Washington & Wall Street: Janet Yellen Waves White Flag on Housing
Federal Reserve Board Chairman Janet Yellen has made it known that the United States Central Bank is fine with the idea that the U.S. housing market is contracting.
In a research note, analysts at Bank of America Merrill Lynch said that by "affirming the QE taper and seemingly doubling down on tightening by adding the 'six months' comment, the Fed seems to be saying that it is OK with the 15% decline in pending home sales and may well even be comfortable with further declines," Housing Wire reports.
The thrust of Yellen’s comments on housing suggests not only that the is Fed giving up on its previous target to reflate the housing sector by purchasing mortgage backed securities, but it seems to be an admission that the entire quantitative easing or “QE” effort was a failure. The reaction of the equity markets has been for investors to dump growth-oriented stocks and head for cover, Zero Hedge observes.
BAML analysts Justin Borst and Chris Flanagan say that they are "surprised" by the idea that the Fed is fine with the decline in sales: "This comes as a surprise to us and forces us to reconsider our investment views for securitized products.”
February new home sales were down at a seasonally adjusted annual rate of 440,000, according to the U.S. Census Bureau. This rate puts February 2014 3.3% below January 2014's rate of 455,000 and 1.1% below February 2013's 445,000. More importantly, applications for new mortgage loans tracked by the Mortgage Bankers Association continue to decline, suggesting that purchases of existing homes will be weak this summer.
Applications for U.S. home mortgages fell last week on lower refinancing demand, an industry group said on Wednesday. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, declined 1.2 percent in the week ending March 28. MBA's seasonally adjusted index of refinancing applications fell 2.9 percent, while the gauge of loan requests for home purchases, a leading indicator of home sales, rose 0.9 percent.
CoreLogic reports that home prices nationwide, including distressed sales, increased at a 12.2 percent annual rate in February 2014 compared to February 2013. This change represents 24 months of consecutive year-over-year increases in home prices nationally. On a month-over-month basis, home prices nationwide, including distressed sales, increased by 0.8 percent in February 2014 compared to 0.9 percent in January 2014, illustrating the fact that home price appreciation is decelerating nationally.
As we’ve discussed in Washington & Wall Street previously, U.S. home prices started to peak a year ago even as the Fed was buying tens of billions of dollars in mortgage bonds. Bond yields backed up for most of the second half of 2013, reaching a peak around three percent at the start of 2014. Keep in mind that mortgage rates rose two times the ten-year bond yield. With the Fed now committed to tapering bond purchases within the next six months, this suggests that bond yields are headed higher, bringing mortgage rates with it.
While a number of economists and housing market mavens believe that the increase in interest rates since last summer has put a damper on housing, the fact is that mortgage rates are still quite low. The real impediments to a further recovery in housing prices seem to be structural, namely a weak jobs market and flat consumer income. Major investment firms such as Blackstone Group are pulling back from buying single family homes for rental, which may be another factor contributing to a slowdown in home price appreciation. Almost half of home purchases in 2013 were all-cash investor deals.
Blackstone is slowing purchases of houses to rent amid soaring prices. The biggest U.S. single-family home landlord has cut its purchases 70 percent from its peak last year, when the private equity firm was spending more than $100 million a week on properties, said Jonathan Gray, global head of real estate for Blackstone.
After investing $8 billion since April 2012 to buy 43,000 homes in 14 cities, the company has narrowed most of its purchasing to Seattle, Atlanta, Miami, Orlando, and Tampa. “The institutional wave has passed,” Gray, who oversees almost $80 billion in property investments, told Bloomberg News. “It’s at a much lower level than it was 12 or 24 months ago.”
The Fed under Janet Yellen faces the prospect of flat or even declining home prices in the next several years as a combination of a flat economy, reduced institutional purchases, and excessive regulation of the mortgage lending business keep home price appreciation subdued. Hot markets in the most desirable parts of states like California and Florida will continue to rise, but much of the country will see home prices falling in 2014.
As one reader wrote to us last week: “Down here in Florida there is an unbelievable glut of abandoned properties and underperforming loans. Meanwhile, other properties are selling near bubble highs, some above asking--but in the last few months, this has slowed.” Somebody pass the word to Fed Chair Janet Yellen.