Reinventing Feudalism in America: How can existing home sales go up when mortgage applications are falling?
This week we were welcomed by the news that existing home sales reached a multi-year high. Good news right? Depends on where you stand since the stock market continued to react to the potential of the Fed moving slowly away from their unprecedented mortgage experiment. As you know, mortgage rates are now at a multi-year high as well. It is very clear that this has hampered the ability of your average family to purchase a property since the big money from hedge funds and investors is still fiercely competing for the current inventory in the market. Big trends do not change overnight. Yet it is clear that we reached an inventory bottom in March of 2013. It is also clear that cash buyers are a much bigger portion of our market today (in fact, they might be the biggest player of all). The real estate game has completely shifted from a stale boring play that tracked inflation to a boom and bust cycle that is fully dependent on the wills of the Fed. If that is the case, the Fed pulling back even a little is enormous. The nation is becoming one of more renters largely because low rates have done very little to help out regular families. The big winners of course are the large investors. So let us look at the paradox of the current market.
Existing home sales and mortgage applications
The news of rocketing home sales was plastered all over the headlines. However, mortgage applications are going in the exact opposite direction (of course little was reported on this):
The median home price in the US is $214,000 and from multiple reports, most Americans don’t have much saved up (definitely not enough to buy a home without a mortgage or even a car for that matter). This trend simply highlights the massive power being wielded by the cash buying crowd. Someone is buying these homes and if mortgages are not being used, something else is being used. The cash buying crowd has always been around but as a small subset of the market. Today, it is one of the biggest players out there. The group is big enough to push prices up as it has over the last few years.
The chart above simply adds more evidence to this scenario. Your regular buyer is being pushed out of the game while investors continue to battle over what inventory is available. Yet we are now seeing that an inventory bottom was reached in March of 2013:
The trend has been unmistakable. Since late 2010 available inventory has gone only in one way, down. That however has changed since March of this year. Inventory is now creeping up and in some markets, the turnaround is dramatic. Where is this coming from? You probably have two groups:
-1. Investor trying to time a top (including banks)
-2. Underwater homeowners no longer underwater exiting the game
Coupled with these two groups you also have your regular sellers and the trend has reversed. The normal crowd is also being pushed out because rates have gone up quickly this year.
Refinancing boost collapsing
The economy has received an ancillary boom courtesy of refinancing activity. Keep in mind banks have made droves of money from refinancing fees. Yet with higher rates, the gig is likely up:
It is clear that the jump in mortgage rates has stifled this activity. Yet this only helps current homeowners (and by the larger trend, home ownership has been falling). Many investors were buying homes to rent out (this is how you have 5,000,000 people losing their “home ownership” via foreclosure only to exchange them back to financial institutions that have turned around and converted them to rentals). Without a doubt, many people should have not purchased homes in the last decade. That is an understatement. Yet now, instead of fueling the flames for the regular buyer the Fed has given large investors a big incentive to buy. No reform, just ramping the game up with a different tone. This is how you can have falling mortgage applications and a significant rise in home sales.
The cash crowd
The myth that somehow the cash crowd was small can be put to rest now:
It is obvious that the cash buying crowd is large and driving many markets. The big banks are carefully looking at the Fed’s next move because they realize that without low rates, financially strapped US households will not be able to purchase their property for a nice profit. The bailout was subtle if you can call the Fed’s balance sheet at $3.4 trillion subtle but the big win has gone to banks. Low rates alone are not enough to save an economy. The home ownership rate has collapsed and all this focus on housing has diverted our attention from other growth sectors to housing. Rents and home prices are rising yet incomes are not. Is this a positive development?
The trend is very clear now:
This trend has only continued in the last year. We are becoming a nation of renters yet home prices continue to go up as banks trade with one another leveraging low rates. Rising inventory and rising rates will definitely make an impact. Do you think this kind of cash buying trend is sustainable?