Wednesday, June 10, 2009

Second Week of Mortgage Application Discussion

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This will be the second week of analysis on the mortgage applications and the last for a while. I only wanted to confirm for myself one last time how dependent this country is on easy money. Sometimes I feel like the crazy old man on the park bench as I look at data, and the world around me ignores it. The data the past two weeks, proves my point and more... without cheap money, our country is in serious danger. At least until American rebuild their balance sheets which will take the greater part of a half decade. So further discussion is moot at this point, it is plainly confirmed how tied in the American consumer is to cheap rates for 'prosperity' as per data revealed in the past fortnight.

I could only shake my head when about 10 days ago CNBC said higher mortgage rates were good for the housing market. Why? Because desperate buyers don't want to miss out on the interest rates of the century and will rush in to lock in purchases immediately. Jim Cramer made the exact same point yesterday. I am amazed at some of the things I hear, and this confirms to me that the ivory tower set still has no idea what is happening in Main Street America. I said the same thing in 2007 when we were told there is no recession and there would be no recession. Those who report our financial news live in a parallel universe -- certainly not in Main Street. So while I am happy Jim Cramer is bidding against a multitude of buyers for 4 unit apartments as he detailed yesterday, that is just not what is happening in Main Street "Cramerica". Most Americans not only don't live on that same street, they are in a whole different zip code.

Uncle Ben needs to get rates back down unless the sole basis of the bull market will be China will save the world, and the US consumer is not needed. Even though said consumer was the driver behind global growth for over 2 decades.

For those who missed last week, some posts to get you caught up
  1. [May 29: Bloomberg - Bernanke Bid to Lift Housing Scuttled by Rising Rates]
  2. [Jun 1: Cutting Back Meritage Homes Pending this Week's Mortgage Applications]
  3. [Jun 3: Weekly Mortgage Applications Coning Today; Fed Already Loses $5 Billion on Mortgages]
  4. [Jun 3: A Country that Cannot Function Without Easy Money]
  5. [Jun 4: Clarification on Yesterday's Mortgage Statistics]
So here are the key points - the government has done everything in its power to suppress the free market from working. Even though, in reality (the point I've been making for 2 years) is - after a one time painful adjustment ... low housing prices (and hence monthly costs) would be better for all of us. Less money would have to be spent to have a roof over our head and more money could go to things like savings. But we're fighting that tooth and nail and wasting trillions of national treasure in the process. Truly a shame. And I say that as a homeowner who is underwater.

Among the litany of things they have done are as follows
  1. Billions upon billions have been thrown at the mortgage market by the Federal Reserve to surpress the mortgage rate to a level below 5%.
  2. Billions upon billions have been thrown at the housing market by the federal government; with such proposals as offering $8000 not just as a tax credit to first time home buyers but indeed now as a handout to buyers to use as their down payment... i.e. opening the housing market to just about anyone who can make a monthly payment. [May 13, 2008: Tax Credit as Mortgage Down Payment Now Official Federal Government Policy]
  3. After denying that home prices could EVER fall nationally, the same pundits who showed their face on TV month after month now speak of green shoots as home prices in many regions have fallen 30-40% versus a year ago time frame. And we're down to 2002 pricing in many markets.
  4. 50% of all sales nationally are now foreclosures... most of which are much heavier discounted than the 30-40% "natural" price drop listed in point 3.
  5. We are in the heart of home selling season - late spring/early summer
  6. Home affordability measures (some convuleted measure of median income v prices v mortgage rates) are at the 2nd highest EVER after only January of 2009.
Despite all those actions, how has the "green shoot" consumer reacted? This is why the last two weeks fascinated me.

The truth would happen when mortgage rates jumped a bit... we would see just how strong the consumer is. Here is what happened last week.

What are the results?
  1. This week in 2008 interest rates for 30 year fixed were at 6.17%
  2. This week in 2009 interest rates for 30 year fixed were at 5.25%
But why was this week interesting to me? Because LAST week 30 year fixed was at 4.81%... so I wanted to reaffirm how addicted we are to cheap money. How just a small increase in interest rates from "historical levels" to "incredibly cheap levels" would change behavior.

This small increase to still historically low levels caused refinancing to plunge 24% week over week. The share of applicants seeking to refinance loans fell to 62.4 percent of total applications from 69.3 percent.

How did year over year purchases do, which is how we SHOULD compare housing? Despite a 92 basis point drop in interest rates and all the items I listed above in terms of affordability, government handouts, half off price sales, blah blah - purchases applications were down 19.7% year over year.


This week? More of the same

The average 30 year "surged" to 5.57% (from last week's 5.25%) and refinancing plunged to the lowest level since fall 2008. As important as the lost access to the house ATM (to drive American consumerism) is how despite all the incentives thrown at the housing market, and much lower prices than a year ago - how purchases applications responded year over year.
  • After dropping -24% week over week last week, refinancing dropped another 11.8% week over week. So we've lost 1/3rd of applications simply by moving from upper 4% mortgage rates to mid 5%. That's just applications - not approvals.
  • The share of applicants seeking to refinance loans fell to 59.4 percent of total applications last week from 62.4 percent.
Remember refinancing was at 70% of all applications for much of the past 4-5 months; so even as overall mortgage applications dropped, refinancing as a % is dropping even more quickly

Now on to purchases - as we noted last week the main stream media only is looking at week over week changes. And since as each week we go until mid summer, housing season is seasonally stronger it is masking reality. We need to look year over year for purchases to reflect seasonality. So on the surface we had a 1.1% gain week over week in purchase applications but versus this same week last year?
  • This week in 2008 interest rates for 30 year fixed were at 6.19%
  • This week in 2009 interest rates for 30 year fixed was at 5.57%
So mortgage rates, despite rising are STILL 62 basis points more consumer friendly than last year. So what happened?
  • Purchase applications were down 28% year over year

And that proves my point. Despite record high affordability, $8000 tax "credits" (now used as down payments for 1st time home buyers), home prices down 30-40% in most major urban markets, foreclosure prices down 50% in most markets.... when we moved the lever up from upper 4% 30 year mortgages to STILL HISTORICALLY LOW mid 5%s... we lost almost a third of our purchase applications versus last year at this time.

This folks is reality.

Again does any of this matter as a stock market participant? As I always say, it does not matter, until it matters. So we can ignore one of the main tenants of the US recovery as explained to us since the government went on this campaign to distort rates as long as we wish. Until one day it matters. And people realize the mirage we're living inside.
  • Tom Marano, chief executive of mortgage operations at GMAC, said in an exclusive interview with Reuters on Tuesday that home loan volume at GMAC is about 75 percent lower now than when mortgage rates hit record lows several months ago.

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