The HARP Success Story

From E. Scott Reckard at the LA Times: Federal refi program for underwater homeowners hits its stride

Nearly 1.1 million homeowners with little or no equity were able to refinance last year under HARP, which assists borrowers who are current on their monthly payments. That's nearly as many as in the three previous years combined, and the latest figures show that early this year, the pace of these refis abated only slightly.
...
"This is a program that has reached a lot of people — probably more underwater homeowners than anybody thought it would," said Guy Cecala, publisher of Inside Mortgage Finance. "It is also one of the few programs that has rewarded people who have stayed current on their mortgages."

The program has been successful because it addressed one of the hangover effects from the housing bust: the millions of Americans stranded in expensive, high-interest-rate loans. These borrowers owed too much on their homes and could not refinance.

The HARP program really took off when most of the representations and warranties associated with the original loans were eliminated (meaning the lenders would not be responsible for defects in the original loans) and after the automated systems were updated in March of 2012. Since these borrowers were current, and Fannie or Freddie already owned the loan, it made sense to allow them to refinance at a lower rate even if they owed more than their homes were worth (this lowered the risk of default for the GSEs). 

The FHFA thought this program would help close to 1 million homeowners - that estimate was too low!

Bank Failures #9 & 10 in 2013: North Carolina and Georgia

From the FDIC: CertusBank, National Association, Easley, South Carolina, Assumes All of the Deposits of Parkway Bank, Lenoir, North Carolina

As of December 31, 2012, Parkway Bank had approximately $108.6 million in total assets and $103.7 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $18.1 million. ... Parkway Bank is the ninth FDIC-insured institution to fail in the nation this year, and the first in North Carolina.

From the FDIC: Hamilton State Bank, Hoschton, Georgia, Assumes All of the Deposits of Douglas County Bank, Douglasville, Georgia

As of December 31, 2012, Douglas County Bank had approximately $316.5 million in total assets and $314.3 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $86.4 million. ... Douglas County Bank is the 10th FDIC-insured institution to fail in the nation this year, and the second in Georgia.

Two more ... it is Friday!

Lawler: Selected Results (and Comments) from Large Publicly-Traded Builders for Last Quarter

From economist Tom Lawler: Selected Results (and Comments) from Large Publicly-Traded Builders for Last Quarter; Consensus is Strong Spring Selling Season, Increased Pricing Power, Though Big Differences in Net Order Growth across Builders

Below is a table showing results on net home orders, home settlements, and average closing sales price for large publicly-traded home builders who have released results for the quarter ended March 31st, 2013. (These results include “discontinued operation”.)

Net order growth varied significantly across builders, to a large extent reflecting growth/margin strategies. E.g., PulteGroup’s average community count last quarter was down 14% from a year ago, reflecting its emphasis on “price, margin realization, and effective management of land assets” rather than growth, though it did increase its planned investments in land and development (see below), while other builders increased their community counts. NVR’s “sub-par” net order growth came despite a double-digit increase in its average community count.

The combined order backlog of these six builders on March 31, 2013 was 30,082, up 42.2% from last March.

	Net Orders			Settlements			Average Closing Price
Qtr. Ended:	3/31/13	3/31/12	% Chg	3/31/13	3/31/12	% Chg	3/31/13	3/31/12	% Chg
D.R. Horton	7,879	5,899	33.6%	5,643	4,240	33.1%	$242,548	$219,481	10.5%
PulteGroup	5,200	4,991	4.2%	3,833	3,117	23.0%	$287,000	$261,000	10.0%
NVR	3,510	3,157	11.2%	2,272	1,924	18.1%	$330,400	$304,600	8.5%
The Ryland Group	2,052	1,357	51.2%	1,315	848	55.1%	$277,000	$254,000	9.1%
Meritage Homes	1,547	1,144	35.2%	1,052	759	38.6%	$314,000	$269,000	16.7%
M/I Homes	1,047	764	37.0%	627	507	23.7%	$284,000	$249,000	14.1%
Total	21,235	17,312	22.7%	14,742	11,395	29.4%	$277,580	$252,391	10.0%

Here are a few select excerpts from some of the company’s press releases (NVR’s press release generally has no “color” comments.

Pulte: ‘“The stronger demand which the housing industry saw throughout 2012 has carried into the spring selling season of 2013. We experienced higher traffic in our communities with buyers feeling a greater sense of urgency given the combination of limited product inventory and rising prices found in many markets throughout the country. Within this environment, and aligned with our focus on generating higher returns, we continue to emphasize price, margin realization and effective management of land assets. Our successful execution of these strategies can be seen in the higher selling prices and improved margins achieved across each of our primary brands.

‘“Given the operational gains demonstrated by our strong first quarter results, and our expectations for an ongoing recovery in new home demand, we have again increased our authorized investment in land and development for 2013 and 2014 to $1.4 billion annually. The incremental investment, which amounts to approximately $200 million in each year, will be made using the defined and disciplined process we put in place more than 18 months ago.”

‘The higher average selling price reflects price increases implemented by the Company and a shift in the mix of closings toward move-up homes which carry higher prices.’

Ryland: For the first quarter of 2013, sales incentives and price concessions totaled 7.9 percent of housing revenues, compared to 10.9 percent for the same period in 2012.

Meritage: ‘"Housing demand is greater than the supply of homes available for sale in many of the areas where we operate, causing home prices to increase," Mr. Hilton explained. "To meet the higher demand, we opened 24 new communities during the first quarter and also grew our active community count to its highest point in almost four years. In addition, our 9.5 orders per average community for the quarter was a 27% increase over 2012 even as we raised prices in many communities. As a result, we received orders for 35% more homes for a 69% increase in total order value compared to the first quarter of 2012. We are pricing our homes and limiting the number of lots we're releasing for sale in some communities to better manage our order volumes relative to our production capacity, and to maximize our profit from those communities."’

M/I Homes: ‘With housing conditions continuing to improve, we are optimistic about our business and look for continued growth.’

D.R. Horton: ‘Donald R. Horton, Chairman of the Board, said, “The spring selling season is off to a strong start at D.R. Horton, with robust demand driving higher sales volumes and favorable pricing, which is reflected in the 14% increase in our average selling price. (LEHC note: this refers to the average net order price; the average sales price on homes closed last quarter was up 10.5% from a year ago.) We are in an excellent position to continue to meet increased sales demand and aggregate market share with 15,800 homes in inventory and 175,000 lots owned or controlled under option contracts, of which 58,000 lots are fully developed.’

Q1 GDP and Investment

Final demand increased in Q1 as personal consumption expenditures (PCE) increased at a 3.2% annual rate (up from 1.8% in Q4 2012), and residential investment (RI) increased at a 12.6% annual rate (down  from 17.6% in Q4).  This was the strongest private domestic contribution (PCE and RI) since Q4 2010, and the 2nd strongest quarter since the recession began.

Unfortunately PCE will probably slow over the next couple of quarters as the sequester budget cuts ripple through the economy. 

The negative contributions came from less Federal Government spending (subtracted 0.65 percentage points), less state and local governments spending (subtracted 0.14 percentage points) and from trade (subtracted 0.50 percentage points).

Overall this was a medicore report and below expectations (mostly due to government spending and trade).  The increase in PCE and RI were positives, but the ongoing government budget cuts continue to slow the economy. 

The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter centered average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue.

The dashed gray line is the contribution from the change in private inventories.

Click on graph for larger image.

Residential Investment (RI) made a positive contribution to GDP in Q1 for the eight consecutive quarter. Usually residential investment leads the economy, but that didn't happen this time because of the huge overhang of existing inventory, but now RI is contributing.

Equipment and software investment was positve in Q1, however the contribution from nonresidential investment in structures was slightly negative (the three month centered average was still positive). Nonresidential investment in structures typically lags the recovery, however investment in energy and power has masked the ongoing weakness in office, mall and hotel investment (the underlying details will be released next week).

The second graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.

The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has added to GDP growth for the last 8 quarters (through Q1 2013).

However the drag from state and local governments is ongoing.   I was expecting the drag from state and local governments to end, but this unprecedented and relentless decline in state and local government spending is still a drag on the economy. The good news is the drag has to end soon - in real terms, state and local government spending is back to early 2001 levels.

Residential Investment as a percent of GDP is up from the record lows during the housing bust. Usually RI bounces back quickly following a recession, but this time there is a wide bottom because of the excess supply of existing vacant housing units.   Clearly RI has bottomed, but it still below the levels of previous recessions.

I'll break down Residential Investment (RI) into components after the GDP details are released this coming week. Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

The last graph shows non-residential investment in structures and equipment and software.

I'll add details for investment in offices, malls and hotels next week.

The key story is that residential investment is continuing to increase, and I expect this to continue. Since RI is the best leading indicator for the economy, this suggests no recession this year or in 2014 (with the usual caveats about Europe and policy errors in the US).