A colleague of mine pointed out that Trump has not been tweeting his flatulence about the economy recently. This thankful hiatus is after he just passed tax cuts and a spending budget that is supposed to be stimulative. As it turns out, the economy is hitting the headwinds of marginally higher interest rates and a consumer that is bulging from the eyeballs with debt. Windfall tax rebates to large corporations will not fix this nor will rampant Government deficit spending.
This leads us to the housing market. Mortgage originations were down 5.6% in Q4 from Q3. This is not a result of seasonal bias. Q4 mortgage originations in 2017 were down 26.7% from Q4 2016. One caveat is that the Fed does not break out the numbers between purchase mortgages and refinancing. But higher rates are starting to affect all mortgage applications. According to the latest data from the Mortgage Bankers Association, mortgage purchase applications dropped 6% two weeks in the row. Declines in purchase apps should not happen to move from January to February, as February is statistically a seasonally stronger month for home sales than January.
Moreover, existing home sales for January were released this morning. To the extent that we can trust the National Association of Realtor’s Seasonally Adjusted Annualized Rate statistical Cuisinart, existing home sales plunged 3.2% in January from December and nearly 5% from January 2018. Decembers headline report was revised lower. I’m sure the King of Spin, Larry Yun, will blame it on “low inventory.” But this is simply not true:
If Yun’s thesis were true, the chart above would be inverted. Instead, going back to j1998, there is a definitive inverse correlation between inventory and home sales. Curiously, when I attempted to run the numbers to the present, I discovered that the Fed removed the data series I had used to create the chart in 2015. Mere coincidence, I’m sure…
The mortgage rate for a 30-yr fixed-rate conventional mortgage at Wells Fargo, the country’s second-largest mortgage originator, is now 4.5% with an APR of 4.58%. As recently as September, the rate for a 30yr mortgage was 3.87%. At current rates, the monthly payment for a home purchase with a $400,000 mortgage has increased $187. It may not sound like much, but for many first-time buyers that small jump in monthly payment can mean the difference between buying and not buying. If you are thinking about buying a home, doing thorough research will benefit you greatly when you are deciding on what you exactly need. Checking out sites such as https://huxleymortgageservices.co.uk/ can help you with your first-time buying needs.
Since the Fed began printing money and the Government knocked the down payment requirement to 3% on a Government-backed mortgage, homebuyers have based the amount they are willing to pay for a home on determining the highest possible monthly payment the mortgage underwriter will allow. In the example above, the monthly payment on a $400k mortgage at 3.78% is $1,857. At 4.58%, the same payment only “buys” a $363,000 mortgage. This is nearly a 10% decline.
The same math applies to flippers/investment buyers, who pay an even higher rate for an investment purchase. One of the SSJ subscribers is a real estate professional here in Denver. She emailed to tell me that, “it doesn’t take much for interest rates to change Investor ideas.” She has a client who wants to buy an investment home for around $350000. Since investor rate loans are at least a quarter of a point higher than an owner-occupied mortgage, the client’s purchase with 20% down goes up to $161 a month from the recent jump in mortgage rates. This means he now needs the rent to go up by that much to work on the purchase-decision formula he is using.” I believe that a lot of flippers are going to be stuck with homes they can’t re-sell at the price they paid.
The average price the average-income homebuyer can afford has declined nearly 10% as a result of just a 75 basis point rise in mortgage rates. What happens when rates go up another 50-75 basis points? This fact has not been reflected in the home price data that is released every month from Case-Shiller and from the Government. This is because those surveys have a 3-6 month lag built into the methodology of calculating their respective home price indices.
As it becomes obvious that the price the average potential homebuyer can pay has been reduced from $400k to $363k, it will trigger a price decline cycle similar to 2007-2009. Flippers will be the first to fold just like during the mid-2000’s housing bubble. That housing market crash was triggered by the collapse of subprime lenders, which removed a key source of funding used by the flipper and for end-user home purchases from flippers. This time around it will be triggered by a lack of buyers who are able to pay the same price now that they could have paid in September when rates were 80 basis points lower. Soon rates will be 180 basis points higher than in September and home values will be crushed.
The analysis on the housing market above is an excerpt from the latest Short Seller’s Journal, a weekly newsletter that provides insight on the latest economic data and provides short-sell ideas, including strategies for using options. You can learn more about this newsletter here: Short Seller’s Journal information.
Let’s not forget that the new tax law has provisions where there is less tax incentive to buy, eg, only so much property and income tax is deducible and anyway, the std deduction is now 24k for a couple.
Good point, naturally that little factoid gets conveniently left out of the narrative – why bother with facts?
But the narrative! (U.S. economy, not “The Russians are coming” in this case)
“The Dallas Fed expects that U.S. GDP will grow at approximately 2.5 to 2.75 percent in 2018. We believe that consumer spending will be strong, owing to a healthy jobs market and the multiyear improvement in household balance sheets.”
“Since the Great Recession, the household sector in the U.S. has substantially deleveraged. The financial health of the household sector is crucial because the consumer comprises approximately 70 percent of GDP.”
This is complete BS, but fits the US econ. narrative nicely.
“Broken down, consumer credit rose by $11.2 billion in revolving credit, or credit card debt, which pushed it a record $1.023 trillion, the highest credit card amount outstanding on record. This was also the second highest monthly increase in credit card debt on record.”
It’s well known that the US consumer savings rate is back down to 2008 levels and debt is being used for “getting by”. Household deleveraging? Is this guy serious? Of course not. Colorado is a microcosm of the overall U.S. economy, where Fed-inflated housing is crippling the economy (again). This doesn’t even address high inflation in healthcare, higher ed., etc. The consumer is tapped out for this cycle. Debt is not wealth creation.
(The article focus is on rent, but applies to house prices as well.)
“Lack of affordable housing is a top concern for Coloradans. A household must make $21.97 to afford rent and utilities in Colorado, but the average renter wage is only $17.13. Nearly half of all Colorado renters are cost burdened, with an additional 24 percent severely cost burdened….”
“No wonder that “when we talked to people in different parts of the state, housing tended to be at the top of their list,”
The U.S. is experiencing huge asset inflation in most every asset class, but esp. housing and stock and bond markets. The Fed has created “The Everything Bubble”. This will not end well. There’s no escape from the economic effects of even slightly higher interest rates in a highly leveraged economy. Even small interest rate increases are amplified by high debt levels and have a proportionately large impact on the economy. The Fed knows this, but is trying to prepare for the next downturn which they know is coming withing a year or less. They’re so behind the curve (again). Let someone else clean up their mess (read taxpayer).
The Fed inflated housing bubble 2.0 using mostly the same methods as in 1.0. Now prices have reached a limit for traditional buyers just as the unconventional buyers are disappearing (read speculators, foreign buyers, flippers, etc.) because they know the game is over and prices have plateaued, or even started moving lower. Add to this rising rates, which effectively reduce price (people buy the monthly payment, not the house). Market meet air pocket.
The “why bother with facts” issues also results from a dumbed down and lazy population.
People know they can get away with just saying something in social media or on the internet and it becomes the gospel.