Saturday, August 17, 2013

Trying to Pump Up the Mortgage Market

It seems to me that housing prices hold a unique place in economics.  People who buy houses have taken a long term commitment to pay back their debt, and the mortgages are held or bought and sold by the holders.  The system needs to be based on stable to increasing home prices - the worst possible place for an asset bubble that traps people with 30 year commitments in a house that they couldn't possibly sell for what they owe on it.  As you know, that's exactly what happened. Being underwater on their loan traps them in their house, so people's perceptions of their stature in life plummets and they feel miserable.

There's an old saying that if you can't make your mortgage payment, you're in trouble; if no one can make their mortgage payment, the bank is in trouble.  Again, that's exactly what happened.

So it seems to me that one of the prime emphases of the QE to infinity that has been going on since '08 has been to create inflation in the housing market, to make the cost of the houses, in fiat dollars, more than the mortgage note is written for. One way to do that is to make borrowing cheap, by pressing interest rates artificially low (check!).  Here's a plot of mortgage rates since 1970:

The downside of all that money pumping is that every dollar is worth less compared to real physical things, like food and energy.  Gas prices go up, which makes food and everything else go up.  You're screwed by the attempt to make it look like the banks don't lose money.

You can see in that plot that mortgage rates face the same problem the long bond showed in the post I did last week.  They simply can't go much lower without going negative, so they simply must go up.  When the rates start going up, housing gets less affordable. 

I'm sure you hear realtors on TV or see them in your local paper talking about how house prices are recovering.  John Ransom, finance guy at Town Hall, points out some of the problems that don't show up until you look below the surface.
Half of all home purchases today are being made with cash, accord to the analysis made by Goldman Sachs.
For every dollar of purchase price, only 44 cents is being financed compared with 67 cents before the crash.
Who can buy a home for cash?  In large enough numbers for it to affect this kind of national, big picture, only other banks.  The banks are propping up the housing market, trying to make it look good enough so regular people buy and prices inflate.

There are other ominous signs:
  • Mortgage origination in the United States is only about a third of the size it was at the market peak.
  • “But over the past seven years, the all-cash share of sales has more than doubled”  
  • With the median home price in the U.S. at $214,200, ... the average buyer is putting down $119,952
  • That means that it’s highly likely that you ... can’t afford to buy a home no matter how good your credit is if you don’t have the prohibitive cash down payment. [Some editing: SiG]
Back in the old days of the '70s and '80s, you couldn't get a mortgage on a house if the principal and interest payment for a month exceeded 25% of your gross.  Far from saying you could buy a house worth 4x your gross pay, with the interest rates in place in those days, it had the effect of limiting the price of the house you can buy to about 2.5x your annual gross.  That was with a 20% down payment.  Putting that in perspective to today's prices, if you divide that median price of $214,200 by 2.5, you get an income of $85,860 required to afford that median price home, and that's way above the US median income.  The nominal median income (unadjusted for inflation) is $48,152. 

House prices need to fall a lot (or real incomes grow a lot) if someone making median income is to be able to afford a median house.  House prices need to rise to make the banks look good.  Which do you think is going to happen?  Yeah, me too. 

1 comment:

  1. Another source of cash home buyers is investment. I know two or three people that are taking their life savings out of the stock market and buying houses for cash at foreclosure auctions.
    Around here, a house can be bought at a foreclosure auction for about $60K and then rented out for $1100-1200 a month. I know one woman who owns four, and rents three of them. She has a solid $2500 a month income.
    Another woman I know has three furnished homes with pools that she rents to tourists for $1000 a week.
    Either way, owner occupied homes are becoming more rare.