Note: For the record, I am expecting the possibility that the new homes sales report for February released today will show an unexpected spike up. For the past several months, there’s been what I believe to be a pre-meditated pattern in which the existing home sales data series and the new home data series move in the opposite direction. Let’s see if the trend continues.
The existing home sales data series has become as erratic and unpredictable as the Census Bureau’s new home sales report. One can only wonder about the reliability of the National Association of Realtors reporting methodology when its Chief “Economist” repetitively states month after month that “job growth continues to hum along at a robust pace.” Any economist who uses the Census Bureau’s monthly employment report as their evidence that the U.S. economy is producing meaningful, income-producing jobs is either just another propaganda mouthpiece or is of questionable intelligence. Either way a statement like that is highly unprofessional.
All cash sales of existing homes in February were reported to be 25% of all sales in February, down from 26% in January. This means that 75% of existing home sales (93% of new home sales) are dependent on mortgage financing. The FHA has been underwriting 3.5% down payment mortgages since 2008. 3.5% down payment mortgages are nothing more than sub-prime mortgages “dressed in drag.” The FHA’s share of the mortgage market soared from about 2% at the beginning of the 2008 to around 20% currently (plus or minus a percent or two). Fannie Mae and Freddie Mac have been issuing 5% down mortgages for quite some time and lowered the down payment to 3% in early 2015.
If you require a 5% or less down payment to buy a home, you are a subprime credit risk, I don’t care what your FICO score it.
First time buyers represent about 30% of all existing home sales. A good bet is that the first time buyer segment almost exclusively uses the lowest down payment possible to buy a home. RealtyTrac issued a report in June 2015 which showed that low down payment purchases hit a 2-year high in Q1 2015 and accounted for 83% of all FHA purchase mortgages. Understandably RealtyTrac has not updated this report. My bet would be that somewhere between 30-50% of all purchase mortgages were of the low down payment variety, or clearly de facto subprime quality.
The Wall Street Journal published an article last year which discussed the rising trend in low to no down payment mortgages: Down Payments Get Smaller.
This is where soaring subprime auto loan delinquencies come into play. To the extent that a potential home buyer is behind on his auto loan, it will impede his ability to take out a mortgage of any down payment variety. In fact, I believe that the U.S. financial system has hit the wall in terms of the amount of debt that can be “absorbed” by potential borrowers. Auto loans and student loans outstanding hit new record highs daily, with both well over a combined $2 trillion outstanding. In my opinion, this is why existing home sales dropped 7.1% from January, more than double the 3.1% decline forecast by Wall Street.
The National Association of Realtor’s Chief Clown attributes the big drop in home sales in February to “affordability.” But this is statement seeded either in ignorance or fraud. Forget the Case-Shiller housing price comic book. Nearly every major MSA has now entered into the continuous “new price” vortex. This has been going on Denver since last June. I’m getting reports from readers all over the country describing the same dynamic in their markets. This problem is especially acute the high end. Besides, every mortgage sales portal in existence markets a calculator that take your monthly income and calculates how much house you can “afford.” Price has nothing to do with ability to get approved for a mortgage.
Speaking of “affordability,” the cost of financing home dropped to 3.66% in February, it’s lowest rate since April 2015. In other words, the cost of buying a home actually became more affordable in February.
“There is no means of avoiding the final collapse of a boom brought about by credit expansion” – Ludwig Von Mises. The Fed and the Government prevented the collapse of the system that was set in motion by the housing/mortgage market in 2008. As Von Mises stated, “The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion , or later as a final and total collapse of the currency system involved.”
I believe that it is quite likely that the Fed’s ability to push further credit expansion has reached, or is close to, its limits. The soaring delinquency rates of auto loans and a housing market which is likely beginning to tip over now reflect this reality.
I was early in 2004 when I predicted a collapse in the housing market. I underestimated Greenspan and Bernanke’s ability to expand mortgage credit. I was once again early in predicting the demise of the current housing bubble. Again, I underestimated the Fed’s ability and the Government’s willingness to stuff the average American up to his/her eyeballs in debt. Regardless of flaws in predictive abilities with regard to timing, my overall analysis materialized in 2008 and it’s a good bet that it’s coming to fruition once again – only this time it is likely that the Fed will be helpless in preventing the inevitable.