Real Estate Facing First Test of 2013
I noticed a lot of women wearing sparkling red shoes this holiday season, now I know why. They all want to follow the yellow brick road to Kansas, the land of no cliffs. The market seems to be cheering over:
1. Everyone has to pay more taxes.
2. There's not a dent in the deficit.
3. The debt ceiling is looming, if it's not already here.
Pertaining to real estate, the 10 year treasury yield has risen solidly above 1.8%. I suspect this is going to fluctuate wildly as the markets digest the impact of the fiscal cliff-related decisions. In the next few days, we shall also see how mortgage rates react. More importantly, we should be able to see if the invisible hands of the Feds can hold the agency MBS market steady. So far, since the announcement of QE3, the Feds have already been going full throttle, purchasing $236.9 billion of MBS in 14 weeks. I am not sure what the wizard can do anymore without buying more than the QE3 guidelines he has set for himself.
We know that refinancing has accounted for at least 70% of the mortgage originations in 2012. Freddie Mac reported that the average 30 year mortgage rate was 3.35% for December 2012, a full half percentage point below the 3.96% a year ago and over 1% below the 4.71% average during December two years ago. If rates go up, the refinance business will not just decline, it will vanish. Frankly, I have no clue how rates may affect the HAMP and HARP interventions, but their aggregate volume is not expected to be much.
The bigger test, however are purchases. If you watch CNBC, it is unanimous that the housing bottom is behind us and recovery is well on the way. If you listen to the home builders, they will tell you that their average buyers are over-qualified and a little increase in mortgage rates would have no impact on sales. In the next few weeks, we should be able to see if rates actually matter. It becomes a true test to see how qualified buyers really are, as they try to purchase at a higher cost.
Most of the time, the weekly mortgage application reports from the are pretty useless. They are however one of the earliest indicators of changes and may prove to be very telling in the next few weeks. If mortgage rates go up, there should be a rush to lock in rates, resulting in a spike of applications when all the procrastinators come off the sidelines. Then the volume will settle down and we shall see how deep and strong the demand pool really is.
Also coming up is the traditional spring selling season for the home builders, starting after the super bowl weekend. This year, the season may be overshadowed by the debt ceiling battle. I make it a practice not to discuss specific trades, but I have to admit I am salivating over the opportunities in these home builders right now.
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