May 14: Office supplies & lending? The up & down trend of Existing Home Sales – a primer… inventory & affordability still major issues

Residential lending touches a lot of other businesses, and certainly the general business climate & regulatory trade winds impact lending. This week Jeff Curtis wrote to me saying, “As a former mortgage banker and currently the owner of an office supply company, OfficeZilla, you caught my attention when you mentioned the Staples/Office Depot ruling. For those, not really following this potential merger, it was blocked this week by the FTC, after taking over 12 months to review the case. I happen to agree with the ruling, particularly when you consider that the two entities combined have about an 80% market share in the large, Fortune 100 office supplies business. While a surprise to many, if you spend any time reviewing their quarterly or annual reports, it’s pretty clear why the FTC ruled against them.


“The central issue has always been the large, commercial (Fortune 100) contract business, which represents the largest source of revenue and greatest opportunity for revenue growth for both Staples and Office Depot. In effect, the bid by Staples was a bailout for Office Depot and its denial provides additional challenges for both companies, as they look for new ways to compete in the $200 billion plus office supply industry. We are already seeing disruptions through price increases, servicing and delivery issues.


“We often take for granted the office supplies (including furniture, breakroom, cleaning essentials) that are needed daily, in order for all of us to do our jobs. As the cost of producing loans continues to increase, however, reviewing the expense and ordering process for these supplies may be an area of savings (in both hard and soft dollars) that you should consider. Your office supply vendor should be a valued partner that is seeking new ways to help you be more profitable.” Thanks Jeff!


We have a lot of housing numbers coming at us this week. And besides hoping for a pick-up in listings, a lot of loan officers are doing their darnedest to be subject matter experts for the real estate agent clients. So let’s take a look at the housing market, and especially trends in existing home sales.


We are well aware there is a problem with the first time homebuyer. They are saddled with large student loan debt, many are under-employed for the most part, standard underwriting guidelines don’t apply well, and so one. The other big issue – low housing inventory is making the starter home unaffordable. When you look at the expensive areas, it quickly becomes ridiculous. The mortgage payment for a starter home in San Francisco (admittedly an extreme example) would run someone 110% of median income! The difference between 2% GDP growth and 3% GDP growth is housing. To address the dearth of inventory, experts say should have a run rate of 2 million starts a year. Yet we remain mired around 1.2 million and experts say it isn’t an oversupply issue – it is a credit issue. Yet the consensus seems to be that the financial sector remains “unregulated” and needs to be reined in. You would think politicians would like to see 3% economic growth but apparently they don’t.


And the housing bust lingers for Generation X.  Ownership rates went from first to last, interrupting market’s direction.  The group of Americans known as Generation X has suffered more than any other age cohort from the housing bust, according to an analysis of federal data, suggesting homeownership rates for that group could remain depressed for years to come.


Looking back to last year, WalletHub, a personal finance website, conducted an analysis of the Healthiest Housing Markets for 2015.WalletHub compared 300 U.S. cities with data ranging from median home-price appreciation to home price as a percentage of income to job growth. The top five healthiest housing markets according to their report include Frisco, TX, Allen, TX, Arvada, CO, Plano, TX and Sunnyvale, CA and the five least healthy housing markets include Fall River, MA, Providence, RI, Detroit, MI, Cleveland, OH and Hartford, CT.  Highlights of the report include the percentage of homes with negative equity is 25 times higher in Hartford, CT than in Berkley, CA and the home price as a percentage of income is 13 times higher in Santa Monica, CA than in Flint, MI.


Last autumn at least one housing statistic is showing signs of returning to normalcy – mortgage debt outstanding is rising again. This was the first gain since 2008. Such an extended contraction in mortgage debt is pretty much unprecedented, at least as far back as the data goes (late 1940s). Of course anyone in the mortgage business could tell you it has been nuclear winter since the crisis began.


And going back to last summer to give this spring selling season even more perspective, Zillow found that 28 percent of homes lost value between August 2014 and August 2015 on a national level, compared to the average of 22 percent from 1998 to 2005. Some markets have not fared as well as others during the housing recovery, for example in the Denver metro, 1.5 percent of homes lost value YoY in August, compared to 48.1 percent in the Greater Baltimore area. (Zillow has an interactive tool to determine the real estate market conditions in various markets.)


The weakness in housing starts remains a conundrum, given the demand for housing. Builders have pointed to a shortage of labor, but as Goldman Sachs points out, you aren’t seeing increases in wages in the construction sector, at least not yet. Interestingly, the average age of a construction worker is the highest ever, as young people are not entering the sector. The other issue: regulations, and lots of them. You would think that government would be interested in seeing more housing construction, because that is the difference between 2% and 3% GDP growth, but the only discussion of housing these days revolves around how hard to slug the originators.


March represented a much-needed rebound in existing sales volume after February’s big monthly decline. Inventory of homes for sale also posted a welcome increase, rising 4.1 percent from February, the largest monthly increase since last March and a sign tight inventory may be easing as we head into the spring shopping season. But prices overall, especially for condos favored by many first-time and younger buyers, also are rising fast, which could pose challenges to many buyers going forward. Existing home sales have been very volatile lately, and have failed to string together more than a couple months in a row of increases before stumbling again. We’ll need to see a few more months like this before fully declaring a breakthrough in existing sales volume and shaking the two-steps forward, one-step back routine the market has been stuck in for a while.


We also recently learned that Pending Home Sales increased 3.5% in February, more than expected. But of more interest is to step back a few months and take a look at the patterns over time. For example, we also learned that January saw a revision down to -3.0% from -2.5%.


This week we’ll see some Existing Home Sales stats. What are they? The numbers are produced by the National Association who will tell you that Existing–home sales include single–family, townhomes, condominiums and co–ops and are based on transaction closings from Multiple Listing Services. Changes in sales trends outside of MLSs are not captured in the monthly series. NAR re-benchmarks home sales periodically using other sources to assess overall home sales trends, including sales not reported by MLSs.


“Existing–home sales, based on closings, differ from the U.S. Census Bureau’s series on new single–family home sales, which are based on contracts or the acceptance of a deposit. Because of these differences, it is not uncommon for each series to move in different directions in the same month. In addition, existing–home sales, which account for more than 90 percent of total home sales, are based on a much larger data sample — about 40 percent of multiple listing service data each month — and typically are not subject to large prior–month revisions.”


Let’s take a look at last year to give things some perspective. From May to July, existing home sales had exceeded expectations but in August, sales of existing homes were well below expectations. Although, September existing home sales are expected to increase slightly from August. The annualized pace of growth of existing home sales has been slowing, dropping from a YoY pace of 10 percent in July to 4 percent in September.


Existing Home Sales were -4.8% in August. NAR noted that home sales in August lost some momentum to close out the summer. “Sales activity was down in many parts of the country last month…the persistent summer theme of tight inventory levels likely deterred some buyers…The good news for the housing market is that price appreciation the last two months has started to moderate from the unhealthier rate of growth seen earlier this year.”


The FHFA Housing Price Index rose 0.3% m/m in August versus a gain of 0.6% in July. Existing home sales grew to a seasonally adjusted 5.55 million annual rate in September from 5.3 million in August. There were 2.21 million homes were available for sale, a 3% decline from the prior month and 4.8 months’ worth of supply at the current rate versus the typical 6 months. Much of the gain came from an increase in all-cash and investor demand. All-cash sales accounted for 24% of all sales in September, up from 22% in August. Individual investors purchased 13% of existing homes in September, up from 12% in August.


And Existing Home Sales rose 4.7% in September to 5.55 million, up 4.7% month-over-month. The median existing home price was $219k, up 6.1% from a year ago. Housing inventory dipped again to 2.21 million homes, which represents a 4.8-month supply, down from 5.1 months in August. Tight inventory remained an issue – 6.5 months is considered a balanced market. First-time buyers continue to sit on the sidelines, as their percentage fell to 29%. This is flat with a year ago. 40% is more or less the historical average.


The third quarter was the best in nearly a decade, according to the NAR. Home prices increased in 87% of all MSAs. Existing home sales are up 8.3% YOY and prices are up 5.4%. Inventory remains tight.


In October Existing Home Sales fell 3.4 percent to a seasonally adjusted annual rate of 5.36 million in October from a slightly downwardly revised 5.55 million in September. At that point sales were still 3.9 percent above a year ago (5.16 million).  Although the percent share of first-time buyers increased to 31 percent in October, up from 29 percent both in September and a year ago; NAR’s annual Profile of Home Buyers and Sellers revealed that the annual share of first-time buyers fell to its second-lowest level since the survey began in 1981.


They dropped again in November (-10.5%) to the slowest pace in 19 months, but some of the decrease was likely because of an apparent rise in closing timeframes that may have pushed some transactions into December. All four major regions saw sales declines in November.


Existing home sales surged 14.7% month-over-month in December to a seasonally adjusted annual rate of 5.46 million units from 4.76 million in November. That was the largest monthly increase ever recorded. December closed out the strongest year of existing home sales (5.26 million) since 2006 (6.48 million). But the surge was driven by scheduled closings for November that spilled over to December due to the implementation of “Know Before You Owe” regulations that slowed down the process.


Moving into this year Existing Home Sales were -7.1% in Feb.  After increasing to the highest annual rate in six months, existing-home sales tumbled in February amidst unshakably low supply levels and steadfast price growth in several sections of the country.


But Existing Home Sales rose 5.1% MOM to 5.33 million in March. The median home price rose 5.7% to $222,700. This puts the median house price to median income ratio at 3.9x, which is higher than its historical range in the 3.2x – 3.6x. There are 4.5 months’ worth of inventory, which was an uptick from the 4.4 months’ worth in February. Days on market fell to 47 however. Sales slowed at the $1 million + price points, which could be a reflection of the global economic slowdown. The number of first time homebuyers was steady at 30%. Historically, that number has been closer to 40%.


Given the weak housing starts data and the existing home sales data, some say that we aren’t seeing the breakout spring selling season that some had hoped for in many parts of the nation. The main issue continues to be a supply and affordability problem. Finding the right property at an affordable price is burdening many potential buyers.”



(Thanks to Doug B. who sent along this “Note on the fridge”!)

I came home from the golf course today.

The wife had left a note on the refrigerator.

“IT’S NOT WORKING, I can’t take it anymore!

Gone to stay with my mother.”

I opened the fridge, the light came on, and the beer was cold…

What the heck is she talking about?





(Copyright 2016 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)

Rob Chrisman