June 2, 2013

Putting The Cart Before The Horse

Readers suggested a topic on the mortgage market. “At what point, if ever, will U.S. home sales slow down due to rising mortgage rates? When Treasury yields spike, 30-year mortgage rates tend to move up in lockstep with a slight lag. It seems like May 2013 has represented a serious paradigm shift in the Fed’s conviction that quantitative easing is the best way to heal the economy from the Fall 2008 financial collapse. One thing I have learned from the recent economic experience is that unbiased commentary on economic reality during a time of crisis is taboo. The high priests of lies and deceptions don’t much care to be called out on their games of charades.”

One said, “The charts look like 1976 again for gold and stocks. But this ‘1976′ could be two or three years long before it turns into late 1976 through 1980.”

One asked, “When the cash runs out and the primary buyers are J6P. Cash doesn’t care about rates, J6P does. The number of mortgage apps is due more to refinances than to purchases. There’s a huge rush of rfi’s, but at some point won’t we run out of those too?”

And finally, “The last crash happened why? Because resets were hitting and people couldn’t sell or refi their way out of the problem. Prices stalled and demand cratered. Is there anything like this on the horizon to stop the flips mania going on now? No resets like last time.”

The Memphis Business Journal. “Through late 2012, the planets seemed to be aligning for Realtors both in Memphis and across the U.S. With no imminent end to the Federal Reserve’s bond-buying strategy, mortgage rates promised to continue to lure in homebuyers off the sidelines. But the latest weekly report from Freddie Mac showed the average rate on a 30-year fixed rate mortgage crept up once again. But is the upswing in the market enough to either dissuade would-be homebuyers or persuade others to jump in the mix?”

“‘I’d mentioned in our sales meeting a couple weeks ago that rates were projected to increase through the rest of the year and my agents’ reaction was that they’re so low, does it really matter?’ said Jules Wade, principal broker at Prudential Collins-Maury Inc. ‘From their perspective, it’s not really turning any heads.’”

From Inman News. “Will housing heat up as buyers race to beat rising rates? The media loves this concept. A reminder how foolish so much media ‘analysis.’ In a long working life I’ve never once met a ‘not-buying’ client converted into ‘buying-now’ because rates are rising.”

“More important — hunch here, more important than all else put together — fear has faded, replaced by tentative optimism. Home prices are rising in the most desirable markets, but even in the price-flat ones, liquidity has returned. One of the most frightening aspects of the last half-dozen years: ‘Honey, our Realtor says the place is worth about $300,000, but might not sell.’ Just being able to sell is a great relief.”

From Barrons. “The rise in sales of new and existing homes has buoyed purchases of home furnishings and appliances. It’s also the reason why residential investment, a component of gross domestic product, has grown over each of the past eight calendar quarters — in five of them, including the most recent, at double-digit rates. Why barely one cheer, then? Because this housing recovery has been so stuffed with government steroids, you wonder if it could make it on its own if these drugs were withdrawn.”

“And where the FHA and VA are concerned, the down payments required are minuscule by conventional standards, ranging from 0% to 5%. According to a recent FHA report, the average down payment required on its insured mortgages in the first quarter has been a little over 4%. The VA’s rather chilling statistical category called No Down Payment indicates that close to 90% of its home loans normally enjoy this status.”

“Recent data are not available for the share of all mortgages insured by the FHA and VA. But we do know they accounted for a hefty 46.4% of all mortgages in 2011, way up from an average of about 10% from 2004 to 2007, just before the Great Recession. And even if the FHA/VA share has shrunk to about one-third of mortgages over the recent year, that one-third would help explain the rise in house prices, given the minuscule down payments. Imagine if a third of all recent purchases of stock were done on margin requirements of 0% to 5%.”

“If mortgage rates were to rise to 6% from a recent low of 3.5% (they were above 6.5% as recently as mid-2006), monthly payments on a 30-year mortgage would rise by a third, meaning the same-priced home would cost one-third more. (While the increase in the rate would exceed 71%, the payment would go up by only a third because of long-term amortization.)”

“Such a jump in financing costs would certainly slow the rise in home prices and purchases. Alternatively, to keep the housing boom going, the government could push for looser lending standards. It would be déjà vu all over again.”

From Town Hall. “This week economists, investors and politicians were treated to some of the ‘best’ home price data since the frothy days of 2006 when home loans were given out like cotton candy and condo flipping was a national pastime. The strong housing data is taken as proof that the economy has turned around and that a recovery is under way. Cooler heads may simply see how government policies have channeled money into real estate in order to reflate a bubble that has been collapsing for the last five years.”

“The truth is that most buyers cannot afford today’s prices without the combination of government guarantees and artificially low mortgage rates. The Federal Reserve has been conducting an unprecedented experiment in economic manipulation. At the same time, Federal control of the mortgage industry has become nearly complete. In addition, a variety of Federal programs are in place to help keep underwater homeowners in homes that they could not otherwise afford. Taken together, these programs create far more favorable terms for home buyers than those that existed before the crash.”

“This trend has allowed a recovery in home sales even while the national home ownership rate has dropped to 65%, the lowest rate since 1995. For the first quarter of 2013, the Federal Reserve reports a 10% delinquency rate for residential mortgages (those with payments that are at least 90 days past due). This is more than 6 times the rate in the first quarter of 2006. In contrast, credit card delinquencies currently stand at 2.65%.”

“In the meantime, by blowing more air into a deflating housing bubble, the Fed is misdirecting money into a sector that investment capital should be avoiding. A successful economy can’t be built on housing. Rather, a robust real estate market must result from a healthy economy. You can’t put the cart before the horse. As a nation, we do not need more houses. We built enough over the last decade to keep us well sheltered for years. Private equity funds should be using their investment capital to fund the next technology innovator, not wasting it on townhouses in Orlando and Phoenix.”

“Of course the real risks in housing center on the next leg down, in what I believe will be a continuation of the real estate crash. We can’t afford to artificially support the market indefinitely. When significantly higher interest rates eventually arrive, the fragile market will again be impacted. We saw that movie about five years ago. Do we really want to see it again.”

Bits Bucket for June 2, 2013

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