by Calculated Risk on 5/09/2015 02:31:00 PM

From housing economist Tom Lawler: Analyzing/Projecting Household Formations: It’s Not Just “Demographics” (With a Special Focus on the 60’s and 70’s)

When talking about the outlook for housing, economists, analysts, and even home builders themselves often focus on “demographics.” Probably the most common discussion relates to recent trends in and future projections of the US population by age, with special emphasis on the age distribution of adults.

One of the simplest “models” used to analyze and project household growth is one that breaks out the actual and projected population by age buckets (or cohorts); looks at “recent” trends in “headship” rates, and then make what is often a “subjective” assumption of headship rates by age cohort based both on recent trends and historical “averages.”

There are, of course, several “challenges” related to this approach: first, of course, there are no timely reliable estimates of US households; rather, there are multiple and conflicting estimates based on different Census surveys. The only relatively reliable estimates come from the decennial Census, which is (1) seldom timely; and (2) provides analysts with only very infrequent “snapshots.”

The second challenge is that both headship and homeownership rates were decidedly unstable in the latter half of the last century, with many of the “swings” related not just to “economic” conditions but also to massive social and cultural changes.

Consider this simple example. Suppose that at the beginning of each decade one had perfect information on what the US population – both total and by age – would be a decade later, and suppose further that one assumed that “headship” rates (or the number of householders as a percent of the population) would be the same at the end of a decade as they were at the beginning of a decade for each age cohort. Here is what the resulting forecast for the increase in the number of households would have been compared to the “actual” increase in the number of households.

	Actual	Projected Assuming Previous Census Headship Rates	Difference
1960-1970	10,425,812	6,781,855	3,643,957
1970-1980	16,939,926	12,747,585	4,192,341
1980-1990	11,557,737	13,267,479	-1,709,742
1990-2000	13,532,691	14,292,026	-759,335
2000-2010	11,236,191	13,546,146	-2,309,955

As the table indicates, a “constant for a decade headship-rate” model for household growth produced household projections that were massively to low during the 60’s and 70’s, but were significantly too high over the subsequent 30 years.

As I hope most folks know, the 60’s and 70’s were a time of huge social and cultural upheaval and change, and I won’t discuss these. One result, however, was a massive surge in the number of people living alone – from 1960 to 1980 the number of people living alone increased to 18.2 million from 7.1 million. The 158% jump in the number on one-person households from 1960 to 1980 obviously vastly exceeded the 26.3% increase in the overall population, and the share of people living alone increased for each “adult” age group – with especially large increases in “young” adults living alone. This “explosion” in the number of people living alone reflected substantial declines in marriage rates, sizable increases in the divorce rate (from 1970 to 1980 the number of divorced people living alone double), and significant increases in the number of widows living alone. It did not, interestingly, reflect a decline in the number of young adults living at home. Rather, it reflected a surge in the number of young adults who left home to live alone.

Share of Population Living Alone by Age Group
Age	1980	1970	1960
15-64	7.4%	4.9%	3.9%
15-24	4.0%	1.7%
25-34	9.0%	3.8%
35-44	5.9%	3.3%
45-64	10.3%	9.3%
65+	27.7%	24.6%	17.5%

The surge in the number of people living alone, which was driven as much by and probably more so by social and cultural changes as opposed to “economic” changes, produced sized increases in “headship” rates (and big declines in average household sizes), and as a result household growth massively outpaced population growth in a fashion not readily explainable by “demographics.”

Given the surge in the number of people living along, especially among “younger adults,” from 1970 to 1980, one might have expected the overall US homeownership rate to have declined over this period (the homeownership rate for one-person households has traditionally been way below that for married-couple families). In fact, however, the overall homeownership rate increased, mainly reflecting sizable increases in the homeownership rates for married-couple families in all age groups.

Homeowership Rates
	1980	1970
Total	64.4%	62.9%
Married Couple Households	77.8%	70.7%
15-24	36.5%	26.0%
25-34	66.9%	56.9%
35-44	82.6%	76.7%
45-64	87.1%	80.8%
65+	83.0%	78.4%
Other 2+ Households	43.8%	49.5%
One-Person Households	43.5%	42.4%

During most of the 1970’s the “typical” home buyer purchased a home that was much more modest than was the case in subsequent decades, both in terms of size, price relative to income, and housing expense relative to income, as during most of the decade buyers typically purchased a home mainly as a place to live rather than as an investment. In addition, manufactured housing was a much more important source of “affordable” housing back then – in 1980 16% of owner-occupied housing units built between 1970 and 1980 were manufactured homes/trailers.

As inflation accelerated during the decade, however, an increasing number of buyers, looking for a “hedge” against inflation, began to focus more on housing as an investment as well. That trend, which was temporarily halted by the surge in interest rates and the exceptionally severe recession of the early 1980’s, accelerated in the latter half of the 1980’s for a variety of reasons, and continued to accelerate (with a brief recession-related respite in the early 90’s) through much of last decade.

But that discussion will be in a subsequent edition.

by Calculated Risk on 5/09/2015 10:01:00 AM

The key economic report this week is April Retail sales on Wednesday.

For manufacturing, the April Industrial Production and Capacity Utilization report, and the May NY Fed (Empire State) survey will be released this week. 

----- Monday, May 11th -----
At 10:00 AM ET: The Fed will release the monthly Labor Market Conditions Index (LMCI).

----- Tuesday, May 12th -----
9:00 AM: NFIB Small Business Optimism Index for April.

10:00 AM: Job Openings and Labor Turnover Survey for March from the BLS.

This graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Jobs openings increased in February to 5.133 million from 4.965 million in January. This was the highest level for job openings since January 2001.

The number of job openings (yellow) were up 23% year-over-year, and Quits were up 10% year-over-year.

11:00 AM: The New York Fed will release their Q1 2015 Household Debt and Credit Report

----- Wednesday, May 13th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:30 AM ET: Retail sales for April will be released.

This graph shows retail sales since 1992 through March 2015. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). On a monthly basis, retail sales increased 0.9% from February to March (seasonally adjusted), and sales were up 1.3% from March 2014.

The consensus is for retail sales to increase 0.2% in April, and to increase 0.5% ex-autos.

10:00 AM: Manufacturing and Trade: Inventories and Sales (business inventories) report for March.  The consensus is for a 0.2% increase in inventories.

----- Thursday, May 14th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to increase to 276 thousand from 265 thousand.

8:30 AM ET: The Producer Price Index for April from the BLS. The consensus is for a 0.2% increase in prices, and a 0.1% increase in core PPI.

----- Friday, May 15th -----
8:30 AM: NY Fed Empire State Manufacturing Survey for May. The consensus is for a reading of 5.0, up from -1.2 last month (above zero is expansion).

9:15 AM: The Fed will release Industrial Production and Capacity Utilization for April.

This graph shows industrial production since 1967.

The consensus is for no change in Industrial Production, and for Capacity Utilization to be unchanged at 78.4%.

10:00 AM: University of Michigan's Consumer sentiment index (preliminary for May). The consensus is for a reading of 95.8, down from 95.9 in April.

by Calculated Risk on 5/08/2015 06:35:00 PM

From the FDIC: Republic Bank of Chicago, Oak Brook, Illinois, Assumes All of the Deposits of Edgebrook Bank, Chicago, Illinois

As of March 31, 2015, Edgebrook Bank had approximately $90.0 million in total assets and $90.0 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $16.8 million. Compared to other alternatives, ... Edgebrook Bank is the fifth FDIC-insured institution in the nation to fail this year, and the second in Illinois. The last FDIC-insured institution closed in the state was Highland Community Bank, Chicago, on January 23, 2015.

This is the first bank closing since February, and it looks like failures might be in single digits this year (lowest since 2007 when 3 banks failed).  Last year 18 banks were closed by regulators.

by Calculated Risk on 5/08/2015 04:36:00 PM

Housing economist Tom Lawler sent me this updated table of builder results for Q1.

For these nine builders, net orders were up 20.3% year-over-year.  Although cancellations are handled differently, this is about the same year-over-year increase for Q1 as for New Home sales as reported by the Census Bureau.

The average closing price is only up slightly this year following a sharp increase in 2014.

From Tom Lawler:

Below is a table with some summary statistics for nine large publicly-traded home builders for the first calendar quarter of 2015. While results varied across builders, the general themes were significantly higher unit sales, but lower home building margins, relative to the comparable quarter of 2014.

Net orders per community for these combined nine builders combined were up 13.2% YOY, and their combined order backlog at the end of March was up 14.8% from last March.

	Net Orders			Settlements			Average Closing Price
Qtr. Ended:	3/15	3/14	% Chg	3/15	3/14	% Chg	3/15	3/14	% Chg
D.R. Horton	11,135	8,569	29.9%	8,243	6,194	33.1%	$281,305	271,230	3.7%
PulteGroup	5,139	4,863	5.7%	3,365	3,436	-2.1%	$323,000	317,000	1.9%
NVR	3,926	3,325	18.1%	2,534	2,211	14.6%	$371,000	361,400	2.7%
The Ryland Group	2,389	2,186	9.3%	1,463	1,470	-0.5%	$343,000	327,000	4.9%
Beazer Homes	1,698	1,390	22.2%	936	977	-4.2%	$305,800	272,400	12.3%
Standard Pacific	1,571	1,311	19.8%	972	995	-2.3%	$528,000	483,000	9.3%
Meritage Homes	1,979	1,525	29.8%	1,335	1,109	20.4%	$387,000	366,000	5.7%
MDC Holdings	1,593	1,236	28.9%	909	873	4.1%	$414,800	364,900	13.7%
M/I Homes	1,108	982	12.8%	717	732	-2.0%	$325,000	299,000	8.7%
Total	30,538	25,387	20.3%	20,474	17,997	13.8%	$330,848	$318,886	3.8%

by Calculated Risk on 5/08/2015 02:31:00 PM

Fannie and Freddie reported results this week. Here is some information on Real Estate Owned (REOs).

From Fannie Mae:

We continue to experience disproportionately higher credit losses and serious delinquency rates from single-family loans originated in 2005 through 2008 than from loans originated in other years. Single-family loans originated in 2005 through 2008 constituted 12% of our single-family book of business as of March 31, 2015 but constituted 59% of our seriously delinquent loans as of March 31, 2015 and drove 67% of our credit losses in the first quarter of 2015.
emphasis added

From Freddie Mac:

Our single-family REO acquisitions in the first quarter of 2015 were highest in Florida, Illinois, Ohio, and Michigan, which collectively represented 38% of total single-family REO acquisitions during that period, based on the number of properties, and comprised 38% of our total single-family REO property inventory at March 31, 2015.

Our REO acquisition activity is disproportionately high for certain types of loans, including loans with certain higher-risk characteristics. For example, the percentage of interest-only and Alt-A loans in our single-family credit guarantee portfolio, based on UPB, was approximately 2% and 3%, respectively, at March 31, 2015. The percentage of our REO acquisitions in the first quarter of 2015 that had been financed by either of these loan types represented approximately 20% of our total REO acquisitions, based on loan amount prior to acquisition. In addition, loans from our 2005-2008 Legacy single-family book comprised approximately 71% of our REO acquisition activity during the first quarter of 2015.

Fannie and Freddie are still working through the backlog of loans made during the housing bubble, mostly in judicial foreclosure states.

Click on graph for larger image.

Here is a graph of Fannie and Freddie Real Estate Owned (REO).

REO inventory decreased in Q1 for both Fannie and Freddie, and combined inventory is down 30% year-over-year.   For Freddie, this is the lowest level of REO since Q2 2008.  For Fannie, this is the lowest level since Q3 2009.

Short term delinquencies are at normal levels, but there are still a fairly large number of properties in the foreclosure process with long time lines in judicial foreclosure states.