Sep252013
What will a long-term rise in interest rates do to home prices?
Everyone has an opinion on how rising mortgage rates will impact housing. Most of what you read in the mainstream media is wishful thinking from those who want to inspire buyer confidence in an uncertain market. The words of Pollyannas doesn’t educate anyone, but it does give people who are looking for assurance more than insight exactly what they are after. Most analysts agree that rising interest rates will reduce the buying frenzy. That much is clear (See: realtors lament low demand, low supply, and collapsing first-time homebuyer market). However, analysts are divided on the long-term impact of rising rates.
What Rising Interest Rates Mean for Home Prices
By Nick Timiraos — September 20, 2013, 8:00 AM
It’s a hotly debated question among economists and analysts right now: What will the recent spike in mortgage rates do to the housing market? …
Over the long run, “there’s no major correlation between rates and prices,” says Douglas Duncan, chief economist at Fannie Mae. Moreover, even at 4.75%, interest rates are still very low by historical standards. But the speed at which rates climb matters in the short-run, Mr. Duncan says, because it can force would-be buyers to adjust what they’re willing to pay.
This is the king of thoughtless and glib analysis that pollutes the MSM. I explored this in great detail in Future housing markets will be very interest rate sensitive. While it’s true that the correlation has been weak in the past, a good economist would explore why this was true. Previously, when interest rates went up or down, lenders could rely on affordability products and flexible debt-to-income ratios to keep prices moving upward. Since affordability products are now banned, and since the maximum DTI is capped at 43%, these tools are no longer available. This will make rates and prices correlate much more strongly in the future.
Other data, however, show that the amount of debt sought by prospective borrowers has fallen from a peak in early May, before mortgage rates began to rise, as the accompanying charts illustrate. While borrowing amounts are still above their year-earlier levels, the rate of growth has slowed.
In early September, the average loan on an application for a mortgage to purchase a home had fallen to $252,400, down from a high of $269,700 in April. While some of this decline could be seasonal, the average loan amount in early September was up by 7% from one year earlier, compared with gains of 12% witnessed in April.
The main determinant of house prices is aggregate mortgage debt. It increased dramatically during the housing bubble, and it collapsed during the credit crunch. If mortgage balances are currently falling, either house prices will fall, or sales volumes will dry up.
The real long-term impact of interest rate reversion to the mean
I’ve written extensively about the impact of interest rates on house prices. I recently recounted the housing market impact of 25 years of falling mortgage interest rates. Today, I want to look more closely at what would happen if interest rates spent the next seven years rising back to the 7% level, the current average of the last 42 years.
The chart below shows the median home price, rental parity (current cashflow value), and fundamental value at a steady 7% interest rate. As you can see, rental parity has been above and below fundamental value at different points in the interest rate cycle. Each housing bubble where values detached from these fundamentals was caused by different mechanisms, but as mentioned previously, these mechanisms were all recently banned by the new rules on qualified residential mortgages.
Below is the chart of median resale, rental parity, and fundamental value for Orange County, California, from 1988 to present. Note the upward tilt of rental parity as compared to fundamental value. That’s a result of three decades of falling interest rates.
Reversion to a mean is a concept from statistics that says values return to historic norms over time. Record low mortgage rates will not last forever. Each time values get detached from the mean, they revert back over time, and when they do, house prices generally fall in line at the new equilibrium level.
The Great Housing Bubble was kicked off by the dramatic drop in interest rates in the early 00s, but once it got started, it had a life of its own.
In the collapse of any asset bubble, values tend to overshoot to the downside as everyone who overpaid is flushed out in wave after wave of capitulatory selling. We didn’t get that this time due to a myriad of policies and market manipulations from lenders, regulators, and politicians.
If the federal reserve had not lowered interest rates, and if government regulators hadn’t suspended mark-to-market accounting, and if lenders had not embarked on a can-kicking loan modification policy to dry up MLS inventory, the housing market would have crashed far lower than it did. If the overshoot to the downside from rental parity were extrapolated to fundamental value, house prices in Orange County would have dipped well below $300,000.
Forestalling the disaster by artificially lowering interest rates means a longer and more painful period of reversion to the mean ahead. The chart below is my best guess as to how this might all play out.
Interest rates must rise from about 4.5% to 7% to reach historic norms. If this happens over a 7 year period — which is a very gentle rise — rental parity will still fall from its current level even as rents and fundamental values rise. Since rental parity will serve as a more rigid ceiling on appreciation in the future, when prices rise beyond this barrier, it will serve as a major drag on appreciation.
I do believe prices will rise above the affordability ceiling over the next few years. First, the percentage of all-cash buyers is near record highs. All-cash buyers are not constrained by financing, so the affordability ceiling does not apply to them. Second, until prices get close enough to the peak for borrowers to get out from under their bad loans, lenders will continue to restrict inventory keeping prices artificially high.
After a few years, lenders will liquidate enough of their bad loans that they will effectively lose control of the supply. Once organic sellers take over, sales volumes should increase, and sales prices will have to adjust to levels financed buyers can afford.
Plus, all-cash investors will start looking for the exits in a few years, and when they do, they too will need to find a financed buyer. Many all-cash investors may choose to keep holding their properties to get a better price, but with the ongoing pressure of rising rates, some will lose patience and get out while they are still ahead.
The bottom line is that the falling affordability ceiling will be a drag on future appreciation. Unless the magic appreciation fairy finds a new mechanism to push prices higher, this cycle of bubble reflation will be shorter than previous real estate rallies.
Once interest rates revert to the mean, and once the market adjusts to this new equilibrium, we will finally reach a state of market normalcy similar to the 1993 to 1999 period. By 2020, we may finally be past the excesses of the housing bubble.
A median Ponzi
An ordinary family in an ordinary house managing their finances like ordinary Ponzis. The former owners of today’s featured property borrowed $176,130 to buy this property in 1994. When prices started going up, they went Ponzi, and in a series of refinances they extracted $259,870 until they nearly tripled their original mortgage. Unfortunately, while they were tripling their mortgage, they weren’t tripling their income. Once they went Ponzi, there was no turning back.
[raw_html_snippet id=”newsletter”]
[idx-listing mlsnumber=”WS13188086″ showpricehistory=”true”]
5805 LOS FELIZ Dr Buena Park, CA 90620
$459,000 …….. Asking Price
$171,000 ………. Purchase Price
3/28/1994 ………. Purchase Date
$288,000 ………. Gross Gain (Loss)
($36,720) ………… Commissions and Costs at 8%
============================================
$251,280 ………. Net Gain (Loss)
============================================
168.4% ………. Gross Percent Change
146.9% ………. Net Percent Change
5.1% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$459,000 …….. Asking Price
$16,065 ………… 3.5% Down FHA Financing
4.37% …………. Mortgage Interest Rate
30 ……………… Number of Years
$442,935 …….. Mortgage
$123,946 ………. Income Requirement
$2,210 ………… Monthly Mortgage Payment
$398 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$96 ………… Homeowners Insurance at 0.25%
$498 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$3,202 ………. Monthly Cash Outlays
($547) ………. Tax Savings
($597) ………. Principal Amortization
$26 ………….. Opportunity Cost of Down Payment
$135 ………….. Maintenance and Replacement Reserves
============================================
$2,218 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,090 ………… Furnishing and Move-In Costs at 1% + $1,500
$6,090 ………… Closing Costs at 1% + $1,500
$4,429 ………… Interest Points at 1%
$16,065 ………… Down Payment
============================================
$32,674 ………. Total Cash Costs
$34,000 ………. Emergency Cash Reserves
============================================
$66,674 ………. Total Savings Needed
[raw_html_snippet id=”property”]
Interest rates fell sharply during yesterday’s trading session. They remain near all time lows. With the FED printing likely remaining under a Yellen FED chair, it is unlikely to expect rates to move substantially higher. I would view any backup in rates as nothing more than a short term fluctuation. Only problem I am having is finding a decent property after the big price jump in coastal locations. I am suffering sticker shock. I would guess there are many more potential buyers also suffering from sticker shock. I expect another price jump in spring, but I may be wrong. We will see.
You describe the biggest problems below:
“Only problem I am having is finding a decent property after the big price jump in coastal locations. I am suffering sticker shock.”
You confirm that Affordability sucks.
Combined with:
“Interest rates fell sharply during yesterday’s trading session. They remain near all time lows.”
So lack of affordability with interest rates still remaining near all time lows, how’s this going to happen:
“I expect another price jump in spring”
I guess the Fed could become the sole distributor of all mortgages and offer home buyers 1% fixed mortgages.
Welcome to the zombie economy
A more realistic discussion should be titled: “How would a prolonged period where rates remain near their historically low levels affect house prices” because that is where we are. Short of an all out government bond crisis or high inflation, there is little reason to expect an extended rise in long term yields. Secondly, the high inflation scenario would be good for housing.
Ditto.
“high inflation, there is little reason to expect an extended rise in long term yields”
The only reason yields are low is due to the QE. Once you printed enough money the additional money supply will cause inflation. The bill will come due one day for all this money creation.
“Secondly, the high inflation scenario would be good for housing.”
People keep throwing this out as if it’s true, but there is no evidence of this.
Inflation is only good for housing if it’s caused by rapidly rising wages. Only through rising wages will people be able to bid up the prices of homes, and only if rising interest rates don’t remove the extra buying power created by higher wages.
House prices rose rapidly in the 1970s, not because wages rose significantly, but because lenders expected wages to rise significantly, and they began underwriting loans at 60% DTIs. This won’t happen in the future due to the 43% cap on DTIs.
+1
Thanks for pointing out the obvious IR. Some in here still haven’t figured this out.
Uh… the era of inflation seen as the nation’s salvation is coming to its dramatic end…….
http://www.advisorperspectives.com/dshort/charts/inflation/inflation-since-1872.html?inflation-purchasing-power-of-dollar-since-1871-log-scale.gif
Don’t be so doom and gloom. That chart levels out at zero.
I do love the argument “the fed ensures stability in the banking system and currency”. I can’t think of a more idiotic statement.
Interesting, I bet refi go up this week.
Mortgage apps inch up 5.5%
Mortgage applications inched up 5.5% from a week earlier, the Mortgage Bankers Association said this week. This comes after last week’s significant jump after weeks of little movement.
Furthermore, both the refinance and purchase index rose 5% from the previous week.
As a whole, the refinance share of mortgage activity stayed frozen at 61% of total applications.
The average contract interest rate for a 30-year, fixed-rate mortgage with a conforming loan limit fell to 4.62% from 4.75%.
Meanwhile, the 30-year, FRM jumbo dipped to 4.66% from 4.83%.
The average 30-year, FRM backed by the FHA decreased to 4.32% from 4.50%, and the 15-year, FRM dropped to 3.68% from 3.81%.
In addition, the 5/1 ARM plummeted to 3.39% from 3.55% a week earlier.
This is great evidence of the extreme sensitivity of the housing markets to minor shifts in interest rates. If rates go up, mortgage applications plummet, and if rates go down, mortgage applications go up — and it not just refinance activity — it’s originations as well.
“Meanwhile, the 30-year, FRM jumbo dipped to 4.66% from 4.83%.”
You can do even better than that if you shop your loan around. We have one offer at 4.25% with zero origination fees, and another at 4.375% with -.25% cash back.
Anyone here think rates may actually go back down in the next year? Many of the articles posted and written on this board assume that the long term trend is up, and up a lot. I am surprised that more people have not taken the position that the market overreacted in May/June and that a correction is due. I believe there may be a correction in stock prices coming soon. This could cause a flight to bonds. I would not be surprised to see the 10 year in the 2.0-2.4 range by year end.
Pridicting interest rates is much like predicting the weather. Predicting long-term trends in weather is easier and more accurate the predicting short-term conditions. That being said, it’s entirely possible that interest rates will keep trending down. Inflation is tame, and there are few other places for that money to go, so investors may continue to pile into bonds.
When someone does bravely step forward and predicts that mortgage interest rates will fall significantly and may even approach the record lows of the spring, that’s when interest rates will rise significantly. When enough people begin to believe interest rates can only go down, they become a contrarian indicator of impeding interest rate hikes.
I have 3.875% jumbo locked until Monday if we can lock down this house Shevy is working on for us……..
New-Home Orders Slower for Lennar, KB Home
Rising home prices and higher interest rates continue to sap the momentum of new-home sales as two national home builders reported Tuesday that their pace of new orders slowed in their most recent quarter.
Lennar Corp.LEN +0.53% and KB Home gave differing reasons for their relative shortfalls in orders, though analysts were generally pleased with the builders’ quarterly results. Lennar’s stock closed Tuesday at $36.01, up 4.3%, in 4 p.m. composite trading on the New York Stock Exchange. KB Home’s stock finished at $17.76, also up 4.3%.
For new orders, Lennar posted a 14% gain for its quarter ended Aug. 31 from the same period a year ago in comparison with analysts’ expectations of a 24% gain. Lennar executives noted that buyers now are more hesitant due to rising rates, concerns about federal budget negotiations and double-digit percentage increases in home prices this year.
“Over the past couple of months, we’ve experienced a slowdown in our sales pace and traffic in our communities as the consumer has adjusted to the change in the interest-rate environment,” Lennar Chief Executive Stuart Miller said during a conference call with investors. “But it is our belief that this (pause) is mild and temporary. … The housing recovery is still very much intact and the fundamentals of that recovery remain solid.”
KB home posted an 8.6% decline in new orders for its quarter ended Aug. 31 to 1,736, in contrast to analysts’ expectations of a 10% gain from a year earlier. KB Home executives blamed the miss on the builder’s ongoing effort to shift its focus to more affluent markets, namely building more in California’s coastal communities than in the state’s less-pricey inland markets.
A point in KB Home’s defense: While its orders were down, its sales and profits are increasing amid the shift. The builder’s revenue of $549 million in the quarter was a 29% increase from a year ago.
Banks exceed mortgage aid promised to Californians, monitor says
Thanks to abundant short sales, Bank of America, Wells Fargo and JPMorgan Chase have exceeded by 50% the amount of help they pledged to struggling California homeowners when they settled foreclosure-abuse allegations 20 months ago.
The three banks had promised to reduce the amount Californians owed on mortgages by $12 billion; they have provided more than $18.4 billion in relief, according to the monitor, UC Irvine law professor Katherine M. Porter.
The monitor’s report was to be issued Tuesday morning. The Times reviewed it in advance.
IN DEPTH: Five take-aways on housing from Fannie Mae economist Doug Duncan
“I am very, very pleased that these banks delivered such widespread principal reduction so quickly,” Porter said in an interview.
She said the California aid included three components:
Short sales. A little more than half the relief was recorded by allowing borrowers to sell their homes for less than they owed on their first mortgages. The process provides a more dignified and less credit-damaging way than foreclosure for troubled borrowers to relinquish their homes.
The difference between what the borrowers owed and what the homes sold for totaled $9.24 billion. That was nearly three times the $3.1 billion in short sales benefit expected when California Atty. Gen. Kamala D. Harris announced the deal — an additional $6.1 billion.
“Thanks to abundant short sales, Bank of America, Wells Fargo and JPMorgan Chase have exceeded by 50% the amount of help they pledged to struggling California homeowners when they settled foreclosure-abuse allegations 20 months ago.”
Thanks to abundant short sales? How does this help borrowers?
They were given credit for taking losses they were destined to take anyway. This was a giant loophole that allowed lenders to fulfill their requirements without actually having to provide any real aid.
If a short sale does not count as real aid, why do so many borrowers pursue it? I’ve personally witnessed borrowers and their agents talking to senior VP’s and begging for a short sale approval.
I think you underestimate the emotional burden that many borrowers are under. Losing a house is not a cold-hearted business decision in most cases. There is a huge emotional toll when these issues are not resolved. Many just want to get on with their lives.
Also, getting it resolved quickly allows their credit to begin healing quicker, especially in judicial states where foreclosures take 2-3 years on average.
Perhaps borrowers feel better about it, but the bank was going to lose that money anyway. For the settlement relief to have any real teeth, it needed to cost banks money they weren’t already poised to lose.
I agree with you there.. The settlement was a political victory – something to brag about in campaign speeches – but not a real victory for borrowers. On the flip side, I don’t know if it was ever proven that robo-signing negatively impacted even one borrower that wouldn’t have been foreclosed on anyway.
Widespread Decline in Buyer Traffic Suggests Market Cooldown
As temperatures cool around the country and the summer home shopping season winds down, new data suggests the market is losing more steam than normal for this time of year.
Data from the latest Campbell/ Inside Mortgage Finance HousingPulse Tracking Survey shows a drop in traffic in August for all three groups of homebuyers—current homeowners, first-time homebuyers, and investors—a strong indicator that future sales activity will slow, Campbell Surveys says.
According to the survey, the sharpest decline in traffic was seen among current homeowners, which make up the largest group of purchasers in this year’s market. The first-time homebuyer group also saw a decline in traffic, though Campbell noted “both current homeowners and first-time homebuyers groups are still posting relatively strong traffic numbers.”
The same can’t be said for the investor group, which saw its index scoring below 50, indicating a decline in traffic below a “flat” level.
“While some of the emerging slowdown is attributable to seasonal factors, there also are growing anecdotal reports from real-estate agents that higher mortgage interest rates are reducing home purchases in some parts of the country,” Campbell said in its survey report.
Accompanying the decline in investor traffic is a drop in the share of distressed properties, which usually attract investment from buyers seeking deals.
The HousingPulse Distressed Property Index, a measure of distressed properties as a share of total home purchase transactions, fell to 25.4 percent in August, based on the three-month moving average.
“That was not only down from a distressed property share of 35.8 percent seen as recently as last March, but also the lowest level ever recorded by the HousingPulse survey,” Campbell said.
“…Plus, all-cash investors will start looking for the exits in a few years, and when they do, they too will need to find a financed buyer…”
Will we see a return of seller based financing?
Would it not make sense for the all cash investor to, in effect, become the bank and offer financing to organic buyers?
Since all cash investors are chasing returns on their cash, it would seem that such a strategy would offer a way to get better returns that if they (the all cash investor) re-invested cash in T-bills, CD, or even stock.
To the organic buyer, it might be a way to get financing that would not be obtainable via conventional methods, albeit at higher interest rates.
In fact, if the market really goes south, such a scheme might be a way for sellers (the all cash investor) to sell at a discount, but recover their losses on the back end by charging above market interest. In effect a kind of seller financed short sale.
For many all-cash sellers, this will be a good option. Unless they have a place to park money that gets them a better return, seller financing works.
Most of the hedge funds probably won’t be able to do this. Most of those agreements assume a complete liquidation at the end of a specified period. This is necessary to calculate total returns on the fund and calculate the profit sharing bonuses to the principals.
Housing “Recovery” Endgame Escalates
Och-Ziff were perhaps a little early but used the last 10 months to unwind their real estate and exit the landlord business as the hedge-fund sponsored echo-bubble in housing rolled over into the mainstream. “American-Homes-4-Rent”‘s IPO suggested a scramble to exit.
With 60% of home purchases now being cash-only (explains the ongoing and massive layoffs in the mortgage business not just due to rate-driven weakening of demand), it is therefore a concern when one of the biggest funds playing in this space – OakTree Capital – announces plan to exit the buy-to-rent trade – selling roughly 500 fully-leased homes. As Reuters notes, it is yet another indication that early investors are looking to cash-out.
http://www.zerohedge.com/news/2013-09-23/housing-recovery-endgame-escalates
This really shouldn’t be too surprising. Many of these funds anticipated 20% to 30% appreciation over the course of 10 years. If they obtain this return in one year, their ROI is astronomical. If I were a principal of one of these firms, and my compensation was tied to ROI, I would be pushing to exit too.
Indeed, get out while the get’n is good; it’s a no brain’r. 😉
“selling roughly 500 fully-leased homes”
That’s not what I heard. I believe the actual total is closer to half of that, maybe 300 homes, but maybe they saw fit to exaggerate for the news story. At any rate, the real story for Oaktree is that the strategy never got off the ground. With the capital they had allocated ($450M), they should have been able to acquire 2,500 homes, and I believe they had an option to allocate another $450M or so if the strategy proved to be wildly successful.
These guys would have done ok if they had made their purchases from ’09-’11, but they were too late to the game and will probably break even once all the costs are factored. Nobody will want to pay full retail for a bulk portfolio of “500” homes.
“strategy never got off the ground”??
Ha! That $450m was not all about Oaktree, but as I recall, a JV with a well-seasoned big player who knows good and well how to get things off the ground. Carrington.
Nope, I think the real story here is a flawed model– as good real returns derived from rents did not materialize.
Takeaway being: windows are closing.
Getting good real returns from rents requires buying at a low enough price. Oaktree missed the bottom of the RE cycle and did their acquiring in 2012 when bidding wars were erupting. The model wasn’t flawed but the timing was.
MR says: These guys would have done ok if they had made their purchases from ’09-’11,
———————————————————-
Orly??
C/S 20 city
Apr 09: 139.26
Apr 10: 144.56
Apr 11: 138.43
Apr 12: 135.98
MR says: Oaktree missed the bottom of the RE cycle and did their acquiring in 2012 when bidding wars were erupting. The model wasn’t flawed but the timing was.
——————————————————————————-
LOL!!!
fyi, they did their ”aquiring” once the feds REO to rental initiative commenced in Feb ’12. In other words, they bought SFR foreclosures from Fannie at bargain basement prices, so their timing was spot-on.
Cheers!
That’s a nice cherry-picked data point, but completely irrelevant to the timing argument.
As you know, April C/S includes contracts inked as far back as December, prior to the Oaktree foray into REO rentals. Not only had they not acquired a single property, but they hadn’t even announced the deal yet.
Next!
“In other words, they bought SFR foreclosures from Fannie at bargain basement prices, so their timing was spot-on.”
Please.. Go back and review the list of winning bidders for the Fannie bulk REO’s and talk to me once you are informed.
Hint: You might want to revisit the required holding periods for those properties.
MR says: That’s a nice cherry-picked data point, but completely irrelevant to the timing argument.
As you know, April C/S includes contracts inked as far back as December, prior to the Oaktree foray into REO rentals.
———————————————————————-
Very well…let’s revisit the Oct #’s, which would include inked contracts recorded during the Jun July Aug Sep timespan (peak selling season) of each year.
C/S 20
Oct 09: 146.49
Oct 10: 145.24
Oct 11: 140.05
Oct 12: 146.10
What is now quite clear clear, these #’s point to:
1) bidding wars were not really underway in 2012,
2) Oaktree did NOT really miss the bottom of the RE cycle
3) Oaktree bought at low enough prices, similar to the 09–11 levels
4) timing was not really flawed.
Facts are stubborn.
According to the article referenced in Zerohedge’s post:
http://www.reuters.com/article/2013/09/23/us-foreclosed-oaktree-housing-idUSBRE98M0WV20130923
“The homes, mainly located in several western U.S. states, are being shopped to other large investors in foreclosed homes, said three sources, who asked for anonymity because they were not authorized to discuss the matter.”
Let’s review the C/S indexes for various Western metros for the 12 months ending 12/31/2012:
Las Vegas +13.4%
Los Angeles +10.2%
Phoenix +23.8
Riverside +10.0%
Sacramento +13.4%
San Franciso +13.0%
San Jose +17.0%
Tucson +12.5%
U.S. +7.3%
Every Western metro beat the U.S. handily in 2012 meaning the Western states led, while the rest of the country lagged. Therefore, using the C/S 20 amounts to cherry-picked data to confirm your pre-existing beliefs. There were double digit price increases in every Western metro due to inventory shortages and bidding wars. (Please refer to the past 2 years of OCHN blog entries for reference.)
The only one of your 4 points that is correct is that they bought at low enough prices. Unfortunately, they could only secure 300-500 homes before the market priced them out.
With the rapid increase in prices and the dramatic decline in inventory, your timing assertion makes sense. This business model worked fantastically for early investors. For those late to the party, not so much.
Time to Worry About Home Sales Again?
The real estate market has been one of the strongest pillars in the economic recovery, but higher interest rates and a sluggish economy are hindering new single-family home sales.
On Wednesday, the U.S. Census Bureau reported that purchases of new homes, measured by contracts signed, increased 7.9 percent to a seasonally adjusted 421,000-unit pace in August compared to the downwardly revised July rate of 390,000 units. Home sales were up 12.6 percent from a year earlier, but as the chart above shows, the housing market is still well below its glory days.
Purchases of new homes in July and August were the two weakest months this year, while the pace of sales in July was the worst month since October 2012 and the biggest miss of expectations since May 2010. On average, economists were expecting a pace of about 420,000 units in August.
The Commerce Department also reported the median sales price on new houses sold last month was $254,600, down from $256,300 in July, but slightly higher than $253,200 a year earlier. The average sales price came in at $318,900 for August.
The seasonally adjusted estimate of new houses for sale at the end of August was 175,000 units. This represents a supply of 5 months at the current sales rate, up from only 3.9 months at the beginning of the year. The all-time high for supply hit 12.1 months in January 2009. A supply of around 6 months is typically considered to be healthy.
This all-cash investor-fueled housing boom has had a much different effect on home-buyer sentiment than the credit bubble of the 2000s. Jumping into the frenzy isn’t even an option for many, so lots of families are opting to vote with their feet and move out of state. Anecdotally, all the conversations I hear around housing are NOT euphoric at all. Everyone’s fed up with these insane prices, and I know several families who are finding work in other states and bailing on the now impossible California dream. Everyone knows these prices are driven by wealthy investors. And rather than fall for it this time around, they’re packing up and moving elsewhere. I think the data around first time homebuyers not participating in this cycle supports that, and the low interest rates fueling this boomlet are actually counter-productive.
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Indeed. Many (most?) of the move up buyers in the 2000s were using their “free money” (equity) as their down payment.
There are a lot of would be homebuyers on the sidelines today that have carefully saved their money (the old fashioned way) that are reluctant to throw it away in an artificially inflated market.
It’s a lot easier to part with easy money than it is to part with money you’ve worked years for, likely making sacrifices along the way.
There are plenty of folks that can plunk down $120K+ towards a 60 year old stucco box, but why? $600K? For what?
Investors have pushed prices to where they are today. Many folks with means recognize this and simply aren’t playing the game. 2005 this is not.
Perhaps people did learn something from the housing bubble after all.
The frenzy from the spring did have a different feel to it. The people bidding up prices were simply trying to get homes for their families. There were all-cash investors, but we didn’t have the ignorant leveraged speculators of the housing bubble who were willing to insanely bid up prices with the lender’s money. It’s far easier to get excited when you get all the upside and someone else assumes all the risk. That wasn’t present this time around.
Mortgage alert: Borrowers change how they cheat
The good news: Fewer borrowers are lying on their mortgage applications. The bad news: The remaining cheaters may be pulling a more dangerous scam. Instead of inflating their home prices, they are now inflating their incomes and assets, according to researchers at CoreLogic.
“There’s no need to inflate the value of the home because home prices are rising,” said CoreLogic’s chief economist Mark Fleming.
But new federal regulations forcing lenders to prove that borrowers can repay their loans has some borrowers shifting the focus of their fraud to their personal balance sheets. Lenders are now scouring financial records, unlike during the recent housing boom, in order to make sure they are complying with new rules, so fraudsters are following suit, jacking up the numbers.
That could be more dangerous to the banks, because jacking up a home price only hurts if the home price falls, but inflating income means the borrowers may not be able to pay the loan no matter what.
Play Video
August new home up 7.9 percent
CNBC’s Diana Olick breaks down August new home sales.
“The bubble markets of old, the lax lending practices, were making it a lot easier to perpetrate fraud. On a no-doc loan you didn’t need to prove anything. Clearly that shifted to a much tighter underwriting standard environment,” said Fleming.
Overall, mortgage fraud was down 5.6 percent in the second quarter from a year earlier, although it is up slightly quarter to quarter, according to CoreLogic. Fraudulent residential mortgage loan applications totaled an estimated $5.3 billion nationally in Q2, down from $5.5 billion a year earlier. That is still less than 1 percent of home loan applications.
Stunning Libor Fraud Admissions: “As For Kick Backs We Can Discuss That At Lunch” And Much More
Remember when everyone decried wholesale Libor manipulation as a crazy conspiracy theory (Zero Hedge: January 2009: “This Makes No Sense: LIBOR By Bank” – after all, it was impossible for so many people to keep their mouth shut or whatever the generic justification is for disproving such “conspiracy theories”? Why, none other than ICAP chief Michael Spencer says they all though Libor was “unmanipulable.” As it turns out, not only is Libor “manipulable”, and a vast rate-rigging “conspiracy theory” is quite possible when everyone’s interests are aligned, but it also is quite profitable, as ICAP just found out to its public humiliation. $87 million worth of humiliation.
http://www.zerohedge.com/news/2013-09-25/kick-backs-we-can-discuss-lunch-libor-manipulation-full-frontal
Treasury 10-Year Yields Touch 6-Week Low Amid U.S. Budget Talks
Treasury 10-year notes rose, pushing yields to the lowest level in six weeks, amid bets U.S. budget talks in Washington risk a government shutdown.
The benchmark debt gained after Treasury Secretary Jacob J. Lew said investor confidence a deal can be struck to raise the debt limit is “a bit greater than it should be” and the government will probably have less than $50 billion in cash by mid-October. A report showed purchases of new U.S. homes increased in August, capping the weakest two months this year. The U.S. will sell $35 billion of five-year debt today.
“The market has had a good tone, and nothing’s changed out of Washington,” said David Ader, U.S. government bond-strategy head at CRT Capital Group LLC in Stamford, Connecticut. “We’re being held hostage to the debt-ceiling debate, timing and outcome. We will get through it. There won’t be a default, but potentially we could see the government shut down.”
The benchmark U.S. 10-year yield declined two basis points, or 0.02 percentage point, to 2.64 percent at 11:47 a.m. New York time, according to Bloomberg Bond Trader prices. It touched 2.63 percent, the lowest since Aug. 13. The price of the 2.5 percent security due in August 2023 added 1/8, or $1.25 per $1,000 face amount, to 98 25/32.
The Bloomberg U.S. Treasury Bond Index (BUSY) has fallen less than 0.1 percent since the end of June, heading for a fourth quarterly decline. It gained 0.8 percent in September, leaving it down 2.5 percent for 2013.
Westminster Councilwomen Slam Caltrans Push For Converting 405 Freeway Into Toll Road
Orange County’s political superstars tonight were Diana Carey and Margie L. Rice, both Westminster City Council members, who figuratively kicked the sniveling ass of a state transportation bureaucrat trying to sway the council to back off its vocal rejection of adding future, costly tolls fees on the long-ago-built 405 freeway.
Councilwoman Carey told the Caltrans official that Westminster citizens “are angry beyond words” about turning the 405 into a mechanism for private toll-road profit and firmly asserted, “We will not tolerate it.”
State government officials, working in league with faceless but ultra-wealthy Wall Street investment interests that make billions of dollars a year by enticing elected officials across the country to convert public roads to tollways, want citizens to pay fees each time they use already constructed roads.
Their excuse is that the freeways need to become private revenue generating sources to expand traffic capacity.
In reality, toll roads are a huge windfall for Wall Street bankers who take road projects that should cost, for example, $350 million, and convert them into semi-private roads that cost $12 or $15 billion or more–with the overwhelming bulk of the money landing in the bank accounts of New York fat cats.
That example isn’t a hypothetical.
That’s what is happening in Orange County’s horrific financial experience with the San Joaquin Hills Toll Road.
Every time a toll road is created, it, in effect, becomes a private freeway for the ultra wealthy 1% who could care less even if it costs $1/mile for tolls.
What the 1% get is a wide open traffic conditions at all hours of the day while the remaining 99% fight congestion on the remaining free lanes.
Add in nationalized housing and its just another day and another step on the road (literally and figuratively) to serfdom.
And let’s not forget socialized medicine.
The best government money can buy. I wonder what would happen if citizens revolted to demand that money get out of politics? Hmmm. These fat cats have thier own private armies tho. Ya know, the contractors our govt pays to fight in the middle east when we already have he most advanced military in the world.
Peoe better wake up and realize we are gettig ripped off before the wealth gap turns into a chasm.
Mega FHA bailout reportedly in the works
Lawmakers who stand against the current structure of the Federal Housing Administration were among the first to pipe in when reports of a possible FHA bailout surfaced Wednesday afternoon.
A Reuters report, citing unnamed sources, said for the first time in the agency’s history, the FHA will need a Treasury bailout when the current fiscal year ends.
The report was credible enough for Rep. Scott Garrett, R-N.J., to pipe in with a comment.
Garrett is one of several lawmakers behind an ongoing push to restructure the FHA.
“For several years now, President Obama has kicked the can down the road while the Federal Housing Administration’s (FHA) fiscal position continues to worsen,” Garrett wrote after hearing news reports of the impending bailout.
“Reports of the FHA needing a bailout should come as no surprise,” he added. “Time and time again, government guarantees lead to taxpayer-funded bailouts. But the American people are sick of seeing their hard-earned dollars going to bailout irresponsible government programs run by Washington bureaucrats. To make matters worse, the FHA benefits from an unlimited and direct line of credit from Treasury.”
Of course, Garrett used the moment to plug the PATH ACT – legislation drafted in the House – which intends to restructure the FHA as well as Fannie Mae and Freddie Mac.
“This bailout would require no congressional action, and that’s a problem. The PATH Act, recently passed by the House Financial Services Committee, will reform our housing finance system and get the FHA back on track to prevent future bailouts,” Garrett added.
[…] (See: What will a long-term rise in interest rates do to home prices?) […]
[…] What will a long-term rise in interest rates do to home prices? The main determinant of house prices is aggregate mortgage debt. It increased dramatically during the housing bubble, and it collapsed during the credit crunch. If mortgage balances fall due to higher borrowing costs, either house prices will fall, or sales volumes will dry up — or perhaps both with declining sales volumes first followed by falling house prices. […]