Real Estate Market vs Mortgage Rates – Let the Battle Begin
On September 13, 2012, Ben Bernanke launched QE3. The Federal Reserve is going to buy $40 billion of agency MBS per month, or $9.12 billion per week.
During the 15 weeks since the QE3 announcement, ending Jan 2, 2013, the Fed has purchased $245.4 billion or an average of $16.36 bn. per week. In other words, the Fed is buying $7.24 billion more per week than announced. There are currently $927 billion of agency MBS on the Fed balance sheet. The $7.24 billion per week is the amount the Fed is re-investing as previous MBS are being prepaid. At this rate, the Fed will turn over about 40% of its portfolio this year.
If we use the average MBS purchases since QE3 began, the Fed is buying at a rate of $850.7 billion per annum. Let us put this number in the proper perspective:
1. According to the Mortgage Bankers Association, the US originated $1,712 billion of mortgages in the four quarters ending Sept 2012. At its current pace, the Fed is buying 49.7% of all originations.
2. According to Freddie Mac, for the first eleven months of 2012, 80% of the mortgage originations were refinances. This is a weighted average, so we can assume $1,270 billion of the originations were refinances and $342.4 billion were purchases. In other words, the Fed is purchasing 100% of all purchase mortgage originations plus 41.4% of the refinances.
3. Approximately 90% of originations are agency conforming and those are the only securities that Bernanke can buy. With this adjustment, the Fed is actually buying up a whopping 55% of all conforming originations.
4. There are about $9.5 trillion of total mortgages outstanding, with the Fed owning about 10% of all mortgages. As the non-conforming loans are prepaid, either voluntarily via a refinance or involuntarily via foreclosure, the Fed is going to own more and more as QE-infinity continues.
What is the expected outcome of this unprecedented recklessness? In theory, the Fed should be in total control of mortgage rates, since they are buying 50% of the market. However, if driving down rates is the goal, Bernanke has not been too successful thus far. The chart below shows rates have been flat since QE3 has begun and have reversed upward in the first few days of the new year.
Mortgage interest rates as of January 3
Similar to mortgage rates, the 10 yr treasury has not responded much to QE3 and QE4 until recently, when it started going up. If Bernanke wants to manipulate treasury rates, he may have to launch another QE to finance yet another $1 trillion of the federal budget deficit, just for this year. 'QE4' that has recently replaced Operation Twist is apparently not enough.
The 10 year treasury note yield. 'QE 3 and 4' are increasing inflation expectations, which proves to be a more powerful influence on rates for the moment than the purchases by the Fed.
The first signal is already here. According to the most recent Mortgage Bankers Association loan application survey for the two weeks ending December 28, 2012:
Mortgage applications for the week ending December 28, 2012 decreased 21.6 percent from the week ending December 14, 2012 (two weeks prior) ……………… The Refinance Index decreased 23.3 percent compared to the week ending December 14, 2012. The refinance index fell for three consecutive weeks, with the week ending December 28, 2012 at the lowest level since April 2012. The seasonally adjusted Purchase Index decreased 14.8 percent compared with levels reported two weeks ago.
There is no reason for anyone to refinance once rates are no longer going down. The only refinances left would be the HAMPs, HARPs and the procrastinators. It would not take long to flush them out of the system. The chart below is based on data from Freddie Mac. At over 80%, the percentage of refinances is not only at record high, it has been this high for the last four years. By how much will refinance applications drop this time, 20%, 30%, 50%, more? Look at what happened in 1999, at the end of the technology bubble. When rates increased from the 7% range to over 8%, refinance activity plummeted. I think if mortgage rates were to rise above 4%, refinance activity may vanish completely.
Refi percentage versus mortgage rates
We know rates cannot go down forever. Is this the beginning of trend reversal or is Bernanke going to throw in a few more kitchen sinks before throwing in the towel? Am I the only one who thinks that Bernanke has exhausted his bag of tricks? What can he possibly do to drive rates lower, if that is his desire?
There are two ways to drive rate lower. Firstly, Bernanke can up his bid and buy whatever is needed to keep interest rates at his target level. This should not cost much more since Bernanke is already buying approximately half the market. Another trillion or so and Bernanke can own the entire market. Secondly, Bernanke can hope that if the volume of refinancing applications decreases, the originators will voluntarily reduce their profit margins. That obviously would only have a limited effect. Lenders are certainly not going to originate loans at a loss.
It is not too early to contemplate what real estate conditions would be like if rates were no longer declining.
Without the refinance business, what would happen to the lenders such as Wells Fargo which have been living off the Bernanke gift?
Even without mortgage equity withdrawal, refinances have typically reduced mortgage payments, contributing to household cash flow. To what degree will the economy be affected when the music stops?
The housing bulls have always claimed that there are millions upon millions of well qualified buyers on the sidelines, even though they are unjustly denied mortgages due to unreasonably stringent underwriting practices. How many qualified buyers are really there, waiting to jump in on this recovery?
If rates were to go up, home prices would have to offset a higher mortgage payment. Is the market strong enough to absorb that added cost?
Real Estate Market vs Mortgage Rates – Let the Battle Begin.
Charts by: StockCharts, Freddie Mac
Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
8 Responses to “Real Estate Market vs Mortgage Rates – Let the Battle Begin”
Most read in the last 20 days:
- Alan “Bubbles” Greenspan Returns to Gold
Faking It Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. […] The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. — Alan Greenspan, 1961 He was in it for the power and the glory... Alan Greenspan gets presidential bling...
- End of an Era: The Rise and Fall of the Petrodollar System
The Transition “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
- European Banks and Europe's Never-Ending Crisis
Landfall of a “Told You So” Moment... Late last year and early this year, we wrote extensively about the problems we thought were coming down the pike for European banks. Very little attention was paid to the topic at the time, but we felt it was a typical example of a “gray swan” - a problem everybody knows about on some level, but naively thinks won't erupt if only it is studiously ignored. This actually worked for a while, but as Clouseau would say: “Not...
- Writing on the Wall
Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so. It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
- Gold – Eerie Pattern Repetition Revisited
Gold Continues to Mimic the 1970s Ask and ye shall receive... we promised we would update the comparison chart we last showed in late November in an article that kind of insinuated that it might be a good time to buy gold and gold stocks (see: “Gold and Gold Stocks – It Gets Even More Interesting” for the details). We are hereby delivering on that promise. A Lydian gold stater from the time of the famously rich King Croesus, approx. 570 BC. It seems they already had this...
- The Central Planning Virus Mutates
Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination. A...
- A Fully Automated Stock Market Blow-Off?
Anecdotal Skepticism vs. Actual Data About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals. The bots keep buying... Illustration via...
- Destination Mars
Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks. If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical. But, in certain economies, this is now standard operating procedure. The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
- America Has Become a “Parasitocracy”
Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to. Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
- Fat People for Trump!
Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot. The protest vote attractor with the funny hair. Image credit: Liberty Maniacs Trigger warning: In the following ramble, we make fun of...
- Long Term Market Perspectives
Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world. Ye olde bristlecone Photo credit: Kosta Konstantinidis You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...
- EU Sends Obsolete Industries Mission to China
“Tough Negotiations” The European press informs us that a delegation of EU Commission minions, including Mr. JC Juncker (who according to a euphemistically worded description by one of his critics at the Commission “seems often befuddled and tired, not really quite present”) and European Council president Donald Tusk, has made landfall in Beijing. Their mission was to berate prime minister Li Keqiang over alleged “steel dumping” by China and get him to cease and...