The Housing Bubble

A weekend topic starting with the Post Bulletin. “Long-term U.S. mortgage rates climbed for the fifth straight week amid investors’ growing concern about inflation. Mortgage giant Freddie Mac said Thursday the average rate on 30-year, fixed-rate mortgages shot up to 4.32 percent this week, up from 4.22 percent last week and the highest since December 2016. A year ago, it stood at 4.17 percent. The rate on 15-year, fixed-rate loans, popular among homeowners who refinance, rose to 3.77 percent from 3.68 percent last week and the highest since May 2011. It was 3.39 percent a year ago. The rate on five-year adjustable rate mortgages rose to 3.57 percent this week from 3.53 percent last week and the highest since April 2011. It was 3.21 percent a year ago.”

‘Will higher rates break housing-market momentum? It’s too early to tell for sure,’ said Len Kiefer, a Freddie Mac economist. He noted that applications to buy homes are still up 8 percent from a year ago.”

From Lew Sichelman. “It’s the age-old chicken-or-egg story of the housing market: Should you buy that home now, while interest rates are still fairly low? Or wait for rising prices to moderate? Of course, there are many factors that will go into your decision. But here’s one you probably haven’t considered, and it has real ‘buy now’ implications: Mortgage payments zoomed last year and are likely to rise even higher this year, continuing a trend that has persisted for the past six years.”

“CoreLogic has been tracking mortgage payments for the past generation, says that while home prices may be up 6 percent through August of last year, the average mortgage payment went up 10.1 percent during the corresponding period. And for 2018, the typical home loan payment is likely to rise by more than 11 percent. That’s a good bit more than most of us have been seeing in yearly raises, if we get them at all.”

“CoreLogic’s ‘typical mortgage payment’ (TMP) is a mortgage rate-adjusted monthly payment based on each month’s median home sale price in the United States. Of the four components of a mortgage payment — often compartmentalized as PITI, for principal, interest, taxes and insurance — the TMP measures only the principal and interest payments. It assumes a 20 percent down payment, the amount necessary to avoid having to pay for private mortgage insurance (PMI), and a 30-year, fixed-rate loan. Of course, many homebuyers put less than 20 percent down and must purchase PMI, which can add several hundred dollars more to their monthly house payment.”

“The typical mortgage payment was higher than today’s TMP before the Great Recession, which stands to reason, as home prices climbed to unsustainable highs before the markets crashed in 2008. Back in June 2006, before things started to go south, the typical monthly payment was $1,250. That fell to a low of $546 in February 2012, and has risen steadily since then to $816 as of August of last year. That comes to about a 50 percent increase over five years, or about 10 percent a year.”

“Of course, in 2006, the average mortgage rate was a lot higher: 6.7 percent, compared to 3.9 percent last August.”

From Realty Biz News. “Thanks to changes in mortgage rules, realtors in the GTA have to be more creative when it comes to making a sale.Numbers show that home sales in the area have fallen 22 per cent over the last year. Industry experts have been pointing the finger at high interest rates and the new, tighter mortgage rules that came into effect on January 1st this year.”

“‘It’s still a buyers’ market in the GTA,’ notes Larry Weltman of AccessEasyFunds, a real estate commission advance company based in Ontario. ‘Let’s look at a GTA home that a year ago was selling for $1.4million, for example. Today that will likely go for $1.05 million. Let’s assume a buyer is putting 25% down, so they will carry a mortgage now of $787,500. Most of these secondary mortgages are for a one year term or less. So, at 8% per year, the buyer is paying in one year 4% extra on the mortgage or $31,496. This in turn means that effectively the property cost is an extra $31,496.’ Weltman adds, ‘This is not significant given that the buyer could close in a buyer’s market that is heavily discounted. They can then look in a year’s time to refinance with a traditional bank mortgage, and will hopefully be in a much better situation with more time to process.’”

“On the other hand, he stresses that realtors should not put a buyer client into a high interest secondary mortgage who cannot afford to carry this mortgage and has no chance of refinancing within the one year.”

From Vitaliy Katsenelson. “The Federal Reserve’s changing of the guard — the end of the Janet Yellen’s tenure and the beginning of the Jerome Powell era — has me remembering what it was like to grow up in the former Soviet Union. In the command-and-control economy of the Soviet Union, the prices of goods often had little to do with supply and demand but were instead typically used as a political tool. This in part is why the Soviet economy failed — to make good decisions you need good data, and if price carries no data, it is hard to make good business decisions.”

“Over the past decade the global economy has started to resemble one, as well-meaning economists running central banks have been setting the price for the most important commodity in the world: money. Interest rates are the price of money, and the daily decisions of billions of people and their corporations and governments should determine them. Like the price of sugar in Soviet Russia, interest rates today have little to do with supply and demand (and thus have zero signaling value).”

“The consequences of well-meaning (but not all-knowing) economists setting the cost of money are widespread, from the inflation of asset prices to encouraging companies to spend on projects they shouldn’t. But we really don’t know the second-, third-, and fourth derivatives of the consequences that command-control interest rates will bring. We know that most likely every market participant was forced to take on more risk in recent years, but we don’t know how much more because we don’t know the price of money.”

“Quantitative easing: these two seemingly harmless words have mutated the DNA of the global economy.”

“Americans have a healthy distrust of their politicians. Unfortunately, we don’t share the same distrust for economists and central bankers. It’s hard to say exactly why. Maybe we are in awe of their Ph.D.s. Or maybe it’s because they sound really smart and at the same time make us feel dumber than a toaster when they use big terms like ‘aggregate demand.’ For whatever reason, we think they possess foresight and the powers of Marvel superheroes.”

“Just as the well-meaning economists of the Soviet Union didn’t know the correct price of sugar, nor do the good-intentioned economists of our global central banks know where interest rates should be. Even more important, they can’t predict the consequences of their actions.”