US Housing Market In Peril As "Increase In Mortgage Rates Has Shocked Consumers"

Tyler Durden's picture

While rising treasury yields may be music to the ears of savers who have been crushed by low interest rates over the past 7 years, they're a bit of downer for the overwhelming majority of Americans that have been funding their lavish lifestyles with cheap debt.  Yes, sadly the days of upgrading to the $65,000 luxury car despite a $40,000 annual salary, because you can "afford it" so long as you can cover the low monthly payments courtesy of 7-year terms and low interest rates, may finally be coming to an end. 

But auto OEM's aren't the only ones about to get crushed by the "normalization" of interest rate policies in the U.S.  As the Wall Street Journal points out, according to the Mortgage Bankers Association, mortgage refinancings are set to drop 46% in 2017.  And with many American's funding their daily expenses with "cash-out" mortgage refi's, pretty much everyone selling goods to consumers, which happens to represent about two-thirds of the economy, has reason for concern.

The fast rise in rates has spurred homeowners to pull back from refinancing their mortgages. Applications dropped 3% in the week ended Nov. 18 from the prior one, the seventh consecutive weekly decline, and the second since Election Day, according to data released Wednesday by the Mortgage Bankers Association.

 

The MBA estimates refinances will fall 46% next year, to $484 billion, which will hurt Americans’ ability to free up cash by reducing the cost of their monthly mortgages. The fall in refinances also will hit an important area of consumer-loan growth for banks. To slow the possible damage, banks already are pitching riskier loans that come with adjustable interest rates or allow borrowers to pull more equity out of their homes.

 

“The increase in rate has shocked consumers…I didn’t expect it either,” said Dave Norris, chief revenue officer at LoanDepot, the 10th largest mortgage lender in the U.S. by loan volume.

 

This month’s rate increase has eliminated a large share of borrowers for whom refinancing would make financial sense. Before the election, 70% of all borrowers with a 30-year fixed-rate conforming mortgage stood to incur at least a half a percentage point in savings by refinancing. Now only 35% of borrowers are eligible for such savings, said Walter Schmidt, who tracks mortgage-backed securities at FTN Financial.

Mortgage Rates

 

While mortgage applications have risen in recent weeks as people have rushed to lock-in rates, eventually the MBA expects rising rates will take their toll on new mortgage originations as well with estimates calling for a 16% drop in volume in 2017.  Of course, with American's linking "affordability" solely to monthly mortgage payments, it would stand to reason that rising rates would put pressure on home prices over the coming months/quarters.

The impact on home buying may be less clear-cut, but some buyers have rushed to lock in terms before rates rise further. In the week ended Nov. 18, applications for mortgages to purchase homes jumped 13% from a week earlier and were up 11% from a year ago, the MBA data showed.

 

Eventually, though, rising rates make houses less affordable, and that could lead to slowing sales, price growth and mortgage activity. Some analysts are now projecting home values will decline by the end of next year in many U.S. housing markets.

 

The MBA lowered its projections for next year’s new mortgage loans by 3% last week, to $1.58 trillion. That would represent a 16% drop from the nearly $1.9 trillion in mortgages that lenders are on pace to originate this year, with refinancing accounting for all of the drop.

Meanwhile, as the MBA points out, as refinancings sink, volume levels of the good ole "adjustable-rate mortgage" have surged in recent weeks as lenders/buyers scramble to salvage existing purchase contracts by maintaining monthly mortgage payments despite higher rates.

"Refinance volume dropped further over the week, particularly for refinances of FHA and VA loans. Purchase volume increased sharply for the week compared to both last week, which included the Veteran's Day holiday, and last year, with purchase volume up more than 11 percent on a year over year basis. The increase in purchase activity was driven by borrowers seeking larger loans and that drove up the average loan amount on home purchase applications to $310 thousand, the highest in the survey, which dates back to 1990."

 

The refinance share of mortgage activity decreased to 58.2 percent of total applications from 61.9 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 5.2 percent of total applications.

As a reminder, on Friday, housing market expert Mark Hanson pointed out something similar when he calcualted that to buyers who are in need of a mortgage, "houses have never been more expensive."

Houses have NEVER BEEN MORE EXPENSIVE to end-user, mortgage-needing shelter buyers. The recent rate surge crushed what little affordability remained in US housing. It now it requires 45% more income to buy the average-priced house than just four years ago, as incomes have not kept pace it goes without saying.

 

The spike in rates has taken "UNAFFORDABILITY" to such extremes that prices, rates, and/or credit are now radically out of scope.

 

At these interest rate levels house prices are simply not sustainable even in the lower-end price bands, which were far more stable than the middle-to-higher end bands (have been under significant pressure since spring).

 

Hanson then showed the following "bonus chart" revealing in which metro areas the second housing bubble can be found:

 

Should rising rates finally put a lid on demand for real estate, it will be so long to the "Obama recovery" - at least there's a new regime that can take the blame for the unwind of the largest financial asset bubble in history.

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Wulfkind's picture

And here......we......go.......

Chris Dakota's picture
Chris Dakota (not verified) Wulfkind Nov 27, 2016 4:36 PM

4% is not a high rate.

I got a Nissan with zero down and 0% for 4 yrs, but I don't owe anything but a small balance on my mortgage.

I don't take equity loans, they get your house like that.

They are spending fools, sorry to say.

knukles's picture

"Rate shock"
Why's that make me think of couch lock?

Gold...Bitches's picture

While a rate just above 4% is not high and actually to me seems low, in regard to the current level of house prices it is very high.  To sustain these prices requires a 4% or lower rate.

de3de8's picture

Well, that depends as I took an equity loan at 2.75 on my house to replace mortgage. This is with my credit union and even though my rate will rise with what is happening now, my balance very low. I do agree though that should never use house as a "bank".

Save_America1st's picture

@Chris Dakota

4% isn't high in historical terms, you are correct.

But in this day and age and this shitty market, with house prices bubbled up so high once again, most people can't afford even 4% when they don't have a good sizeable down payment to make up front.

House prices will need to come down pretty substantially for most people to be able to afford 4%. 

However, who is going to want to sell their house if they have to lose a big chunk of "equity" in their home value just so they can find someone to buy it?  They most likely will not and will just keep their house off the market. 

Plus these days most people's credit is still trash after the last 9 years or so and has not recovered which means 4% is still most likely going to be out of reach and if they can get a loan it might be at a higher rate than 4% which makes it even harder.

FUBAR all around as usual and it ain't gonna get better anytime soon, that's for sure.

Paul Kersey's picture

When, and not if, there is a stock market crash, the Fed will throw everything into pumping asset prices back up.  That means lower rates and the refi game is on again.  When it comes to buying houses and new cars, the debt-serfs look at payments and not prices.  Ultimately, it's a sucker's game. 

mkkby's picture

I've been saying this too.

What changed after the election -- nothing so far.  Rates jumped up because traders think TrumpEnomics will be positive for growth.  Infrastructure spending is a sugar high that won't last.  Tax reform is more long term, but gov will just borrow more unless there is a real cut in parasitic jobs/pensions.  Clamping down on globalization will help long term, but short term there will be lots of chaos.

Most likely, rates will come right back down within a few months to a year.  We're turning Japanese, I really think so...

 

King Tut's picture
King Tut (not verified) mkkby Nov 27, 2016 5:41 PM

Reagan started "Tax Reform"- which means "Fuck The Middle-Class Serfs" in Hebrew. ZH had a chart up yesterday and it showed middle class wealth going in the crapper in 84- after Reagan's trickle-down econ policies finally took hold.

Backin2006's picture

A rigged market always eventually becomes someone's buying or selling opportunity. Depressing or inflating prices artificially costs serious amounts of cash, and those that bet against you will eventually get their pay out.

Paul Kersey's picture

Reagan's "Trickle Down Economics" worked for at least 400 Americans. As for the rest, not so much.

"The Forbes 400 provides a useful snapshot of the nation’s wealthiest individuals, an insight into a world most people will never witness firsthand. The Forbes 400 also provides an insight into just how lopsided our economy has become: Just 400 people hold as much wealth as over 190 million."

"Definition: Trickle-down economics is a theory that says benefits for the wealthy trickle down to everyone else. These benefits are usually tax cuts on businesses, high-income earners, capital gains, and dividends. ... They use any extra cash from tax cuts to expand business growth."

CzarVladimirI's picture

I miss the days back in '81 when I got a 6 month CD at 17%. Those were the days!

Truthy1's picture

Here we have the words of an absent Japanese spokesman on the Liquidity Trap. https://www.boj.or.jp/en/announcements/press/koen_2016/data/ko160112a.pdf

j0nx's picture

Please. Homes in N VA sell in days still at record highs. Sick of this shit in this area. It just simply is never going to crash again like it did.

King Tut's picture
King Tut (not verified) j0nx Nov 27, 2016 4:53 PM

DC is like The Capitol in Hunger Games.

lasvegaspersona's picture

yup...never again...because it can't happen!!!

Oldwood's picture

Living in Texas, real estate, especially builders got hit pretty hard but it didn't stay down for long. Everything ends up being regional. What I would worry about if I were you, is the "swamp" getting drained. Lots of money will be leaving the area. Government leaching is one industry I would be glad to see offshored.

mkkby's picture

If the republicans really want smaller gov, they COULD EASILY close down several departments.  Education, labor, HUD and agriculture could all go, along with millions of parasitic jobs.

Pass a real campaign finance law and millions of lobbyists could be unemployed too.  This would make DC-area real estate become a lot more affordable fast.

Bad Whitey's picture

The general public doesn't seem to want prolonged government department shut downs.  Even the Republicans have no political tolerance for it.  Campaign finance reform, perhaps.  That doesn't mean there will be no lobbyists though; they'll just have to play by different rules.  

August's picture

>>> Government leaching is one industry I would be glad to see offshored.

The cost of one K-Street leech is about the same as 200 Salvadoran illegals, or 5,000 Bangladeshis, so there's definitely room for cost savings.

Of course, those Bangladeshis won't be contributing an awful lot to the urban travel and entertainment sectors.

Bad Whitey's picture

The capital city of the good old USA ain't falling TOO far, me thinks.  It generally doesn't feel like a bubble here until you get into the world of DC proper condos and commercial property.  Good points about RE being regional and draining the swamp.  I hope they do.  

neidermeyer's picture

Metro DC real estate is going to absolutely suck as entire departments get downsized and eliminated... sell while you can.

Bad Whitey's picture

I doubt the USMC and FBI are moving from Quantico anytime soon.  UVA did a study published by the Washingtonian magazine last year and the Stafford / Spotsylvania Virginia area's pop. is expected to grow by 137-141% in the next 20 years.  Area attracts both job seekers and retirees.  Even factoring in massive government cuts, you'd be ok when recession hits as long as you bought on the lower end.  Those are both RED COUNTIES fairly close to DC btw. 

robertsgt40's picture

"Won't crash again"?  Wanna bet?

Truthy1's picture

Not so in FFx county Mount Vernon area. Prices are down with houses sitting for weeks and months only to be sold after discount.

Bad Whitey's picture

DC/metro housing prices don't begin to make sense until you drive 40 minutes south of the district.  

Bank_sters's picture

Home ownership is a lie.  If you own something you shouldn't have it under constant threat of being taken away because of property taxes after you've obtained legal title.  I wish people would tell the truth about the transaction which is that the state and the banks they owe money  to(created out of thin air) are still in ultimate possession of the property.  Homeowners are in fact higher level renters.

Oldwood's picture

Then the whole notion of ownership is false if we are not supposed to have to fight to keep it. This is what has happened to our liberties. We thought they had already been paid for and failed to realize our "maintenance fees" had not been paid. It's going to be damned expensive to fend off foreclosure on what have remaining. 

It's never good to accept the utopian notion that government can preserve our rights to ANYTHING. Our responsibility as citizens is to PREVENT them from taking our liberties while SERVING US.

Bank_sters's picture

Exactly.   The state/banks want to us to be under threat of losing our shelter because it makes us less secure and easier to control.  .Gov can go to hell because might is NOT right regardless of how brainwashed the general public may be.

August's picture

It may not be right but, like greed, might works.

adanata's picture

 

If they can tax it or loan money to it, they OWN it. We pay tribute to the Barons every day. We run 'their' businesses, live in 'their' housing as their servants/slaves. They always get their cut [and cutting deeper every day]. They laugh and laugh at humanity and how they took possession of virtually everyone's real assets with little pieces of worthless paper. 

The real gut wrencher for me is the fact this could all be stopped in a day... the day the People see the con. I doubt that day will ever come.

Stan Smith's picture

You could pay cash.    Your house isnt going get repo'd if you have back taxes on it.    It'll get a lien -- and likely a first in line one as well.   Yes, you do have to pay your taxes.   And likely your home owners insurance.    But would you rather hope to have some equity or help pay your landlords mortgage, taxes, and insurance?   Because that's what rent is.

I guess you could buy a camper and hit campgrounds across the country.   I actually have extended family who's done this.   But they're long retired and have adult kids.    Thats harder to do if your working and raising a family.   Im sure folks do it, but im pretty sure not many of them are on these boards.

Bad Whitey's picture

Well stated.  Everyone has to live somewhere and a 30 year fixed mortgage on a SFH in an area with low property taxes is a solid path to building wealth for your average citizen(s) that works full time and wants to stay in the same area.  

all-priced-in's picture

Renters also pay property taxes -

 

If you own something you can sell it -

 

I understand what you are saying - and it is a cute way of looking at things - but not really meaningful - sort of like something Paul Krugman would say.

 

 

 

 

AnngeloJamaica's picture

I do not see what the problem is, I lived thru the time when the Interest rate was 22% now that was ball busting.  

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) AnngeloJamaica Nov 27, 2016 8:59 PM

Same here. Anyone that didn't foresee rates increasing is a moron. Interest rates have been kept artificially low for too long. I started shopping for my refi in October and locked in my rate. I close this week. Costs were great, got a nice lender credit. Did I take out any cash? Oh hell no! Refi'd for the lower interest rate, 2.875%. It is a VA loan so if I decide to sell my house I can also sell the loan, too. Easy in my area, lots of retired / active duty.

NoWayJose's picture

My assessment jumped 20% last March - and you can bet I will be arguing to get a big chunk of that back thus coming March - based on interest rates!

AnngeloJamaica's picture

factoring inflation what actually will you be getting back?  Hmmm.  and what percentage on top ot that.

 

truthalwayswinsout's picture

The real interest rate is around 5-6% and for the past 7 years the FED has been stealing that money and giving it to banks who instead of fixing their 2006 mess have been doubling down on the same bad bets.

Nothing has been fixed in the past 7 years except the FED has fucked savers up the ass to keep the corrupt system going.

 

King Tut's picture
King Tut (not verified) Nov 27, 2016 4:40 PM

All of the fucking deadbeats that got kicked out in 2009-2012 are getting $0 down mortgages on Shitty McShitboxes again.

Mena Arkansas's picture

8.7 million jobs were lost in the recession.

http://www.cbpp.org/research/economy/chart-book-the-legacy-of-the-great-...

7 million Americans lost their home in the recession.

https://bobsullivan.net/restless/7-million-americans-lost-their-homes-du...

Many of those who lost jobs were never able to replace their previous income and many were out of work for as much as a couple years.

The labor force participation rate was recently at 63%. The worst in nearly 40 years.

But yeah, they're all "fucking deadbeats".

Hope it happens to you.

wmbz's picture

The rate increase has "shocked" consumers! When you live in a false fantasy e-con-no-me any rate increase will come as a shock.

The cry of "it's not fair" will be heard far and wide, soon enough!

Get your safe space ready, pussies!

Sudden Debt's picture

THIS TIME IS DIFFERENT!! HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA

my god... why do people still believe that buying at a top is the best thing to do...

and when you hear them, they're so convinced that they'll sell it for tripple the price in 10 years time...

Stan Smith's picture

It's not the best thing to do.    It's the worst.    My house just got to where its likely to have the value I paid 10 years ago in a sale, and we're in a fairly in demand area.    Places where that demand isnt there though is going to take the pipe for a lot longer.

Gilligan's isle's picture

If they are going to be "taking the pipe", I,m pretty sure they'll be taking the exhaust pipe, cause there will be no further real estate recovery if they have not recovered by now, sorry to say.

Last of the Middle Class's picture

There's a many in peril if the Fed interprets the relief felt from the election of Donald Trump as a stronger economy, either by some impaired thought process or by demented design. Just sayin

 

wisehiney's picture

"We'll have fun, fun, fun til feddy takes the refi away."

Stan Smith's picture

+1 and then some.   Exactly.

 

If anyone doesnt think the biggest "culprits" of the previous housing bubble -- and the one coming -- wasnt our friends in DC at the FHA, Fannie, Freddie,  and ecosystem of brokers nationwide (and international as well) are naive fucking rubes.