Mortgage activity slides 24.3%

Reuters ^ | July 30, 2003 | Reuters

[AntiGuv]

Demand for home loans drying up as mortgage rates continue to climb.

NEW YORK (Reuters) - A rise in interest rates dampened demand for home mortgage refinancings and loans for home purchases last week, an industry survey reported Wednesday.

The drop in demand diminishes the key support that housing has provided the U.S. economy in recent years.

[AntiGuv]

Ping!

[Jim Noble]

I expect house prices to fall by 75% or more.

What do you think?

[AntiGuv]

My ballpark estimate a few months ago was a 20% decline with the housing bubble bursting about April 2004. That's just guesswork however because real estate market shocks are difficult to forecast when boom-bust cycles are so rare. The price decline estimate is based on a correction toward the inflation baseline charted from prior the extraordinary spike in home prices over the past five years.

[AntiGuv]

The April 2004 date was simply based on a two year lag from when REITs peaked back in 2002; however, that's just to give myself a rough time horizon to work with. There's no further intrinsic meaning to that somewhat arbitrary point.

[arete]

Is that a bubble I hear popping?

Richard W.

[babaloo]

The market always takes the excess out. Witness farm prices in the early 80's. Lenders had been handing out dough to farmers based on double digit soybean prices as well as high corn prices. Farmland soared in value. A few years later "good" farmers were forced to sell their property. It was a sad and ugly time in the Midwest.

[arete]

Pushing on a coiled string ping to the (un)ususal suspects.

Richard W.

[Mamzelle]

Housing dropping 75%...

I do expect dropping, particularly of highend housing. A lot will depend on region. Cal, for instance, has a market that doesn't make much sense, but it hasn't made much sense for quite a few years.

Frankly, hasn't everybody already refinanced? Isn't this why mortgage activity has slowed? What scares is that everyone seems to have cashed out instead of merely taking advantage of lower rates.

[isthisnickcool]

July should be a barn burner for refi's and new home loan activity.

[KarlInOhio]

I expect house prices to fall by 75% or more.

75%? Where? In my neighborhood, prices have spiked a little recently. A house a half block away from me sold for maybe 10% more than I thought was reasonable for my neighborhood. I don't know if it had some spectacular remodeling inside, or if it was bought by a refugee from Kookifornia (3 bedrooms and a quarter acre for $120k? That house is easily work half a million). There's no way house prices will fall 75% where I live without a total economic collapse.

[PGalt]

Interesting article. Thanks for posting it.

[KarlInOhio]

That's a good, general purpose statement on California:

Cal, for instance, has ____________ that doesn't make much sense, but it hasn't made much sense for quite a few years.

Just fill in the blank with just about anything.

[Beck_isright]

Pop goes the weasel. So I guess this means that we'll be hearing from the "don't worry be happy" crowd anytime now and they'll say this doesn't mean anything. I love having a historical perspective. It means you can hold an opinion while events happen, and watch everyone else make an *** of themselves.

Ok, bots, flame away.

[Beck_isright]

"I expect house prices to fall by 75% or more."

I will not speak in general, but in Florida, I expect to see home prices cut in half by the end of this decade. There are other reasons for my specualtion on this than just the economy. But based on the current moron running the Fed, this will be a very, very ugly decade as we continue to pay the bills for the 90's.

[MaryFromMichigan]

Good post!
(Great tag, btw)

[FreedomPoster]

>>What scares is that everyone seems to have cashed out instead of merely taking advantage of lower rates.

I keep hearing this being said, but don't see anything to back it up. Everyone I know has refinanced to a) lower payments or b) shorten term (30 => 15). I suppose 1 or 2 might have taken a few bucks out for some remodelling, but they might have done that with a home equity loan in any case. I don't know anyone "cashing out" with a re-fi, though I suppose with all the layoffs, they are out there.

Is there any decent hard data on your claim, or are we all just guessing?

[Beck_isright]

We are all guessing. However I will speak for 5 of my friends who did re-finance, turned around, and bought more expensive cars and paid off credit cards (which they promptly ran back up I'm sure). There are no stats to analyze what happened with the money from all the refis. All we can do is watch what the market tells us about next year.

[Alberta's Child]

One of the more interesting developments of the last couple of months has been the rise in mortgage interest rates even as the Fed has cut rates to historic lows.

This is because mortgages are tied to the interest rates on 10-year (I believe) Treasury notes, not to the Federal Reserve Bank's rates. And the interest rates on 10-year Treasuries are rising for two basic reasons: 1) the ballooning federal deficit, which must be financed with an increasing level of U.S. debt, and 2) the decline of the U.S. dollar, which means that Uncle Sam must offer a higher rate on his debt than before in order to entice foreign investors to buy U.S. bonds.

[Phaedrus]

I expect house prices to fall by 75% or more.

I don't. Housing demand has to do more with demographics and employment than interest rates. A whole lot more than an uptick in interest rates would have to happen to cause a decline of this magnitude.

[Alberta's Child]

The refinancing picture is only part of the story. There are an inordinate number of people out there who purchased overpriced homes in the last couple of years simply because the lower interest rates allowed them to afford them. Their payments will be consistently "low" for as long as they hold the loan, but with a steep price decline they may end up owning a home that is worth less than the mortgage on it.

[I still care]

In my area (Florida)housing prices are going up like mad. I went house hunting this week: new listings pulled up the night before had bids on them by the afternoon. My friend refinaced 6 months ago - His 120,000 house then is now worth 135. It's pretty hard on the house hunter.

[Petronski]

I believe you've nailed it.

[KarlInOhio]

easily work -> easily worth (stupid fat fingers. Who put the k key next to the th key?)

[arete]

Do the words "tulip mania" bring anything to mind?

Richard W.

[FreedomPoster]

That's just stupid, but I suppose there is a fair amount of that, when you put it that way. At least when combined with the stats on credit card debt.

On this last, I wonder how "per capita" credit card debt is computed? Is it "summation of all bills / population" or is it "summation of rolling balance part of the all bills / population"?

If the former, I believe the growth in "credit card debt" must be overstated, as people more and more use their credit cards as "check cards", and to get affinity program (airline, for instance) points, and then pay off the bill each month. We tend to cycle a fairly enormous amount of cash through the card, and pay it in full each month.

[Mamzelle]

Only anecdotes. The wise ones I know are refinancing for lower rates, will put their car loans on their home note for tax purposes, and basically leave that equity alone. The silly I know have refinanced several times to get their payments as low as possible for as long as possible, and they feel that the wise are foolish for "tying up" their money by paying down debt...I guess they plan not to own a home upon retirement, or are building a bankrupcy into their financial plans.

[Orangedog]

Mortgage activity slides 24.3%

And so it begins. I get a lot of grief on some of the econ threads for being too pessimistic about the economy, but that's okay...I can handle that. I just can't understand how anyone can ignore the growing, structural problems with the fundamentals. We're on our way to a $7 trillion federal budget deficit, a balance of trade deficit of that's about 5% of GDP (a figure higher than any other country that I can recall, now or in the past) and obscene levels of consumer and corporate debt.

Greenspan, IMHO, has lost his freaking mind. He started raising rates a few years ago to try and dampen the rampant speculation in the stock market. If he really wanted to get that under control, he could have raisied margain requirememtns for traders but instead decided to go with rate increases. Now the fed is "printing" money like mad in an effort to stave off deflation and another depression. This is playing with fire. At best, we are looking at 1970's style inflation. There is also a very real possibility that the dollar could suffer the same fate as Argentina's currency.

[Orangedog]

There's no way house prices will fall 75% where I live without a total economic collapse.

I believe that is a correct assumption. It's also a very likely possibility.

[Movemout]

Lots of gloom and doom on this thread. I think real estate markets are driven by regional needs not national trends. If you buy anything as an investment you have exposure to risk. I buy a house because I need somewhere to live. Its appreciation/depreciation is a matter of concern but I still need a place to live.

I bought a smallish three bedroom in 1987 for $125K. I sold it for $165K in 1993. I then bought a more upscale place for $300K. I sold it for $375K in 1999. I bought a near mansion on 10 acres for $530K. I refinanced it in 2002 and bought another 10 acres in another state with no financing with no change in my house payment. I am refinancing my house again again to consolidate two notes with a thousand a month decrease in mortgage payments. The county tells me that it's worth over $800K based on my tax assessment but that is traditionally low. So far I'm out nine thousand dollars which was my original 1987 down payment on the $125K house and whatever monthly costs it takes to live somewhere other than a tent in a national forest. The rest of it has been somebody elses money. If the bubble bursts then so be it. But doom and gloomers will never get to the end of the rainbow if they don't pony up some cash and start taking reasonable risks.

[Alberta's Child]

That's a good post, because it shows the real impact that leverage can have on your personal finances.

If you put $25,000 down on a $150,000 home and sell the home for $200,000 soon thereafter, your property appreciated by 33% ($50,000/$150,000) but you personally made a 100% gain because you only put up $25,000 for the home (we'll neglect the effect of the small principal payments on the mortgage for the sake of this argument).

[Petronski]

The doom and gloom crowd has all their money in gold coins buried in the back yard.

[AlexW]

"I expect house prices to fall by 75% or more."

You must be listening to old Nick on www.wallstreetunderground.org

You could be right.
I doubt that a .15% hike in rates could cause a 24% decline.

[FreedomPoster]

The *real* gloom and doom crowd has their money in machined steel, brass, lead, copper, and smokeless powder.
;-P

[AntiGuv]

I think you meant that reply to post #3 [Jim Noble].

[Orangedog]

The real doom and gloom types are the ones selling their homes believing that they can re-enter the housing market for 10 cents on the dollar in a few years. I can only speak for myself, but I think (from what I've read here) that most of us are more concerned with paying down debt and preparing to run very lean for the immediate future. I do believe that there will be quite a few markets where over-inflated real estate prices will drop by 75%, but not every market in the US. I think 35-50% as a nationwide average is very possible.

[arete]

What's to be pessimistic about? Here, read this -- it'll brighten your day.

Escape and Fantasy

Richard W.

[Movemout]

Well that is an interesting notion. Ten cents on the dollar would be nice. I think I'll run with the mainstream a bit longer. Debt reduction philosphies are good. Ignoring regional imperatives in real estate are bad. A national reduction of a third of value means nothing in a regional market that appreciated by a fifth of value. When I was born there were 150 million people looking for a place to live in the USA. There are now 250 million people looking for a place to live in the USA. You do the math.

[StatesEnemy]

There's no way house prices will fall 75% where I live without a total economic collapse.

Now you're catching on...

[FITZ]

Their payments will be consistently "low" for as long as they hold the loan, but with a steep price decline they may end up owning a home that is worth less than the mortgage on it.

Also some might not be able to afford the high property taxes that go with a higher cost home. I think it's inevitable that prices will decline because many mortgages were handed out to the less than credit worthy or those about to lose a job and with bankrupcy so high, many of these homes will be auctioned at a foreclosure sale. Plus in many areas middle class homes now have 2 or 3 families living in them which will bring down the price of homes in the whole neighborhood.

[FITZ]

I wonder how much home prices would have to fall for that to bring on the economic collapse?

[StatesEnemy]

Housing demand has to do more with demographics and employment than interest rates

Ummm... tidal wave of poor (socialist primed) illegals, and outsourcing white collar jobs to India.

[HurkinMcGurkin]

In my area (Florida)housing prices are going up like mad. I went house hunting this week: new listings pulled up the night before had bids on them by the afternoon. My friend refinaced 6 months ago - His 120,000 house then is now worth 135. It's pretty hard on the house hunter.

This is going to end in the near future when interest rates go back up. Right now, many people are shopping for houses like they do cars - based upon payments, not the price. Home values are being inflated due to low interest rates. People not shopping who are home owners believe their homes have appreciated when that may be true if they attempt to sell now, during this time of low rates, but when they go back up, so do payments. Because of the low rates, people can afford a house priced 5% to 15% more than they could have with rates in the 7% to 8% range.

When the bublle bursts, I expect to see a bunch of pissed people who think their home(that they probably paid 10% too much for) should a)be worth more than they paid for it and b)should keep appreciating at a high rate.

[HurkinMcGurkin]

The refinancing picture is only part of the story. There are an inordinate number of people out there who purchased overpriced homes in the last couple of years simply because the lower interest rates allowed them to afford them. Their payments will be consistently "low" for as long as they hold the loan, but with a steep price decline they may end up owning a home that is worth less than the mortgage on it.

Thank You, Thank You, Thank You!!

And thank God I am not the only one who understands this.

[SauronOfMordor]

Frankly, hasn't everybody already refinanced? Isn't this why mortgage activity has slowed? What scares is that everyone seems to have cashed out instead of merely taking advantage of lower rates.

Think of it as the real-estate equivalent of short-selling. If you think the housing market will implode in your area, cash out at the inflated price, and then when the market value of your house is a fraction of the mortgage, walk away and let the bank have the house

[Alberta's Child]

Also some might not be able to afford the high property taxes that go with a higher cost home.

Excellent point -- that's the great unknown factor here.

My attitude may change after I get married and want to settle down, but for the reason you just described I refuse to own any real estate that doesn't generate its own cash flow.

In my mind, the dumbest investor on the planet is the one who pays $9,000 a year in property taxes and yet still thinks he "owns" his home. If it costs you $750 a month to live there even after you have a title free and clear of all liens, then you don't own a damned thing.

[Alberta's Child]

Absolutely right.

[Movemout]

It's funny reading some of these posts. The latest trend in housing has been the proclivity for smart growth. What does smart growth really mean? Well, I'll tell you. Quite simply it means packing more folks into less space.

What are the implications, you might ask. Well, I'll tell you the answer. It means that you can't build on smaller parcels unless they have been grandfathered under newly passed zoning laws. This has a net effect of making these smaller parcels, with already built houses, more valuable. Guess what? People with liquid assests want to live in places with scenic value, a new term has been coined "scenic-sheds" akin to watersheds I guess; where will the people with dinero be living compared to the liberal smart growth apologists? It is not a tough question to answer. I see some fairly large organizations buying up lots of property. Their agenda is probably not benign in the sense that they intend to let people develop and live on it. I'm really glad that I'm getting old because these libs are starting to get control of things that they shouldn't be getting control over. I'll fight them for a while but it's the young turks, and turkettes, who will bear the brunt of the battle.

[arete]

If it costs you $750 a month to live there even after you have a title free and clear of all liens, then you don't own a damned thing.

Of couse you don't really own it. You lease it from the taxing authority until you turn it over to a new "own to rent" occupant.

Richard W.

[Beck_isright]

Actually it only measures true credit card debt. Debit or check cards are deducted from accounts within 72 hours of the transaction. The credit card problem is magnified by the out of work individuals who are going to their limits to buy grocerys, gas and pay utilities. This house of cards can not last forever and the Fed knows it.