by Calculated Risk on 12/08/2005 12:16:00 PM

The FED Flow of Funds report was released today. It shows that household mortgage debt increased at a 14% annual rate in Q3, 2005.

On a dollar basis, household mortgage debt increased by an all time record $289.5 Billion in the 3rd quarter. The last 7 quarters (billions increase in household mortgages):

q1 2004: $190.4
q2 2004: $211.1
q3 2004: $277.1
q4 2004: $223.5
q1 2005: $176.5
q2 2005: $263.7
q3 2005: $289.5

The debt story continues.

by Calculated Risk on 12/07/2005 12:03:00 PM

Following the negative predictions from Dr. Leamer and the Anderson forecast, the MBA reports that mortgage applications rebounded and are still near record territory (seasonally adjusted).

UPDATE: Long term MBA graph courtesy of ILD:


Click HERE for larger image.

The Mortgage Bankers Association (MBA) reports: Mortgage Application Volume Rebounds

The Market Composite Index — a measure of mortgage loan application volume was 656.7 -- an increase of 5.2 percent on a seasonally adjusted basis from 624.1, one week earlier. On an unadjusted basis, the Index increased 46.8 percent compared with the previous week [Thanksgiving holiday] but was down 6.1 percent compared with the same week one year earlier.

The seasonally-adjusted Purchase Index increased by 4.0 percent to 495.1 from 476.2 the previous week whereas the Refinance Index increased by 7.0 percent to 1596.4 from 1484.3 one week earlier.

Click on graph for larger image.

The graph shows overall and purchase activity since June. Overall activity has fallen significantly due to the drop in refis. Purchase activity is steady.

Mortgage rates increased last week:

The average contract interest rate for 30-year fixed-rate mortgages increased to 6.32 percent from 6.20 percent on week earlier...

The average contract interest rate for 15-year fixed-rate mortgages increased to 5.84 percent from 5.72 percent...

Overall this report shows purchase activity is steady at a very high level.

by Calculated Risk on 12/07/2005 11:52:00 AM

From the AP: Housing Slowdown May Claim 800,000 Jobs

A sustained decline will hit the U.S. housing market next year, costing the nation as many as 800,000 jobs, according to a new economic report released Wednesday.

The slowdown is likely to last several years, with as many as 500,000 construction jobs and 300,000 financial sector positions lost, the quarterly Anderson Forecast predicted.

"We expect housing to start slowing the economy this quarter or the next," said Edward Leamer, director of the study done at the University of California, Los Angeles.

"Some jobs in manufacturing might well disappear as a result of weakness in housing, but this may be offset by jobs brought home or not lost to foreign competition," he wrote.

The forecast said eight of the last 10 economic recessions were started by housing market slowdowns. Though the coming cooldown will cause a drag on the nation's economy, it will fall short of triggering a recession, the forecast said.

The report cited several signs that the decline could be under way:

• New construction of housing in October was down 5.6 percent from the previous month, with new construction of single-family housing accounting for a 3.7 percent dip.

• New home sales have declined.

• Applications for home mortgages have trended downward since late September as rates increased.

• In some regions, homes are remaining unsold longer and the pace of housing construction is outpacing population growth, which could spell a decline in demand.

"On all these grounds, we believe housing is due for a sustained decline," economist Michael Bazdarich wrote in the forecast. "The remaining questions are how hard the fall will be and when it will begin."

by Calculated Risk on 12/06/2005 11:46:00 AM

Bloomberg reports: Housing Bubble Bursts in U.S. Mortgage Bond Market

Bonds backed by home loans to the riskiest borrowers, the fastest growing part of the $7.6 trillion mortgage market, have lost about 2.5 percent since September on concern an 18-month rise in interest rates may force more than 150,000 consumers to default.

``We've been hearing about risks of a house price bubble, easy credit and loans to borrowers that really don't qualify, and now in the last couple of months we're starting to see things turn for the worse,'' said Joseph Auth, a bond fund manager who helps oversee $135 billion at Standish Mellon Asset Management in Boston. ``We don't know if it's going to be a hard or soft landing.''
...
The slump in the bonds is one of the first signs the housing boom is ending after the Federal Reserve's 12 interest- rate increases. Real estate has accounted for about half the economy's growth since 2001, according to Merrill Lynch & Co.
...
About 13.4 percent of all mortgages at the end of June were to borrowers considered most likely to default, such as those with high credit card balances, up from 2.4 percent in 1998, according to the Mortgage Bankers Association. The Washington- based trade group's 2,700 members represent 70 percent of the home-loan business.

The amount of bonds backed by these high-risk loans has more than doubled since 2001, to a record $476 billion, according to the Bond Market Association, a New York-based trade group of more than 200 securities firms.

The market ``will deteriorate as housing slows down,'' said Christopher Flanagan, who runs asset-backed debt research at New York-based JPMorgan Chase & Co., the fourth-largest mortgage lender in the U.S. The amount of loans made next year may fall by as much as 25 percent, he said.
...
The last time delinquency rates on lower-rated mortgages jumped was in 2000 as economic growth slumped following the Fed's six rate increases. The central bank has lifted rates 12 times since June 2004, to 4 percent from 1 percent.
...
Delinquencies tend to peak two to three years after subprime loans are originated, said Glenn Costello, an analyst at Fitch Ratings in New York. Peak rates of about 20 percent to 25 percent now will likely rise to the high-20s in 2006, he said.
...
Lenders that rushed to provide mortgages amid rising home prices are now stuck with loans worth less than they expected because bond investors are demanding more protection. They are raising mortgage rates help to make up the difference.
...
``In a rapidly changing environment, you can find yourself ahead or behind the yield curve,'' Robert Cole, chief executive officer of New Century, the No. 2 lender to people with the lowest credit scores, said in a Nov. 15 interview in New York. ``With rates going up, it's more likely behind.''

This is really no surprise. Many marginal buyers used excessive leverage (a type of speculation) to purchase a home. They were hoping that continued home price appreciation would bail them out, if their personal financial situation did not improve.

Even if home prices just flatten out, many of these marginal buyers will be in trouble. And the mortgage bond market is reflecting that fear.

by Calculated Risk on 12/05/2005 05:32:00 PM

The Sentinel & Enterprise reports: Foreclosure rates on the rise

David Anderson has seen his share of families facing trouble with late bills and expensive mortgages, as a counselor for people about to lose their homes.

But lately Anderson, who works for a Gardner-based Residential Assistance Transitional Housing, got a surprise -- a big jump in foreclosures in the area.

"It used to be that people in foreclosures find themselves in a catastrophic situation, something medical or a losing a job," Anderson said. "But it seems to be now I get a lot of desperate calls from first-time homeowners who have done a 20-80 mortgage or a zero interest mortgage, what some would call predatory lending."

Homeowners across the state are losing their homes at a growing rate, forcing lawmakers to face a hard reality on Beacon Hill -- the state's economy is far from a healthy recovery.

I think this is key: people are getting in trouble, not because of a personal emergency, but because they are simply over their heads in debt.

The number of foreclosures in Massachusetts has increased by more than 33 percent in the past year.
...
Economists who spoke to the Sentinel & Enterprise expect the trend to continue as long as the state's economy, particularly job growth, remains sluggish.

"There has been a confluence of events: very slow job growth and higher interest rates, have all conspired to have this one particular result of (more) foreclosures," Nakosteen said.

Bob Forrant, a professor in the regional economic and social development department at UMass Lowell, said foreclosures are on the rise because high real estate prices and loose mortgage requirements clashed with a lack of well-paying jobs in the state.

"The state is not generating enough well-paying work ... and people have been buying more house than they can afford," he said.
...
William Wheaton, an economist and professor at the Massachusetts Institute of Technology in Cambridge, said the spike in foreclosures is "not an economy thing."

"The economy is improving, not very dramatically, but we are on a recovery," Wheaton said.

Wheaton blames the national lending explosion, where more people than ever before had been able to qualify for a mortgage.

"It used to be that you had to have good credit to get a mortgage, but now no matter who you are, you can get a mortgage," he said. "You get a huge number of young people able to buy homes, but they are at a very high risk (of defaulting on loans) ... so the foreclosure rates there will be very high. It won't be getting any better for awhile."

Wheaton also said tougher federal bankruptcy laws, which went into effect in October, will make it harder for people to escape major debt and leave people stranded with high payments and possibly lose their homes.

by Calculated Risk on 12/05/2005 12:26:00 AM

My Angry Bear post builds on my previous demographic posts: The Best of Times. The post includes an enhanced animation of the demographic changes from 1900 to 2050 (based on Census Bureau projections).

Recommended:

Dr. Duy's Fed Watch: Looking for a Reason to Worry ...

And excerpts from Paul Krugman's: Joyless Economy

"It should have been a good year for American families: the economy grew 4.2 percent ... Yet most families actually lost economic ground. Real median household income ... fell for the fifth year in a row. And one key source of economic insecurity got worse, as the number of Americans without health insurance continued to rise. ..."

I believe this story of a bifurcating US economy is important. In the roaring 20's many families were struggling because of increased productivity on farms (due to the farm tractor). This shows up in the demographic numbers - the start of the Baby Bust was before the start of the Depression.

The improved farm productivity (a good thing) contributed to a period of depressed wages for a large segment of America (a bad thing) and was a factor in the Great Depression. It really is important that a rising tide floats a vast majority of boats. That didn't happen in the 20's and its not happening now.

Best to all.

by Calculated Risk on 12/04/2005 09:27:00 PM

Barrons opines on housing (pay):

... the accompanying chart ...[with] that single line rising toward the heavens depicts the share of household real-estate assets as a percentage of gross domestic product. It's a graphic (in every sense of the word) description of the fantastic rise of the housing bubble. ... As David warns, "Caveat emptor whenever anything approaches 150% of GDP."

There are ... any number of reasons to be wary. Among them: Affordability is at a 14-year low; the sales of new and existing homes are leveling off or worse, even as prices continue to rise; inventories of unsold homes are more than ample; mortgage applications are running some 20% below the summer's high; and even a few -- make that a very few -- home builders insist that business is as good as it gets, but could get better.

Moreover, the regulators are growing restless, as they inevitably do when denial can no longer serve as adequate policy to cope with a speculative frenzy that's reaching fever pitch. ... the Comptroller of the Currency, the Fed, the FDIC and their kin who oversee the thrifts and the credit unions are busily drawing up drafts of rules they plan to issue before year-end to seriously tighten standards on risky loans.

Not surprisingly, those risky loans ... are those that cheerfully don't require the consumer to pay down principal; for their part, the originators of such loans ... haven't the foggiest real notion as to whether said consumer can afford the house he's buying. Since these exceedingly risky loans are ... "ubiquitous" a crackdown on them could ... "have a significant impact on the housing market, bank-lending activity and the broader economy, beginning in the first half of next year."

What has made the regulators more than a little antsy is that many of the folks taking interest-only or so-called option adjustable-rate mortgages (ARMs in the popular parlance) are due for brutal "payment shock" when the loans reset, as a heap of them are slated to do over the next several years. Resetting, in this instance, means that the suddenly-not-so-happy home owner, besides higher interest rates, will have to start paying down the principal, a double whammy that could raise his monthly mortgage payments by 50%, even 100%.

Since the bulk of option ARMs and interest-only loans are also "stated income" loans, in which the bank cheerfully accepts as income whatever the borrower says it is and no documentation is required, the shock -- and the consequences -- are sure to be that much greater for the borrower. In the circumstances, lenders might begin to feel a bit queasy as well.

Such risky (to put it mildly) loans, ISI reports, may account for nearly half of all the loans made in the past 18 months...

by Calculated Risk on 12/03/2005 01:20:00 AM

US Population distribution by age, every decade 1920 - 2000, plus 2005.

NOTE: Thanks to InsultComicDog for hosting this animation. Please see previous post for individual graphs.

by Calculated Risk on 12/02/2005 08:33:00 PM

The following graphs shows the US population distribution by age since 1920.
All data from the Census Bureau.

This is nothing new, but its interesting when considering the debates on Social Security, medical care, budget deficits or when considering investments that are related to demographics (like 2nd homes).

Click on graphs for larger image.

1920 The graphs for 1900 and 1910 have a similar shape as 1920. With the medical advances of the 20th Century, we would expect the shape of the distribution to become flatter as fewer people die of illnesses in the prime of their lives. Otherwise this represents the expected population distribution.

1930 Although 1930 has the general shape of the previous decades, the first evidence of the Baby Bust is apparent. Although 1929 is usually considered the start of the Depression, there was a large segment of America that was struggling economically several years earlier. This shows up in the drop in births.


1940 The Depression era Baby Bust is evident in the 1940 census data. With tough economic times, it is no surprise that many families postponed having children.


1950 Here comes the Baby Boom. The Boom actually started during World War II and really picked up after the war.

The Baby Bust is very clear on the graph.


1960 The Baby Boom probably peaked in the mid-1950s.

The 1960 graph clearly shows both the Baby Bust of the '30s and the Baby Boom that followed.


1970 The Baby Boom is over and a mini-bust has started.


1980 By 1980, the Boomers are mostly in the workforce. Social Security is close to running a deficit and Alan Greenspan heads a commission to fix the program. The Greenspan commission recommends several changes, including having the Baby Boomers prepay their Social Security.


1990 By 1990, the Baby Bust is close to retirement. The Boomers are entering their peak earning years.

This combination of fewer retirees in the '90s (Baby Bust) and Boomers entering their peak earnings years is a positive for running huge Social Security surpluses and working towards balancing the Federal Budget.


2000 By 2000 it is hard to distinguish the Baby Bust, but the Baby Boom is very clear. New entries into the population have been relatively steady for years. Even with the lower impact from the Baby Bust, medical costs are still straining the budget - and with the Boomers nearing retirement age, this is clearly a major issue for the US.


2005 And here is an interim population estimate from the Census Bureau. The distribution is starting to flatten out due to advances in medical care. The largest increases in the distribution have been in the older age groups (compare 2005 to 1920).

I will refer to these graphs in future posts. All comments are welcome.

by Calculated Risk on 12/02/2005 01:24:00 PM

Fiscal 2006 is off to a poor start as the increase in the National Debt set a record for the first two months of the fiscal year. The National Debt increased $159.6 Billion to $8.092 Trillion as of Nov 30, 2005.


Click on graph for larger image.

The previous record through November was in 2004 (fiscal 2005) with an increase in the National Debt of $146.2 Billion.

Each month I will plot the YTD increase in the National Debt and compare it to the proceeding years. I expect fiscal 2006 to set a new record for the annual increase in the National Debt.