By Ramsey Su
Real estate prices are now appreciating at a double digit pace in many markets. Zillow publishes the most conservative estimate and pencils in a 5.2% year over year appreciation for the period ending in April. Corelogic's Home Price Index rose by 10.5% year-on-year as of March. Case-Shiller are usually a little slow in reporting. Their 20 city composite showed a 9.3% increase as of February. The NAR reported that for period ending in April, existing home prices were up 11% year-on-year. Finally, the average new home price has risen from $287,900 in April 2012 to $330,800 this April, according to the Census Bureau.
Against this backdrop, does it make sense that the Federal Reserve is still buying an average of $16.5 billion in agency MBS per week? In fact, using just this one data point, the Fed should be tightening, not accommodating.
Unfortunately, it is not all good news. At the end of the first quarter of 2013, Zillow estimates that 25.4%, or 13 million households with a mortgage remain underwater. They also use an "effective" negative equity adjustment, which includes the households with insufficient equity to sell. The adjustment brings the underwater households to 43.6%, or 22.3 million households. Corelogic estimates only 10.3 million households with negative equity. This interactive chart from Zillow and the press release do not paint a pretty picture.
Furthermore, Freddie Mac just reported that the delinquency rate has dropped below 3% for the first time since the sub-prime bubble burst. This may be considered good news headlines, but consider that this is now the 7th year since prices peaked. It has been at least six years since loose sub-prime underwriting practices were discontinued and underwriting standards have returned to a level of sanity, resulting in constant complaints about them being too tight. Under these conditions, a 3% delinquency is way too high and should be of great concern to policy makers. The chart below from my cyber-friend Calculated Risk clearly illustrates how stressed borrowers are and how far we still are from normalcy. Drowning in 8 feet of water is really not that much better than drowning in 10 feet.
Single family delinquency rates recorded by Fannie Mae and Freddie Mac
The Federal Reserve launched QE1 in November, 2008. It has been nine months since the launch of QE3. The bench mark 30 year fixed rate mortgage rate, per Mortgage News Daily, is higher today than in September 2012. Last week the mortgage rate rose above 3.8%, the highest level since April 2012.
Does it make sense for the Federal Reserve to continue down the same path, without considering its ineffectiveness in lowering mortgage rates, not to mention the unintended consequences? Allow me to illustrate.
The Mortgage Bankers Association (MBA) releases a Weekly Application Survey using a Market Composite Index. This index is further broken down in purchase applications and refinance applications. Mortgage News Daily has two excellent charts. The first chart below plots the MBA Purchase Index versus the 30 year fixed rate. The purchase index and the 30 year fixed rate should be inversely correlated. The chart clearly shows that in spite of monumental efforts by the Fed to drive down the rate, the most it can say is that it has finally arrested the decline in purchase applications. If the real estate market is allegedly so robust, why is the purchase index not going up? That is because the market is supported by bulk investors, local investors and other cash buyers who do not need a mortgage. The demand for housing is limited by the ability of mom and pop to qualify for a payment even at current low interest rates. It is clearly no longer responding to lower rates.
Purchase Index versus the 30 year fixed mortgage rate
The second chart, also from MND, is even more revealing. It plots the Refinance Index versus the 30 yearr fixed rate. Similar to the purchase index, the refinance index should have a inverse relationship with mortgage rates and that seems to be the case. The chart below appears to show such a relationship, unless you factor in all the Making Home Affordable programs:
- Home Affordable Modification Program
- Principal Reduction Alternative SM
- Second Lien Modification Program (2MP)
- FHA Home Affordable Modification Program (FHA-HAMP)
- USDA’s Special Loan Servicing
- Veteran’s Affairs Home Affordable Modification (VA-HAMP)
- Home Affordable Foreclosure Alternatives Program
- Second Lien Modification Program for Federal Housing Administration Loans (FHA-2LP)
- Home Affordable Refinance Program
- FHA Refinance for Borrowers with Negative Equity (FHA Short Refinance)
- Home Affordable Unemployment Program
- Hardest Hit Fund
The administration claims that it has helped something like 2 million homeowners to date. I can only take its word for it. Per the most recent MBA release, the refinance share of all mortgage activity is 74%. The HARP share of refinance activity is 32%. In other words, without HARP, the refinance index would be 32% lower and the overall index would be 24% lower. HARP alone is supporting almost a quarter of the mortgage market today.
The market should pay attention to this. All these HARP loans are by definition bad loans. They most likely have sub-prime borrowers with no equity and insufficient income to qualify for a loan today, if they were new purchasers.
Refi index versus the 30 year fixed mortgage rate
In closing, I am going to borrow another chart from Calculated Risk, a simple Case-Shiller Index chart.
Case-Shiller composite house price indexes (10 and 20 cities), nominal
There should be no disagreement that the price action from 2001 to 2006 was a bubble, supported neither by fundamentals nor the economy. What is the Fed trying to do now? It appears that Bernanke would like to fix the consequences of the last bubble with a new bubble.
Does that make sense?
Charts by: Mortgage News Daily und Calculated Risk