Housing Smoke and Mirrors (26) “The Plot Thickens” depicted the crime scene in which the Federal “Acronyms” were moving with alacrity, to occupy the receding GSE housing footprint, before the “Government Shutdown” and/or the “Taper” intervened. Over the last week, new evidence arose that shed light on previous crimes and explained the modus operandi of the criminals. In anticipation of impending doom, the National Association of Homebuilders (NAHB) changed the reasoning and methodology behind its Improving Markets Index[i]. The new index will now track the markets to show a transition stage from recovery to bubble conditions. The NAHB is clearly setting a tripwire to indicate the onset of the next crisis.
The Fannie Mae September National Housing Survey[ii] suggested that, although mortgage interest rate expectations have risen, rising house price expectations have just been put on temporary hold. The “Taper” has been taken on board; and it is not seen as an overwhelming negative factor for house prices. It will be interesting to see if the “Shutdown” has a similar benign impact on house price expectations in the next survey.
In sharp contrast however, respondents significantly became more negative on the prospects for their own personal finances. House prices therefore still remain disconnected from individual financial reality; which suggests that a bubble exists. The Lender Processing Service (LPS) provided probable cause for this disconnection in its disingenuous August Monitor[iii]. The report admitted a direct causal link between rising interest rates and declining mortgage refinancing activity.
The rise in interest rates has made approximately 50% of mortgages un-refinancible. The survey then admitted that the “Acronym” known as HARP is driving the refinancing business. This supports the thesis in Housing Smoke and Mirrors (25) “The Game’s Afoot” that “Acronyms” are providing lower than market interest rates in order to keep the refinancing window open.
The disingenuousness was compounded when the report concluded that it is reasonable to expect that 2nd Liens will now increase again. One can reasonably ask how 2nd Liens can increase at a time when high mortgage interest rates are choking off refinance activity. The LPS is either suggesting that interest rates are about to fall; or it is saying that HARP refinancing is going to get ramped up into 2nd Liens. In our opinion the LPS is suggesting the latter, by being vague about the former. We came to this conclusion based upon an objective appraisal of the analysis provided in the survey.
The survey provides a graph (above) which clearly shows the creation of bubble conditions in the housing market. The LPS does not however consistently call a Bubble a Bubble. The first Bubble, identified in 2002, has no Federal Government stimulus involved. It was clearly created by the Federal Reserve’s monetary stimulus which monetised the fiscal expansion related to the Federal Government’s War on Terror. The second Bubble in 2007 is called a “Crisis”. This “Crisis” was created on Wall Street. Amazingly, the third Bubble is actually called HARP; which suggests that it was created by the Federal Government. We saw three Bubbles; the LPS saw one Bubble, one “Crisis” and a HARP.
We suggest that the LPS’s expected increase in 2nd Liens in 2017 is the fourth Bubble; which will be driven by “Acronyms” like HARP which are enabled by the Fed’s balance sheet.
The FHFA confirms that the disingenuousness began with the “Acronym” known as HAMP. HAMP modifications jumped immediately after the Housing Bubble burst in 2009. These modified mortgages came from the GSE’s, who found themselves in Federal custody, as a consequence of the Bubble bursting. Fannie Mae in particular was the biggest casualty and hence HAMP user. The recently published Foreclosure Prevention Report suggests that HAMP may not be running at crisis levels, however it is still at elevated levels above the norm[iv]. The LPS graph should then have another Bubble Peak in 2010, presumably called HAMP by applying the same convention!
The Mortgage Bankers Association (MBA) September Credit Availability Index (CAI) suggests that the “Acronyms” will need to increase their business volumes, because credit conditions have weakened again for the second month. This drop in in credit was attributed to the withdrawal of thirty year loans by the banks. This is a very interesting early warning signal. In Terminal Velocity (12) “Normalization?”[v] it was suggested that the Fed was normalizing the Yield Curve; in an attempt to stimulate risk taking by lenders through creating higher market rates of return. One can see that refinancers have also been stimulated through subsidised lower than market interest rates, by the various “Acronyms”, so that they do not get punished by this Yield Curve normalization. The pulling of thirty year mortgages suggests that the banks have not been stimulated to lend by the higher returns that they can now command. If anything, the banks have concluded that higher interest rates will weaken the economy and the credit worthiness of borrowers. Consequently the banks have tightened credit conditions. The Fed’s attempt at Yield Curve normalization has therefore failed; and has actually created an economic headwind. One can also say that the Fed’s Guidance has been too effective. The market has tightened liquidity well in advance of the Fed delivering on this promise. The Fed therefore is now in a situation in which its next move is an easing one, even though it has signalled a “Taper”. Guidance has therefore been so effective, that it has failed in practice. Allegedly, “dogs that bark don’t bite”; and it would seem that the Fed’s bark has inflicted greater damage than its bite was intended to.
The results of this failure are just starting to appear, like the light from dead stars, in the historical data. RealtyTrac tried to talk up the picture in its latest report[vi].
The general long term picture is portrayed as improving foreclosures; but this is achieved by using easy comparisons from the worst of the crisis. The shorter term monthly data, beginning in August, shows the foreclosure picture getting worse. CoreLogic noted this similar deteriorating short term pattern, moving against an improving long term trend[vii]. According to the company, foreclosures were completed in August at a rate of two thirds of that from a year earlier. There were 48,000 completed foreclosures during August 2013 compared to 72,000 in August 2012, a decrease of 34 percent. The August number was however up 1.3 percent from the 47,000 completed in July. According to a new index compiled by First American and the NAHB, housing activity is running at 85% of its pre-Crash levels[viii]. Clearly there are those within the industry who see the attempts, by the Federal Government and Federal Reserve, to make up the remaining 15% as the rarified atmosphere of the next Bubble.
- NAHB Replaces Improving Markets Index; Smaller Metros Lead
- Housing Market Optimism Tempered by Shutdown
- Rising Rates Plus Rising Equity May Spur HELOC Demand
- GSE Delinquency Rate Less Than Half of Industry Average
- Terminal Velocity (12) – “Normalization?”
- Foreclosure Problems are Increasingly Local
- Shadow Inventory Drops below 2 Million Homes
- Housing Market Running at 85% of Normal, Pre-Recession Activity
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