What the Housing 'Apocalypse' Prophets Aren't Revealing

There are four adages that drove this article’s creation and content:

1. If enough people say the same thing often, loudly, and dramatically enough it becomes fact/reality.
2. People will tell you what they want you to hear, “the housing market is headed into the eternal abyss, -- believe me, I am an expert.”
3. People will tell you what is to their benefit, ie. “Housing and Financial Stocks are Tanking -- SELL” ie, (I have shorted housing/financial stocks – I want you to sell, “it is for your own good”).
4. When doing your own analysis – always look for what is NOT being told/sold.

So What Do We “Know”

1. Housing prices are dropping in many markets, especially those that were overbuilt or speculated – yup.
2. Foreclosure rates are up – yup.
3. Financials have been decimated by write downs, often related directly or indirectly to the mortgage market – yup.
4. Housing construction has slowed, and home builders are suffering, construction unemployment is up – yup.
5. ARM rates are resetting – the consumer can’t afford them, and they are foreclosing even faster! Well….(Interesting how this “prophecy” hushed with FED rate cuts.)
6. Mortgage rates, due to Fed cuts, are down – (Shhh! Heretic! You’ll ruin the widely prophesied economic demise of Amerika!!)

What the Housing “Apocalypticists” Aren’t Telling You

No “doom prophet” has mentioned the Mortgage Bankers Association weekly mortgage applications survey in the deluge of economic fear-mongering. They don’t want you to pat attention to it – or grasp its ramifications. The survey compiles data on about 50% of US mortgage applications submitted the previous week. The “survey contains 15 indices covering application activity for fixed rate, adjustable rate, conventional and government loans for home purchases and refinances. A new report is posted every Wednesday with the previous week’s market activity."

Thus, the MBA survey is a representative data sample, publicly reported primarily as indices. My interest is to highlight the shift in those indexes from July 07 to 01/25/08 as representative of mortgage application behavior by consumers, and indirectly, by lenders.

This is not NAR hype material. The survey is a contrarian gold mine to the current housing mantra, (thus I expect a howl of apocalypticist’s ire for revealing this “anathema” data that will be minimized, demeaned, trashed, etc.)

What follows was compiled from the MBA news release data from the end of July, 2007 to January, 25, 2008. Here is what I think I have learned:

1. The Market Composite Index of application activity increased 42.4% from July 07 to 01/25/08. MBA states that the current composite index reading is 70.7% higher than January 06. (People are filing mortgage applications like crazy. What the heavens are they filing for?)
2. The home purchase index is relatively flat for the last 6 months. (Doesn’t seem they are applying to buy more new or existing homes. What are they up to?)
3. The refinancing application index is up 66.2% since July. Most change occurred in January 08. (Yowsers! Refinance your home and not buy a new one?! How novel!)
4. The refinance applications “market share” has increased from 39.4% in July to 73% of last week’s applications. That is a 33.6% change or an 85.3% increase in refinancing applications that mortgage bankers are perusing over compared to July 07. (John Q Public is figuring out how to take advantage of the FED cut. “Moral hazard” – you say).
5. The conventional loan index is up 42.3% since July, (Some people are still credit worthy.)
6. The government loan index is up 44.1% since July. (The FHA, etc. is still in business).
7. The adjusted mortgage rate [ARM] application market share has dropped from 22.3% in July to only 8.6% of last week’s filings. That is a 61.4% decline. (We are cutting our ARM’s off. Consumer’s generally don’t want ARM refinancing, and lenders do not want the ARM reset risk problem.)

Well! This doesn’t match the envisioned “housing market collapse.” Nightmare interrupted?

Implications for Homeowners: “My brother, a leading economic indicator”

My brother bought a new house with an ARM in August, 07. Post the first rate cut, he threw some cash into a fixed rate refinancing, and is now saving over 6K a year in cash flow. Why this tale?

1. Homeowner’s that refinance out of ARM’s are getting into lower cost/lower risk fixed rate loans that free up cash, or reduce expenses.
2. Refinancing either increases their cash flow to pay down debt, save more, or to spend more – (What? Increased consumer spending? How absurd!)
3. Refinancing, and further rate cuts, if they occur, may lead to increased home purchases.
4. The consumer is not stupid – while analyst and economists are crying “house price collapse,” some consumers are waiting for prices to drop to afford the housing they would like to purchase, when it is affordable – at the right price. American consumers may see the current environment as “houses going on sale,” as time passes. For example, another family member just purchased their third housing property this past year and refinanced the other two -- the other two are rentals. While this has not been easy and added lots of grey hairs, negotiating with panicky lenders, it made cash flow sense. Time will tell.

Implications for banks and mortgage companies:

1. Lenders, banks, etc. are being able to re-rate the risk of home loans as these applications are approved. Applications are going through a more stringent process. Approvals will be perceived as more sound, with reduced lending risk.
2. Lenders, banks etc. are getting rid of ARM’s that carry a higher default/credit risk, which should help to ultimately reconfirm debt/risk ratings on their debt. This will sometime reduce the perceived risk of CDO’s etc. and help ease the banking and mortgage lending crisis.
3. As banks and lenders regain rating credibility by refinancing, they too stand to benefit from increased lending/borrowing to fund future housing loans.

So apocalyptic prophets of doom – have at this.

For the rest of you, another adage: All things are not as they seem.

For full disclosure purposes, I do not own any U.S financial, housing, REIT, or mortgage related investments. (Greek and Cypriot Banks are a better investment).