by Calculated Risk on 4/11/2014 09:42:00 PM

CR Note: Historically the IRS has considered debt forgiveness (like short sales) as taxable income. In 2007, Congress passed a measure to exempt most forgiven mortgage debt from being considered taxable income (this helped increase short sale activity). This measure expired on Dec 31, 2013. However, according to a letter from the IRS:

"[I]f a property owner cannot be held personally liable for the difference between the loan balance and the sales price, we would consider the obligation as a nonrecourse obligation. In this situation, the owner would not treat the cancelled debt as income."

So in states that passed anti-deficiency provisions (like California), this means many loans will be considered nonrecourse by the IRS (and forgiven debt will not be taxed).

However, in many other states, forgiven debt will be taxed.  There is little opposition to extending the debt relief act, and extending it would probably be helpful - especially in judicial foreclosure states (like New Jersey) where housing is still struggling to recover.

Note2: I looked for an update today after reading Dina ElBoghdady's article at the WaPo: Distressed homeowners seeking mortgage relief could get stuck with a big tax bill

This was written in February from Laurie Goodman and Ellen Seidman at the Urban Institute: The Mortgage Forgiveness Debt Relief Act Has Expired—Renewal Could Benefit Millions

Under the federal tax code, when a lender forgives part or all of a mortgage, the borrower must count that forgiveness as taxable income. Congress wisely recognized that this tax rule would discourage the forgiveness of debt as a tool to reduce foreclosures and add insult to injury for borrowers already struggling to pay their bills, many of whom had just lost their home. So in 2007, it passed the Mortgage Debt Forgiveness Act (the Act), which excludes this forgiveness from taxable income.

On December 31, 2013, the Mortgage Forgiveness Debt Relief Act expired.1 Unless Congress extends it, housing debt that has been forgiven or written off after 2013—through short sales, foreclosures, or loan modifications that include principal forgiveness—will generally be treated as taxable income. A bill that would extend the Act for two years has been introduced by Representative Bill Foster (D-IL), and many analysts predict that the Act will eventually be renewed. In the meantime, however, uncertainty over its renewal has made it increasingly difficult for lenders and borrowers alike to take actions that will be beneficial to both parties. We calculate this uncertainty will affect up to 2 million borrowers who are seriously delinquent or in foreclosure, many of whom will lose their homes, and as many as 1.4 million more who could potentially benefit from loan modifications that include principal reductions.

The case for rapid resolution is made more poignant by the fact that failure to do so contradicts other public policy initiatives. Last July, the U.S. Department of the Treasury extended the Home Affordable Modification Program (HAMP) for two years, until year-end 2015. HAMP loan modifications may include principal reduction, a technique that has proven especially effective in keeping homeowners in their homes. With the expiration of the Act, borrowers receiving principal reductions risk being taxed on the forgiven debt, sharply reducing the utility of the modification. Just as important, the large settlements between government regulators, lenders, and servicers are increasingly including commitments by institutions to provide significant sums of debt forgiveness. In the 2012 settlement between the State Attorneys General, the Department of Justice, and the nation’s five largest lenders, $10 billion of the $25 billion settlement was set aside for principal forgiveness. The actions under this settlement have been substantially completed but it has set the template for others to follow. In November 2013, JPMorgan Chase reached a $13 billion settlement with regulators over soured mortgage securities sold prior to the 2008 crisis; $4 billion of the settlement was set aside for consumer relief, which will take various forms, including principal reduction loan modifications. In December 2013, Ocwen reached a $2.2 billion settlement, with $2 billion to be used for principal reduction modifications. We can expect to see a series of additional settlements in the coming year, with much of the restitution in the form of principal reduction.

The timing of the expiration of the Mortgage Forgiveness Debt Relief Act is thus particularly unfortunate because it undermines the effectiveness of an increasingly utilized tool to reduce foreclosures. In this paper we describe the implications of the Act’s expiration and call for its rapid reenactment.

by Calculated Risk on 4/11/2014 03:30:00 PM

From Nick Timiraos at the WSJ: Fewer Foreclosures Could Mean Fewer Homes for Sale

In a report Friday, her firm Zelman & Associates said it now expected a 5% drop in sales of previously owned homes for 2014 to a seasonally adjusted annual level of 4.8 million units. At the start of the year, the firm had forecast nearly a 6% gain from last year, to 5.4 million from last year’s 5.1 million units.
...
Ms. Zelman isn’t changing her forecasts for new home sales, which are forecast to hit 505,000 units this year, up 17% from last year. ... recent data, including a proprietary survey her firm also released Friday, point to a pick-up in new-home orders since last fall ...

This is a reminder that a decline in existing home sales isn't "bad news" for the overall economy, and  what matters most for jobs and the economy are new home sales.   This updated Zelman forecast fits with my view of a decline in existing home sales this year, but a solid increase in new home sales.

by Calculated Risk on 4/11/2014 12:08:00 PM

In addition to Case-Shiller, CoreLogic, I'm also watching the FNC, Zillow and several other house price indexes.

FNC released their February index data today. FNC reported that their Residential Price Index™ (RPI) indicates that U.S. residential property values increased 0.5% from January to February (Composite 100 index, not seasonally adjusted). The other RPIs (10-MSA, 20-MSA, 30-MSA) increased between 0.7% and 0.8% in February. These indexes are not seasonally adjusted (NSA), and are for non-distressed home sales (excluding foreclosure auction sales, REO sales, and short sales).

Since these indexes are NSA, this is a strong month-to-month increase.

The year-over-year change continued to increase in February, with the 100-MSA composite up 9.0% compared to February 2013.  In January, the year-over-year increase was 8.9%.  The index is still down 22.8% from the peak in 2006.

Click on graph for larger image.

This graph shows the year-over-year change based on the FNC index (four composites) through February 2014. The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals.

There is still no clear evidence of a slowdown in price increases yet.

The February Case-Shiller index will be released on Tuesday, April 29th.

by Calculated Risk on 4/11/2014 09:55:00 AM

Click on graph for larger image.

The preliminary Reuters / University of Michigan consumer sentiment index for April was at 82.6, up from 80.0 in March.

This was above the consensus forecast of 81.0. Sentiment has generally been improving following the recession - with plenty of ups and downs - and a big spike down when Congress threatened to "not pay the bills" in 2011, and another smaller spike down last October and November due to the government shutdown.

I expect to see sentiment at post-recession highs very soon.

by Calculated Risk on 4/10/2014 08:56:00 PM

For amusement: Years ago, whenever there was a market sell-off, my friend Tak Hallus (Stephen Robinett) would shout at his TV tuned to CNBC "Bring out the bears!".

This was because CNBC would usually bring on the bears whenever there was a sell-off, and bulls whenever the market rallied.

Today was no exception with Marc Faber on CNBC:

"This year, for sure—maybe from a higher diving board—the S&P will drop 20 percent," Faber said, adding: "I think, rather, 30 percent"

And Faber from August 8, 2013:

Faber expect to see stocks end the year "maybe 20 percent [lower], maybe more!"

And from October 24, 2012:

"I believe globally we are faced with slowing economies and disappointing corporate profits, and I will not be surprised to see the Dow Jones, the S&P, the major indices, down from the recent highs by say, 20 percent," Faber said...

Since the market is up 30% since his 2012 prediction, shouldn't he be expecting a 50% decline now?

Friday:
• At 8:30 AM ET, the Producer Price Index for March from the BLS. The consensus is for a 0.1% increase in prices.

• At 9:55 AM, the Reuter's/University of Michigan's Consumer sentiment index (preliminary for April). The consensus is for a reading of 81.0, up from 80.0 in March.

by Calculated Risk on 4/10/2014 06:29:00 PM

First an error ...

From the NY Times: Tax Revenue Soars, Decreasing Deficit, U.S. says

Over all, the deficit is expected to equal 4.1 percent of gross domestic product in 2014, down from nearly 10 percent in 2009, during the depths of the recession.

Actually in February the CBO projected the deficit to be 3.0% of GDP in fiscal 2014 (4.1% was for fiscal 2013). Next week the CBO will update their projections, and I expect the deficit projection for 2014 to be revised down again.

NY Times:

The deficits in the next few years are expected to stay at 2 to 3 percent of gross domestic product, before widening sharply again toward the end of the decade.

It depends on what "widening sharply" means, but the CBO is projecting 3.4% in 2019 and 3.7% in 2020.

And this is a key point:

“It is the fastest four-year reduction in deficits since the demobilization after World War II,” [said Ernie Tedeschi, head of fiscal analysis at ISI], “but it has come in the middle of an economy that is not yet healed from the worst recession since the Great Depression.”

The economy would probably be better off (more employment, faster GDP growth) if the deficit hadn't been reduced so quickly.

by Calculated Risk on 4/10/2014 04:25:00 PM

This is a follow-up to a previous post: A Closer Look at Post-2007 Labor Force Participation Trends

From Melinda Pitts, John Robertson, and Ellyn Terry at Marcoblog: Reasons for the Decline in Prime-Age Labor Force Participation. They focus on prime working-age population (25 to 54 years old).  They discuss a number of topics with several graphs. Here is their conclusion:

The health of the labor market clearly affects the decision of prime-age individuals to enroll in school or training, apply for disability insurance, or stay home and take care of family. Discouragement over job prospects rose during the Great Recession, causing many unemployed people to drop out of the labor force. The rise in the number of prime-age marginally attached workers reflects this trend and can account for some of the decline in participation between 2007 and 2009.

But most of the postrecession rise in prime-age nonparticipation is from the people who say they don't currently want a job. How much does that increase reflect trends established well before the recession, and how much can be attributed to the recession and slow recovery? It's hard to say with much certainty. For example, participation by prime-age men has been on a secular decline for decades, but the pace accelerated after 2007—see here for more discussion.

Undoubtedly, some people will reenter the labor market as it strengthens further, especially those who left to undertake additional training. But for others, the prospect of not finding a satisfactory job will cause them to continue to stay out of the labor market. The increased incidence of disability reported among prime-age individuals suggests permanent detachment from the labor market and will put continued downward pressure on participation if the trend continues. The Bureau of Labor Statistics projects that the prime-age participation rate will stabilize around its 2013 level. Given all the contradictory factors in play, we think this projection should have a pretty wide confidence interval around it.

CR note: I think this is an important graph ...

Click on graph for larger image.

This graph shows the population distribution of the 25 to 54 age group over time. In 2013, the largest group is the tail end of the "boomers" - and this is a key reason why disability has increased in the prime working-age population.    This also probably explains the slight pickup in retirement for prime-age workers.

A very interesting post.

by Calculated Risk on 4/10/2014 12:26:00 PM

From Freddie Mac today: Fixed Mortgage Rates Tick Down

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates moving down slightly as we head into the spring homebuying season. ...

30-year fixed-rate mortgage (FRM) averaged 4.34 percent with an average 0.7 point for the week ending April 10, 2014, down from last week when it averaged 4.41 percent. A year ago at this time, the 30-year FRM averaged 3.43 percent.

15-year FRM this week averaged 3.38 percent with an average 0.6 point, down from last week when it averaged 3.47 percent. A year ago at this time, the 15-year FRM averaged 2.65 percent.

Click on graph for larger image.

This graph shows the 30 and 15 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®. 

After increasing last June, mortgage rates have mostly moved sideways for the last 9 or 10 months.

by Calculated Risk on 4/10/2014 10:16:00 AM

From Trulia chief economist Jed Kolko: Home Prices and Population Growth: Cities vs. Suburbs

Despite declining investor purchases and more inventory coming onto the market, asking home prices continued to rise at the start of the spring housing season. Month-over-month, asking prices rose 1.2% nationally in March 2014, seasonally adjusted. Quarter-over-quarter, asking prices rose 2.9% in March 2014, seasonally adjusted, reflecting three straight months of solid month-over-month gains.

Year-over-year, asking prices are up 10% nationally and up in 97 of the 100 largest metros. Albany, NY, Hartford, CT, and New Haven, CT, are the only three large metros where prices fell year-over-year, albeit slightly.
...
In March, rents rose 3.9% year-over-year nationally. Rent increases were higher for apartments (4.4% year-over-year) than for single-family homes (1.9% year-over-year).
emphasis added

In November 2013, year-over-year asking prices were up 12.2%. In December, the year-over-year increase in asking home prices slowed slightly to 11.9%. In January, the year-over-year increase was 11.4%, in February, the increase was 10.4% - and now the increase is 10.0%.

This suggests prices are still increasing, but at a slightly slower pace.

Note: These asking prices are SA (Seasonally Adjusted) - and adjusted for the mix of homes - and this suggests further house price increases, but at a slower rate, over the next few months on a seasonally adjusted basis.

by Calculated Risk on 4/10/2014 08:35:00 AM

The DOL reports:

In the week ending April 5, the advance figure for seasonally adjusted initial claims was 300,000, a decrease of 32,000 from the previous week's revised level. The last time intial claims were this low was May 12, 2007 when they were 297,000. The previous week's level was revised up by 6,000 from 326,000 to 332,000. The 4-week moving average was 316,250, a decrease of 4,750 from the previous week's revised average.

The previous week was revised up from 326,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.


The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 316,250.

This was lower than the consensus forecast of 320,000.  The 4-week average is close to normal levels during an expansion.