U.S. mortgage demand withers as loan rates spike

[notesdev]

http://www.reuters.com/article/ousiv/idUSTRE55238H20090610

By Lynn Adler

NEW YORK (Reuters) - Spiking U.S. mortgage rates drove down total home loan applications last week as demand for refinancing shriveled to the lowest level since November, the Mortgage Bankers Association said on Wednesday.

The swift rate rise crimps affordability, likely cutting offer prices on home sales and prolonging a housing turnaround.

Borrowing costs have soared as bond yields have risen, even as the Federal Reserve has sopped up hundreds of billions of dollars in bonds to keep rates low and stimulate the housing market.

The average 30-year fixed mortgage rate jumped 0.32 percentage point in the June 5 week to 5.57 percent. That was nearly a full point, about 100 basis points, above the record low rate of 4.61 percent in March, the trade group said.

"Clearly, 50 or 100 basis points more on mortgage rates is enough to matter. It effects what people can afford to buy," said Bill Cheney, chief economist at John Hancock Financial Services in Boston.

The vast majority of mortgage activity this year has been from homeowners cutting costs with new loans at rock-bottom rates.

The Mortgage Bankers Association's seasonally adjusted index of total applications dropped 7.2 percent to a four-month low of 611.0 in the latest week.

The refinancing index slumped 11.8 percent to a nearly seven-month low of 2,605.7 last week, and refinancing accounted for about 59 percent of all applications, the lowest share since November. As recently as April, refinancings accounted for almost 80 percent of all home loan applications.

Purchasers have been slower to act in the current housing market, with some waiting in hopes that prices will fall further and others paralyzed by unemployment or wage cuts.

"The more you get people making low-ball offers because they can't afford to offer any more, the less willing conventional sellers are to sell at all," Cheney said. "It tends to freeze the housing market for a bit longer."

Demand for loans to buy homes was little changed last week, rising 1.1 percent to 270.7, having basically been stuck in neutral throughout the important spring sales season.

"I'm not optimistic for 2009 or 2010," Mark Goldman, real estate lecturer at San Diego State University and mortgage broker, said on Tuesday.

The swift percentage point rise in mortgage rates cuts the purchasing power of a borrower by about 10 percent, he estimated.

"Employment is still bad, wages are still low, interest rates are up. That's going to hurt the housing market," Goldman added.

The number of U.S. jobs cut in May was the lowest level since September, but the unemployment rate rose to 9.4 percent, the highest since July 1983. Continued...

[dkf]

1. Once we started talking about how much healthcare would cost

and the realization of how much larger the deficit would be, that was it for low mortgage rates.

So unless prices fall yet again, I've stopped looking for a place and I'm content not buying.

[napi21]

2. Their idea of a spike is .32%!!!! THAAT'S ridiculous!

Back in 1965 we got our mtg. at 6 1/4% and considered it a good rate!

[notesdev]

3. Keep in mind a few macro facts

#1 - abnormally low interest rates were key to blowing the housing bubble and are a key part of the Fed/US gov't strategy to combat the economic crisis

#2 - Even with the huge correction in valuations, housing prices are still far above historical price-to-wage ratios

#3 - a third of a percent in one week doesn't sound like much but it is a huge move, and part of a larger move over the past few months

#4 - Interest rate hikes impact everything in the economy, from governments' ability to borrow to businesses' ability to fund payrolls, to buyers' ability to buy houses, and so on and so forth.

What we are watching is not a little thing; it is Game Over for the Federal Reserve, which now has to explain where it allocated $10 trillion plus and why, in the absence of any results to back up such an enormous financial commitment made on the nation's behalf by that unelected and apparently unaccountable organization.

[Pale Blue Dot]

4. All great points. nt

[CoffeeCat]

5. Were mortgage rates lowered to help the banks?

If so, I'm wondering why mortgage rates have now increased? The powers that be understand that
raising those rates will deter people from re-financing or purchasing a home at all.

Maybe the major reason for those temporary lower mortgage rates was to help the banks shore up some
capital. Maybe, the lower rates were solely to help those banks?

[notesdev]

6. Yes, and...

They were also lowered to dodge the bullet of a mountain of ARM resets last year and this year.

However, in 2010-11 the next mountain - pay-option ARM resets - is going to come tumbling down, and these interest rate games can't be sustained, as the bond market is calling the bluff.

In a year from now when even the Treasury can't borrow below 6%, how much is a house whose valuation was based on 5% mortgages going to be worth? Heck, if this continues the way it is going, no one will be able to borrow for any reasonable rate and the only transactions that will occur will be paid for in cash.

[CoffeeCat]

7. Thank you...

...I so appreciate your perspective and your insight.

I am trying to figure out what in the hell is going on--so I can prepare our family
financially--for whatever the future holds.

The MSM toes the corporate line. No help there.

Again...thanks for your input. I think it helps many.

[notesdev]

8. Glad to be of service

(Disclaimer: I am not a registered investment advisor, and if you make any investment of your own money without doing your own research and coming to your own decision as to the right thing to do, then you deserve to lose it. Also, never buy into an investment you don't understand!)

As to how to prepare... if you have any holdings in stocks, this might be your best chance in a long time to recover some of that value. Bond yields are looking to skyrocket so if you hold bonds stick to short-term only. In my humble opinion the stock markets are being propped up deliberately (see: Plunge Protection Team, Quantitative Easing) to buy time for certain large but insolvent banking concerns to do capital raises. Once the suckers' money is in pocket, look out below!

For the long term there are a couple of ways to look at it. If you think there's a serious possibility that the country will go straight to hell, that society will crumble as governments run out of the money to bribe various constituencies into passivity, that we'll go Mad Max... then the way to plan is not complicated - find a place out of the way, where your family can survive on its own, stock food and fuel and guns and farming equipment and wait for the big collapse. In this scenario, debt doesn't matter since the creditors won't exist as such after the collapse and the currency is unlikely to have any value anyway.

While I acknowledge that is not an impossible scenario, I think (reserving the right to later revise my opinion if I receive new data) that at this time it is still fairly low likelihood for the nation in general. If you think this is the more likely, then pay off every debt that is linked to interest rates in any way at all, as even the most conservative debts will compound like an unsecured credit card. Absent total civilizational collapse, interest rates are going up; the only question is by how much. Presuming that the nation will not fall apart, I am stockpiling cash, saving all I can, and waiting for that interest rate spike; should Treasury bonds hit 15%+ rates for 30-year durations, stick every last dollar accessible into those bonds and spend the rest of my life living off the interest and sipping margaritas in Tahiti. My fallback plan is to wait for the big capitulation in housing prices and buy a good home for peanuts, paying cash, borrowing nothing.


Disclosure: My financial position is pure cash at this time so I have no interest in seeing anyone buy or sell anything.

[CoffeeCat]

9. Preparing....

Yeah, it's hard to know exactly what to prepare for. I'm just not sure.

I do feel that our economy is undergoing a major paradigm shift. We artificially increased our economy's
aggregate demand with credit cards, home-equity dollars and the housing boom that was a house of cards. Now that this
is ending--aggregate demand is moving closer to what it should be if we were rational consumers. The problem, as I
see it, is that we are throwing money at problems--instead of allowing a return to normal. We are creating more
and more bubbles.

These bubbles are then touted as "green shoots". :eyes:

We're also hiding catastrophe. You mentioned insolvent banks. Yeah...interesting. We used to talk about that, but now
it's as if the problem doesn't exist anymore. How quaint! The banks had trillions of toxic assets on their books that
obviously rendered those banks insolvent. Banks were supposed to use our tax dollars to get the mess off the books.
Instead they bribed those in charge of our federal accounting standards--which then allowed the banks to determine
the value of those assets. Viola...suddenly we have healthy banks who are paying back the TARP money!

I think you would agree that those toxic assets are still THERE, and they're still toxic. So yeah, I wonder when this
all falls down.

You mentioned that the stock market is being artificially propped up. Sure feels that way to me as well.

We got out of the market in the fall. We lost about 20 percent, which isn't great--but it could have been worse. My husband wants
to get back in. He sees the market rising daily. I feel a final collapse will happen, but I don't know when. I'll look into short-term
bonds.

So far, my strategy has been to stockpile cash. We're saving like crazy weasels. The only debt we have is my cursed student
loan and our mortgage. I do have about a 4 month supply of food and essentials. So, I'd give us about a C+ for preparedness, if
we have a long recession or depression. If we're go into Mad Max land, I think we're at about a D-.

Do you read Karl Denninger? I like what he has to say and I find him credible. I wish I there were more credible voices
out there.

Sounds like you've got a good plan and that you're doing well. Good on you! I hope you make it to Tahiti and enjoy those margaritas! :)

[notesdev]

10. For dramatization purposes

I like Chris Mortensen's "crash course": http://www.chrismartenson.com/crashcourse

I'm not sure how much I am actually in agreement with his conclusions, but I can't deny, the man can drive a point home, and his facts seem to be solid.


You seem to have a reasonably good handle on the situation. With regards to your husband wanting to get back into stocks - appeal to his mathematical ability, ask him to calculate the upside potential vs. the downside risk - and don't forget that if you take a 50% loss on an investment, a 50% gain only gets you back half of what you lost! I view the risk of equity crash as being very high, and the corresponding upside potential to be limited at best. If you wanted to make money off this bear market rally, that chance is already gone. If you can't spend full-time as a market trader, stick with long term strategies that aren't subject to high levels of risk.


Hope to see you and your family on that beach in Tahiti!