Mercy CR, the rage will simply not end. You don't have to put the purchases and applications on every freaking spread. You waste bandwith by doing that.
CR (a/k/a "Ragin' Spreadsheet"): I think refis will drop when the spread between first mortgage rates and HELOC rates narrows sufficiently. What I'm seeing in the Q2 numbers (first mortgage cash-outs up, HELOC portfolio balances down) is balance transfer. If you currently have a 3/1 ARM that's about to adjust, and a HELOC whose rate is up into the 8.00-9.00% range, and you still have sufficient equity, you can do a cash-out refi to pay off the HELOC and end up with the whole balance in a fixed rate at 6.5% or so. That's a smart move for most borrowers.
As I said in the comments to your "60 Days" post, I don't think the new regs themselves will have the immediate effect, if you're thinking in terms of a tightening of credit standards. The short term effect on refis, if any, will come from the bond market reading the new regs and finally demanding a risk premium. (Yeah, I know.)
Freddie Mac's last cash-out report showed that the median age of refinanced loans was just under three years and the median price appreciation was around 33%. In other words, recent refi activity isn't coming from the last-poor-fools-to-the-party who bought 6-12 months ago at the top of the market with 100% stated income Option ARMs. These folks can't afford to refi, or don't have the appraised value to roll costs into the loan.
You would be surprised at how long lenders will be willing to refinance cruddy loans, regulations or no regulations. It's called "a rolling loan gathers no loss," or, alternately, "hot potato." The mortgage industry understands how to play this game of old.
Lenny, I disagree. This isn't a "Alright folks, move along, there's nothing to see here" story, as you apparently would like it to be. CR has been giving us some of the best data and analysis on the biggest factor driving the U.S. economy. He has my thanks and appreciation. And I don't think I speak for the minority of his readers, as I reckon you do.
CR, I'm curious about the apparent contradiction that most of the activity is in both refinancing existing ARMs and new ARMs. Can it be that people are refinancing from one ARM into another? The spread between fixed and variable rates is much closer now and I can't imagine why people wouldn't be getting into a fixed rate.
tanta you're spot on. people with equity (and that's anyone who bought even 24 months ago in the bubble states that only tapped via a HELOC and cashing out, paying off and rolling the balances into a fixed 30-year. makes sense only after you've done a stupid and did a HELOC to begin with. IMO the home ATM concept won't change but will die down dramatically as home price appreciation grows and the only equity to be tapped is through paying off the loan. the peak wealth generation will be the baby boomers than it's all downhill for the majority.
It's very interesting that the share of refinancing is increasing, but at the same time ARM share is increasing too.
One would imagine that the tipical refinancer is combining his old ARM and HELLOC together into one 30-year fixed. But not. He's flipping one ARM that is expiring to another ARM.
That suggests the motivation is not the smart move to reorganise finances, but a forced move to decrease current payments no matter what.
I an individual has an ARM about to reset, let's a 3/1 LIBOR, the margin A credit) is 2.25% plus the one year LIBOR. That now stands at 5.46%. New rate is 7.71%. They can refi back into a new 3/1 for 5.875% with zero points. Makes sense.
"One would imagine that the tipical refinancer is combining his old ARM and HELLOC together into one 30-year fixed. But not. He's flipping one ARM that is expiring to another ARM." - Bob
"I an individual has an ARM about to reset, let's a 3/1 LIBOR, the margin A credit) is 2.25% plus the one year LIBOR. That now stands at 5.46%. New rate is 7.71%. They can refi back into a new 3/1 for 5.875% with zero points. Makes sense." - Lyon
My guess is the above quotes tell the story in a nutshell.
Old ARM into new ARM or increasingly creative loan roll-over makes a ton of sense for people whose time line is very short and the old loan 'expired'.
It also makes sense if you are betting long rates start to go down within the next reset period - a reasonable but not sure-thing bet.
One thing this shows though is the residential RE market will clear very slowly - as is typically the case for RE corrections. So it will take longer to unwind than most expect and probably take just as long or longer to recover.
So Lenny, you're gonna have to be patient. Got lots more of these reports to read.
So it will take longer to unwind than most expect and probably take just as long or longer to recover.
I would guess the mortgage and banking industry will do everything they can to introduce and enforce (if in fact they ever even plan to enforce) the new mortgage guidance " vewy vewy slooooowly", for this exact reason.
Delay the pain as long as possible. Give the homeowner every possible opportunity to get themselves out of trouble. Rollin' Rollin' Rollin' Keep those doggie-loans rollin!
Hey! If I, Joe Homeowner, refinance into another 3/1 ARM, who's to say I won't hit the lottery jackpot before my next three years are up! Anything can happen - this is America!
CR,
Here are some back of the envelope #'s. Seem reasonable to you (obvious took some data points from earlier posts)?
New Home Sales: average from 1963-1995 was roughly 600,000 per year. Average from 1995-present was roughly 970,000 per year. U.S. is adding about 2.7 million people per year. With 2.4 people per household, 1.1 million additional housing units are needed each year. Home ownership is currently 69%, so total annual new home demand is ~759,000 (I round up to 800,000 for some 2nd homes and to be more conservative). The average of new home sales over the last 4 years is ~1.1 million, so the glut is (1.1 million - 800K)*4 years = 1.2 million homes (could be more if you go back further- again, being conservative). Current building rate is still over 1 million with demand closer to 800K. If we are to work off the overhang, the U.S. needs to have less than 800K homes built for many years (this is down from the 1.3 million built in 2005). That is a 40% drop in new home sales. From a builders standpoint, that is a big hit and does not include any hits to sales price and margin squeeze.
Any way to find out new houses already in the backlog to see how much inventory could grow in next 6 months?
CR,
Here are some back of the envelope #'s. Seem reasonable to you (obvious took some data points from earlier posts)?
New Home Sales: average from 1963-1995 was roughly 600,000 per year. Average from 1995-present was roughly 970,000 per year. U.S. is adding about 2.7 million people per year. With 2.4 people per household, 1.1 million additional housing units are needed each year. Home ownership is currently 69%, so total annual new home demand is ~759,000 (I round up to 800,000 for some 2nd homes and to be more conservative). The average of new home sales over the last 4 years is ~1.1 million, so the glut is (1.1 million - 800K)*4 years = 1.2 million homes (could be more if you go back further- again, being conservative). Current building rate is still over 1 million with demand closer to 800K. If we are to work off the overhang, the U.S. needs to have less than 800K homes built for many years (this is down from the 1.3 million built in 2005). That is a 40% drop in new home sales. From a builders standpoint, that is a big hit and does not include any hits to sales price and margin squeeze.
Any way to find out new houses already in the backlog to see how much inventory could grow in next 6 months?
CR,
Here are some back of the envelope #'s. Seem reasonable to you (obvious took some data points from earlier posts)?
New Home Sales: average from 1963-1995 was roughly 600,000 per year. Average from 1995-present was roughly 970,000 per year. U.S. is adding about 2.7 million people per year. With 2.4 people per household, 1.1 million additional housing units are needed each year. Home ownership is currently 69%, so total annual new home demand is ~759,000 (I round up to 800,000 for some 2nd homes and to be more conservative). The average of new home sales over the last 4 years is ~1.1 million, so the glut is (1.1 million - 800K)*4 years = 1.2 million homes (could be more if you go back further- again, being conservative). Current building rate is still over 1 million with demand closer to 800K. If we are to work off the overhang, the U.S. needs to have less than 800K homes built for many years (this is down from the 1.3 million built in 2005). That is a 40% drop in new home sales. From a builders standpoint, that is a big hit and does not include any hits to sales price and margin squeeze.
Any way to find out new houses already in the backlog to see how much inventory could grow in next 6 months?
cbazz, the comments did something weird - and my response to you (and others didn't show up). Hmmm ...
First, thanks to all for the great comments.
Tanta, I suspect you are correct (the guidance will have minimal direct impact). Perhaps the market will correct - I noticed H&R Block and Horizon have taken hits!
dryfly, I'm definitely in the "clear slowly" camp - so I think the bust will last several years.
cbazz, thanks for the numbers. In my missing comment, I noted you might be underestimating the number of second homes and the number of tear-downs. (I see Keith noted this). I'll try to look at the numbers - thanks again for the fine work!
The rate of tear-downs is proportional to appreciation... you need to have sufficient appreciation to generate 'for sure' gains to cover the cost of the tear down & rebuild. As appreciations slow so will tear down rates.
Tear down should not be confused with abandonment - homes can be abandoned and fall into severe disrepair before conditions are ripe for tear down & rebuild.
Look for abandonment to increase & tear down to decrease IMHO.
Occasionally cities will tear down abandoned homes for public safety reasons BEFORE conditions are ripe for rebuild - say to deny gangs & druggies a base of operations. But my experience from the rust belt 80s is that when things get tight - as in a recession - these programs dry up. Its becomes boom time for bangers.
Mercy CR, the rage will simply not end. You don't have to put the purchases and applications on every freaking spread. You waste bandwith by doing that.
We know housing isn't red hot anymore ok?
CR (a/k/a "Ragin' Spreadsheet"): I think refis will drop when the spread between first mortgage rates and HELOC rates narrows sufficiently. What I'm seeing in the Q2 numbers (first mortgage cash-outs up, HELOC portfolio balances down) is balance transfer. If you currently have a 3/1 ARM that's about to adjust, and a HELOC whose rate is up into the 8.00-9.00% range, and you still have sufficient equity, you can do a cash-out refi to pay off the HELOC and end up with the whole balance in a fixed rate at 6.5% or so. That's a smart move for most borrowers.
As I said in the comments to your "60 Days" post, I don't think the new regs themselves will have the immediate effect, if you're thinking in terms of a tightening of credit standards. The short term effect on refis, if any, will come from the bond market reading the new regs and finally demanding a risk premium. (Yeah, I know.)
Freddie Mac's last cash-out report showed that the median age of refinanced loans was just under three years and the median price appreciation was around 33%. In other words, recent refi activity isn't coming from the last-poor-fools-to-the-party who bought 6-12 months ago at the top of the market with 100% stated income Option ARMs. These folks can't afford to refi, or don't have the appraised value to roll costs into the loan.
You would be surprised at how long lenders will be willing to refinance cruddy loans, regulations or no regulations. It's called "a rolling loan gathers no loss," or, alternately, "hot potato." The mortgage industry understands how to play this game of old.
Lenny, I disagree. This isn't a "Alright folks, move along, there's nothing to see here" story, as you apparently would like it to be. CR has been giving us some of the best data and analysis on the biggest factor driving the U.S. economy. He has my thanks and appreciation. And I don't think I speak for the minority of his readers, as I reckon you do.
CR, I'm curious about the apparent contradiction that most of the activity is in both refinancing existing ARMs and new ARMs. Can it be that people are refinancing from one ARM into another? The spread between fixed and variable rates is much closer now and I can't imagine why people wouldn't be getting into a fixed rate.
tanta you're spot on. people with equity (and that's anyone who bought even 24 months ago in the bubble states that only tapped via a HELOC and cashing out, paying off and rolling the balances into a fixed 30-year. makes sense only after you've done a stupid and did a HELOC to begin with. IMO the home ATM concept won't change but will die down dramatically as home price appreciation grows and the only equity to be tapped is through paying off the loan. the peak wealth generation will be the baby boomers than it's all downhill for the majority.
Seasonally-adjusted purchase index is about 9% down from June, 2.5 months ago. I suppose that's a very fast decline.
It's very interesting that the share of refinancing is increasing, but at the same time ARM share is increasing too.
One would imagine that the tipical refinancer is combining his old ARM and HELLOC together into one 30-year fixed. But not. He's flipping one ARM that is expiring to another ARM.
That suggests the motivation is not the smart move to reorganise finances, but a forced move to decrease current payments no matter what.
I an individual has an ARM about to reset, let's a 3/1 LIBOR, the margin A credit) is 2.25% plus the one year LIBOR. That now stands at 5.46%. New rate is 7.71%. They can refi back into a new 3/1 for 5.875% with zero points. Makes sense.
"a rolling loan gathers no loss." - tanta
"One would imagine that the tipical refinancer is combining his old ARM and HELLOC together into one 30-year fixed. But not. He's flipping one ARM that is expiring to another ARM." - Bob
"I an individual has an ARM about to reset, let's a 3/1 LIBOR, the margin A credit) is 2.25% plus the one year LIBOR. That now stands at 5.46%. New rate is 7.71%. They can refi back into a new 3/1 for 5.875% with zero points. Makes sense." - Lyon
My guess is the above quotes tell the story in a nutshell.
Old ARM into new ARM or increasingly creative loan roll-over makes a ton of sense for people whose time line is very short and the old loan 'expired'.
It also makes sense if you are betting long rates start to go down within the next reset period - a reasonable but not sure-thing bet.
One thing this shows though is the residential RE market will clear very slowly - as is typically the case for RE corrections. So it will take longer to unwind than most expect and probably take just as long or longer to recover.
So Lenny, you're gonna have to be patient. Got lots more of these reports to read.
So it will take longer to unwind than most expect and probably take just as long or longer to recover.
I would guess the mortgage and banking industry will do everything they can to introduce and enforce (if in fact they ever even plan to enforce) the new mortgage guidance " vewy vewy slooooowly", for this exact reason.
Delay the pain as long as possible. Give the homeowner every possible opportunity to get themselves out of trouble. Rollin' Rollin' Rollin' Keep those doggie-loans rollin!
Hey! If I, Joe Homeowner, refinance into another 3/1 ARM, who's to say I won't hit the lottery jackpot before my next three years are up! Anything can happen - this is America!
CR,
Here are some back of the envelope #'s. Seem reasonable to you (obvious took some data points from earlier posts)?
New Home Sales: average from 1963-1995 was roughly 600,000 per year. Average from 1995-present was roughly 970,000 per year. U.S. is adding about 2.7 million people per year. With 2.4 people per household, 1.1 million additional housing units are needed each year. Home ownership is currently 69%, so total annual new home demand is ~759,000 (I round up to 800,000 for some 2nd homes and to be more conservative). The average of new home sales over the last 4 years is ~1.1 million, so the glut is (1.1 million - 800K)*4 years = 1.2 million homes (could be more if you go back further- again, being conservative). Current building rate is still over 1 million with demand closer to 800K. If we are to work off the overhang, the U.S. needs to have less than 800K homes built for many years (this is down from the 1.3 million built in 2005). That is a 40% drop in new home sales. From a builders standpoint, that is a big hit and does not include any hits to sales price and margin squeeze.
Any way to find out new houses already in the backlog to see how much inventory could grow in next 6 months?
Great blog. Thanks.
CR,
Here are some back of the envelope #'s. Seem reasonable to you (obvious took some data points from earlier posts)?
New Home Sales: average from 1963-1995 was roughly 600,000 per year. Average from 1995-present was roughly 970,000 per year. U.S. is adding about 2.7 million people per year. With 2.4 people per household, 1.1 million additional housing units are needed each year. Home ownership is currently 69%, so total annual new home demand is ~759,000 (I round up to 800,000 for some 2nd homes and to be more conservative). The average of new home sales over the last 4 years is ~1.1 million, so the glut is (1.1 million - 800K)*4 years = 1.2 million homes (could be more if you go back further- again, being conservative). Current building rate is still over 1 million with demand closer to 800K. If we are to work off the overhang, the U.S. needs to have less than 800K homes built for many years (this is down from the 1.3 million built in 2005). That is a 40% drop in new home sales. From a builders standpoint, that is a big hit and does not include any hits to sales price and margin squeeze.
Any way to find out new houses already in the backlog to see how much inventory could grow in next 6 months?
Great blog. Thanks.
CR,
Here are some back of the envelope #'s. Seem reasonable to you (obvious took some data points from earlier posts)?
New Home Sales: average from 1963-1995 was roughly 600,000 per year. Average from 1995-present was roughly 970,000 per year. U.S. is adding about 2.7 million people per year. With 2.4 people per household, 1.1 million additional housing units are needed each year. Home ownership is currently 69%, so total annual new home demand is ~759,000 (I round up to 800,000 for some 2nd homes and to be more conservative). The average of new home sales over the last 4 years is ~1.1 million, so the glut is (1.1 million - 800K)*4 years = 1.2 million homes (could be more if you go back further- again, being conservative). Current building rate is still over 1 million with demand closer to 800K. If we are to work off the overhang, the U.S. needs to have less than 800K homes built for many years (this is down from the 1.3 million built in 2005). That is a 40% drop in new home sales. From a builders standpoint, that is a big hit and does not include any hits to sales price and margin squeeze.
Any way to find out new houses already in the backlog to see how much inventory could grow in next 6 months?
Great blog. Thanks.
My apologies. Not sure why my comment is on there three times.
cbazz,
What about tear-downs? Isn't there a certain amount of housing destruction too?
cbazz, the comments did something weird - and my response to you (and others didn't show up). Hmmm ...
First, thanks to all for the great comments.
Tanta, I suspect you are correct (the guidance will have minimal direct impact). Perhaps the market will correct - I noticed H&R Block and Horizon have taken hits!
dryfly, I'm definitely in the "clear slowly" camp - so I think the bust will last several years.
cbazz, thanks for the numbers. In my missing comment, I noted you might be underestimating the number of second homes and the number of tear-downs. (I see Keith noted this). I'll try to look at the numbers - thanks again for the fine work!
Best to all.
The rate of tear-downs is proportional to appreciation... you need to have sufficient appreciation to generate 'for sure' gains to cover the cost of the tear down & rebuild. As appreciations slow so will tear down rates.
Tear down should not be confused with abandonment - homes can be abandoned and fall into severe disrepair before conditions are ripe for tear down & rebuild.
Look for abandonment to increase & tear down to decrease IMHO.
Occasionally cities will tear down abandoned homes for public safety reasons BEFORE conditions are ripe for rebuild - say to deny gangs & druggies a base of operations. But my experience from the rust belt 80s is that when things get tight - as in a recession - these programs dry up. Its becomes boom time for bangers.