Let's face it, mortgage rates shot up one percentage point in spring 2013 and since then, the refinance market has been dead. Once again, it was an artificial stimulant to artificially produce wealth for homeowners. The second stimulant included institutional investor purchases. The spurt in home prices is beginning to slow and, in some cases, values are dropping.
Higher interest rates won't have a significant impact for consumers who want to purchase a home. The difference between 4% and 6% is pretty negligible, especially if ARMs are available as Qualified Mortgages. Thinking of the QM rule, it may tighten credit--a little--but it'll basically have an adverse impact on applicants who probably shouldn't have a mortgage in the first place.
Although compliance issues will add jobs to the mortgage market, they're likely to be seen with more attorneys and legal staff, IT hires for compliance technology and experienced loan officers.
I have more concerns this year, mainly about home prices and existing home sales.
First, the unemployment numbers are generally not good. Even though we're at 6.7% unemployment (which is really good at face value), there are so many people who are not looking for work and there are over 13% who are frustrated workers with part-time jobs that want full-time positions. We don't know how many people are overextended in debt nor do we know everyone's income, but men and women in their 20's are likely to have lower wages, unless they work on Wall Street. The new debt-to-income limit is 43%. That was a flexible number at one point--back in the 1990's and during the time when many lenders were simply handing out No Income, No Job, No Asset (NINJA) loans. Now, the pendulum has swung to be no flexibility--at least for the first six months of this year.
Second, first-time homebuyers were outnumbered by domestic and foreign investors and all-cash buyers on existing home sales last year. Fewer than 30% of first-time homebuyers accounted for existing home sales and that continues into 2014. Unless the first-time homebuyer category earns a higher paycheck this year and/or pays more than $1 trillion in student debt--or pays off their delinquent student debt--that number is going to remain low.
The kids living with their parents could try to purchase a home, but they may be more inclined to rent. First off, there's now so many disclosures to sign and a plethora of bank statements, legal papers and tax returns to show lenders, some buyers don't want the hassle. To add, where is the rent payment history from this group? If kids living with their parents never paid rent in their lives, there's no history of housing payment. Is that the kind of risk Fannie Mae and Freddie Mac are willing to take?
As for investors, if home prices start to flatten in the "sand states," known as Arizona, California, Florida and Nevada, then they'll start flipping their portfolios over to true REO-to-Rental investors, like Blackstone (NYSE:BX) and Colony Capital, who are in it for the long term.
Those investors are moving East, but I'm not sure if they'll find the same volume of distressed properties at the same deals they had last year. They've already been to states hit hardest by the housing crisis, now just leaving Illinois.
If there's a decline in investor activity and the first-time home buyer group remains flat, existing home sales numbers might fall from 2013. We've already seen a significant drop in the January numbers and, if we are to blame weather, February shouldn't be much better. Also, weather wise, March has come in like a lion on the East coast. The good news is that last weekend was nice, so there's no excuse for homebuyers not coming out of the woodwork during the second weekend in March.
Do you really expect better year-over-year numbers for the first quarter of 2014 over 1Q 2013? I would expect the data to show declining home sales numbers from the previous year as we've already seen declining home sales and stalling prices from the previous month. These declining numbers can sour consumer confidence on housing or at least give potential home buyers pause to see if home prices start to become more affordable and drop this year.
One other thing, I do have concerns that the new mortgage servicing rules are going to keep homeowners facing delinquencies and foreclosures in their homes longer. Mortgage servicers will modify some loans, but the uncertainty that millions of homeowners will eventually lose their homes might keep new home construction down this year. After the tirade from Consumer Financial Protection Bureau Deputy Director Steve Antonakes at the Mortgage Bankers Association's Mortgage Servicing Conference last month, I expect mortgage servicers to pay even closer attention to the rules--maybe letting homeowners destined to fail stay in their homes even longer.
Economically speaking, the recent retail trends don't bode well for 2014. I'm seeing a restaurants closing down due to a lack of business during the weekdays. I'm seeing 4Q results from Target, JC Penney's and big box stores decline, including Best Buy. While consumers are going out on weekends, the weekdays remain pretty slow and that's also not a good indication that consumers are going to shop for a home anytime soon. That's my opinion based on recent data and anecdotal evidence.
Some areas of the country have healthier economic environments--more employment--than others, including Dallas, Washington, D.C. and New York City. The wages are likely higher as well. But, outside of these major urban hubs, in areas that experienced major home value hikes last year, like Las Vegas, what goes up quickly usually comes down in the same fashion.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CAHS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.