Jan302014
Federal reserve’s taper could trample Coastal California housing
The federal reserve is tapering its purchases of mortgage-backed securities. This may drive up mortgage interest rates and cause housing markets in more sensitive markets like Coastal California to feel pain though lower sales volumes and perhaps lower prices.
If mortgage interest rates go up and incomes do not, borrowers will not be able to borrow enough to support today’s prices. In June of 2013, rising interest rates killed the bubble reflation rally that began in early 2012; prices stopped going up, and transaction volumes declined to levels lower than witnessed in 2012. If mortgage interest rates move even higher, sales volumes will decline further, and it may begin to erode pricing, although a crash is unlikely given the nature of cloud inventory. So what caused the sudden rise in mortgage rates in 2013? Could these same forces push rates higher again in 2014?
Policies in Washington impact housing in many ways. The federal reserve’s direct purchase of mortgage-backed securities, zero-interest-rate policy, quantitative easing (printing money), forward policy guidance, and other measures serve to push mortgage rates down. In fact, mortgage interest rates hit record lows in early 2013; however, the party didn’t last. It’s been said that the federal reserve’s mission is to take away the punch bowl when the party gets started: 
in May of 2013, then Chairman Ben Bernanke hinted that the federal reserve might slow its ravenous purchases of mortgage-backed securities, and the bond market reacted by selling before the biggest buyer slowed its buying activity. The sudden collapse in mortgage bond prices drove mortgage interest rates from 3.5% to 4.5% in a very short time — and this was on the mere suggestion that the federal reserve might slow its purchases; they still purchased $45 billion per month even while prices collapsed.
In December, the federal reserve announced they really were going to slow their purchase activity. The market didn’t immediately react with another selloff, but those investors most active in this market know that a big buyer is going to taper its purchases, and removing that much demand from the market is not likely to send prices higher. With low bond prices on the horizon, most market watchers believe bond prices will fall, driving mortgage interest rates up; higher mortgage rates will, in turn, hurt the housing market — and it’s the Coastal California housing markets, those which inflated the quickest, that potentially face the biggest problems when the federal reserve tapers its mortgage-backed securities purchases.
Fed taper could hit housing market
Soaring mortgage costs already discouraging local buyers
By Dan McSwain5 p.m.Jan. 18, 2014
The stakes are high for San Diego’s housing market as the Federal Reserve tapers the national economy off super-low interest rates. …
And there’s little question that higher rates would hurt potential homebuyers. Already, skyrocketing mortgage payments may have chased away enough demand to halt price growth.
Further increases would pile a new problem onto the region’s housing market, which is distorted by a chronic supply shortage and soaring costs caused by local and federal government polices.
While I agree there is little question higher rates will hurt potential homebuyers (See: Future housing markets will be very interest rate sensitive), many housing market bulls completely dismiss such concerns because the percentage of all-cash buyers is so high. Housing bulls argue that mortgage rates don’t matter to those who don’t borrow money to buy a house. While there is some validity to that argument over the short term, what happens when all-cash buyers stop? At some point, financed buyers must regain control of the market, and when they do, prices will only rise as high as mortgage interest rates will allow.
Waiting has certainly punished potential buyers lately. A typical new mortgage in San Diego County hit a modern low of $1,150 a month in February 2012, but by last month it had jumped nearly 47 percent to $1,695.
Most of the increase came from home prices, which surged 38 percent in less than two years.
Last summer the action shifted to interest rates, which have climbed from 3.5 percent to nearly 4.5 percent for the average fixed-rate, 30-year mortgage. That run-up started in May, when Fed Chairman Ben Bernanke outlined his plan to gradually reduce bond purchases the central bank began in September 2012 to keep rates low.
Maybe it’s a coincidence, but San Diego’s soaring housing market leveled off at almost precisely the same time.
The median price has inched up less than 1 percent since June, when it was $416,500, to $420,000 in December, according to DataQuick, a San Diego-based reasearch firm.
In contrast, the median had shot up 36 percent before the announcement from $305,000 in February 2012, when the typical payment reached its low. …
It’s no coincidence house prices stopped rising when interest rates went up. There is a direct cause and effect; buyers were unable to raise their bids.
On the bright side, many experts see little risk that interest rates will skyrocket as they did in the early 1980s, when the Fed cranked up rates to tame high inflation. Indeed, Bernanke has warned that inflation is too low.“I would tell people not to panic on interest rates; they aren’t going to be going up very much,” said Christopher Thornberg, founding partner of Beacon Economics in Los Angeles. “We have a world that is awash with capital, and not much demand for it for a variety of reasons.”
Bernanke has said the Fed will effectively be stimulating the economy until it stops buying bonds completely and begins to raise short-term interest rates, probably not before 2015 or beyond.
His successor, Janet Yellen, shares that view. Both are worried about inflation, which slumped to 0.7 percent in October, well below a 2.5 percent target.
I agree. In today’s economy, a sudden surge of interest rates doesn’t seem very likely.
Thornberg also predicts rising prices, even as he warns that the shortage poses a serious threat.“If you think about the California economy, and what is holding back growth right now, it has to do with a high number of people leaving the state because housing is unaffordable,” he said.
Rising mortgage rates will make housing even more unaffordable; apparently, despite the problems it causes the State, everyone in California bawls for higher house prices. Can’t live without that ATM machine, you know.[dfads params=’groups=165&limit=1′]
In previous market cycles, an uptick in mortgage rates has caused a spurt of sales activity, as potential buyers jump off the fence to lock in low rates.
This time such demand might not materialize. … early this month regulators released the new rules — which raise fees and expose lenders to lawsuits for many of the jumbo or adjustable-rate loans common in high-cost areas such as California.
So even if interest rates stay tame for years, borrowers face higher costs and fewer loan options. …
In the past, California could count on lenders to come up with some innovative loan program to push prices higher and distribute free money to homeowners to stimulate the economy through reckless spending. The housing ATM machine will not be running at peak efficiency for a while.
In the past, California could count on a rapidly growing economy to generate abundant high-paying jobs so new buyers would have to compete for available housing stock and push house prices higher. With the outflow of talented people caused by unaffordable house prices coupled with a business unfriendly State Government, the rapidly expanding growth machine will not be running at peak efficiency for a while either.
Given the realities of the situation, the federal reserve’s taper could trample Coastal California housing.
[dfads params=’groups=164&limit=1′]
[idx-listing mlsnumber=”OC14014324″]
5498 PASEO DEL LAGO East Unit P Laguna Woods, CA 92637
$389,900 …….. Asking Price
$140,000 ………. Purchase Price
6/22/1988 ………. Purchase Date
$249,900 ………. Gross Gain (Loss)
($31,192) ………… Commissions and Costs at 8%
============================================
$218,708 ………. Net Gain (Loss)
============================================
178.5% ………. Gross Percent Change
156.2% ………. Net Percent Change
4.0% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$389,900 …….. Asking Price
$13,647 ………… 3.5% Down FHA Financing
4.41% …………. Mortgage Interest Rate
30 ……………… Number of Years
$376,254 …….. Mortgage
$128,856 ………. Income Requirement
$1,886 ………… Monthly Mortgage Payment
$338 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$81 ………… Homeowners Insurance at 0.25%
$423 ………… Private Mortgage Insurance
$600 ………… Homeowners Association Fees
============================================
$3,329 ………. Monthly Cash Outlays
($422) ………. Tax Savings
($504) ………. Principal Amortization
$22 ………….. Opportunity Cost of Down Payment
$69 ………….. Maintenance and Replacement Reserves
============================================
$2,494 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,399 ………… Furnishing and Move-In Costs at 1% + $1,500
$5,399 ………… Closing Costs at 1% + $1,500
$3,763 ………… Interest Points at 1%
$13,647 ………… Down Payment
============================================
$28,207 ………. Total Cash Costs
$38,200 ………. Emergency Cash Reserves
============================================
$66,407 ………. Total Savings Needed
[raw_html_snippet id=”property”]
Taper is a factor, but not a major factor. In fact, it is possible that taper may continue in a slow economy, which might cause mortgage rates to fall.
When in investing in real estate, the main factor is income growth. That is where you need to focus. And, in today’s economy, the upper class and/or highly educated is getting the bulk of the income growth. So real estate investments should be channeled into their zip codes.
Lately, I have found falling sales in many zip codes. For some areas, such as Newport Beach and Manhattan beach, you will find the number of home listed is at an all time low, so falling sales is inventory constrained. No problem here.
However, in middle class zips, you will also find falling sales, but inventory levels are rising slowly. This may be a problem since falling sales may not be inventory constrained. Watch these middle class zips closely once the spring selling season fires up, which is only about 6 weeks away.
“you will find the number of home listed is at an all time low, so falling sales is inventory constrained. No problem here.”
That’s just wrong. Falling sales is never a good sign. Restricted inventory should cause dramatically increasing prices, particularly if there was any real demand. Falling sales volumes is a sign of weak demand, and only restricted inventory is keeping prices as high as they are.
The price increases in many of the higher end beach cities are stunning. Manhattan Beach properties are facing bidding wars. Huge price increases in Santa Monica and CdM also.
SO WHAT! They were ”stunning” back in 05/6 too.LOL.
I agree with Jimmy. Who cares if sales fall. If there is only one house for sale, it also has no competition. Lack of Supply always trumps demand (in nice areas). In fact as we have seen, it can dictate alot.
Its like that old Jack in the box commercial:
A kid is sitting in a beach chair at a fastfood convention. Jack asks “what do you do? “The kid replies,” Im a proffessional taste tester.”
“How much do you charge?” – Jack
“1 million dollars”- kid
“Any takers?”- Jack
“I only need one.”-kid
End of commercial Jack walks by the kid bending over with some. Exec signing a contract on the kids back! Lol
Lesson: price is relative. And there is always some sucker out there.
This is the Feds plan for housing. If cash buyers remain the only buyers so be it. As long as they control the market with no reprucussions then who cares? Let the rest rent and eat cake!
Here is what I would like to better understand.
Since the Fed is tapering MBS security purchases, is it correct to assume that balance sheets of major banks are improving?
If above statement rings true, would banks then be inclined to aggressively initiate foreclosure proceedings on [banks] remaining shadow inventory?
If such shadow inventory then appears on market, it would seem to me that would go a long way to moderate prices.
It would take both a stronger balance sheet and some better place to put the money. Right now, lenders don’t have much of an opportunity cost, and as house prices rise, they actually make more on home price appreciation than they would on foreclosing, getting their money out, and making a loan. Until either home price appreciation stops, or lenders find a better use for their money — both of which would happen if interest rates went up — they are content to sit on those bad loans.
Regardless of bank balance sheets improving…
Since there is no mark to market for these homes on banks balance sheets, banks will only have an incentive to foreclose on homes that have a value greater or equal to the bullshit value on their balance sheet. Else, why take a loss when you can fake it for eternity?
“…why take a loss when you can fake it for eternity?…”
I suppose FASB 157 was the enabler which allows the banks to continue their smoke and mirrors con job.
Frustrating for ordinary buyers to say the least.
The words you use, “… feel pain … hurt the housing market … trample coastal California housing…” seem to describe it as a bad thing that prices and sales drop in these markets. But isn’t that a good thing? Isn’t that just the inevitable correction that would bring housing prices down to reasonable (or less unreasonable) levels?
What worries me is if the proportion of investor-owned rentals gets too high, as absentee groups of owners are more likely to let properties deteriorate, as opposed to owner-occupants and “individually owned” rentals. I’d rather see a 15% drop from where they are now than gradually see neighborhoods deteriorate because of decisions made by investment groups looking at spreadsheets.
I think the opposite will prove true: the corporate landlords will take better care of the place than mom and pop landlords. Professional real estate investors know they need to keep up with the maintenance to preserve the property’s ability to garner high rents and maximize resale value. Many mom and pop investors aren’t sophisticated, and many of them overpaid, so they spend as little as possible on maintenance, and their properties deteriorate.
It is a given that coastal and inland Cali housing will be trampled once again simply because the fed cannot prevent what it cannot see.
On Monday, January 27, another 10 metric tonnes, thats 321,500 ounces, was withdrawn from the JPM eligible gold inventory at the COMEX. JPM’s eligible inventory went from 1.459 million ounces to 816,027 ounces in a week. But who’s counting?
So what do you think that means?
What is does mean is that there is less and less actual physical gold backing up the gold futures contracts at the COMEX. It does mean there are less ounces to be sold if the price goes higher. It does mean that someone or something has a whole lot of currency with which to buy gold and would rather have physical gold in their vaults rather than in the COMEX vaults, and that same someone would rather have physical gold in their vaults rather than have it available to sell if the price goes up. It does mean that the trend of the COMEX losing actual physical gold ounces is continuing.
What I think it means is my opinion, and that will cost you.
Fed Officials Agree to Continue Tapering Asset Purchases
In its first meeting this year, the Federal Open Market Committee (FOMC) voted to once again cut back on the Federal Reserve’s bond-buying program.
Starting in February, the Fed will scale its monthly purchases to a combined $65 billion, down $10 billion from January’s pace.
The call to taper the Fed’s purchases was the second in as many FOMC meetings. The vote was unanimous.
In its public statement, the committee maintained a positive view of economic activity, saying indicators point to growth in recent quarters.
“Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat,” the statement reads. “Fiscal policy is restraining economic growth, although the extent of restraint is diminishing.”
The change in language strikes a more positive tone than the December statement, in which the committee noted the extent of restraint “may be“ diminishing.
While the committee noted that “[l]abor market indicators were mixed”—the only acknowledgement of December’s dismal jobs report—members held the view that “economic activity will expand at a moderate pace and the unemployment rate will gradually decline.”
The meeting was the last to be held under the leadership of Fed Chair Ben Bernanke, who will depart from his post at the end of the month. Taking over is Janet Yellen, who analysts don’t expect will stray from her predecessor’s current course.
“[W]e expect [Yellen] to stick with the plan to continue winding down the asset purchases this year and begin [to] hike the fed funds rate around mid-2015,” said Paul Ashworth, chief U.S. economist for research firm Capital Economics.
Why did the Fed taper?
JMO … they’re concerned about stability. The last thing the FED wants to deal with is defending the US dollar.
Rates are headed higher, despite the recent decline … make no mistake, this cheap money scam is just about over. The Fed will need inflation to sustain asset prices … including houses.
Also, the only way we’re gonna see inflation in the Fed stops paying the banks interest on their reserves.
Mortgage purchase index down 12% from last year
Mortgage application volume remained essentially flat last week, with refinance and purchase loan numbers canceling each other out, the Mortgage Bankers Association (MBA) reported Wednesday.
According to MBA’s Weekly Mortgage Application Survey, loan application volume fell a scant 0.2 percent (seasonally adjusted) for the week ending January 24. The
results include an adjustment to account for the Martin Luther King, Jr. holiday, on which markets were closed.
Unadjusted, applications fell 9 percent week-over-week.
MBA’s Refinance Index decreased 2 percent on a weekly basis, with refinance share falling 2 percentage points to 62 percent.
That decline was offset by a 2 percent gain in the seasonally adjusted Purchase Index.
On an unadjusted basis, the Purchase Index fell 3 percent from the previous week, dropping 12 percent lower than the same time last year.
Meanwhile, the group recorded a decline in long-term fixed rates for the week. According to MBA’s measure, the average contract interest rate for a 30-year fixed-rate mortgage was 4.52 percent last week, down from 4.57 percent and the lowest rate since the end of November. Points increased to 0.40 (including the origination fee) for 80 percent loan-to-value ratio loans.
Stocks fall after second taper announcement
There was no taper rally Wednesday after the Federal Open Market Committee made its announcement that yes, the taper is here and we’re tapering more.
By closing on Wednesday, we saw a steep stock market drop that ended with a minor rally that kept the loss to down 189 to 15,738.79.
The HW 30 index was down 0.85%. Zillow (Z), Radian Group (RDN) and Corelogic (CLGX) took heavy hits but there was blood all over the HW 30 board.
The Nasdaq dropped 1.14% to close at 4051.43, while the S&P 500 dipped 1.02% to close at 1774.20.
It’s amazing that the Fed’s role in creating this latest round of global financial instability (via emerging markets and the Taper) isn’t headline news. Even the business-friendly Bloomberg news admits the Fed is 100% responsible for the chaos in the currency markets and the plunging stock markets. Here’s Bloomberg today:
“Emerging economies have benefited from cheap money as three rounds of Fed bond buying pushed capital into their borders in search of higher returns. ….
The Fed’s asset purchases had helped fuel a credit boom in developing nations from Turkey to Brazil. Accumulated capital inflows to developing-country’s debt markets since 2008 reached $1.1 trillion,according to a study by the International Monetary Fund in October. ”
So QE has laid these other economies to waste, but no one really gives rip in the US.
Pretty selfish policy if you ask me.
It is not the job of the United States Federal Reserve to take care of the world. They already far exceed their mission as it is within the borders of the United States.
Second REO-to-rental deal to raise millions, and questions
With Bloomberg breaking news Tuesday night that American Homes 4 Rent, the nation’s second-largest single-family landlord, has tapped Goldman Sachs (GS) to arrange a bond backed by house rental payments, it looks like REO-to-rental as an asset class is here to stay a while.
The deal announcement comes just a few months after Blackstone Group (BX) spent the past two years building an expansive portfolio of single-family rental homes via subsidiary, Invitation Homes, spending $7.5 billion to acquire 40,000 houses. Blackstone then packaged rental income from single-family homes into a pass-through security, which is functionally not unlike a mortgaged-backed security.
Moody’s Investors Service(MCO) provided a credit analysis for Invitation Homes 2013-SFR1, an REO-to-Rental securitization, awarding $278.7 million in triple-A ratings.
Goldman Sachs started coverage on American Homes 4 Rent at a neutral rating and a price target of $18, reports say. American Homes 4 Rent has spent some $3.5 billion to acquire more than 21,000 rental homes.
With millions of homeowners who lost homes to foreclosure and millions more unable to meet new lending requirements, the home rental market is seeing a lot of demand, and investors see a lot of potential for growth in REO-to-Rental if it can be made viable.
News of the American Homes 4 Rent deal has prompted skepticism for a number of reasons.
Rick Sharga, executive vice president at Auction.com, said as an operation, REO-to-rental is solid.
“I think the death of the REO to rental movement has been greatly exaggerated. There will be an unusually high demand for rental properties in the next few years, and investors playing in the space are meeting a need,” Sharga said. “A lot of people either don’t have cash for down payment or can’t meet lending requirements or are not comfortable buying now. REO-to-rental is not exactly a new idea. Individual investors have been doing it forever. It’s just we’ve never seen it on a national scale.”
“I think the death of the REO to rental movement has been greatly exaggerated.”
It’s almost as if he’s speaking directly to el ORACLE.
Uh… never said it was dead. Yet.
Nonetheless, the commencement of the ‘offloading risk’ phase, AS IT WAS WITH SUBPRIME, signals a transition is well underway.
Look… no single trade is perpetual. Pertaining to an entity such as the largest landlord in the US, or 2nd largest (who are now both sitting under a huge spotlight), the longer they hold their massive positions, a counter-move continues to build and at some point, the size of the counter-move becomes bigger than the size of the position being defended, and the trade can head south pronto.
And… since volatility is NOT currently priced-in, assets can turn to liabilities in an instant, especially for those who literally borrowed the cash to buy in. (LOL). Of course, they know this and will only hold their position for so long.
Buyer Competition Declines in December
According to Redfin’s most recent Real-Time Bidding Wars report, 52.0 percent of offers made by the company’s agents faced competition last month, down from 52.8 percent in November and 62.4 percent a year earlier.
Market-by-market data paints a revealing picture of the factors that influenced buyer competitiveness over the month.
“Between November and December, half of the markets highlighted in this reported experienced an uptick in bidding wars while the other half saw competition fall,” explained Redfin analyst Ellen Haberle. “The contrasting bidding war trends likely reflect regional and seasonal factors that impacted the U.S. markets in December, including holidays, snow storms, and the limited number of homes for sale.”
Competition plummeted in the Northeast, which experienced “[p]articularly frosty weather” in the year’s final month. Instances of competing offers dropped most in Boston and Baltimore, falling 19.7 and 13.5 percentage points, respectively.
According to Redfin agent Adam Welling: “Boston had multiple snowstorms during December, which fully shut down home tours at times. For the adventurous homebuyers who braved the arctic-like conditions, the reward was a bit of space in a market that had otherwise been congested and claustrophobic.”
Though competition in the market is expected to return as December’s chill thaws and the new season starts up, Haberle says “the rebound is likely to be muted somewhat by continued snowy weather across the Midwest and the East Coast during January, which probably will lead many buyers to put their home shopping plans on hold.”
“Housing bulls argue that mortgage rates don’t matter to those who don’t borrow money to buy a house.”
What a tiny world they live in, mortgage rates will only be higher if other rates are higher as well. What investor is going to chase a 6% return in real estate when they can get it elsewhere with a lot less risk.
Plus this “cash” in many cases was borrowed in large sums, just not via mortgage. If the difference in interest rate borrowed at compared to rate of return disappears then so will investment.
“If the difference in interest rate borrowed at compared to rate of return disappears then so will investment.”
This is already happening in the REO-to-rental field. There are local banks now willing to make portfolio loans to investors at 5% to 6%, but with prices moving higher, cap rates are falling below that, so these lenders aren’t finding many takers.
Hello IrvineRenter…
How do you define “coastal” real estate? Is Irvine coastal, or do you have a stricter view of what is coastal – Newport Beach, Laguna Beach, Dana Point, etc.?
It’s amazing to me how some people in real estate are still not aware of the new regulations governing qualifying mortgages. I think some people will be shocked when they find out what it all means.
I am shocked every day hearing questions about ATR and QM that should have been asked and answered months ago! These questions are coming from people whose job is to evaluate these statutes/regulations, and they have just a basic understanding of what ATR means.
I think some of the problem is that the CFPB has not provided clear documentation around certain issues. Part of the CFPB’s interpretation of Dodd-Frank has been expressed only verbally, and other things have been implied but not confirmed either verbally or in writing. The issue around refundable MI premiums was one of those vague areas that not all industry players agreed on, at least initially.
Agreed. The CFPB especially needs to confirm in writing to industry folk that if you charge discount points, you must discount the rate. If you want to exclude up to 2% of discount points from the QM points and fees, then the starting adjusted rate must be reduced at least 25 bps per discount point charged.
“…early this month regulators released the new rules — which raise fees and expose lenders to lawsuits for many of the jumbo or adjustable-rate loans common in high-cost areas such as California…”
No, the rules weren’t “released early this month.” The ATR rules became effective this month, but the statute was “released” years ago and the final regulations were “released” months ago. And please explain to me how the ATR rules “raise fees”? You can argue fees are indirectly increased due to onerous regulations, but the regulation itself did not “raise fees.”
Chris Martenson spells it out in about 3 minutes …
http://youtu.be/71hA1l_IzjA?t=13m10s
“We are coming upon one of the most extraordinary wealth transfers in history”