Low Rates and Limited Liability Mean Hot Markets

What clear-eyed mortgage underwriter would sign on to a thirty-year loan at less than 3 percent? After all, in Las Vegas, for instance, the unemployment rate in November was 11.5 percent, second highest in the country. The city’s main engine, tourism, has been stymied by covid. But, as if there were nothing wrong, nothing to see, or no risks to consider, new home sales are on the verge of being the highest in 2020 since the historic housing-boom year of 2007. 

“Heading into the final month of 2020, the housing market in Southern Nevada continues to impress and defy normal seasonal trends,” Smith wrote in the Home Builders Research monthly report cited by Eli Segall in the Las Vegas Review-Journal. “Despite the continuing uncertainty of the pandemic, low interest rates and low inventory have kept both new and resale homes moving at unprecedented levels for this time of year.”

Realtors I know are swamped. They’ve never been so busy, despite mask wearing and virtual showings. The resale market set another record (that’s six months in a row) for the highest median price, $345,000. 

“On the construction side,” Segall writes, “development plans have ramped up. Builders pulled nearly 10,400 new-home permits this year through November, up 6.6 percent from the same 11-month period last year.” 

While 9 million jobs were lost nationwide in November, as Wolf Richter perfectly describes the situation,

the housing market has gone crazy in many parts of the country—a phenomenon of the Pandemic stimulus extend-and-pretend forbearance free-money foreclosure-ban economy…from February—and that this crazy housing market couldn’t last has become apparent to everyone months ago.

On the finance end, Mark Cabana, head of US rates strategy for BofA Securities, told the Financial Times’s John Dizard: “There is going to be a train wreck at the front end of the [Treasury] curve next year (2021). There is way too much cash chasing too little paper.” Meaning, as Dizard writes, “Given what we know today about the US government’s likely spending over the next several months and its cash on hand, it is possible, even likely, that Treasury bill rates will be negative for a significant period of time.”

What’s this mean for mortgage rates, typically priced off the Treasury curve? Credit Suisse strategist Zoltan Pozsar told the FT: “Yes, a bill shortage would radiate out the curve, to the two-year and three-year, out to the belly. If on top of that there is a flight to quality, it would exacerbate that move.” 

Referring to Dizard’s FT piece in a series of tweets just after Christmas, Bank analyst Chris Whalen said, “With 30-year conventional mortgage rates closing in on 2.5% APR and the FOMC [Federal Open Market Committee] buying 1.5% MBS coupons as part of quantitative easing, this is a good time to take cash off the table in IMBs and REITs [real estate investment trusts], and go buy a well-located residential home.”

Perhaps the rush to buy homes makes sense. And then there is this: “Total inventory for sale at the end of November declined to 1.28 million homes, down 22% from November last year, for a supply at the current rate of sales of 2.3 months, an all-time low,” Wolf Richter points out. While some cities are losing population and housing inventory is increasing, nationwide housing inventory is slim pickings.

Private lenders aren’t driving this home purchase–palooza. Fannie Mae, Freddie Mac, and the FHA (Federal Housing Authority) guaranteed $7 trillion in mortgage paper as of 2019, which was “33 percent more than before the housing crisis,” the Washington Post reported.

The taxpayer is backstopping more credit risk than ever. The Post reported that nearly 30 percent of the loans Fannie Mae guaranteed were to borrowers whose house payment exceeded half of their monthly income, up from 14 percent in 2016. “At the FHA, 57 percent of the loans it insured breached the high-risk echelon, jumping from 38 percent two years earlier,” Damian Paletta reported for the Post. 

In a dozen states, mortgage loans are nonrecourse, meaning that if the owner defaults the lender can only foreclose on the collateral; the rest of the borrower’s assets cannot be pursued. After the crash of 2008, Nevada changed its laws and is now a nonrecourse state in some situations. 

The twelve nonrecourse states, per financialsamurai.com:

• Alaska

• Arizona

• California

• Connecticut

• Idaho

• Minnesota

• North Carolina

• North Dakota

• Oregon

• Texas

• Utah

• Washington

It’s no wonder some of these states are the fastest growing in the country.