Mark Hanson Reveals "The Next Housing Bubble"

The striking Case-Shiller regional charts shown below, courtesy of MHanson.com, make Mark Hanson angry: "so, 2006/2007 was the largest house price bubble ever, but there is nothing to see here in 2017?" and sarcastically points out that "if this isn"t a house price bubble, I would hate to see one."

His bottom line:

If 2006/07 was the peak of the largest housing bubble in history with affordability never better vis a’ vis exotic loans; easy availability of credit; unemployment in the 4%’s; the total workforce at record highs; and growing wages, then what do you call “now” with house prices at or above 2006 levels; worse affordability; tighter credit; higher unemployment; a weakening total workforce; and shrinking wages? Whatever you call it, it’s a greater thing than the Bubble 1.0 peak.

And visually:

Below are some further observations and "red-flags" from Hanson on Peak Housing, after the latest new home sales data:

• Sharp downward sales revisions for past 3-months.


• Huge downward price revisions for past 3-months, lower by 10%, 5% and 3%, respectively, exactly as I predicted on last month"s release.


• Builders maxed out on pricing power; Med & avg prices flat for 2-years.


• The all-important Southern Region was flat YY; the South makes up over half of all sales in the nation, and drives builder demand and profits.


• 100% of the June YY sales gain came from the Western Region, which doesn"t jibe with the weak price performance and will likely be revised lower next month.


• Income required to buy the avg priced builder house is at historical highs and has completely diverged from the multi-decade trend line.


• Historically low growth & rebound relative to resales suggest "lack of supply" meme in the Existing Sales market is over-stated.

As he says, "Peak builder is here."

Finally some other quantitative and qualitative observations from the housing guru:

1) New Home Sales "up to" 1995 levels after $15 TRILLION in debt and Fed liquidity aimed largely at the sector.

2) Builder pricing power largely flat for 2-years.

3) Income required to buy the average priced builder house has completely diverged from the multi-decade trend line. This obviously explains why sales are only at 600k SAAR now vs 1.2 million in Bubble 1.0. Reversion to this mean will occur...either thru a sharp rise in income; new exotic loan programs, which make payment less; or house prices dropping.

4) Last time builders were this euphoric was the peak of the biggest credit bubble in history.

5) It"s too bad the public isn"t as euphoric about buying as the builders think they are.

New Warning Signs Emerge For Subprime Auto Securitizations

Last month, we pointed that one of wall street"s largest underwriters of auto debt was suddenly slashing their own holdings of auto loans while simultaneously ramping up the issuance of auto securitization facilities thereby pawning off the risk to "suckers" who have no idea they"re jumping in front of yet another financial freight train (see "Deja Vu: JPM Slashes Auto Loans For Their Own Book; Ramps Up ABS Issuance For The Suckers").

Now, according to Bloomberg and Wells Fargo, new signs are emerging which suggest that auto ABS facilities, like their RMBS cousins of last decade, aren"t quite as bullet proof as the "suckers" thought they were.  While a subtle degradation, Wells Fargo points out that fewer auto borrowers are suddenly paying off their loan balances early.  And while that may not sound as dire as say a default, it suggests that auto borrowers may be finding it more difficult to find new financing when they go to trade in their 3-year old clunker for that brand new BMW.

Fewer subprime borrowers are paying off their auto loans early, a possible sign that consumers with weaker credit scores are struggling more, according to a report by Wells Fargo & Co. researchers.

Borrowers are making fewer extra payments on loans that were bundled into bonds in 2015 and 2016, compared with loans in 2013 and 2014 bonds, according to Wells Fargo analysts led by John McElravey. The data on prepayments may offer another sign that subprime consumers are having more trouble paying their bills, the analysts wrote in a note dated Tuesday. Borrowers are already defaulting on a growing amount of auto debt.

Last decade, slower monthly payment rates on credit cards were an early sign of the consumer credit cycle changing for the worse, the analysts wrote. For auto loans, slower prepayment may be more of a coincident indicator than a leading one, they wrote.

Of course, just like 2007, the largest seller of auto ABS, Wells Fargo (just as Bear Stearns did in 2007), is telling investors that they have nothing to worry about...unless you think slower paydowns and a massive declines in used car prices are a problem...

The researchers at Wells Fargo, the number one seller of bonds backed by subprime auto loans, have said that the bonds pose few risks to bondholders, even though they recommend investors cut their risk exposure because of valuations.

Slowing prepayments can hurt investors in bonds backed by car loans, said Peter Kaplan, a senior portfolio manager at Merganser Capital Management. They can result in a deal’s bonds getting paid down more slowly, which can hurt the riskiest securities in a transaction.

“I think downgrades are completely possible,” with a remote possibility that the riskiest securities will take losses, he said.

Lenders and big bond graders, such as S&P Global Ratings, have pointed to the debts’ fast amortization and possible upgrades as reasons for investors to have faith in the securities.

Of course, this is just the latest sign of trouble in auto ABS...below are recent developments in delinquency and default trends courtesy of Morgan Stanley.

***

If you"re among the growing minority of investors still under the impression that  "everything if awesome" in the auto industry simply because new car sales volumes continue to hover around all time highs, while turning a blind eye to soaring incentive spending and that pesky little debt bubble, then we may need your help with how we should be interpreting the following subprime auto loan delinquency stats from Morgan Stanley. 

In a recent report, Jeen Ng of Morgan Stanley took a look at 266 subprime auto ABS deals to assess the underlying "health" of the auto loan market and this is a recap of what he found.

First, despite low unemployment, high consumer confidence and debt-to-income ratios at 30-year lows, 60+ day delinquencies and default rates are soaring back to "great recession" levels for prime and subprime auto securitizations.

Meanwhile, loss severities are also starting to rise... 

....just as used car prices come under pressure...

...which likely has something to do with the flood of lease returns that are about to hit the market...

Of course, it can"t be that these deteriorating credit metrics are the result of 21 consecutive quarters of loosening lending standards from 2Q 2011 through 2Q 2016, right?

Lending Standards Have Eased...: While overall household debt remains below pre-crisis peaks, auto debt has ballooned to all-time highs. While this debt grew, the median FICO score of borrowers receiving auto loans fell roughly 30 points from peak to trough. According to the Senior Loan Officer Opinion Survey (SLOOS), auto lenders eased lending standards for 21 consecutive quarters from 2Q 2011 through 2Q 2016.

...but Lenders Now Appear to Be Reversing Course and Tightening Standards: While FICO scores did drop precipitously, they have recovered in recent months, and the SLOOS reports 3 quarters of tightening standards after the 21 of easing. A look at the weighted average FICO scores of loans going into subprime ABS deals reveals similar trends, with a number of lenders reporting increases in these scores over recent years. However, the overall trend has moved lower since 2013.

Meanwhile, just like in the past housing crash, the mix of "deep subprime" collateral being pawned off on the ABS market is soaring...because who else would buy it?

Shift in Deal Mix the Real Culprit: The main driver of this dynamic appears to be that, while individual lenders are increasing their weighted average FICO scores, the securitization market has become more heavily weighted towards issuers that we would consider deep subprime - those with a weighted average FICO score below 550. In fact, since 2010, the share of Subprime Auto ABS origination that has come from these deep subprime deals has increased from 5.1% to 32.5%.

Deep Subprime Driving Delinquencies: Since 2012, 60+ delinquencies of non-deep subprime deals picked up from 3.03% to 3.92%. While that 89bps increase certainly demonstrates deterioration, it pales in comparison to the over 300bps increase coming from these deep subprime deals.

But sure, 18mm new cars per year is probably a "normalized" level of demand for the U.S. market...just like 1.3mm in new home sales was "normal" in 2005.

Commercial Banks Slash Auto Loans Outstanding For First Time In Six Years

After the subprime mortgage bubble burst back in 2009, new regulations prevented banks from rushing right back into mortgages to re-inflate a market that nearly took down the global financial system.  Of course, Uncle Sam didn"t restrict wall street from blowing massive bubbles in all asset classes, in fact the Fed seemingly condones it, just the mortgage market.

And so, all that loan volume shifted to autos...

...and student loans.

Alas, it seems as though commercials banks are finally starting to wonder whether they"ve inflated at least the auto loan bubble to the brink of bursting.  As the Financial Times points out today, the FDIC"s commercial lending report for 1Q 2017 showed that commercial banks slashed their auto loan exposure sequentially for the first time in the past six years.

But data released last week by the Federal Deposit Insurance Corporation showed the first sequential drop in car loans outstanding at commercial banks in at least six years. The total slipped $1.6bn to $440bn from the fourth quarter of last year to the first of this, suggesting that banks — wary of repeating the mistakes of the subprime mortgage crisis — have been spooked by rising delinquencies and the threat of litigation. 

Wells Fargo and JPMorgan Chase, the two biggest banks in the sector, saw first-quarter originations drop by double digits from the same period a year earlier. Even relatively aggressive specialists such as Capital One — which added a net $2bn to its $50bn car loan book over the first quarter — are toning down their outlook.

“We’re certainly one more notch cautious,” said Richard Scott Blackley, chief financial officer, noting bigger-than-expected falls in used car prices in the first quarter. “We think that by pulling back a little bit, we’re going to . . . maximise price over volume,” he said.

But for all you banking investors out there who are worried about replacing that juicy auto lending revenue stream, fear not because Citizens Financial"s CEO would like for you to know that while they "ran up auto for a while" they now see "better risk-adjusted returns" in things like student loans.... 

One of the banks pulling back is Citizens Financial Group, the US’s ninth largest by assets. Bruce van Saun, chief executive, told the Financial Times he would rather steer resources into areas such as student loans. “We ran up auto for a while when there was not much else going on. Now we have growth in other areas which offer better risk-adjusted returns.”

...which we guess is true if you simply ignore the fact that over $135 billion of student loans are currently in default.  

Of course, this shouldn"t be new news to our readers as we recently pointed out that after 21 consecutive quarters of loosening lending standards from 2Q 2011 through 2Q 2016, commercial banks finally started to pull back on auto loans in 3Q 2016...

Lending Standards Have Eased...: While overall household debt remains below pre-crisis peaks, auto debt has ballooned to all-time highs. While this debt grew, the median FICO score of borrowers receiving auto loans fell roughly 30 points from peak to trough. According to the Senior Loan Officer Opinion Survey (SLOOS), auto lenders eased lending standards for 21 consecutive quarters from 2Q 2011 through 2Q 2016.

...but Lenders Now Appear to Be Reversing Course and Tightening Standards: While FICO scores did drop precipitously, they have recovered in recent months, and the SLOOS reports 3 quarters of tightening standards after the 21 of easing. A look at the weighted average FICO scores of loans going into subprime ABS deals reveals similar trends, with a number of lenders reporting increases in these scores over recent years. However, the overall trend has moved lower since 2013.

...which probably had something to do the soaring delinquency rates that have resulted from years of declining underwriting standards.

But sure, 18mm new cars per year is probably a "normalized" level of demand for the U.S. market...just like 1.3mm in new home sales was "normal" in 2005.

They're Killing Small Business: The Number Of Self-Employed Americans Is Lower Than It Was In 1990

Authored by Michael Snyder via The Economic Collapse blog,

After eight long, bitter years under Obama, will things go better for entrepreneurs and small businesses now that Donald Trump is in the White House?

Once upon a time, America was the best place in the world for those that wanted to work for themselves.  Our free market capitalist system created an environment in which entrepreneurs and small businesses greatly thrived, but today they are being absolutely eviscerated by the control freak bureaucrats that dominate our political system.  Year after year, leftist politicians just keep piling on more rules, more regulations, more red tape and more taxes.  As a result, the number of self-employed Americans is now lower than it was in 1990…

In April 1990, 8.7 million Americans were self-employed, but today only 8.4 million Americans are self-employed.

Of course our population has grown much, much larger since that time.  In 1990, there were 249 million people living in the United States, but today there are 321 million people living in this country.

What this means is that the percentage of the population that is self-employed is way down.

In fact, one study found that the percentage of Americans that are self-employed fell by more than 20 percent between 1991 and 2010.

And if you go back even farther, the numbers are even more depressing.  It may be hard to believe, but the percentage of “new entrepreneurs and business owners” declined by a staggering 53 percent between 1977 and 2010.

Sometimes I like to watch a television show called Shark Tank, and on that show they make it seem like entrepreneurship in America is thriving.

But the exact opposite is actually the case.  In a previous article, I discussed how the number of new businesses being created in the United States has been steadily falling over the years.  According to economist Tim Kane, the number of startup jobs per one thousand Americans has been declining for several consecutive presidential administrations…

• Bush Sr.: 11.3


• Clinton: 11.2


• Bush Jr.: 10.8


• Obama: 7.8

So why is this happening?

As I mentioned at the top of this article, self-employed Americans are being absolutely strangled by oppressive rules, regulations and taxes.

To illustrate this point, I would like to share with you some quotes from an open letter that was authored by a small business owner named Don Chernoff…

#1 I work for myself and have to pay my own medical expenses. Before the “affordable care act” I was paying about $200 per month for a high deductible policy. It was far from perfect but it got so much worse under the “Affordable” care act.

I now pay over $400 a month, my deductible went from $5,000 to over $6,000 and my out of pocket costs for care have skyrocketed.

#2 I have to spend dozens of hours and thousands of dollars for a tax accountant each spring to prepare my taxes because I cannot possibly understand how to do it myself, and I have a master’s degree in engineering.

#3 Many years ago when I quit a perfectly good job to start my own small business, I was shocked to learn that I had to pay both my share and what had been my employer’s share of Social Security.

#4 Between state, federal and local taxes you’ve probably paid 50% or more of your income in taxes, but that’s not enough for politicians.

If you’ve been lucky enough to have created a business you can sell, now you’ll get to enjoy paying another tax on the capital gain from the sale.

This is another reason why we need a conservative revolution in Washington.  We should demand that our members of Congress lower tax rates dramatically, completely eliminate the self-employment tax, greatly simplify the tax code and get rid of as many regulations on small business owners as possible.

In fact, if it was up to me I would abolish a number of federal agencies completely.

What we are doing right now is not working.  Small businesses have traditionally been one of the main engines of economic growth in this country, but thanks to the left they are unable to play that role at the moment.

It isn’t an accident that over the last ten years the U.S. economy has grown at exactly the same rate as it did during the 1930s.

If we want our economy to be great again, we need to go back and start doing the things that made it great in the first place.  If we continue to suffocate our economy, we will continue to get the same results.

And with each passing day, we get more signs that the economy is heading into another major downturn.  For instance, we just learned that Sears is closing 30 more stores on top of the 150 that had already been announced…

Sears Holdings, which wasn’t shy when it announced at the start of the year that it is closing 150 underperforming stores, has quietly added at least 30 more to the list.

Another 12 Sears stores and 18 Kmarts are among the locations that are closing, from Carson, Calif., to Hialeah, Fla., with most scheduled to shut their doors in July, based on calls to the stores, malls and confirmation in local media.

At the start of the year, the retailer pinpointed the 150 stores it said it would close. But it declined this week to provide a list of additional locations that are slated to shut since then, saying that it update store counts each quarter.

In addition, we just learned that new home sales in April were 11.4 percent lower than they were in March…

If you’re surprised by the collapse in new home sales in April, then you’re not paying attention.

The 11.4% MoM plunge in new home sales in April was 5 standard deviations below expectations and the biggest since March 2015.

Yes, the stock market is holding up for the moment, but for most Americans the “real economy” just continues to deteriorate.  Just because we are at the end of a giant financial bubble does not mean that everything is going to be okay.

The numbers that I brought up in this article are just another example of our long-term economic decline.  In a healthy economy, entrepreneurs and small businesses would be thriving.  But instead, they are being systematically strangled out of existence by a political system that is wildly out of control.

Signs Of An Auto Bubble: Soaring Delinquencies In These 266 Subprime ABS Deals Can't Be Good

If you"re among the growing minority of investors still under the impression that  "everything if awesome" in the auto industry simply because new car sales volumes continue to hover around all time highs, while turning a blind eye to soaring incentive spending and that pesky little debt bubble, then we may need your help with how we should be interpreting the following subprime auto loan delinquency stats from Morgan Stanley. 

In a recent report, Jeen Ng of Morgan Stanley took a look at 266 subprime auto ABS deals to assess the underlying "health" of the auto loan market and this is a recap of what he found.

First, despite low unemployment, high consumer confidence and debt-to-income ratios at 30-year lows, 60+ day delinquencies and default rates are soaring back to "great recession" levels for prime and subprime auto securitizations.

Meanwhile, loss severities are also starting to rise... 

....just as used car prices come under pressure...

...which likely has something to do with the flood of lease returns that are about to hit the market...

Of course, it can"t be that these deteriorating credit metrics are the result of 21 consecutive quarters of loosening lending standards from 2Q 2011 through 2Q 2016, right?

Lending Standards Have Eased...: While overall household debt remains below pre-crisis peaks, auto debt has ballooned to all-time highs. While this debt grew, the median FICO score of borrowers receiving auto loans fell roughly 30 points from peak to trough. According to the Senior Loan Officer Opinion Survey (SLOOS), auto lenders eased lending standards for 21 consecutive quarters from 2Q 2011 through 2Q 2016.

...but Lenders Now Appear to Be Reversing Course and Tightening Standards: While FICO scores did drop precipitously, they have recovered in recent months, and the SLOOS reports 3 quarters of tightening standards after the 21 of easing. A look at the weighted average FICO scores of loans going into subprime ABS deals reveals similar trends, with a number of lenders reporting increases in these scores over recent years. However, the overall trend has moved lower since 2013.

Meanwhile, just like in the past housing crash, the mix of "deep subprime" collateral being pawned off on the ABS market is soaring...because who else would buy it?

Shift in Deal Mix the Real Culprit: The main driver of this dynamic appears to be that, while individual lenders are increasing their weighted average FICO scores, the securitization market has become more heavily weighted towards issuers that we would consider deep subprime - those with a weighted average FICO score below 550. In fact, since 2010, the share of Subprime Auto ABS origination that has come from these deep subprime deals has increased from 5.1% to 32.5%.

Deep Subprime Driving Delinquencies: Since 2012, 60+ delinquencies of non-deep subprime deals picked up from 3.03% to 3.92%. While that 89bps increase certainly demonstrates deterioration, it pales in comparison to the over 300bps increase coming from these deep subprime deals.

But sure, 18mm new cars per year is probably a "normalized" level of demand for the U.S. market...just like 1.3mm in new home sales was "normal" in 2005.

Goldman: Investors Will Soon Realize They Were Too Optimistic

Goldman Sachs really wants the market lower.

After several increasingly more comprehensive critiques of Trump"s fiscal policies, on Friday, just as the S&P closed at fresh all time highs propelled by a late day ramp, Goldman"s chief equity strategist who has a 2,300 year end target on the index, cautioned that "cognitive dissonance exists in the US stock market" as "investors must reconcile S&P 500’s performance with negative EPS revisions from sell-side
analysts." Specifically he notes that the "S&P 500 has returned 10% since Election Day while consensus 2017E adjusted earnings have been lowered by 1%", and predicts that "investors will soon de-rate their expectations of potential 2017 EPS growth as they face the reality that the accretive impact from tax reform will not occur until 2018."

In short, "Financial market reconciliation lies ahead: We are approaching the point of maximum optimism and S&P 500 will give back recent gains as investors embrace the reality that tax reform is likely to provide a smaller, later tailwind to corporate earnings than originally expected."

First, Goldman points out that the underlying current of optimism unleashed with the Trump election is no longer warranted:

Cognitive dissonance exists in the US stock market. S&P 500 is up 10% since the election despite negative EPS revisions from sell-side analysts (see Exhibit 1). Investors, S&P 500 management teams, and sell-side analysts do not agree on the most likely path forward. On the one hand, investors, corporate managers, and macroeconomic survey data suggest an increase in optimism about future economic growth. In contrast, sell-side analysts have cut consensus 2017E adjusted EPS forecasts by 1% since the election and “hard” macroeconomic data show only modest improvement.

Some of the optimism has to do with a jump in Q4 earnings, however much of that has to do with a slowdown in energy company writedowns.

On an operating basis, EPS grew by 24% aided by a recovery in Energy profits. Energy operating EPS recovered from -$2.43 in 4Q 2015 – the lowest level on record since 1967 – to $0.29 in 4Q 2016 as asset write-downs slowed. Energy contributed 13 pp of 24 pp to 4Q S&P 500 EPS growth. Index-level operating EPS grew by roughly 6% in 2016; we expect 10% growth in 2017.

While there has certainly been an earnings rebound, the future is far less exciting than the recent rally will make it appear.

Investors are optimistic about an improvement in economic growth and the prospect of increased corporate EPS.
All 11 sectors contributed to the 10% rise in the S&P 500 index,
with Financials and Information Technology contributing 30% and 22% of
the 208 point gain. Decomposing the strong performance shows reduced EPS
growth has been more than offset by P/E expansion which accounts for
all the index gain (Exhibit 2).

Goldman then notes that while corporate management team commentary from Q4 earnings calls substantiates some of this optimism, forward EPS do not justify it, and indeed "analyst EPS estimates paint a different picture. Consensus 2017E adjusted EPS has been revised downward by 1% over the last 3 months. Sell-side analysts appear hesitant to incorporate potential tax reform and deregulation into their estimates given elevated policy uncertainty. Positive revisions to aggregate S&P 500 EPS estimates are rare – during the last 33 years, consensus EPS estimates have been revised upward from their starting point just six times."

Kostin then points out something we have shown on various occasions in the past month: the recent "recovery" has been all in soft economic indicators such as sentiment and outlook. Hard data has for the most part, faded the entire bounce since the election:

 

“Hard” macroeconomic data has shown only modest improvement. Housing indicators have flashed mixed signals with a notable decline in the latest reading of new home sales. Industrial Production was weaker-than-expected in January (-0.3% vs. median forecast of flat) and the December reading was revised down.

Just as Congressional Republicans are likely to use the reconciliation process to pass fiscal policy legislation this year, so must investors reconcile S&P 500 performance with corporate earnings. We are approaching the point of maximum optimism regarding policy initiatives. Our US Economics team expects a tax reform package may not pass until late 2017 or early 2018. Even so, the tailwind to corporate earnings from tax reform will be constrained by the unwillingness of certain Congressional Republicans to significantly expand the federal budget deficit.

Kostin"s conclusion: "We expect investors will soon de-rate their expectations of potential 2017 EPS growth as they face the reality that the accretive impact from tax reform will not occur until 2018. Many investors have incorporated lower taxes in a 2017 S&P 500 earnings estimate of roughly $130, reflecting 11% growth. In contrast, our S&P 500 adjusted EPS estimate for this year remains $123, just 5% above the flat earnings of 2014, 2015, and 2016. We forecast S&P 500 will peak in 1Q at 2400 before slipping to 2300 by year-end."

It"s perhaps worth noting once again, that every time Goldman has warned that a market turnaround is imminent, the S&P has proceeded to surge to new highs. For those expecting Trump"s first market correction, or worse, they may have to hold their breath until the bank that spawned most of Trump"s economic advisors finally throws in the towel and says to buy at any price.