Ticking Time Bombs Of Moral Hazard
Readers suggested a topic on the GSE’s. “How about a topic on Fannie and Freddie - their planned demise, what is going to end up taking their place, is there the slightest chance that nothing will take their place, etc. I’m pasting this from the NYT. Don’t ususally post entire articles, but I can’t figure out how to cut this one. It is largely about what is being considered for now, not what should be considered, but it is still very interesting. And it raises the issue of the entire idea of whether the availability of 30 year fixed mortgages should be a policy or not.”
One said, “I read a different article on this, and one question I have is whether the new government insurance will also cover NEW apartment loans. The article I read noted that they would continue to guarantee existing apartment loans. If you really want to see the affect of rising rates, you should look no farther than multifamily and multifamily cap rates. Cap rates (yields) are currently at remarkably low levels, and rents have nearly fully recovered in many places. The combination of the two have resulted in apartment values being at VERY high levels…driven substantially by low financing rates that are available…through the good graces of the FHA and Fannie/Freddie.”
“An estimate that I’ve heard is that if Fannie/Freddie were to go away tomorrow, that interest rates and cap rates for apartments would rise by 1% overnight…if your starting point is a 5% cap (infill So Cal commonly sees these cap rates), a 1% rise reduces your value by 17%. AND if we are in the context of a rising rate environment generally, cap rates could rise even further. The only option for the apartment owner is to raise rents to try to make up this difference…and at today’s home prices, that would simply tend to push more renters to buy.”
A reply, “If an ‘expert’ sez it, then it must be true…at least at bubblelicious price levels which reflect subsidized insurance! A politician tells a NY Times journalist that the private market cannot possibly take over the role of the GSEs, and suddenly the laws of economics are repealed.”
And finally, “Given the ‘time bomb’ of maintenance costs a 30 year mortgage is an accident waiting to happen. 15 year should be the norm - maybe 20 years for new construction. Or maybe not as lumber is not as good now as in years past.”
Investor’s Business Daily. “Can Washington stay in the mortgage game without putting the taxpayers at risk once again? Some senators think so, but there’s reason to be skeptical. No one ever said it would be easy to replace Fannie Mae and Freddie Mac. The two hold some $5 trillion in mortgages. That’s a lot to unwind.”
“If worse comes to worst, the taxpayer is still there to absorb the losses. That’s a big problem for two reasons. One is that any taxpayer backup invites overly risky behavior — as happened with Fannie and Freddie. The other reason is that the real estate, banking and construction lobbies will do all they can to make the limited government role less so. This lobby tends to get (and keep) what it wants. Witness the continued sacred-cow status of the mortgage-interest deduction and the continued survival of Fannie and Freddie themselves.”
“The big question is whether this smaller federal ‘footprint’ stays small. Our guess is that it would morph under political pressure into something like the Fannie and Freddie we have today — too-big-to-fail monsters that, profitable for the present, are ticking time bombs of moral hazard in the long run.”
US New & World Report. “According to the National Association of Realtors, only 15 to 20 percent of the homes that were foreclosed on during the downturn were making their way to the market in 2008 and 2009. The remaining 80 to 85 percent of the homes were bought back at foreclosure and are now owned by the banks. One might ask why the banks would want to own these properties. The answer is both telling and very scary.”
“Current bank regulations do not require the banks to ‘mark-to-market’ their real estate holdings. Bank management, therefore, would rather continue to book an inflated real estate value and pay the debt service and management costs to hold the property rather than sell the property and book the losses. This is why some markets have no inventory, why banks are still hesitant to lend money and why we are not free from the issues we created in the U.S. and globally by overextending our leverage.”
“We have seen a decline in this inventory of about 35 percent from the peak in 2010, however, the last quarter saw a fairly dramatic increase of 9 percent. So which way is the pendulum swinging next? In April of 2012, the finalization of the national mortgage settlement clarified acceptable foreclosure processing procedures giving the banks better ability to effectively foreclose and avoid a lengthy court process. We have seen a rise from $175 billion to $205 billion in the estimated value of the shadow inventory and I am guessing there is more to come.”
The Lake Spokane Outpost. “HomePath®.com is the official website owned by Fannie Mae on which they post information about all their foreclosed homes for sale and any special financing terms. You can use any type of mortgage to purchase a Fannie foreclosure, but the special HomePath® financing can only be used to purchase Fannie Mae owned homes.”
“Why use the HomePath® loan instead of a regular Conventional, FHA, VA, or USDA? There are two very significant advantages to using this special program. First, the appraisal is waived which saves you about $500 and shaves at least 5 days off the escrow process. And with no appraisal there is no fear of the appraised value coming in less than the sales price and jeopardizing the entire transaction.”
“Second, there is no mortgage insurance required when putting less than 20% down. While many people chose to put as little down as possible this feature is particularly beneficial to first time home buyers who might not have saved up a large down payment. The monthly cost of mortgage insurance can easily be $150 or more (the actual amount depends upon loan amount and your FICO score). Not having to pay that equates to about $20,000 extra in house price you can afford.”
“In addition, the private mortgage insurance companies are very restrictive on their approval of applicants. Avoiding this hurdle opens up home ownership to many families who would not have met the requirements for mortgage insurance had they chosen a standard loan instead of using HomePath®. Even investors are allowed on this program – you can buy the home as a rental with 15% down and no mortgage insurance.”
‘Cap rates (yields) are currently at remarkably low levels, and rents have nearly fully recovered in many places.’
‘The only option for the apartment owner is to raise rents to try to make up this difference…and at today’s home prices, that would simply tend to push more renters to buy.’
If yields are so low, and apartment owners can raise rents at will, why don’t they raise rents now? Let me guess; they are really nice guys and are accepting the low returns out of the goodness of their hearts.
Or there is this possibility; that as rates rise, apartment owners will be forced to eat the costs, further lowering rent returns and apartment owners will join the line of FB’s on the curb.
‘June 28, 2013: Government-backed U.S. mortgage bonds are poised for their largest quarterly loss in almost two decades, with some of the debt extending declines today.’
‘Fannie Mae’s 3 percent, 30-year securities fell 0.2 cent today to 97.5 cents on the dollar as of 3:30 p.m. in New York, down from about 103 cents on March 28, according to data compiled by Bloomberg. A Bank of America Merrill Lynch index tracking the more than $5 trillion market lost 2 percent this quarter through yesterday, the most since the start of 1994.’
‘What just occurred is indicative of just how important QE is,’ Brad Scott, Bank of America’s New York-based head trader of pass-through agency mortgage securities, said today in a telephone interview. The Fed’s current buying provided demand as other investors retreated and has grown as a percentage of forward sales by originators tied to new issuance, which is set to fall as higher rates reduce refinancing, according to Scott.’
‘The Fed, at times during this period, was the only outlet in terms of demand for securities,’ he said.’
‘The mortgage-bond losses rival the 2.3 percent declines in the first quarter of 1994 amid a slump in debt prices sparked by the Fed unexpectedly raising its target for short-term interest rates on Feb. 4 of that year, the first of seven increases totaling 3 percentage points. Fortune magazine at the time declared it a ‘bond market massacre.”
“‘Cap rates (yields) are currently at remarkably low levels”
No question.
Rental rates are slipping nearly everywhere.
“If yields are so low, and apartment owners can raise rents at will, why don’t they raise rents now? Let me guess; they are really nice guys and are accepting the low returns out of the goodness of their hearts.
Or there is this possibility; that as rates rise, apartment owners will be forced to eat the costs, further lowering rent returns and apartment owners will join the line of FB’s on the curb.”
They are trying.
I spoke to a guy who owns 1,000 units in one part of So Cal recently. Rents are already back to their highs of 2006/2007, and in 2013, for the first time, they are encountering resistance in their rent increases. They don’t think they’ll get their 3-4% increases, they think they might get half that.
The loans the owners have are generally long-term fixed rate (through the graces of Fannie/Freddie). If cap rates rise, it simply means they will own the asset, as opposed to sell it.
My fear is that higher yields decrease apartment construction, and we have more doubling up to make up for higher rents.
“My
fearhope is that higher yields decrease apartment construction, and we have more doubling up to make up for higher rents.”Fixed.
I own no apartments (REITs or otherwise). Inflation screws the little guy.
Only problem with homepath is 95% of the houses listed are unlivable.
They’ll loan you the money to fix them up. Homepath/Homestep, along with Harp/Hamp/USDA are the new subprime and have been for years.
‘the appraisal is waived..And there is no fear of the appraised value coming in less than the sales price’
‘there is no mortgage insurance required when putting less than 20% down…this feature is particularly beneficial to first time home buyers who might not have saved up a large down payment…Not having to pay that equates to about $20,000 extra in house price you can afford.’
‘the private mortgage insurance companies are very restrictive on their approval of applicants. Avoiding this hurdle opens up home ownership to many families who would not have met the requirements for mortgage insurance had they chosen a standard loan. Even investors are allowed on this program’
But let’s hear the media tell us, loan standards are tight, so we can’t possibly have a bubble!
‘USDA Rural Development State Director Terry Brunner will recognize two Bloomfield families June 20 for taking advantage of programs that further homeownership and home renovation. ‘Now that the economy is beginning to pick up this is as good a time as any to take advantage of buying or rehabilitating your house,’ Brunner said. ‘[These] two families we have honored in Bloomfield are good examples how Rural Development has helped them live in the home of their dreams while at the same time strengthening our economy one home at a time.’
These government housing departments would grease their mobile home axles with people intestines if they thought it would help sell more houses.
good examples how Rural Development has helped them live in the home of their dreams while at the same time strengthening our economy one home at a time.’
It would be fun to see a good analysis of the default and foreclosure stats for these programs that are “strengthening our economy one home at a time.”
Anyone know of a good source?
Here’s what a quick search turned up. They are kinda defensive about it:
‘On Friday, May 25, 2012, the Wall Street Journal published an article headlined “USDA is a Tough Collector When Mortgages Go Bad.” It describes USDA’s efforts to collect from borrowers under the Section 502 guarantee program who lost income in the recession and then lost their homes to foreclosure.’
‘HAC responded with the following letter to the editor. To the Editor:
“USDA is a Tough Collector When Mortgages Go Bad” (May 24) describes serious problems, but fails to recognize the positive achievements of USDA’s rural housing programs. The debt collection practices described in the article should be corrected, but this does not mean – as some of the online commenters suggest – that USDA should be taken out of the mortgage business.’
‘To qualify for USDA’s direct mortgage program, families must have low incomes; to qualify for the guarantee program, they must have low or moderate incomes. Yet USDA’s delinquency and foreclosure rates are comparable to those of other lenders and guarantors.’
‘It is not surprising that some of USDA’s borrowers have been affected by the recession. It may be more surprising that a far greater proportion are successful homeowners, despite their income levels. The article reports that 12 percent of USDA’s guaranteed loans and 17 percent of its direct loans are delinquent or in foreclosure. In other words, 88 percent of the guaranteed loans and 83 percent of the direct loans are in good standing.’
http://www.ruralhome.org/information-and-publications/announcements/495-hac-responds-to-wall-st-journal-article-on-usda-foreclosures
Thanks, Ben.
I’ve had trouble finding comparable data for USDA and Fannie/Freddie. Fannie/Freddie seem to report only “serious delinquencies”, which they define as 90+ days past due for SFH. The USDA doesn’t seem to define what they mean by delinquency, and I’m guessing that their rates are so much higher because they are reporting 30+ days past due.
It sure would be nice to have similar or standardized reporting that was easy to compare across lenders…
Slithers…..
You’re dead wrong as usual. Over 90% of all Fannie houses are turnkey, move in condition. At a fraction of the price of private sales.
Sucks for you huh Slithers?
very true…homepath homes are the bottom of the barrel…they do need a lot of work…and no ‘normal’ lender would fund these P’sOS…if the buyers were smart enough to get a home inspection, they would run away superfast.
the prices of these P’sOS are not even really that low, considering…
Nonsense
It’s like anything else, good product moves quickly without incentives. Garbage product sits and sits and can only be moved with heavy discounting and incentives. If these houses were livable people would buy them without the Fannie bribes, err I mean incentives.
I see it differently. In a foreclosure, I want a house that needs repairs. It eliminates most retail buyers, and these have the best price. You just have to know what the repairs will be.
Let’s look at the other side. Fannie can put 20k into fixing a house up and then charge the buyer 30k more. For that, you’ll get cheap carpet, paint/colors that they pick out, cheap appliances, cheap, small water heater, etc. I’d rather get the discount and put it back the way I want it.
Ben, that’s an entirely viable way to operate. But you need cash, and lots of it. Not to mention time and energy, something few families have.
The foreclosures in my neighborhood tend to run $50K less than a house in good condition. It’s MUCH easier to buy a house in good condition and finance those extra $50K than it is to pony up $50K for a reno.
You can finance the renovations through these GSE programs or HUD. It goes up to 125% of the purchase price, I believe. Those buyers are few in number. I only mentioned it because these posters were saying the houses are unlivable. What do you expect, they’re foreclosures! A foreclosure is just a house that has most times been neglected and sat empty for a while. But house owners don’t exactly always do a bang up job maintaining the thing. Basically, if you want a deal, foreclosures/distressed are the only way to go. Otherwise you are going to pay for the “pride of ownership” jive that goes away the minute you get the keys. If you want $15-$30 per square foot, you have to work a little for it.
Agree on wanting to buy a house that needs non major repairs, updating etc. so I can do the work myself to my liking and get a good price (plus I enjoy the work)…but when I spent a year trying to do that I quickly learned that in my area (Santa Rosa, CA) that is what the speculators and flippers are looking for too and all my bids were ignored as they offer cash so I’ve been on the sidelines for a year or so. Out of curiosity I looked to see what Homepath had in my town of 170,000 and only four houses are for sale and the prices look very high to me…but have no doubt that the RE situation will be very different by next year.
http://www.homepath.com/listing/search?q=santa+rosa%2C+ca&pi=&pa=&bdi=&bhi=&x=0&y=0
‘the speculators and flippers are looking for too’
There should be a period for HUD/GSE houses in the beginning that are reserved for primary house only purchases. A couple of weeks or so, where you don’t have to compete with investors. Sometimes BofA and other banks will have the same arrangement. With HUD, every time they reduce the price it will revert to this primary home category.
Thanks, good to know that….I’m on the sidelines through 2013 at least but will start looking again when Bubble 2.0 pops. The local paper has finally run a story that conceded that the current bubble is not so good for people who are trying to buy for the right reason (to LIVE in the house) but implied that it was just people that needed to go FHA or VA that were having a hard time…not the case, I had a big down payment, a preapprovoved conventional loan, good job, etc. and none of that mattered, got beat by cash several times.
1937 is just getting started
The Single Largest Driver of the US Economy is About to Collapse
June 26, 2013
The markets continue their dead cat bounce while the economic data worsens.
First quarter US GDP was revised down from an annual rate of 2.4% to 1.8%. The drop was due to lower personal consumption expenditures than initially forecast.
This is the crux of the US’s current economic woes: consumer-spending accounts for roughly 70% of our GDP. And QE does nothing to help incomes, ” WHICH DRIVES CONSUMTION “!!!.
http://gainspainscapital.com/2013/06/26/the-single-largest-driver-of-the-us-economy-is-about-to-collapse/
Gee…….people that don’t have any money, and who are getting less all the time, tend not to spend the money they have.
Whowoudathunk?
you guys a riot. Two days ago you were all laughing at $100K a year tech jobs saying they were beneath you since you had to travel. And yet at the same time it’s 1937 all over again. So $100K jobs are chump change AND everyone is starving. Sure, why not? Anything’s possible in HBBWorld
Yeah, there are 100K tech jobs, in California and the Northeast.
And you know what? That tech job in Cali, that pays 100K to a Sales Engineer who spends 50% of his time on the road, is underpaid.
Why? Because “people skills” are a rare commodity, and people who have those skills are subject to rapid burnout. Why? Because customers are assholes and/or idiots 50% of the time. Frankly, I don’t see how anyone fills sales positions at minimum wage pay……maybe that’s why those companies have so much turnover. And there aren’t many “road warriors” who are willing to be away from the house 50% of the time. Being gone that much adds costs of their own. Like divorce lawyers, if you are married.
$100K jobs around here, of any kind? Not so much. And the job pays 2/3 of what the same job in California pays. With “pay raises” that average about 1.5-2.0 %/year.
But it’s funny. Most stuff costs the same (and is getting more expensive all of the time), whether you buy it out here in BFE, or California.
Just about everybody in the country is working a lot harder, for less money (when indexed for even the BS government inflation numbers) than they were in 1985-1990.
A Google image search for “old economy steve” yields some darkly amusing images.
Sure, why not? Anything’s possible in HBBWorld ??
But you still come here don’t you…Nothing better to do Smithers ?
“The markets continue their dead cat bounce while the economic data worsens.”
And China wasn’t even even a factor in 1937.
Does anyone else have the sensation as this economic drama plays out of watching a giant asteroid traveling through space en route to crash into the Earth at high velocity?
Asia-Pacific News
Why China’s Economy May Be Heading for a Crash
Published: Saturday, 29 Jun 2013 | 9:00 AM ET
By: Justin Menza
Mark Ralston | AFP | Getty Images
Empty apartment developments stand in the city of Ordos, Inner Mongolia.
China’s central bank sent global markets reeling when it attempted tighten credit and rein in the country’s shadow banking system. But the consequences of China’s credit binge may just be getting started, and experts say there could be more pain to come for the world’s second-largest economy.
“We’ve been seeing tightening since the end of last year,” said Leland Miller, China Beige Book International president. “This is not a spur of the moment decision by the central bank.”
Leland said the higher interbank lending rates are an indicator of a tension in the system. “The credit transition mechanism is broken and until that’s fixed, there will be no happy endings in China,” he said.
The People’s Bank of China in a statement said the performance of the economy and financial system “are sound” and that there was no shortage of liquidity in the market.
But the economy must still come to grips with the credit binge and the over-investment undertaken in an attempt to avert an economic slowdown at the outset of the global financial crisis.
Bill Smead, CEO & CIO of Smead Capital Management says investors are as resilient as the Black Knight from Monty Python’s Holy Grail - the knight who refused to stop fighting no matter how badly injured he was.
“They launched $2.5 trillion worth of stimulus in 2008-11,” explained Bill Smead, CEO and CIO of Smead Capital Management and a long-term China bear. “Most of that went to special purpose vehicles to build rail, bridges, airports, condo buildings, you name it.”
Many of those projects were built with the sole purpose of showing strong economic growth and not to generate economic rent, Smead said.
Gordon Chang, author of “The Coming Collapse of China,” said China may only be growing 2 or 3 percent and if you strip out all the construction going into ghost cities and “high-speed rail lines to nowhere,” the economy may not be growing at all.
…
China’s credit crunch effect
EconoMeter panel checks China’s central bank credit tightening effect
By Roger Showley
Noon June 28, 2013
Chinese women walk past a poster displayed at a shop which is undergoing renovations in Beijing, China Wednesday, June 26, 2013. China’s central bank tried Tuesday, June 25 to quell fears the country faces a credit crisis by promising to support banks that face cash shortfalls. The central bank promised “liquidity support” if needed after a shortage of money in credit markets caused the interest rate that banks must pay to borrow from each other to spike last week. That caused Chinese stock mark Chinese women walk past a poster displayed at a shop which is undergoing renovations in Beijing, China Wednesday, June 26, 2013. China’s central bank tried Tuesday, June 25 to quell fears the country faces a credit crisis by promising to support banks that face cash shortfalls. The central bank promised “liquidity support” if needed after a shortage of money in credit markets caused the interest rate that banks must pay to borrow from each other to spike last week. That caused Chinese stock mark — AP
U-T EconoMeter
Question: Will China’s recent tightening of lending rules affect the pace of economic recovery in the U.S. and San Diego?
Panel’s answers: Yes 4, No 4
Marney Cox, San Diego Association of Governments
photo Marney Cox
Answer: YES
But it’s not just China. Confidence in the global economic recovery is wavering after a jolting one-two punch (suggested tightening in the U.S. and China) that has driven both bond and equity markets down around the world. Central bank intervention is so widespread and deep that any indication of a change in policy sends markets into a tailspin. This reaction represents a lack of confidence in the “stand alone” economy and is contrary to the “smooth landing” central banks promised. In light of the unexpected market reaction, central banks are backing off; the longer they postpone, the bumpier the landing.
…
Friday, June 28, 2013
The Housing Market Is An Accident Waiting To Happen: Part 2
Builder home “sales” at risk…But now that the monthly payment has skyrocketed over the past 6 weeks [from much higher mortgage rates] now they [homebuyers] can “afford” 20% less. Thus, right now builders and mortgage lenders are scrambling to try and recover the lost “affordability” through shoving higher-risk ARMs down borrowers throats, requiring much larger cash-in at close, removing upgrades etc. Needless to say, this spike in mortgage rates from the low 3%’s to the mid-to-high 4%’s changes everything for the majority of New Home buyers several months back, which don’t really “buy” the house at the time of contract. - Mark Hanson, private housing market consultant
http://truthingold.blogspot.de/2013/06/the-housing-market-is-accident-waiting_28.html
I currently am renting a townhouse. The owner is looking to sell the place. (he lives in another state) Question: What obligations do I have in making the place look sellable? Am I obligated to get a professional cleaner to come in? Do I pull out the power washer (that I don’t have) and do two hours of power washing? It’s kind of hard to make the place look not lived in when you have three small children! Thoughts? Thanks in advance! Sorry for the double post as I posted in the other section as well!
It’s not your problem. The depreciating dump is your landlords. Not yours.
Your responsibilities are spelled out in your lease. If there is nothing there about you being obligated to power wash on your landlord’s demand then you don’t have to do it. Other than that, there may be some default requirements in the landlord/tenant laws, but they aren’t going to be obligating you to do stuff like a power wash. You may have to make accommodations for showings like allowing landlord or his agent access to the premises when he gives you plenty of forewarning. If the landlord wants more than what is spelled out under the lease or required by the land lord tenant law, then let him pay you for your bother. Or tell him no. Your choice.
Thanks Polly. There is nothing in the lease other than me being obligated to let people come view the place and they have to make reasonable attempts to contact me before they come by.
‘The owner is looking to sell the place’
This happened to me years ago. You have to be firm and not let them push you around, and that will include the agents. I had them try and show the house when I wasn’t there and I told them absolutely no way. It was a bad deal because the “owner” couldn’t make the payments and eventually lost four other houses as well. I was gone before it all fell down.
But if the landlord is asking you to pressure wash, he/she is an idiot. If you get over 2000 PSI you can write your name in the paint. If it isn’t done right, you can do a lot of damage to the exterior.
Our (out of state) LL tried to sell our rental at 1.5 year point in a 3 year lease. We decided to be decent about it, since he was in trouble. We soon realized he didn’t care at all about us, or any trouble/expense this caused us.
I also found that the agents were the worst part of it. They ignore any restrictions you request regarding days/times. People were on our lawn after dark.
I demanded a reduction in rent for our time and effort, then an additional reduction as it became obvious how time consuming and inconvenient this would be. Some of the prospective buyers also looked like they just might have been casing the joint.
He finally told me to stop sending the rent. Never heard from him again. A year later, an agent showed up at the door. We paid a very reasonable rent for two months, gave notice and moved on.
I’m waiting for our present LL to tell us he’s selling due to skyrocketing prices in Las Vegas. Not a nice way to live.
Well the good thing is that nobody has asked me to do anything…..yet. The ll is actually a decent guy, although he is caught up in trying to get what he paid for it a few years back……which means it is going to be on the market for quite some time. Then again, there is only one other house (ridiculously over priced of course) on the market in my neighborhood. (The couple of places in foreclosure aren’t on the market…..shocking, I know!) Anytime a house comes on the market, it is gone in a few days. The mania and stupidity is alive and well in Central Florida.
check out http://www.nolo.com/legal-encyclopedia/renters-rights
lots of good info
Have used Nolo books over the years for buying, selling (once each) and renting and been happy with them…FWIW they are especially good for Californians as there are specific titles for CA and they are updated regularly…but lots of free info at the website too.
“If worse comes to worst, the taxpayer is still there to absorb the losses. That’s a big problem for two reasons. One is that any taxpayer backup invites overly risky behavior — as happened with Fannie and Freddie. The other reason is that the real estate, banking and construction lobbies will do all they can to make the limited government role less so. This lobby tends to get (and keep) what it wants. Witness the continued sacred-cow status of the mortgage-interest deduction and the continued survival of Fannie and Freddie themselves.”
The really awesome thing is that discussions that used to mainly take place on the HBB or in academic circles are now discussed openly in financial newspapers with international distribution. Maybe if enough people pay attention to this discussion, the political support for high-risk taxpayer-funded insurance schemes will dissipate.
I think housing has definitely bottomed, but we’re going to see growth slowing (albeit still growing). In the future, I think most of the growth is going to come from new home sales whereas existing home sales will be flat.
I’ve noticed you and your fellow Realtors™ are quite weak in the finance department.
WOULD 1% HIKE IN MORTGAGE RATES STALL HOUSING?
By Lily Leung
12:01 a.m. June 29, 2013 Updated
3:37 p.m. June 28, 2013
Mortgage rates have been inching up, causing some concern among potential homebuyers. Would a 1 percent increase in mortgage rates stall the housing market? U-T San Diego’s Housing Huddle panel, a group of real estate insiders, chimes in. Lily Leung • U-T
No: A percentage point increase in interest rates in a year will cost about $200 more per month in mortgage payments for a median-priced home, which is $406,000 in San Diego. Despite the recent spike in interest rates caused by the announcement of the Fed’s withdrawal of stimulus, the increase in the cost of borrowing is eclipsed by the more rapid increase in the cost of homes themselves. I, therefore, expect a slower rate of growth in home prices, as borrowers cap out on their affordability. Nevertheless, with consumer confidence strong and interest rates still historically low, the housing market remains stable.
The 10-year Treasury bond yield, which underlies the 30-year mortgage rate, has risen by nearly 1 percentage point over the past six weeks without significantly slowing the housing market. While housing is not in bubble territory, it is prudent to wean the market off abnormally low rates. Rising rates will slow investor demand, which may be good for the long-term market stability. Although another 1-percentage-point rate increase will reduce affordability, house prices are still well below historical peaks in most submarkets. A decrease in demand given tight supply is unlikely to lead to falling house prices.
No: An increase of 1 percent to a rate would still be very attractive. Raising the rate might push some potential homebuyers out of the market. But it also might encourage more lenders to re-enter the market, which would loosen up the lending guidelines that potential buyers face. Many people with credit scores as high as 720, for example, can’t get approved for a loan because of tight restrictions. A slight rate increase could spur lending and buying.
No: Positive consumer confidence and the lack of housing supply are the main drivers (of) increasing San Diego home values. An increase of 1 percent in interest rates will not change the limited supply; although, it is more difficult to ascertain the impact it may have on consumer confidence and therefore the demand for housing. I don’t believe an increase of 1 percent will hurt consumer confidence to a point that it will stall the housing recovery. However, while I think it is necessary, I fear the anticipated end to the Fed’s QE3 (quantitative easing) program will result in rate increases of greater than 1 percent.
No: While the transaction volume would not completely stall, prices would likely flatten out. Some fence-sitting buyers might finally make acquisitions to lock in a mortgage at a rate that could still prove to be very favorable in the long run. However, the higher rates would require most buyers to reduce their maximum purchase price, taking the steam out of the recent price escalations. The current frenzied conditions might relax to a better balance between buyers and sellers. In 30 years of brokerage, I’ve rarely experienced a well-balanced market. Might one actually materialize in 2014? I’m not holding my breath.
No: Stall is defined as “to bring to a standstill,” which wouldn’t happen. What it would do is diminish the purchasing power of a homebuyer by about $50,000. This would definitely start bringing home prices back down and slow the rapid increase in prices. The one X factor is the “psychological” effect it would have on buyers, sellers and our economy as a whole. This could be too much of a shock for our housing market to absorb at one time and really cause buyers to pull back in a knee-jerk reaction. Moderation is the key to rate hikes.
…
Nice post Pbear….I do agree with this;
But it also might encourage more lenders to re-enter the market….
“I think housing has definitely bottomed”
You’re in for the surprise of your life.
But go ahead and leverage up $500k on a depreciating asset worth $175k.
“One might ask why the banks would want to own these properties. The answer is both telling and very scary.”
Here are a few guesses:
1) They heard that real estate is recovering and will always go up again from now on, and are hence holding on to reap the largest possible capital gain on foreclosed property.
2) No banker ever saw coming the huge spike in mortgage rates since early May 2013.
3) Megabank, Inc realizes it is still too-big-to-fail, and will qualify for another round of bailouts in the trillions of dollars if U.S. housing prices take yet another dive.
I have a post on this topic coming up, but in short, I don’t think the banks are holding much of this stuff.
Remember, the reason we got into this mess in the first place is that banks were making crappy loans (that they knew were crappy), and they were selling them as fast as they could to investors.
If anyone is holding onto inventory, it’s the servicers, not the banks.
Looking on the FDIC website, all insured institutions ($14.4T worth) hold $7.9B of REO in the 1-4 unit category. This is about $5B more than was held in 2004.
$5B worth simply isn’t very many homes when you consider 5MM homes are sold each year.
If REO is being held by foreclosing entities, it’s being held by someone other than the banks.
I wish the people who are talking about banks holding onto REO would share their research. Like, which banks are holding onto REO, and how much? All these guys publish financials, it shouldn’t be that hard to dig up the information.
So far, I’ve just seen claims about what banks are doing without any data other than lack of listings on the market (which can be explained by a number of other reasons).
Going to the FDIC website, and looking on their database for all depository institutions, there is a total of $7.9B of 1-4 unit residential on the books of banks as of 3/31/13.
This is down from $11B @3/31/12, $13.1B @3/31/11, and $13.6B @3/31/10.
As of 3/31/04, there was $2.5B in this category, so the EXCESS REO today is approximately $5B, down from over $10B. If they’re just holding onto the inventory and not marking it down, shouldn’t this number be rising?
Where is all this so-called inventory on the books of the banks? Because, if you pick your value per home, $7.9B really isn’t that much.
Where is the inventory? Is it even held by banks? Is it held by the servicers of the mortgage backed securities? Fannie/Freddie? Because if you expect that there is a million homes as REO at $100k apiece, that would be over $100B of assets. My understanding is that there is 500k of REO out there (based on a few sources)…at $100k apiece, this is $50B of assets.
If there are $50B+ of homes held by the foreclosing entities, and less than $10B is held by FDIC insured institutions, where is the rest?
I don’t really give a damn who owns it, it is vacant and decaying in every neighborhood across this vast nation. There is oversupply of grotesque proportions. One thing is clear: These houses will go on the market at some point.
Comment by “Uncle Fed, why won’t you love ME?”
2013-06-28 19:10:23
Rick:
You need to review the literature more. Women still learn less than men, even after you factor in marriage, children, education, accomplishments, and hours worked.
No they don’t.
Or don’t take my word for it - google for “single women outearn men in every major metropolitan area” and find out for yourself.
Now that the tables are reversed, you DO support affirmitive action in favor of men in education and the workplace right? RIGHT?
Regardless of the reasons, if fewer men are admitted to college and fewer men are awarded degrees, you do support affirmative action as you did when this was the case for women, right?
Or are you just a hypocrite?
Still waiting for my answer about women registering for the draft….