Inspired by my analysis of yesterday’s WSJ article, I thought I’d explore the effectiveness of low mortgage rates in getting the housing market going. I matched year-to-date sales volume where a mortgage was used and mortgage rates broken out by conforming and jumbo mortgage volume.
Mortgage volume has been falling (off an artificial high I might add) since 2005, while rates have continued to fall to new record lows, yet transaction volume has not recovered. I contend that low rates can now do no more to help housing than they already have.
Even the NAR has run out of reasons and is now focusing on bad appraisals as holding the market back (I agree appraisal quality post Dodd-Frank is terrible and is impacting the market to a limited extent – and I secretly wish appraiser held that much sway over the market).
I’m no bear, but the uptick Case Shiller’s report today (remembering that Case Shiller reflects the housing market 5-7 months ago) still shows slowing momentum and all 2012 year-over-year comparisons in the various national reports are skewed higher from an anemic 2011.
Five years of falling mortgage rates have only served to provide stability in volume. The monetary and fiscal conversation ought to be on ways to incentivize banks to ease credit – falling rates only makes them more risk averse.
Of course a significant drop in unemployment would likely solve the tight credit problem fairly quickly.
Home sales using a jumbo mortgage had year-over-year growth of 7.9% through September, compared with 2.7% for nonjumbo sales, according to an analysis for The Wall Street Journal by mortgage-technology company FNC.
Could this be a sign that credit is thawing a bit more quickly at upper end of the market?
Capital Economics Ltd., in a recent research note, found that jumbo loans are going to borrowers with credit scores as low as 700, compared with 720 or higher previously, and that financing has generally reached $2 million from a previous upper limit of $1.5 million.
Anecdotal sure, but when looking at the actual jumbo mortgage data, it appears that from 2005 to 2012, mortgage volume for jumbo fell 83.1% and non jumbo fell 46.9%. In other words, jumbo mortgage volume fell 2x further than non jumbo from peak. Also, a number of the high cost markets had their base level lowered expanded what is now considered a “jumbo loan”:
Also, the floor for a jumbo loan fell in some high-cost areas last fall. In Los Angeles and New York, for example, the definition of a jumbo dropped to $625,500 and up from $729,750 and up. With the lower floor, a loan of $700,000 would now be a jumbo loan.
So the fact that jumbo volume is up 7.9% versus 2.7% reflects it being calculated from a much lower base number, and with lower jumbo thresholds, more loans are being classified as jumbo. This likely resulted in a somewhat larger jumbo market share, reaching 5.5% of total mortgages in 2012 compared to 5.2% in 2011.
My takeaway here is that jumbos are not growing at 3x the rate of conforming as FNC seems to be suggesting, but jumbos (5.5% of the first mortgage market) are more likely consistent with the balance of the mortgage market.
Since jumbos have no real secondary market to allow mortgage lenders to free up their capital to lend more, jumbos are actually performing amazingly well however you slice it, just not better than conforming mortgages.
All but one index shows a year over year decline in housing. Trulia’s new Price Monitor by Jed Kolko would be a great addition once the year-over-year history is established. It was also interesting that NAR’s Existing Home Sales was omitted (I’m not advocating).
Beyond the obvious price decline, my takeaways were:
US indices are general in sync on the year-over-year. Our confusion in the monthly barrage of housing metric releases is that most push the month-over month.
With the proliferation of these indices, data subscriptions must be getting cheaper. There are a few more out there as well.
Of the indices presented, their data collection and methodologies vary significantly (where disclosed) yet their results were consistent perhaps suggesting the 7 for 8 result is coincidence as opposed to an aggregated trend.
Sales prices are not something we should be obsessed with as an indicator of market health (think Las Vegas, mid decade). I’d much prefer seeing more attention paid to sales trends since they are a pre-cursor to price trends if you are trying to reasonably answer the question: Has the US housing market hit bottom?
It is interesting and my rough understanding that most of these indices were created and run by economists, scientists or data wonks, many for Wall Street purposes with virtually no real estate types. That’s obviously fine until you consider what is said in barrage of monthly press releases for some, citing things that are not empirically measured in their respective reports, i.e. weather, inventory, etc. that create further confusion.
I’d love to see a side by side comparison of the lag time from the point of “meeting of the minds” between buyer and seller for each index. The significant lag time reflected in this index genre is a practical one due to the massive scale of information, but I think it would give consumers (who were generally not the intended users of any of these indices at the time they were created) a better sense of reliability for each.
National housing indices provide useful tools for setting government economic policy but the consumer’s obsession with the idea of a national housing market and it’s relevance to their local markets is, well, crazy.
I had a “fantastic” conversation with Dr. Bill Rayburn who is the co-founder, Chairman & CEO of FNC, Inc. Their value proposition has been on collateral side of mortgage origination. He’s a fascinating industry leader who pulls no punches.
BABY BOOMERS, MORE THAN ANY OTHER GENERATION, seem stuck in their youths. Think of how the tastes of so many of their numbers remain ossified in the 1960s and 1970s, from Classic Rock on the radio to recreations of the autos of their youth, such as the VW Beetle, the Mustang and the Mini.
So, too, have their expectations about the economy. Prices only go one way — up — whether for the stuff they buy every day (except for computers and the other electronic accoutrements), their assets such as stocks or houses, or the pay for their services. They can no more conceive another kind of world than one without cell phones. And any departure must be an aberration, surely short-lived and certain to revert to the norm they’d known.
In other words, finance, as we know it, is undergoing massive change and the products we end up with are not going to be the same as we had a few years ago when the market was always going up.
Some say that with the nearly 8 trillion in exposure we taxpayers have through guaranties and investment, rates will rise with the flood of paper issued to pay for all this. I’m not sure. If the economy is lackluster at best for the next 2-3 years, I have a hard time seeing rates rising with the lack of demand in the near term.
Big 3 + UAW aside: Combined common stock worth $3B, so lets give them $34B To date they have: fought emissions restrictions, fuel economy, safety features, make poor quality cars, and paid 12,000 people to not work. I went to school in Michigan and, despite obvious sympathy for hard working people in this situation, I have a hard time seeing how things are going to change in any way whatsoever. I’ll bet they don’t go on the same extravagant trips that AIG took if this goes through now that they have driven their own hybrids.
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About Jonathan Miller
Jonathan Miller is President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm he co-founded in 1986. He is a state-certified real estate appraiser in New York and Connecticut, performing court testimony as an expert witness in various local, state, and federal courts. He holds the Counselors of Real Estate (CRE) designation, is an Appraiser “A” Member of the Real Estate Board of New York, and is a member of RAC. Learn More...
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Columns by Jonathan Miller
'Three Cents Worth' column 3CW ('05-'16)
When Curbed was acquired by Vox, my eleven years of 3CW chart art and column links were broken on Curbed NY, Curbed DC, Curbed Miami, Curbed Hamptons, Curbed LA, and Curbed Ski.
I joined my friend Barry Ritholtz on his new podcast, At The Money (or cleverly, ATM). Masters in Business is still going strong, but he had a new idea – create a really good personal finance-focused show. We recorded this on Tuesday… Read More