An astounding read on housing

A report from Wells Fargo reveals a booming mortgage business -- and a U.S. economy in fine shape.

Beginning this week we won't have time -- at least most of us won't -- to do enough work on individual quarterly reports as they happen. The next three weeks will be sheer hell, and I am always amazed when generalists have claimed they've seen more than just the cheat sheet of the reports -- the CliffsNotes, so to speak.

But last week was different. If you took the time out to read the report of Wells Fargo (WFC +1.03%) -- and, believe me, there was time to do it -- you would have been pretty much stunned at how much business it's doing and at how strong the mortgage business is in the U.S.

Put the following facts in perspective from a company that has more than 30% of the mortgage market in this country.

Mortgage business revenue was up 90% from a year earlier and 11% from the prior quarter.
Revenue from refinancing was up more than $19 billion, or 43%, from the first quarter, "indicating continued strength in the overall housing market, where we see increases in sales and pricing in markets throughout the country, even some of the hardest hit areas during the slowdown," according to CEO John Stumpf.
A 31% increase was achieved in commercial loan growth, through portfolio acquisitions and organically increased credit card penetration.
Credit quality continued to improve, with the charge-off ratio declining to 1.15%, the lowest since 2007.
Nonperforming assets declined by $1.8 billion from the first quarter, down 11% from a year earlier.
Record net income rose by 17%, with earnings per share up 17% from a year earlier.
"Mortgage volumes have been much stronger than anyone expected a year ago or even three months ago, for that matter, with originations more than double where they were a year ago, and our mortgage pipeline, which should lead to future revenue and expense growth, has also doubled," according to CFO Timothy Sloan.

These are astounding numbers. They're the kinds of numbers that signal a gathering strength in housing, something that few people expected and fewer still had thought possible, given that the economy was supposed to have hit a wall a few months ago.

When the largest bank for mortgages reports these numbers, you simply have to rule out the kind of slowdown the employment numbers suggest to us. You have to conclude otherwise. The numbers from Wells are just too big.

I have been a believer in Wells ever since the bank got its arms around the portfolio it bought from Golden West via Wachovia.

That deal -- which no one, other than Wells Fargo, would ever admit was cheap -- now does look incredibly intelligent for this simple reason: The amount of national coverage Wells bought otherwise never would have been allowed by regulators. Wells basically got control over most of the country's mortgage market and servicing market. It services an astounding $1.9 trillion in residential mortgages, with an amazing ability to cross-sell, in return for two years of outsized losses.

Put simply, Wells Fargo is telling you that housing is back and that it is booming and that this moribund part of the economy is now a huge tailwind, not a headwind. Can housing carry the economy? No. Can it offset sluggish employment? I'm beginning to think it can, and that's the main reason the market was able to reverse direction and go up at the end of last week. When you consider the good commercial lending by JPMorgan Chase (JPM +0.39%) and the mortgage lending by Wells, you basically come back with a picture of the U.S. being in fine shape, by far the best of all economies around the world, save for China. It emerges as an economy with increasing strength, not declining strength, as we head into the second half of the year.

Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and is long JPM.

Thirty-year mortgage rate drops to another record low

WASHINGTON (AP) – Average rates on fixed mortgages fell again to record lows, giving would-be buyers more incentive to brave the housing market.Mortgage buyer Freddie Mac says the average rate on the 30-year loan fell to 3.56%. That's down from 3.62% last week and the lowest since long-term mortgages began in the 1950s.The average rate on the 15-year mortgage, a popular refinancing option, dipped to 2.86%, below last week's previous record of 2.89%.The rate on the 30-year loan has fallen to or matched record low levels in 11 of the past 12 weeks.Cheaper mortgages have contributed to a modest housing recovery this year. Home sales were up in May from the same month last year. Home prices are rising in most markets. And homebuilders are starting more projects and spending at a faster pace.Low mortgage rates could also provide some help to the economy if more people refinance. When people refinance at lower rates, they pay less interest on their loans and have more money to spend. Many homeowners use the savings on renovations, furniture, appliances and other improvements, which help drive growth.Still, the pace of home sales remains well below healthy levels. Many people are still having difficulty qualifying for home loans or can't afford larger down payments required by banks.And the sluggish job market could deter some from making a purchase this year.U.S. employers added only 80,000 jobs in June, a third straight month of weak hiring. The unemployment rate was unchanged at 8.2%, the government reported last week.Slower job creation has caused consumers to pull back on spending.Mortgage rates have been dropping because they tend to track the yield on the 10-year Treasury note. A weaker U.S. economy and uncertainty about how Europe will resolve its debt crisis have led investors to buy more Treasury securities, which are considered safe investments. As demand for Treasurys increase, the yield falls.To calculate average rates, Freddie Mac surveys lenders across the country on Monday through Wednesday of each week.The average does not include extra fees, known as points, which most borrowers must pay to get the lowest rates. One point equals 1% of the loan amount.The average fee for 30-year loans was 0.7 point, down from 0.8 point last week. The fee for 15-year loans also was 0.7 point, unchanged from the previous week.The average rate on one-year adjustable rate mortgages rose to 2.69% from 2.68% last week. The fee for one-year adjustable rate loans slipped to 0.4 point, down from 0.5 point.The average rate on five-year adjustable rate mortgages dropped to 2.74% from 2.79% last week. The fee was unchanged at 0.6 point.

Housing Passes a Milestone

The housing market has turned—at last.

The U.S. finally has moved beyond attention-grabbing predictions from housing "experts" that housing is bottoming. The numbers are now convincing.

Nearly seven years after the housing bubble burst, most indexes of house prices are bending up. "We finally saw some rising home prices," S&P's David Blitzer said a few weeks ago as he reported the first monthly increase in the slow-moving S&P/Case-Shiller house-price data after seven months of declines.

The U.S. finally has moved beyond attention-grabbing predictions from housing "experts" that housing is bottoming. The numbers are now convincing, according to David Wessel on The News Hub. (Photo: Bloomberg News)

Home Builders Beef Up on Cash to Gird for Next Wave 7/10/12

Housing Healing in More U.S. Cities 7/9/12

Number of the Week: Has Housing Bottomed? 7/7/12
Outlook: Housing Ends Slide but Faces a Long Bottom 4/29/12

Stunned Home Buyers Find Bidding Wars Are Back 4/27/12

Journal Community

Nearly 10% more existing homes were sold in May than in the same month a year earlier, many purchased by investors who plan to rent them for now and sell them later, an important sign of an inflection point. In something of a surprise, the inventory of existing homes for sale has fallen close to the normal level of six months' worth despite all the foreclosed homes that lenders own. The fraction of homes that are vacant is at its lowest level since 2006.

The reduced inventory of unsold homes is key, says Mark Fleming, chief economist at CoreLogic, a housing data-analysis firm. For the past couple of years, house prices have risen in the spring and then slumped; the declining supply of houses for sale is reason to
believe that won't happen again this year, he says.

Builders began work on 26% more single-family homes in May 2012 than the depressed levels of May 2011. The stock of unsold newly built homes is back to 2005 levels. In each of the past four quarters, housing construction has added to economic growth. In the first quarter, it accounted for 0.4 percentage points of the meager 1.9% growth rate.

"Even with the overall economy slowing," Wells Fargo Securities economists said, cautiously, in a note to clients, "the budding recovery in the housing market appears to be gradually gaining momentum."

Economists aren't always right, but on this at least they agree: A new Wall Street Journal survey of forecasters found 44 believe the housing market has reached its bottom; only three don't. (The full results of the Journal's July survey will be released at 2pm ET) Housing is still far from healthy despite the Federal Reserve's efforts to resuscitate it by helping to push mortgage rates to extraordinary lows: 3.62% for a 30-year loan, according to Freddie Mac's latest survey. Single-family housing starts, though up, remain 60% below the 2002 pre-bubble pace. Americans' equity in homes is $2 trillion, or 25%, less than it was in 2002 and half what it was at the peak. More than one in every four mortgage borrowers still has a loan bigger than the value of the house, though rising home prices are reducing that fraction slowly.

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Still, the upturn in housing is a milestone, a particularly welcome one amid a distressing dearth of jobs. For some time, housing has been one of the biggest causes of economic weakness. It has now—barely—moved to the plus side. "A little tail wind is a lot better than a headwind," says economist Chip Case, the "Case" in Case-Shiller.

From here on, housing is unlikely to drag the U.S. economy down further. It will instead reflect the strength or weakness of the overall economy: The more jobs, the more confident Americans are about keeping their jobs, the more they are willing to buy houses. "Manufacturing had led growth and construction had lagged," JPMorgan Chase economists said last week."Now the roles are reversed: Manufacturing growth has slowed as private construction comes to life."
Plenty could go wrong. The biggest threat is a large shadow inventory of unsold homes, homes which owners won't put on the market because they are underwater, homes that will be foreclosed eventually and homes owned by lenders. They have been trickling onto the market, slowed in part by government efforts to delay foreclosures; a flood could reverse the recent rise in prices. Or the still-dysfunctional mortgage market could get worse. Or overly zealous regulators or a post-election change in government policy could unsettle mortgage lenders or home buyers.

But the housing bust is over.

Write to David Wessel at capital@wsj.com

A version of this article appeared July 12, 2012, on page A2 in the U.S. edition of The Wall Street Journal, with the headline: Housing Passes a Milestone.

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