Jan232017
Rising mortgage interest rates repel first-time homebuyers
Rising mortgage interest rates caused an alarming 10% decline in potential first-time homebuyers.
Over the last several years, most pundits predicted mortgage interest rates would rise. With the exception of the taper tantrum, a 1% rise in mortgage rates during a six-week period in mid-2013, mortgage interest rates trended consistently downward, nearing record lows again just before the election.
Paired with the flawed predictions of rising rates, market analysts were always quick to assure everyone that rising mortgage interest rates would have no impact on the housing market. The economy is strong, they said. Incomes are rising, they said. Nothing could hold back the housing recovery juggernaut.
Well, guess what? It was all bullshit.
Yes, for several years everyone covering real estate succumb to their optimism bias, believed the bullshit, and put on a happy face.
So what’s wrong with a little optimism? An optimistic outlook is certainly essential for happiness and inner peace, but it isn’t quite so helpful when it comes to investments. Boundless optimism fuels asset bubbles of every kind, leading to painful clashes with reality later on.
As skeptics like to point out, reality bats last, and the reality is that rising mortgage interest rates do hurt the market — even in ways nobody counted on.
FIRST-TIME BUYERS HAMPERED BY RISING RATES
Study from realtor.com sets drop of those planning to buy this spring at 10%.
New data out today from realtor.com® suggests that the share of first-time buyers planning to buy in spring 2017 fell sharply when mortgage rates began to rise at the end of last year, dropping by as much as 10% since last October.
One of the many reasons first-time homebuyer participation rates are so low is because prices are so high relative to income. The only mechanism by which today’s prices are tenable is through super low mortgage interest rates — and first-time homebuyers are wise enough to figure that out. They know intuitively that rising mortgage interest rates price them out of the market, and they either react with urgency or despondency.
At the same time, the site said, record low inventory levels, higher prices and heavy buyer competition is creating more urgency for active home buyers.
“Last fall, we saw a large jump in the number of first timers planning home purchases, which was very encouraging because their market share is still well below pre-recession levels,” said Jonathan Smoke, chief economist for realtor.com®. “But, as evidenced by their decline in share, first-time buyers are really dependent on financing and affordability is one of their largest barriers to home ownership. This number could continue to decline with anticipated increases in interest rates and home prices.”
I’ve only pointed the fact that rising mortgage interest rates would hurt the market dozens of times over the years, but despite my small doses of reality, the financial media bullshit spin machine kept repeating the mantra that rising rates won’t make a difference.
According to its January survey of active home buyers, 44% of buyers planning to buy in spring 2017 are first-time home buyers. This has dropped significantly since the survey was conducted in October, when 55% of buyers of planning a spring purchase indicated they were looking for their first home.
The average 30-year conforming rate rose to more than 4.2% by the end of December 2016 from 3.4% at the end of September 2016. With average rates today about half a percentage point higher than they were in 2016, a median-priced home financed with 20% down would cost an additional $720 per year in added interest. That equals more than 1% of the median household’s income.
The math is inescapable. Most financial analysts glossed over the math problem by invoking the magical offset from rising wages in an improving economy. Unfortunately, it takes a 12% raise to compensate for a 1% rise in mortgage rates. The 0.8% rise since before the election requires about 9% more income to compensate. Do you know anyone who got a 9% raise in the last two months?
Survey data collected by realtor.com found that first-time buyers were nearly five times more likely than repeat buyers to say they faced challenges qualifying for a mortgage, with affordability ranking highly among first-time buyer concerns. First-time buyers comprised 32 percent of all buyers in November, according to the National Association of Realtors®.
“The rise in rates is associated with an anticipation of stronger economic and wage growth, both of which favor buyers,” added Smoke. “At the same time, higher rates make qualifying for a mortgage and finding affordable inventory more challenging. The decline in the share of first-time buyers since October suggests that the move up in rates is discouraging new home buyers already.“
The market pundits didn’t anticipate any problems from rising rates, but even I didn’t foresee this one. I expected first-time homebuyers to carry on in blissful ignorance until reality hit when they finally started the process to buy a home. I assumed first-time homebuyers believed the bullshit peddled by others. Apparently, I was wrong, and first-time homebuyers possess a much better understanding of interest rates and affordability than I gave them credit for.
To date, rising interest rates appear to be having the opposite impact on repeat home buyers. Even with the current increases, interest rates remain historically low, and the movement in rates hasn’t yet tipped overall buyer demand down. It has actually sparked demand from experienced buyers trying to close before rates increase further, as evidenced by increased realtor.com® listings views and decreased inventory. In the short term, the rate movement seems to have encouraged rather than dampened overall demand.
This is a foolish, knee-jerk reaction. People already in the market should be impacted least by changes in mortgage rates. If higher rates make the value of their homes decline, it will also bring down the cost of a move-up in proportion.
Even after 51 straight months of a below-normal supply of homes for sale, 2017 is expected to be even more challenging. Active inventory in December on realtor.com® was down 11% compared to December 2015. As a result, the year has started with the lowest inventory of homes for sale at least since the recession, and possibly in decades. Inventory was a challenge all year but a stronger offseason in the fall depleted the available homes for sale even more than is typical.
So we have below normal inventory and rising mortgage interest rates. What can we deduce from that?
Resale sales volumes will crumble, but homebuilders should do well. Even though new homes are priced at a premium, they provide much-needed supply. Builders who provide affordable products will enjoy strong sales in 2017.
I still can’t get over the small moves in rates having such an impact. That is a signal regarding the fragility of the system as a whole.
4.25% slows
4.75% freezes
5.25% kills
Not much of a range to work within right now.
They need debt to keep rising at a perpetually increasing rate or the system will collapse. Maybe its time to ‘scare’ investment from equities into bonds to keep rates under control. Should be an exciting year! They just need a catalyst to create the flight to safety.
Historically, rates tend to rise very slowly off cyclic bottoms. After WWII, interest rates dropped to 2% to finance the huge government debt after the war. They allowed inflation to run high to lower the burden of this debt and accelerate growth. It still took 20 years for rates to go back up to 5%.
Even small rises in rates kill growth and hurt asset values at the bottom of the interest rate cycle. The only way to overcome this is through solid growth and its accompanying inflation. If Trump delivers on his promises (which is unlikely), rates will be able to rise gently over the next several years, but it won’t happen quickly.
What is slowing the number of sales is the lack of decent listings. What does get listed tends to go under contract very quickly if it is priced in the ballpark of recent comps. Appears to be another strong year. Those that bought in 13 or 14 are now feeling pretty good about the appreciation.
Rates hovered near record lows just before the election, so people who bought in 13 or 14 were rewarded with an artificial boost from lowered rates. If mortgage rates do rise this year, they won’t be so encouraged by appreciation because borrowers won’t have the borrowing power to push prices higher.
Mortgage Rates Lower for Third Consecutive Week
30-year fixed-rate mortgage (FRM) averaged 4.09 percent with an average 0.5 point for the week ending Jan. 19, 2017, down from last week when it averaged 4.12 percent. A year ago at this time, the 30-year FRM averaged 3.81 percent.
I define draining the swamp as getting rid of guys like Jeb Hensarling.
Debating the Merits of GOP’s Dodd-Frank Alternative
With so much talk lately around the possibly of the soon-to-be-installed Trump Administration rolling back regulations for the financial industry, the House Financial Services Committee Chairman is making his case for the Republicans’ Dodd-Frank alternative while Democrats are vocalizing their strong opposition.
Rep. Jeb Hensarling (R-Texas), who was recently elected to a third term as Chairman of the House Financial Services Committee, recently appeared on two national radio talk shows to discuss H.R. 5983, a.k.a. the Financial CHOICE Act (Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs), which he introduced last June. In September, it passed through the Committee, largely along party lines.
“I know it is a priority of President-elect Trump,” Hensarling said on the Hugh Hewitt Show recently. “He has said he’s committed to dismantling Dodd-Frank, and in the House Financial Services Committee we have a bill to allow him to do that. I don’t think there’s another bill out there today that does do that. So it is a priority of the administration, and conversations I’ve had at high levels of the administration, I know they’re interested in using the reconciliation process.”
On Fox News Radio’s Kilmeade & Friends, Hensarling stated, “What’s interesting is even Barney Frank has indicated he would change about a half a dozen fairly significant provisions of his own namesake law but there are so many Democrats who view this as sacred text like it came down from the tablets on Mt. Sinai and it’s kind of an ideological commitment, a class warfare thing, but meanwhile the big banks are getting bigger, the small banks are getting fewer and the poor beleaguered middle income American is seeing his paycheck stagnant and his savings decimated, it has failed.”
Among the provisions of the CHOICE Act are: allowing banks that remain strongly capitalized the option to be exempt from certain regulations; more than two dozen measures aimed at providing regulatory relief for community banks and credit unions; and a proposal for a bi-partisan, five-member commission to lead the Consumer Financial Protection Bureau, the controversial agency created out of the Dodd-Frank Act.
Democrats have fought against any attempts by Republicans to roll back any part of Dodd-Frank, which the Obama Administrations considers to be one of its greatest triumphs. Rep. Maxine Waters (D-California), Ranking Member of the House Financial Service Committee, has been one of the most vocal critics of the CHOICE Act, calling it the “wrong choice” for America.
“In response to (the devastation of the 2008 crisis), the Dodd-Frank Act made sweeping changes to our financial regulatory system so that our economy would never again be threatened by special interests,” Waters said. “Yet, here we are, pretending that the crisis never happened, and considering toxic legislation that takes us in exactly the wrong direction. Let us be clear about who would benefit from the Republicans’ ‘wrong choice’: Wall Street and other special interests who have been fighting against financial reform since before it was enacted. The regulatory roll-backs in this bill know no bounds.”
Americans for Financial Reform said of the CHOICE Act, “The Financial CHOICE Act would be an unprecedented blow to effective oversight of the financial sector and to fairness for consumers, investors, members of the public, and businesses. This is not a serious piece of legislation. It is, however, a sad reminder of the Financial Services Committee’s apparent willingness, under its current leadership, to do Wall Street’s bidding with breathtaking disregard for the costs to consumers and to the safety of the financial system as a whole.”
U.S. Interest in Canadian Real Estate Surges Following U.S. Presidential Election
Forty per cent of real estate advisors believe that American inquiries will continue to climb after Donald Trump assumes power
Canada’s reputation surges in international rankings
TORONTO, Jan. 20, 2017 /PRNewswire/ – According to data released today by Royal LePage, Canada’s leading real estate services provider, American interest in Canadian real property has risen following the U.S. Presidential Election, with an increased number of Americans conducting research into real estate markets across the nation.
American web traffic on royallepage.ca, the company’s consumer real estate portal, has been highly correlated to recent U.S. political events. U.S.-originated sessions surged 329.0 per cent the day following the election and climbed 210.1 per cent year-over-year the week after Donald Trump’s victory. Looking at the full month of November, 2016, U.S. web traffic grew 73.7 per cent year-over-year, when compared to the same period in 2015. This trend continued throughout the remainder of 2016, with American web traffic rising by 40.9 per cent year-over-year during the fourth quarter1.
Trump means different things to different people because each group heard what they wanted to hear and disregarded the rest during the campaign. Everything written below is wishful thinking that will never come to pass.
The New Administration and the Future of Housing
“I welcome the inauguration of Donald J. Trump as President of the United States and the change a new administration will bring to the nation,” said Ed Delgado, President and CEO of the Five Star Institute and a former executive with Wells Fargo and Freddie Mac. “As a successful and prominent real estate developer, I believe President Trump is uniquely qualified to address the concerns and challenges facing the housing and mortgage markets with sound policies and strong cabinet appointments.”
Trump has also promised reform to the Consumer Financial Protection Bureau, which Republicans have long criticized as unaccountable and overreaching. In particular, Republicans have been critical of the CFPB’s handling of enforcement activities within the mortgage industry, which they believe have made mortgage loans more expensive and more difficult to obtain.
“I hope both the Trump Administration and Congress include on their ‘priority list’ how to bring some stability and certainty to our nation’s housing finance system,” said Brian Montgomery, Vice Chairman and Co-Founder of the Collingwood Group and a former FHA Commissioner in the Bush and Obama Administrations. “Excessive enforcement actions, coupled with state and federal regulatory reforms, have discouraged mortgage lenders from making any loans that fall outside of the strict boundaries set by CFPB regulations. In the end, prospective homebuyers, including many who are first-time buyers with perhaps a blemish or two on their credit score, are largely shut out of the mortgage market from this stifling of housing credit.”
The homeownership rate in the U.S. sank to a 51-year low in the second quarter of 2016, down to 62.9. It rose by 60 basis points in the third quarter but is still hovering above a record low.
“There is tremendous opportunity,” said Meg Burns, Managing Director of the Collingwood Group. “The Trump leadership team has publicly acknowledged a concern with the regulators’ heavy-handed approach over the course of the crisis. There is a good chance that they will halt the very aggressive enforcement activity. It would be best to return to a monitoring regime that identifies problems and issues, so that they can be addressed and resolved, as opposed to stringent enforcement for the sole purpose of imposing financial penalties. The latter approach has clearly resulted in less lending activity and stifled access to credit.”
For the last several months, the housing industry has been experiencing a shortage of available inventory for sale as demand has outpaced supply, and new construction has not been keeping up with the demand.
“[T]he administration of Donald Trump could take a fresh look at existing regulations across the board, and that could result in new rulemaking to change provisions that are hurting real estate, including provisions in the Dodd-Frank financial services reform law enacted in 2010 in response to the financial crisis,” the National Association of Realtors (NAR) wrote. “NAR analysts say the association might favor easing some Dodd-Frank requirements on community banks, which traditionally provide the bulk of financing for housing construction. Housing starts have been far below what’s needed to meet rising demand, and easing some requirements on community banks could lead to more robust construction lending.”
The inability of Congress until now to address the longstanding issues in the housing industry has had seriously adverse effects for the U.S. economy as a whole, according to Collingwood Group President Brian O’Reilly.
“It’s amazing that something so vital as housing to the overall health of the American economy and the average—is something Congress still can’t rally in support of resolving—especially when the risks associated with continued failure to do so are potentially so serious,” O’Reilly said. “The facts are that housing is a critical component of overall economic health in the U.S. Thus, continued failure by Congress to address housing reform is reckless and irresponsible.”
Housing market headwinds
When the Federal Reserve raised interest rates last month, the news was considered a sign that the U.S. economy was on the upswing.
But that quarter of a percentage point rate hike has already had an unintended consequence for house-hunting Millennials—a cohort that lags behind previous generations when it comes to rates of home ownership. New research from Fitch Ratings, a credit-ratings research company, found that the average U.S. Millennial borrower has lost 9% in mortgage capacity over the past three months.
What does “mortgage capacity” mean? It’s an analysis that looks at a borrower’s income and job stability compared with his proposed debt, which helps a lender determine how likely that borrower is to repay the loan. It is also one of the factors that affects how big a loan a potential homebuyer can get.
In early October 2016, the interest rate on a 30-year mortgage was 3.42%, but during the week of January 5, that rate jumped to 4.2%—an almost two-year high, according to Fitch Ratings. So if the maximum loan a would-be buyer could afford in autumn was $120,000 (the current median mortgage for borrowers under 35, according to the Federal Survey of Consumer Finances), by last week that loan value would have dropped to approximately $109,000, assuming all other factors aside from the rate hike were the same, reported Fitch.
And the lower the mortgage amount that you’re approved for, the tougher it might be to make those picket-fence dreams a reality—something 83% of Millennials say they plan on doing someday, according to Trulia’s Housing in 2017 report.
But that isn’t the only thing preventing Millennials from buying real estate. Stagnant wages, heftier rents and mega student loan debt have all conspired to slow down the process of saving for a down payment. Also, stricter underwriting standards imposed by lenders after the housing bubble burst in 2008 means that potential owners need higher credit scores to secure a mortgage, reported Fitch.
It’s no wonder, then, that so many young adults continue to rent or even live at home with their parents. The homeownership rate for under 35-year-olds declined to 35% in 2016, from 39% in 2010, according to the U.S. Census Bureau. And for the first time in over a century, more 18 to 24 year olds live with mom and dad than with a partner or spouse in their own household, according to a 2016 Pew Research study.
I wanted to sell my house and move up to a nice house last month but the increase in payment at 4.5% interest was higher than i was comfortable with(i am at 3.75). That said, the house i wanted is now pending and houses here in 90620 are selling really fast.
This is exactly why rising mortgage rates are a problem.
Eventually, the house you want to buy will either be purchased by someone with a higher income or a larger down payment, or the seller will need to adjust the asking price to reflect the new financing environment of potential buyers. If you wait, the price of this house or a similar one may come down.
Of course, the rub is that this same phenomenon will impact your house, so if you need every penny of today’s equity plus the lower mortgage rate to execute the trade, then you really can’t afford to move up. You won’t be able to get the price of a 3.75% mortgage rate on your house but only pay the price of a 4.5% mortgage rate on your move up.
Is it really interest rates? a $720 increase per year is $60/mo. Rising home prices affect affordability more than this increase. Taken together they are pricing first time home buyers out of the market.
It’s the combination of rates and prices.
When rates spiked in 2013, houses were still undervalued, but the increase in mortgage rates caused the undervalued condition to evaporate, so sales slowed down, and so did appreciation.
As rates drifted lower since mid-2013 and as wages crept up, home prices kept rising, but they are near the limit of affordability, so we have no cushion like we did in 2013. As rates go up from today’s higher prices, sales will be immediately impacted. If rates remain high despite low origination volume, then house prices will weaken as well as buyers and sellers struggle to find a new equilibrium price based on current incomes and mortgage rates.
I thought that banks had supposedly gotten their acts together after the housing market crash of just a few short years ago. Nope. The people who bought the house across from my parents couldn’t qualify for one loan on their $700k house so some other idiot bank gave them a second mortgage to fill in the gap. Who in the hell does that?
Banks seem to to doing extremely risky things once again. I had never heard of a borrower who couldn’t qualify for one big loan being given a secondary loan from another lender before. That’s insane. It makes me wonder how many risky loans are out there again just waiting to drag the housing market back down.
My mom found out yesterday from the lady who sold it that a family of eight bought this house, which is essentially a three bedroom, so that doesn’t make much sense to me either. They could have moved one city over and bought a five or six bedroom house for less than that price.
In that instance, the bank originating the first mortgage isn’t doing anything riskier than normal, but the lender originating the second mortgage is taking an enormous risk. That second mortgage would be outside the “safe harbor” provisions of Dodd-Frank, and the originating lender would be required to keep 5% of the capital on their own balance sheet in a first-risk position. So far this has prevented lenders from acting too stupidly and destabilizing the market. Of course, Trump and the Republicans want to do away with protections like this as unnecessary regulatory burdens, and if they succeed, then we probably will begin seeing really stupid and reckless lending all over again.
Sorry for asking such a basic question but is this what a 10/10/80 piggyback mortgage is?
Is so what would the typical rates on such a mortgage be?
Thanks,
The 80 is a typical first mortgage. It’s only 80% of the purchase price leaving the buyer to come up with the other 20%, usually through down payment savings. During the housing mania, lenders made 80/20 loans all the time where the 20 was a 20% purchase money second mortgage. Since so many lost so much on these loans, almost nobody does these loans today.
I don’t know where the 10/10 is coming from. There are both lenders and equity providers that will provide a 10% second mortgage, but those usually still require the buyer to put up a 10% down payment, which is probably what you are referring to. I don’t know any lender willing to provide a 10% third mortgage when the other mortgages are at 90% LTV.
A 10/10/80 would be when the buyer still puts 10% down and gets a second mortgage for the other 10% because the interest rate is a better deal than mortgage insurance. There aren’t any industry wide standardized programs for this, but there are a some niche lenders offering it, as well as government agencies that offer down payment assistance loans. Often times the government version has a silent second, meaning you owe no payments for the first 5 years.
I should add that the government down payment assistance programs are often times structured more like an 80/20 program, with very little down payment required from the borrower. When I read Josiah’s comment, my first thought was that is what his neighbor may have gotten.