Mortgage Purchase Applications’ Falling Slope
Recently we saw that the mortgage purchase application number had its first negative year over year number on the 4 week moving average.
Even though interest rates are still below 5% and have made a recent pull back, the trend has been negative since mortgage rates started to rise in early May.
Now we have a minor slowdown in existing home sales as well. Pundits have always insisted that since rates are below 5% the housing story will stay on its course to nirvana.
However, there are many factors to show that housing isn’t as strong as they may lead you to believe.
Below are five points to consider.
1. The recent NAR existing home sales report shows there are 33% cash buyers in the market place. This is a bad number considering that we are in year 5 of the economic cycle and mortgage rates are yet under 5%. However, this is no surprise to me, because I have been saying for years we simply don’t have enough qualified home buyers.
2. Mortgage Purchase applications chart looks awful. Even in the year that the bulls said housing should prosper, we pulled out a negative year over year report on the 4 week moving average. There are many reasons for this decline in applications. Debt to income and liability to income is still too high for most Americans. Liquid asset availability is light for down payments and closing costs. Falling participation rates means fewer Americans are working. Also, the jobs recovery is layered with low wage paying jobs going to people 50 and over.
3. Home prices rose too fast. I know the Fed is totally in bed with the theory that the wealth factor is great for America. However, there is a price to pay for housing inflation. Not only payments rise but money required for a down payment rises as well. Now the one item that is on the bright side of this problem is that I believe 2013 will be the peak of year over year appreciation. While that may sound like a negative, in reality the best thing to happen for housing is for prices to cool down.
4. No ease in standards is coming. Starting next year a lot of regulations that are for the most part already in the market will be made permanent. I have never believed lending standards are so tight that many Americans are being left out of the market place. And the more I discuss this view with housing bulls who say standards are simply too tight, the more I come to the conclusion that none of them have actually worked on a mortgage in their lives and actually don’t even know the Freddie, Fannie and FHA guidelines.
5. Mortgage Rates, We saw what happened to the market place when the 10 year note went from 1.60% -3% in less than 17 weeks and it’s impact on mortgage purchase applications. Now imagine a mortgage rate at a very ultralow 6%, for now the housing market couldn’t take it. In fact even the Cheerleaders at the NAR believe home sales are going flat. Rates are going up, maybe not like a bullet but will rise in time and we simply don’t have the income growth needed to keep pace.
So does this mean the housing market will come crashing down? Not really, even a bear like me knows that millions of Americans, Hedge Funds, and foreigners will still buy homes. Even I have SAARS running at 5.25 -5.45 million next year which is really a flat year. However, this is based on 30% plus cash buyers and mortgage rates not going anywhere near 6%. Simply put, the U.S. housing market can’t handle fewer cash buyers concurrent with higher mortgage rates because as always, we don’t have enough qualified home buyers. But, in case my point has not been made the third fourth and fifth times, let me make it once more; the reason we don’t have enough qualified buyers is because incomes and liquid assets are light and not due to tight 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 and contributor for Businessinsider.com