Posted on 06/22/2013 8:05:05 AM PDT by whitedog57
There was an interesting article on Bloomberg.com entitled “Housing Seen Shrugging Off Loan Rate Rise as Banks Loosen” complete with a video interview of Trulia’s chief economist Jed Kolko. Essentially, he denies that rising mortgage rates won’t be a problem until mortgage rates rise to 10.5%.
If we use a rent or buy calculator, people should buy today at these low mortgage rates according to Koklo.
But at a 10.5% mortgage rate, Koklo suggests that you would rent.
Holding all other things constant (which they never are), people will be buying because the relative cost of homeownership is lower.
The “rent to own” gap varies across the US. In Phoenix, it has finally broken through the zero barrier meaning that the monthly after-tax cost of owning the median priced home is more than the monthly cost of the average asking rent.
In the Washington DC metro area, the gap has been mostly positive since 2009 meaning the cost of owning is greater than the cost of renting.
Orange County? The gap was never negative.
Now you can see that hidden dragon of a low mortgage rate, positive rent to own gap.
Paul Willen at the Boston Fed chimed in with “If people believe house prices are going up, credit availability will evolve. There is too much money to be made lending to homebuyers. Lenders will find a way.”
If mortgage standards are loosening, then why are mortgage purchase applications still stuck at 1995 levels? Evolving? Yes. Racing upwards? No.
The rapid rise in house prices (better known as a bubble) is definitely creating interest from foreign and domestic investors (as well as cash buyers), but not so much from traditional home buyers. Credit, as Jed mentioned, is a big constraint. The average credit score for Fannie Mae, Freddie Mac and Ginnie Mae MBS is higher than 700.
The lowest average credit score in that screen shot is a Freddie Mac Gold MBS with a weighted average credit score of 716. The weighted average loan to value (LTV) ratio is 80%.
Credit remains tight, but the credit bucket will likely increase if the housing bubble shows sustainable legs. So I agree with Willen that lenders will find a way. But they will proceed slowly.
Here is the rub. Bank excess reserves skyrocketed 2008 as the banking system tried to cope with the massive increase in mortgage delinquencies.
While there is now plenty of reserves in the system, it is very slow to leak out of the Federal Reserve system to aid GDP growth. M2 Money Velocity continues to tank.
And the M1 Money Multiplier remains below 1.0 meaning that every dollar created by the FED (an increase in the monetary base M0) will result in a <1 dollar increase of the money supply (M1). So, the credit and deposit creation of commercial banks is limited in this case. The banks are still holding on to a lot of excess reserves.
Why don't the banks release more money into the economy? First, they are regulated and The Fed wants to guard against "too much" inflation. Second, would YOU lend if this was YOUR money? Economic growth is very slow, unemployment is still high and the housing market may or may not be in a bubble.
Discretion is the better part of valour, as The Bard famously wrote.
What guy? It's YOUR blog.
And you STOLE the charts yet call yourself the author of the material.
The Fed is pumping money into banks and there it sits.
C&I loans are more important than mortgage loans and they are essentially flat.
Why should they open the mortgage tap? They pay nothing to depositors, so they can afford to sit on the money, and if they don’t want to they can charge a much higher interest rate on credit card balances and advances.
Foreclosure in today’s market is a loser, so the risks are not that much higher on credit cards.
The US housing market and mortgage financing needs a real overhaul. Right now the Fannie, Freddie, FHA and FDA are providing most of the financing for mortgages. So the taxpayer is again on the hook and interest rates are low..banks don’t decide who get 90% of the loans the govt. does. All the same mistakes are being repeated. Plus some new ones.
“If mortgage standards are loosening, then why are mortgage purchase applications still stuck at 1995 levels?”
That’s a big indication that many recent surges in house prices are investor driven not consumer driven.
Well, say what you will but in my platte-—which was absolutely dead for two years-—the builder has just put up five new homes in just a couple of months. And the “mini-mansions” down the street ($1m-$1.5m) have been going up steadily throughout the recession.
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