Tag Archives: Fannie Mae

The Housing Market Has Stalled

The housing market headed for very “rough waters.” The title is from the National Association of Realtor’s Pending Home Sales report for August in reference to NAR chief “economist” Larry Yun’s commentary on the housing market. Pending homes sales in August, which are based on contracts signed, dropped 2.6% from August. They’re also 2.6% below a year ago August. These are SAAR numbers. The “not seasonally adjusted” numbers were worse, down nearly 4% from August and 3.1% lower than last August.

Once again Yun is blaming the problem on supply. I torpedoed that assertion with facts in last week’s Short Seller’s Journal.  Although, there is indeed a “supply” issue in one regard: there’s a shortage of end user buyers who are required to use, and qualify for the use of, the Government’s de facto subprime mortgage program (as I detailed last week). There’s also a shortage of existing home owners in the mid-price range who can afford to move-up. So yes, in that sense there’s a shortage – it’s just not in homes.

DR Horton (the largest homebuilder in the country) is carrying about the same amount of inventory now as it was carrying at the end of 2007 – around $8.5 billion. The average home price is about the same then as now, which means it is carrying about the same number of homes in inventory. It’s unit sales run-rate was slightly higher in 2007. The point here is that there are plenty of newly built homes available for purchase. Per the Census Bureau, the median sales price of a new home in August was $300k, while the average price was $368k. DH Horton is an averaged price homebuilder.

Per DH Horton’s inventory numbers, there is not a shortage of inventory around the average priced newly built home. Again, there’s a shortage buyers available who can qualify for the debt required to buy one of those homes. This is why the Government has significantly loosened mortgage standards every year since 2014 (see the graphic below). Up against the wall again, I don’t know if the Government will again further loosen the Fannie/Freddie mortgage requirements. If it does nothing, which would be the sensible decision, the housing market is going to sustain a rapid downward price “adjustment.”

Housing stocks are in a mini “melt-up” though it’s somewhat subdued relative to the melt-up in semiconductor stocks. This is despite the threat of rising interest rates and rapidly deteriorating demand-side fundamentals. This is the signal that the end is near for these stocks. Ironically, the University of Michigan consumer confidence survey for September released Friday showed that consumers who judge the current home-buying conditions as favorable plunged to a 5-yr low. This is notwithstanding the easiest mortgage approval standards in over two years:

The graphic above shows consumer perception of homebuying conditions on the left and the latest Fannie Mae lender survey on credit standards on the right. As you can see, the credit standards are the easiest in at least 2-years. Note:  The Fannie survey only dates back to Q3 2015. I would bet good money that the current credit conditions are the easiest since right before the previous housing bubble popped in 2008.

I’ve been discussing and detailing, the alleged “supply issue” affecting home sales is, in fact, a demand-driven issue. This graphic illustrates this:

The graph above is also from Fannie Mae’s latest housing market survey. As you can see, the demand for GSE (Fannie/Freddie/FHA) purchase mortgages has plunged since Q3 2016. The demand for non-GSE and Ginnie Mae purchase mortgages has also declined significantly since Q3 2016.

There’s an online MLS home-listing site called REColorado. I’m signed up to get listing and price-change alerts as they occur in several difference zip codes the represent the areas in metro-Denver that have been hottest. Colorado has experienced a massive inflow of people from all over country, especially California, which has made the Denver area one of the hottest housing markets since 2012, when the State fully legalized marijuana. Since mid-summer, I’ve been “price-change” alerts on homes over $700k on a daily basis. As I write this, I just received two more today. One of the homes started at $1.8 million in September and has taken the price down 11% over three price drops. The other house has an asking price of $779k but has been reduced more than 8% in four price reductions since June. If this is happening in metro-Denver, it’s happening in most formerly “hot” areas. Yes, there will be a few areas around the country that remain “hot” for awhile (like SoCal), but those areas will eventually suffer the most just like in 2008.

I want to reiterate that the housing market is a great short here. The only explanation for the move in the homebuilder stocks this past week is that it’s a momentum-driven technical run. The stocks I’ve been presenting in the last several issues will be lower this time next year. Probably a lot lower. Redfin (RDFN), the online real estate brokerage that I presented last week, closed Friday down $2.88 (10.3%) from the previous Friday. It’s going lower. It’s a good bet that this stock will be trading at or below $20 by Christmas. Zillow Group (ZG) is down 20% since a re-recommended shorting it in the June 25th SSJ issue at $50.69. I will say that I did not expect that to be close to ZG’s all-time high it was an obvious short to me at that point. Companies that earn commissions and fees directly from (RDFN) or related to (ZG) home sales volume will be the leading indicators.

The above analysis and commentary is from the latest issue of the Short Seller’s Journal.  You can out more about subscribing to this weekly investment newsletter here:  Short Seller’s Journal subscription info.  Despite the major indices hitting new all-time highs everyday now, there are many stocks that are declining.  The perfect example is Zillow Group, which I recommended shorting at $50 in June .  It is currently down 18% (an 18% gain if you are short, more if you bought the puts I recommended).  Subscribers also get 50% off the price of subscribing to the Mining Stock Journal.

The Government Is Desperate To Re-Stimulate Housing Sales

The Fed printed $2.5 trillion to prop up the mortgage market and the Government “refurbished” all of the mortgage programs it sponsors (Fannie Mae, Freddie Mac, FHA, VHA, USDA) in a way that positioned the Government/taxpayer as the new subprime lender of choice.  The two programs combined inflated a new housing bubble – one that ended up fueling housing price inflation  more than sales volume.   The FHA program was the first program to replace the collapsed subprime mortgage lenders of the mid-2000’s with a 3.5% down payment program. It’s market share of mortgage underwriting rocketed from 2% in 2008 to around 20% currently.

As home sales began to falter in mid-2014, the Government rolled out a revision to the Fannie and Freddie programs in early 2015 that reduced the down payment requirement from 5% to 3% and reduced the monthly cost of mortgage insurance.  The VHA and, believe it or not, the USDA (U.S. Dept of Agriculture) programs provide low interest rate mortgages with zero down payment.

Fannie and Freddie permit the borrower to “borrow” the down payment or receive down payment assistance from a home seller willing make price/fee concessions in an amount up to the 3% down payment.  In other words, under FNM/FRE, a homebuyer can close a conventional FNM/FRE mortgage with zero down payment.   These alterations to the taxpayer guaranteed mortgage programs provided another short-term bounce in home sales volume and sent home prices soaring.

The housing market is headed south again.  Just in time, the Government is making it even easier for a potential buyer to load up more debt to leverage into the American dream. Fannie Mae is raising the debt-to-income ratio on its 3% down payment product from 43% to 50%.  DTI is the total household monthly debt payments divided by pre-tax income. While the credit standards are not quite as insane as during the last housing bubble, the current mortgage underwriting standards facilitated by the Government do not allow any cushion for household financial instability. This is especially true considering more than 50% of all households can’t write a $500 check to cover an emergency.

The latest iteration from the Government  reeks of desperation.  But wait, it gets even better. Some mortgage companies are now offering a 1% down payment mortgage that includes a 2% “gift” from the mortgage company in order to conform to the 3% FNM/FRE underwriting convention. The mortgage lender pays the 2% portion of the down payment.

However, this is not a free lunch “gift.” The mortgage lender assesses a higher rate of interest to the borrower than would be otherwise available from a standard FNM/FRE 3% down-payment mortgage. The mortgage lender, as the servicer of the mortgage, keeps the difference between the interest rate on the mortgage paid by the borrower and the amount of interest payment “passed-thru” to FNM or FRE. Over the life of the mortgage, assuming the borrower does not default, the mortgage company makes substantially more than was “gifted” to the borrower.

If a homebuyer does not have enough capital to make a 3% down payment, the odds are that the buyer also does not have the financial strength to maintain the cost of home ownership. Home-buyers who are “gifted” 2% of their down-payment do not need down-payment assistance, they need earning assistance.

This is going to end badly, especially for the taxpayer.  Obama promised after his mult-trillion dollar Wall Street bailout that the Government would not bail out the banks again. This “promise” guarantees that it will happen again.  Only this time the source of financial nuclear melt-down will be many:  mortgages, auto loans, unsecured household debt (credit cards) and student loans.   Oh ya, then there’s the derivatives. The sell-off in the banking sector since March 1st reflects the market’s awareness of the rising degree of risk lurking in the financial system from an orgy of reckless debt creation.

I don’t know when the this giant Ponzi bubble will blow, no one does, I just know that it will be worse than 2008 when it does blow.  The balloon latex is stretched so tight at this point that any systemic “vibration” not anticipated by the Fed could impale the thing.

The above commentary was partially excerpted from IRD’s latest issue of the Short Seller’s Journal.  Two financial sector stocks and one auto sector stock, all three of which have been falling and could easily get cut in half from their current level by year-end with or without a market “accident” were presented.  To find about more, click here:  SSJ Subscriber Information. 

I look forward to any and every SSJ. Especially at the moment as I really do think your work and thesis on how this plays out is being more than validated at the moment with the ongoing dismal data coming out, both here in the U.K, and in the U.S – James

 

FOMC Day: There Has Been No Recovery – The Housing Bubble Is Re-Popping

The whole thing was in fact a giant lie used to cover up the fact that none of the money was spent to try and generate economic growth.  – Phoenix Capital Research LINK

The Fed’s FOMC is concluding another two-day meeting today and will issue its latest policy statement around 2 p.m. EST, as the idiots on financial tv sit on the edge of their seat trying to figure out which word or syllable has changed from the last policy decision statement.  The entire process is nothing more than well-staged theatre of the absurd.

How do we know the US is not in recovery? It’s really quite simple. If it were, the Fed wouldn’t have any issue with raising rates.  – Phoenix Cap Research

Now that we’re seeing retail sales decline month to month almost every month, manufacturing indices plunging to levels not seen since 2008-2009 and the GDP registering a decline, before inflation is stripped out – of almost 1% in Q1, it is highly improbable that the Fed will dare raise rates.  Not even a gratuitous quarter point bump.

Why this country’s debt-bloated, overleveraged financial system now has unmanageable levels of debt bulging for every nook and cranny in the system.  Even worse, there’s $100’s of billions of leveraged exposure lurking behind of the insidious facade of off-balance-sheet accounting at the big banks.

Then there’s housing bubble 2.0.  Only this time around its only a “price” bubble – as opposed to a price and volume bubble like housing bubble 1.0.   This price bubble has been fueled by the $2.0 trillion – and still counting as the Fed is still buying $10’s of billions of mortgages every month – of money printing.  – Investment Research Dynamics

Why do I say it’s only a price bubble?   Because, other than the loud noise of water cooler and cocktail party chatter about hot housing markets, transaction volume is at best tepid:

existing home salesBased on the level of existing home sales for the last 7 years, it’s hard to characterize this as a “hot” market. Too be sure, there are some poor souls who are getting suckered into buying a home by their aggressive realtor, but they are competing with a large cohort of investor/flippers who YTD have represented roughly 40% of transaction volume (more on this later). Institutional investment buyers who drove volume in 2011-2013 are leaving the scene, with some of them unloading homes onto the gaggle of mom and pop flipper operations.

price bubble

Here’s your housing bubble:   the median price of existing homes has soared 41% since 2012.  BUT as you can see from the graph just above, the price-action is not supported by volume.  As the volume dries up, there will be an an air-pocket collapse of the price.  Anyone who has traded relatively illiquid securities – homes are extremely illiquid most of the time – knows exactly what I’m talking about.  Once volume dries up and the market heads south, if you’re long, you’re wrong.

Speaking of a system bulging with debt protruding from every crevice, Jim Quinn’s Burning Platform featured a must-read article yesterday in which the author has discovered that the Loan-To-Value Ratio on Fannie Mae-issued mortgages is now at its highest level in history – nearly 10% higher than at the peak of housing bubble 1.0:

fannie mae loan to debt ratioThis is a debt and price bubble that has been fueled by the Fed and by the significant easing of credit terms for Government-sponsored and Government-backed mortgages. You can buy a home with effectively with a negative down payment. The Government requires a 3% down payment, the seller can subsidize up to 6% of your closing costs AND you can borrow the down payment.  That math adds up to a negative down payment.  Note:  Government = you, the taxpayer.

If the Fed raises interest rates, we will witness perhaps the the fastest systemic collapse in history.  We are going to witness a stunning collapse in housing anyway.  It’s just a matter of time before we see a reversion to the mean in which housing prices revert back to the true fundamental condition of the middle class in this country.  A fundamental condition which is has significantly and substantially degraded over the last seven years since the first housing bubble exploded.

Fannie And Freddie Are Headed For Another Bailout

Taxpayers pumped over $200 billion in to Fannie Mae and Freddie Mac after the financial collapse of 2008.   While the Obama Government used taxpayer subsidized loans to move  a large quantities of foreclosed housing inventory from the FNM/FRE and in to big investment funds, FNM/FRE were busy ballooning their mortgage holdings – again.

Now the Inspector General’s Federal Housing Finance Agency has issued a warning that both FNM/FRE are headed for another bailout, which is no surprise to me:

“Future profitability is far from assured,” Federal Housing Finance Agency Office of Inspector General said in a report, pointing out that the firms could again chalk up losses on their derivatives portfolios, similar to those they reported in the fourth quarter. “This increases the likelihood of additional Treasury investment,” the report stated.  Reuters (LINK)

Similar to when Fannie was plugged full of derivatives under former CEO Franklin Raines – who by the way had no clue how catastrophic the situation was and should be in jail but instead received a $100 million “you’re fired” severance agreement – the Government has once again looked the other way while Wall Street unloaded another avalanche of derivatives onto FNM/FRE.   Once again the Taxpayers will pay for this.

This is not a ‘warning” – this is a “get ready here it comes” statement.   The fact is that most of FNM/FRE’s “profitablity” has been driven by the same fraudulent “mark to model” accounting that has generated most the big bank profits since 2009.

fragile-by-design

And the Government used this fraudulent accounting to suck money out of FNM/FRE.   The “improved” balance sheet has enabled both FNM/FRE to issue debt to investors.  The money raised has been used reload their mortgage holdings and for dividend “payback” payments to the Treasury.

FNM’s CEO warned of the possibility of another bailout in February, after announcing FNM’s smallest dividend payment to the Treasury in more than four years.  This is not a warning – it’s an inevitability.  The housing market is set to re-collapse, which will blow-up both Fannie and Freddie – once again.