A Look at Housing’s One-Percenters

CoreLogic Chief Economist Mark Fleming suggests that an examination of housing's one-percenters might be as valuable an analysis as a glance at that segment's income and/or wealth distribution.  Historically, at least for the last two decades, homes that have sold for over $1 million have made up 1 percent of sales, a useful proxy. 

The share remained below 1 percent through most of 2003 than began to move, reaching as high as 1.8 percent when prices peaked in mid-2006.  But even as prices began to deflate, the share of upper-priced homes continued to rise, reaching 2.2 percent at the peak in June 2007 - more than twice the share 5 years earlier.  And even as prices suffered in general, the market share of million dollar homes held at an average of 2 percent through August 2008; twice the traditional share.

The collapse in high-end real estate market share coincided with the collapse of the financial markets themselves starting in September 2008.  By February 2009 high end sales had retreated back to 1 percent, the same as in December 2003.  Then financial markets stabilized and sales came back, accounting for 1.5 percent in the last part of 2009.   Fleming says that "over the next three years as the S&P 500 steadily rose and eventually hit all-time highs, the million dollar sales share also rose, reaching 2 percent by mid-2913 and remaining at that level since then".

This tie between housing prices and the stock market was clearly no coincidence.  Fleming says several studies document the wealth effects of financial and real estate markets on consumption and they typically conclude that housing-wealth affects are much larger than financial wealth-effects, primarily because more people own houses than own stocks.  "But for real estate's 1 percent," he says, "the stock market is the barometer of the wealthy's consumer confidence." This is clear in that sales share and the S&P are so tightly correlated and the S&P 500 index serves as an excellent two-month leading indicator of sales.

While the 500 dipped in the last few weeks of January 2014, it recovered its December levels in February.  One can expect $1 million home sales to remain strong as long as the stock market remains high CoreLogic's economist says.

But that is the one-percent.  How is the rest of America doing?  Many lower price segments are actually enjoying healthy sales growth, Fleming says, with the fastest appreciation in the $650-$950,000 category which was up 33 percent from a year earlier.  The next grouping, $350,000 to $650,000 is up 26 percent but the $150,000 to $300,000 rose only 12 percent year over year, and sales below $150,000 are actually contracting as prices increase and investor, cash, and REO sales decline.

The relationship between consumer confidence and spending is well established, he says, but it doesn't always affect all market segments equally.  The one-percenters have benefited from financial market gains and the direction of other financial markets this year will determine how many homes the one-percenters purchase in 2014. 

Fannie Mae REO Purchase Incentives Extended

Strong response to an earlier limited incentive offer for home buyers has prompted the Fannie Mae HomePath® Program to briefly extend the offer's deadline.  HomePath is the marketing program for Fannie Mae's foreclosed properties (REO). Its FirstLook period gives potential owner-occupants or public entity buyers the first 20 days after a property is cleared for sale to investigate properties and submit offers without competition from investors.  

HomePath announced that effective February 14, buyers in the FirstLook period could receive a bonus of up to 3.5 percent of the final sales price to pay closing costs.  Funds could be used, for example, to buy down the mortgage interest rate through upfront points.   

The original incentive was available for initial offers on homes that were made between February 14 and March 31, 2014 with the transaction required to close before May 31, 2014.  Fannie Mae has now extended the offer period through April 30 for transactions closing by June 30.

The closing cost bonus is available in 27 states and the extension announced today affects only dates, not areas of eligibility.  A list of the eligible locations and further information on the program is available at www.HomePath.com.

 "We have received a strong response from the incentive since it went into effect on February 14, and we are happy to extend the offer to even more homebuyers," said Jay Ryan, Vice President of REO Sales. "With the unusually cold and extended winter season ending, we want to give people more opportunity to use the incentive to buy properties that they will call home."

Fannie Mae and Freddie Mac must not Die: Bove

The current plan to wind down Fannie Mae and Freddie Mac would result in lower housing prices for everyone. It would harm the United States economy by lowering growth. It would increase unemployment.

Despite this probability, the president and Congress seem to be intent on killing these companies - and the media and public do not seem to care. The prevalent belief is that these are failed companies with failed structures that exacerbated the American housing crisis that flared up in 2008 and therefore they must be expunged from the system.

In fact, the opposite is true. For eight decades, the system that they represent was successful in allowing tens of millions of Americans to own their own homes. The system was abused by politicians, regulators, and bankers beginning in the mid-1990s and this led to the downfall of these two giant companies. It was not structure but political and financial interference with proper underwriting that created their difficulties. The reaction to these misdeeds is to eliminate these companies without considering what this will do to housing and beyond housing, the economy.

Consider the current proposals, in Washington D.C.:

• One set of ideas would result in the elimination of the 20- and 30-year self-amortizing mortgage.
  
• Another concept would result in increasing the federal debt ceiling by more than $5.3 trillion and maintaining pressure to keep raising it going forward.
  
• Another option would wipe away $350 billion of tax payer equity.
  
• Other ideas would result in the complete nationalization of the housing finance industry.
  

What is certain is that under every one of the proposals, the concept of every American owing his or her own home is now gone. The result will be to create neighborhoods of rental units - or in my view, instant slums. Given the risks implied by the current proposals, one would think that Americans would want to know more about what is happening to home finance or, more specifically, the price of their homes. To date they are not interested - and neither is the media.

It is probable that the housing industry in the United States is the nation's most subsidized sector. The problem, of course is how do we get from the most heavily subsidized system of home finance in the western world to a system that is not subsidized at all? Clearly if the transition is not handled properly, major dislocations will emerge and these dislocations will be very painful to all Americans.

If the current plan from the U.S. Treasury clears Congress and the courts, two things will happen: Fannie Mae and Freddie Mac will stop functioning on January 1, 2018; they will then enter a liquidation phase that may take at least 10 years.

This will not be good for anyone in this country. If there is no Fannie Mae and Freddie Mac, no bank will be willing to make 20- or 30-year self-amortizing mortgages. I have spoken to at least a dozen banks who feel very strongly about this issue - they just don't view mortgage lending as the profit center it once was in the past. It's more of a loss-leader to attract customers and cross-sell them other products.

Banks will simply be unwilling to put 30-year self-amortizing mortgages on their balance sheets, particularly at today's interest rates. They will be willing to make 10- and 15-year adjustable-rate loans. The math here is frightening. The median income of American households is approximately $51,000. Under the new qualified mortgage rules, if you want to buy a home:

• You must make a down payment equal to 20 percent of the value of the home to be purchased.
  
• You are not allowed to pay more than 40 percent of your household income to meet principal and interest payments.
  

So, if the homeowner obtains a 30-year mortgage at a 4.25-percent fixed rate, then he/she/they can afford a home worth approximately $435,000. Conversely, if all they could get was a 10-year adjustable-rate mortgage at 6.25 percent (the average over the past 20 years), they could only afford a house worth $345,000 - a drop of $90,000.

You can play with the numbers any way you want but the bottom line is always the same: Affordability drops. Housing prices must come down. Moreover, if the American banks adopt the mortgage systems widely used in Canada, the 3-5-year balloon mortgage will be back.

Of course, no one believes that this will ever happen. However, they need to think again. The program to eliminate Fannie Mae and Freddie Mac is already in place. Unless Congress acts or the courts throw out the U.S. Treasury's plan, the price of every home in the United States is about to fall. After the fact, people will care and the media will awaken from its somnolent state.

What should be done

To me it is very clear that the following should be done to minimize the impact of the government's withdrawal from the home finance industry.

• The conservatorship controlling Fannie Mae and Freddie Mac should be eliminated.
  
• The companies should be returned to private sector ownership.
  
• The government should exercise its warrants and sell the stock in the open market.
  
• The dividend on the Series A preferreds should be returned to 10 percent.
  
• The two companies should have as their mission:
  1) The elimination of their owned portfolios
  2) The expansion of their insurance roles without the full faith and credit of the nation behind this insurance
  3) The requirement that they give preference to insuring long duration fixed rate mortgages
• The Senior Preferred Stock should be placed in a new trust dedicated to funding low-income housing.
  

None of this requires congressional or court actions. The president is able to do it by fiat. There is no massive government takeover of the housing finance industry and more importantly no massive bureaucracy created. It is simple, low cost, and would avoid disrupting the American public by forcing the prices of their homes lower.

- By Richard X. Bove

Richard X. Bove is an equity research analyst at Rafferty Capital Markets and the author of "Guardians of Prosperity: Why America Needs Big Banks," which is due out on Dec. 26.

Existing Home Sales Lowest Since July 2012

Existing Home Sales, which are completed transactions for single-family homes, townhomes, condominiums and co-ops, continued trending lower in February, falling to their lowest level since July 2012 according the the National Association of Realtors (NAR).  Compared to last month's reading of a 4.62 mln annual pace in January, today's 4.60 mln is essentially unchanged. 

While that is in line with the median forecast among economists surveyed by Thomson Reuters, it contributes to a downtrend beginning after the post-crisis highs in July 2013 when sales stood at a 5.38mln annual pace (note: November 2009 was slightly higher at 5.44mln, but can't truly be considered 'post-crisis' as it was the last month to benefit from the homebuyer tax credit.  Case in point: sales fell to 4.4 mln in the following month).

The trend could improve as the year progresses, according to Lawrence Yun, NAR's chief economist.  “We had ongoing unusual weather disruptions across much of the country last month, with the continuing frictions of constrained inventory, restrictive mortgage lending standards and housing affordability less favorable than a year ago,” he said. “Some transactions are simply being delayed, so there should be some improvement in the months ahead. With an expected pickup in job creation, home sales should trend up modestly over the course of the year.”

Even within today's data, there are a few bright spots.  Prices have been trending higher for more than 2 years and experienced a very normal month-over-month change from January.  March prices are almost always higher compared to February, and improvements tend to stick around until August before prices ebb into the Fall months.

The inventory situation improved as well, rising 6.5 percent to 2.0 million existing homes.  At the current pace of sales, that's a 5.2-month supply, up from 4.9 percent in January.  Ostensibly a strong improvement, such jumps are the norm for the February data.  The positive implication is that last February's inventory stood at 1.9 mln units, making this the first February to show a year-over-year gain since 2011.  Before that it was 2008.

In addition to inventory and tough guidelines, NAR President Steve Brown noted the troublesome impact of student loan debt.  “20 percent of buyers under the age of 33, the prime group of first-time buyers, delayed their purchase because of outstanding debt," Brown said.  "In our recent consumer survey, 56 percent of younger buyers who took longer to save for a downpayment identified student debt as the biggest obstacle.”

All-cash sales made up 35 percent of the market in February, a 2 percent increase from January, and a statistic that remains historically elevated.  That's not purely driven by large companies gobbling up rentals though.  Individual investors bought 21 percent of February's homes, with 73 percent of them paying all cash.  The major caveat here is that Existing Sales can only account for transactions happening through MLS.

Lenders Reach Farther Out Credit Spectrum to Fill Capacity

Among closed loans in February, the share of refinances fell to 43 percent from 47 percent in January, and from 68 percent in February 2013, according to to Ellie Mae's Origination Insight Report.  Every month, Ellie Mae compiles statistics on closed and denied loans processed through its Encompass software, which accounted for 3.5 million transactions in 2013.

Consistent with the increase in the share of purchases, FHA loans accounted for 22 percent of the total compared to 21% in January, and the share of 15yr terms (more prevalent among refinances) fell to 12.2 from 15.0 percent.

Average closing times moved appreciably lower to 41 days from 45 days in January.  Faster closings and decreased refinance share both suggest lenders are operating under capacity.  A look at the changes average credit scores confirms that lender approvals have had to move farther out the credit spectrum to fill that capacity. 

"There has been significant loosening compared to where we were a year ago," notes Jonathan Corr, President and Chief Operating Officer of Ellie Mae. "The average FICO score on all closed loans was 724 in February 2014 compared to 745 in February 2013, or a 21-point decrease. Last month, 33% of closed loans had an average FICO score under 700 compared to 24% in February 2013."

One aspect of the report that does not corroborate decreased refinance activity and excess capacity is the monthly change in average interest rates.  Ellie Mae notes a lower average 30yr Fixed rate in February--4.655 compared to 4.723 in January.  This makes the decrease in refinance share seem counterintuitive. 

The issue likely stems from much higher rates in the early part of January--not a typically busy time of year.  As consumers got down to business for 2014, rates fell sharply, leading to increased refi demand by the end of the month.  While February's rates may have been lower on average, they never made it down to late January levels, where a majority of the month's volume was concentrated. 

Mortgage Applications Fall 1.2% Last Week

Mortgage applications fell slightly percent during the week ended March 14. According to MBA's Weekly Mortgage Applications Survey the Market Composite Index, a measure of mortgage volume decreased 1.2 percent on a seasonally adjusted basis from the week before and down 1 percent on an unadjusted basis.

The Refinance Index fell slightly week-over-week and refinancing garnered a 56.5 percent share of mortgage activity, down from 57 the previous week.  The refinancing share is off aproximately 6 percentage points from the level at the beginning of the year and is at the lowest point since April 2011.

Refinance Index vs 30 Yr Fixed

The seasonally adjusted Purchase Index was 1.0 percent lower and the unadjusted Purchase Index was 1.0 percent higher than in the week ended March 14.  The unadjusted index was 17 percent below that of the same week in 2013. 

Purchase Index vs 30 Yr Fixed

Both contract and effective interest rates decreased for all mortgage products during the week.  The average contract rate for conventional (loan balances under $417,000) 30-year fixed-rate mortgages (FRM) was 4.50 percent with 0.26 point.  The previous week the rate was 4.52 percent with 0.29 point. 

 The average rate for the jumbo version of the 30-year FRM (balances in excess of $417,000) was 4.39 percent, a decrease of 2 basis points from the week before.  Points were down 1 basis point to 0.19.

FHA backed 30-year FRM had an average rate of 4.13 percent with 0.18 point.  This was a decrease from the prior level of 4.18 percent with 0.21 points.

The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.52 percent from 3.53 percent.  Points decreased to 0.25 from 0.28.  

Adjustable rate mortgages (ARMs) had an 8 percent share of mortgage applications which has been essentially unchanged for the last eight weeks.  The average contract interest rate for 5/1 ARMs decreased to 3.09 percent from 3.18 percent, with points increasing to 0.38 from 0.36.  

MBA's survey covers over 75 percent of all U.S. retail residential mortgage applications, and has been conducted since 1990. Respondents include mortgage bankers, commercial banks and thrifts. Base period and value for all indexes is March 16, 1990=100 and interest rates are based on loans with an 80 percent loan-to-value ratio.  Points include the origination fee.

Building a Better House Price Index With MLS Data

Two Federal Reserve economists have developed a home price index which they claim operates in a more real time environment than those indices currently accepted as the industry standard.  Rather than base their index on sales prices, Elliot Anenberg and Steven Laufer have constructed theirs using a repeat-sales approach but relying on listing data.  Using Data on Seller Behavior to Forecast Short-run House Price Changes was published as part of the Fed's Financial and Economics Discussion Series.

The paper notes that home price changes have consequences for the economy as they affect both household wealth and an owner's ability to borrow.  But information on those prices, unlike that of other assets such as stocks, are reported with a significant time lag.  The Case-Shiller house price index contains information from several months earlier but has an immediate effect on home building related stock prices and it is likely that the prices indexes also have an impact on individual homeowners, policy makers, lenders, and others.  By using information that was available at the time of the contract negotiations, the authors designed their list-price index to mitigate this information friction.

The authors attribute the time lag in producing the traditional indices to a lack of incentive for buyer or seller to publicize the price once they have negotiated an agreement.  Even once the price is disclosed at closing there is typically another lengthy delay before the public record becomes available.  In contrast, before the contract is signed the seller has a strong incentive to broadcast the current asking price as a marketing tool.  Thus information on listing prices is disseminated through platforms such the Multiple Listing Services (MLS) in real time.  Once a sale agreement is reached those listings are removed.  The authors theorize that using the information on home prices before those homes are delisted could allow them to learn about the level of sale prices much earlier than what is currently available.  

The authors developed a new house price index reproducing the Case-Shiller repeat-sales index, substituting sales prices with an estimate based on the final list prices of all homes that are delisted.  Key to the methodology is associating each delisting with the most recent prior sale of that property, creating a pair of observations analogous to a pair of repeat sales in the Case-Shiller and other similar indices.  This allows a timelier index of price trends while maintaining the most attractive feature of other indices; their ability to control for changes in the mix of homes sold over time by partialing out a house-specific effect from each price. 

Testing their theory was complicated because the sale-to-list price ratio varies, both in the cross section and across time and because many delistings are done for reasons other than a sale.  The authors found that some of these variations could be explained by other observable information about seller behavior such as the time on market (TOM) and the history of list price changes.  This information was used to adjust the final list price up or down. 

The index was tested by using micro data from three large metropolitan areas, Phoenix, Seattle, and Los Angeles, over the period 2008-2012.  They found their index could account for hetroskedastic errors (i.e. homes with a longer interval between sales should be downweighted because the likelihood of unobserved changes to house quality are higher).  It could also account for value weighting - that more valuable homes comprise a larger share of a real estate portfolio and thus their appreciation/depreciation rates should be given more weight.  The index also accurately forecasts the Case-Shiller index several months in advance, outperforms forecasting models that do not use listings data, and for the one metropolitan area in which data on futures contracts are available, outperforms the market's expectations as inferred from prices on Case-Shiller future contracts.

The second set of data was micro data on home listings with dates from which can be derived the TOM.  There is no data to indicate the reason for delisting or whether, if it were delisted because of a sale, no information on the terms of that sale.  The listing also includes the specific property address and some information on the home's characteristics.   Each home was linked by address to its previous sales record.

All three cities in the sample experienced significant declines in house prices during the beginning of the sample period, although the magnitude of the decline varied considerably across cities   The sample period also covers time during which the homebuyer tax credit was in effect and the 2012 beginning of price recovery in the cities, all three of which are covered by the Case-Shiller 20-City Index.  The authors identified nearly a million properties that were delisted during the sample period and which they could link to a previous transaction record. A majority of listings are delisted without a list price change. The median TOM is between one and two months. Many delistings are relisted soon after delisting: 20 percent of delistings are relisted within less than a month and 17 percent of are relisted between 2 and 6 months later. Many of these relistings may be due to sales agreements that fall through because a mortgage contingency fails or an inspection fails.

The authors derived two index models.  In the first, which they called the simple-list price index they used the same regression equation as Case-Shiller except for the months where that index was not yet available and they substituted sales prices with the final list prices of delistings that were expected to close in a month.  For the previous sale, they used the house price level calculated from the transaction data alone rather than re-estimating it using both transactions and listings data.

They found that, despite the extreme changes in housing market conditions over the sample period the sale-to-list price ratio fluctuated within a band of only several percent but that variation does appear to be correlated with the house price cycle; periods of rising prices tend to have high sales-to-list price ratios.  Another potential source of bias was the inclusion of all delistings rather than just those that led to sale.  Delistings that led to sales tended to have lower list prices and the magnitude of that price difference was negatively correlated with the house price cycle. This share is also volatile over time, with hotter markets being associated with a higher probability of sale, suggesting that including all delistings, rather than only the ones that result in sales, will bias the index due to selection.

On average, there is a delay of about six weeks between delisting and closing. The distribution of delays does not change much over time. This suggests that the assumption of a time-invariant distribution seems very reasonable, especially since the index is calculated as a moving average of the previous three months.

The second model, the adjusted list price index, attempted to eliminate problems with including all delistings by delivering predictions for how outcomes would vary by applying observable listing variables such as time on the market and the list price history. That model attempts to describe the behavior of a homeowner trying to sell her house. It had to take into account various factors that might influence the outcome such as the value the sellers place on not selling and staying in the home which may arise from factors such as employment opportunities or changes in the family's social or financial situation; time constraints such as the start of the school year or a closing date on a trade-up home purchase.

The authors considered the ability of each index to forecast the Case-Shiller HPI at various time horizons - i.e. the number of weeks from the date of the last observed listings data until the end of the month they were trying to forecast.  At longer horizons an increasing share of the sales are from properties which have not yet observed delistings.  However, even five months into the future they found their index still had significant predictive power which occurs become sore transactions take a significant amount of time to close and because the smoothing process causes sales that close in a given month to affect the index for the two subsequent months as well.

The adjusted list price Index performs well, even at 12 weeks.  Not surprisingly performance improves as more listings information about the month becomes available.  Even the Simple List-Price Index performs well although the adjusted index delivers improved performance of about 20 percent.

They authors stress that their sample period covers one of the most volatile time periods in housing history and Phoenix, one of the most volatile sub-markets.  The fact that our index performs so well during this time period gives us confidence that performance would be as good, or possibly even better, out of sample."

MBA Sees Wintertime Volatility in Builder Survey

New home sales were up slightly in February the Mortgage Bankers Association (MBA) said today, but the increase was based on a substantially downgraded January estimate.  MBA issues their estimate of new home sales, which is based on mortgage applications, in advance of the official count by the U.S. Census Bureau.

Sales of new homes were at a seasonally adjusted annual rate of 533,000 units in February, 1 percent above the revised January rate of 527,000.  January's sales were originally estimated at a rate of 543,000 which represented a 35 percent surge from an unusually low sales rate of 402,000 in December.  On an unadjusted basis MBA said there were 43,000 new homes sold during the month, a 13 percent bump from January's 38,000 sales.

Mortgage applications for new home purchases increased by 12 percent relative to January; a change that does not include any adjustment for typical seasonal patterns.  Conventional loans composed 65.1 percent of loan applications, FHA 16.5 percent, VA loans 13 percent, and Rural Housing Services/USDA loans 5.3 percent.   The average loan size of new homes increased from $289,358 in January to $295,008 in February.

MBA derives its estimates from its Builder Application Survey which tracks mortgage application volume from mortgage subsidiaries of home builders across the country and from assumptions regarding market coverage and other factors.  The Census Bureau's report on new home sales, data that is recorded at contract signing which is typically coincident with the mortgage application, will be released on March 25.

Housing Recovery Continuing, but not yet Robust -Fannie Survey

Americans expectations regarding home prices ticked up decisively in February, both in terms of anticipating continued price increases and in the size of such gains.  Fannie Mae's National Housing Survey results released on Monday showed an increase of 7 percentage points to 50 percent in the share of survey respondents who expect home prices to rise over the next 12 months, more than bouncing back from a 6 percentage point downturn in January.  Among that 50 percent, the average size of the expected price gain jumped to 3.2 percent from 2.0 percent in January.

Expectations about the direction of mortgage interest rates have flattened out over the last few months with slightly over half (56 percent) expecting rates to increase while about a third expect no change over the next 12 months.

At the same time, those who believe that it would be easy to get a mortgage dropped 7 percentage points from January's all-time survey high of 52 percent while those who viewed the possibility as difficult increased the same 7 percentage points from 46 percent in January.   

Even with home prices expected to rise and getting a mortgage to be more difficult, survey respondents who said it was a good time to buy a house increased from January by 3 percentage points to 68 percent while those who see it as a good time to sell decreased by 3 percentage points to 34 percent.  The share who say they would buy if they were going to move fell four percentage points to 66%, and those who say they would rent increased to 30%.

Respondents expect rentals to be more expensive over the next 12 months as well.  Fifty-one percent expect rents to increase compared 48 percent in January.  The average expectation for rents also shot up, going from a 2.8 percent rise to 4.3 percent in only a month.

The share of respondents who say the economy is on the wrong track increased 3 percentage points to 57 percent in February, following a four-month decline. Despite a decrease in optimism across some of the indicators last month, consumer attitudes remain in generally positive ranges with 43 percent of respondents saying they expected their personal financial situation to get better over the next 12 months, down 1 point from January.  The share of respondents who say their household income is significantly higher than it was 12 months ago increased 2 percentage points to 24 percent while those who say their household expenses are significantly higher than they were 12 months ago rose 4 percentage points to 36 percent.

"Similar to the noisy economic and housing data published over the past few months, we've seen a corresponding increase in volatility in our survey results, particularly for home price expectations and perceptions about the ease of getting a mortgage," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Weather may have played a role, as suggested by a 6 percentage point jump over the past two months in the share of consumers who say their household expenses are significantly higher than a year ago. This response would be consistent with higher home heating costs. Despite the volatile month-to-month changes, we believe that the housing recovery is continuing, but is not yet robust."

Fannie Mae's survey polls 1,000 Americans, homeowners and renters, by phone each month, asking over 100 questions to assess their attitudes toward owning and renting a home, home and rental price changes, homeownership distress, the economy, household finances, and overall consumer confidence.  The current report relies on data collected between February 1 and February 23, 2014.

Breaking Down Weather Implications in Stronger Employment Report

This morning's Employment Situation Report was stronger than expected.  By historical standards, the "beat" isn't especially large (175k vs 149k forecast), but most market participants (at least those expressing opinions) are surprised there was a 'beat' at all.  The great debate on the impact of uncommonly cold/snowy winter is at the heart of this expectation.  In my conversations, even those who really don't think much of the weather impact are still willing to admit it exists in some small form.

The Bureau of Labor Statistics agrees.  Buried in the labyrinthine caverns of their data collection lay nuggets we can mine and ultimately refine into a usable conclusion, but this is not for the faint of heart.  There are a lot of words and numbers in the rest of this analysis, but the end result will be a number that's likely somewhere close to the number of jobs missing from Nonfarm Payrolls due to the weather.  (Hint: it ends up being about 50k, and this was reasonably-well circulated among the investment community, but a number is just a number without a detailed breakdown.  This is that breakdown):

Reprinted with permission from an update that went out to MBS Live Subscribers earlier today:

UPDATE: What does all that "Weather Stuff" mean in the Payrolls Data?
Update Issued: 3/7/2014 9:41 AM

You're not alone if connecting these dots is a bit confusing.  Hopefully this will be somewhat of a roadmap for the significance of the weather-related data in this morning's payrolls report.

Background facts:

• There are two surveys in the Employment Situation: Establishment and Household.  NFP comes from Establishment, Unemployment rate from Household. 
• In order to NOT count in NFP, a worker would have to be absent for the entire pay period.
• Just over 20% of workers have 1-week pay periods
• The Household survey asks workers if they had a job, but missed the whole week due to weather!  (These people would be counted as employed in the Household survey, but not in the establishment survey).

From there, let's look at what happened last report vs current...

• In January's data (reported early Feb), 262,000 workers said they missed the whole week due to weather.  That's historically low, and no big deal (although on an unrelated note, that does lend some credence to how some economic data was surprisingly strong in January vs December).
• The jump up in February's data (today) was big.  There are now 601,000 workers saying they didn't work for the whole week due to weather. 
• In both cases, 20% of these workers can be assumed to be 'missing' from the NFP figure (because 20% of workers have 1-week pay periods and NFP only counts you if you worked during that pay period).
• Such absences will ALWAYS detract from NFP (i.e. the fact that we can assume they're 'missing' isn't some scandalous revelation... it's always like that), but what we're interested in is the DIFFERENCE from the last report, and more importantly from the average/median February data.

So, from the last report where 262k workers didn't work that week to 601k claiming the same this week, we have a difference of 

601k - 262k = 339k

20% of those have one week pay periods and therefore are not likely counted in NFP.

339k*20% = 67.8k

More important is the difference in this February vs the average past February (helps us assess "how many more jobs would we have seen without the weather?"  The $64k question...)

The average number of workers reporting no work during the survey period for the past 10 Februaries is 356.8k (tally the Feb column on this page and divide by 11). 

601k (this report) - 356.8k (average report) = 244.2k

So the difference between this report and the average is 244.2k.  In other words, 244.2k fewer people than normal worked during the survey week.  And 20% of those folks only have 1-week pay periods, meaning they wouldn't be counted in NFP. So.......

244.2k*20% = 48.84k

CONCLUSION: It's strongly possible that payrolls would be at least 48k higher if the weather effect had been in the middle of it's historical range (one of those months spiked to over 1000k, so using the historical median as opposed to the average makes this figure jump to over 70k).

NAHB Leading Markets Data Bodes Well for 2014

Metropolitan areas considered leading markets on the National Association of Home Builders (NAHB)/First American index of that name increased to 59 this month, a net gain of one from the previous month.  The 59 areas have returned to or exceeded their last "normal levels" of economic activity as measured by employment levels, housing permits issued, and home prices.

The Leading Market Index (LMI) had a nationwide score of 87, unchanged from February.  This means that based on current permits, prices and employment data, the nationwide average is running at 87 percent of normal economic and housing activity.  Thirty-two percent of the 350 metro areas tracked by the index had higher scores this month than last and 84 percent have shown improvement over the past year.

"Despite the cold weather that has constrained economic and housing activity across much of the nation this winter, markets are returning to normal levels," said NAHB Chairman Kevin Kelly.  "As the job and housing markets continue to mend and the onset of spring releases the pent-up demand for new homes, this will bode well for the remainder of 2014."

A number of markets are poised to break through on the index according to Kurt Pfotenhauer, vice chairman of First American Title Insurance Company, co-sponsor of the report.  Pfotenhauer said that 130 of the cities tracked are now at 90 percent or above of their previous norms.  This is "a positive trend to watch as the year progresses," he said.

Baton Rouge is the top major metro on the list with a score of 1.41 - or 41 percent better than its last normal market level. Other major metros whose LMI scores indicate their market activity now exceeds previous norms are Honolulu, Oklahoma City, Austin and Houston, Harrisburg and Pittsburgh.  Top smaller markets include Odessa and Midland, Texas, both of which have an index of 2.0, meaning they are at twice their previous economic highpoint.  Casper, Wyoming; Bismarck and Grand Forks, North Dakota round out the top five. 

"The strong energy sector is at the forefront of the recovery and centered in many small and mid-sized markets in Texas, Louisiana, North Dakota and Wyoming," said NAHB Chief Economist David Crowe. "In fact, these four states account for eight of the top 10 markets on the LMI and 45 percent of the markets that are at or above normal."

The metropolitan areas are scored by taking their average permit, price and employment levels for the past 12 months and dividing each by their annual average over the last period of normal growth.  The period of 2000-2003 is used for single-family permits and home prices and 2007 is the base comparison for employment.  The three components are then averaged to provide an overall score for each market; a national score is calculated based on national measures of the three metrics. Any value above one indicates that a market has advanced beyond its previous normal level of economic activity.  Calculations are based on Census Bureau construction data, Bureau of Economic Statistics employment figures, and home prices from Freddie Mac.

Institutional Investors' Effect on Home Price Appreciation

Even though they stated in a news release two weeks ago that institutional investment was waning, RealtyTrac has released a report on its impact on the housing market.  Institutional investors are defined as those who have purchased ten or more residential properties in a calendar year and in January they accounted for 5.2 percent of home purchases, down from 8.2 percent one year earlier. In all of 2013 institutional investors purchased 354,000 properties or 7.40 percent and over the last three years their purchases have totaled 850,000 units. The January number was a 22 month low.

In a select set of markets, purchases made by institutional investors represent more than 20 percent of all residential sales over the past three years and they remain a significant force in a number of areas, accounting, for a quarter of the market for example in Jacksonville, Florida and Atlanta.  RealtyTrac's new report contends that in areas where institutional investors played a significant role there was also a significant impact on home prices.  The same, however was not true of rents where the effect was slight but in the opposite direction.   

RealtyTrac looked at 1,264 counties nationwide with sufficient data available to evaluate institutional investor purchases or lack thereof and constructed the heat map below showing where these investors have been most active.  Hover over any county to see the percent of residential sales going to institutional investors over the past three years, along with home price appreciation and the change in fair market rents for a three bedroom home during the same time period.

The company says that the average home price appreciation between December 2011 and December 2013 in all counties studied was 14 percent and the change in fair market rents was 7 percent.  However, in the 14 counties where institutional investors made 20 percent or more of the home purchases during that period, prices appreciated an average of 31 percent and while rents increased by only 6 percent.  These counties contain 1 percent of the U.S. population.

In an additional 88 counties accounting for 12 percent of the population, institutional investors made-up 10 percent or more of purchases.  In those counties the average home price increased by 23 percent and rents were up by 5 percent.

RealtyTrac says that the data indicates that institutional investors have helped accelerate home price appreciation in the markets they have concentrated - "or possibly they have been very good at picking the right markets."

Weather Continues to Hamper Home Sales

Pending sales changed little from December to January the National Association of Realtors® (NAR) said today.  That is not surprising as the bad weather NAR blamed for the lackluster December pending sales numbers did not change going into January either.

NAR's Pending Home Sales Index (PHSI) inched up 0.1 percent to 95.0 in January while the December number was revised up to 94.9 from the previously announced 92.4.  January pending sales were 9.0 percent below a year earlier when the PHSI was 104.4.  The December index reading was the lowest since November 2011 when it stood at 94.6.

The index is a forward looking indicator based on contract signings for home purchases.  Transactions are generally expected to be finalized within 60 days of contract signing.

Lawrence Yun, NAR chief economist, confirmed that weather remained a factor in January.  "Ongoing disruptive weather patterns in much of the U.S. inhibited home shopping," he said. "Limited inventory also is playing a role, especially in the West, while credit remains tight and affordability isn't as favorable as it was a year ago."

Monthly gains in the South and Northeast were by offset declines in the West and Midwest.  The PHSI in the Northeast rose 2.3 percent to 79.0 in January, but is 5.3 percent below a year ago. In the Midwest the index declined 2.5 percent to 92.9 and is 9.3 percent lower than January 2013. Pending home sales in the South increased 3.5 percent to an index of 111.2 but remained 5.5 percent below a year ago. The index in the West fell 4.8 percent in from December to 84.2, and is 17.5 percent below January 2013.

NAR is projecting that sales of existing home will be weak in the first quarter but prices will continue to rise because of limited inventory. "Increasing new home construction can quickly solve two problems, producing more inventory and taming price growth," Yun said.

Sales should pick up in the middle part of the year and finish just over 5.0 million units for the year, slightly below the volume in 2013.  The national median existing-home price is forecast to grow in the range of 5 to 6 percent.

The Pending Home Sales Index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined. By coincidence, the volume of existing-home sales in 2001 fell within the range of 5.0 to 5.5 million, which is considered normal for the current U.S. population.