Given the employment report released last week and expectations that mortgage-underwriting guidelines will loosen soon, this is a good time to review the homebuilders, which I wrote about last August. Since I last reiterated my negative expectations, the performances have been:
- Toll Brothers (TOL) +5%
- PulteGroup (PHM) +18%
- Lennar (LEN) +25%
- KB Home (KBH) 0%
- DR Horton (DHI) +20%
- Ryland Group (RYL) +13%
- Beazer Homes USA (BZH) +12%
- Hovnanian (HOV) -1.5%.
These very aggressive positive moves have made Pulte, Lennar and Horton positive for the year while others are still negative. The positive trajectory of the past few months has been driven by expectations for an increase in demand for homes caused by increasing employment, incomes and general economic activity, combined with mortgage rates that have declined this year and expectations for easier access to mortgages.
It is true that mortgage rates have declined from the spike that occurred during the second half of 2013. It Is not true, however, that there has been an increase in real wages and employment that will allow for an increase in confidence, thus, demand for homes, regardless of the positive response to the employment report last week. It's also highly improbable that there will be a substantive loosening of mortgage credit availability.
On the income and wage front, the Bureau of Labor Statistics showed an increase in employment of 4,000 workers and an increase in unemployment of 115,000. There's nothing positive about that. The labor force increased by 119,000, about 0.7% year over year, which is equal to population growth.
Real wages are also up 0.7% year over year, which is flat per capita. This is suggests a 2.3% real annual GDP growth rate, 2% real final sales growth rate, a 1.6% per capita GDP growth rate, and about a 4% nominal GDP growth rate. Given the growth of the population, labor force, and productivity, this is the best the cyclical rate will grow.
More importantly, however, is how much debt is being produced in order to achieve this. It requires over $3 of debt to produce $1 of GDP.
It also requires $8 of debt to produce $1 of wages.
This is indicative of how unproductive or uneconomic the U.S. economic system has become given how much debt is necessary just to get back to even from the housing bust and financial crisis of 2007-08. It's also indicative of the fact that there is no gain in real incomes, which is necessary for an increase in demand for mortgages. I last addressed that issue in November and updated the payroll tax receipts data with a chart from Mathematical Investment Decisions last week, before the BLS employment report was released.
On the mortgage underwriting front, there's been optimism expressed by many that a reduction in down payment requirements in order to qualify for a Fannie Mae or Freddie Mac mortgage, to 3% from 5%, will cause an increase in demand for homes.
In reality, it is probable that the 2% decrease in down payment requirement will be more than offset by increases in mortgage insurance premiums and mortgage rates. This could cause both transaction/settlement costs and monthly principal and interest payments to be higher for a 3% down payment loan program than a 5% down payment program.
The totality of all of this is that the expectations for economic growth reflected in the rebound of homebuilders' stocks the past few months are not grounded in the available data on real economic activity. Unless and until there is an increase in real wages, there can't be an increase in demand for the mortgages required to purchase homes.
There may be an increase in home sales next year, but that will likely be the result of pent up demand from buyers who withdrew from the market when mortgage rates spiked last year.