From Tyler Durden: While rising treasury yields may be music to the ears of savers who have been crushed by low interest rates over the past 7 years, they’re a bit of downer for the overwhelming majority of Americans that have been funding their lavish lifestyles with cheap debt.
Yes, sadly the days of upgrading to the $65,000 luxury car despite a $40,000 annual salary, because you can “afford it” so long as you can cover the low monthly payments courtesy of 7-year terms and low interest rates, may finally be coming to an end.
But auto OEM’s aren’t the only ones about to get crushed by the “normalization” of interest rate policies in the U.S. As the Wall Street Journal points out, according to the Mortgage Bankers Association, mortgage refinancings are set to drop 46% in 2017. And with many American’s funding their daily expenses with “cash-out” mortgage refi’s, pretty much everyone selling goods to consumers, which happens to represent about two-thirds of the economy, has reason for concern.
The fast rise in rates has spurred homeowners to pull back from refinancing their mortgages. Applications dropped 3% in the week ended Nov. 18 from the prior one, the seventh consecutive weekly decline, and the second since Election Day, according to data released Wednesday by the Mortgage Bankers Association.
The MBA estimates refinances will fall 46% next year, to $484 billion, which will hurt Americans’ ability to free up cash by reducing the cost of their monthly mortgages. The fall in refinances also will hit an important area of consumer-loan growth for banks. To slow the possible damage, banks already are pitching riskier loans that come with adjustable interest rates or allow borrowers to pull more equity out of their homes.
“The increase in rate has shocked consumers…I didn’t expect it either,” said Dave Norris, chief revenue officer at LoanDepot, the 10th largest mortgage lender in the U.S. by loan volume.
This month’s rate increase has eliminated a large share of borrowers for whom refinancing would make financial sense. Before the election, 70% of all borrowers with a 30-year fixed-rate conforming mortgage stood to incur at least a half a percentage point in savings by refinancing. Now only 35% of borrowers are eligible for such savings, said Walter Schmidt, who tracks mortgage-backed securities at FTN Financial.
While mortgage applications have risen in recent weeks as people have rushed to lock-in rates, eventually the MBA expects rising rates will take their toll on new mortgage originations as well with estimates calling for a 16% drop in volume in 2017. Of course, with American’s linking “affordability” solely to monthly mortgage payments, it would stand to reason that rising rates would put pressure on home prices over the coming months/quarters.
The impact on home buying may be less clear-cut, but some buyers have rushed to lock in terms before rates rise further. In the week ended Nov. 18, applications for mortgages to purchase homes jumped 13% from a week earlier and were up 11% from a year ago, the MBA data showed.
Eventually, though, rising rates make houses less affordable, and that could lead to slowing sales, price growth and mortgage activity. Some analysts are now projecting home values will decline by the end of next year in many U.S. housing markets.
The MBA lowered its projections for next year’s new mortgage loans by 3% last week, to $1.58 trillion. That would represent a 16% drop from the nearly $1.9 trillion in mortgages that lenders are on pace to originate this year, with refinancing accounting for all of the drop.
Meanwhile, as the MBA points out, as refinancings sink, volume levels of the good ole “adjustable-rate mortgage” have surged in recent weeks as lenders/buyers scramble to salvage existing purchase contracts by maintaining monthly mortgage payments despite higher rates.
“Refinance volume dropped further over the week, particularly for refinances of FHA and VA loans. Purchase volume increased sharply for the week compared to both last week, which included the Veteran’s Day holiday, and last year, with purchase volume up more than 11 percent on a year over year basis. The increase in purchase activity was driven by borrowers seeking larger loans and that drove up the average loan amount on home purchase applications to $310 thousand, the highest in the survey, which dates back to 1990.”
The refinance share of mortgage activity decreased to 58.2 percent of total applications from 61.9 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 5.2 percent of total applications.
As a reminder, on Friday, housing market expert Mark Hanson pointed out something similar when he calcualted that to buyers who are in need of a mortgage, “houses have never been more expensive.”
Houses have NEVER BEEN MORE EXPENSIVE to end-user, mortgage-needing shelter buyers. The recent rate surge crushed what little affordability remained in US housing. It now it requires 45% more income to buy the average-priced house than just four years ago, as incomes have not kept pace it goes without saying.
The spike in rates has taken “UNAFFORDABILITY” to such extremes that prices, rates, and/or credit are now radically out of scope.
At these interest rate levels house prices are simply not sustainable even in the lower-end price bands, which were far more stable than the middle-to-higher end bands (have been under significant pressure since spring).
Hanson then showed the following “bonus chart” revealing in which metro areas the second housing bubble can be found:
Should rising rates finally put a lid on demand for real estate, it will be so long to the “Obama recovery” – at least there’s a new regime that can take the blame for the unwind of the largest financial asset bubble in history.
The Vanguard REIT Index Fund (NYSE:VNQ) fell $0.08 (-0.10%) to $80.10 per share in premarket trading Monday. Year-to-date, the largest real estate-focused ETF has gained just 0.56%.
This article is brought to you courtesy of ZeroHedge.