Tuesday, September 18, 2012

Year of the Recovery: August Home Sales Boom

1.  Wisconsin home sales increased 20.3% in August, median sales price by 2.9%.

2. Kalamazoo MI housing market shows highest sales volume since 2007, August home sales were up 14%, average sales price by 7.5%.

3. Louisville area home sales up 26% in August over last year, median sales price by 3.7%.

4. Chicago-area home sales increased 26.5% in August above last year, and were the highest August sales total since 2007.  

47 Comments:

At 9/18/2012 6:35 PM, Blogger Craig Howard said...

Hey. Mortgage rates are low.

But -- never forget -- a booming housing market is the result of a thriving economy. Not the cause.

 
At 9/18/2012 7:25 PM, Blogger Unknown said...

Yeah, GO KALAMAZOO!

 
At 9/19/2012 8:16 AM, Blogger Unknown said...

"For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of it's own which has to be liquidated in turn, thus threatening business with another crisis ahead."
Joseph Schumpeter

 
At 9/19/2012 9:02 AM, Blogger Moe said...

Found this tidbit this a.m. from Yves Smith regarding QE and housing:

"...Remember, in a balance sheet recession, businesses and individuals focus on shoring up their financial condition rather than exploiting opportunities (save maybe an iPhone splurge). So all the past norms on how housing price increases translate into a particular level of additional consumer spending are likely to be very much dimmed down. If your formerly $300,000 house, which went down to $230,000, is supposedly up to $245,000, are you really going to go out and spend more? You’ve still taken a hit on your net worth and are in catch-up mode."

 
At 9/19/2012 9:30 AM, Blogger morganovich said...

trulia showing very different numbers for kalamazoo:

"The median sales price for homes in Kalamazoo MI for Jun 12 to Aug 12 was $100,743 based on 256 home sales. Compared to the same period one year ago, the median home sales price increased 0.7%, or $743, and the number of home sales decreased 55.2%. There are currently 1,205 resale and new homes in Kalamazoo on Trulia, including 29 open houses, as well as 79 homes in the pre-foreclosure, auction, or bank-owned stages of the foreclosure process. The average listing price for homes for sale in Kalamazoo MI was $158,283 for the week ending Sep 12, which represents a decrease of 0.3%, or $432, compared to the prior week. Popular neighborhoods in Kalamazoo include Westwood and Edison, with average listing prices of $144,126 and $45,816."

http://www.trulia.com/real_estate/Kalamazoo-Michigan/

not sure what the disconnect is.

 
At 9/19/2012 9:30 AM, Blogger morganovich said...

This comment has been removed by the author.

 
At 9/19/2012 9:31 AM, Blogger morganovich said...

This comment has been removed by the author.

 
At 9/19/2012 9:54 AM, Blogger Jon Murphy said...

Realtor.org released their August Existing Homes Sold number this morning.

Nationally, about 4.8 million homes were sold (seasonally-adjusted annual rate). That's a gain of 9.3% from August 2011 and the highest total since May 2010. Additionally, it was a gain of 7.8% from July, making this the 4th strongest July-to-August rise on record (dates start in 1976).

Thought y'all would like to know.

 
At 9/19/2012 10:10 AM, Blogger bart said...


Zillow’s August Real Estate Market Reports, released today, show that home values decreased 0.1 percent to $152,100 from July to August (Figure 1). This is the first monthly decline after nine consecutive months of appreciation. This year has seen a turnaround in the housing market with sustained appreciation that, at times, has been very strong.

As we enter the back half of this year, we expect home values to see more volatility with a saw tooth pattern setting in characterized by months of home value declines interspersed with months of appreciation. Overall, the positive trend will hold as evidenced by home values being up by 1.7 percent (Figure 2) in August 2012 on a year-over-year basis.

Rents continued to rise in August, appreciating by 0.2 percent from July to August. On an annual basis, rents across the nation are up by 5.9 percent (Figure 3), indicating that demand, fueled by elevated foreclosure levels, is still outpacing investor-driven increases in rental supply.



Much of the recent exuberance over the “housing recovery” is likely to grow quiet.

 
At 9/19/2012 10:37 AM, Blogger Jon Murphy said...

Bart-

The first three paragraphs; are you quoting the Zillow report? I've just never heard you use the word "we" before.

 
At 9/19/2012 10:46 AM, Blogger bart said...

Yes Jon, the first three paragraphs are from today's Zillow report - sorry, should have quoted it.

I picked it up from PragCap.

 
At 9/19/2012 10:48 AM, Blogger Jon Murphy said...

Cool, thanks. I was just wondering if it was Zillow or your guys.

 
At 9/19/2012 10:58 AM, Blogger bart said...

"Mortgage Applications decrease, Mortgage Rates decline to Survey Lows


From the MBA: Mortgage Rates Drop to New Survey Lows

The Refinance Index increased 1 percent from the previous week. The HARP 2.0 share of refinance applications was 22 percent this past week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.72 percent, the lowest rate in the history of the survey, from 3.75 percent, with points increasing to 0.45 from 0.44 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The effective rate decreased from last week."

http://www.calculatedriskblog.com/2012/09/mba-mortgage-applications-decrease.html



Mortgage applications, per the MBA abd the CR chart, have been flat all the way back to mid 2010 or so.

 
At 9/19/2012 11:02 AM, Blogger bart said...

Jon Murphy said...
Cool, thanks. I was just wondering if it was Zillow or your guys.


You're welcome.

No clue on what you mean by "your guys" though. I work pretty much alone.

 
At 9/19/2012 11:03 AM, Blogger Jon Murphy said...

No clue on what you mean by "your guys" though. I work pretty much alone.

That's what had me confused.

 
At 9/19/2012 12:11 PM, Blogger Tamerlane said...

When people by homes in the Chicago area at today's 30-year fixed rates aren't the banks taking an enormous risk? How can interest rates stay this low over a 30-year period?

 
At 9/19/2012 12:33 PM, Blogger Methinks said...

Tamerlane,

The short answer is "no". Interest rate risk is easily and regularly hedged.

The interest rate risk in a fixed rate loan can be hedged with a fixed/floating swap. Banks can also sell Treasurys or Eurodollar Futures to hedge their exposure. Those three methods are probably the most common ways to hedge the interest rate risk you describe.

 
At 9/19/2012 12:52 PM, Blogger bart said...

About $504 trillion of the approx. $647 trillion of total world derivatives, per the Bank of International Settlements, are based on interest rates.

They're by far and away the huge majority of interest rate hedges. Anything else is relative chicken feed.

 
At 9/19/2012 1:21 PM, Blogger morganovich said...

This comment has been removed by the author.

 
At 9/19/2012 1:26 PM, Blogger morganovich said...

When people by homes in the Chicago area at today's 30-year fixed rates aren't the banks taking an enormous risk? How can interest rates stay this low over a 30-year period? "

there is actually even an easier hedge for banks: sell it a week later to freddy or fannie.

that is most of what is currently going on.

freddy, fannie, and the fha are about 90% of the mortgage market right now and currently hold or guarantee about 50% of the entire us residential mortgage market.

theoretically, the treasury can sell 30 year bonds and lock in a rate, but with the 30 year at about 3%, it's difficult to see how there could be much profit in it after servicing costs and paying a premium to get the loans in the first place even if defaults were zero.

i also have real doubts that the treasury is selling enough 30's to offset this.

but any meaningful default rate would lead to big losses.

even with zero premium, you are only locking in about 50bp return.

3% default turns that into a loser.

 
At 9/19/2012 1:30 PM, Blogger Methinks said...

You should clarify your comment a bit for folks who are interested - it's 648T notional of OTC derivatives at the end of 2011. That figure doesn't include exchange traded derivatives. The overwhelming majority of OTC derivatives are fixed income derivatives because the worldwide fixed income market dwarfs the worldwide equity market.

Since interest rate risk is the most commonly hedged fixed income risk, it's not surprising that 504T or 78% of all OTC derivatives are interest rate derivatives.

 
At 9/19/2012 1:37 PM, Blogger bart said...

Methinks said...

You should clarify your comment a bit for folks who are interested


If anyone would have asked after I corrected your statement, I would have.

And it's $647.7622 trillion notional total, and $27.2848 trillion net.

 
At 9/19/2012 1:37 PM, Blogger Methinks said...

You're right, Morganovich, but Freddie and Fannie hedge their interest rate risk as well.

Also, Morganovich, the banks aren't selling a lot of 30's. They're predominantly active in the 10's because it's uncommon to hold mortgages beyond 7-10 years and you want to duration match your hedge.

Of course, hedging interest rates is only hedging one fixed income risk. You're still exposed to several other risks including prepayment (negative gamma because they sold the option to the borrower) and default.

 
At 9/19/2012 1:41 PM, Blogger Methinks said...

bart, your attempts at relevance are already exhausting and your understanding of finance and especially derivatives is close to zero. Do try to be an adult when somebody digs really deep and graciously attempts to make your comment relevant.

 
At 9/19/2012 1:45 PM, Blogger morganovich said...

methinks-

of course, we might ask "to whom are freddy and fannie shorting these bonds"?

if the answer is "the fed", well, then we're just taking risk out of one packet and putting it in another.

even if they use derivatives, there's still going to be delta hedging of the underlying and someone needs to buy the shorted debt.

i'm more than a little worried that this hedging is nothing of the sort from the perspective of the taxpayer.

 
At 9/19/2012 1:54 PM, Blogger morganovich said...

methinks-

one sort of wildcard here is that while average mortgage duration is about 7 years historically, there may be strong reasons to suspect that this class of loans will be longer.

one of the big issues in mortgage duration is refi.

with rates this low and not likely to go much lower, this cohort of mortgages would seem less likely than average to get refi'd. i have no idea how much that adds to duration, but it might wind up being significant and result in bad modeling of hedges.

i have no idea if this will wind up making a material difference, but if i were running a mortgage portfolio (and mercifully, i am not) i'd sure be looking at that.

 
At 9/19/2012 1:54 PM, Blogger bart said...

No. I'm suggesting that I and hopefully others learn from you and Methinks on the subject of economics, but I learn nothing from mudslinging, in which I have a masters degree, as well as graduate studies in prickly.

I have a PhD+++, as in Piled Higher and Deeper... and I'd have to kill you if I told you what the +++ means.



It doesn't actually matter whether I condone them or not, as it's not my blog, and as you must have noticed I often insult people myself. I'm only suggesting that trading insults is a low value activity compared to discussions of economics and ideology.

I think it matters a great deal about condoning things like encouraging someone else to commit suicide (sign of the times and the decline of a culture), but fair enough.

I don't trade insults anyhow - I always win... and do note that I haven't started anything with She Whose Name Shall Not Be Mentioned (or anyone) else for quite a while. I wait until she proves her ID 10 T+ nature, and then expose it for all to see and be sad or amused about - frequently in sarcasm mode.

And as you may have noticed on this thread especially, all I've actually done is point out the continuing attack spew, and the lack of any socially redeeming value.




Not at all. I'm only suggestion that it may be a waste of time. I can't afford to be upset by anonymous writers on the internet. Also it's my observation that you are upset by your exchanges with Methinks, while she seems to enjoy them.

Sometimes it is a waste of time, but it is my time to use however I like... and it can be quite a hoot to permanently shoot folk like her down in flames, like I've done virtually 100% of the time since way back in the late '80s on BBSs.

She's quite an amateur when compared to others, who were real honest-to-goodness psychos and murder freaks.




One thing I can say about me apparently seeming to be upset is that it's all part of "the plan", although I do believe that someone who has to stoop to things like encouraging others to commit suicide, even in jest, has way deeper and very real problems.

 
At 9/19/2012 1:54 PM, Blogger Methinks said...

of course, we might ask "to whom are freddy and fannie shorting these bonds"?

if the answer is "the fed", well, then we're just taking risk out of one packet and putting it in another.


I was trying to explain to Tamarlane that interest rate risk is hedgeable and would be hedgeable without Fan or Fred.

But, of course, you're completely right. The Fed is buying mortgages outright - and the Fed ain't hedging because the whole point is to drive interest rates down. You can't buy with one hand, sell with the other and accomplish that.

In today's f'ed up (hey'e there's a pun, I think!) market, we're on the hook for interest rate moves. The taxpayers are the unwilling counterparty to any mortgage's in the Fed's book.

And people wonder why we're generally pessimistic about this country.....


 
At 9/19/2012 1:59 PM, Blogger bart said...

Methinks said...

bart, your attempts at relevance are already exhausting


I see you're close to giving up and admitting that you're substantially inferior to me... but sooner than I expected.

You really should thank me for the correction on derivatives, but graciousness is something I expect to train you more better on.

 
At 9/19/2012 2:03 PM, Blogger bart said...

morganovich said...

one of the big issues in mortgage duration is refi.

with rates this low and not likely to go much lower, this cohort of mortgages would seem less likely than average to get refi'd. i have no idea how much that adds to duration, but it might wind up being significant and result in bad modeling of hedges.


Very much so. The MBA Refi Index has been flat since mid 2010.

Hedgies get Wedgies the majority of the time...

 
At 9/19/2012 2:03 PM, Blogger morganovich said...

methinks-

well, at least we have a fed chair with a proven track record in housing:

""I agree with most of the commentary that the strong fundamentals support a relatively soft landing in housing," Bernanke told his follow FOMC members at his first meeting as chairman in March."

of course, it's a track record of being spectacularly wrong, but hey, why would that stop him form making trillion dollar bets?


 
At 9/19/2012 2:03 PM, Blogger Methinks said...

one sort of wildcard here is that while average mortgage duration is about 7 years historically, there may be strong reasons to suspect that this class of loans will be longer.

one of the big issues in mortgage duration is refi.


You might be right, I have no opinion on that because my interest is on the derivatives side, not the the lending itself.

But, supposing that's true, people move more frequently than every 30 years and if the duration of the mortgages increases, they'll move to 20's or some combo. Usually, they just try to find the most liquid market - whether it's swaps, Eurodollars or Treasuries or some other correlated asset - because a more liquid market is going to provide them with the lowest hedge price.

It's unlikely that the lenders (ultimate lenders, that is) are going to really suffer from that duration move because duration isn't going to move sharply. As they notice that mortgages are being held longer, they'll adjust the duration of their hedges.

 
At 9/19/2012 2:04 PM, Blogger morganovich said...

"
Hedgies get Wedgies the majority of the time..."

i know a large number of arb funds that would beg to differ.

 
At 9/19/2012 2:06 PM, Blogger Methinks said...

LOL, Morganovich (2:03 pm post)!

Although, this is no laughing matter!

 
At 9/19/2012 2:15 PM, Blogger morganovich said...

methinks-

they can adjust their hedges, but the question is "at what cost"?

5 years from now, rates are likely to be quite a bit higher. that's a principal hit and the possibility of being upside down on the next hedge.

it's not difficult to imagine the 5 year being well over 3.5% again especially if we get a new fed chair and or keep losing debt rating and running big deficits.

resetting hedges at such a time to up duration could get expensive.

 
At 9/19/2012 2:23 PM, Blogger Methinks said...

they can adjust their hedges, but the question is "at what cost"?

Yeeaah...that's the thing about negative gamma. You're only ever hedged for that moment.

On the plus side, while a negative gamma position exposes you to all moves, the sudden moves are going to be more costly and mortgage holding periods aren't likely to rise sharply without anyone noticing (although, if you've ever worked for a big bank, you may have your doubts about how alert they are). It'll cost, but if I give the banks some benefit of the doubt that they aren't completely asleep, it shouldn't be that painful.

Fingers crossed, eh?

But, who cares? The Fed is going to destroy us all anyway.

 
At 9/19/2012 2:23 PM, Blogger bart said...

morganovich said...

i know a large number of arb funds that would beg to differ.


A few are successful of course and do outperform their benchmarks, even after their cut, but give it a few more years as "surprises" start to eat them.

Every hedgie that I know (except two) are disastrously arrogant.

 
At 9/19/2012 2:30 PM, Blogger Methinks said...

"..aren't likely to rise sharply without anyone noticing..."

By which I mean that duration is, in part, a function of time. If people are holding their mortgages longer than 7 years, the lender is going to notice the duration of their book is getting longer and since time creeps, they aren't going to wake up to a book whose duration has shifted from 7 years to 15 years overnight.

(Morganovich, between the greeks and fixed income jargon, we need to start clarifying since this ain't a finance blog.)

 
At 9/19/2012 3:28 PM, Blogger Methinks said...

Also, apologies to Mark Perry for grammatical errors assorted typos. There are random apostrophes and all sorts in some of my comments. I swear those were just typos. I do know the difference between singular and possessive and when it's appropriate to use its.

 
At 9/19/2012 3:45 PM, Blogger morganovich said...

bart-

am i one of the 2?

i know literally hundreds of hedge fund PM's, analysts, traders etc.

some are arrogant to be sure, but most are not. i think that's a common stereotype, but arrogant guys tend not to make it.

you need to be arrogant enough to look at a market and say "i know more than you, this is mispriced" but not so arrogant that you cannot see when you have made a mistake and get out or so hubristic that you lever up to a point where being wrong can wipe you out.

it's like the "goldilocks zone" in a solar system.

cool enough for water to be liquid, not so cold it's all ice.





 
At 9/19/2012 4:17 PM, Blogger bart said...

morganovich said...

bart-

am i one of the 2?

i know literally hundreds of hedge fund PM's, analysts, traders etc.

some are arrogant to be sure, but most are not. i think that's a common stereotype, but arrogant guys tend not to make it.



Sorry - make it 3. The truly arrogant wouldn't even think of asking.... but the non arrogant can fake arrogance when needed or wanted. -g-

I only know a few dozen, so the sample may be too small or perhaps its just "luck" of the draw. You could meet and think they're not arrogant too.

Basically and as a whole I'm just plain unimpressed with hedge folk as *people*. Quants are a different story entirely - I expect most real ones to be a bit awkward at best, but I enjoy their company more.


you need to be arrogant enough to look at a market and say "i know more than you, this is mispriced" but not so arrogant that you cannot see when you have made a mistake and get out or so hubristic that you lever up to a point where being wrong can wipe you out.

As a Valley girl I used to know said, fer shure fer shure.

 
At 9/19/2012 5:39 PM, Blogger juandos said...

Home sales boom, eh?

Interesting in light of this WaPo story: Census: Middle class shrinks to an all-time low

Published: September 12

 
At 9/19/2012 7:51 PM, Blogger Ron H. said...

"Also, apologies to Mark Perry for grammatical errors assorted typos. There are random apostrophes and all sorts in some of my comments. I swear those were just typos. I do know the difference between singular and possessive and when it's appropriate to use its."

Too late. You can't smooth talk yout way out of it now. You are on Dr. Mark's naughty list, and your errors will appear in his next Grammar Rant. :)

 
At 9/19/2012 8:08 PM, Blogger Methinks said...

I throw myself on the mercy of the host, Ron H.!!

 
At 9/20/2012 9:43 AM, Blogger morganovich said...

bart-

a think a fair bit of your experience may be selection bias.

most of the hedgies i know are pretty nose down guys who just do their work and don't talk about it much with folks not in the industry. the best ones question themselves all the time.

i also try (and hopefully succeed) to know mostly successful ones with whom sharing info and working on projects together makes sense.

if one is not in the industry, i could certainly see how the guys you met would largely be the loudmouth crowd. it's always like that. they seem to be the face everyone likes to focus on, but they are not really representative. those guys mostly wash out.

much of the HF group are pretty good guys in my experience. they just tend to keep to themselves.

i actually think the quants are a far more hubristic group that than the fundamentals guys.

they cook up rocket science models, believe in them and their own brilliance far too much, and wind up dying in a fiery ball of leverage as they get run over by something fairly common that their models mistook for a black swan.

 
At 9/20/2012 10:06 AM, Blogger bart said...

morganovich said...

a think a fair bit of your experience may be selection bias.


I defer to your experience and observation, which are definitely broader than mine. The ones I've met or know definitely are more in the sales end.

I have gotten a kick out of the few quants I've met, they remind me of '60s wackoes but without the psychedleic overtones.

 
At 9/20/2012 11:19 AM, Blogger Methinks said...

i actually think the quants are a far more hubristic group that than the fundamentals guys.

I know the exception to that rule and he's quite the exception, but the quants we work with are....let's just say you have to watch them like a hawk because they have a lot more faith in their math than they ought to.

they cook up rocket science models, believe in them and their own brilliance far too much, and wind up dying in a fiery ball of leverage as they get run over by something fairly common that their models mistook for a black swan.

This is absolutely spot on. A lot of them have physics degrees and finance is not physics.

 

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