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[michellemahzari]

Economic Update

The combined construction of new single-family homes and apartments in March rose 7% to a seasonally adjusted annual rate of 1,036,000 units. Single-family starts decreased 4.8%. Volatile multifamily starts rose 31.1%. Compared to the previous year, housing starts were up 46.7% in March. Applications for new building permits, seen as an indicator of future activity, fell 3.9% to an annual rate of 902,000 units.

The Mortgage Bankers Association said its seasonally adjusted composite index of mortgage applications for the week ending April 12 rose 4.8%. Refinancing applications increased 5%. Purchase volume rose 4%, the highest level since May 2010.

The National Association of Home Builders/Wells Fargo monthly housing market index fell two points in April to 42. An index reading below 50 indicates negative sentiment about the housing market.

Consumer prices fell 0.2% in March, following a 0.7% increase in February. Compared to March 2012, consumer prices have risen 1.5%. Consumer prices at the core rate — excluding volatile food and energy prices — were up 0.1% in March.

Industrial production at the nation's factories, mines and utilities rose 0.4% in March after a 1.1% increase in February. Compared to March 2012, industrial production has increased 1.9%. Capacity utilization rose to 78.5% in March from 78.3% in February.

Initial claims for unemployment benefits for the week ending April 13 rose by 4,000 to 352,000. Continuing claims for the week ending April 6 fell by 35,000 to 3.06 million. The less volatile four-week average of claims for unemployment benefits was 361,250.

Upcoming on the economic calendar are reports on existing home sales on April 22, new home sales on April 23 and gross domestic product on April 26.

via Prospect Mortgage

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[michellemahzari]

Thank Renters for Healthier Housing Market

Housing construction is soaring but much of it is still going to renters.  Builders are breaking ground on more new homes than in years but buyers are not keeping up.  For the past year, housing starts has increased by 37%.  However, home sales have only risen by 9% in the same period.  According to a report by Capital Economics, housing starts rose at the fastest pace since summer 2008 but at 954,000, there are much more builds than the 369,000 new homes sold in the same time period.  

This does not mean that builders are overbuilding like when the market boomed on easy credit.  Builders are building for renters, instead of buyers.  This shows the housing market may not necessarily call for more home sales, certainly nowhere near as many during the boom years.  

Shares for the biggest U.S. builders, Lenner Homes (LEN) and Toll Brothers (TOL) have soured in the last year but investors are more excited about renters than homeowners.  Construction of multi-family units designed for rentals rose 150% over two years ending in the third quarter of 2012.  This is much higher than the 50% rise of newly constructed multi-family homes for sale, and a 30% increase of single-family starts for sale.  

The tendency to rent compared to buy is obvious when considering the homeownership rate.  The homeownership rate has stayed flat as borrowers lost their homes to foreclosures and tighter lending standards.  During the final 3 months of 2012 the homeownership rate fell from 66.3% in the previous quarter to 66%, according to the U.S. Census Bureau's latest report.  This is considerably lower than when homeownership peaked during the housing market boom in June 2004 when the homeownership rate was 69.2%.  

Individual buyers have played a larger role in the housing recovery.  Mortgage applications for home purchases have risen in the last five months and interest rates have remained very low.  Furthermore, the rate of homeownership has risen from its post-peak low of 65.9% during the second quarter of 2012.  It is doubtful that homeownership will return to its peak anytime soon although this is not necessarily a bad thing given that easy credit is what helped dive the nation into financial disarray in the first place.  It is welcome and appreciated that renters are helping the market heal.

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[michellemahzari]

CMBS Delinquencies Down for 9th Straight Month

Fitch Ratings reported that U.S. CMBS delinquencies fell for the ninth straight month in February.  Two large loan modifications brought down the CMBS delinquency rate, falling 30 basis points (bps) to 7.61 percent, down from 7.91 percent in January.  The dollar balance of delinquent loans sank below the $30 billion mark for the first time since February 2010.  

Fitch reported that two high-profile loans are being modified and removed from the index.  These loans were the Babcock & Brown FX 3 portfolio at $195.1 million and the One Congress Street loan at $190 million.  Mary MachNeil, managing director at Fitch said, "With many loans over $100 million still in the index, steep month-over-month declines in CMBS delinquencies are likely to continue as larger loans get resolved."

Additionally, February was the month for the largest new CMBS issuances in over 5 years.  This also helped to bring down the delinquency rate.  Resolutions, reaching $2 billion, have outpaced the $1.1 billion new additions in February.  With the exception of industrial, all commercial sectors saw a month-over-month drop in delinquencies.  The multifamily delinquency rate fell to 59 bps to 9.14 percent, while the hotel delinquency rate decreased to 8.32 percent from 8.78 percent in January.  The office sector was down to 8.18 percent compared to 8.33 percent in January, and the retail sector declined 8 bps to 7.35 percent.  The industrial sector increased to 9.61 percent from 8.69 percent in January.

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[michellemahzari]

Commentary: Go With The Flow

BY: MARK LIEBERMAN, FIVE STAR INSTITUTE ECONOM

Perhaps the most important piece of economic news in the last few days was not the continued drop in the unemployment rate or the positive blurbs in the Beige Book or even the Dow reaching a new record high, but Thursday’s quarterly Flow of Funds report,, perhaps the most detailed breakdown of personal and business finances.

The funds report is zero-sum; that is, what is an asset for one sector is acknowledged and reported as a liability for another (or others)—income for one, an expense for another.

While a look back, the funds report also provides a look ahead to consumer spending, the most critical element of the economy.

According to the report for Q4 2012, household assets grew to $79.5 trillion in the fourth quarter, an increase of $1.3 trillion—not too shabby. Household financial assets were up $784 billion to $54.4 billion but home equity (the value of household real estate less loans against that real estate) grew $452.8 billion, the result of two moving parts: real estate values (which increased) and household mortgage liabilities, which dropped.

Once the dust settled, it meant owners’ equity in household real estate assets moved to 46.6 percent in the fourth quarter from 45.2 in the third and 40.5 in the fourth quarter of 2011. At the current level, net worth is the highest it’s been since Q1 2008.

While those numbers are good for mortgage lenders, they mean even more for the economy. Net worth—the difference between assets and liabilities —increased $1.1 trillion in the quarter. While it wasn’t record growth==net worth grew $1.4 trillion one quarter earlier—the composition of the growth is critical, dominated by the growth in the value, both actual and net, of real estate.

Consumers spend based not on income, but on wealth, with spending increasing about six cents per year in year two for every dollar increase in wealth in year one. The effect is refined further with a dollar increase in the value of real estate contributing four cents in spending growth compared with a two cent contribution from the increase in financial assets.

Based on the increase in net worth, we should look to an increase in consumer spending, which, according to the latest version of the gross domestic product report, is about 70.8 percent—if the stock market, a contributor to net worth, doesn’t get in the way.

Indeed, the new Dow Jones Industrial Average stock market record, while celebrated by market watchers, could be a downer for the economy. The stock market doesn’t always reflect the economy. Stock prices are based largely on anticipated future earnings adjusted for future assumptions about inflation. Investors look for a return on their investment and make their decisions to purchase a particular stock because of their estimate of future earnings.

Those estimates put board of directors and their employees (management) under severe pressure to achieve earnings targets, which are the net of revenue increases and/or spending reductions. If net earnings don’t grow appropriately to meet those investor expectations, corporate management will turn to their other option to increase profits: reducing expenses which usually means layoffs. Thus, in a very real sense, the strong gains in jobs reported for February could be temporary. While the boost in financial assets might be good for some investors, it might not be good for the economy as a whole.

An alternative argument—calculated for non-publicly held businesses by Sageworks.com —is revenue or profit per employee, which also governs staffing decisions whether business owners consciously realize it. Simply put, a business is not going to add (or perhaps even keep) and employee if that employee doesn’t generate enough revenue or profit to cover his or her salary.

Either methodology poses the same risk to sustainability of Friday’s employment report: If consumer spending doesn’t continuing to grow, employment will not either, and indeed could shrink.

http://www.dsnews.com/articles/commentary-go-with-flow-2013-03-10

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[michellemahzari]

Administration Reports Improvement

According to the Obama Administration's Housing Scorecard for February, the housing market showed sigs of progress but overall recovery is still fragile.  There is necessity to prevent avoidable foreclosures to protect the fragile housing market.  

The scorecard, jointly released by HUD and the Treasury, provides a comprehensive view of the housing market based on public and private sector data.  Kurt Usowski, the HUD deputy assistant secretary for economic affairs said, "House prices are steadily rising above the mid-crisis lows in markets throughout the country, while inventories of new and existing homes are further tightening, and even estimates of the 'shadow inventory' are down.  That said, we still remain considerably below long-term normal levels of home sales and production."

The Administration, through the Making Home Affordable (MHA) Program, has assisted in more than 1.5 million homeowner assistance actions including 1l1 million modifications through the Home Affordable Modification Program (HAMP).  Additionally, data through December showed HOPE Now lenders have offered 3.4 million propriety mortgage modifications.  On average, borrowers receiving HAMP mods saved $546 on their monthly mortgage payments.  The scorecard also revealed that 60 percent of homeowners with eligible non-GSE mortgages received principal reduction with their HAMP mods.

Homeowners avoided foreclosures through the Home Affordable Foreclosure Alternatives Program (HAFA), which has helped 114,000 homeowners avoid foreclosure and exit their homes through short sales or deed-in-lieu of foreclosures.  

The Making Home Affordable Program Performance Report was released in conjunction with the scorecard and assesses servicer performance.  The servicers assessed were Bank of America, CitiMortgage, GMAC, Homeward Residential, JPMorgan Chase, Ocwen, OneWest, Select Portfolio Servicing, and Wells Fargo.  Servicers were found to show continued overall improvement and two servicers were found to need only minor improvement on the areas reviewed and seven servicers were found to need moderate improvement.  The report revealed the nine major servicers are improving at evaluating homeowners for MHA program eligibility.  According to the report, the "second look disagree" category, which is the rate Treasury's program reviews disagree with a servicer's decision to find a homeowner ineligible for assistance, was below 2 percent in the fourth quarter.

Mortgage servicers continued to show accuracy when calculating homeowner income to determine program eligibility.  In the fourth quarter, the average income calculation error rate for the top servicers was below 2 percent, and three servicers had zero percent income calculation error rate.  Treasury's benchmark is for the error rate to be lower than 5 percent.  The only servicer with a high rate than the benchmark was Homeward Residential.  

Tim Massard, the Treasury assistant secretary for financial stability said, "The Administration continues to improve outcomes for homeowners seeking mortgage relief by setting new standards for customer service and holding mortgage companies publicly accountable.  As a result, struggling families today have stronger consumer protections and more sustainable options to avoid foreclosure."

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[michellemahzari]

Capital Economics Revises Home Price Forecast Upward

Existing home sale are back to "normal" levels and further gains are possible due to strong demand and tight inventory.  Market conditions may result in more relaxed lending conditions.  

Capital Economics has revised their previous forecast of a 5 percent gain this year and raised it to 8 percent.  Next year, they project a smaller gain at 4 percent.  Much of the renewed demand in the housing market is due to investment activity.  Although an uptick in sales between investors may indicate some investors are leaving the market, Capital Economics is confident that investor demand will remain strong overall.  

Capital Economics is suggesting unemployment and delinquencies will make lending conditions more favorable and allow mortgage-dependent buyers to reenter the market.  Existing home sales will rise to 5.1 million this year and new home sales to 0.5 million.  This is up from 4.7 million existing and 0.4 million new last year.  Both existing and new home sales are expected to rise even further next year.  

Mortgage rates have risen slightly but will not impede sales.  Rates my fall again throughout the rest of the year but affordability will remain high.  Capital Economics expects inventory will remain tight but not get tighter as the year progresses.  Currently there is a market supply of about 4.6 months which is the lowest recorded in the past seven years.  The type of inventory is in a transition mode due to fewer foreclosures taking place.  Capital Economics said, "[M]ore homes that, a few years ago, would have come onto the market as foreclosures are now coming onto the market as short sales."  Short sales are often at a smaller discount than foreclosures and even foreclosures themselves are selling with smaller discounts.  During the housing crisis, foreclosed homes sold for about 30 percent less than equivalent non-foreclosed homes.  Now the difference is about 12 percent.

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[michellemahzari]

Why are homeowners so reluctant to take part in government programs?

Borrowers, still with the mortgage crisis fresh in their mind, are passing up real deals and cash.  It's typically easy for mortgage brokers to give away money and refinancing activity has skyrocketed as interest rates plummeted. Homeowners who did not participate in the refi boom had their home prices tank and not enough equity to qualify for refinancing.  Now they are eligible for loan restructuring with a new government program.  Mortgage originators have discovered, however, that it is surprisingly difficult to persuade these people to take the great deals being offered.  

The first government program to assist homeowners after the housing bubble burst only helped homeowners who had stopped paying their mortgage.  Later, the Home Affordable Refinance Program (HARP), was introduced and designed specifically to help homeowners underwater and still paying their mortgage by giving them access to low rates.  HARP has been refined several times since it was introduced in 2010 and each version makes it easier for homeowners to qualify.  

Despite expectations about the popularity of the program, HARP is not used by many.  And only about 25% of homeowners who qualify for HARP end up refinancing.  HARP rewards good behavior and helps those who are paying their mortgage but in financial distress.  It attempts to even the playing field by giving more Americans access to low interest rates that big businesses and the wealthy receive.  HARP also benefits the economy because consumers spend much of the money they save on their mortgage payments.

So how can government and mortgage originators convince the public to take advantage of a program that can truly help those who need it?  Wounds from all the no-money-down loans and balloon payments are still fresh in the mind of homeowners bitten when the housing bubble burst.  Others are apprehensive of paying hundreds for appraisals in attempt to refinance only to find out their homes are valued at less than they owe on the mortgage.  It is going to be difficult to get homeowners to trust anytime soon, but if they do, they may find the help they desperately need.

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