The contours of a typical economic expansion and recession are strongly driven by loan performance. When times are good, lenders expand loan production to more marginal borrowers but when loan performance begins to deteriorate, lenders become more conservative, which often exacerbates an economic downturn. Therefore, an understanding of the credit cycle is important to understanding the economic cycle. While loan performance improved across various loan types throughout the first five years of the expansion, over the last year three of the four major types of loans began experiencing a deterioration in loan performance. The exception to the deterioration in credit performance was real estate, which continues to improve. However, a closer look reveals performance is deteriorating, albeit from pristine levels of performance. The most common methods of evaluating mortgage performance are delinquency or foreclosure rates. While they are fine to gauge credit trends, they are backward looking and a lagging performance indicator. There are several methods to address that shortcoming, such as transition rate analysis, which tracks early stage changes in performance and is forthcoming in our new Loan Performance Insights Report, or vintage analysis, which controls for time by typically focusing on only a year’s worth of loan production and allows for a much more nuanced view of performance. Analyzing the vintages for the performance of the first 10 months of each year allowed me to evaluate 2016 using the most recent data. While loan performance after only 10 months for any vintage may seem to be an early starting point to evaluate performance, historically after 6 to 9 months performance has very strong persistence and remains on a similar track years later. Since 2010 was the first full year of the expansion vintage and underwriting has remained roughly similar since then, it is a good starting point for the analysis in the post great recession world.
Analyzing the 2010 to 2016 vintages reveals three important trends. First, the 2016 vintage was the first year in which the serious delinquency rate after 10 months was worse than the prior year. Second, there is clear clustering for certain years when the economy was weak versus when it was healthy. For example, ten months into the year, the 2010 and 2011 vintages had a 0.32% serious delinquency rate compared with 0.21% average for 2012 through 2014. Performance in 2010-2011 was weaker because the economy was still recovering from the recession and home price growth was nascent. Third, the trough in performance was during 2015 when the serious delinquency rate 10 months into the year was only 0.13%, the lowest rate in the last two decades. The stellar 2015 performance reflects a combination of the highest economic growth since the Great Recession, a labor market approaching full employment and steady home price growth. During 2016, economic growth slowed by a substantial full percentage point and affordability cracks began to show, causing the serious delinquency rate for that vintage to worsen modestly to 0.17% at the 10-month mark. While performance for the 2016 vintage is still very good from relative to the last two decades, it is beginning to worsen. Historically, when the mortgage credit cycle begins to deteriorate it continues to do so until the economy bottoms and the credit cycle begins to improve again. While the deterioration in mortgage performance is very small and rising from very low levels, it is important to track because turning points are critical but difficult to identify in real time.
Oil recoups losses, but US oil output growth weighs
Crude oil recouped earlier losses on Monday in subdued trading, but signs that the United States is continuing to add output largely counteracted strong economic growth in China and OPEC-led efforts to cut production. Benchmark Brent crude futures were down 14 cents at $55.75 at 1350 GMT, after trading as much as 58 cents lower. US West Texas Intermediate crude futures were down 14 cents at $53.04 a barrel, after falling by as much as 55 cents earlier in the day. Both benchmarks rose last week for a third consecutive week, and were trading close to 12% above their 2017 lows. Speculators in the week to April 11 also increased their bets on bullish performance in both contracts. But in thin trading due to holidays across Europe, the focus was on indications that shale oil output in the United States was creeping higher. “All the signs of an ever-growing bull market are starting to fade away, (with) Libya and geo-political tensions easing, but also because the Texans are back and they are pumping like there’s no tomorrow,” said Matt Stanley, a fuel broker at Freight Investor Services (FIS) in Dubai. “If I were OPEC, I’d be pretty worried.” Although the failure of a ballistic missile launch in North Korea brought some respite, markets were braced for further tensions in the region. In Libya, fighting between rival factions has cut oil output, but state oil company NOC was able to reopen at least one field and was pushing to reopen another. US drillers last week added rigs for a 13th straight week, bringing it to its highest in roughly two years. Investors are also pouring money into the industry, suggesting US output gains will continue.
NAHB – builder confidence holds firm in April
Builder confidence in the market for newly-built single-family homes remained solid in April, falling three points to a level of 68 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) after an unusually high March reading. “Even with this month’s modest drop, builder confidence is on very firm ground, and builders are reporting strong interest among potential home buyers,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas. “The fact that the HMI measure of current sales conditions has been over 70 for five consecutive months shows that there is continued demand for new construction,” said NAHB Chief Economist Robert Dietz. “However, builders are facing several challenges, such as hefty regulatory costs and ongoing increases in building material prices.” Derived from a monthly survey that NAHB has been conducting for 30 years, the NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor. All three HMI components posted losses in April but remain at healthy levels. The components gauging current sales conditions fell three points to 74 while the index charting sales expectations in the next six months dropped three points to 75. Meanwhile, the component measuring buyer traffic edged one point down to 52. Looking at the three-month moving averages for regional HMI scores, the West and Midwest both rose one point to 77 and 68, respectively. The South held steady at 68, and the Northeast fell two points to 46.
Keep the change: Travelers left behind nearly $1 million in coins, currency in airports last year
In the rush to get through airport security checkpoints, it is not uncommon for distracted travelers to leave laptops, cellphones, jewelry and other valuable items in the plastic bins needed to scan their belongings. As it happens, they also leave behind lots of accumulated cash. For its fiscal year 2016, the Transportation Security Administration reported that passengers left behind more than $867, 812.39 in coins and currency in the plastic bowls and bins at various US airport checkpoints. That’s about $102,000 more than the amount left behind in 2015, and the more than $484,000 left behind in 2008. Over the years, the amount of change left behind by travelers at airports has been steadily climbing—jumping from about $489,000 in 2011 to almost $675,000 in 2014, and hitting $766,000 in 2015. “There is no real way for TSA to know why this happens,” spokeswoman Lisa Farbstein told CNBC. “It makes sense to point to an increase in the number of travelers as one likely reason, but other than that, we have no theories.” Last year, passengers at New York’s John F. Kennedy International Airport were the most forgetful (or generous, perhaps): Travelers there left behind $70,615 in unintentional ‘tips’ for TSA. Back in 2005, Congress passed a law saying TSA gets to keep that unclaimed cash, and spend it on any sort of civil aviation security efforts it deems fit. In at least two previous years’ reports, TSA stated that the unclaimed money collected from airports would be used to support the expansion of the TSA Precheck program, which gives travelers expedited screening privileges. Precheck allows fliers to keep shoes and lights jacks on, and their laptops and quart-sized bag of liquids and gels inside their carry-ons. When it filed its report on 2016’s unclaimed cash haul, TSA said it had not yet determined how it would spend those funds.
Builders bet tiny apartments will lure renters
A Pittsburgh developer is betting that more 20-somethings will pay more than $1,500 a month for the tiny studios in its new building, called Ollie at Baumhaus, even though space is so tight the beds double as couches. It is a big risk in a city where the average apartment rents for a modest $979 a month, compared with nearly $3,400 in the New York metropolitan area and more than $2,800 in San Francisco, according to data provider Reis Inc. The seven-story, 127-unit Ollie at Baumhaus building in Pittsburgh is set to open in June. A trend that started in pricey coastal cities as a response to rising rents is spreading to smaller cities that often have an abundance of relatively inexpensive housing options. In Milwaukee, Cleveland, Detroit, and Kansas City, Mo., developers are betting on demand from young people to live in tiny quarters even when cost isn’t the primary consideration. Micro apartments generally come fully furnished with amenities such as wireless internet and in some cases maid service, at a price similar to those of larger traditional apartments. The cramped units encourage people to use the common spaces more, creating a greater sense of community, developers say. The developers are gambling that such amenities will help set the units apart in a crowded marketplace, where a rush of new building is coming online despite ample supply of affordable older housing stock. “I think it will be an adjustment, for sure,” said Dan Mullen, president at Bedrock, the development arm of mortgage magnate Dan Gilbert’s family of companies. But the tall ceilings and windows help make it feel larger, he added. “When you get in one of these units, it feels very spacious.” Bedrock’s new micro-unit building is set to open this summer, with 218 furnished units averaging 260 square feet each.
Mr. Mullen points to perks such as free high-speed internet, a flat-screen TV and a rooftop terrace where tenants can watch movies. The units will rent for less than $1,000 a month—roughly in line with larger studios in other new buildings, which typically don’t include utilities and internet. The Pittsburgh building, which has 127 units in total and was developed by local firm Vitmore, will feature not just tiny apartments but also three-bedroom units designed to be shared by roommates—some of whom might never have met before. Christopher Bledsoe, co-founder and chief executive of Ollie, a real estate startup that is managing the project, said the building, which is set to open in June, will feature a community garden where renters can grow their own fruits and vegetables, an on-site manager who is a fitness instructor and bartender, and cooking classes from local chefs. “What would cause a 20-something graduate to leave Pittsburgh and come to New York City?” he said. “It’s the desire to not come home to an empty apartment.” The buzz around the mini units could help distinguish the building. Nearly 2,300 new apartment units were completed in Pittsburgh in 2016 and an additional roughly 1,800 are expected this year, according to MPF Research, a division of RealPage . That compares with the historical average dating back to 2000 of 1,000 units a year.
In Kansas City, a developer is installing queen-sized beds in case would-be residents want to get even cozier and share their 300-square-foot flats with a roommate. The units will rent for $700 to $800 a month—about in line with the average rent for apartments of all sizes, according to Reis. “Young people today seem to be able to group together,” said John Hoffman, a partner at UC-B Properties, which is developing the 50-unit building that is set to break ground in the coming months. Mr. Hoffman said he modeled the design of the units on a cruise ship cabin. The sink doubles for both the kitchen and the bathroom, the microwave doubles as an oven and the fridge can handle “a 6-pack of long neck beer and a 12-inch pizza,” he said, which is all he figures young people these days need.