Housing Soon May Be Cheaper and Unaffordable

Includes: MCO, SPGI, XHB
by: Markos Kaminis
With the dastardly debt deadline less than a week away, interest rates are poised to climb significantly higher on a dime should a major rating agency determine to cut the U.S. sovereign debt rating. Yet, in the latest reported week, mortgage activity declined. Mortgage brokers and other real estate professionals are missing an important opportunity to get mortgages refinanced and nonchalant home buyers into favorable mortgage contracts while they still last, because basic shelter may soon be unaffordable for the average American.
The Mortgage Bankers Association reported Wednesday that mortgage activity fell 5% in the period ending July 22. Contracts tied to the purchase of a home declined 3.8% from the immediately preceding week, while mortgage refinancing applications dropped 5.5%. The decline in refinancing occurred even while mortgage rates remained attractive. Contracted rates on average 30-year and 15-year fixed rate mortgages inched higher to 4.57% (from 4.54%) and 3.67% (from 3.66%), respectively.
This lackadaisical activity in the mortgage market is reflective of the slow going housing market, but it’s also indicative of idle real estate professionals. Those pros are missing an important opportunity to generate business now, and more importantly, to get people into affordable contracts while they still last.
If a default occurs on American credit, or if Standard & Poor’s (MHP) or Moody’s (NYSE:MCO) downgrade U.S. credit, Treasury rates will increase and rates will rise across the board. That also means mortgage rates. Far too many Americans are in variable rate contracts or are in position to buy a home today but are sitting on the sideline idle due to fear. It’s unfortunate that this frozen state is exactly what makes them vulnerable today, because inaction will price many out of the ability to buy a home should events proceed as they appear poised to today.
One of the few assets I would want to own in an economic depression is the shelter provided by an owned home. The basic necessities must be accounted for, and those include shelter, food and water. If the economy deteriorates as it should in the scenario that is growing in probability, that situation brought on by Washington’s debt debacle, then it will get much harder for many Americans to even afford rent. So, even if home prices were to drop further on decreased demand, which is certainly likely in a harder economic environment, at least many would be able to better endure it within a home. As a renter, you are dependent on your landlord’s compassion in desperate times. But as a home owner, you can rent out space to afford your home in tough times.
Say what you will about scare tactics, but in this case if real estate professionals were to employ them responsibly (in other words, to simply warn folks about an imminent rate rise), it might actually do some important good for many Americans. The interest rates we see today should not exist for much longer, even if Washington somehow circumvents a debt downgrade.
In the positive growth scenario, we also see rising rates, as global economic growth driven by the expanding emerging markets drives scarcity in commodity resources. In this case, inflation should feed through the system, in my view. Thus, I feel compelled to share what I believe is helpful information with those who can take advantage of it now, renters who can afford a home now but may not be able to if/when rates rise.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.