The Macro Market Wrap Up With The Mad Genius, Vol. 27

Continuing with the review of my 2018 forecast I’ll be talking about housing today. Before I get started I want to remind my audience that a few weeks ago I mentioned some of the housing indicators, such as falling new housing starts, rising prices, rising inventories, falling mortgage applications, and other factors.  Today we’re looking at other factors which I mentioned in my 2018 forecast.

At the end of last year, 2017, the median price of a single family home was $324,900. 23.7% higher than the prior peak in 2007.  The Case-Schiller 20-city composite index was at 203.5, just 1.46% below the 2006 peak of 206.52. Case-Schiller was also showing very low default rates on home loans.  At the time I said the canary in the home loan coal mine was secondary mortgages, or equity loans and lines of credit. The sources I had used for secondary loans in delinquency in the past no longer publish their information, so I am still searching for reliable data on this.

I also said that the default rate on second mortgages had been steady in a range of 0.5%-0.75%, but that I was concerned that it had moved up to 1.08% in November 2017. As for primary home loans Experian tracks the default rate in a normal range of 0.65%-0.75%, and I said I would begin to become concerned as that rate moved up past 2% and towards 3%. The St Louis Fed also tracks it, but at a higher rate…currently at 3.01% and falling, with huge spikes coming at the onset of recessions. In January I said that if defaults on loans would move at a quickening pace, assertively, and significantly out of their normal range, all kinds of warning bells should go off. Nothing is happening yet on this front, however, according to the Fed data the normal range looks like 1.5%-2.0%, so for an economic expansion when the default rate still hasn’t come back down to a normal range, that is troubling. Worse yet, the mortgage bankers association has the default rate at 4.47% for the 3^rd quarter this year, an uptick from the 2^nd quarter, but down nearly half a percent from a year ago. Digging deeper into their report, nearly 9% of FHA loans are in default.

Currently the 20-city composite is 213.89, which is just off the record high of 213.91 in October.  No big deal, as nothing goes up in a straight line.  The 10-city is at 227.65 which is a record high. And the national index is at a record high of 206.03.  Second mortgage defaults peaked at 1.22% in December last year, and is now back in the normal range at 0.54%.

The national median home price, reported by the St Louis Fed, was $257,400 at the prior peak in 1Q07. The recent peak was $337,900 in 4Q17. It’s off from that high, now sitting at $325,200, but still 26.3% higher priced than 2007. And the National Association of realtors is reporting home prices at $257,700, up from a year ago at $247,200.  Sales are actually down by 7% from a year ago. 

The NAR cautions though, that higher interest rates and higher inventories will cause prices to come under pressure, and homes are staying on the market for longer durations. A buzzing economy with a growing population doesn’t have a fall in home sales, rising inventories, and warnings from the biggest housing cheerleaders in the country. On top of that, Freddie Mac has the average 30 year fixed mortgage coming in at 4.87%, nearly one full percentage point higher than a year ago. On that 30 year mortgage it translates into $200 extra per month if you put 20% down…just to borrow an extra $10,000.

To summarize housing, there are four points: 1) interest rates are rising which will put pressure on prices to move down, 2) prices are still rising, though I think they’ve peaked, but rising prices and rising interest rates make it less and less affordable to buy housing, 3) inventories are rising, which will also put pressure on prices, and 4) delinquencies are pretty low, but this measure of a coming recession is pretty murky. It lags, but the spike will likely come once we are recognized to be in recession.

A better measure of delinquencies signaling recession is probably going to be business loans of all different types. I spoke about a lot of different types of lending yesterday, but the delinquencies to focus on is commercial and industrial loans at all commercial banks, which is seeing a rising default rate, and add to that the delinquency rate on all loans and leases commercial and industrial for all commercial banks, and the charge off rate on commercial and industrial loans at all commercial banks.

That’s it for today, tomorrow I’ll get into stocks and bonds. Let me know what you think or ask your questions in the comments.  Thanks for reading Volume 27 of The Macro Market Wrap Up With The Mad Genius.  Until next time remember that there is always a bull market somewhere in the world, and on the opposite side of every crisis, lies opportunity.

#economics #lending #defaults #housing #recession #interestrates #yearinreview2018