Feb. 29: Notes on debt/savings, FHLB membership, and U.S. demographics: who has the highest property tax?

For me the last few weeks have included travel in Louisiana, California, Arizona, North Carolina, Florida, and Nevada. (With all that time in a flying metal tube, I’ve finally advanced to doing the “medium” difficulty Sudoku puzzles!) The mood is good, 2020 is off to a fine start, and behind the scenes the industry is grappling with document changes, current and anticipated, underwriters noting the amount of debt some have, the capacity issues that have arrived with these low rates, the possibility of the QM Patch being extended, and housing affordability issues.

With these low rates, money has become cheap, right? But many seem to be “saving their money for a rainy day.” One issue that is in the back of people’s minds is the overall economic health of the United States. Of course no one could have foreseen the coronavirus impacting economies. But debt is an issue. Debt… savings… everything in moderation, right? Americans are swimming in debt, but not drowning in it: household debt hit $14.2 trillion in the last quarter of 2019, up $601 billion over the course of the year, the largest annual hike since 2007. That is more than 11 percent higher than the peak prior to the Great Recession. But less than 5 percent of outstanding debt was delinquent, and a mere 3.1 percent had payments over 90 days behind, compared to 11.9 percent delinquent in 2009 and 8.6 percent 90 days overdue. The personal savings rate is at 7.6 percent, which is well above the low of 2.2 percent notched in 2005, meaning that people are socking away a lot of money rather than spend it on artwork or houses.

The QM versus non-QM environment has not resulted in any litigation, which is a good thing. Of course, a solid U.S. economy has helped. If business does indeed shift toward non-QM/non-conforming loans, the impact on the secondary markets will be felt. Certainly the consumer’s ability to access credit will be impacted; the cost will go up to those who can least afford it, impacting home ownership. Will the FHA step in for a portion of these loans? Probably, although it has limits as well. The fabled “private money” stepping in is also an expensive proposition.

This week the commentary discussed public affairs, and how the Federal Housing Finance Agency (FHFA, overseer of FNMA and FHLMC) issued a request for input (RFI) related to non-bank membership into the Federal Home Loan Bank System (FHLB). The move prompted Shelly Schwiso to send, “I wanted to let you know all the articles coming out on this, including the WSJ recently, are missing one big point. Namely, that regardless of whether the FHLBanks want this, the FHFA can ask for input but it does not have the power to change membership. Only Congress can make that change, and it would require an amendment to the Federal Home Loan Bank Act of 1932.


“When you think about the origin and intent of the Act, it was to provide low cost funding to spur home ownership during the Great Depression and that continues to be their primary mission.

“But what was never contemplated was the co-existence of IMBs. The reason this is an issue is the simple fact that they don’t have equity or loans to hold up as collateral in the same way banks and CUs can. What they can do is put up loans held for sale a sort of warehouse line arrangement which does take place with certain FHLBanks on a case by case basis with some strong members today (kinda a hidden fact), but it’s also very controversial in the system and it frankly doesn’t operate under the same rigor as a traditional warehouse bank because FHLB has a blanket lien on the institution with all their other eligible collateral that secured their line of credit used to borrower at these reduced rates.


“I have spoken to many folks on this topic for years as really IMBs in some sense should be granted this same access to funding, however they don’t possess the capital that FHLB members have today so it’s like fitting a square peg into a round hole. Most IMBs wouldn’t have a strong enough balance sheet to meet what would likely come out as qualifications for membership. So it’s very difficult to find a path that works.”

LOs keep an eye on demographics


I love paying property taxes, and knowing that the money straight into keep my state’s infrastructure safe and sound. Apparently if I want to pay more I should move to New Jersey, which has the highest property taxes in the nation, and stay away from Hawai’i, which has the lowest. (California, which has more people than the 20 least populous states combined, isn’t bad at #16.)

The U.S. population increased just 0.5 percent to 328 million in 2019, not only continuing a decades-long slowdown in growth, but registering the slowest population growth rate since 1918 Population growth is determined by natural increase (births minus deaths) and migration from other nations, both of which slowed in 2019 versus 2018. With population growth being a fundamental driver of potential economic growth, these trends are worth paying attention to. Natural increase fell below one million for the first time in decades, driven by a falling birth rate and an aging population, a trend which will likely continue. As far as migration goes, a net of just 595K residents moved to the United States from abroad in 2019, marking the lowest level since the mid-1980s, and a 15 percent drop from 2018. Since 2016, international migration is down more than 40 percent. For the year, the South saw the strongest overall population growth (+0.8 percent) of the four Census regions, followed by the West (+0.7 percent), the Midwest (+0.1 percent) and the Northeast, which contracted 0.11 percent. The annual Census estimates are the best real-time population data but have tended to exaggerate shifts in population growth. If population has decelerated like it has this past decade, the subsequent Census has tended to partially reverse this, showing up as an outsized gain for the decennial year. The opposite has occurred when population growth has been accelerating.

It seems easier buying conditions are enticing more renters to become homeowners. The homeownership rate rose to end 2019, with the number of homeowners increasing and renter households declining slightly. The homeownership rate for those under the age of 35 saw the largest uptick. But with the current business expansion well into its 11th year and facing heightened geopolitical risks, economic forecasts for 2020 are generally erring on the side of caution. For lenders, the Wuhan coronavirus and heightened tensions in the Middle East will likely keep long-term interest rates, and mortgage rates, a little lower than they would otherwise be. So, will housing continue to be a bright spot?

While affordability remains challenging for many first-time buyers, nearly every key driver of home sales and new construction remains solidly positive. Job and income growth continue to be solid, and consumer confidence remains high. Interest rates remain low and credit is readily available. Builders are increasingly looking to develop more product for first-time homebuyers, and public policy is turning toward easing development burdens.


The most recent housing data is encouraging. The most recent NAHB index, a measure of sentiment among single-family homebuilders, registered the highest reading since 1999. And new home sales beginning 2020 at a pace running ahead of last year’s overall sales. Sales of existing homes rose less in 2019 than in 2018, though sales over the last five months of the year ran ahead of 2018 pace, beginning 2020 with strong momentum. Sales have been limited by extremely low inventories, particularly of homes priced at or below the median, a persistent problem throughout this business cycle. Younger households are expected to continue to remain in apartments for longer than previous generations, showing a greater preference for urban living. At some point eventually, millennials have to age into buying homes and not renting, right?

The South and West, together accounting for 85 percent of all new home sales, should continue to get the most attention from builders who are increasingly looking to pivot to more affordable regions of the country. Much of the improvement in sales has been in the South, where home prices remain relatively moderate. At a time where fewer people are moving within the United States, more of those that are moving are headed to major metropolitan areas in the South, which has seen its share of new home sales and single-family starts surge relative to the rest of the country. The shift in home buying toward the South, where the median home price of a new home is nearly 10 percent below the national median, is one of the reasons that new home prices have moderated so much during the past year. Nationwide, single-family starts have risen in five of the past six months and single-family permits have risen for seven consecutive months.


Another aid to the housing market, wages are rising faster than home prices recently, which is a departure from the rest of this economic expansion. If this trend continues, it should prevent affordability conditions from deteriorating further and help boost affordability for some. Also aiding affordability, low mortgage rates continue to lift nearly every facet of the housing market and aid homebuilding in gradually returning to its historic norms relative to population and household growth. With mortgage rates remaining low, already dropping to multi-year lows in 2020, home sales and new home construction have both reversed 2018’s slide and now appear to be solidly on a path to higher ground. Though, don’t expect lower rates to turbocharge the housing market like it has in earlier decades. The demand for housing should remain high, keeping the housing industry as a strong point of the overall U.S. economy.

In a recent paper the Dallas Fed discussed how gentrification has transformed American central city neighborhoods through the rising value of high-skilled workers’ time. Over the last three decades, American cities have experienced a wave of urban revival during which the growth of income and home value in central city neighborhoods has far outpaced that in the suburbs. This “gentrification” process that is characterized by educated residents, improving amenities and rising housing costs, contrasts sharply with the long period of decline in central cities and departure of residents to the suburbs during the 60’s 70’s, and 80’s.


The time period of gentrification coincides with a period in which working long hours became more prevalent among high-wage earners. Low-wage workers tended to work longer hours than high-wage workers before the mid-1980s, before the pattern reversed itself. In recent years, high-wage workers have been much more likely to work long hours than their low-wage counterparts.


The relocation of high-skilled workers into the central cities is related to their changing value of time and increasing desire for shorter commute time, as evidenced by the growth of reported commute time being much slower among workers in the top wage deciles than workers in lower wage deciles since the 90’s. The study showed the increasing value of time raises the cost of commuting and increases the demand for central locations by high-skilled workers. The effect in change in the value of time is substantially magnified by amenity improvement. As highly skilled workers move into the central cities, amenity conditions improve and rents increase due to increased demand for central city housing. The improved amenities make central cities increasingly attractive to high-skilled workers, despite rising rents. On the other hand, low-skilled workers, which are needed to provide the amenities while facing the same rising rents, demand these amenities much less than high-skilled workers do. As a result, low-skilled workers increasingly relocate to the suburbs while high-skilled workers increasingly sort into central city neighborhoods.


These changing location preferences contribute to the rising demand for housing in central city locations. The paper showed workers in occupations with rising value of time increasingly live in central city neighborhoods. While this paper shows that the rise in value of time contributes to gentrification, the mechanisms that cause the value of time to change remain unclear, as does whether the increase of amenity in central cities is a cause or a consequence of the inflow of high-skilled residents.

The government is aware of the affordability issue. The news broke recently that the Federal Housing Finance Agency (under the direction of Mark Calabria) allocated $502.2 million to the National Housing Trust Fund and the Capital Magnet Fund, marking the GSE’s largest ever contribution to the federally managed entities.

NAR commented, and commended, “… the Federal Housing Finance Agency for authorizing nearly half a billion dollars to address housing affordability challenges in America… In particular, we applaud Director Calabria for prioritizing the efficacy of the National Housing Trust Fund and the Capital Magnet Fund–this significant investment illustrates the agency’s commitment to increasing the inventory of supply-level homes.”

“Cleaning your house while your kids are still growing up is like shoveling the sidewalk before it stops snowing.” (Phyllis Diller)

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Rob Chrisman