Real Estate Update – Does it Make Sense?

Real estate prices are now appreciating at a double digit pace in many markets. Zillow publishes the most conservative estimate and pencils in a 5.2% year over year appreciation for the period ending in April. Corelogic's Home Price Index rose by 10.5% year-on-year as of March. Case-Shiller are usually a little slow in reporting. Their 20 city composite showed a 9.3% increase as of February. The NAR reported that for period ending in April, existing home prices were up 11% year-on-year. Finally, the average new home price has risen from $287,900 in April 2012 to $330,800 this April, according to the Census Bureau.

Against this backdrop, does it make sense that the Federal Reserve is still buying an average of $16.5 billion in agency MBS per week? In fact, using just this one data point, the Fed should be tightening, not accommodating.

Unfortunately, it is not all good news.  At the end of the first quarter of 2013, Zillow estimates that 25.4%, or 13 million households with a mortgage remain underwater. They also use an "effective" negative equity adjustment, which includes the households with insufficient equity to sell. The adjustment brings the underwater households to 43.6%, or 22.3 million households. Corelogic estimates only 10.3 million households with negative equity. This interactive chart from Zillow and the press release do not paint a pretty picture.

 

Furthermore, Freddie Mac just reported that the delinquency rate has dropped below 3% for the first time since the sub-prime bubble burst. This may be considered good news headlines, but consider that this is now the 7th year since prices peaked. It has been at least six years since loose sub-prime underwriting practices were discontinued and underwriting standards have returned to a level of sanity, resulting in constant complaints about them being too tight. Under these conditions, a 3% delinquency is way too high and should be of great concern to policy makers. The chart below from my cyber-friend Calculated Risk clearly illustrates how stressed borrowers are and how far we still are from normalcy. Drowning in 8 feet of water is really not that much better than drowning in 10 feet.

 

 


 

FannieFreddieJan2012

Single family delinquency rates recorded by Fannie Mae and Freddie Mac

 


 

The Federal Reserve launched QE1 in November, 2008. It has been nine months since the launch of QE3. The bench mark 30 year fixed rate mortgage rate, per Mortgage News Daily, is higher today than in September 2012. Last week the mortgage rate rose above 3.8%, the highest level since April 2012.

Does it make sense for the Federal Reserve to continue down the same path, without considering its ineffectiveness in lowering mortgage rates, not to mention the unintended consequences? Allow me to illustrate.

The Mortgage Bankers Association (MBA) releases a Weekly Application Survey using a Market Composite Index. This index is further broken down in purchase applications and refinance applications. Mortgage News Daily has two excellent charts. The first chart below plots the MBA Purchase Index versus the 30 year fixed rate. The purchase index and the 30 year fixed rate should be inversely correlated. The chart clearly shows that in spite of monumental efforts by the Fed to drive down the rate, the most it can say is that it has finally arrested the decline in purchase applications. If the real estate market is allegedly so robust, why is the purchase index not going up? That is because the market is supported by bulk investors, local investors and other cash buyers who do not need a mortgage. The demand for housing is limited by the ability of mom and pop to qualify for a payment even at current low interest rates. It is clearly no longer responding to lower rates.

 


 

purchase index

Purchase Index versus the 30 year fixed mortgage rate

 


 

The second chart, also from MND, is even more revealing. It plots the Refinance Index versus the 30 yearr fixed rate. Similar to the purchase index, the refinance index should have a inverse relationship with mortgage rates and that seems to be the case. The chart below appears to show such a relationship, unless you factor in all the Making Home Affordable (MHA) programs:

 

  • Home Affordable Modification Program (HAMP®)
  • Principal Reduction Alternative SM (PRA)
  • Second Lien Modification Program (2MP)
  • FHA Home Affordable Modification Program (FHA-HAMP)
  • USDA’s Special Loan Servicing
  • Veteran’s Affairs Home Affordable Modification (VA-HAMP)
  • Home Affordable Foreclosure Alternatives Program (HAFA)
  • Second Lien Modification Program for Federal Housing Administration Loans (FHA-2LP)
  • Home Affordable Refinance Program (HARP)
  • FHA Refinance for Borrowers with Negative Equity (FHA Short Refinance)
  • Home Affordable Unemployment Program (UP)
  • Hardest Hit Fund (HHF)

 

The administration claims that it has helped something like 2 million homeowners to date. I can only take its word for it. Per the most recent MBA release, the refinance share of all mortgage activity is 74%. The HARP share of refinance activity is 32%. In other words, without HARP, the refinance index would be 32% lower and the overall index would be 24% lower. HARP alone is supporting almost a quarter of the mortgage market today.

The market should pay attention to this. All these HARP loans are by definition bad loans. They most likely have sub-prime borrowers with no equity and insufficient income to qualify for a loan today, if they were new purchasers.

 


 

refi indexRefi index versus the 30 year fixed mortgage rate

 


 

In closing, I am going to borrow another chart from Calculated Risk, a simple Case-Shiller Index chart.

 


 

CSDec2012

Case-Shiller composite house price indexes (10 and 20 cities), nominal

 


 

There should be no disagreement that the price action from 2001 to 2006 was a bubble, supported neither by fundamentals nor the economy. What is the Fed trying to do now? It appears that Bernanke would like to fix the consequences of the last bubble with a new bubble.

Does that make sense?

 

 

Charts by: Mortgage News Daily und Calculated Risk


 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

4 Responses to “Real Estate Update – Does it Make Sense?”

  • Andrew Judd:

    Ramsey, it appears to be the case that HARP applicants all have either Fannie or Freddie mortgages, are current in their payments, but are underwater.

    Why make it so difficult for these people and encourage foreclosure when they have not walked away and made the effort to keep paying so that the US government does not have to bail out the agency investors?

    Further more until recently many of the HARP applicants were unable to refinance because the rules excluded them, so possibly that is why the refinance rate for HARP is so relatively high? Either way all of these home owners have made an effort to keep on paying.

    And as you probably know Calculated risk is saying the future is so bright he has to wear shades:-) But he is also saying that once inventory bottoms then house price rises are going to flatten

  • Solon:

    Ramsey, you might find this interesting:

    http://www.zerohedge.com/news/2013-05-28/keeping-recovery-dream-alive-3-big-banks-halt-foreclosures-may

    ZH is reporting that Wells and Citi have not processed a foreclosure sale since May 6 in thfive western states, which are the states driving the recent price rises. Channel clogging.

  • georgew:

    Please forgive the careless typing, and otherwise accept my thanks for the useful information you supply Ramsey!

  • georgew:

    Ramsey, I enjoy your posts very much. The theme of this post however seems to me silly however. Why ask a silly question? Most of the readers of this blog understand full well that the ends of Govt and the ends of the citizenry are hardly correlated at all; in fact only linked by the needs to avoid serf uprisings and to support demagoguery. So why ask and assert that the Govt (FED in this case) is acting in a way that is not rational for the citizenry at large? Of course it doesn’t, ever, except by occasional coincidence. In other words, the evidence you supply should in fact be the expected outcome, not a surprise to anyone.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Is the Canary in the Gold Mine Coming to Life Again?
      A Chirp from the Deep Level Mines Back in late 2015 and early 2016, we wrote about a leading indicator for gold stocks, namely the sub-sector of marginal - and hence highly leveraged to the gold price - South African gold stocks. Our example du jour at the time was Harmony Gold (HMY) (see “Marginal Producer Takes Off” and “The Canary in the Gold Mine” for the details).   Mining engineer equipped with bio-sensor Photo credit: Hulton Archive   As we write these...
  • Fed Credit and the US Money Supply – The Liquidity Drain Accelerates
      Federal Reserve Credit Contracts Further We last wrote in July about the beginning contraction in outstanding Fed credit, repatriation inflows, reverse repos, and commercial and industrial lending growth, and how the interplay between these drivers has affected the growth rate of the true broad US money supply TMS-2 (the details can be seen here: “The Liquidity Drain Becomes Serious” and “A Scramble for Capital”).   The Fed has clearly changed course under Jerome Powell...
  • Are Credit Spreads Still a Leading Indicator for the Stock Market?
      A Well-Established Tradition Seemingly out of the blue, equities suffered a few bad hair days recently. As regular readers know, we have long argued that one should expect corrections in the form of mini-crashes to strike with very little advance warning, due to issues related to market structure and the unique post “QE” environment. Credit spreads are traditionally a fairly reliable early warning indicator for stocks and the economy (and incidentally for gold as well). Here is a...
  • The Gold Standard: Protector of Individual Liberty and Economic Prosperity
      A Piece of Paper Alone Cannot Secure Liberty The idea of a constitution and/or written legislation to secure individual rights so beloved by conservatives and among many libertarians has proven to be a myth. The US Constitution and all those that have been written and ratified in its wake throughout the world have done little to protect individual liberties or keep a check on State largesse.   Sound money vs. a piece of paper – which is the better guarantor of liberty?...
  • Fed President Kashkari Hears Voices – Are They Lying?
      Orchestrated Larceny The government continues its approach towards full meltdown. The stock market does too. But when it comes down to it, these are mere distractions from the bigger breakdown that is bearing down upon us.   Prosperity imbalance illustrated. The hoi-polloi may be getting restless. [PT]   Average working stiffs have little time or inclination to contemplate gibberish from the Fed. They are too worn out from running in place all day to make much...
  • US Stocks and Bonds Get Clocked in Tandem
      A Surprise Rout in the Bond Market At the time of writing, the stock market is recovering from a fairly steep (by recent standards) intraday sell-off. We have no idea where it will close, but we would argue that even a recovery into the close won't alter the status of today's action – it is a typical warning shot. Here is what makes the sell-off unique:   30 year bond and 10-year note yields have broken out from a lengthy consolidation pattern. This has actually surprised us, as...
  • Switzerland, Model of Freedom & Wealth Moving East – Interviews with Claudio Grass
      Sarah Westall Interviews Claudio Grass Last month our friend Claudio Grass, roving Mises Institute Ambassador and a Switzerland-based investment advisor specializing in precious metals, was interviewed by Sarah Westall for her Business Game Changers channel.   Sarah Westall and Claudio Grass   There are two interviews, both of which are probably of interest to our readers. The first one focuses on Switzerland with its unique, well-developed system of  direct...
  • Exaggerated Economic Growth of the Third World
      Exciting Visions of a Bright Future Fund Managers, economists and politicians agree on the exciting future they see in the Third World. According to them, the engine of the world’s economic growth has moved from the West to what were once the poverty-stricken societies of the Third World. They feel mushy about the rapid increase in the size of the Middle Class in the Third World, and how poverty is becoming history.   GDP of India vs. UK in 2016 – crossing...
  • Choking On the Salt of Debt
      Life After ZIRP Roughly three years ago, after traversing between Los Angeles and San Francisco via the expansive San Joaquin Valley, we penned the article, Salting the Economy to Death.  At the time, the monetary order was approach peak ZIRP.   Our boy ZIRP has passed away. Mr. 2.2% effective has taken his place in the meantime. [PT]   We found the absurdity of zero bound interest rates to have parallels to the absurdity of hundreds upon hundreds of miles of...
  • Why You Should Expect the Unexpected
      End of the Road The confluence of factors that influence market prices are vast and variable.  One moment patterns and relationships are so pronounced you can set a cornerstone by them.  The next moment they vanish like smoke in the wind. One thing that makes trading stocks so confounding is that the buy and sell points appear so obvious in hindsight.  When examining a stock’s price chart over a multi-year duration the wave movements appear to be almost predictable.   The...
  • How Dangerous is the Month of October?
      A Month with a Bad Reputation A certain degree of nervousness tends to suffuse global financial markets when the month of October approaches. The memories of sharp slumps that happened in this month in the past – often wiping out the profits of an entire year in a single day – are apt to induce fear. However, if one disregards outliers such as 1987 or 2008, October generally delivers an acceptable performance.   The road to October... not much happens at first - until it...
  • Yield Curve Compression - Precious Metals Supply and Demand
      Hammering the Spread The price of gold fell nine bucks last week. However, the price of silver shot up 33 cents. Our central planners of credit (i.e., the Fed) raised short-term interest rates, and threatened to do it again in December. Meanwhile, the stock market continues to act as if investors do not understand the concepts of marginal debtor, zombie corporation, and net present value.   The Federal Reserve – carefully inching forward to Bustville   People...

Support Acting Man

Item Guides

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com