Sep272013
Payment or price: what defines home affordability?
During the housing bubble, house prices became very inflated relative to rents and incomes. Basically, there was no justification for prices, only wishful thinking and delusion about the “new paradigm.” In response to the collapse of the housing bubble, the federal reserve lowered interest rates to allow borrowers to finance the same bloated mortgage balances of the bubble, but this time, the loan terms are stable. However, that still leaves us with house prices that are greatly elevated by historic measures of price-to-income or price-to-rent. So what really defined affordability? Is it the ability to make a stable monthly payment, or it is the price relative to historic measures?
My monthly housing market reports take the view that stable monthly loan payments based on conventional 30-year fixed-rate mortgages define affordability. The actual price in the open market is largely determined by how much this payment will finance, so it’s very sensitive to mortgage interest rates. This is why the federal reserve lowered rates so much. Because without lower rates, borrowers had no chance of financing bubble-era prices. However, I am willing to question my assumptions, and the author of today’s article does so directly.
What’s killing the US housing recovery?
Heidi Moore — Friday 13 September 2013 10.10 EDT
Don’t believe the hype about rising interest rates smothering housing market improvement. Homes are simply unaffordable
Picture it: a hopeful young couple wants to buy a house. They’ve been reading stories about a housing recovery, and interest rates are low. They start their search in the late spring. Things start to turn over the summer: as interest rates on 30-year mortgages suddenly rise to 3.5%, 3.7% and then 4%, they start to get discouraged. Eventually, they walk away and keep looking. The housing recovery dies as examples like this happen all over the country. Banks start laying off mortgage professionals, grousing all the time that rising rates are ruining their profits.
Some version of this narrative has been playing out in the mortgage coverage of many major newspapers.
There’s only one flaw: none of that is happening.
That’s a very bold assertion. Anecdotally, Shevy tells me this scenario has happened many times. It isn’t that people are necessarily priced out, but they are forced to substitute down in quality so much they just aren’t’ motivated. When you thought you could buy a detached 3/2, and suddenly all you can afford is a 2/2 condo, what is your natural reaction? The real question is what’s causing this. Is it the rising interest rates or rising prices. Both happened at the same time. I would argue it was rising interest rates because the rising prices came about much more gradually, and it wasn’t until interest rates spiked that buyer motivation really changed.
Rising interest rates are not wrecking the housing recovery; what’s wrecking the recovery is that house prices are rising faster than the ability of people to afford them. Maybe we thought we could cheat history, and that a housing recovery would bring about an economic recovery. That can’t happen. The housing recovery can’t start until the economic recovery begins.
On this I agree with her totally. Many politicians seemed to believe that reflating the housing bubble would bring back HELOC abuse and stimulate the economic recovery. The economy of the 00s was a Ponzi scheme based on housing debt, and despite efforts to go back to that economic model, banks have so far proven unwilling to give free money to deadbeats.
Typically, a durable housing market recovery would begin with a durable economic recovery. People would go back to work, earn a salary, and they would use their new wages to form households and bid on houses. This in turn puts homebuilders back to work which creates more jobs, and the two sources of new households causes the recovery to strengthen. Unfortunately, you can’t have one without the other. It takes a spark of recovery in some other part of the economy to get housing back on its feet.
Unfortunately, the economic recovery is overblown; in fact, the economy is stagnant, and there’s no evidence of any progress despite years of stimulus by the Federal Reserve.
Similarly, the housing recovery was an illusion: the best housing stock has gone to large private investors, not individual homeowners.
There is no denying the fact that owner-occupant participation in the reflation of the housing bubble has been negligible. If not for investors and restricted inventory, there would be no housing recovery.
So let’s look at why the housing recovery is weak.
You can forget the idea that it’s somehow due to higher interest rates. Rates are historically low. In 2003 through 2006, when the housing market was booming, the interest rate on mortgages over 30 years was around 6% or even higher, and that never hurt buying. That’s because at the same time, incomes were also rising, after adjusting for inflation. The year at the height of the housing bubble, 2006, was also a peak for income growth. By comparison, look at this chart to see how interest rates are correlated to housing bubbles: it shows that they aren’t, really.
The chart she refers to is the long-term interest rate chart. It shows there is no correlation between interest rates and housing bubbles. She is making the same mistake nearly everyone in the MSM makes when discussing this issue. Just because the correlation was weak in the past doesn’t mean it won’t be strong in the future. The mechanisms lenders used to get around interest rate fluctuations are now banned in the qualified mortgage rules. I explored this in great detail in Future housing markets will be very interest rate sensitive.
So, if interest rates are still at rock bottom in historical terms, we know that “rising” mortgage rates are probably not a big enough deal to hurt the housing recovery.
Wrong! What will a long-term rise in interest rates do to home prices? Rising rates will be a long-term drag on home price appreciation. The math is inescapable.
So what is?
In a nutshell, what’s hurting the housing recovery is that there aren’t enough houses to buy, and those that are available are too expensive.
I can’t argue with that. But what defines “expensive,” price or payment?
First, the supply of affordable homes has diminished. In the aftermath of the housing crash, one-third of all home sales were distressed homes, and those houses tend to be sold for affordably low prices by banks.
But, as home prices have risen, there is evidence that banks and lenders are not selling those foreclosed houses and instead holding on to some of them to sell for a higher price later. They’re also not selling them now because flooding the market would result in low sale prices – and those lenders want to get high prices.
It’s a bit more complicated than that, but she has the basics right. The banks aren’t holding much of their own REO off the market. What they are doing is preventing distressed inventory from coming to market by simply choosing not to foreclose and by denying short sale requests. Lenders are can-kicking with loan modifications to get a few more payments out of borrowers who simply can’t afford their homes.
That strategy by lenders seems to be working. House prices have rocketed in the past year, rising too fast for buyers to keep up, even with a 30-year mortgage. In July 2012, home prices were still falling from the housing bust. In the past year, they have rocketed up 12%.
I do have to give credit where credit is due (no pun intended). The banks did a remarkable job of reflating the housing bubble. If you had told me in late 2011 that by mid 2013 prices would be up over 20% in OC, I would have flatly said it was not possible. To get a cartel to act as one unit and restrict supply so completely and effectively is almost unheard of in modern economics. The fact that the banks pulled this off is almost a miracle.
At the same time, rental prices have also zoomed up, which is perhaps why mortgage applications seemed to rise earlier this year: a high rent will make people think about buying a home instead.
But neither renting nor buying looks great any more at these prices, because people still don’t have much money.
(See: Can it be a good time to buy and a good time to rent?)
Personal incomes have collapsed since the recession, meaning households – many still struggling with heavy debt – can’t afford the sudden rise in house prices and are not applying for mortgages any more. Anyone who manages to buy a house for the first time right now is not feeling rich: the National Association of Realtors found recently that 42% of first-time buyers have to make sacrifices to afford a new home.
This issue of home prices is a huge factor in why there’s no actual housing recovery.
Affordability and home ownership are far more closely correlated than interest rates and home ownership. Interest rates may make mortgages more expensive, but they don’t affect the underlying price. That price is what drives people away.
This is a bold assertion, and she provides no evidence to back it up. Interest rates do impact house prices because they directly control how much most buyers can borrow to get a house.
Some may argue that interest rates don’t impact all-cash buyers because they aren’t getting a mortgage, but that’s not true either. All-cash buyers are also looking for the best place to park money. If there were better competing investment alternatives, all-cash buyers would be putting their cash there instead of in real estate. Interest rates impacts the pricing of all asset classes.
The low demand for overpriced houses may be why banks are laying off mortgage professionals.
Actually, the collapse in refinance volumes cause by higher mortgage rates is what’s causing mass layoffs of mortgage professionals.
Reuters, Bloomberg, the Los Angeles Times, and, most recently, the Wall Street Journal have all written stories about the layoffs in mortgage departments. They attribute those layoffs to rising rates. That’s not the whole story, however.
Laying off mortgage professionals is, at this point, an ancient trend – one that precedes rising interest rates by months and years. Demand is low, and when demand is low, banks lay off people. It has happened every year since 2008, and continued into 2011, after the crisis.
Earlier this year, Chase said it would lay off mortgage professionals because business was improving as foreclosures fell; now the bank and other rivals are suggesting that they’re doing more layoffs because business is bad. They can’t have it both ways. The truth is that banks will most likely continue layoffs as they slim down the incredibly bloated infrastructures they built up during the boom years and then during the foreclosure and mortgage-cleanup time of 2009 to the present day.
It’s amazing how many people made a living from mortgages back in 2006. The guy who built the first version of this website was telling me about his mortgage business back during the bubble. It seems everyone was doing a few mortgage deals back then. Perhaps I get a skewed perspective living in Orange County, but it isn’t surprising that the number of people making a living from mortgages is steadily declining.
In order to drum up business, banks are walking down a well-worn and dangerous path. According to Bloomberg, those banks are loosening their mortgage standards, dropping the bar for down payments and income requirements in order to get more customers in the door, as Bloomberg reporters perceptively found this week.
Mellow Ruse, one of our favorite astute observers, mentioned this months ago. Lenders adjust their standards on the margins to increase their business when they want to. Most lenders are still shell-shocked from the housing bubble, and they worry about the buy-back clauses in their contracts with the GSEs and the FHA, but they have been lowering standards to recapture some of the volume they are losing through the dramatic decline in refinances.
Loosening mortgage standards? That’s a fantastic idea; what could possibly go wrong? Except of course, for a replay of the last housing crisis. Weaker underwriting standards help more people get homes, but they also sow the seeds of trouble as unqualified people make their way into the system.
She is correct in her assessment.
Banks still have not proven that they know how to judge the risk of a mortgage, so they turn their spigots either all the way on, giving mortgages to everyone, or all the way off, giving mortgages to almost no one.
That’s the nature of a credit crunch. The spigot generally gets turned on very slowly after a credit crunch. Lenders in in no hurry to discover where loans start going bad again. I see little or no risk of the credit spigots being opened fully any time soon.
John Carney, at CNBC, theorizes that the rising home prices are proof of a bubble. The idea is directionally sound, but has a major flaw: bubbles require mass participation.
There’s no bubble right now because many people can’t get the homes they want. Paradoxically, that will create less of a bubble even though housing prices are growing at bubble rates.
That’s a very good point. Further, a bubble generally requires some form of debt arrangement to really get going. Right now, much of the rise in prices is all-cash buyers. Aggregate loan balances are still falling nationwide as lenders continue to write down bad loans.
What this all means is that people are going to stay locked out of the housing market until the economy recovers, they have more money in their pockets, and there’s a larger supply of affordable houses. Until then, don’t believe the hype about interest rates.
I am not convinced by her arguments. Price matters, but terms matter even more. I always remember a conversation I had with my mentor not long out of college. He was a seasoned negotiator and land developer. He told me “I’ll let you determine the price if you let me dictate the terms.” It was such a sweeping statement that it really caught my attention. After spending the last 20 years in the business world, I have a much better understanding of what he meant. In my opinion, affordability is defined by the terms, not the price.
[raw_html_snippet id=”newsletter”]
[idx-listing mlsnumber=”PW13173014″ showpricehistory=”true”]
12502 PINE St Garden Grove, CA 92840
$798,000 …….. Asking Price
$315,000 ………. Purchase Price
7/17/1997 ………. Purchase Date
$483,000 ………. Gross Gain (Loss)
($63,840) ………… Commissions and Costs at 8%
============================================
$419,160 ………. Net Gain (Loss)
============================================
153.3% ………. Gross Percent Change
133.1% ………. Net Percent Change
5.6% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$798,000 …….. Asking Price
$159,600 ………… 20% Down Conventional
4.37% …………. Mortgage Interest Rate
30 ……………… Number of Years
$638,400 …….. Mortgage
$156,519 ………. Income Requirement
$3,186 ………… Monthly Mortgage Payment
$692 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$166 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$4,043 ………. Monthly Cash Outlays
($781) ………. Tax Savings
($861) ………. Principal Amortization
$254 ………….. Opportunity Cost of Down Payment
$220 ………….. Maintenance and Replacement Reserves
============================================
$2,876 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$9,480 ………… Furnishing and Move-In Costs at 1% + $1,500
$9,480 ………… Closing Costs at 1% + $1,500
$6,384 ………… Interest Points at 1%
$159,600 ………… Down Payment
============================================
$184,944 ………. Total Cash Costs
$44,000 ………. Emergency Cash Reserves
============================================
$228,944 ………. Total Savings Needed
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9-23 Existing Sales (Resales) Matter More to the Economy than New Sales…Contrary to Popular Belief
As we await builder earnings and New Home Sales data this week (you should all have a great handle on what to expect; if not let’s do a quick call), I thought it was a good time to put out some “New-Era Housing-U” material. It’s amazing how age-old, old-school housing economics, metrics, and clich’s still reverberate loudly through most all research and thought processes today. The note and data below are on the misguided belief that builders/New Home Sales still matter more than Existing Sales to the macro economy.
http://mhanson.com/archives/1489
I welcome the recent falloff in new home construction. Less housing supply with a growing population equals pricing increases amid low inventory levels. We are seeing some of this now. Low levels of new home construction inflates existing home prices.
So, as a rEALTOR, price carries more weight vs transaction volume with you? Interesting.
I am not a realtor. I work on Wall Street in New York City.
That explains the early posts. But you sound like you lived in California at one time.
I live in Corona Del Mar about 1 week per month. The remainder of the time is spent in NYC and Boston area homes.
That sounds like a nice life.
BTW, despite our disagreements, I appreciate that you take the time to comment here. It’s great to have opposing points of view to keep people thinking about these issues.
This market is just not about affordability. The FED is printing a lot of money. And, the debt is spiraling. If not for the FED buying, then refunding coupon payments to the Treasury, not to mention artificially low interest rates, the debt would be rapidly rising relative to GDP. People with financial assets wonder how long this can continue. At some point, a sovereign debt crisis should be in the cards. So, many are taking a portion of their financial assets and reallocating to housing often acquired with all cash purchases. A good portion of the activity in beach cities is this paradigm. There is more to the all cash market than investment firms scooping cheap housing in third class locations. I am one of those worried about the money printing, the eventual inflation from such policies, and potential sovereign debt crisis. I am searching for another deal to add to my housing portfolio, most of which are paid off.
“many are taking a portion of their financial assets and reallocating to housing often acquired with all cash purchases. A good portion of the activity in beach cities is this paradigm.”
The data does not support this contention. The percentage of all-cash purchases and free-and-clear ownership hasn’t changed much. Most of the sales in the beach communities are still move-up trades with mortgages well in excess of $1M.
The main reason you can’t find a deal on a property is because the distressed inventory in these markets — and there is still a lot of it — is not coming to market.
I’m picking up on this as well. It seems many of the cash buyers aren’t simply buying RE in an attempt to chase yields. Looks like a lot of folks are picking up RE as a hedge for their investments, and any yield is just icing on the cake.
As we all know, any good portfolio is well diversified. With the future of the dollar and stock market in question, it’s not a bad idea to mix in some gold, RE, etc. to hedge your bets.
Whether you’re concerned with inflation, a sovereign debt crisis, or outlandish theories on “them” confiscating all your cash (http://thecommonsenseshow.com/2013/09/08/the-ultimate-false-flag-event/), it’s not a bad idea to have a few tangible assets under your belt.
I’d guess even if rates rise to the point where you can make safe, healthy guaranteed returns (in bonds, etc), many investors will hold their RE until the dust settles from all the printing. Could be many years.
Problems: with RE, most people will have all of their eggs in one basket, so diversification is zippo nada. Also, RE is a fixed target, and the mutha of all bureaucratic ‘tax hunts’ has only just begun.
I’m always reluctant to post an article when it quotes Lawrence Yun.
Pending Sales Index in 3rd Straight Monthly Drop
Continuing to respond to higher mortgage rates, the Pending Home Sales Index (PHSI) slipped for the third straight month, dropping 1.6 percent in August to 107.7 the lowest level since April, the National Association of Realtors which compiles the index reported Thursday. Economists had expected a more modest decline, 1.0 percent, to 108.3. NAR also revised the July index down to 109.4 from the originally reported 109.5.
The index covered the same month in which new home sales, reported Wednesday by the Census Bureau of Department of Housing and Urban Development, improved 7.9 percent. Like the PHSI, new home sales are tracked when buyers sign contracts. The existing home sales report for, also a product of the NAR, is based on closed transactions.
NAR Chief Economist Lawrence Yun said the drop was expected as a consequence of buyers accelerating purchase decisions while mortgage rates were increasing. Indeed, existing home sales jumped in both July and August. The corresponding PHSI rose a sharp 5.8 percent in May – the strongest month-month increase in two years. The index dropped a scant 0.4 percent in June.
Yun downplayed expectations for home sales.“Moving forward, we expect lower levels of existing-home sales,” he said, “but tight inventory in many markets will continue to push up home prices in the months ahead.”
“Moving forward, we expect lower levels of existing-home sales,” he said, “but tight inventory in many markets will continue to push up home prices in the months ahead.”
I don’t like agreeing with Lawrence Yun either, but in this instance, I think he’s right.
Even a broken clock is right twice a day…
Home-Buying Competition Continues to Wane as Market Rebalances
For the fifth month in a row, competition among buyers for homes declined in August, further assurance that we are shifting away from the seller’s market that dominated the first half of the year toward one that is more balanced. Still, tight inventory conditions mean that across Redfin’s 22 markets, most customers making offers at the end of the summer faced competing bids. In August, 60.5 percent of offers written by Redfin agents across the country faced bidding wars, a drop from 63.3 percent in July and from 63.5 percent in August 2012. This was the first year-over-year drop in competition seen since Redfin began collecting this data in 2011.
To me, an issue just as important as interest rate sensitivity is carry cost sensitivity.
Interestingly, carry costs seem to be rarely discussed in the context of the overall price of a property.
Overall [non-tax deductible] carry costs (taxes, insurance, HOA dues, maintenance and the like) can easily reach 3-4% of the purchase price/year.
So, carry costs, (at least in Irvine) could approach [tax deductible] interest costs on a loan.
This is a trend that has been occurring with short sales, some of your readers were first to note and comment on it. I think it really designed to keep people in their homes and the homes off the market. Maybe they think low mortgage rates will be around for some time.
FHFA OIG Recommends More Efficient Pursuit of Deficiencies
The Office of the Inspector General (OIG) of the Federal Housing Finance Agency (FHFA) has issued a pair of reports critical of the GSEs’ efforts to collect billions of dollars in deficiencies from underwater homeowners who walked away from their mortgages.
“If either the foreclosure sale’s proceeds or the value at which [the GSE] records a property in its real estate owned portfolio is less than the borrower’s mortgage loan balance, the shortfall (or deficiency) represents a loss to [the GSE],” one of the reports explained. “Such losses can be reduced if the enterprise recovers deficiencies from borrowers who possess the ability to repay. Enhanced deficiency management practices can also serve as a deterrent to those who would choose to strategically default on their mortgage obligations.”
The reports found that Freddie Mac did not refer nearly 58,000 foreclosures with estimated total deficiencies of approximately $4.6 billion to its deficiency collection vendors. Between January 2010 and June 2012 Fannie
Mae failed to pursue 26,000 foreclosures that had an average deficiency of $79,000.
In most cases the collection of deficiencies was abandoned because of state laws limiting the amount of time that can pass between a foreclosure sale and a collection action. Delays in collecting and processing paperwork often allowed this statute of limitations to pass.
“Of the 44,652 foreclosure sales, Fannie Mae’s vendors reviewed 14,960 foreclosures and confirmed the existence of deficiency balances, before ceasing action to pursue these deficiencies,” the report on Fannie Mae said. “It is likely that only a portion of these deficiencies may be recoverable, as many borrowers likely do not possess the ability to repay. Further, the deficiency vendors did not pursue or estimate the total deficiencies on the remaining 29,692 accounts because the statutes of limitation expired before the vendor could gather the necessary information to review the accounts and calculate the deficiency balances.”
The principle is the problem, hence, housing remains on life-support. Too bad.
“So what really defined affordability? Is it the ability to make a stable monthly payment, or it is the price relative to historic measures?”
My first thought is that this is a great example of a False Dichotomy.
The answer is: neither prices nor payments define affordability, current and prospective economic conditions do.
Gaging affordability by comparing prices today amidst economic stagnation with prices a decade ago, when the economy was booming, is sheer folly. If you tell me what wage growth will be over the next 10 years, I will tell you if housing prices will rise, irrespective of rates. As long as wage growth outpaces rate growth, housing prices will rise. This was true in the 70s when wages were growing at 10%/yr for a decade, and rates were in the teens. In the land of fixed rate mortgages, ANY price or rate is affordable when incomes are rising 10%/yr. The payment is fixed, but take-home will double in 7 years.
The federal reserve is going to need to print a lot more money before we see that level of wage inflation. With unemployment so high, wage growth is nil, and it will continue to be until we reach full employment. Nobody sees that happening for several years.
Wage growth in CA just jumped ~25% this week for the folks at the bottom of the pay scale (from $8/hr to $10/hr). This probably will not have a lot of impact on the RE market, though it “might” apply some upward pressure on wages when fully implemented (2016).
it might also put pressure on our already sky-high state unemployment rate.
I fully expect to see articles over the next 3 years where politicians and analysts are perplexed as to why California’s unemployment rate is so much higher than the rest of the country’s.
$8 -> $10 may justify an overall increase in rents, since low end earners can now pay more.
I suppose indirectly it may help float high R/E prices, since higher rents = higher cap rates would could justify higher rental property purchase prices.
I think that $2 increase in 3 years will be eaten away by all the money printing. It will be spent food and energy, maybe shelter.
“I fully expect to see articles over the next 3 years where politicians and analysts are perplexed as to why California’s unemployment rate is so much higher than the rest of the country’s.”
Rarely do politicians admit to their non-understanding. More likely they will blame unemployment on greedy corporations.
My point was that you can’t measure affordability retrospectively (historic context), or even presently (monthly payment), but you have to consider prospective economic prospects to determine current affordability. I’m not saying that wages are going to rise 10%/yr. What I am saying is that homes are more affordable if wages are rising than if they are stagnant or falling, regardless of current prices or rates because of the fixed monthly payment. High DTI’s are less risky in times of rising wages because a 50% DTI will only be 50% for a short time. Carrying a 50% debt load for 30 years is much more onerous than carrying the same debt load for 5 years, and then being down to a 25% DTI.
That’s the same reason banks used when they let DTIs get out of control in the 1970s and inflated the first housing bubble. I’ve always resisted putting long-term projections into estimates of value because as the bank experience of the 1970s shows, there are too many variables to make an accurate long-term forecast.
When I compute the cost of ownership relative to rent, I only look at today. It certainly isn’t because I can’t do a discounted cashflow analysis or create long-term projections, but I just don’t believe in their accuracy. Invariably, someone will tweak a variable for appreciation by a percentage point or two, and suddenly the purchase that looks foolish today becomes a great investment. There is far too much room to manipulate the numbers when you start considering long-term rates of wage growth or inflation.
If rates do stabilize at or below 4%, sales activity and prices will be very resilient this fall and winter.
Fixed mortgage rates fall to a nine-week low
Fixed mortgage rates fell to a nine-week low this past week, following the Federal Reserve’s announcement that it will maintain its bond-buying program to keep homebuyer affordability elevated.
The 30-year, fixed-rate mortgage posted its lowest level since the week ending July 25. The 30-year, FRM came in at 4.32%, down from 4.50% last week, but up from 3.40% last year, Freddie Mac said in its Primary Mortgage Market Survey.
The 15-year, FRM decreased to 3.37%, down from 3.54% last week and a steep rebound from 2.73% last year.
Meanwhile, the 5-year Treasury-index adjustable-rate mortgage averaged 3.07%, down from 3.11% last week and an increase from 2.71% a year ago.
Additionally, the 1-year Treasury-index ARM declined to 2.63%, down from 2.65%, but up from 2.60% a year earlier.
“Mortgage rates fell following the Federal Reserve announcement that it will maintain its bond-buying stimulus,” said Frank Nothaft, vice president and chief economist for Freddie Mac.
He added, “These low rates should somewhat offset the house price gains seen the last number of months and keep housing affordability elevated. For instance, the S&P/Case-Shiller 20-city composite house price index rose 12.4% over the 12-months ending in July, which represented the largest annual increase since February 2006. In addition, more than half of the cities had annual growth exceeding 10% and four cities saw increases exceeding 20%.”
Bankrate data also show mortgage rates falling to a three-month low.
Bankrate’s 30-year, FRM dropped to 4.47% from 4.66% a week earlier.
In addition, the 15-year, FRM decreased to 3.53%, down from 3.7%, while the 5/1 ARM dropped to 3.41% from 3.55%.
Bankrate senior financial analyst Greg McBride also attributed the continued decline in mortgage rates to the Fed’s decision to not begin tapering its monetary stimulus.
“Mortgage rates will likely resume their upward march when the Fed does inevitably begin their tapering,” McBride said.
He continued, “With the looming debt ceiling and the government debate, the Fed wanted to make sure Congress didn’t run the economy off the rails in October.”
However, according to the Federal Housing Finance Agency, mortgage rates continued their upward trend in August, with the contract mortgage interest rate increasing slightly by 0.25% to 4.35%.
Additionally, the average interest rate on a conventional, 30-year, FRM of $417,000 or less hit 4.49% in August, the FHFA reported.
The average loan amount in the latest FHFA report was $274,500 in August, down from $278,000 in July.
The 10 year US Treasury is going under 2.60% right now.
Five Years Later: FHA Demands $1.7 Billion Treasury Bail Out
One would think that five years after the bail out of the GSEs, that the Federal Housing Agency, the government agency created to insure loans made by banks and other private lenders for home building and home buying, would be stable and growing. After all, the “housing recovery” and those $3 trillion (and rising exponentially) in liquid injections by the Fed should have assured it. Right? Wrong. Moments ago, the FHA, just as we predicted, officially announced it needs a government bailout – the first in its 79 year history – in the form of a $1.7 billion in funding from the Treasury to “cover projected losses in a mortgage program for seniors” and specifically losses due to reverse mortgages: those Fonzy-advertized fake piggy bank programs that end up anyone who uses them through the nose, and now taxpayers too. But… but… but… if the FHA just failed…. does that mean they lied about the housing recovery too? Unpossible!
And to think it was only November 2009 when the Clevelend Fed lied when it said “are FHA-insured loans truly the new subprime? From our analysis it doesn’t appear so. In fact, several findings that emerged from our examination of FHA lending in Ohio point to “no” as the answer.” Once again, the answer turned out to be yes.
http://www.zerohedge.com/news/2013-09-27/five-years-later-fha-demands-17-billion-treasury-bail-out
I think makes it a Trifecta of Housing agencies than needed a bailout.
The “experts” aren’t faring too well this month. First, they all blew the taper, and now they all blew the FHA bailout.
Experts pull back reins on FHA bailout rumors
Rumors swirling around Capitol Hill suggest the Federal Housing Administration will need a Treasury bailout for the first time in 80 years when this fiscal year ends.
It came as no surprise that lawmakers who stand against the current structure of the FHA immediately responded to the rumors, including Rep. Scott Garrett, R-N.J.
Garrett is one of several policymakers behind an ongoing push to reform the FHA.
However, before the market begins to panic, many mortgage experts believe rumors of a potential bailout are ‘seriously exaggerated.’
“Anything that happens is a temporary and technical shortfall,” explained The Collingswood Group partner and managing director Tim Rood.
He added, “It will certainly not reach a magnitude for any type of reform to actually happen.”
In April, the Obama Administration projected that the FHA would need a bailout to cover $943 million in losses during the current fiscal year as a result of mortgage-related losses.
At the time, FHA Commissioner Carol Galante admitted a bailout may be required in the future, but the agency has yet to reach that point.
While the situation is still fluid, it appears the temporary shortfall will fall in the $1 billion-ballpark, according to Compass Point.
“We believe that from a practical perspective the only thing an FHA draw would increase is the political rhetoric surrounding the issue and our sense remains FHA reform is unlikely to become law in the medium-term,” explained Compass Point policy analyst Isaac Boltansky.
After an “expert” completely blows it, I wonder how long they feel the need to keep their head down in disgrace?
Oops! FHA needs $1.7B bailout
The Federal Housing Administration will require a $1.7 billion bailout from the Treasury to cover project losses in mortgage-related programs, officials told Congress in a letter Friday.
This will be the first time the agency will require taxpayer support in its 79-year existence. In April, White House officials projected a $943 million shortfall for the current fiscal year, which ends Sept. 30.
“The amount is higher than the estimate provided in the president’s budget because of a decline in FHA endorsement volume in the last few months of the fiscal year — consistent with the trend in the broader housing market in response to higher interest rates,” explained FHA Commissioner Carol Galante.
She added, “It is also consistent with FHA’s goal of reducing its footprint in the market.”
I think it’s important to keep this in perspective. This hardly qualifies as a bailout when compared to previously insolvent entities like GM, Chrysler, AIG, Fannie, and Freddie. The FHA insurance fund didn’t come close to running out of funds but legally they have to reserve for 30 years of losses, and they fell short of that mandate.
http://www.latimes.com/business/money/la-fi-mo-federal-housing-administration-fha-bailout-20130927,0,6044953.story
Galante said the bailout request doesn’t reflect the state of the FHA’s insurance fund. When the fund’s status is updated in the next few months, improvements the agency has made could result in more than $5 billion being added to the fund.
Galante stressed that the FHA does not need the bailout money to pay claims at this point. It has more than $30 billion in reserves. But under law, it is required to have enough reserves to pay off all claims over the next 30 years.
Nice post. They fell short of the mandate indeed. Good of you to note the importance of keeping that in perspective.
Have a nice weekend.
While “affordability” does factor in, I think the general populace’s basic concept of future value is more responsibile for the non-existent demand. Most buyers are not financially minded. The buyer ignores that the $400k house will cost them $750k by the time their mortgage is paid off. Instead, they focus on the $400k house may be $600k by the time I sell, so I made $200k and lived in my house for “free”. In today’s market though, the current $600k house may only be worth $500k when they want to sell. Call it the reverse kool-aid effect. They all rushed into the market when double-digit appreciation was going to last forever, and they all run away when told the asset may depreciate in value. Unless they feel like they are getting a deal, Joe Consumer won’t risk it.
I hope you are right. That would represent a huge change in consumer attitude toward housing.
Political Pressure is what’s going to stop the madness of the Federal Reserve:
http://www.zerohedge.com/news/2013-09-27/when-bubbles-fail-albert-edwards-what-happens-when-fed-can-no-longer-contain-fury-99
“We would go further: when the fury of the 99% boils over, the 1% (and their bought and paid for politicians) better hope that the army is on their side. Because the reverse wealth redistribution when (not if) it comes, will be swift, militarized, and very brutal.”