Rising Rates Destroys Refinances But Not Sales Yet
For the past few weeks I have been tweeting out the term Refi pipeline destruction. This means that though there were many loans that were in the refinance pipeline being underwritten, the rate, however, was floated. When you get such a spike in the 10 year note and mortgage rates, those floating loans are dead. So these last 6 weeks has brought what I called the Kill Rate of 3.75% to the mortgage markets. In an earlier article in February of this year I referred to the refinance business as a Highway to the Danger Zone. This is why; an interest rate of 3.75% and higher will drastically reduce the available pool of refinance candidates out there in America. (I am assuming there will not a HARP 3.0, which would change things .)Now there are concerns that this rise in rates would affect home sales. I continue to believe that we simply don't have enough qualified home buyers in America ( excluding cash buyers) to call this a true recovery because Debt To Income capacity is limited and liquid asset availability is light. However, a push to 4% interest rate in this environment wouldn't destroy demand in a big way. A rate more like 5.875%-6.375% with home prices continuing their mini bubble price pace would certainly impact debt to income capacity. In fact you could see some real demand destruction. I hear all the time that people say jobs are coming back and people will have the incomes to buy. However, what they don't take account for is a lot of those are low paying jobs, not the ones that would make someone have the capacity to buyright away. There is a reason why the first time home buyer is soft in this housing cycle. They don't have enough income, some are loaded with student loan debt, and liquid asset availability for a down payment and closing cost is lightHowever, as long as the market place has 30% cash buyers and these low rates it can move forward even though the pace of activity could slow down. The 30% cash buyer metric is important because if that falls, that means the traditional or first time home buyer has to step in. I don't believe that would be a successful hand off, especially when rates rise.On another note a big problem in the housing market today is the inventory crisis. A lack of home building, over 10 million homeowners underwater or not having enough equity to sell, and 4.5 million plus homes in some stage of delinquency or foreclosure process has made inventory levels drop to barely over a 5 month supply. In conversations with a few potential buyers who are thinking of putting their home in the market all have expressed one similar theme to me. They might not be able to buy something they want. Light inventory and multiple bids here in Orange County CA has made some potential home buyers gun shy. Some who are forced by their own financials to do a FHA loan feel like their bid would not stand a chance in this type of market bubble fever.As I continue to note, these factors are all part of a market place that has been propped up by cheap money, and held back from a proper price correction and an influx of of cash (and likely investor) buyers. However, as long as rates are near these historical low levels, the market has 30% cash buyers and inventory is low, sales will continue to grow and prices will rise. It may be that Housing Emperor does indeed have clothes, but the clothing is from Target not Saks . In other words, don’t get too excited.
Logan Mohtashami is a Senior Loan Officer at AMC Lending Group, which has been providing mortgage sercvices for California resident since 1988
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