On Friday, the rate on the 30-year “fixed” mortgage soared to a two-year high of 4.51 percent. That’s more than a full percentage point higher that 6 weeks earlier when rates touched bottom at 3.35 percent. The sudden spike in rates has triggered a bloodbath in mortgage applications which have dipped for 4 weeks straight and are currently down 28 percent on the month. When applications drop, housing sales start to sputter, although the wreckage doesn’t appear in the data for a month or so. Even so, the rising rates will reduce sales and put downward pressure on prices. This could be the end of the housing rebound.
The higher rates are due to the Fed’s June 19 announcement that it planned to scale back on QE (asset purchases) sometime in late 2013 ending the program by mid-2014. Fed chairman Ben Bernanke has since softened his position on “tapering” in an effort to calm the equities markets and push yields on long-term debt lower. But mortgage rates have stayed stubbornly high because of an unexpected selloff in US Treasuries. The Fed will not be able to force mortgage rates lower unless it increases its $85 monthly bond purchases, which none of the analysts anticipate. Thus, rates will hover in the 4.5 percent to 5 percent range for the foreseeable future decreasing the affordability of houses for new entrants and crushing the (profit) margins for professional investors. (Private Equity)
What we are looking at now, is a sharp a decline in housing sales that will send speculators–who represent more than 30 percent of the sales in some of the hotter markets–racing for the exits. Realtors across the country are already reporting a significant change in conditions. As applications drop, the buzz around housing has turned to a whisper. A pall is settling on the market that’s going to change the thinking of many potential buyers who believed that owning a big plywood box with a lawn in front would provide a comfortable retirement. Stagnating house prices will put a swift end to that notion.
Here’s a roundup of news from CNBC’s Diana Olick:
“The housing recovery is in for a major pause due to higher mortgage rates. It is not in the numbers now, and it won’t be for a few months, but it is coming, according to one noted analyst. The market has seen rising rates before, but never so far so fast; there is no precedent for a 45 percent spike in just six weeks. The spike is causing a sense of urgency now, a rush to buy before rates go higher, but that will be short term. Home sales and home prices will both come down if rates don’t return to their lows, and the expectation is that they will not.
Where is the proof of this? We only need look to the $8,000 home buyer tax credit that expired in 2010. The falloff was dramatic.
“That stimulus was so small compared to a 3.5 percent interest rate, it’s almost not even a comparable, but it’s the only thing I can find,” said Mark Hanson, a well-known mortgage analyst in California who predicted many aspects of the mortgage market crash. “When that stimulus went away, new home sales fell 38 percent in a single month, down 25 percent year-over-year, and existing home sales fell 30 percent over a single month, 24 percent year-over year.” (“Dire Predictions for the Housing Recovery”, Diana Olick, Realty Check)
Hanson figures that nearly 1 in 5 new home buyers will cancel their contracts and move on. He also thinks the home improvement stores, big builders, and “mortgage-centric regional and national banks” will get hammered. Hanson emphasizes that a 45 percent jump in rates in 6 weeks is a major “credit event” that will have far-reaching and perhaps catastrophic implications for the market. As he says on his blog, “A comparable credit event in 2010 left new home sales down 37 percent Month-over-Month and existing sales down 30 percent MoM.”
Let’s face it, a “37 percent” decline in sales would be housing Armageddon.
Red flags are already popping up at the country’s biggest lenders where Friday’s earning reports reveal the fallout from the higher rates. Get a load of this from the New York Times:
“Even as two of the nation’s largest banks reported record profits on Friday, beneath the rosy earnings were signs that a sharp uptick in interest rates could spell trouble ahead for Wall Street and the broader housing market.
Kicking off bank earnings season, JPMorgan Chase and Wells Fargo handily beat analysts’ expectations. Profit at JPMorgan surged 31 percent, bolstered by gains in the bank’s trading and investment banking business. Wells Fargo, the biggest home lender in the country, posted a 19 percent increase in its second-quarter profit.
The gains were spread across the banks except for one important source: mortgage banking. The results showed that refinancing activity slowed, as did demand for mortgage loans.
The results could worsen. If rates continue to rise, fewer borrowers are likely to refinance or buy a house. And if the mortgage bond market weakens, banks will take a smaller gain when selling the mortgages…
The banks’ second-quarter results show the early results of the sudden surge. In the second quarter, Wells Fargo received $146 billion worth of quarterly home loan applications, down from $208 billion in the period a year earlier. (Ed: Whoa! That’s a 25% drop in mortgage app revenues already and Bernanke just made the announcement last month which means the quarter was nearly over already.)
Predictably, the Times waits until the end of the article to explain that the two behemoth banks’ “record profits” were mainly the result of accounting sleight-of-hand that shifted reserves into the “win” column. Take a look:
NYT: “But important drivers of the returns at Wells Fargo and JPMorgan did not stem from substantial growth in the underlying businesses. Instead, they came from reduced expenses. Wells Fargo, for example, reduced a crucial expense — building a reserve for bad loans…
In the second quarter, JPMorgan also lifted its profits by reducing loan-loss reserves by $1.5 billion. The bank defended the practice, saying it pointed to the improving condition of its loans.” (“JPMorgan and Wells Fargo Feel First Chill of Rising Interest Rates”, New York Times)
Hmmm. Let’s see: If I just move this number over here, and scratch out my loan loss reserves then, Viola! Record Profits!”
Funny how that works.
It’s going to take more than Enron-type book-cooking to stop the bleeding in the 3rd Quarter when the higher rates put housing sales into a nosedive and the perennially-undercapitalized banks have to take their lumps. Bottom line: The faux housing recovery was built on the Fed’s cheap money. Now the price of money has suddenly shot up leaving the industry without a cornerstone.
Keep an eye on the data. The end is nigh.
MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. Whitney’s story on declining wages for working class Americans appears in the June issue of CounterPunch magazine. He can be reached at firstname.lastname@example.org.