Mortgage Mess Ahead?

Low mortgage rates and large down payments are how buyers today are able to afford these lofty prices. Wondering where the big money comes from? Some of it could be from cash-out refinances:

The article has a couple of other zingers too – excerpts:

In recent years, wealthy homeowners have gotten into the cash-out refi game in a big way. A CoreLogic report in January 2019 found 230 active giant refinanced mortgages between $10 million and $20 million — most originated since 2013. Almost half of these loans were identified as cash-out refis. The average amount of cash pulled out was $6.6 million.  Last year, the average had risen to $8.3 million.

Almost 10 million cash-out refis were originated during the wildest bubble years of 2004–07. While a significant number of them have been foreclosed, most still have not.  As I noted in a previous column, mortgage servicers nationwide have been extremely reluctant to foreclose on long-term deadbeats since 2012.

Another column earlier this year laid out the enormous problem of modified mortgages that have re-defaulted one or more times. Close to two-thirds of all sub-prime bubble era mortgages had already been modified by 2015.  The re-default disaster was so great that by mid-2010 there were more subprime modified mortgages re-defaulting than there were delinquent loans being foreclosed and liquidated by mortgage servicers.

The author is probably the biggest doomer on the beat. He called me once and insisted that I agree with him on his gloomy predictions, and when I wouldn’t, he hung up on me.  But his articles here are a good reminder – whatever happened to those loan modifications?

Link to Full Article

Who Will Give Them Away?

Hat tip to PC for sending in this doomy article about the future of real estate – an excerpt:

At some point, housing prices become so expensive that no matter how low interest rates go, the average household simply can’t afford to buy.

We may very well be at that point now. But even if not yet, it’s clear that the tremendous tailwind driving US housing prices since the Great Financial Crisis is sputtering out.

With this year’s plummet in mortgage rates and the seasonally-strong summer months just ended, one would expect a strong boost to home sales. But instead, just reported a highly unusual price drop from July to August — the largest summer decline seen since the company started compiling this data set.

Suddenly, many of the most incandescent of the red-hot US housing markets are now cooling off fast. This list of the 16 Fastest Shrinking Housing Markets includes San Francisco, San Jose and Boulder, CO

It’s not just prices that are slumping. Home construction is plummeting in hot markets, too. Take San Diego, which just reported that there were 43% fewer homes built in H1 2019 than the year prior. All of SoCal fell 25% for the same period.

What’s behind the sudden softening?

Well, as mentioned, affordability is a big issue. While wage growth has been anemic since the Great Recession, US household debt is now higher than it has ever been.

Read the full article here:

We should get a steady stream of doom from now on because it’s such good click bait.  Just look for the only answer that matters in each article: who is going to give their house away?

Doom, 2019 Style

One of the more vocal doomers is at it again. 

Here’s a link to an article from 2014 when he thought the sky was falling:

Today’s version – an excerpt:

There are growing signs that U.S. home prices are no longer rising. If this is indeed the case, now is the time for sellers or prospective sellers to take a good look at the state of housing markets around the country.  To make smart decisions, home sellers as well as buyers need to find out whether home price gains are simply slowing or whether housing markets are actually topping out.

An excellent publication,U.S. Home Sales Report, published by real-estate data firm Attom Data Solutions, gives a detailed look at conditions in major U.S. housing markets. This quarterly report provides data on the actual gross profit that sellers pocketed in 124 housing markets nationwide.  It tracks every home sold in that metro and compares the price to what the seller previously paid for the house. An average is then taken for all the homes sold in that quarter. The result is the average gross profit in each metro before commissions are deducted.

More Bubble Talk

This expert says the next recession will cause home prices to come down hard, but we learned last time that people have to live somewhere, and the government will save us.

An excerpt:

Stack’s prescience makes his latest warning particularly ominous. He has dusted off the same Housing Bellwether Barometer that raised red flags more than a decade ago and is watching it to see when — not if — the nation’s booming housing market will turn down.

That barometer, Stack explained, is an index of “the most sensitive stocks in the housing industry” — including homebuilders and mortgage companies. It recovered nicely after the 2008-2009 crash and has been flat for the past few years. But over the past 12 months, Stack said in an interview, it “started to go up like a rocket ship again, similar to what it did back in 2004-2005.

That tracks the anecdotal evidence he’s seen of frantic bidding wars in some of the nation’s hottest markets. “It’s that kind of nuttiness that defines the psychology of a bubble,” he said.

Some key statistics also point to a new housing bubble:

  • The Case-Shiller national index hit all-time highs last December and continues to rise.
  • Case-Shiller indexes show prices in Boston, San Francisco, and Charlotte, N.C. about 10% above their previous peaks; Portland and Seattle, around 20% higher, and Denver and Dallas, 40% higher. These are the new boom towns, replacing Las Vegas, Phoenix, and Miami the last time around.
  • The SPDR S&P Homebuilders ETF has quintupled (up 400%) from its March 2009 lows, vastly outperforming the broad S&P 500 , which has gained around 270%.

Stack says the best way to measure housing’s true value is to compare it with long-term inflation, and that measure is also raising a warning flag.

“Median family home prices are 32% above the long-term inflationary trend — in other words it has to fall 32% to get down to where it was,” Stack explained. “That’s not as bad as the 35% in 2005, but it does kind of wake you up and say, this isn’t normal, this is going to end badly.” To me, there isn’t much difference between being 32% and 35% overvalued.

Stack acknowledges there are big differences between 2005 and now. “You’re not seeing the esoteric mortgages, the so-called liars’ loans…,people buying multiple homes, thinking that they can rent it and make money on it,” he said.

Back then there was rampant mortgage fraud, huge demand from Wall Street for subprime mortgage securities and rating agencies giving them black checks, with no regulatory oversight whatsoever. Also, says Stack, there was an inventory glut then and a shortage now that is causing prices to soar.

On the other hand, “you are seeing lending institutions loan 95% or more of the value of the home,” he said. “That is a problem, because when home prices come down, it makes it very easy for the home buyer to walk away from that mortgage.”

One key similarity: “We still have a lot of easy money out there for mortgages,” he said. “We have a Federal Reserve policy today that’s unfortunately like the early 2000s,…, and it’s conducive to bubbles.” The federal funds rate now is very close to the 1% low where Greenspan pushed it, and that triggered the final, disastrous stages of the last bubble.

The big danger, of course, is the next recession, which Stack views as inevitable. “At some point we’re going to have another economic downturn, another economic recession,” he said.  “When we see that downturn…you’re going to see [housing] prices come down quite hard over a period of 12- to 24 months.” He added that he doesn’t foresee a recession until at least 2018.

Stack’s record isn’t perfect — in early 2016 he called a bear market that never happened — but it’s been excellent over the long run, and going back to the 1987 stock market crash, he’s had a knack for spotting bubbles.

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