Have Mortgage Applications Peaked For 2017? Purchase Applications Fall 2.75% WoW (Up 9% YoY), Refi Apps Fall 5.7%

 

Mortgage applications decreased 4.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 12, 2017.

The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. The unadjusted Purchase Index decreased 3 percent compared with the previous week and was 9 percent higher than the same week one year ago.

Typically, applications for a purchase mortgage peak in May (sometimes in April, sometimes in June). So, last week’s mortgage purchase applications print may have been the high water mark for 2017.

The Refinance Index decreased 6 percent from the previous week.  But notice that while mortgage refinancing applications plummeted aroud MayJune rapid the rise in the Freddie Mac 30 year mortgage survey rate (thanks to Fed Chair Bernanke saying that The Fed might end their asset purchase programs), the recent rise in the 30 year mortgage rate has produced decline in refi application.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($424,100 or less) remained unchanged at 4.23 percent, with points increasing to 0.37 from 0.31 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Mortgage originations have not recovered to previous levels due to the amazing disappearance of subprime (sub 620 credit score) lending,

So, we at (or near) the peak for 2017 in terms of mortgage purchase applications. Historically, it will be all down hill until January 2018. But a 9% increase in mortgage purchases applications YoY is pretty impressive!

 

How Homeownership Became the Engine of American Inequality (Or NOT!)

The New York Times had an interesting piece recently entitled “How Homeownership Became the Engine of American Inequality.”

The author blames the mortgage interest deduction (MID) in part for inequality. But the MID has been used for decades to stimulate and preserve homeownership, one of platforms of the Democrat Party. Unfortunately, housing is often no longer “affordable.”

One measure of housing affordability is home prices relative to household income or wages. For example, check out YoY earnings growth for 2001-2003 period. Wage growth was declining as YoY home prices grew. As wage growth grew from 2004-2007, home price growth slowed.  The housing bubble is characterized as a period of declining/low wage growth coupled with rapidly rising home prices. (orange box)

Since 2012, home price growth has started to grow rapidly again and has been higher than earnings growth (pink box).

True, the MID does tend to support home purchases in more expensive housing areas like the west coast. And raising the standard deduction will reduce the demand for housing in lower cost areas like the US flyover states. But is the home affordability problem in the more expensive areas of the country as MID problem? Or is it a supply problem? (as in zoning results in higher home prices making housing progressively more unaffordable). And what about The Federal Reserve with its zero interest rate policies (ZIRP) which contributes to income inequality?

But let’s look at the GINI coefficient (a measure of income inequality) and homeownership rate in the US. Despite continued attempts at leveling the playing field, income inequality has just been getting worse and worse. Notice that income inequality was positively correlated with homeownership rates until 2004; after 2004, income inequality has risen as homeownership has fallen.

How has The Fed helped lower income inequality? It hasn’t.

So focusing on the mortgage interest deduction (MID) as the cause of income inequality is misplaced. Again, Democrats have pushed the homeownership (and affordable housing) platform for decade, but it is only now that it is “unfair?”

Here is Phil Hall”s assessment of the NY Times article.

There is little doubt that removing the MID will result is a slowing or decline in home price growth. Not something that mortgage investors are looking forward to.

Simply Unaffordable! Case-Shiller Home Price Index Grows At 5.8% YoY In February (>2x Earnings Growth)

It is April 25, 2017 and S&P/CoreLogic just released the home price indices for February.

The good news (for homeowners)? Home price growth keeps on rising, now at 5.8% YoY.

The bad news (for renters)? Earnings growth YoY for Production and Non-supervisory workers is growing at 2.34% YoY. That is less than half of home price growth.

Yes, there is a lack of available inventory and median sales price for existing homes is growing at a steady rate around 6.8% YoY.

And home listinga hit a new record low.

But WHERE at home prices growig the fastest? Seattle at 12.2% YoY followed by Portland at 9.7% YoY. The slowest? New York City and Washington DC at 3.2% and 4.1%, respectively. Followed by Cleveland at 4.5% YoY.

With home prices rising at over 2x earnings, housing in the US is becoming simply unaffordable.