The mortgage rate shuffle: Higher mortgage rates already having impact on housing market. 4 significant housing trends to look out for as 2013 enters the fall selling season.
Mortgage rates recently reached another multi-year high as predictions for the Fed’s triumphant taper seem more likely. We continue to hear that people are rushing out of their homes bursting out of the front door with suitcases of pre-approvals but that is clearly not the case. The housing “recovery” is being driven by investor buying. There is no denying that. There is also a clear case materializing that banks are going to eat a significant drop in refinancing revenues and with mortgage applications remaining low given the rampant run-up in prices. Again, the explanation for this is coming from the non-traditional juggernaut of investor buying. As people shuffle to purchase homes there are a few major trends that are appearing on the housing horizon as we enter the fall selling season.
Trend 1 – There was never a recovery with new home sales
There was really no recovery in new home sales. Even if we zoom into the above chart, the bump was pathetic:
Normally what you will have in a typical healthy housing market is a mix of “used” home sales and new home sales. The new home sale portion never materialized. Investors have been eating up existing home sales at deep discounts although those discounts likely peaked or are near peaking and we are now running on mania fumes. As your history lesson in bubbles might have taught you, bubbles can last longer than you would imagine yet this thing is looking ripe especially as we look at higher rates.
Trend 2 – Higher rates do make an impact
Mortgage rates are making multi-year highs:
By the way, these rates are still fantastic in a longer-term perspective but we have a short-term thinking financial system. The issue with this is that the market since the crash has been used to the Fed buying down rates lower and lower and this psychological expectation is now broken. With rates going up, the system changes. Sure, some people rushed out to buy but the evidence tells us that this was a small unsustainable event. What has occurred more heavily is the low rate environment has allowed big financial players to get their hands on easy/near no risk cash and pump it into buying up real assets in the form of single family properties. The Fed’s goal of helping average families? The data tells us otherwise.
Higher rates will have a bigger impact on more expensive markets where prices are already reaching levels that in some cases, were last seen during the peak of the last housing bubble. Investor buying is still incredibly high and if this segment of buyers begins to slow down, this will be a major catalyst to slow the housing market.
Trend 3 – Where in the world are those mortgage applications?
Keep in mind that something like half of buying in 2013 has come from investors nationwide. So this overall figure matches up with the massive drop in mortgage applications:
You have to look at multiple data items to get the bigger picture here. Investor demand is eating up what little inventory has been out in the market. Nationwide, we are seeing inventory pick-up but buying from investors is still robust. As long as this continues, you can expect a battle between investors for the limited inventory that is out there. Yet, this trend is reversing.
Trend 4 – Banks to take hit in refinancing gravy train
Banks were enjoying a big refinancing boom courtesy of the low rate environment but that will definitely change as rates go up:
We are seeing as much refinance activity as we did in the pre-bust days of 2007. What is fascinating with the above chart is how much refinancing occurred during the bust courtesy of the Fed. So what occurred was the Fed was helping current owners that are already heavily subsidized via tax breaks but also, were probably never going anywhere to begin with. The refinancing activity for troubled owners never showed up until late in the game and many ended up losing their homes (now probably owned by a big hedge fund).
These trends, in particular higher rates, definitely show that the current pace of higher prices in the housing market will be unsustainable. We are already starting to see inventory build-up and price reductions increase (although some of the prices being asked are ridiculous to begin with but buyers will go for the max of what the market can support). Investors have been willing to bid this game up. How much longer can this go on?