Mortgage "Refi Boom" Crashes To Lehman Lows

Tyler Durden's picture

While mortgage applications tumbled across the two-week holiday period - even seasonally-adjusted...

 

It was the complete collapse in the refinancings that is most notable. Down over 60% since August, the refi index crashed over 22% over the xmas/new year period to its lowest since the post-Lehman collapse in Oct 2008.

Complete bloodbath in mortgage apps...

 

And judging from the taper tantrum in 2013 (which saw applications collapse over 70%) there is more to come...

 

Of course, this is no surprise, as we recently explained...

The Rate Surge Changes Housing Affordability Statistics

Redfin.com did a purchase market survey of 2400 ready-buyer users between Nov 7 and 11 - right when rates first started surging and were much lower than today - on how a 1% jump in interest rates would impact their purchase decision, if at all.

Note, today rates are 50 bps higher than when the survey was done and up greater than the 1% referred to in the questioning.

Bottom line: A 1% rate surge changes everything. Especially, considering the macro housing market - demand and prices - is controlled by the incremental buy or sell pressure.

  • 68% weigh rates heavily into their purchase decision; only 11% don't care.
  • 72% of buyers would have to change strategy on a 1% rate-surge; 29% wouldn't.
  • 46% OF BUYERS WOULD HAVE TO BUY A LESS EXPENSIVE HOUSE.

The metric I highlighted red is what I find the most important. It is exactly why I always assume most people buy as much as they can afford using contemporary mortgage rates and guidelines.

It's important to remember, however, that a RATE-SURGE OVER A SHORT TIME-PERIOD actually creates a month or two of higher numbers followed by a sharper give-back period, which portends a much weaker than a year-ago Spring and Summer (when yy comps haven't been so steep since 2006).

PART 2) AFFORDABILITY LOST ON THE RATE SURGE (from my recent note on post rate-surge affordability).

Bottom line: The rate surge took away 11% of purchasing power, which will drag on house prices. It comes as houses cost the most ever to the end-user, shelter-buyer (see FOUR charts below).

 

ITEM A) MOST EXPENSIVE HOUSING EVER

BUILDER HOUSES

1) The average $361k builder house requires nearly $65k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $65k is needed.

For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper.

Bottom line: Reversion to the mean can occur through house price declines, credit easing, a mortgage rate plunge to the high 2%'s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.

 

The following chart compares Bubble 1.0 (2004 and 2006) to Bubble 2.0 on an apples-to-apples basis using the popular loan programs of each era.

Bottom line: Builder prices are up 19% from 2006 but the monthly payment is 43% greater and annual income needed to qualify for a mortgage 83% more.

 

RESALE HOUSES

2) The average $274k RESALE house requires nearly $53k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $53k is needed.

For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper.

Bottom line: Reversion to the mean can occur through house price declines, credit easing, a mortgage rate plunge to the high 2%'s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.

The following chart compares Bubble 1.0 (2004 and 2006) to Bubble 2.0 on an apples-to-apples basis using the popular loan programs of each era.

Bottom line: Resale prices are down 1% from 2006 but the monthly payment is 32% greater and annual income needed to qualify for a mortgage 68% more.

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rccalhoun's picture

and rents are astromically high, also.  homeless population to grow soon?

FireBrander's picture

I refied 6 years ago, and rates dropped another ~1 point over that time, but today, rates are about 1/8 point higher than 6 years ago...so, basically, everyone that bought in the last 6 years has no reason to rifinance...that industry is dead for now.

bh2's picture

Yeah, I think that's right. Anyone who wanted to refi has done so. The minor bump up in rates has simply demonstrated the refi market is sated.

Widespreadpanic's picture

You are forgetting people that destroyed credit score playing the game.

There are people who strategically defaulted, negotiated and won the lottery when the attorney general made BOA pay billions for mortgage fraud.

They (i) have been rebuilding credit scores during that period.

My second mortgage of 60k was dropped
First mortgage reduced to market value -90k
Total-150k

My rate is @6.5 on 130k.
I am just now receiving solicitations to convert to 15 year, pay the same monthly and knock 4 years off loan life.

So not everyone who wanted to has. CREDIT rebuilding lag.

wcvarones's picture

People need to get roommates.

Déjà view's picture

Hardly a flinch years ago to such a slight movement in rates...

Fascinating...correlation between increasing debt loads and rising interest rate sensitivity...

Raffie's picture

It is all coming down, but people watch for the flash crash to do anything.

Get out of debt while you can.

silverer's picture

Does this qualify for Marshall Law?

Txpl9421's picture

You mean like Geroge Marshall?

He's dead.

Or Marshall Tucker?  They havent had a hit in years?

Or Peter Marshall.  Again, dead.

The college, Marshall?  Never let them on Air Force One.

What Marshall are you refering to?

 

JRobby's picture

No, but it might be martial law soon

wcvarones's picture

What kind of complete moron didn't refinance in the last couple years?

Rainman's picture

Housing is just like a great big bond market ... rates up, prices down

FireBrander's picture

Actually, it's "rates up, Prices UP"...the trick is to lower your lending standards and get "creative" with the financing options...a 7 year, adjustable, no interest, balloon starting at 3% for anyone with a 300 credit score or higher will "revitalize" the housing market.

JRobby's picture

(Laugh Track Deafening!!!!)

Soon that will not sound too far fetched to the central planners.

The final bubble? NAH!!!!!

FireBrander's picture

If they can write 7 balloons, that would take the housing market all the way to the end of Trumps second term...my idea will probably be reality...kick the can until 2024 and let Madden President Hillary deal with it then..:)

two hoots's picture

Funny:  I'm looking at a 1962 mortgage guide with amortization tables.

The lowest rate shown is 6%

The highest loan amount is $85,000

 

moorewasthebestbond's picture

Check out the home surgery kits and other goodies in the 1898 Sears catalog.

two hoots's picture

yep, those were the good ol' days when people had no grid to be off of. 

two hoots's picture

Some people keep the slightly higher rate rather than refi and push their payments out to 15-30 years when they have a payoff in 5-10 years.  It is all simple math. 

Some don't need the extra monthly income and don't want the bother.

Why refinance just to feed the loan sharks?

 

ZippyBananaPants's picture

Thats what we did, only have 7 years left on 15 year.  Did not make sense to push out another 15 years and pay up front interest when we are killing the principal now.

two hoots's picture

That information is close hold and not to be released.  National Bankers Association

(And why public education don't teach much about economics.)

JRobby's picture

Bingo, get the rate and send extra principal every month. "They hate that" is the best reason to do it.

GraveDancer's picture

Inflation of the kind experienced in pre-WW2 Germany on its way!

Book> The Road to World War III: "Can the dark forces of anti-freedom "Trump" humanity?"

Kindle> https://www.amazon.com/Road-World-War-III-anti-Freedom-ebook/dp/B01MT31AXZ/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1483002008&sr=1-1&keywords=Road+to+world+war+iii
 

moorewasthebestbond's picture

Fuck you National Association of Realtors!

svs9000's picture

BUY MOAR ON THE WAY TO DOW 20,000!

Vegasradar's picture

A lot of people are using 3% down and paying PMI

orangegeek's picture

Where's NAR to tell us how great things really are.

 

LMFAO!!!

JRobby's picture

Still nursing lobotomized level hangovers from the weekend.

They know the party is way over.

Kirk2NCC1701's picture

We had planned to do mtge refi and free up monthly cashflow, but the mtge industry front-ran the Fed's rate hike, with rises in mtge rates.

This made the whole proposition unpalatable -- as it pushes the Breakeven point for Cost v. Savings too far out into the future.

Rebel yell's picture

Nevertheless, there is a shortage of single family homes. Additionally, how do the bankers who have dreamt up this plan to raise rates and lower housing prices anticipate that local and state governments will adjust to the declining revenues since real-estate taxes are local governments primary source of income which fund everything from police, to schools, to garbage collection? Will they just comply and vote to lower their salaries and retirement benefits?

ipso_facto's picture

Don't worry.  Local governments will just increase the assessments.

Rebel yell's picture

Then housing will not be any more affordable than it is now. The reduced mortgage payment would be countered by increased property taxes making monthly housing costs equivalent to what they currently are.

Bay of Pigs's picture

Two words buddy.

It's. Over.

Rebel yell's picture

I am notoriously pessimistic, but not to your level of hysteria.

ichan's picture

Maybe a few more words. The days of housing/shelter being out of reach of avg. people is over. AND SHOULD BE. It's fucking shelter.

Rebel yell's picture

Also, all markets being local, home prices in my area are still down by roughly 20% of the 2006-2007 highs when the average 30 year fixed rate was 6.62%.

And there were no 4 % rates in 2004! Rates bounced between 5.5 and 6.25% that year.

http://mortgage-x.com/general/national_monthly_average.asp?y=2004

FireBrander's picture

There isn't a "shortage of homes"...there's an excess amount of people buying houses at GROSSLY INFLATED PRICES because of cheap money...can the majority, many of whom have less than $500 in savings, make those payments for the next 15/30 years...yeah, right... 

Rebel yell's picture

Prices are still down from pre 2008 highs in most areas. Supply and demand is the final arbiter of prices. People don't have to sell there house to the majority of Americans. They have to sell it to one person. The majority of the homes owned by businesses who rent homes do not finance them. They do not hold a mortgage. They pay cash.

Totally_Disillusioned's picture

This only serves to demonstrate despite Obama's fiddling and the Fed's QE program and Wallstreet's boom the housing market recovery was FAKE NEWS

GoldToDaMoon's picture

Is this the first "Since Lehman" of 2017, or did I miss one?