2014 was unique but predictable in regard to mortgage demand for purchase applications. Looking back on the data now, it was down every single week of the year, year over year, and negative by double digits every week except for four weeks. The good news ( cough cough) is we have pulled ourselves out of the morass that was 2014 and the New Year is upon us.
Comparatively speaking, my outlook for purchase applications is not as negative this year. My 2015 housing predictions include at least 5%-10% growth, year over year, in purchase applications. This is primarily due to having such a low bar in 2014.
Because we experienced 21st century lows in mortgage purchase applications in 2014 and we are now in the 7th year of this economic cycle with employment to population rising, it is not a stretch to expect at least 5%-10% year growth in this purchase applications in 2015. Of course, year over year growth in purchase applications doesn’t mean a recovery when we experienced such low numbers in 2014. Expect housing bulls to highlight the year over year growth without adding the appropriate context.
Let’s remember the 2014 bar for housing metrics is low as is shown in this graph from Anthony Sanders.
With regards to interest rates, the ten-year note is near my predicted low-level range of 1.60% , keeping mortgage rates near the lowest rates of this economic cycle. If the 1.60% level breaks lower, expect a new low print of 1.34%.
However, if I am wrong and we don’t see any growth in 2015 purchase applications and existing home sales stay flat or even go negative, then we will need to admit that home prices have surpassed peak affordability in relation to income capacity. We know this is true for some areas of the country already. The rich can only buy so many homes and there hasn’t been strong household formation to drive first time home-buyer demand. No matter how low rates go, no matter how many jobs are created, no matter what all the king’s horses and all the king’s men try to do… if we don’t have and uptick in household formation and see wage growth, we will not have a true housing recovery.
From now to the end of March we should see some positive year over year prints. By the end of March we will be able to tell how the rest of the year will shape up. I expect existing home sales to benefit from the massive price inflation we saw for new homes in the past few years. In 2015 builders are unlikely to cut prices in order to be competitive with existing homes. New home sales only make 1/10th of total sales though, so the buyer switch from new to existing homes will only have a marginal impact in total home sales.
I expect our prime middle class mortgage buyers to move forward with caution, to be price sensitive and budget conscious and thus drive a trend toward the purchase of older less expensive homes which will marginally help the total existing home sale numbers . And to that rejection of builders over pricing homes I say “Bravo”!
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
Thanks Logan. As a potential future home buyer, I’m particularly interested in your expertise and analysis. Regarding new construction, you’re dead on. I’m amazed at what new homes are going for relative to pre-existing right now. These national builders come in and throw together a new home in what seems like a day, and list it for $500k! It’s shiny and new but the structural integrity is a mess with corners being cut all over. It seems like all they need to do is check all the boxes. I think 5 – 10 yrs from now, the issues will be revealed (mold, air leaks, water, foundation cracks, rotting materials, etc.). Keep up the good work!
MI2MP model for new homes
Median Income to Median Prices show that not only new homes are at the most expensive ratio to median incomes, but we also have the biggest gap from new to old in terms of prices.
2014 was supposed to be a 25% sales year for new homes and most likely it will be revised negative year over year.
People are smarter than the builders gave them credit for.
Existing
inventory is coming back and it’s cheaper and has a geographical edge
Could we have more future home buyers like Jack, please? I know two different people in new construction where insulation wasn’t right. When I pointed it out, the simply didn’t know it.
Logan, I’d like to add, mortgage purchase applications may be higher this year, but … you already know this … inventory is extremely low where it counts (rent or buy)! It’s upping prices even in areas it shouldn’t. Stalled incomes aren’t so much an issue; it’s price. As you pointed out, new construction is the first to feel it.
There are two housing stories for sure: the mid-to-high end where there’s location / incomes / demand (now saturated) and then the rest. Single family residential rentals (lifestyle without the hassle) are also affecting supply and demand.
In central Ohio, the lower-to-mid end has plenty of inventory. It’s the bulk of inventory numbers. Problem is that they’re over-valued, then location and condition aren’t appealing (further showing they are over-valued). Investors won’t touch them, because again, they’re over-valued! This half can only be corrected with even more supply eventually deflating footballs … errr … values.
I have a friend who’s priced out. What’s left isn’t appealing at all … translation: keep renting until things correct further. ***He’s been sitting, a couples of months now, on an approval.*** A home isn’t something the majority will simply settle for.
Price, more than income, is the major problem right now. Correct prices = correct housing on both ends. People are moving, even entire companies are moving, to other states for this very -quality of life- reason. Which is most likely to happen first (or at all): higher incomes catch up to price or lower prices align with income?
Here is why I don’t believe in the inventory demand thesis 100%
We had more net housing demand in 2013 than we did in 2014
This with lower inventory and higher rates in 2013
So what happened in 2013
We had the biggest price gain this century outside the housing bubble years leading to much higher PITI inflation than what median income and wage growth can handle.
This is a model housing pundit & economist don’t use.
I spoke recently at the BNY Mellon Stock Conference with Bloomberg Financial talking exactly about this and showing why my model showed housing demand was slowing down.
Here is the link
http://loganmohtashami.com/2014/12/04/bloomberg-financial-interview-at-the-bny-mellon-conference-housing-reality/
Back in May of 2013 I wrote an article calling for the 2nd hand of inflation, rising rates would impact demand, because we had weak internal demand but no rate inflation which goes into PITI model
If we look back at the data the start of May when I wrote that article was the start of the bear market for mortgage purchase application
http://loganmohtashami.com/2013/05/07/housing-mammoth-stuck-in-tar-has-bigger-problems-to-worry-about/