Banks ease mortgage rules
With homeowning percentages down to the 1965 level of America’s overall residential market, the U.S. leading banks are substantially easing qualification for “jumbo loans,” large home loans in the range of $417,000 in most parts of the country, or $625,000 in major metropolitan urban centers. Last year, such loans accounted for about 20% of all first lien mortgages. They are primarily used to purchase or refinance larger homes. So far this year, these mortgages have been up 5.5% from 2009, and comprise a major focus of home mortgage investment.
This upward trend has led to such leading financial institutions as J. P. Morgan/Chase, Bank of America and Wells Fargo to consider easing the minimum FICO credit scores. These are required indexes but have been reduced to 680 from 740 for loans on primary single-family purchases and second homes — for those indicating the financial means to sustain these mortgages.
It’s estimated that such jumbo mortgage volume amounted to $235 billion in 2014, 20.3% of all first-lien mortgages by dollar volume, according to Inside Mortgage Finance. These loans are generally held by banks on their own balance sheets, rather than selling them to government-backed Fannie Mae and Freddie Mac, which also have loosened their borrowing requirements this year.
While the dollar amount generated by these jumbo mortgages indicates a definite upward trend, it’s nowhere near the $500 billion range reached in 2005, which began its downward slide in the three-year interim before the Great Recession. During the 2008-10 bottom, when such large mortgages slid to less than $50 billion annually, the trend toward long-term leasing and rentals reached a base from which potential homeowners have not substantially departed.
While such major Western cities as Phoenix, San Francisco and Los Angeles have displayed strong home ownership comebacks, an increasing amount of this interest is generated by foreign investors, who view American real estate as a desirable investment focus. However, the basic departure from homeowning by an American population that has doubled to more than 320 million in the last 60 years has not substantially changed.
With homeowning and resale no longer the sure-fire asset it was conceived to be until the recession, it is doubtful that “requirement easing” in jumbo loans will generate significant interest among the bulk of the American public. Many of them now view the immobility of home ownership, and the “flipping” capability that facilitated such commitments, no longer available.
Rents revive construction
While much has been hyped about the demise of single-home ownership, whether in houses generally or condos in urban areas, a shift to increasing housing construction is currently taking place.
It had been readily accepted by most observers that the long period of 1.6 million new home constructions should be relegated to past history, with 600,000 new housing starts a more realistic objective, now and in the future. Even those manufacturers and service providers (plumbers, latherers, electricians, plasterers, contractors, sales agents), dependent on America’s previous world-leading housing market, had been resigned to a sparse long-term house-building future.
Further feeding this pessimism were statistics indicating the average age of existing homeowners had crept up to the middle 30s. This implied that the Millennials and other youthful-age homeowner prospects had no interest in getting stuck with a long-term mortgage and the lack of movement flexibility such ownership indicated.
But most recent statistics indicate current new housing construction is clipping along at an annualized pace of 900,000 to one million starts per annum. With low-interest mortgage rates, and rising rental and long-term leasing costs becoming increasingly expensive, America’s population increase, spurred by millions of legal annual immigrants, is engendering fast-increasing housing demand.
This has been further stimulated by second homes for many well-to-do U.S. residents, as well as Canadians and Asian investors.
While record auto sales have generated an unexpected post-recession boom, it’s plausible that a new housing ownership market also is in the making. If current construction levels, spurred by new housing demand, becomes reality, the sheer weight of a rapidly expanding American population could make more than one million new houses built per year an achievable reality now, and in the foreseeable future years.
Wage stagnation, small businesses
What is generally not well-known is that two-thirds of America’s growing 160 million workforce continues to be potentially employed by independently owned businesses, erroneously classified as small businesses. This term has emanated as a separation from corporate entities, most of which are listed on the various U.S. stock exchanges.
These small businesses can be what used to be called “Mom and Pop” stores, generating less than $1 million in annual revenues, to privately owned giants such as the Koch brothers and Wal*Mart, who generate multibillions but are family-owned and -managed and not responsible to legions of stock market investors.
While America’s large investor-owned corporations, such as GE, Boeing, Caterpillar, DuPont, etc., are generally multinational in choosing their most effective international cost base, small businesses, independently owned, tend to be 100% American-based, with their employees generally part of a “working group” with access, in most cases, to the ownership by its customers and employees alike.
Unfortunately, much of the stringent regulations emanating from the federal government in the last few years has negatively impacted small businesses far more than the huge free-wheeling corporate enterprises. The corporate giants are backed by their flexibility in shifting their operating base, state-wise or internationally, and absorbing the mounting cost of lawyers and accountants to minimize the burden of regulations and taxation on their bottom lines.
This turn of events in the increasing regulatory environment in which the hundreds of thousands of small businesses operate today has forced them to cut back existing business focus, and decrease or eliminate the number of people on their payrolls.
The mounting regulatory pressures emanating from Washington, whether increasing insurance costs or impinging on their net income after taxes by such obstacles as the Dodd-Frank mandate, has decreased the number of fully benefit-covered employees, while broadening the part-time employee base.
Under such current conditions, it should come as no surprise that average employment wages are stagnating. No contrived and government-forced arbitrary minimum wages will cure the stagnating wage problem. This is especially true as the labor force participation rate remains at or near an all-time low.
Hedging reaches record volumes
While hedging may not be a familiar term to most financial investors, it has reached stratospheric proportions as the globally dominating dollar currency has crushed the price levels of a wide range of popular commodities (oil, copper, iron ore, cotton, lumber, etc.).
With managers of stock funds of all types seeking to retain their investors, hedging is proving successful in attracting and retaining the commitment of the world’s trillions of dollars comprising the global investment arena. A good example are the energy-dominated master limited partnerships, savaged by the worst oil crash since the recession, which technically ended in 2009.
With some of these MLPs losing up to 90% of their market prices, the underlying values of oil, natural gas and a variety of energy derivatives has helped these funds to maintain their actual wealth at a much higher level than their reflected equity market pricing indicates.
Unbeknownst to most casual investors and observers, hedging has multiplied as an underlying insurance policy that retains much of their value, despite the greatly depreciated pricing the investment community has tendered them.
As an example, when oil prices degenerated from $100 per barrel in mid-2014 to near $40 in late summer 2015, these MLP funds were able to retain monetary distributions, even though reduced, but at a high percentage of their funds’ investment value.
This hedging approach has become almost universal in its usage by sophisticated equity trading funds. From negligible totals in 2007, they have risen to a cumulative asset value of $230 billion in late July 2015.
While softening the crushing blow of these equity funds’ underlying value, leading master limited partnerships, for example, have hedged as much as 80% of market pricing, based on nearly twice their current value extended for as much as two years or more.
As this hedging practice by equity trading funds, etc., has become more apparent to potential investors, it will likely influence active traders and universal investors.
As the dollar is unlikely to be seriously challenged by other world currencies in the foreseeable future, hedging will become an increasingly valuable component, especially to the great number of equity funds utilizing this practice.