Weak Housing Data Reflects Reality: Housing In Trouble
Recent housing market data has been broadly negative.
Despite some analysts blaming "'weather" or other causes that imply that really, just around the corner, housing will come roaring back, nothing in the data suggests that's true.
Housing starts, mortgage applications, sales of existing homes and new homes are all weak at best. The one bright spot is that mortgage delinquencies, foreclosure inventory and foreclosure starts have declined. However, there's reasons to suspect that particular data point is more likely to get worse than continue to improve.
In March both housing starts and building permits were weaker than expected. Homebuilders remain slightly bearish; the National Association of Home Builders/Wells Fargo Housing Market Index came in at 47 in April. A reading over 50 means that more builders report good conditions than poor ones.
In April both JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) reported weak consumer demand for mortgages. First quarter demand for loans was down more than 65 percent for both banks. JPMorgan Chase believes it will lose money on the business line in 2014. Industry-wide, meanwhile, lending is at a 17 year low.
The Mortgage Bankers Association reported that mortgage applications decreased last week. So far this year, about half of the weeks have been increases, and half decreases. The weak demand exists even though mortgage rates are historically low and credit standards for purchase loans are easing slightly.
Refinancing Boom Ends
For a long time originations have been distorted toward refinancings, driven by ever lower-rates. Refinancing currently makes up about 51 percent of mortgage applications. At the end of January refinancing accounted for 62 percent of applications, which was then described as the “lowest level since late September 2013.”
The slight increase in mortgage rates in the past year has ended the refinancing drive. For example, 69 percent of Wells Fargo originations in first quarter 2013 were refinancings, but only 34 percent were this quarter.
According to the National Association of Realtors, existing home sales in January were “the lowest level in a year-and-a-half”, and then declined a little further in February and March. In March foreclosures were ten percent of sales, and sold at an 18 percent discount to non-distressed prices. Four percent of deals were short sales, and they were discounted 12 percent.
No First Time Home Buyers
First-time home buyers were 30 percent of the market in March. That's been more or less the percentage since August of 2010, according to National Association of Realtors data. The NAR says that, normally, first-time home buyers are more like 40 percent of the market.
New home sales for March were down by more than 13 percent both, month-over-month and from March 2013. Strikingly, sales plunged at the bottom end of the market, posting declines from 22 percent to 50 percent, depending on which slice of the under $300,000 market was looked at. Houses over that level saw increased sales.
The fall-off at the low end probably reflects Wall Street's pullback. Financial investors were scooping up foreclosed homes on a massive scale, paying cash as they did. In October of last year Forbes reported 49 percent of all home sales were cash, as "Institutional Investor Activity" hit a new high. This past March, cash buyers were 33 percent of the market.
Such a significant drop in demand, if not replaced by another source, signals future weakness in the market. Given the housing segment at issue, the most"'affordable" homes, it's hard to see what group will step up to fill the void.
First-time homebuyers are struggling with student debt and poorly paying jobs. A significant number of Empty Nesters and others who might want to downsize are underwater or effectively so, and therefore can't afford to sell.
Foreclosure Improvement or Lull?
Although foreclosure and delinquency rates are down, according to Black Knight Financial Services, the national view masks the activity in local markets. For example, California foreclosure starts are up. Similarly, the national delinquency rate according to Black Knight is 5.52 percent, but it is 12 percent in Florida.
More importantly, signs continue to emerge that delinquencies could start rising.
For starters, mortgages modified under the HAMP program are going to become increasingly less affordable as interest rates reset. The resets begin five years after the modification was put in place, and so are starting for 2009 modifications. Each year interest rates will rise one percent until the mortgage is back to its original interest rate, Housing Wire explains.
Another driver of future delinquency will be sharply higher home equity loan payments, as the "interest only" deals of the bubble era shift into principal repayment. While most of the increases will happen in 2015-2017, according to the New York Times, some $30 billion worth will recast this year.
In short, the brightness of the only somewhat bright spot in the housing numbers depends on where you see it from today. And it's going to dim over the next couple years. In all other respects, the data remain pretty grim.
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