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NAHB – apartment and condominium market bounces back to trend in second quarter

The Multifamily Production Index (MPI), released today by the National Association of Home Builders (NAHB), posted a gain of eight points to 56 in the second quarter. The MPI measures builder and developer sentiment about current conditions in the apartment and condominium market on a scale of 0 to 100. The index and all of its components are scaled so that a number above 50 indicates that more respondents report conditions are improving than report conditions are getting worse. The MPI provides a composite measure of three key elements of the multifamily housing market: construction of low-rent units, market-rate rental units and “for-sale” units, or condominiums. All three components increased in the second quarter: low-rent units and market-rate rental units rose five points to 53 and 60, respectively, while for-sale units climbed 14 points to 57. This is the highest the for-sale index has been since 2005. The Multifamily Vacancy Index (MVI), which measures the multifamily housing industry’s perception of vacancies, fell three points to 38, with lower numbers indicating fewer vacancies. After peaking at 70 in the second quarter of 2009, the MVI improved consistently through 2010 and has been fairly stable since 2011. “Multifamily developers continue to see strong demand in many parts of the country,” said Steven E. Lawson, president of The Lawson Companies in Virginia Beach, Va., and vice chairman of NAHB’s Multifamily Council. “However, developers need to be careful to manage costs as prices of land, labor and some materials continue to rise.” “A return to a positive trend in the MPI is consistent with positive builder sentiment in other segments of the housing industry,” said NAHB Chief Economist Robert Dietz. “Multifamily demand remains solid even as apartment construction comes off cycle highs as the multifamily market seeks a balance between supply and demand.”

US core capital goods orders rise, shipments surge

New orders for key US-made capital goods rose slightly more than expected in July and shipments surged, pointing to an acceleration in business spending early in the third quarter. The Commerce Department said on Friday non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, increased 0.4% last month after being unchanged in June. Economists polled by Reuters had forecast these so-called core capital goods orders rising 0.3% last month. They were up 3.3% from a year ago. Shipments of core capital goods jumped 1.0% after an upwardly revised 0.6% increase in June. Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement. They were previously reported to have gained 0.1% in June. Businesses are boosting spending despite uncertainty over the prospect of tax cuts. President Donald Trump and his fellow Republicans in Congress have said they want to lower both corporate and individual taxes as part of a comprehensive tax restructuring, but few details have emerged. With lawmakers soon to be preoccupied with legislation to raise the country’s debt ceiling and keep the government funded beyond September, it is unclear how quickly the tax changes will be put on the legislative agenda.

MBA – delinquencies and foreclosures continue to decline in Q2 2017

The delinquency rate for mortgage loans on one-to-four-unit residential properties decreased to a seasonally adjusted rate of 4.24% of all loans outstanding at the end of the second quarter of 2017.  The delinquency rate was down 47 basis points from the previous quarter, and was 42 basis points lower than one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The percentage of loans on which foreclosure actions were started during the second quarter was 0.26%, a decrease of four basis points from the previous quarter, and six basis points lower than one year ago. The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure.  The percentage of loans in the foreclosure process at the end of the second quarter was 1.29%, down 10 basis points from the previous quarter and 35 basis points lower than one year ago. The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 2.49% in the second quarter, down 27 basis points from the previous quarter and 62 basis points lower than one year ago. Mortgage delinquencies decreased in the second quarter of 2017 across all loan types – conventional, FHA and VA – on a seasonally-adjusted basis.  The conventional delinquency rate dropped to 3.47% from 4.04% in the first quarter, reaching its lowest level since 2005.  The FHA delinquency rate decreased to 7.94% from 8.09% in the first quarter, reaching its lowest level since 1996.  The VA delinquency rate dropped to 3.72% from 3.90% in the first quarter, reaching its lowest level since 1979.

Marina Walsh, MBA’s Vice President of Industry Analysis, offered the following commentary on the survey results: “In the second quarter of 2017, the overall delinquency rate was at its lowest level since the second quarter of 2000.  The foreclosure inventory rate was at its lowest level since the first quarter of 2007. In addition, the seriously delinquent rate, which combines loans that are 90 days or more past due with those loans in the process of foreclosure, dropped to a ten-year low. “The employment outlook continues to support loan performance.  Monthly job growth topped 200,000 jobs in June for the fourth time in the first six months of the year. Job growth in the month of July also topped 200,000.  Possible factors that could influence a directional change include rising loan-to-value and debt-to-income ratios for certain product types, as affordability is stretched by tight inventory and rising home prices, and normal loan aging.”

Trump to start push for tax reform in speech

US President Donald Trump will next week embark on a major push to reform tax policy, The Financial Times reported Friday Opens a New Window. , citing an interview with Gary Cohn, Trump’s chief economic advisor. “He will start being on the road making major addresses justifying the reasoning for tax reform and why we need it in the US,” Cohn was quoted as telling the newspaper. The president will begin a series of tax-focused speeches on Wednesday in Missouri.

MarketWatch – how this housing crisis hangover will shape the market into the next decade

On Thursday, data from Black Knight Financial Services showed the number of homes in foreclosure fell below 400,000 for the first time since February 2007. The foreclosure inventory has dropped by 28% in the last 12 months alone. That’s indisputably good news. It means fewer homeowners are presumably facing hardship and already-distressed situations are getting resolved. But that good news comes with a few caveats that underscore the lingering effects of a housing crisis so deep and enduring that it cost millions of Americans their homes. First, the robust market in home flipping—where mostly investment-focused buyers scoop up cheap properties, remodel quickly and resell—that sprang up after the crisis may be drying up. At the end of last year, Attom Data released a report showing that the number of house flips was on the decline as steeper home prices compressed margins on their investments. Flippers aren’t just bottom-feeders trying to turn a quick profit on other people’s broken dreams. As Attom Vice President Daren Blomquist told MarketWatch at the time, flippers have been performing a vital function in the housing market: providing newly renovated homes at a time when builders aren’t constructing as many new ones. What’s more, while the number of homes in foreclosure now is a fraction of what it was at the market’s darkest hour, it’s still not back to pre-bubble levels. In a June report, Black Knight wrote that it thinks the foreclosure backlog might not get back to normal levels until mid-2021. That will be due to what the data provider calls “excess aged” foreclosures in states like New York, which rely on a lengthy and protracted court process to settle foreclosures.

CoreLogic – is the adjustable-rate mortgage making a come back?

During the past decade, homebuyers have mostly preferred fixed-rate mortgages (FRMs) over adjustable-rate mortgages (ARMs). Proof of this is the precipitous drop in the ARM share of the dollar volume of originations from almost 45% during mid-2005 to a low of 2% in mid-2009. Since then, the ARM share has fluctuated between about 5 and 13%, generally rising when FRM rates increase and falling when FRM rates decline. As of Q1 2017, the ARM share accounted for 8% of all conventional residential mortgage originations, up 2 percentage points from Q4 2016. If FRM rates increase in the coming year, the ARM share will likely increase. ARMs are more common among homebuyers borrowing large-balance mortgage loans than for those with smaller loans. Among mortgages of more than $1 million originated during Q1 2017, ARMs comprised 47%, up 4 percentage points from Q4 2016. Among mortgages in the $400,001-$1 million range, the ARM share was about 13%, up 3 percentage points from Q4 2016. However, among mortgages in the $200,001-$400,000 range, the ARM share was just 4% for Q1 2017, up 2 percentage points from the previous quarter. Historically, borrowers have favored ARMs when they were income-constrained or because they preferred the lower interest rate relative to FRMs, especially when the spread between a FRM rate and an ARM initial interest rate is wide. Unfortunately, ARMs received a bad reputation since those originated during the pre-crash period were more likely to default than FRMs. Underwriting standards were relaxed during the boom period as numerous risky products were available. These included the option ARM, which allowed the borrower to choose between several monthly payment options (including a negative amortization option) and the interest-only ARM, which allowed the borrower to pay only the interest, with no principal, during an initial period. Many automated loan approvals did not require full documentation, and some lenders didn’t always verify the borrower’s ability to repay.

The ARMs today are very different than the pre-crash ARMs. About 60% of ARMs originated during 2007 were low- and no-doc compared with only 40% for FRMs. Similarly, 29% of borrowers with ARMs during 2005 had a credit score below 640 compared with only 13% for FRMs. Today, almost all conventional loans, including both ARMs and FRMs, are full doc, amortizing, and made to borrowers with credit scores above 640. Based on the four variables of underwriting: credit score, loan-to-value ratio (LTV), debt-to-income ratio (DTI) and share of low- and no-doc, conventional ARMs today are better in terms of credit risk quality than are conventional FRMs, signaling a shift from the historical trend of FRMs having higher quality. As of Q1 2017, the average credit score of borrowers with ARMs was 765 compared with 753 for borrowers with FRMs. Similarly, the average LTV for borrowers with ARMs was 67% compared with 74% for borrowers with FRMs. The average DTI for borrowers with ARMs is also slightly lower compared with the DTI for borrowers with FRMs. Overall, these charts illustrate that ARMs today have much lower credit risk than ARMs of a decade earlier, and in addition, have lower risk attributes than today’s FRMs.

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