Combining the January and February stats gives us the larger sample sizes to better identify the trends.
The sellers are doing a phenomenal job at restricting the supply, and there have been enough buyers to keep the momentum going. The current listings/sales ratio is better than it was in the years before the frenzy, in spite of much higher pricing. Compare today’s pricing to 2021:
There were 78 of the 201 sales that were all-cash (39%).
It would help if there was more innovation in the mortgage world. You can get a 5-year fixed jumbo at 5.625% today, but with everyone buying their forever home, how many will want short-term money?
Without creative financing or lower rates, we will likely be on a long bumpy road for years to come.
What do you have in mind for creative financing? The S@L days had neg-am, allowing for 3 payment options so borrowers had control of payments during good times or bad, but most took the minimum pay option.
Inflation is sticky and high, Wells Fargo is about to dump the market with 250 billion in MSR’s killing the smaller bankers who have been selling MSR’s to raise cash.
And finally, the fed has drastically reduced their buying of MBS, acting as a lender of last resort.
This is why 39% just pay cash, hoping to refi or use helocs to get some liquidity if needed down the line. But many banks have pulled out of Helocs also.
The banks want to force some more sales to the market, and this will create some price compression.
The RE and lending business will be rightsized before we see any improvements.
What do you have in mind for creative financing?
Well, nothing as exotic as a neg-am, although many will remember how big a fan I was. They are now illegal in California.
How about a 10-year ARM at the 10-year yield, or close? The 10-year T-bill is 4% today, and if a credit union would offer 5% or 5.5% they would have a line of takers out the door. The 5.625% for 5-years was a credit union quote, but 5 years is too short for today’s buyer.
How about a 40-year? That will lower your payment.
Can we go back and add an assumable feature to the existing 3% mortgages? Add a reasonable fee if you must.
And for pete’s sake, can we do a no-doc loan? Qualify by bank statements if you must, but we need a reasonable rate to go with it, like 6% or 7%. Today you hear 9%.
Hey Jim, this is the truth don’t know why I came up Anonymous.
Some good ideas, if we had the normal 1.5-1.75% markup from the 10 year T-bill we would be at 5.5 to 5.75 right now, but the bond market is a mess, pricing for both inflation and a recession, maybe even stagflation.
The large banks and fed have pulled out of the market, so these non-bank lenders need to sale at higher rates because their MSR’s are worth less due to all the selling and only about 6 major buyers in the market currently.
Regarding assumption (like FHA, VA) anything not backed up by Ginnie Mae insurance or some type of credit enhancement not going to happen. The investors make the rules and they don’t like credit or market risk of fully assumable loans, who really can carry 2.5-3% for 30 years not even pension funds or life insurance companies are happy to report those yields, especially if inflation runs at over 4%-6% for the next several years, the fed has themselves backed in a corner and the banks and non-banks are stuck in a liquidity trap.
The best we can hope for is the normal markup of the 10 year T-bill moving forward.
Sellers and Buyers at some point will have to come to terms of the new reality, and the terms will have to include “deal structure.”
Otherwise, we can all face the fact that we are not going to see sub 4% rates again, and let life decide for us if we want to be married to the rates and stuck in our homes. Mobility be damned..
If we had the normal 1.5-1.75% markup from the 10 year T-bill we would be at 5.5 to 5.75 right now, but the bond market is a mess, pricing for both inflation and a recession, maybe even stagflation.
I’m hoping that the future Fed increases (roughly 0.75% expected) are baked into the current mortgage rates so when the Fed pulls the trigger, our rates don’t overreact. And maybe stay the same as they are today?
A 5-6% 10-Year Fixed ARM is not holding anyone back. Hell, I had one at 10.75% in 1991. For non-cash buyers and for those who don’t have mommy and daddy giving them the 10% to 20% down payment is one issue. Mommy and daddy are now counting their pennies and the 5% CD looks attractive compared to giving their child a down payment with the child promising to pay them back when they sell it or when they refinance it and get cash out. Also, some stock options are underwater now and the down payments are shrinking or have evaporated. Now the market is more dependent on people selling their home and rolling their equity into a new home by either trading up or trading down and paying with cash.
We are in a period of price discovery. Will the market rise, remain stable or drop in price? Mortgage rates above 7-8% could have an impact as a well as a prolonged bear market in stocks and a deep long recession in the job market. Could those economic events happen? The real estate market will also be impacted at some point by a liquidity event which will be unforeseen.
Keep in mind that California real estate has never failed to make a new high eventually. Have the cash flow to weather any storm and time is your friend.
Couldn’t agree with your takes more “Old School”.
“The real estate market will also be impacted at some point by a liquidity event which will be unforeseen”
Old School was right again. Silicon Valley Bank probably was the event.
Not done yet:
The gov’t has about 48 hours to fix a-soon-to-be-irreversible mistake. By allowing
to fail without protecting all depositors, the world has woken up to what an uninsured deposit is — an unsecured illiquid claim on a failed bank. Absent
acquiring SVB before the open on Monday, a prospect I believe to be unlikely, or the gov’t guaranteeing all of SVB’s deposits, the giant sucking sound you will hear will be the withdrawal of substantially all uninsured deposits from all but the ‘systemically important banks’ (SIBs). These funds will be transferred to the SIBs, US Treasury (UST) money market funds and short-term UST. There is already pressure to transfer cash to short-term UST and UST money market accounts due to the substantially higher yields available on risk-free UST vs. bank deposits. These withdrawals will drain liquidity from community, regional and other banks and begin the destruction of these important institutions. The increased demand for short-term UST will drive short rates lower complicating the
’s efforts to raise rates to slow the economy. Already thousands of the fastest growing, most innovative venture-backed companies in the U.S. will begin to fail to make payroll next week. Had the gov’t stepped in on Friday to guarantee SVB’s deposits (in exchange for penny warrants which would have wiped out the substantial majority of its equity value) this could have been avoided and SVB’s 40-year franchise value could have been preserved and transferred to a new owner in exchange for an equity injection. We would have been open to participating. This approach would have minimized the risk of any gov’t losses, and created the potential for substantial profits from the rescue. Instead, I think it is now unlikely any buyer will emerge to acquire the failed bank. The gov’t’s approach has guaranteed that more risk will be concentrated in the SIBs at the expense of other banks, which itself creates more systemic risk. For those who make the case that depositors be damned as it would create moral hazard to save them, consider the feasibility of a world where each depositor must do their own credit assessment of the bank they choose to bank with. I am a pretty sophisticated financial analyst and I find most banks to be a black box despite the 1,000s of pages of
filings available on each bank. SVB’s senior management made a basic mistake. They invested short-term deposits in longer-term, fixed-rate assets. Thereafter short-term rates went up and a bank run ensued. Senior management screwed up and they should lose their jobs. The
and OCC also screwed up. It is their job to monitor our banking system for risk and SVB should have been high on their watch list with more than $200B of assets and $170B of deposits from business borrowers in effectively the same industry. The FDIC’s and OCC’s failure to do their jobs should not be allowed to cause the destruction of 1,000s of our nation’s highest potential and highest growth businesses (and the resulting losses of 10s of 1,000s of jobs for some of our most talented younger generation) while also permanently impairing our community and regional banks’ access to low-cost deposits. This administration is particularly opposed to concentrations of power. Ironically, its approach to SVB’s failure guarantees duopolistic banking risk concentration in a handful of SIBs. My back-of-the envelope review of SVB’s balance sheet suggests that even in a liquidation, depositors should eventually get back about 98% of their deposits, but eventually is too long when you have payroll to meet next week. So even without assigning any franchise value to SVB, the cost of a gov’t guarantee of SVB deposits would be minimal. On the other hand, the unintended consequences of the gov’t’s failure to guarantee SVB deposits are vast and profound and need to be considered and addressed before Monday. Otherwise, watch out below.
From a source I trust:
@SVB_Financial depositors will get ~50% on Mon/Tues and the balance based on realized value over the next 3-6 months. If this proves true, I expect there will be bank runs beginning Monday am at a large number of non-SIB banks.
No company will take even a tiny chance of losing a dollar of deposits as there is no reward for this risk. Absent a systemwide @FDICgov deposit guarantee, more bank runs begin Monday am.
Current List of Companies With Silicon Valley Bank, $SIVB, Deposits:
1. Circle: $3.3 billion
2. Roku: $487 million
3. BlockFi: $227 million
4. Roblox: $150 million
5. Ginkgo Bio: $74 million
6. iRhythm: $55 million
7. Rocket Lab: $38 million
8. Sangamo Therapeutics: $34 million
9. Lending Club: $21 million
10. Payoneer: $20 million
The worst part?
These are only the companies that have disclosed their exposure SO FAR.
SVB has nearly $200 billion in deposits with 97% of those deposits above the $250,000 FDIC limit.
Prof Scott’s views: