Mortgage rates are rising and the housing market is getting weaker. In May of 2013, the 30-year fixed rate mortgage was 3.59%. Today it is 4.71%, more than a full percentage point higher. That means that the payment on a $200,000 loan is 15 percent more than it would have been just two months ago. The higher rates mean that would-be homebuyers are getting less bang for their buck and might not be able to afford their dream home. It means that housing sales will fall and prices will drop. Higher rates are poison for housing.
Last week, the Mortgage Bankers' Association (MBA) announced that mortgage purchase applications had dropped 3 percent from the week before following a downward trajectory that has persisted for the last two months. At the same time, new home sales plummeted 13.4 percent in July to 394,000, less than a third of their total in July 2005 when sales tipped 1,200,000 per year. The impact on existing home sales is still unknown because the data from June will not be released until late September, but given the uptick in rates, we can assume that sales will be well-below expectations. The housing market is cooling, sales are sluggish, and prices are flattening out. The recovery is over.
The big banks can see the handwriting on the wall and are making the adjustments they think will maintain profitability in a tighter rate environment. This is from an article by Christopher Whalen at Zero Hedge:
"Wells Fargo and Chase... both told the industry yesterday that things might become grim in their mortgage divisions. Wells told investors at a conference that it expects mortgage originations to drop nearly 30% in the third quarter to roughly $80 billion, down from $112 billion in the second quarter...Wells has already cut 3,000 jobs in the mortgage business since July (roughly 1% of the bank's total workforce). Mortgage-banking income dropped 3% at Wells Fargo and 14% at J.P. Morgan in the second quarter from a year earlier. At Bank of America, which announced 2,100 job cuts on 8/29, the decline was 22% from the year-ago period." ("Mortgage Market Slump: Is it Interest Rates or Jobs and Consumer Income?" Zero Hedge)
It doesn't matter that rates are still low by historic standards. What matters is that the Fed's unprecedented rate stimulus vanished overnight, severely dampening the demand for housing. That's why mortgage applications and new home sales are cratering, and that is why existing home sales will fall sharply. Because what matters is rates, rates, rates; the cost of money. Borrowers don't buy a house, they buy a mortgage, and the price of that mortgage is what counts. When Bernanke started talking about "tapering" his asset purchases (QE) in May, he pulled the rug out from under housing leaving the market vulnerable to a sales shock. Now traditional buyers are putting off their home purchases for a later date while investors are headed for the exits. Check this out from Reuters:
"A recent survey by polling firm ORC International found that about 48 percent of investors surveyed planned to curtail home purchases over the next year... Only 20 percent expect to buy more homes, down from 39 percent....- Advertisement -
"The softening of investor demand has also coincided with a drop in sales of so-called distressed properties, whether foreclosures or short sales. These homes usually sell for less than others and had been the focus of investor interest.
"In July, distressed homes made up only 15 percent of sales, according to the National Association of Realtors. That matched June's reading, which was the lowest since the group started monitoring distressed sales in October 2008..." ("Analysis: Waning investor demand opens door for first-time U.S. home buyers," Reuters)
As we've been saying for months, Bernanke's Potemkin housing market is built on four very shaky pillars -- (Low rates, suppressed inventory, excessive speculation, and Obama's bogus mortgage modification programs) Significant change to any of these props will lead to a market stall and a sharp dropoff in sales. Here's how housing analyst Mark Hanson puts it:
"All it will take is the wave of 'cash-money' buyers 'easing off' a bit; 'some' of the organic first-time and repeat buyer cohort stepping away due to the sudden lack of 'affordability'; and/or a wave of supply from 'panic sellers' hitting the market to send sales volume and prices down sharply, over a very short period of time."
Hanson is the second best housing analyst in the country (Robert Shiller still holds the top-spot) and his latest blog post is a "must read" for anyone who wants to know what is going on in housing. Here's an excerpt from the post titled "Housing...Where we sit":
"Starting in Q4 2011 'housing' was injected with arguably the greatest stimulus of all time; a 2% 'permanent mortgage rate buy down' gift from the Fed. As a result of rates plunging over a very short period of time in 2011 from the 5%'s to the low-to-mid 3%'s an instant 15% to 20% 'purchasing power' was created out of thin air. In other words...somebody could buy a house that cost 15% to 20% more...ca-ching...- Advertisement -
"Some think the rate 'surge' will have little impact... while the bears... think the rate surge was a rare and powerful 'catalyst' only rivaled two times in the last seven years. The first, when the housing market lost all it's high-leverage loan programs all at once in 2007/2008; and the second, on the sunset of the Homebuyer Tax Credit in 2010.
"In both these previous instances ... when the leverage/stimulus went away ... housing 'reset' to the current supply/demand/lending guideline/interest rate environment, which in 2008 resulted in the 'great housing crash,' and in 2010 the 'double-dip.' Here we sit in a eerily similar situation." ("Housing...Where we sit," Mark Hanson)
The media has tried to downplay the importance of the spike in rates, pointing to the fact that rates are still very low by historical standards. But Hanson disagrees. He thinks that the "the greatest stimulus of all time" has just been removed, leaving the market exposed to a catastrophe similar to the downturn in 2008 or 2010. If he's right, then September existing homes sales (which will be reported in late October) should fall precipitously, which they should since the fundamentals --wage growth and employment-- are still weak.
Eventually the abysmal condition of the underlying economy will resurface. Bernanke's smoke and mirrors can't last forever. Keep an eye out for September's existing homes sales.