Mortgage Purchase Applications Near 21st Century Lows As Q.E. Ends

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Lets be honest here.

Why are mortgage purchase applications near 21st century lows with rates  near 4% and homeownership rates at a 19 year low, a number which is artificially high because it includes  delinquent homeowners. There are still 3 million loans in delinquency which means we will have a lot more future renters coming on-line.

An overview of these metrics for the past 20 years illustrates the real story for housing:

- Real Median Income
– Employment to Population Ratio
– Average Wage Growth Year over Year
– Mortgage Purchase Applications
– U.S. Homeownership Rates

From Professor Anthony Sanders

http://wp.me/p1rch2-9Vx

horincome

This economic cycle has seen great demand from cash buyers, renters and rental
construction. However, mortgage demand from main street has been sleepy.

http://wp.me/p1rch2-9VI

mbapsa102914

We have lower rates in 2014, higher inventory and rising rents and still demand shows no growth.

Still think lending is too tight?  Advocates of the “tight lending’ theory lack a financial lending background. We can clearly see that main street America needs to make more money to have the capacity to own the debt of a home. We don’t need to ease lending standards, Americans need a raise.

As QE is over today we can  also take joy that those crazy home loans are deep in the economic grave as well.  That’s a good thing.  Residential lending is based on debt-to-income ratios and availability of liquid assets — which means now people have to make money in order to get a loan! Disability payouts and food stamp are on the rise in this country and we are looking for a housing recovery from main street? Tsk Tsk.

The “saving grace” for housing in this cycle  is that we have  the rich, both foreign and domestic, buying homes with cash.  If  the rich weren’t buy homes with cash at 20% above historical norms, then sales would be down -13% to -17% year over year.

When asked to give an opinion as to why Warren Buffet is terribly confused by the low housing demand when rates are so low; my answer:  It’s not rocket science, it’s simply math.
My Q&A with Mutualfunds.com

http://mutualfunds.com/q-and-a-and-interviews/interview-with-logan-mohtashami/

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com

Collapse of the 10 Year Note Yield and What it Means to You

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Logan Mohtashami, Benzinga Contributor

With the violent drop of the 10 year note yield in the past two days, from 2.28%  to 1.95% , we can expect changes in the mortgage rates offered by the major banks as well. Wall Street “analysts” who predicted the 10 year yield of 3.5% and 4% for the 10 year note in 2014 should hang their heads in shame as making the worst 10 year note calls on record.

 

On Main Street, where the rest of us live, we see refinance rates as low as 3.875% for the most qualified home owners and 4% seeking a no cost loan.

 

Unfortunately, I don’t expect these lower rates to have much of an effect on housing demand. Despite rising inventory and lower rates (typical drivers of housing demand) year over year demand in 2014 has been negative.  The current low rates will not change that because it is not mortgage rates that are keeping buyers out of the market.  Our fellow Americans simply don’t make enough money to own the debt of a home, and until incomes go up or housing prices dramatically decline, that hard truth will continue to suppress housing demand.

 

Right now, people who bought their homes in late 2013 and early 2014  may be good candidates to refinance their mortgages. Having said that, refinance activity is down 72% from the peak in May of 2013 because many  already have lower rates and this recent move down won’t mean much to them.  Therefore, people who can take advantage of these lower rates will only be a small pool of home owners. For those with the sufficient equity to eliminate their private mortgage insurance due to recent home prices gains, could benefit by refinancing.  Others may benefit by combining their first and second loans into one at a new loan as well. For the rest of us, however, we should not expect lower rates to boost housing and/or the economy as a whole. We simply don’t have enough qualified home buyers in America!

Chart from Professor Anthony Sanders
http://confoundedinterest.wordpress.com/2014/09/17/got-rent-homebuilder-confidence-rises-to-9-year-high-despite-stagnant-wages-and-declining-labor-force-participation/

hpdata

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com

Economic Denial From Builders: The Sequel

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Logan Mohtashami, Benzinga Contributor

On this date last year I shared a chart with CNBC’s Diana Olick, which indicated how far removed home builders were from economic reality. Titled appropriately “Economic Denial From Home Builders” the chart and article can be read here:

http://loganmohtashami.com/2013/09/17/economic-denial-from-home-builders/

Now, one year later, the builders have raised confidence to yet a higher and ever more disconnected from reality level, by reporting confidence levels equal to the number recorded back in November of 2005 . At that time, numbers of total starts were quite high compared to today’s numbers. Also, it is notable that November 2005 was in the middle of the housing bubble being formed

Below a chart, from Diana Olick on CNBC, illustrates the current disconnect. As can be seen, we are witnessing the summer sequel of economic denial by home builders.

Embedded image permalink

An irony to this is that 2014 has been the most disappointing year from new home sales and starts that I can remember since I began tracking housing data. A year which sales growth was expected to rise 20% or more, and starts expected to show growth in single family starts too, is puttering to a point at which we are questions if sales and single family starts are even going to be positive year over year. As for starts, those are led by multifamily expansion, which has been booming in this cycle for good reasons, but not reasons which bode well for single family housing.

One reason for these trends, I believe is that new home buyers are more interested in the fresh existing inventory crop that is coming back to the market, than buying a new home. Why would this be?

Existing inventory provides two advantages to a buyer

1. Much cheaper

2. Geographical advantage in any given city

At the beginning of the year, my conservative outlook was for 8% sales growth year over year due to the  “low bar we had to beat” factor and that the new home buyers are coming from more affluent class of Americans. But now, even 8% is looking doubtful

As always housing is soft because we have a DTI ( Debt to Income) and LTI (Liabitly to Income) problem. Another great chart from Professor Antony Sanders

http://confoundedinterest.wordpress.com/2014/09/17/got-rent-homebuilder-confidence-rises-to-9-year-high-despite-stagnant-wages-and-declining-labor-force-participation/

hpdata

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com

Rising Inventory & Low Rates Hasn’t Created More Housing Demand

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Logan Mohtashami
, Benzinga Contributor

Simply put, the lack of recovery in housing demand is directly related to the a lack of recovery in real median income and growth in year over year average hourly wages. Yet many have failed to recognize how important wages and liquid assets are to creating  real demand in the housing market.  This, in spite of the preponderance of evidence presented to us from the likes of the distinguished and insightful Professor Anthony Sanders who has provided pictorial analyses  of this issue, such as the chart below.

 

http://confoundedinterest.wordpress.com/2014/08/06/death-valley-mortgage-purchase-applications-drop-1-56-from-previous-week-down-16-from-last-year-no-recovery/

Embedded image permalink

 

Three other important indicators, which typically drive an increase in home purchases, rising rents, rising housing inventory and lower mortgage rates, in this climate seem to have no effect – signaling a fundamental softness in the housing market in 2014.

- Rising rents: Even with rents consistently rising in most markets demand for housing from the mortgage buyer remains soft.  The buying a home is cheaper than renting thesis sounds good, but didn’t work out too well in this cycle. Mortgage buyers have been below historical norms through out this housing cycle.

- Rising Inventory: Even with more homes on the market this year than last year,  demand for housing from the mortgage buyer & the cash buyer has been less year over year. On a positive note we are seeing a cooling off on price gains and this is a good factor for the housing market, not a bad one.

- Lower Mortgage Rates: Even with mortgage interest rates falling from Jan 1, 2014, demand for housing from the mortgage buyer has been negative year over year all year long. The 10 year is yielding a whopping 2.34% as of the close of August 15, 2014. We have taken back the Taper Tantrum of 2013, but with home prices still rising the total cost of a home is still higher even with mortgage rates being the same.

 

When three economic factors  that have historically driven buyers into the market are having little to no effect, one must suspect a significant change in the economic fundamentals. Low wages,  a buildup of household debt and a lack of liquid assets combined with increasing purchase prices for homes means many if not most Americans cannot afford to buy.   Until wages grow, liquid assets get built up and home price gains cool down, it’s going to be a long slow climb for the housing market.

As I  discussed in the recent article published in Origination News, lending standards cannot be blamed for the soft housing.  We simply do not have enough qualified home buyers – ie those with sufficient income for both the down payment and the monthly mortgage expense plus tax and insurance.

http://digital.originationnews.com/originationnews/august_2014?pg=16&pm=2&u1=texterity&linkImageSrc=%2Foriginationnews%2Faugust_2014%2Fdata%2Fimgpages%2Ftn%2F0016_kennxg.gif%2F#pg16

In a recent television interview with CNBC, I reiterated this point, emphasizing that the weakness in housing is due to a lack of income – not lack of credit availability. Starts at 10:27 into the show

If you want a strong housing market you need Main Street America to have the capacity to own the debt of housing.  The housing market must be less reliant on cash buyers and the wealthy. It needs a big dose of Main Street America participation to see year over year growth in existing home sales again. For that to happen, it will require more income & liquid assets and not easing of lending standards.

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com

Housing 2014 Mid-Year Update: The Rich Have Their Cake And Eat It Too

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Logan Mohtashami, Benzinga Contributor

As the housing selling season winds down with the end of spring and the beginning of the summer months, it is a good time to get informed perspective of housing demand for the year. This can be gleaned from three major metrics; mortgage purchase applications,  existing home sales and new home sales, year over year (YoY).

Six months of data for the first indicator, mortgage purchase applications, shows applications significantly down compared to the same period last year.

1. Mortgage purchase applications are down -16% YoY.

(All charts from Professor Anthony Sanders)

http://confoundedinterest.wordpress.com/2014/07/02/still-dead-mortgage-purchase-applications-decline-16-yoy-refinancing-applications-up-0-1/

mbapnsa070214

Mortgage demand has been soft since interest rates rose in May of 2013. Even though we saw the typical seasonal pick up on total volume for the first half of the year, year over year purchase applications have been down double digits.

Because the interest rate spike that started in May of 2013 lead to a larger decline in purchase applications than one would expect due to seasonality, the YoY purchase applications comps for the second half of 2014 will look “less bad”. If we don’t see a single digit YoY decline in applications then demand is truly weaker for the second half of the 2014.

2. Existing Home Sales – 5% YoY

5 months of data year to data.

http://confoundedinterest.wordpress.com/2014/06/25/death-valley-days-mortgage-purchase-applications-fall-again-down-18-since-last-year/

ehs062314

Cash buyers continue to prop up existing home sales, staying above the 30% level of total buyers of existing homes . Historically cash buyers are 10% of the market. Cash buyers are up slightly from last year, but the total number of homes purchased with cash is lower due to the smaller number of distressed homes on the market. This YoY metric shows how soft the demand is from traditional (mortgage) buyers.  First time home buyers as a percentage of all mortgage buyers have been in a range of 26%-29% for 2014, below their historical norm of 40%.

We can expect 1 to 2 more months of increasing sales before the dampening effects seasonality kicks in, as happens each year. 2013 had a  peak Seasonal Annual Adjusted Rate of Sales (SAARS) of 5.39 million. I project  a peak SAARS of  5.14 -5.21 million in the up coming sale reports but even with more homes on the market, we will not see growth from last year.  Look for total sales to be between 4.78 million to 4.93 million.  There is not enough demand to have even a flat year in sales, year over year, even with increased inventory.

3New Home Sales +1% YoY


http://confoundedinterest.wordpress.com/2014/06/24/case-shiller-home-price-index-increased-10-8-yoy-in-april-new-home-sales-increased-18-6-in-may/
nhs062414

The last metric, YoY New Home Sales are up! — but only by 1%. This sector is primarily driven by the wealthier buyer and is composed of only about 15% of first time buyers. I expected this number to be higher because  historically new homes are about 1/6th of the market and in the last year they were only 1/10th of the market, so there was lots of room to grow. The weakness in this sector can be explained by the fact that the Median Income to Median Price (MI2MP) for new homes is well above what is was during the housing bubble years. These homes are just too expensive for many main street America buyers.

 Having said that, we should finish the year with total growth of 8-12% YoY in new home sales. There is also growth in housing starts, sales and permits– boosted by rental construction demand and demand from wealthy buyers. With the inventory of existing homes rising, some buyers in 2015 will be weighing the comparable value of  existing homes to the pricey new homes. That could be an interesting economic dynamic to watch for in 2015.

Home ownership in the current economic climate is  heavily tilted toward the wealthy — those with good incomes or cash to buy. The metrics for housing show decreased mortgage applications, decreased existing home sales, with a high percentage of cash buyers, 4% YoY increase in sales for existing homes priced over 1 million dollars, 1% increase in new homes sales and strong demand in construction for rental housing.

Not only are there not enough first time home buyers in the market but I am seeing financial stress among move-up buyers.   This year, like I saw with first time home buyers 2 years ago,  are having to stretch above their comfort payment level. This doesn’t mean they don’t qualify for a home loan, but the total payment is more than they anticipated.   However, for 2014 move-up buyers were in the market.  It will be interesting to see what happens next year.

Organic housing sector growth in 2015, will require significant wage growth to balance the skewed MP2MI equation for both new and existing homes. Simply said, the low wage job recovery cycle has been hobbling housing and we will not see a healthy housing market until we see a higher paying jobs market. One possible bullish note for next year is that the job gains so far this year have been on average a higher than expected 230,000 per month. Interestingly, job gains really began to pick up once the federal unemployment benefits expired. More importantly, higher wage jobs are making up a bigger part of new jobs. We are now seeing approximately 58% to 42 % higher wage to lower wage new jobs. If this trend continues and if we get up to 67% higher wage jobs, we should start to see a more mortgage buyers in the housing market because these wage earners should be able to afford the total payment, especially in the more affordable areas of the country.

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com

Housing Hobbled By Low Wage Recovery

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Logan Mohtashami, Benzinga Contributor

At the recent Chicago Booth Conference in Los Angeles, Professor Amir Sufi and I had an opportunity to discuss his  excellent new book, House of Debt, which lead to a further discussion on why housing has been  soft for years.  Three points are worth repeating.

First, even though interest rates  have been low for a long period,  mortgage buyers financial profiles aren’t strong.   Unlike during the housing bubble and tech bubble of the last 2 cycles, our economy has not generated decent wage jobs — rather we have seen a growth in low wage service jobs. This is one of the major reason why housing has been much weaker in this cycle, even with the starkly lower rates. Without a third financial bubble to create fake demand for fake good paying jobs, our  capacity for growth in the housing market is limited.

Second, consider the effects of my proverbial “four horse men of housing– “Globalization, Technology Demographics and Debt. These four economic forces have contributed to wage deflation for middle and lower class Americans. In certain sectors, technology has  enhanced wages for those at the top while eliminating jobs at the lower end. Net asset inflation has also been a boon for capital gains income (again, preferentially helping those at the top) while low-interest rates are preventing cash savers from earning anything . While this housing cycle is strong with cash buyers, it lacks mortgage buyers. My original thesis on housing still stands;; we simply don’t have enough qualified home buyers once you x out the cash buyers.

Third, although wage inflation for most Americans has been nonexistent, housing inflation is artificially high. Consider that we have seen a 15%-45% rise in home prices in the last 2 years, concurrent with a parabolic rise in student loan debt since 2007. Wage growth on the other hand, is barely over 2%,  below rent  and housing inflation. People who complain that lending standards are holding housing back simply have forgotten math

We cannot expect new home construction to bolster the economy like it did in previous economic cycles.  Construction while growing is going to be light in the near term because we  over built during the period when we thought every American should own a home. While homes were sold to “anyone with a pulse”, many of those purchasers did not have the capacity to  carry that debt burden.  Rightly so, lending standards have gone back to normal so those unqualified buyers are not coming back. Nor should we tempt them to do so or ease standards to allow them back into the housing market. As a country we will have a good size demographic group ages 20-35  that will naturally be renters not buyers. So, the recent demand we have seen in multifamily construction from the builders is  warranted

The Chart below from Professor Anthony Sanders clearly shows a lack of income is the real problem, not tight lending standards.

http://confoundedinterest.wordpress.com/2014/06/13/imf-sounds-global-housing-bubble-alarm-us-uk-australia-all-above-10-yoy-growth/

csyoyfedinc

Remember a big portion of the jobs recovered following the recession were from the low-level service jobs sector which does not generate the income needed to support  mortgage debt. We have gone from 18%  to 3.25% mortgage rates and yet we have more buyer stress at 3.25%-4.25%. Today we have a housing affordability crisis for the rental market due to a lack of wage growth and decent base salaries. So, it will be obviously much more difficult for Americans, barring the rich and very strong middle class, to own the debt of housing. The reasons have more to do with economics than the myth that lending standards are too tight.

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com and contributor for Businessinsider.com

Interview With American Banker On Tight Lending Myth

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Logan Mohtashami, Benzinga Contributor

Will Looser Credit Jump-Start Housing Market or Overheat It?

http://www.nationalmortgagenews.com/news/origination/will-looser-credit-jump-start-housing-market-or-repeat-its-woes-1041814-1.html?

By Kate Berry

Regulators’ recent moves to encourage lenders to relax standards have reignited a contentious debate over whether looser credit will revitalize the housing market or set it up for another disaster.
Some experts say the changes by the Federal Housing Finance Agency and the Federal Housing Administration will help the housing recovery that lost traction a year ago, when interest rates jumped and mortgage applications collapsed. Others say lending to weak borrowers will drive up home prices in the short term but lead to more foreclosures down the road.

Still others say the changes will make little difference either way.

“We simply don’t have enough qualified homebuyers even with mortgage rates getting as low as 3.25%,” says Logan Mohtashami, a senior loan officer at AMC Lending in Irvine, Calif. “We’re coming off a debt-asset bubble and deleveraging of mortgage debt is still going on. How much more risk do regulators want lenders to take?”

Lending standards are already quite liberal, Mohtashami contends. Far from restricting credit, he argues, lenders have been making loans to borrowers with low credit scores, low down-payments and high debt loads since the housing crash (through FHA, for example). In that light, the changes announced by new FHFA Director Mel Watt and FHA Commissioner Carol Galante amount to tweaks on the margins.

“It won’t do anything for demand,” Mohtashami says. “An economy with low wage jobs cannot fuel a housing market that has seen home prices rise 40%.”

Watt, in his first major announcement as head of the FHFA, the regulator and conservator of Fannie Mae and Freddie Mac, moved to reduce the risk to lenders of having to buy back defective loans. The aim is to embolden lenders to remove so-called credit overlays—FICO score requirements of 680 or so that are used to screen out borrowers with a higher probability of default. Starting in July, the government-sponsored enterprises will allow lenders to “cure” loans that have nitpicky defects, rather than making them repurchase the assets. The FHA is advancing a similar quality assurance plan meant to ease lenders’ fears of having to indemnify the agency for losses on loans to riskier borrowers.

Those changes, combined with the recent dip in mortgage rates and easy comparisons with home sales a year ago, could spark a rebound in lending in the second half, some lenders and analysts say. A drop in rates “is a big plus, particularly in the context of the opening of the credit box,” says Mark Zandi, chief economist at Moody’s Analytics. “We’re counting on it because the housing recovery is so vital to the economy.”

Indeed, housing’s doldrums are now threatening to derail a full economic expansion, sparking ominous comments from Federal Reserve Chairwoman Janet Yellen and Treasury Secretary Jack Lew. Single-family originations fell 27% in the fourth quarter to $293 billion, according to the Mortgage Bankers Association, and many lenders suffered another 30% drop or more in the first quarter.

Zandi, who is leading the charge for looser credit, has long claimed the pendulum has swung too far. Easing up on mortgage buybacks and urging lenders to eliminate credit overlays will go a long way toward a normalized market, he says.

“There are a lot of creditworthy borrowers who cannot get credit and so it’s very reasonable to ease underwriting standards, mostly by lowering FICO scores,” Zandi says. “If housing doesn’t pick up, then we’ll be stuck in a slow-growth economy.”

But with unemployment still high and wage growth persistently weak, some critics say policymakers are setting the stage for another housing recession.

Despite rising home prices, many homeowners are still living in the aftermath of the financial crisis.

Six and a half million or so borrowers are underwater, owing more than the value of their mortgage, according to CoreLogic. Another 10 million have insufficient equity to sell their homes and buy another. Another 3 million homeowners are in some stage of delinquency, which is 50% higher than the current inventory of homes for sale. Cash buyers make up 30% of homebuyers, up from 10% in a normal market, and have been the major driver of home price increases.

Ed Pinto, a fellow at the American Enterprise Institute and longtime critic of government intervention in the housing market, called the changes the regulatory agencies announced last week “the official launch of subprime 2.0.”

Without lender overlays, the FHA’s minimum requirements of a 3.5% downpayment and 43% debt-to-income level and no set credit score are a recipe for default, he says.

“We have a curious policy of taking the most vulnerable potential homeowners with the most volatile income streams, and urging them to buy homes in the most price-volatile neighborhoods, and then wonder why they don’t gain wealth,” says Pinto.

Some housing experts argue this time around is different.

The Dodd-Frank Act and other reforms enacted in the wake of the financial crisis eliminated the egregious loan products that pushed many borrowers into foreclosure. Loans with teaser rates, balloon features, and negative amortization do not meet the “qualified mortgage” requirements of the Consumer Financial Protection Bureau. In addition, all lenders are required to assess a borrower’s ability to repay a loan.

“There is abundant data that shows standard loans, even to low-FICO borrowers, did extremely well through the crisis,” says Mike Calhoun, the president of the Center for Responsible Lending, an advocacy group in Durham, N.C. “Product type was the overwhelming determinant of default rates.”

Dick Bove, vice president of equity research at Rafferty Capital, sees a political impetus for the Obama administration to relax credit standards. Democrats desperately need strong GDP growth of at least 4% heading into the midterm elections if they are to have a shot at wrestling control of the House away from Republicans, he says. Meanwhile, the QM rule that went into effect in January has prevented first time homebuyers and many minorities from qualifying for home loans.

“We heard very clearly from Yellen and Lew that we need housing,” Bove says. “These guys want the House of Representatives and they’re not going to get it if the economy and housing are not strong. So they have to change the rules and come up with a mechanism for allowing low-income people to buy houses.”

Even if lenders do relax some credit requirements, it will take some time for the changes to take hold. Mortgage executives are hardly rushing to their boards of directors suggesting they lend to borrowers with weak credit or that loan repurchases are a thing of the past.

“The largest banks have felt so bruised by buybacks that a move in their direction doesn’t really take back the bitterness of their past treatment,” says Jim Vogel, head of agency debt research at FTN Financial in Memphis, Tenn.

Internal data from lenders shows overall demand is soft, Mohtashami says.

“We’re in year six [of the post-crisis era] and if you’re in the business, you knew that we never had the goods but they always blamed tight lending,” he says. “It is so frustrating.”

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com and contributor for Businessinsider.com