Huh? There is now a robot that can build a house in two days? Sounds pretty good to me... It is certainly a step toward lessening the labor constraint problems that builders have. We've had a lot of builder and building news lately highlighted below.
Here's a topic that comes up once in a while: money laundering. No, not the kind where you find loose change at the bottom of the washing machine. The kind like "structuring" where someone has $30,000 in cash, pays off their mortgage by $8,000 for three months and then another $6,000, and then refinances to pull it back out. (Why $8 and $6k? Because banks are always on the lookout for cash amounts of more than $10,000.)
Depository banks likes Wells, Citi, Chase, and U.S. Bank occasionally see loans and transactions that violate the Bank Secrecy Act and the Anti-Money Laundering Act (BSA and AML). These loans may also violate a bank's internal policy, and then the correspondent group sends the rejected loan back to the lender who asks, "What the heck?" Depository and non-bank lenders need to train their post-closing departments in the nuances of the BSA and AML.
Jonathan Foxx with Lenders Compliance Group was recently asked, "In implementing our AML program, we recognize there are the basic requirements of the law. But what is the difference between what is required by law and what are best practices for an AML compliance program?"
He responded, "Frankly, the law is very general, even vague at times, with respect to distinguishing it and best practices. The result often leaves those who must implement an AML compliance program with little practical guidance as to what should be done.
"At minimum, an organization should consider having a basic set of policies and procedures for assessing its risks for money laundering and terrorist financing. The institution should also have policies and procedures for conducting due diligence on its customers, clients, employees and agents, vendors and third-part service providers. In addition, the policies and procedures should cover how the organization deters, detects and monitors for suspicious activity. Other policies and procedures should be included to address training and how the organization handles legal process, reports suspicious activity and otherwise cooperates with law enforcement and other entities. [FFIEC Exam Manual, 33]
"An organization that is affiliated with other types of entities should also consider adopting policies and procedures that apply on an enterprise-wide or institution-wide basis. Such procedures should permit organization within the enterprise to view their customers' activity across multiply business lines and geographies. [FFIEC Exam Manual, 160]."
While I am yammering on about money, and banks, how big is Wells Fargo's market share compared to the others? Here you go: The Coach. Share has dipped dramatically but it's still "the big dog."
How about those home builders? Rates are good, but they're scrambling for trained workers and decent land in many markets. Yes, homebuilders can obtain construction loans, but have nowhere to build. So homebuilders are finding constraints on construction financing easing but little in the way of quality lots on which to put up their houses.
Confidence among U.S. homebuilders declined in July from a five-month high, showing the construction industry remains in a slow, if unspectacular, recovery as the busiest part of the selling season comes to a close, according to data Monday from the National Association of Home Builders/Wells Fargo.
Zelman Research released a piece on trends for builders. "In 2Q16, land acquisition and development activity continued to grind higher, with both acquisition and development demand ratings increasing for a fifth consecutive quarter, which we believe is indicative of a favorable long-term view of the housing cycle shared by builders and developers. Importantly, the greatest increase in land and lot demand has been experienced in the entry-level segment of the market, aligning with broader homebuyer demand trends as detailed in our recent proprietary analysis of new home inventory, whereas incremental demand for move-up land has moderated as that segment has grown more saturated...stability in the pace of land price appreciation, which has held roughly constant at 9% year-over-year inflation for three consecutive quarters, and ongoing moderation in development costs bode well for stabilization in builders' future gross margins at elevated levels." (For questions, please contact Ryan McKeveny.)
Even going back to the Spring we can see the trends shaping up. For example, while April housing starts rose 6.6% M-o-M and declined 1.7% Y-o-Y, housing starts were flat for a year. Since 4/15, the peak in monthly seasonally adjusted starts was a rate of 1.213 million in 6/15; the trough was 1.063 million in 5/15. However, this stability exists because the 14% increase in single-family activity has been countered by an offsetting 20% decrease in multifamily activity. Single-family builders have it good.
And in the Spring Pending Home Sales shot up in April to over a 10-Year High, increasing by 5.1% in as the sales index climbed to 116.3, the highest level since February 2006. An index of 100 is equal to the average level of contract activity during 2001, which the NAR considers a "normal," or balanced, market for the current U.S. population. Houses remain in short supply relative to steady demand, which has driven up prices, especially in regions with strong job creation. And builders aren't adding new homes. NAR chief economist said vast gains in the South and West propelled pending sales in April to their highest level since February 2006 (117.4). "The ability to sign a contract on a home is slightly exceeding expectations this spring even with the affordability stresses and inventory squeezes affecting buyers in a number of markets," he said. "The building momentum from the over 14 million jobs created since 2010 and the prospect of facing higher rents and mortgage rates down the road appear to be bringing more interested buyers into the market." "Even if rates rise soon, sales have legs for further expansion this summer if housing supply increases enough to give buyers an adequate number of affordable choices during their search."
What about the lack of starter homes? Homebuilders are having a tough time making starter homes work financially due to increased regulatory and compliance costs, mandated open space, lower density, higher land prices, and fees imposed by counties and cities. Indeed, the number of starter homes is at a historical low and falling. Here are some industry quotes: "When you start with a high land basis, it's very hard to end up with a purchase price that the first-time buyer finds affordable," said Stuart Miller, CEO of Lennar. "No. 1, you see it in just the pure requirements. Those requirements can be a very lengthy list of things you maybe wouldn't have seen 10, 15, 20 years ago. But you're also seeing it in fees that counties and cities impose on new home construction. Fees can be anywhere from $50,000 to $100,000 per home to build," said Taylor Morrison's Bodem. "Things like that ultimately get passed on to the consumer and the price of housing. That's one reason why you see the cost of housing so expensive, especially here in Southern California."
It isn't just starter homes. We are starting to see weakness at the very high end of the real estate market. A combination of fevered building of luxury urban properties and waning overseas demand has created a glut of property in places like Miami, where prices are sliding 6% - 8%. The top 10% of condos saw a 15% price decline.
In recent weeks, builders have come out with their earnings. For example, PulteGroup's earnings beat estimates and the company announced a new "value creation" plan: management will buy back up to $1.5 billion in stock over the next 18 months and reduce land investment. This is a bit of a surprise given that revenues increased 41%, and average selling prices increased 11%. As iServe's Brent Nyitray points out, "Pulte has been targeting the first time homebuyer pretty aggressively, and given the pent-up demand, they probably should be investing in the business instead of buying back stock." And D.R. Horton also announced its earnings which were in line with expectations. Revenues increased 9% and earnings increased 13%.
Not much going on with interest rates, which is fine by many. We did have a smidgeon of economic news from the U.S. yesterday: personal spending data showed that U.S. consumers continued to dip into their wallets without hesitation in June but combined with ebbing income growth (spending +.4% versus income +.2%), the higher spending pushed the savings rate down to 5.3%. Core PCE Prices showed decelerating core inflation and will allow for some more complacency at the Fed.
This morning we've already had the MBA's survey covering 75% of retail application data for last week (-3.5%, refis -4% and purchases -2%). We've also had the July ADP Employment Change number (+179k topping forecasts, and June was revised higher); coming up at 10AM ET is some forgettable ISM Services number. Rate sheets can expect very little change since the 10-year closed at a yield of 1.54% and this morning its sitting around 1.55% with agency MBS prices nearly unchanged.
Jobs and Announcements
In job news, a wholesale lender with aggressive growth plans has exciting opportunities for two top talent regional sales leaders - one in the Central Region and one on the East Coast. The candidates selected will have the unique opportunity to shape their respective region's vision and culture by building out and running his/her dream team, backed by an inside team dedicated to their bottom line. The ideal candidates have a solid, performance-based reputation, and are relentless in their pursuit of success. Candidates should send their confidential resumes to me; please specify opportunity.
National MI is searching for a Sales Account Representative in the Northwest region, preferably living in the Boise, Idaho area. The person will be responsible for promoting the sale of National MI products, services and programs to clients through a consultative selling approach via personal sales calls and email/phone contact, in their assigned territory in support of the Account Manager's initiatives. This individual will also assist the Managing Director in sourcing new business from originators, and will manage the relationships of specific clients by serving as a customer advocate, educator, and loan issue problem-solver. Experience in client relationship management and training is imperative, and strong research, process improvement, and presentation skills are required. Headquartered in the San Francisco Bay Area, National MI is a U.S.-based, private mortgage insurer enabling low down payment borrowers to realize homeownership. For the complete job posting, see National MI's careers page.
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Monday I mentioned the convention that residential mortgage regulators are having in Florida this week. I received this note from AnneMaria Allen, CEO of The Compliance Group. "We (TCG) and me personally have been a member of AARMR since 1997. Back then there weren't too many Lender members but there are quite a few Lender and Associate members now. This is an awesome organization for industry folks to get to know their regulators. We generally go every year. In fact, for several years in a row I was invited to attend and train the regulators through AARMR at their AARMR school, part of the training included teaching the regulators the overall process of our industry from A-Z. AARMR is not only the annual conference but throughout the year they have training schools for all state regulators. The schools are for regulators to receive extra training on basic examinations, advanced examinations, fraud, and licensing. I believe all states are now part of AARMR.
"I always encourage all of our clients to join AARMR because it's important for them to spend time with their regulators and this is the place to do it. This is one central organization for all regulators to come together and work together not only regulator to regulator but with their licensees. The AARMR conference is the best conference to attend if you want to get to know your regulators in the various states and have a voice. I strongly encourage all multistate Lenders to be members and to go to the annual conference. Their compliance folks will thank them dearly long term."