Last week the Mortgage Bankers Association (MBA) reported that nationwide mortgage applications have fallen nearly 5%. Higher interest rates combined with increased mortgage insurance premiums and tighter lending standards have hit applications hard. Refinance requests were also down.
During the start of our housing recovery, the Federal Reserve purchased mortgage-backed securities and Treasuries (Quantitative Easing) as a means to keep interest rates low and spur growth. This worked well, but when the Fed hinted at winding this program down in this year, interest rates jumped. Despite this uptick over the last year, interest rates are actually still low by historical standards.
Refinancing loans have been the most adversely effected, with some smaller mortgage refinancing companies actually closing their doors. While the real estate market has gained strength over the last few years, it hasn't been busy enough to fill the void left by the lack of refinance applications.
Right now, the reduction in loan applications has some in the mortgage industry worried. Adding to the woes, The Federal Housing Administration (FHA) has raised the mortgage insurance premiums while simultaneously introducing stricter underwriting requirements. Once insurance premiums are added into the equation, borrowing money may become too expensive for some borrowers.
With the days of the "low-doc" and exploding ARM loans in the rear-view mirror, mortgage requirements have become tighter for both lenders and borrowers. Lenders now will require that debt does not exceed 43% of the borrower’s income. In addition, underwriters must thoroughly scrutinize bank records, tax returns, pay stubs and other paperwork prior to proceeding.
Quantitative easing has certainly boosted consumer buying power and moved markets, but the reality of low wages and unemployment persists in different areas of the country. Remember that real estate is local and is greatly varied within each community. As QE winds down, employment data and median household income will become more important than ever, especially in how they relate to affordability.
Eco 101 says that affordability drops as money becomes more expensive. Buyers will get less house for the money and this will put downward pressure on prices. It would be easy then to conclude that interest rates have an inverse relationship with home values. As rates rise, the value goes down and vice versa.
Others have emphatically argued that this is not the case, and have provided historical data as evidence. I'd argue (also with historical data) that the price increases were a direct result of the Fed's bond buying program. Cheap money created a floor and played a pivotal role in fueling our housing recovery. Also keep in mind, that it wasn’t too long ago when we were abruptly reminded that housing values can go down. Finally, factor in the combination of stricter lending standards, higher insurance premiums, less demand and a growing inventory.
Regardless, you should only buy a home when you're fiscally sound and it should be at a price you can afford. All other economic data should be considered as secondary to that.
Anyway, let’s see what happens next.
-Jason