Fast-rising home prices brought 1.5 million borrowers up from underwater on their mortgages in 2015, but there are still twice as many drowning. In total, 3.2 million homeowners nationally still owe more on their mortgages than their homes are currently worth, according to a new count by Black Knight Financial Services.
That brings the average negative equity rate to 6.5 percent, a vast improvement from the worst of the housing crash, but still well above historical norms. More concerning is that negative equity is now concentrated at the bottom price tier of the market. More than 16 percent of borrowers in these homes are underwater, which means they are frozen in place, unable to sell without losing money; these are the homes the market needs most, in order for young renters to become homeowners...
As with everything in real estate, the underwater numbers vary depending on location. Nevada, where home prices are still 34 percent below their peak, wins the dubious distinction of having the largest share of underwater borrowers at 14 percent.
Looking beyond states, at the lowest end of local markets, the bottom 20 percent in terms of price, Memphis, Tennessee, Cleveland, Detroit and St. Louis show negative equity rates at more than 40 percent. Again, these borrowers cannot move without paying into their homes and are 10 times more likely to default on their home loans than those who have even a small amount of equity.
Ironically, the negative equity on the low end of the market is fueling overheated price growth across even the midtiers of the housing market. That is because it plays heavily into the severe lack of supply of homes for sale this spring. Underwater borrowers are less likely to move. On top of that, homebuilders are not focused on the low end, because they can't make enough money on cheaper homes to offset their rising costs for land and labor. The resulting short supply pushes prices higher for what is available on the low end
Sky-high apartment rents are finally beginning to crack.
Annual gains in the first quarter were still a relatively strong 4.1 percent nationally, but that is a significant drop from the 5 percent gains the market was seeing one year ago, according to Axiometrics. The first quarter rate was also 52 basis points lower than that reported in the fourth quarter of 2015. Rent growth has been 4 percent or higher for seven-straight quarters, but wage growth is nowhere near strong enough to meet the gains, leaving renters more cash-strapped than ever before. ...
Sacramento and Portland, Oregon, reported double-digit rent growth in the first quarter....
Occupancy remains high at 94.8 percent nationally in the first quarter, tied for the highest first quarter rate since the 95.7 percent at the start of 2001. It is about the same as one year ago, but down slightly from the fourth quarter of 2015.
Employment and wages are key indicators for the Fed
Aside from employment, the most important indicator of economic well-being is wages. Despite falling unemployment, one of the conundrums facing the current labor market is flat real or inflation-adjusted wages. Over the past decade, wages have more or less kept pace with inflation, but they haven’t increased
Before the financial crisis, much of the rise in consumption was due to asset price inflation, not wage inflation. Instead of getting big raises, people took out home equity lines of credit to fund consumption. This approach worked as long as housing prices kept rising
However, since the bubble burst, wages have had to fund consumption, and they’ve been more or less flat. In the above chart, you can see how the line changed with the Great Recession in early 2009. Investors are watching closely for the slope to increase.
Is wage growth finally breaking out?
Average hourly earnings rose $0.07 month-over-month in March 2016 and rose 2.3% year-over-year to $25.43. Average weekly hours fell 0.1 hours to 34.4. Given the rough patch in the global economy, the Fed might have an excuse not to hike rates in June. If wage inflation is returning, their hands will be tied.
On another practical level, once inflation starts again, you’ll also see a rise in long-term rates, which you can trade through the iShares 20-year Treasury Bond ETF (TLT).
Implications for homebuilders
Historically, real estate prices have correlated closely with wage growth. That relationship began to change in the late 1990s as wages grew at the inflation rate and real estate prices began posting double-digit gains. Recently, home prices have been rising again, but that’s due to low inventory.
If you use the median home price data from the National Association of Realtors, you’ll find that the ratio of median home price to median income is again approaching bubble-type highs. As the Fed removes accommodation, further home price appreciation will depend on wage growth.
Home price appreciation rates have deteriorated
Virtually all homebuilders’ average sales price growth rates have deteriorated. They’ve been content to keep a lean inventory and raise prices. That strategy seems to have been pushed as far as it can go.
...a falling dollar is good for US stocks because it lures foreign money into the market. And a jumpy dollar, like last year, causes foreign money to flee.
So what’s the outlook for stocks?
Um, despite taking some pretty good licks recently with its bet, Goldman remains a dollar bull. If the bet proves correct, it would send foreign money fleeing. And that’s bad for US stocks...
Chinese companies, supported by state-owned banks and PE firms, have pushed into global M&A on a large scale, including in the US, buying companies lock, stock, and barrel.
But at the same time they’ve been dumping US stocks and bonds.
They’re following the Chinese government, which unloaded $510 billion of foreign exchange reserves in 2015, including $292 billion in US Treasuries, the first ever annual net sell-down, after having religiously piled them up year after year. China still holds about $1.4 trillion in US government debt. So it has a lot left to sell.
That can no longer be said for Chinese holdings of US stocks. From 2008 through the first quarter of 2015, China bought $117 billion of US stocks, riding the big Fed-induced bull market to its peak. Q1 of 2015 was particularly strong, with $20 billion in share purchases.
But in Q2, Chinese investors dumped a net of $14 billion of US stocks; in Q3 $34 billion; and in Q4 they threw another $68 billion out the door, according to a note by Goldman Sachs, reported by MarketWatch. In total, they sold $116 billion in shares over the last three quarters of 2015!...
Other foreigners too lost confidence in US equities. And oil producers – budgets mauled by the oil price plunge – also unloaded US stocks:
Canadian investors dumped $80 billion in US stocks after having been loyal buyers for many years. They still have $102 billion left to sell.
The Middle East unloaded $39 billion in US stocks, after having already dumped $20 billion in 2014 and $22 billion in 2013. Their holdings are down to a measly $33 billion.
Europe sold $24 billion, and still has $556 billion left to sell. If Europe gets more nervous about US stocks, watch out!