Category Archives: Mortgage

Wells Fargo Just Reported Their Worst Mortgage Numbers In Five Years

When ZH reported Wells Fargo’s Q4 earnings back in January, they drew readers’ attention to one specific line of business, the one they dubbed the bank’s “bread and butter“, namely mortgage lending, and which as they then reported was “the biggest alarm” because “as a result of rising rates, Wells’ residential mortgage applications and pipelines both tumbled. Specifically in Q4 Wells’ mortgage applications plunged by $10bn from the prior quarter, or 16% Y/Y, to just $63bn, while the mortgage origination pipeline dropped to just $23 billion”, and just shy of the post-crisis lows recorded in late 2013.

Fast forward one quarter when what was already a grim situation for Warren Buffett’s favorite bank, has gotten as bad as it has been since the financial crisis for America’s largest mortgage lender, because buried deep in its presentation accompanying otherwise unremarkable Q1 results (modest EPS and revenue beats), Wells just reported that its ‘bread and butter’ is virtually gone, and in Q1 2018 the amount in the all-important Wells Fargo Mortgage Application pipeline failed to rebound, and remained at $24 billion, the lowest level since the financial crisis.

Yet while the mortgage pipeline has not been worse since in a decade despite the so-called recovery, at least it has bottomed. What was more troubling is that it was Wells’ actual mortgage applications, a forward-looking indicator on the state of the broader housing market and how it is impacted by rising rates, that was even more dire, slumping from $63BN in Q4 to $58BN in Q1, down 2% Y/Y and the the lowest since the financial crisis (incidentally, a topic we covered just two days ago in “Mortgage Refis Tumble To Lowest Since The Financial Crisis, Leaving Banks Scrambling“).

https://www.zerohedge.com/sites/default/files/inline-images/wells%20mortgage%20apps%20q1.jpg?itok=DKt6MeNj

Meanwhile, Wells’ mortgage originations number, which usually trails the pipeline by 3-4 quarters, was nearly as bad, plunging $10BN sequentially from $53 billion to just $43 billion, the second lowest number since the financial crisis. Since this number lags the mortgage applications, we expect it to continue posting fresh post-crisis lows in the coming quarter especially if rates continue to rise.

https://www.zerohedge.com/sites/default/files/inline-images/wells%20mortgage%20originations%20Q1%202.jpg?itok=_jVai7KX

Adding insult to injury, as one would expect with the yield curve flattening to 10 year lows just this week, Wells’ Net Interest margin – the source of its interest income – failed to rebound from one year lows, and missed consensus expectations yet again. This is what Wells said about that: “NIM of 2.84% was a stable LQ as the impact of hedge ineffectiveness accounting and lower loan swap income was offset by the repricing benefit of higher interest rates.” But we’re not sure one would call this trend “stable” as shown visually below:

https://www.zerohedge.com/sites/default/files/inline-images/WFC%20NIM%20q1%202018.jpg?itok=9pDb-ZbA

There was another problem facing Buffett’s favorite bank: while NIM fails to increase, deposits costs are rising fast, and in Q1, the bank was charged an average deposit cost of 0.34% on $938MM in interest-bearing deposits, exactly double what its deposit costs were a year ago.

https://www.zerohedge.com/sites/default/files/inline-images/wfc%20deposits.jpg?itok=dtXxAD_g

And finally, there was the chart showing the bank’s consumer loan trends: these reveal that the troubling broad decline in credit demand continues, as consumer loans were down a total of $9.5BN sequentially across all product groups, far more than the $1.7BN decline last quarter.

https://www.zerohedge.com/sites/default/files/inline-images/wells%20consumer%20loan%20trends%20q1%202018.jpg?itok=Wdae5yxL

What these numbers reveal, is that the average US consumer can not afford to take out mortgages at a time when rates rise by as little as 1% or so from all time lows. It also means that if the Fed is truly intent in engineering a parallel shift in the curve of 2-3%, the US can kiss its domestic housing market goodbye.

***
Wells Fargo Advisors continues to bleed reps

In the latest quarter, the broker-dealer suffered a net loss of 145 brokers

https://galesmind.files.wordpress.com/2015/09/rats-from-the-ship.jpg?w=600&h=332

Source: Zero Hedge | Wells Fargo Earnings Supplement

 

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Economists Who Push Inflation Stunned That Rising Home Prices Have Put Buyers Deeper Into Debt

Once again, when the government intervenes – this time in housing – the left hand is starting a fire that the right hand is trying to put out. Rising prices for homes are once again pricing out prime borrowers and nobody can “figure out” why this is happening.

It is news like this article reported this morning by the Wall Street Journal that continues to perpetuate the hilarious notion of Keynesian economics as giving a job to one man digging a hole and another job to another man filling it, simply so that they both have jobs.

There is nothing funnier (or sadder) than “economists” struggling to understand how housing prices got so high and why people are taking on more debt in order to purchase them. However, that is the great mystery that the Wall Street Journal reported on Tuesday morning, making note of the fact that people are “stretching“ in order to purchase homes. What’s the solution to this problem? How about just easing lending standards again? After all, what could go wrong?

Apparently blind to the obvious – that forced inflation could amazingly make things more expensive relative to income – “economists” have hilariously blamed this price/debt delta on lack of supply. Of course, no one has mentioned the credit worthiness of borrowers getting worse or the fact that homes prices are being manipulated in order to offer home ownership to people who otherwise may not be in the market.

More Americans are stretching to buy homes, the latest sign that rising prices are making homeownership more difficult for a broad swath of potential buyers.

Roughly one in five conventional mortgage loans made this winter went to borrowers spending more than 45% of their monthly incomes on their mortgage payment and other debts, the highest proportion since the housing crisis, according to new data from mortgage-data tracker CoreLogic Inc. That was almost triple the proportion of such loans made in 2016 and the first half of 2017, CoreLogic said.

Economists said rising debt levels are a symptom of a market in which home prices are rising sharply in relation to incomes, driven in part by a historic lack of supply that is forcing prices higher.

The “lack of supply” argument is just wonderful – a bunch of “economists” finding a basic free market capitalism solution to a problem that has nothing to do with free market capitalism. Perhaps “economists” can also argue that building more, despite the lack of prime borrower demand, will also have the added benefit of puffing up GDP. From there, it’s only a couple more steps down the primrose path that leads to China’s ghost cities.

https://www.zerohedge.com/sites/default/files/inline-images/chart1_0_0.jpg?itok=X7gskNoZ

And of course, people are worried that we could have a “weak selling season” upcoming. In a free market economy, weakness is necessary and normal. In Keynesian theory, it’s the devil incarnate. The Wall Street Journal continued:

Real-estate agents worry that buyers’ weariness from being priced out of the market could make this one of the weakest spring selling seasons in recent years.

Consumers are growing more optimistic about the economy and their personal financial prospects but less hopeful that now is the right time to buy a home, according to results of a survey released in late March by the National Association of Realtors.

At the same time, the average rate for a 30-year, fixed-rate mortgage has risen to 4.40% as of last week from 3.95% at the beginning of the year, according to Freddie Macputting still more pressure on affordability.

These factors “are working against affordability and that’s why you get the pressure to ease credit standards,” said Doug Duncan, chief economist at Fannie Mae. He said that pressure has to be balanced against the potential toll if underqualified buyers eventually default on their mortgages.

CoreLogic studied home-purchase loans that generally meet standards set by Fannie Mae and Freddie Mac, the federally sponsored providers of 30-year mortgage financing.

The amount of these loans packaged and sold by Fannie and Freddie increased 73% in the second half of 2017, compared with the first half of the year, according to Inside Mortgage Finance, an industry research group. In that same period, overall new mortgages rose 15%.

As if the signs weren’t clear enough that manipulating the economy and manipulating the housing market has a detrimental effect, the article continued that Fannie Mae and Freddie Mac are “experimenting with how to make homeownership more affordable, including backing loans made by lenders who agree to help pay down a buyer’s student debt“. Sure, solve one government subsidized shit show (student loan debt) with another one!

Is it any wonder that the entire supply and demand environment for housing has been thrown completely out of order?  On one hand, the government wants to make housing affordable so that everybody can have it, which closely resembles socialism. On the other hand, they are targeting prices to rise 2% every single year and claim that this is normal and healthy economic policy that we should all be buying into and applauding. The left hand doesn’t know what the right hand is doing!

We were on this case back in October 2017 when we wrote an article pointing out that home prices had again eclipsed their highest point prior to the financial crisis. We knew this was coming. We at the time that the ratio of the trailing twelve month averages of median new home sale prices to median household income in the U.S. had risen to an all time high of 5.454, which following revisions in the data for new home sale prices, was recorded in July 2017. The initial value for September 2017 is 5.437.

In other words, the median new home in the US has never been more unaffordable in terms of current income.

https://www.zerohedge.com/sites/default/files/inline-images/ratio-ttma-median-new-home-sale-prices-and-median-household-income-annual-1967-2016-monthly-200012-to-201709_0.png?itok=D3_lX6IP

Here we are 6 months later and “economists” are just figuring this out. What’s wrong with this picture?

What’s really happening is clear. Instead of letting the free market determine the pricing and availability of housing, the government has continued to try and manipulate the market in order to give everyone a house. This is simply going to lead to the same type of behavior that led Fannie Mae and Freddie Mac to fail during the housing crisis.

If we are going to have free market capitalism, the reality of the situation is that not everybody is going to own a house.

Furthermore, while there are many benefits to owning a house, there are also many reasons why people rent. Peter Schiff, for instance, often makes the case that renting is generally worth it because you’re saving yourself on upkeep and it allows you to be flexible with where you live and when you have the opportunity to move. He himself rents property for these reasons, which he often notes in his podcast. Sure, there are some benefits of homeownership, namely that a homeowner is supposed to be building equity in something, but looking again at the situation we are in today, is it worth investing in the equity of a home that might see its price crash significantly again, similar to the way housing prices did in 2008?

The government is creating both the problem and the solution here and instead of trying to continually fix the housing market, they should just keep their nose out of it and allow the free market to determine who should own a house and at what price. Call us crazy, but we don’t think that’s going to happen.

Source: ZeroHedge

NY Fed Launches LIBOR Replacement; Publishes First SOFR Rate At 1.80%

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This morning at 8am, the New York Fed, in cooperation with the Treasury Department’s Office of Financial Research, launched a much-anticipated, if largely worthless (for now) benchmark interest rate to replace Libor, together with two other reference rates, which traders and market participants hope will prove more reliable than the infamously rigged and manipulated index after a long and complex switch over.

The so-called Secured Overnight Financing Rate (SOFR), was set at 1.80 percent, roughly 17bp below the GC repo rate and 12bp above the fed effective.

Here is the full breakdown of today’s rates:

  • Secured Overnight Financing Rate (SOFR) set at 1.80%
  • Broad General Collateral Rate (BGCR) set at 1.77%
  • Tri-party General Collateral Rate (TGCR) set at 1.77%

SOFR – which unlike Libor is secured – is based on the overnight Treasury repurchase agreement market, which trades around $800 billion in volume daily. As Reuters notes, publishing the rate is the first step in a multi-year plan to transition more derivatives away from the London interbank offered rate (Libor), which regulators say poses systemic risks if it ceases publication; ironically it also poses systemic risks if it keeps rising as it references a total of $300 trillion in financial (swaps, futs and derivatives) and non-financial (loans, mortgages) debt.

Some are delighted by the new rate: “It’s going to be based on a very, very robust set of transactions. I don’t think a lot of the issues and unknown volatility around Libor is going to exist,” said Blake Gwinn, an interest rate strategist at NatWest Markets in Stamford, Connecticut.

To be sure, the relentless ramp higher in both LIBOR and L-OIS has confused many: “Instances like what we’ve been going through this past month where it’s not even a clear cut bank credit issue or a dollar funding issue per se. It’s kind of got everybody scratching their heads trying to figure out why it’s doing what it’s doing,” Gwinn said.

And speaking of 3M USD Libor, today’s fixing rose yet again, up from 2.3118% to 2.3208%, the highest since November 2008 and up for their 38th straight session, longest streak since November 2005.

https://www.zerohedge.com/sites/default/files/inline-images/3M%20USD%20LIbor%204.2.jpg?itok=rytIA4QV

Still, a move away from Libor is expected to be gradual and complicated: the most pragmatic reason is that there is not yet a market for term loans such as one and three months, as in Libor. And there may never be one, unless floating debt creators are incented to shift the reference benchmark from Libor to SOFR.

“It’s hard to imagine a way they could come up with a similar calculation for a term rate and that’s the big difference between whether or not people would be comfortable adopting SOFR as a straight replacement for Libor,” said Thomas Simons, a money market economist at Jefferies in New York.

To be sure, it will take a long time to develop liquidity in derivatives based on the rate; it will take even longer to transplant existing Libor-linked securities to SOFR. The CME Group will launch futures trades based on SOFR on May 7, while major dealers will enable swaps trading on the rate this year.

Investors will also need to adjust to the day to day volatility of the repurchase market, where rates typically increase ahead of monthly and quarterly closings.

“A lot of folks have not really followed the repo market and some of the intramonth variations particularly closely,” said Mark Cabana, head of STIR at Bank BofA. “On a day to day basis it will be more volatile, but smoothing out over a three month time horizon it should be similarly volatile.”

Now, the only question is whether it will ever be adopted.

Source: ZeroHedge

Homeowners Tapping Equity In Cash-Out Refis, Highest Level Since ’08

As we detailed on Tuesday, the mortgage refis have cratered to levels not seen since December ’08 amid a spike in interest (and mortgage) rates. Simply put, the population of borrowers who both qualify for a refi and want one given the higher rates has collapsed.

https://www.zerohedge.com/sites/default/files/inline-images/MW-GG523_cash_o_20180329151818_ZH.jpg?itok=Kj5geqy0

Consequently, the remaining homeowners seeking to refinance are overwhelmingly “cashing out” also known as taking out a new mortgage that’s bigger than the remaining balance on the existing one and using the extra money to do sensible things like home improvements maintain their lifestyle.

https://www.zerohedge.com/sites/default/files/inline-images/refi%20candidates%2010y_0.jpg?itok=LPm9AyaB

And why not: just look at all that sweet, sweet equity…

https://www.zerohedge.com/sites/default/files/inline-images/2018-03-27_6-11-29_0.jpg?itok=YopsNV9m

“When rates are low, the primary goal of refinancing is to reduce the monthly payment,” wrote researchers for the Urban Institute in a recent report. “But when rates are high, borrowers have no incentive to refinance for rate reasons. Those who still refinance tend to be driven more by their desire to cash out.”

https://www.zerohedge.com/sites/default/files/inline-images/2018-03-27_7-28-19_0.jpg?itok=x_VFPkKZ

To better quantify the drop-off in refis, Black Knight reports the recent spike in interest rates cut the population of borrowers with an interest rate incentive to refinance by nearly 40 percent in 40 days

  • Virtually all of the decline in potential refinance candidates was among 2009 and later vintages; Fewer than 100K traditional refinance candidates (720+ credit score, <80 percent loan-to-value (LTV) ratio) remain in 2012 and later vintages

“As people stay in their homes longer we see people reinvesting in their homes by using equity to update their homes and do repair work,” said Rick Sharga, executive VP for Carrington Mortgage Holdings and an industry veteran (via MarketWatch). “We’ve seen a huge expansion of the types of retirement options people have. One is aging in place and retrofitting your house.”

In the last go-around, many homeowners “blew the money,” in Sharga’s words, on splashy purchases like vacations and boats. But lenders were complicit too, offering loans that were as much as 120% of the existing value of the home.

Do you believe that? While homeowners may not be taking Hummer limos to Vegas with their cashed-out home equity “winnings” like idiots of ten-years past, it should be noted that the U.S. savings rate is at crisis lows, credit card debt has gone “completely vertical,” and 61% of Americans don’t have enough in savings to cover a $1,000 emergency.

Here are some troubling charts revealing the true state of the US consumer:

https://www.zerohedge.com/sites/default/files/inline-images/2017.12.20%20-%20CC1_1.JPG?itok=mcfm0peo

https://www.zerohedge.com/sites/default/files/inline-images/revolving%20feb%202018.jpg

https://www.zerohedge.com/sites/default/files/inline-images/U5duFxoxq1Ft27U4qrMySnxhvHRAyfA_1680x8400.jpg?itok=la9Rnsuu

https://www.zerohedge.com/sites/default/files/inline-images/2018-03-29_5-33-54_0.jpg?itok=EscWhilD

https://www.zerohedge.com/sites/default/files/inline-images/rosie1_0.jpg?itok=Yws8UpyI

And while it is nobody’s intention to have a negative outlook on things, every several days or so, we notice, and are compelled to point out that there are some very sick looking canaries in familiar coal mines. We would also be remiss if we didn’t caution that home prices may even come down, as once upon a time “markets” moved in a thing called a cycle.

Source: ZeroHedge

Bank Sector In Peril As Refinance Activity Crashes Amid Rising Rates

To visualize the impact the recent spike in mortgage rates is having on the US housing market in general, and home refinancing activity in particular…

https://www.zerohedge.com/sites/default/files/inline-images/rates%20black%20knight.jpg?itok=0gskR295

… look no further than this recent chart from the January Mortgage Monitor slidepack by Black Knight: it shows the recent collapse of the refi market using the recent jump in 30Y and mortgage rates.

https://www.zerohedge.com/sites/default/files/inline-images/refi%20candidates%2010y.jpg?itok=xLHSMeR1

As Black Knight writes, it looks at the – quite dramatic – effect the mortgage rate rise has had on the population of borrowers who could both likely qualify for and have interest rate incentive to refinance. It finds that the number of potential refinance candidates has tumbled to the lowest since December 2008.

Some more details from the source:

  • the recent spike in interest rates cut the population of borrowers with an interest rate incentive to refinance by nearly 40 percent in 40 days
    • Virtually all of the decline in potential refinance candidates was among 2009 and later vintages; Fewer than 100K traditional refinance candidates (720+ credit score, <80 percent loan-to-value (LTV) ratio) remain in 2012 and later vintages
  • Approximately 1.4 million borrowers lost the interest rate incentive to refinance in just the first six weeks of 2018
  • 2.65 million potential candidates could still both benefit from and likely qualify for a refinance at today’s rates
  • That is the smallest this population has been since late 2008, prior to the initial decline in rates during the recession
  • Though the population is only 10 percent off its February 2017 mark, rate/term refinance production could see a more significant impact than this might suggest due to increasing burnout in the market
  • A corresponding drop in the average credit score of refinance originations is typically observed when rates rise

To be sure, it is hardly a shock that after a decade of record low rates, the current rise in rates means a collapse in refi activity: after all anyone who could, and would, refinance, already has, while the universe of those who have yet to take advantage of lower rates and are eligible to do so, has collapsed.

Which is bad news not only for homeowners, but also for the banks, whose refi pipeline – a steady source of income and easy profit – is about to vaporize.

Here are some more details from the WSJ: last year, 37% of mortgage-origination volume was because of refinancings, according to industry research group Inside Mortgage Finance. That is the smallest proportion since 1995, and the number of refinancings is widely expected to shrink again this year. In 2012, refinancings were 72% of originations.

While purchase activity has climbed steadily from a post-financial-crisis nadir in 2011, growth in 2017 wasn’t enough to offset a $366 billion decline in refinancing activity. The result: The overall mortgage market fell around 12%, to $1.8 trillion, according to Inside Mortgage Finance.

“The market has just gotten so very competitive because every loan matters,” said Ed Robinson, head of the mortgage business at Fifth Third Bancorp . He added that the bank is contacting homeowners who could be eligible for a refinancing in coming years to help maintain that business, and it is also instructing mortgage-loan officers to focus more on purchases.

We demonstrated this plunge in bank mortgage financing last quarter when we showed the near record low mortgage application activity at America’s largest traditional mortgage lender, Wells Fargo.

https://www.zerohedge.com/sites/default/files/styles/inline_image_desktop/public/inline-images/wells%20mortgage%20pipeline%20q4%202017.jpg?itok=HPwwGJBS

Non-traditional lenders face even greater peril: Quicken Loans Inc. got about 70% of its mortgage-origination volume last year from refinancings, according to Inside Mortgage Finance—a higher proportion than any other large lender.

Of course, the higher rates rise, the more mortgage applications drop, suggesting that contrary to expectations for a rebound in interest expense as Net Interest Margin rises, bank will be far worse off as a result of rising rates as refi activity grinds to a crawl.

Or, as the WSJ explains it, “increased mortgage rates can hamper refinancing activity because many homeowners have rates that are already lower than what lenders can now offer. In other cases, the higher rates cut into the savings a homeowner stands to reap by refinancing a mortgage.”

The Mortgage Bankers Association expects nothing short of a bloodbath: it forecasts overall mortgage-purchase volume to grow about 5% in 2018 but refinancing volume to drop 27%. Refinance applications fell 5% in the week ended March 16 from the prior one, according to the group.

https://www.zerohedge.com/sites/default/files/inline-images/2018-03-27_7-28-19.jpg?itok=b0RlhifW

Here is another example of how higher rates are crushing – not helping – traditional banks: since around the beginning of 2017, Valley National Bancorp , based in Wayne, N.J., has transitioned its mortgage business to 40% refinancing from 90%, said Kevin Chittenden, who runs residential lending. The bank previously relied largely on attracting homeowners through its ads for low-cost refinancings, but has since engaged with outside sales reps who are focused on purchases.

“Refi goes with the rates,” Mr. Chittenden said. “So you definitely don’t want to be too leveraged on refinancings.”

It’s about to get worse. 

Guy Cecala, chief executive of Inside Mortgage Finance, said he expects some smaller nonbank lenders to sell themselves by the end of the year because of the drop in the refinancing market and mortgage originations overall. Unlike banks, nonbank lenders typically don’t rely on branches or ties to local agents, which are traditional tools for capturing mortgage purchases.

Another risk: the return of subprime borrowers. As the WSJ adds, the waning of the refinancing boom also attracts a different type of homeowner than at the beginning. As mortgage rates go up, the average credit score of refinancings tends to go down, according to industry research.

That is partly because savvy borrowers are the ones who tend to take advantage of low interest rates first. Also, some borrowers who are refinancing now are doing so to get rid of their mortgage insurance: Home prices in many parts of the country are going up, meaning some homeowners are less leveraged even if they have paid down only a small portion of their mortgage.

As for “new” mortgage platforms such as Quicken Loans which face an imminent calamity as their refi platform implodes, Chief Executive Jay Farner said the company is still enjoying demand for both purchases and refinancings, including from homeowners whose decision to refinance is focused less on rates and more on consolidating debt or switching to a shorter-term loan.

But, he added, “You’ve got to be a little bit more strategic about how you market, versus what we saw lenders do in the last few years, which is, ‘Hey, rates are low, you should do something now.’”

* * *

The biggest irony in all of the above, of course, is that there are still those who will claim that higher rates in the “new normal” are good for banks. For the far more unpleasant reality: see a chart of Wells Fargo stock.

Source: ZeroHedge

U.S. Home Ownership Rate Slips Versus Other Developed Nations

https://s-media-cache-ak0.pinimg.com/564x/42/0e/8d/420e8d69c3a0b9e5aa2f5ce7d261e01d.jpgVersus other developed nations, the United States is losing ground in terms of the rate of home ownership, new research finds. 

Compared to 17 other first-world countries around the globe, the U.S. home ownership rate has fallen over time, an indicator that the American Dream is becoming less attainable, according to research published by the Urban Institute.

Researchers Laurie Goodman, vice president for housing finance policy at the Urban Institute, and Chris Mayer, professor of real estate at Columbia Business School and CEO of reverse mortgage company Longbridge Financial, prepared the findings.

Among the 18 countries for which home ownership was considered, the U.S. ranked 10th in 1990 with a 63.9% home ownership rate compared with its ranking of 13th in 2015. Several European countries followed a similar shift, with Bulgaria, Ireland, and the United Kingdom seeing slides between 1990 and 2015; the proportion of homeowners also declined in Mexico over that span.

Thirteen of the countries saw increases in their rate of home ownership, including a 39.6% spike in the Czech Republic and a 29.6% gain in Sweden. 

“While cross-country comparisons are difficult, the slip in US home ownership relative to the rest of the world, and the historically low home ownership rates for Americans ages 44 and younger, should motivate us to look at US housing policies,” the researchers wrote in a blog post on the research published by the Urban Institute. 

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Home ownership among the senior demographic has been touted within the reverse mortgage industry as a clear retirement windfall.

Yet even for those who choose not to tap into their home equity, the option to use the property rent-free once the mortgage is paid can play an important role in retirement savings, the researchers noted in discussing the amount of home equity currently held among seniors in European countries.

By Elizabeth Ecker | Reverse Mortgage Daily

Rising Mortgage Rates Smack New Home Sales Down 7.8% In January

  • Homebuyers increasingly can’t afford what they want.

  • Higher mortgage rates, combined with the loss of homeowner tax breaks in some of the nation’s most expensive markets, are taking away buying power.

  • New home sales were also down 9% in December

New home sales down 7.8% in JanuaryNew home sales down 7.8% in January, on top of being down 9% in December

Sales of newly built homes are falling, and the culprit is clear. Homebuyers increasingly can’t afford what they want. Higher mortgage rates, combined with the loss of homeowner tax breaks in some of the nation’s most expensive markets, are taking away buying power.

Sales fell in December, when the new tax law was signed, and then again in January, when mortgage rates moved higher. Sales are now at their lowest level since August of last year.

The government’s measure of new home sales is based on signed contracts during the month, reflecting the people who are out shopping and signing deals with builders. It is therefore a strong read on current reactions to home affordability. Mortgage rates moved a full quarter of a percentage point higher during January, from below 4 percent to about 4.25 percent. It then took off further from there.

“It seems that the jump in mortgage rates in January had an immediate impact on contract signings,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group. “You can’t get more interest rate sensitive when it comes to homes and cars with the associated cost to finance.”

Higher home prices are adding to the difficulty for buyers. The median price of a newly built home rose to $323,000, a 2.5 percent gain compared with January 2017. Builders are not only increasing prices, but they are also mostly focused on the move-up market, not the entry level where homes are needed most.

While there is a severe shortage of existing homes for sale, the opposite appears to be the case in the new home market. Supply rose to the highest level in four years, another sign that new construction is increasingly out of financial reach for today’s home buyers.

“The drop in sales may be due to saturation in the upper price range of the market, which should compel builders to follow the market and build more moderately priced homes,” wrote Joseph Kirchner, senior economist at Realtor.com. “We may be beginning to see this with the largest drop for new home sales in homes priced above $500,000.”

The expectation had been for an increase in new home sales in January, after the sharp drop in December. Some economists argue that when rates begin to rise, there is an initial surge reaction from buyers who want to get in before rates increase even further. That did not happen, likely because affordability stood in the way.

Builders did note a drop in buyer traffic in January, according to a monthly sentiment survey from the National Association of Home Builders. That measure did not improve in February, when rates moved even higher. Builder confidence remains high, but largely due to sales expectations over the next six months, not current sales conditions or buyer traffic.

Builders may be counting on the tight supply in the existing home market to push more business their way. Sales of existing homes fell in January as well, with the blame laid squarely on a severe shortage of homes for sale.

“This report is undoubtedly disappointing. Like 2017, 2018 isn’t setting up to be particularly favorable for builders — construction materials and permitting costs are high and rising, labor is tight, and desirable, buildable land is scarce and expensive,” wrote Aaron Terrazas, senior economist at Zillow. “It seems clear that we shouldn’t expect a big breakthrough in new home sales any time soon, and should instead look for incremental progress at best. At this point, we’ll take whatever we can get.”

Source: Diana Olick | CNBC