Now part three, after soaring home prices and mortgage rates. It was drowned out by the hullaballoo over the Fed’s taper announcement. It came from Fannie Mae and Freddie Mac. It will drive up mortgage payments even more.
The recent increase in long-term rates is causing major changes in the mortgage markets. Here are some key trends:
1. Refinancing activity continued to decline through Q3. The proportion of mortgage applications for purchase vs. refi has doubled this year (and that’s not because of higher demand for homes).
2. A number of lenders who focused on mortgage refinancing such as US Bank, Provident Funding, and Flagstar are struggling (although the largest banks such as Chase and Wells seem to be less affected). This may result in an increase in the number of riskier mortgages.
DB: – Lenders who specialized in refinancing transactions have experienced dramatic loss of market share and either will have to become more competitive on rates in growth sectors such as ARMs to regain market share or loosen credit standards.
3. While a larger number of buyers now prefer ARMs, the dynamic within the fixed rate universe is a greater demand for 30-year mortgages vs. 20 or 15. That’s because the monthly payments on 30-year mortgages are lower (slower principal repayment) and buyers are looking for the cheapest solution.
DB: – As interest rates have risen and volume has dropped, the product mix has shifted sharply … 30-year mortgages are much more popular with homebuyers—more than 50% of 30-year mortgages are used for purchase transactions but less than 20% of shorter-term mortgages. As a consequence, the share of 15-year mortgages fell from 20% in September to 17% in October as the share of 30-year lending rose to 63% from 59%. Meanwhile, the ARM share has doubled to more than 5% since June as HARP’s share of lending has fallen to 3% from a high of 7% this spring.
4. As a result, MBS bond markets are taking a hit in the form of lower volumes. The sharp decline in refinancing activity has reduced the need to issue new agency mortgage bonds. New issuance is the lowest in years.
|Source: SIFMA (note: this includes CMBS but the bulk of the activity is agency MBS)|
Similarly, trading volumes in MBS have dropped off to new lows.
Here is a summary on US mortgage markets from Freddie Mac (who, just as Fannie Mae, has been issuing fewer bonds):
Frank Nothaft, Freddie Mac Chief Economist: – With the close of 2013 will also come a major transition in the housing finance industry. For the first time since 2000, we’re going to see the mortgage market dominated by purchase activity as the refinance share drops below 50 percent. And with mortgage rates rising, we’re also going to see the home-sales gains as well as the impressive house price growth begin to moderate to more sustainable levels.
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One factor that may continue to provide tailwinds to US housing recovery is the rental market. Rents are rising faster than inflation, widening the spread between housing costs and wages.
Bloomberg: – For households with children, rising housing costs, elevated unemployment and stagnant earnings are increasingly placing rent beyond reach. The housing slump made matters worse as former homeowners turned into renters, increasing competition for available apartments.
Nationally, the average hourly wage among renters is $14.32 this year compared with the $18.79 needed to afford an apartment at a fair-market rent, as defined by the U.S. Department of Housing and Urban Development, without spending more than 30 percent of income on housing, a National Low Income Housing Coalition report found in March. The $4.47 gap this year is wider than the $4.10 differential in 2012.
Median household income has fallen every year for the past five after adjusting for inflation, with Americans earning no more than they did in 1996, according to data from the Census Bureau. The share of people making less than $15,000 climbed to 13 percent of the population in 2012, from 10.9 percent in 2000, and the share making less than $35,000 expanded to 35.4 percent from 31.4 percent.
According to the Fed, the ratio of rental obligations to disposable income is now at post-recession high. Growing rental costs are driven by declining vacancies and lower housing inventory in the US. Of course the recent rise in interest rates has not helped matters either. Higher rates raise the break-even rent level for landlords who finance their properties.
While this development is encouraging some renters to plunge into homeownership, giving a boost to home prices, it is also displacing low income families. This trend is quite troubling.
Bloomberg: – The number of children without a home increased by an estimated 2 percent, according to NAEH, a Washington-based non-profit focused on policy and research on the needs of homeless people.
The share of Americans experiencing “deep poverty,” living at less than 50 percent of the $23,492 poverty line for a family of four, climbed to 6.6 percent in 2012 from 4.5 percent in 2000, based on Census Bureau data released last month.
That may increase the pipeline of Americans heading toward homelessness. There was a 9.4 percent increase in the number of poor people “doubled up,” or living with friends or family due to economic need, between 2010 and 2011, based on the NAEH 2013 report. Crowley said 2011 is the latest year for which usable data on doubling up is available.
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This is a syndicated repost published with the permission of Sober Look. To view original, click here. Opinions herein are not those of the Wall Street…
This is a syndicated repost published with the permission of The Baseline Scenario. To view original, click here. Opinions herein are not those of the Wall…
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