Losing Out To Those Cashing In
The Voice of San Diego reports from California. “Is the San Diego housing market in bubble territory again? In my mind, the ultimate test for bubble-hood lies in valuations. I believe the best way to measure housing valuations is to compare home prices to local incomes and rents. Right now, they are telling us that – bidding wars notwithstanding — there is no bubble to be seen in San Diego housing. I offer no opinion as to the direction of San Diego home prices in the years ahead. But those seeking out a bubble would be advised to look elsewhere.”
The Union Tribune. “The best evidence for a nascent bubble in San Diego County is behavioral. In scenes reminiscent of pre-crash 2005, they are joining waiting lists for new construction, writing offers on the hoods of cars, and sending ‘love letters’ to persuade sellers to pick them. The sense of urgency is increasing along with prices. It’s the classic sign of early bubble formation. ‘In a normal market, higher prices mean that sellers sell less. But the market becomes pathological when higher prices cause more buying,’ said Ed Leamer, an economist at the UCLA Anderson Forecast who in 2003 warned of the last bubble. ‘People are starting to think, ‘I’ve got to buy a house before it is too late.’ That’s a bubble.’”
NBC 7 San Diego. “The San Diego Association of Realtors reported median single-family home prices climbed 23 percent in the year ending in April 2013. One local Real Estate Broker said prices are over-inflated. ‘A 20 percent increase would tell you that, yes,’ said Scott Vinson, owner and broker at Coldwell Banker Royal Realty in Chula Vista. ‘I would like to see the market slow down a little, from a broker’s standpoint. I’d like it to slow down and get those first-time buyers involved and getting them buying homes before it’s too late.’”
“Vinson said some investors have orders for their real estate agents to purchase homes under a certain price without even looking at the property in hopes of purchasing it for a quick remodel and flip.”
CBS Los Angeles. “Matt Manner now has 18 homes that he’s fixing — and flipping. He pointed to one home he bought for $330,000, and plans on selling for $629,000. The goal, he said, is to double his profit. The current frenzy, he said, took off in January. That’s when Charlotte Dewaele began her search. Her initial hope was to have a home about 1,200 square feet. ‘Then that went down to a thousand, and now it’s just about anything,’ she said.”
“Her search for anything led to a California house marketed as having ‘charm.’ The entire house is 672 square feet and with a list price of $268,000. ‘It’s overpriced, but it’ll probably sell for a lot more than it’s priced at right now,’ Dewaele said.”
“Dewaele’s search is getting more urgent. She’s now six months pregnant. She’s ready to buy a house and has the money, but she can’t. Laura Key, Dewaele’s realtor describes the current housing market as ‘a mess.’ Each time they find a house, they lose out to those cashing in. ‘There’s always multiple offers. Then it’s sold within 24 hours. Then, less than 30 days, back on the market,’ Key said.”
“The flipped houses go for at least $50,000 to $75,000 more than what they purchased it for. Dewaele said she can’t bid that high without ‘overextending,’ as so many others did before the last housing boom went bust. And she doesn’t think she’ll find a home before her baby is born. ‘I’ve kind of lost hope,’ she said.”
The Sacramento Business Journal. “Real estate appraiser Ryan Lundquist has been at it for 10 years, so he remembers what his profession and the Sacramento real estate market was like in the mid-2000s. A cautionary note: He said he sees some similarities from then to the market developing now. ‘You see new construction, and back in the heyday, the builders would raise their prices by $10,000 a month,’ said Lundquist. ‘That’s happening again.’”
From KFSN. “Homebuyers are returning to the market but rising prices have some people worried about a ‘double bubble’ where prices again reach an unsustainable level and then collapse. People are happy to see their home values rise but the president of the California Realtors Association, Don Faught worries it’s happening too quickly. He says it’s not good for the recovering economy. ‘We do not want to price people out of this market,’ Faught said. ‘We’re kind of anticipating interest rates, right now it’s about four percent. They’re going to go to about five percent next year.’”
From Reuters. “Out of 50 million U.S. homeowners, 10.2 million are still ‘underwater’, according to the National Association of Realtors. In California alone, two million homeowners are underwater. Another 500,000 are delinquent on their mortgage payments, according to figures from ForeclosureRadar. In the Inland Empire, an area of 4.3 million people and one million homes, 52 percent of foreclosed homes that were purchased in the first quarter of 2013 were bought by Wall Street investors, according to John Husing, a regional economist. None of those homes were even advertised on the open market.”
“‘So over half the market was not even seen by realtors and normal buyers,’ Husing said. ‘This is not a natural recovery. A lot of what is driving demand has nothing to do with a normal housing market. It’s an anomaly caused by huge investment firms.’”
“ForeclosureRadar also uses another metric - sales activity - to determine the health of the housing market. According to the firm, the number of homes actually sold is at the lowest number since 2008. ‘We have artificially low interest rates, and low supply,’ said Sean O’Toole, ForeclosureRadar’s CEO. ‘You do get an increase in prices, but I don’t think you have a real recovery.’”
CBS Oakland. “Cash buyers accounted for more than a third (34.1 percent) of home sales in California in March, more than double the average (a 16.1 percent monthly average since 1988). They are not just buying foreclosures, they are buying everything. Real estate agent Patrick Leaper hasn’t seen this many cash buyers in 40 years. ‘There’s a tremendous amount of cash buyers out there,’ Leaper said. ‘Not just the investor, [or] people who have taken money out of their IRA’s and buying real estate, but homeowners too.’”
“In part it’s a response to the low interest rates paid on money in the bank. Some savers are putting their money in real estate instead. All that cash is helping drive up prices. In Oakland, the median sales price has risen from $240,000 in April last year to $537,000 this April, according to Red Oak Realty.”
“It’s almost as if buying a house in Oakland right now has become an endurance sport. Sara Mertz endured. After being beaten on eight previous offers, she went more than $100,000 over the asking price to get her new house. ‘From our experience, there’s not a lot on the market, and so when there is a house that we’re excited about, so is everybody else,’ Mentz said.”
‘Cramer’s hearing a lot of talk about a bubble. And he finds it concerning. It’s not that the Mad Money host is particularly worried about a bubble per se, - rather he questions the agenda of prognosticators who are tossing around the term. “There’s something about bubble calling that grown-up pundit seekers in search of getting their names around just can’t resist,” he said.’
‘The term has quickly resurfaced in the housing market after new data showed home prices in 20 cities increased a whopping 10% year over year. Again Cramer asked himself whether the asset class had gotten too expensive. In this case Cramer thinks the answer is a resounding no. “On average a home is worth less than it was in 2006. Therefore, I don’t think housing is overheating, nationwide,” Cramer said. “I believe the renaissance in housing remains an investable thesis for the long-term.”
‘There’s always somebody calling a bubble!” Cramer said. “Usually they’re doing it to look smart.” Unfortunately, those kinds of forecasts can be more harmful, than anything else.’
http://finance.yahoo.com/news/cramer-beware-bubble-225356748.html
Cramer makes a great shoeshine boy.
There’s something kinda funny about him saying this:
‘in search of getting their names around’
‘those kinds of forecasts can be more harmful’
Why is this? If some don’t want to buy a house, that just leaves more for the smart money, doesn’t it?
He just wants to make sure EVERYBODY gets rich.
http://www.theonion.com/articles/everyone-who-started-watching-mad-money-in-2005-no,32346/
“…that just leaves more for the smart money, doesn’t it?”
Do the smart money folks have direct (pre-market) access to the shadow inventory?
‘t a time when institutional investors are pouring billions of dollars into the foreclosed homes with the purpose of converting them into rentals, Fannie Mae and Freddie Mac seem to be missing out on all the action.’
‘The bailed-out housing giants, also known as government sponsored enterprises or GSEs, together own over 150,000 foreclosed homes that should be ripe for the picking for investors scouting for bulk deals. But the agencies do not seem to be capitalizing on the opportunity to dispose these assets and it is unclear why.’
‘Fannie Mae and Freddie Mac held about 150,000 foreclosed properties on their balance sheet as on March 31, 2013. Fannie Mae said in its latest 10-Q filing it is unable to market 42% of the more than 100,000 foreclosed homes on its books because many homes are in redemption status, where the borrower gets a chance to win back a home lost to foreclosure.’
‘Other homes are occupied by borrowers who are yet to be evicted or by tenants under its deed-to-lease program. Still others are in need of repair.’
‘Freddie Mac, similarly, says it is unable to market 35% of its REO inventory.’
‘A recent report by the Office of the Inspector General of the FHFA highlighted the GSEs management of foreclosed properties as a critical concern, especially in light of the agencies’ significant “shadow inventory.”
http://www.thestreet.com/story/11941642/1/fannie-and-freddie-missing-out-on-rental-wave.html?puc=yahoo&cm_ven=YAHOO
So the F-word GSEs are officially using term “shadow inventory”, yet many in the press continue to deny its existence. That is perfect.
Cramer specifically exhorted viewers not to worry about Bear (first) and Lehman (later) in the immediate lead-up to both firms going under.
If Cramer were some rando commentator we could assume he was relying on publicly available info. But read Cramer’s c.v. and look at his career as a whole. It is impossible that he didn’t see those collapses as at least a possible (if unlikely) scenario. Similarly, it is impossible that he doesn’t “get it” that there is an asset bubble.
“Similarly, it is impossible that he doesn’t “get it” that there is an asset bubble.”
+1 Cramer’s livelihood depends on his clients “not getting it.”
The price has to be as high as it was at the peak of the last bubble before Cramer will be able to see that another bubble is forming? I really wish someone would pay me a mint to be as dumb as him. Trouble is, I’d flub it because you can’t even fake that kind of stupid. Cramer is famous for being stupid!
“There’s always somebody calling a bubble!”
Eight years since I started posting to the HBB, and there is still no sign the bubble will end any time soon…
This house purchase pre-birth is stupid.
The kid will be fine for a long time
not having a backyard.
Ever hear of a park.
Sometimes the white picket fence
has to wait. They’ll live.
Open House chat I had last weekend,
is that people know it’s a bubble. It’s
the inventory scarcity. How long?
Most I talked to said they think 5
years out.
My wife and I have arrived at this way of thinking as well re: kids. If/when we have our one (1) kid, sorry he/she is not going to have:
- a dedicated “play room”
- an acre-sized backyard
- an all-white, all upper-income school
Instead, we’ll have free time to spend and flexibility to invest in him/her and not constantly be “moving up” to “better” neighborhoods. The ability to (almost) never have to think about paying for housing is a big gift in our housing-obsessed world.
We do have a back yard but IMO big back yards are overrated if you have to invest time/money in caring for them. I’d rather take a kid to the zoo, the beach, skiing, etc. And any city has lots of parks nearby. Surprisingly they are not overrun with “brown people” like many suburbanites seem to think. It’s actually quite the opposite–white ppl love the waterfront and they love parks.
“We do have a back yard but IMO big back yards are overrated if you have to invest time/money in caring for them.”
$400 for a good lawn mower
$200 for a good trimmer
And hour a week to cut the grass.
That’s worth having a nice big yard where my kids can run around and play every day.
YMMV of course.
As for the play room….I used to think the same way. And now I cherish the playroom. It’s one room in the house, in the basement where all the toys are. I don’t see any other toys anywhere else in the house. No play room = toys in every other room in the house which means a continual mess.
You spent too much for your lawn equipment dude.
Not if you want something that will last more than a few years.
I just bought a lawn mower with a Honda engine new for $200. How big is your property?
“We do have a back yard but IMO big back yards are overrated if you have to invest time/money in caring for them.”
I’m with you, but it sure beats a large front yard (useless, visible, dangerous), especially if the place could have been built with a small frontyard and a large backyard.
Besides, the article made it seem like there is no dad. This is just like the artiles during the last bubble. There is always a story that focuses on a woman with kids, with no mention of any dad anywhere. I think we are supposed to want to protect her. Fine, but I want to know what the DAD is doing to house the pregnant mom.
“There is always a story that focuses on a woman with kids, with no mention of any dad anywhere.”
Remember that couple from the “Suzanne” ad? Imagine her pregnant and househunting.
Oh dear, “buy now or be priced out forever” is rising from its ashes like a a phoenix. This isn’t going to end well.
Yes, particularly in the city and metropolitan area named for that mythical bird.
My favorite is the FedEx ad where the guy pronounced it “puh-hoe-nix.”
“Is the San Diego housing market in bubble territory again? In my mind, the ultimate test for bubble-hood lies in valuations. I believe the best way to measure housing valuations is to compare home prices to local incomes and rents. Right now, they are telling us that – bidding wars notwithstanding — there is no bubble to be seen in San Diego housing. I offer no opinion as to the direction of San Diego home prices in the years ahead. But those seeking out a bubble would be advised to look elsewhere.”
Housing bubble symptom numero uno: DENIAL.
“The San Diego Association of Realtors reported median single-family home prices climbed 23 percent in the year ending in April 2013.”
Note that 72/23 is just greater than 72/24 = 3, which is (roughly) the number of years for prices to double at this rate of appreciation. I’m sure this rate of appreciation is sustainable, and there is no bubble in San Diego…
That’s nothing:
‘In Oakland, the median sales price has risen from $240,000 in April last year to $537,000 this April, according to Red Oak Realty’
LOL! Good catch. If the realtors said so then it must be true.
Places & Spaces | 4/16/2013 @ 8:22PM
High Home Price-to-Income Ratios Hiding Behind Low Mortgage Rates
Zillow, Contributor
Zillow has noticed a trend that could become problematic for both the U.S. housing market and policymakers in coming months.
By looking at two metrics — an affordability index and a price-to-income ratio — Zillow researchers have determined that low mortgage rates that make homes appear incredibly affordable are overshadowing a bigger overall trend in which the overall prices of homes are actually significantly more expensive than historic norms relative to annual incomes.
The affordability index measures the percentage of a homeowner’s monthly income devoted to housing (mortgage) payments. In the pre-bubble period from 1985 through 1999, homeowners spent 19.9 percent of their monthly income on mortgage payments. But because of historically low interest rates currently in the 3 to 4 percent range, at the end of Q4 2012, homeowners were spending only 12.6 percent of their monthly incomes on housing payments — or roughly 37 percent below historic norms. Low interest rates have translated into more purchasing power for homeowners, as the cost to finance homes has gone down.
The price-to-income ratio looks at the total cost/price of a home relative to median annual incomes. Historically, the typical, median home in the U.S. cost 2.6 times as much as the median annual income (so if the median income in an area was $100,000, the median price of a home would typically be about $260,000: $100,000 * 2.6).
While historically low mortgage rates are translating into big savings for homeowners, those same low monthly payments are masking a troubling trend. While home values have been on the rise for the past year — in some areas appreciating by 15 percent or more annually — median wages haven’t kept pace. As a result, home price-to-income ratios in many areas are climbing.
Because wage appreciation has failed to keep pace with home value appreciation, once rates rise and the illusion of affordability driven by smaller monthly payments disappears, the market will be left with homes that could potentially be too expensive to afford on the typical median wage.
“The days of historically high levels of housing affordability are numbered,” said Zillow Chief Economist Stan Humphries. “Current affordability is almost entirely dependent on low interest rates, and there’s no doubt that rates will begin to rise in the next few years. This will have an undeniable effect on demand for housing, as home buyers will have to spend more of their incomes to buy a home. Home values will have to either remain stagnant while incomes catch up or, quite possibly, home values will have to fall in some markets. This will especially be the case in some markets that have seen strong home value appreciation.”
…
“In California alone, two million homeowners are underwater. Another 500,000 are delinquent on their mortgage payments, according to figures from ForeclosureRadar. In the Inland Empire, an area of 4.3 million people and one million homes, 52 percent of foreclosed homes that were purchased in the first quarter of 2013 were bought by Wall Street investors, according to John Husing, a regional economist. None of those homes were even advertised on the open market.”
500,000 = MASSIVE SHADOW INVENTORY. How do the Wall Street investment firms plan to profit given the huge glut waiting to hit the market some time soon?
“‘So over half the market was not even seen by realtors and normal buyers,’ Husing said. ‘This is not a natural recovery. A lot of what is driving demand has nothing to do with a normal housing market. It’s an anomaly caused by huge investment firms.’”
I’m sure the Case-Shiller S&P and other housing price indexes properly reflect this ‘over half of the market’ which is sold behind the scenes to investors at fire sale prices, RIGHT!?
Why do you feel that the shadow inventory is going to hit the market soon? I know of bank-owned houses which sit vacant after 5 years. Why can’t they sit another 5 years?
Two trains of thought.
Us baby boomers have less time in front then behind us.
I assume it’s driving decisions to downsize. Did for us, but we were cash. Got a fair price in Sept ‘12 considering.
The young’ins are spoiled. God-forbid they have to rent an apt and save. 5 years of waiting deflates the ego. I want and deserve it now. And the tragedy of jr coming home to a rental.
We started in a 1+1. We lived through it.
“got a fair price”
You did?
And how would you know this?
What did you pay?
inchbyinch:
If you think that today’s youngins are spoiled compared to Baby Boomer, then you are living in a Boomercentric dreamland. Today’s youngins are strapped hard.
‘Why can’t they sit another 5 years’
Another 5 years and they’ll be unlivable. It doesn’t matter what these lenders do with the houses. We’re minting a new batch of FB’s by the thousands. I do think the state will regret the homeowners bill of rights, etc.
‘How do the Wall Street investment firms plan to profit’
The private equity theme has been getting trashed in the media a lot recently, along with their REIT prices.
“Another 5 years and they’ll be unlivable. It doesn’t matter what these lenders do with the houses.”
Who shoulders the loss on these?
“We’re minting a new batch of FB’s by the thousands.”
Don’t most if not all of the loans come with a federal guarantee of principle, which means every American is helping to insure them against loss?
I don’t think the Blackstones are getting FNMA-backed loans though.
Maybe they have the cash to buy all of them, and corner the market.
And so long as they are positioned to quickly dump their holdings in case the market heads south, they are almost certain to make money by purchasing during the parabolic blowout phase of the echo bubble.
REITs reinsured for losses by AIG? Surely these syndicates know that their holdings will lose money in the mid-term, so one can only assume there’s some artificial prop underlying the acquisitions. (Think BofA acquiring Merril Lynch’s toxic mortgage portfolio.)
Maybe a push to take FNMA private so the hedgies can suck out the equity?
Beats me….
But the funny thing is that the Wall Street investors are not buying these houses at fire-sale prices. They are paying way too much. I guess they just have money burning a hole in their pocket.
Maybe they think the Fed has put a floor under housing and there’s no way they can lose.
I’m trying to find the 500,000 from the source. From this page:
http://www.propertyradar.com/california-foreclosures
(foreclosure radar changed its name)
I see 50k homes that have had an NOD filed (but no sale date set)…I wonder if the author misread the data (and thought he saw six digits).
It’s also possible that the 500,000 is the all-encompasing “non-current” number (delinquent, NOD, and foreclosure process), which would make more sense.
Extrapolating from the “Hope Now” alliance’s report, my guesstimate of the number of mortgages in CA is about 7,000,000, which makes the 500,000 about 7% of mortgages. LPS’s last report had CA’s non-current rate at 7%, which would then make more sense.
Florida-Based Lender Processing Services Inc., “LPS” to Pay $35 Million in Agreement to Resolve Criminal Fraud
http://www.justice.gov/opa/pr/2013/February/13-crm-206.html
This is the outfit that publishes fraudulent data that “Rental Watch” likes to quote.
Considering you paid a massively inflated price which you refuse to disclose, you have a stake in the direction of prices.
You’re untrustworthy.
Flippers are bad for the housing market. It is artificial demand as they drive prices through the roof, competing with each other, then bail when prices ultimately adjust to what incomes can afford. Now we have more stories of people with 18 houses a piece. This is a sick joke.
Flipping attempts aren’t always successful. Here’s a case in point from my nabe.
Depending on what Zillow’s server delivers, this listing is active or, as of June 4, removed. Later today, I’ll do a ride-by and see what’s up.
A lot of sellers who strike out in Spring pull the listing down for a few months and re-list the house in late summer/early fall and it shows up as a new listing. I see this commonly here. MLS allows it it the listing has been down for 60 (I think) days. It’s either 60 or 90. Either way, I find listings doing this pretty often. Around Christmas/New Years, the # of listed houses drops alot [sic]. Apparently no one goes house-hunting in December.
We made our offer on our house in late November of ‘10. I think the lateness in the selling season made the sellers more receptive. Either that or they just had a negotiation fall through. Whatever it was they were sure receptive in November. Probably didn’t want the house to sit idle until the next Spring/Summer, in the meanwhile having to pay property taxes and utilities.
Me again. I did a ride-by. House is still listed at $199,999.
Methinks the price is still too high, nice renovation notwithstanding. The surroundings do not justify such a lofty number.
“The surroundings do not justify such a lofty number.”
+1 That place should be closer $45k, max.
Flippers aka parasites aren’t
my favorite people. But I have seen
some homes that would have taken an
end-user a long to bring up, redone by
a good flipper. In the past, they got
a good price at auction, so the end-user price
although higher then comps, made sense.
Those days are gone.
I hesitated with my interior choices,
because of the flipper formula. My home
surpassed it, I hope.
I think “flipping” refers to when someone buys the house only to make cosmetic/simple “upgrades”. Give a house curb appeal, replace windows/doors, maybe a new kitchen/bath, but otherwise not really improve the house for the long run by addressing structural issues, electrical issues, etc. I mean, flippers are not going to re-pipe the house with PVC or replace the leaky sewer line, right?
I agree with you that many houses are “too far gone” for ordinary buyers to fix on any realistic budget or time frame. Most people can’t be out of their house for 3-6 months. So there is a market for contractors to go in and make some fixes. But this is different than flipping, IMO.
If you lived next to a run-down house that had no realistic chance to attract a “good neighbor” type of person, wouldn’t you be sort of glad that a flipper made it more appealing? I would say yes. I would rather a house appeal inviting to a young, employed couple than that it be cheap enough for a multi-generational/multi-family group that is going to park 4 cars on the street and come/go all times of day. If the houses around me ever come up for sale, I plan to have a look and see if they’re worth “flipping”, not so much to make money but to keep the neighborhood strong. I know some of my neighbors have fugly interiors from the 80s that could easily be made move-in ready for good neighbor types.
‘there is a market for contractors to go in and make some fixes’
‘There’s always multiple offers. Then it’s sold within 24 hours. Then, less than 30 days, back on the market’
“I think “flipping” refers to when someone buys the house only to make cosmetic/simple “upgrades”. Give a house curb appeal, replace windows/doors, maybe a new kitchen/bath, but otherwise not really improve the house”
You think a new kitchen and bath is simple? Jeez. If that’s simple, what’s hard?
I mean “new kitchen” or “new bathroom” in the sense that they re-tile and put in new countertops and fixtures. They’re not fixing problems like electrical/plumbing issues. Usually some new stainless appliances.
A common thing around me is for a flipper to re-do a 50+ yr old house that has galvanized steel piping (which could break down soon) or a leaky sewer line… they don’t touch that, but they do spruce up the kitchen and bathroom. We looked at dozens (4-5 at least) of houses when we were hunting and I saw this a lot.
What’s the point of updating a bathroom if you leave 60 yr old separating pipes underneath?
If the flippers and speculators fixed up houses that are too damaged to pass appraisal for a mortgage that would be good for the neighborhoods…but where I live in northern California that is not generally the case, they go after the sort of places first time buyers are looking for (liveable but need some work/updating and will finance OK) and offer 100% cash thereby shutting out anyone who needs to buy via a mortgage…I experienced this first hand several times and eventually retreated (in disgust) to the sidelines.
I guess Rich Toscano has gotten off the Housing Bubble train, then (see first link in article). Hard to believe that Rich has changed his tune about San Diego house prices, but it appears to be true. Seems to me like they never became normal. After all, my family has been there for generations, and they were never unaffordable before. Owning was always cheaper than renting. I dunno, maybe Toscano is just sick of fighting psychologically against the glacial pace of this bubble’s popping. I still think the prices have to become affordable (compared to rents) before anyone can say there is not bubble.
It does not make any sense to say that low interest rates lead to a higher percentage of cash sales. As long as it is nearly free to borrow money, and the down payment required on a mortgage is 0%, or you can get cash back, then you should see lots of folk flooding the market with borrowed money.
The days are gone when a person with a wad of cash would use it to buy a super-cheap house with no competition from mortgaged buyers, and then rent the house out at hefty profits. That is in the past. Today, you have institutional investors, who have already raised billions, feeling forced to spend all those billions. They have driven up prices to heights that don’t pencil out. No one is going to risk their hard-earned cash on today’s speculative bet.
It doesn’t matter whether the institutions make or lose money on the houses, since the managers of these funds will still make their transactional fee, and they will still be millionaires in the end. I pity the fool who invests with these managers. Shoulda hooked up with a fund that works for profits.
Morgan Brennan, Forbes Staff
I write about real estate markets, outrageous homes and cities.
Business | 6/05/2013 @ 4:42PM
How Rising Mortgage Rates Could Affect The Housing Recovery
Mortgage interest rates are rising. In the week ending May 30, the 30-year fixed rate mortgage clocked 3.81%, its highest level in a year, according to Freddie Mac. That’s 15% higher than the 3.31% record low set in November of 2012 and almost 14% higher than the 3.35% rate logged in the beginning of May. The 15-year fixed rate jumped as well to 2.98%.
The increase from the start of May through the month’s final week translates into an extra $20 per month for every $100,000 of debt accrued. If rates continue their upward march, mortgages will become more expensive.
Since cheap financing has been a notable driver of the housing recovery, could those rising rates derail the momentum? To answer that question, let’s first take a look at what low interest rates have done for housing and why they’re increasing now.
Compared to decades past, today’s rates (even at 3.81%) are unprecedentedly — and artificially — low. They’re the direct result of a Federal Reserve-funded fiscal stimulus plan, better known as the third round of quantitative easing or QE3, aimed at hastening the recovery in housing and the economy as a whole. Through the program the Fed has been buying $85 billion worth of Treasury bonds and mortgage-backed securities per month, a process that has tamped down interest rates, making mortgages more attractive to prospective consumers.
The low rates have enabled qualified home buyers (and owners looking to refinance) to access cheap financing, adding to already-record-high levels of home affordability. It’s helped bolster a surge in both home sales and price increases (since lower rates help make larger principals possible).
Rates are climbing now due to both stronger economic data and to speculation: recently Fed chairman Ben Bernanke suggested that the central bank may start slowing its bond buying within the next several months. The news has caused bond investors to begin selling out of their 10-year Treasury positions, driving yields for these bonds above 2%. Since mortgage rates correlate closely with Treasury yields, they have followed suit, rising about a quarter of a percentage point in just a week.
Many economists believe those numbers will continue to climb, albeit at a more modest, uneven pace throughout the year. “I anticipate that the rate [for a 30-year fixed mortgage] will probably go up to 5% by the end of next year. So from now until next year, the general direction will be upward,” says Lawrence Yun, chief economist for the National Association of Realtors.
…
Whoopsie! Mortgage Applications Dive 11.5% As Rates Surge And ADP Employment Misses
The 10 year Treasury yield has surged 50 basis points since May 2nd and mortgage applications dropped like a rock. According to the Mortgage Bankers Association (MBA), the Refinance Index decreased 15 percent from the previous week and is at its lowest level since the end of November 2011.
http://confoundedinterest.wordpress.com/2013/06/05/whoopsie-mortgage-applications-dive-11-5-as-rates-surge-and-adp-employment-misses/
Nobody could have seen it coming!
Once again, it comes down to growth in jobs and incomes. Oh, and household formation too.
None of these three things has been setting the world on fire.
This just in:
The OC Has Most Overvalued Real Estate Market in the US
“Cash buyers accounted for more than a third (34.1 percent) of home sales in California in March, more than double the average (a 16.1 percent monthly average since 1988). They are not just buying foreclosures, they are buying everything. “
I always thought to buy with cash, you get the best deals when borrowing rates are at their highest?
My loan in 1990 was 8.25% so anything under 5% borrowing rate is too expensive. Rates gotta go above 8.25% before I would buy my bargain dream house. Of course with cash.
Today’s mail brought me a full color brochure on expensive card stock complete with picture postcard scenery and a superimposed portrait of the requisite fake-blonde realtresse. A new “real estate specialist” has moved into the area, and she “urges me to call (her) for all (my) real estate needs” because she can “move (my) house fast.”
Rats, just when I thought we’d run the last of them off the mountain, it looks like it’s “go time” again. Where’s Northeasterner when we really need him?