceptional golf talent doesn’t mean that they never sliced a tee shot or made a bogey or made a bad decision. This should be obvious, which is why I am also not compelled to qualify my praise of the US by following up with a litany of its errors or misdeeds.


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