September 29, 2010

Purchase Mortgage Volume Down 32.4% YOY And Refi Activity Slips

With average 30-year mortgage rates falling by 12 basis points over the past three weeks, mortgage application volume for purchases in the U.S. is running 32.4% lower on a year-over-year basis (versus 38.8% lower three weeks ago) while refinancing activity fell 1.6% last week, a fourth straight weekly decline according to the latest MBA survey.

Purchase Mortgage Volume Remains Down 38.8% YOY [SocketSite]
Mortgage Bankers Association Applications Survey: 9/24/10 [mortgagebankers.org]

First Published: September 29, 2010 7:30 AM

Comments from "Plugged In" Readers

Let the QEII set sail!

Posted by: diemos at September 29, 2010 8:07 AM

This is the data that those of us who pay attention have been using to miraculously predict the most recent slowdown in housing, while the "experts" continue to use data that looks backwards over the last 3 months. (and are thus always "surprised")

this particular data (persistently rock bottom purchase applications ever since the First Time Homebuyer Credit expired) most likely means that Case Shiller will continue to downtrend at least through November and probably beyond. (CS uses 3 month averaged data so Septembers data is for July, August, September that is then released in October I think.)

I'll be watching this closely as QE2 is rolled out (probably in November 2010). If you see a meaningful bump in this data then you know that housing will rebound 1-2 months later. (and you can suspect that QE2 is "working"). if not, then you know that downside continues.

important IMO to follow this if you want a fairly good gauge of future national RE activity.

Posted by: ex SF-er at September 29, 2010 8:13 AM

diemos, ex SF-er, and the other economics gurus, Could you explain what could additional QE do for the housing market? Interest rates are already at record lows (at least in nominal terms -- quite high in real terms) and FHA lending is loose. Yet that is doing little to nothing to spur housing demand. Why would pumping a trillion dollars of fed funds into treasuries or something similar change anything in that regard? There just isn't any demand right now for housing, and QE would not seem to affect that. Perhaps it would just flow along with a general pickup in the economy (if things work out as planned)?

Posted by: A.T. at September 29, 2010 8:27 AM

QE1, a massive stimulus and insane tax credits managed to blow a $799K one year apple up by a whopping $1000 in the face of 5 years of pent up demand.

QE2 is going to have to be even bigger to do anything other than slow the inevitable real estate decline.

Posted by: tipster at September 29, 2010 8:47 AM

it depends on your perspective.

which is correct?
1) all the intervention to date hasn't improved housing... look, we're still down substantially from where we were in 2007.
or
2) without the intervention we would be in a worse place than we already are.

answer: probably both.

My thoughts is that QE2 will positively affect housing compared to housing without QE2. this does not mean housing will do "well". it simply means it will do better than otherwise.

IF (big if) QE2 is focused on housing somehow, like let's say further purchases of 10 year Treasuries or of MBS, then lower rates will bail out some people. not all, but some. especially if the Govt re-loosens Fannie/Freddie/FHA's lending practices.

sure, mortgage interest rates are at historic lows... but think bigger! imagine if a 5/1 ARM were at 1%. or 30 year fixed at 3%.
this will "save" a bunch of homeowners who will now be better able to manage their monthly bills. (which will reduce the number of distressed sales). it also increases the amount that prospective buyers can pay for a property (since Americans show a high propensity to buy housing based on monthly costs and not overall price).

look at what happened nationally with a tiny tax credit. Now think what can happen with a 50% reduction in mortgage rates. of course the effect will be short to medium term and will come at a HUGE cost, but most decisions are being made that way these days. short term ad-hoc economic patches.

as i've said a fair amount, I think far more effect will be seen in the commodities market and likely the equities market as well... but housing will reap some gains compared to life w/o QE2.

there are 2 hitches to QE2
1) gold, oil and other commodity prices

it'll be hard to maintain QE2 if gas is $6/gallon, gold is at $3k/oz, and food prices skyrocket. Even the Fed is afraid to mess with American's food and gas.

2) our creditors.

there is a possibility (although small, it is real) that our creditors will stop buying our debt due to the monetization by the Fed. This would then require the Fed to buy more and more US Treasury debt, which can lead to currency crisis in a heartbeat.

although I've forecasted QE2 for a very long time we must all understand that it is an act of sheer desperation.

truly forecasting the effects is not possible because
1) it has been tried so very rarely in the history of Modern Earth
and
2) we need to see details of how the Fed will do QE2.

we know the WHO (Fed), and the WHAT (QE), and the WHY (stalling economy, possible double dip recession), and the WHEN is probably Nov 3. But we don't know the HOW or the WHERE yet.

Posted by: ex SF-er at September 29, 2010 8:59 AM

I had a dream this morning about a 5/1 IO ARM at 1% ... then I woke up. But it was good while it lasted.

I calculated that refinancing into a 5/1 IO ARM at 1% would save me $185k in mortgage costs over 5 years. Now that's economic policy I can believe in!!

Posted by: Jimmy (No Longer Bitter) at September 29, 2010 9:15 AM

Thanks for the feedback. I guess I'm skeptical that rates can do much more. I'm with Jimmy that refinancing is nice, easy money -- I just refied into a new 15-yr loan at 4.1% -- knocked payments down from $2200/mo to $1600/mo resulting in $600/mo "free" money. But today's rates are already insane and they are doing very little to stimulate demand, although I agree things would be far worse if rates were not so low. I think we've done about all we can with rates in terms of stimulating housing demand. Free cash in pocket -- tax giveaways that recently ended -- did it, but it sounds like those aren't coming back. People either cannot buy (e.g. no downpayment) or they don't want to buy a declining asset. I think any impact on housing of QE will be indirect and slight unless it is something akin to handing out cash.

Posted by: A.T. at September 29, 2010 9:25 AM

1.) QE2 is a done deal. Bank on it. What form it takes is unclear (massive shock&awe purchase (say 1-2 trillion of treasuries) or a more open ended purchase plan (few hundred billion bi monthly purchases open to revision/cessation as needed). My guess now is that the Fed will commit to somewhere between 500-750 billion in 5,7 and maybe 10yr Treasuries by March of 2011. It will also allow itself to purchase 200 billion (give or take) thereafter, from meeting to meeting (bimonthly) 'as conditions warrant.' That's my guess, and I feel good enough about it to not bet on it :)

2.) I rarely disagree with xsfr but in this case, I have to. Measuring the 'success' of QE2 by housing price metrics (like C-S) is not appropriate. Barring a truly massive purchase of long end Treasuries (thnk 3+ trillion, committed), mortgage rates will not drop much more than 25 to 50bps due to QE2. Lower mortgage rates may drive a few purchases here and there on the margin, but at this point, supply and demand forces will rule, and market clearing prices, however slowly we get there, are an inevitability. You could make the argument (specious in my view) that adding all of this cash to the system would make the banks more willing to lend, but considering the hoard they are already sitting on and fear over scrutinization from regulators, I find it very hard to believe that lending standards will loosen with another trillion in reserves. The TBTF banks, and MBS investors, at this point have factored in their losses from another inevitable (but slow) dip in housing prices, and they know that their cash hoard will keep them 'solvent and liquid' through the process. QE2 might cushion them even more, but it does not add meaningfully to their capital cushion in a way that would affect their housing lending decisions. A truly massive purchase program might change the dynamic only because it could force yields down so much that banks could conceivably increase their mortgage loan risk profile and make enough profit on the spread to justify the higher default risk. But I don't see the massive purchase plan happening, so I believe this point is moot.

3.) QE1 was very much about recapitalizing the banks and consequently helping housing (even though the claim was that it wasn't for either purpose). The 1 trillion+ in MBS that the Fed purchased gave the banks a fresh 1 trillion that could recycle into reserves or buy USTs. It unclogged the MBS from the banks balance sheets, and gave them the $ they needed for the MBS that they were holding at a wishing price - a wishing price that was actually provided by the Fed! How tidy. Measured by those metrics, QE1 worked. It freed the banks from the part of their mess that they thought was a 'good asset (GSE backed MBS)' but the market was no longer treating as a good asset. This recapitalized them, dropped mortgage rates, increased refi activity, improved home turnover somewhat, and helped to support home prices. The Fed knows that the financial system (TBTF) has now had the time it needed to plan for the worst, and the reserves and UST hoard they are sitting on is sufficient to protect them from even the most pessimistic (but realistic) scenario. Whether QE1's 'success' was ultimately a 'good thing' is an open question that will never be settled.

4.) Unless the Fed is truly being run into the ground, QE2 will be measured by two metrics - inflation (expectations) and the unemployment rate (U-3). GDP will be a secondary endpoint. QE2 will be started not to improve the housing market, but instead to signal to the market that parking money in USTs is going to be a losing proposition, because the Fed will make your dollars worth less than the total discounted income stream from your bond holdings (real return will be negative). Put another way, the Fed will hold down the interest rate (by monetizing the debt) such that the total coupon payments and return of principal in 10 years (on a ten year note) will have lower purchasing power in ten years than it does today. Doing so, in theory, should force dollars into higher risk assets (banks make loans instead of buying treasuries, investors by corporates/junk/equities/commodities instead of Treasuries). This process would raise the specter of inflation, which would make companies more inclined to invest in capital assets instead of sitting on cash. This would generate economic activity. Voila, higher inflation, and lower unemplyment. Fed's mnadate fulfilled, Ben gets beatified, and we are all saved.

My post is already way to long, so I'll leave it to others to point out the myriad flaws in this theoretical framework, but make no mistake, that is the theory behind the oncoming headlights of QE2. Any benefit to housing will be through the 'magic of inflation' and increased household formation via improved employment. But I too have a yearn to learn, so I'll be the first to admit that I could be wrong about all of it :)

Posted by: polip at September 29, 2010 9:32 AM

i agree with polip, tho i think many parts of the country have reached the clearing price for real estate.
QE is pushing on a string but it is forcing those with money to put it to work. locally that means housing in real sf will have a much higher floor than the ss bears seem to wish for.

Posted by: anonee at September 29, 2010 9:42 AM

A different view -- upcoming QE 2 is really QE 3. Vers. 1.0 took place in 2001. In each instance there was temporary relief followed by a rebound headache, each one increasingly worse. I don't expect QE 3, or any subsequent update, to be any different. All are based on the assumption that "aggregate demand" can be raised by spending money. The government may be able to give people money; it can't give them wealth. In fact, the latter will be taken to generate the former.

My hope is that 20-somethings wake up and refuse to allow boomers to beggar future generations to avoid paying the bills now.

Posted by: MortgageMaker at September 29, 2010 10:23 AM

Measuring the 'success' of QE2 by housing price metrics (like C-S) is not appropriate.

I'm sorry, I must have not explained myself well. In the end I agree nearly 100% with your above post. Well stated.

a few things:

1)
I only limited my discussion of QE2 to RE because this is a RE blog. Obviously, QE2 will be about far more than housing prices, and thus it's success or failure will be equally expansive.

2)
I am ambivalent on whether or not QE2 will meaningfully impact housing prices or mortgage rates. As I've tried (and failed) to express, the end result of QE2 is impossible IMO to predict because we don't know how it will be implemented or where it will be focused.

my 1% ARM and 3% Fixed example was just me throwing out numbers showing how QE2 COULD affect housing IF such a thing were to happen. I have absolutely no idea where rates will go. on the one hand: in the past some leaders had expressed optimism about getting 30 year fixed rates sub 4%. on the other hand: it's one thing to desire sub 4% rates and quite another to achieve them.

3) equally frustrating is that we also have to see what our politicians do.
right now the fed is "pushing on a string". they provide cash to the banks who hoard it. Will the Fed change other parameters?
For instance; we would likely see more lending if the Fed starts QE2 while simultaneously charging interest on reserves (instead of paying interest on reserves).

too many moving parts for my head.

lastly:
"But I too have a yearn to learn"
ROFL. I can't get anything by you guys.

Posted by: ex SF-er at September 29, 2010 10:23 AM

anonee-

one could actually argue (quite well in fact) that QE1, and QE2 will actually have a deleterious impact on house prices (C-S measure).

why? banks have held off on foreclosing and unloading their REO inventory to preserve the value of their asset (the asset was the loan, but that loan is in default, of course) and thus avoid taking their marks. As the banks recapitalize (courtesy of QE1 and soon QE2) they have less incentive to hold their real estate portfolio. Banks never wanted to be in the real estate business, and they still don't want to be a part of it. The easy way out is to sell the properties. Adding to the supply, sooner rather than later, will necessarily put downward pressure on the market clearing price. And yes, SF will face that pressure too, though perhaps it will be a bit blunted and slower given the characteristics of the 'real SF' housing market. Perhaps this is/was an unintended consequence of QE. Perhaps it wasn't. Either way, eventually, the market clearing price will be found.

Posted by: polip at September 29, 2010 10:28 AM

"But I too have a yearn to learn"

take it as a compliment. a strong voice is usually a sign of a good writer...

Posted by: polip at September 29, 2010 11:11 AM

I very much appreciate all the comments: you guys are way smarter than I am.

The fed is pushing on a string with respect to business spending. It will have some effect, but the problem is lack of demand. If I see demand resulting from QE2, it's fake demand, not real demand, so I'm not going to invest real dollars to meet it, I'll just muddle along with what I have, with the expectation that it will run out of steam. Same way I knew that stabilizing housing prices this year was meaningless: I can just wait it out.

And prices going up by 5-10% per year isn't going to get me to invest in something I don't really need this year because it might be more expensive next year.

That said, that money is going somewhere. Tulips, maybe?

News from the front: this is the first month ever that none of my customers paid on time. Not a single one. Fortune 100 companies down to little 2 man shops - no one paid on time. Even in the worst of 2008, we got about half the checks on time. This month: not a single one arrived on time.

Posted by: tipster at September 29, 2010 11:34 AM

The Fed is worried about deflationary expectations setting in. They will pump as much money into the economy as they need to, to keep that from happening. It will probably be partially through the purchase of Treasuries, and partially through some method we are not thinking of.

The Fed is not primarily interested in propping up the housing market any more, for all the reasons stated already. They mostly just wanted to keep the banks from failing and have accomplished that objective. The economy is mostly doing okay from a policy perspective, though the electorate is upset about the high unemployment.

Gasoline prices are going up no matter what anyone does, global demand is going to outpace global supply and this disparity gets worse the further into the future you look at things. This will probably upset voters, who will go on one cycle after another of "throwing the bums out" but there is nothing politicians can do about it either. Our trade deficit is pretty much 100% caused by petroleum imports, so in the long run we will be much better off weaning ourselves from our dependence on foreign oil. Getting from here to there is going to be tough for a lot of people though.

How can The Fed engineer inflation in an environment with slack demand? I actually don't think there is as much slack demand as the rest of you do. I think you mostly sit in the real estate and finance worlds, where there is considerable slack demand. But in tech, wages are going up considerably. I just got outbid by Netflix on an Engineer I tried to hire last week. He has 12 years experience, an AA degree and was pretty sharp but didn't knock my socks off or anything. I would guess that he was in his mid-30s. They were offering him $170k/yr, or at least that is what he reported. This is probably the truth:

Netflix salaries per Glassdoor.com

So I think the economy is suffering from a pretty severe skills mismatch problem, where we have way too many people trained to do work we don't need anymore and a shortage of skilled worked in other areas. You can certainly expect to see wage inflation for the workers whose skills are in short supply. Is it enough to cause general inflation? I don't know. But I do know that The Fed is worried about deflation and actively wants to juice up inflation to counter it.

What does this mean for housing in general and for The Bay Area in particular? I am sticking to my original estimate years ago that we would see a prolonged period of slack housing demand and flat to slightly negative nominal prices while inflation slowly erodes the real cost. Nothing that I have seen changes my mind about this. It might take even longer than I expected because it looks like inflation is going to be lower than I had thought. I expected them to overshoot on the upside rather than the downside with the first round of stimulus.

Posted by: NoeValleyJim at September 29, 2010 1:14 PM

I have no idea what QE2 will have in the short to medium term, but I see nothing but downside for real estate in real (inflation adjusted) terms for the next few years. QE2 will definitely put some upward pressure on prices, but there are so many structural issues that I can't see it being the end of the problems.

Posted by: lyqwyd at September 29, 2010 1:14 PM

And now Chase is having to pause all foreclosures like Ally/GMAC:

http://finance.yahoo.com/news/JPMorgan-suspends-certain-apf-1054548494.html?x=0

Things like this may exacerbate the need for QE2. The banksters gotta eat too.

Posted by: sfrenegade at September 29, 2010 2:27 PM

Where does it say 'all foreclosures'?

Posted by: R at September 29, 2010 3:02 PM

You are correct, R, my bad. Upon reviewing the article and some others, it may not be *all* foreclosures.

GMAC/Ally's problem was that they used the same guy to sign declarations for all of their foreclosures in 23 states. This guy claimed he had "personal knowledge" of the facts to which he was testifying, and of course he did not since he was processing up to 500 per day. Given the timing of this suspension, I suspected Chase had a similar procedure. I just looked this up and an article in the Washington Post has facts that support my suspicion:
http://voices.washingtonpost.com/political-economy/2010/09/jp_morgan_chase_freezes_56000.html

However, I looked this up, and it looks like California is not one of the 23 states in which Ally is suspending foreclosures, although someone had previously told me that it was. I imagine Chase isn't suspending *all* foreclosures either.

GMAC's suspensions involve REO sales plus evictions, cash-for-keys, and lockouts.

Chase is suspending 56,000 foreclosures. How many foreclosures is Chase currently involved in nationally??????

Posted by: sfrenegade at September 29, 2010 3:28 PM

Looked up some more information about this. Chase's suspension is also in the same 23 states. Apparently those 23 states are the ones that require a court to approve foreclosure, so that's why they have the declaration from the "robo-signer," as these people have started being called.

Posted by: sfrenegade at September 30, 2010 11:08 AM

sfr, I think this helps answer the 'why are they doing this' question.
Fitch Ratings said Wednesday it's asking mortgage companies about their internal processes for executing foreclosure affidavits. If it finds the processes lacking, Fitch will consider downgrading the company's rating.

Posted by: EBGuy at September 30, 2010 12:19 PM

EBGuy, I saw that. It makes sense, since it could impair the ability to foreclose quite significantly.

I'm assuming that the employee in question who was the robo-signer is the MERS rep at the company.

Posted by: sfrenegade at September 30, 2010 12:36 PM

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