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).

Comments

[fxtrader07]

interesting but somewhat strange conslusions drawn from a rise in mortgage apps.
basically, people are lining up to get loans as equity extraction has all but ended. in fact in a rising number of cases home equity has gone negative now. credit card debt and consumer credit are more difficult to get - so the overextended consumer uses the only road still available. as the author rightly points out, these mortgage apps are not meant for buying new homes.
so rather than celebrating at the figure, it should give reason to think about how bad the shape of the average consumer has gotten that mortgage applications rise at this speed - even thjough interest rates were hardly to be called favourable!

[noname]

do the MBA numbers give data on the number of unique applicants? If lending standards are presumably much tighter and those in ARMs are of a lower credit quality, how much of this increase is due to these people having to apply to do 5 or 6 applications to try to get approved (if they get approved at all) instead of doing 2 or 3 apps.

[contrariwise]

Ummmm - forgive me for being a bit staggered on your interpretation of the leap in loan applications - IMO this reflects the tighter lending standards, with borrowers making more applications to more lenders to increase their chances of getting a loan, as the probability of approval with any given lender has diminished in a big way.

[wunderhof]

HOPE program, perhaps? The last step before foreclosure is to APPLY for a new mortgage. Actually getting one, that's another unreported statistic.

[The reality checker]

Of coarse the public will refiance untill interest rates fall to Japanese levels, but did you notice the huge drop in refinance and purchase relative to historical rates back in 1998 and 2001. A credit expansion requires the refinance and purchase to be HIGHER than the previous lows in interest rates, the credit cycle is unwinding as expected, you are data mining your work..

[helplessobserver]

This post plus comments only addresses one of the credit problems and in normal times a single issue can be addressed. Credit problems in an economy are like circulation and blood problems in the human body. One by one the vital organs become impaired and the patient's survival comes into question. Bedside panic at the Fed and the Treasury is based on data that we have yet to see.

[john haskell]

In many markets it still costs more to own than to rent. in Manhattan the ratio is approximately 2:1. Without the conviction that renting is "throwing money away" and owning is a sure-fire ticket to riches, the demand for purchases falls, and house prices with it. Why should the rent/own ratio be so far out of whack? The collapse in house prices is based on sound fundamentals.

[Humpty Dumpty]

As an existing mortgage officer thank you for very important facts. My take is we have a conundrum at stake. When the media says jump consumers say how high as is the case once again with the fed cut and the hype on rates- (one really has little to do with the other).
How many equity lines are being maxed out for cash? ( lenders are closing them ) How much is going to their bank accounts because they are realizing their homes real worth and are bracing for the worse. Another question with tighter lending standards what will be the conversion rate from application to funding? And of course my main concern is real estate valuation going forward. We are seeing major depreciation in chicagoland and as 2008 progresses our echo systems are being polluted with foreclosures and short pays and it is a mater of time before they visit your neighborhood. This conundrum could have more to do with affordability than rate- that`s the wild card. The consumer is running scared.

Where are all the kings horses and all the kings men because we need to put humpty dumpty ( economy ) back together again.

[Brian Croner]

I'd just guess people are filing for reverse mortgages on the remaining equity in their houses because they're out of cash and need to pay some more immediate bills. Desperation applications to turn what's left of "their" homes into ATM spigots.

[robster]

to the author ben, what a load of dribble. Too reliant on data indeed!!

[galewhitaker]

The price of gasoline is going to $4.50 this spring. When the folks figure out how much its going to cost to commute in their Escalades they will realize that they can't afford to join in the forclosed urban sprawl fiassco. I hate to splash cold water on this polyana scenario but I think that housing prices have a long way to drop.

["Magazine-Cover-Indicator" Indicator....]

It's a matter of MORE information -- don't stop with just 5 or 10 pieces of info....

Mortage app approvals rate has dropped (look it up lazy) ....so.....ergo apps will rise. Not rocket science.

[SoCalsurfbum]

You are missing the other little data point... every housing cheerleader is saying that if fixed 30 yr mortgage rates go lower, it will stimulate sales and re-invigorate the housing market. Well... fixed rates actually have fallen YoY and in that time housing sales (units) have fallen between 15-40% (depending on which market you are looking at). This is the stimulus you are counting on? It doesn't seem to work very well. The only way more units will be sold is if the current owners take very substantial losses on their properties they over-paid on... buyers now are only willing to buy at a reasonable price. And as the saying goes, I have a lot more patience than you have cash to remain solvent... or something like that.

[User 118548]

to the author: what color are your glasses?

[westwest888]

author: So why don't you call a bottom in US Real Estate? I mean, your mortgage broker report is probably as good as gold. Those guys are known for their extremely reliable data. We trust them to fill in our income and everything on the loan application. So they probably can be trusted to fill out surveys accurately too. Everyone needs a mortgage!

[tradeking13]

You fail to mention that price/rent and price/income ratios are still extremely elevated. When these come back in line with historical norms (either through price declines or inflation), then renters, like myself, will see houses as being fairly priced, not necessarily "on sale".

[GregY]

There is no evidence of prices coming down in the area I live - SF Bay, Oakland or Marin County. A lot of stress on rental market, but ownership is still not economical to embrace. From that perspective I am in a full support of the author's analysis - this "panic" is induced by financial institutions, RE and homebuilders to escape accountability for poor management practices and questionable ethics. Whine loud and often - and big, bad government will bail you out with our money.

[Reinko]

Athor Ben 'forgot' number seven of So What Do We “Know”:

7. For a ten year period for the USA housing market as a whole, housing prices climed 10% year on year. Median income only rose with the consumer inflation lets say 3% YoY. And since 1.07^10 = 1.96 we have about 50% bubble money in the housing market...

[WAKEUP]

"If you can't dazzle 'em with brilliance, baffle 'em with bulls---." Old adage, current application. Question: Since you obviously knew this firestorm of not-so-agreeable responses was coming, why did you stay awake so late, massaging those "facts?"

[chrjr]

Reading these comments is like listening to the uninformed blather to the ignorant.
Here is what is going on, if anyone is observant to notice. (The big boys are not always wrong.)
The cut in rates has reduced the bases on which the 1.9 million subprime ARMs are reset (prime, libor, etc.) to the point where most, or many, ARMs are at about breakeven. That is, when they reset mortgage payments will not increase. Some (Merrill) are calling for another emergency rate cut before the FED March meeting. With another .5% cut, when ARM rates are reset the payments will be LOWER in many cases than present payments. And this will enable many who can qualify to get long term financing.
When the toxic waste mortgages now in CDOs become valuable, the CDOs, which are now valued at perhaps 40 cents on the dollar, will increase in value to perhaps 70-75 cents on the dollar. Investment banks may then have to WRITE UP their value, which will restore a lot of much needed capital. Financial markets will recover and much of the mortgage related distress which we have been enduring will disappear.
If you do not believe in this scenario, what do you think the reason for the rate cuts is? To placate Wall Street and/or Main Street?

[..........]

The rate cuts do not affect LIBOR. The Fed does not set the LIBOR rate which is the rate that many loans are tied too.

[Jay Jay]

I like the argumement where the author states that saying things makes them happen. Sorry, fundamentals rule, talk just affects timing a little bit one way or the other.

Mortgage applications are up because approval percentages are down. Lower fed rate doesn't control the longer term mortage rate, this just presses the snooze button on adjustables until the next adminstration is in office.

The percentage of conforming loans being written is up because the percentage of suicide loans is down. This is news?

[DC Housing Bear]

This post and the comments that follow once again highlight how desperate housing bulls are these days. The reason why bears have better arguments is because it really is that bad out there and many people have been seeing this coming for years. The bulls always seem to be grasping at straws, even back when they were arguing that this real estate bull market was going to last forever, they're at it again with posts like this.

FACT: for 6 solid years, we experienced the most dramatic housing run-up in US history.

FACT: reversion to the mean is a very powerful statistical phenomenon.

FACT: most people with negative equity in their homes will walk away.

FACT: in many bubble markets, it still costs half as much money to rent than to own.

FACT: the value of residential real estate is tied to both interest rates AND personal income, at some point it doesn't matter how low rates if prices are too high.

FACT: there is a limit to how much debt the American public can take on.

FACT: a recession will force home prices even lower.

This is all common sense, it's the beginning of the great debt unwinding, if it wasn't subprime mortgages it would have been something else.

[NutritionFacts]

Ad hominem-esque comments about bulls vs bears are really not that useful. And if you want to get into it, it's taken a bloody long time for all these oh-so-prescient and oh-so-intelligent bears to be proved right. Seems to me that everyone's on one side of the trade. Sometimes that's the right side to be on. Perhaps more often, it is not. Still, in time, we will all be right.

[Ben Holdsworth]

Whew! The diatribe I wrote has accomplished its initial purpose. It was tended to be a catalyst for a lively discussion. My sincere appreciation for all who took time to comment. I wish I had time to answer each of you, whethere we agree or diagree. I will do more later, but have to leave for a business trip this morning for a week, so will post more in response as I am able.

Some great comments and food for thought. I encourage all to go look at the MBA data, there is more there than I mentioned.
A couple of quick responses:

User 118548, my glasses are clear. I am very aware of the issues.

Wakeup: Go read the MBA data yourself, which was part of reason for writing. Create your own table, and then decide. Especially note the changes in indices in comparison of application increases to rate cuts. While I recognize applications may be multiple attempts to get refinancing by a single filer, it is possible that there will be more approvals. In both examples I gave, the parties filed at least two applications, then it was a process of negotiation with lenders.

DC Housing Bear: Both examples in my article are from the DC area. Second I would debate some of your facts...I had a number of friends who went through the last California housing bust in the 90's, seems that California real estate did recover, and most people did not walk away from their inverted mortgages.

socalsurfbum: Regarding mortgage rate changes YoY I would suggest you look through the HSH historical mortgage data...I think you may find a difference in perspective, at least at the national level. Fixed rates actually increased on the national monthly level from 2004 through 2007. The 1 Year ARM's went from 3.83% in Jan 2004 to 6.00% in Dec 2007, to a rough parity with the fixed rates versus their earlier discount. One would have to consider seasonality, regional and local variance, etc. in the mortgage rate stats, but the trend was upward on rates, especially ARMs until the rates cuts began. A slow rate decline seems to have begun to in October 2007, post the August rate cuts, etc.

chrjr's comments echo part of my thinking an ARM's and CDO's. Citgroup is estimating FED rate cuts to 2.25% -- think of what that does across the financial system. See the ABC news article "Fed Rate Cut: What It Means for You" for a well reasoned consumer impact article: abcnews.go.com/Busines...

Humpty Dumpty, thanks for the comments, and for the rest as well...I have more in repsonse, but need to run. By the way...$4.50 for gas...Try $8.00+ in my neighborhood. Gotta go.

[robster]

to chrjr - i'm sorry but how did you come up with your argument. CDO's rising to 70-75 cents on the dollar - how did you pluck that number out of thin air. And if they were valued up, they are still 70%-75% of the original value indicating a loss. Secondly, as long as the housing market is in decline, the assets backing these CDO's and loans will be still be decreasing in value regardless of whether the mortgage repayments are still forthcoming.

[Frogman]

"What people who DON'T 'know' about the market"---see above article...Another person who doesn't know what they are talking about... Ben I encourage you to push away from your computor and call some lenders, agents, tax attorneys in CA and Florida...charts are great but you are WAY off...Mortgage Apps are up sure...talk to any lender and they will tell you that they have denied more APS than they ever have...with housing prices declining along with credit tightening it is a double wammy. Also if you were truely convicted then you would be long...I am short will continue to be short the financials and homebuilders...there will be massive HB consolidation to come so be careful of the "National" builder shorts do your homework...the 'second tier' builders are in serious trouble!

[feesher]

chrjr:

ARM's are what, 2-3% plus LIBOR after the reset. Current 1 year libor is 2.82, giving me a reset today of 4.82-5.82. Given further rate cuts, yeah maybe the rest rates are getting closer to the initial. This is not true, however, for the 2/28's and interest only ARM's that have the P part of P+I coming at reset.

Your point only holds water for P+I ARM's, but even then LIBOR must stay low for how long? 30 years? Oh, and home prices cannot slide any further.

Your point does not hold water for interest onlys and 2/28.

[SoCalsurfbum]

You are trying to make the information fit your desired result. In 2007 vs. 2006 on a week-by-week basis so seasonality is included in the analysis, 30 yr fixed rates are higher in 2007 only 35% of the year… in the month of January (+7bp) and the month of August (+5bp)… not exactly high volume months. In the prime selling season (April through July) rates were on average (-20bp) from 2006 levels. We started 2006, 2007, and 2008 at 6.21, 6.18, and 6.07 respectively.

And during this time even the rosiest assessment of units sold (from NAR) showed a -12.8% decrease in units. Rates are currently at 5.68% and it still isn’t stopping the slide in sales... meaning it isn’t the catalyst you thought it was.

As for ARMs… if you believe people are going to start snatching up ARM loans in large numbers and that is what is going to get us out of this mess, I don’t think you have properly gauged the mood of both buyers and lenders… especially with the specter of inflation peaking around the corner.

[NoFate]

If the author had posted such drivel as a comment he would be known as a TROLL. As the actual author I'm not quite sure how to address him.

There are 2 numbers I need. First, we have a 10 month supply of unsold homes. Second, the Case Shiller Composite registered the first annual drop since WWII ...and the graph looks like we are stepping off a cliff!

What is it with you guys? You read some numbers you don't understand and suddenly you are an EXPERT?!

Anyway, SOLD TO YOU! What a rube...

[Sing Expat]

What a load of drivel. Basically, you are simply saying that the bubble is still going up despite all the so-called problems. This implies that either the problems are not real or that this is not a bubble but a permanent, long-term rise in housing prices. Now is a good time to buy or sell a home.

Ok, great. But why are prices lower? Are you telling me that the media determines prices? So, a drop in house prices is attributable to a few magazine covers and esoteric blogs read only by those who were sceptics in the first place?

In Goldilocks land, housing prices don't matter since they will always rise. So, no matter your income, you can buy a home. This is the logic which Bubble Bulls have been espousing if not openly spouting. So now we hear more of it.

The truth remains simple. You can buy and own something you can afford. Otherwise you have to sell it. Assuming the commodity is always rising, you will always make money, but only insomuch as you can afford to hold the commodity (carrying costs) while it rises. If you buy a McMansion for a cool million, you will need to pay, let's say, $6,000 per month. How long can you carry that burden before you go broke? What kind of price rise is needed to cover brokerage, insurance, mortgage interest, maintenance, moving costs, and mental anguish? Twenty percent?

Who will now buy your house? A millionaire or just another speculator? And how will they afford it? Does it matter in the end as long as you keep flipping? Well, yes. Either you keep flipping back into million dollar homes (smaller and smaller each time) which you cannot afford anyway or you downgrade farther and farther with each flip. If everyone keeps flipping and prices keep rising, then ultimately all homes will be over one million and you will never find a house you can afford. And who will absorb all the higher and higher priced homes? Richer flippers, flipping to an infinite number of billionaires?

To make a long story slightly longer, spare me your inane bubble justifications. People buy homes mainly to live in them. Therefore they MUST buy homes they can afford, not homes they speculate with. Affordability over the past forty years has meant 2.8 times income. I am guessing that with higher taxes, shadow inflation, and recession, we will see affordability drop to 2.5 tmes income.

But, you say, that's impossible. That means median homes prices have to drop to under $130k from present $208k. Er, yes, that is what I mean. That is even predicated on buyers finding mortgages and havng sufficient downpayments. How many under thirties have $20 to $40k lying around waiting to buy a house (I don't mean emergency or retirement funds either)? Few.

Evolution has made humans short-sighted. The result of ten years of a housing bubble is that we are convinced (and I really mean that, not just that people are in denial, they really, truly believe) that it's perpetual. So, the shock of seeing declines is impossible for many to accept. Many sellers still refuse to lower prices, preferring to wait out this temporary dip. When it finally all settles down and prices are about fifty to sixty percent below the peak, owners will blame the media, the government, Wall Street. Anyone but themselves and their illogical greed.

Economics is the dismal science, mainly because there are too many factors, many of which are not even quantifiable. But to go from there to simply dismissing it because it is contrary to your own view is exactly what you accuse the Armageddonists of, and exactly what you are doing.

What that long and boring enough?

[tcsnetwork]

"It was tended to be a catalyst for a lively discussion."

Seems everyone agrees, you are way off-base.

Article on the home owners ability to refi

money.cnn.com/2008/02/...

[tcsnetwork]

Seems plenty of people think it makes sense to walk away

online.wsj.com/article...