Destruction of America’s Middle Class: Mortgage Applications Hit 14 Year Low As Home Affordability Declines

America’s middle class is having a difficult time. They are not sharing equally in the Fed-induced stock market surge and real median household income is the lowest since 1995.


Rising home prices (albeit slowing), stagnant wage growth and rising mortgage rates are leading to a decline in home affordability.

Take the National Association of Realtors Homebuyer Affordability Index. You can see that UNaffordability peaked in 2006 when home prices peaked and real median household income was recovering from the 2001 recession.


You can also see that AFFORDABILITY peaked in 2012 after home price declined and mortgage rates hit a low since 2000. Unfortunately, real median household income had also fallen preventing a true housing recovery.

Mortgage purchase applications remain at a 14 year low (like real median household income, mortgage purchase applications are back to 1995 levels). This results in an affordability gap due to rising home prices, rising mortgage rates and declining/stagnant income.


Unless members of the American Middle Class over substantial holdings of the S&P 500 and/or Commercial Real Estate, there massive Federal Reserve asset purchases and interest rate repression scheme has NOT helped the Middle Class.


Is loosening credit standards the answer? Do you think Federal housing policy should heap MORE debt on households that are already suffering from the aftermath of a housing/credit bubble that burst? I would say no.

The solution is not more debt, it is adopting policies that allow that economy and wages to grow. Not stifle recovery.

So, like in the movie “The Incredible Burt Wonderstone,” we have succeeded in making the Middle Class disappear!


Federal Debt Increased By Over $1 Trillion Since Sept ’13 And $6 Trillion Since Dec ’08 (Wage Growth Down 42%, Real Income Down 4.6%)

Well, the US Federal government has certainly been on a tax, borrow and spend spree since 2009. Just since September 2013, US Federal debt has increased by a whopping, mind-numbing $1.1 trillion. And since December 2008, Federal debt has increased by $6 Trillion. That is a 66% increase in Federal debt since President Obama took office.

And how have wages done with $7.5 trillion in Federal government borrowing? Average wage earnings growth are down 42%. And real median household income is down 4.6%.


According to the NBER, the recession ended in June 2009. But Federal debt continued growing, wages kept falling along with mortgage purchase applications.

If we go back to 2007-2008, Federal government debt had begun to soar. Bailouts, stimulus (that didn’t work), continuing wars, etc. are very expensive … and non-productive.

So, $6 trillion in borrowing since 2009 and wage growth down 42% and real median household income down 4.6%. Spiffy!

So, where has all the money gone? Not into the pockets of the American middle class.


Like the scene in the movie “The Incredible Burt Wonderstone” where Stephen Gray tries to drill a hole into his head … and not have any side effects … The Obama Administration and Congress are hoping to spend, spend and spend and NOT have any side effects. Like having citizens pay back the debt.


Is Mortgage Credit Too Tight? Evidence From The Federal Housing Administration (Credit is NOT Too Tight, Income Is Too Low!)

I was moderating a panel discussion at an excellent symposium yesterday on “stress tests” for banks and regulators hosted by IFE Group. The meme that mortgage credit is too tight was repeated several times, mostly by regulators.

Just for background, here are some tables from the FHA Single Family Origination Trends For June 2014.

First, the percentage of loans in the 640-679 credit score buckets has risen from 24.92% in Jan-March 2009 to 42.09% in Apr-June 2014, a 69% increase for the 640-679 credit score bucket. This growth is hardly “tight.” You will also notice that for the highest credit score bucket of 702-850, the peak share was in 2011 of 37.75% and that has fallen to only 17.40% in 2014, a substantial drop in the highest credit score bucket.


Second, the debt-to-income ratio is now averaging 39.45%, only down slightly from 41.675 in 2009. The only noticeable increase in DTI was for the lowest credit score bucket of 500-619 which fell from 40.09% in 2009 to 35.69% in the last reading. An average of 39.45% DTI is not “too high.”


So if credit score and DTI requirements are not “too high,” then what is the problem? Falling/stagnant real median household income.

Here is a chart of FHA Loan Serious Delinquencies. Notice that the first higher delinquency regime occurred when real median household income fell following the 2001 recession. The second higher delinquency regime followed the decline in real median household income starting in 2008 … and it has not abated as of yet.


As Logan Mohtashami and I keeping trying to remind folks … it is the lack of income that is causing the DTI problem, not too tight credit.

Should lenders and regulators loosen credit (again) to stimulate the mortgage market? The answer is no. We do not want to go through another credit bubble cycle again. Particularly when the gap between home prices and income has widened so much.


Good News! Household Net Worth Hits Record $81.5 Trillion In Q2! Bad News! It May Be All Air! (Few Applying For Mortgage Loans)

Earlier today, the Federal Reserve released its latest Z.1 (Flow of Funds) report for the second quarter. The record new worth was driven largely by the growth in stock market prices.


The bad news? The stock market may simply be a bubble inflated by hot air from The Fed via quantitative easing.


If there really is record net worth (and people believe it), why are so few households applying for mortgage loans?


Income growth has stagnated, but the stock market is roaring along. Yet, no Hindenburg Omen.


Yet we do have Fed Chair Janet Yellen pumping all the air into the stock market blimp that she can.



Recovery Summer? Housing Starts Fall 14.4% In August (Down 25% In West), Back To Near Lowest Level Since 1958

So much for another recovery summer. Housing starts declined by 14.4% in August.


Housing starts are near the lows since 1958.


5+ (multifamily) starts are down 31.5% while single unit starts only fell 2.43%.

Of course, housing starts are not skyrocketing because …. household income and wages are not skyrocketing. Quite the contrary.


I wonder if Homebuilders are a little overconfident?



Is US Housing 12% Overpriced? House Prices Rising Faster Than Real Median Household Income (What If Interest Rates Rise??)

Former Goldman Sachs Head of Housing Research says that “House prices are 12% overvalued today. They have already started to decline. Today’s misvaluation matches the excess of 2006-07, just before the Great Recession.

House prices are 12% overvalued today. They have already started to decline. Today’s misvaluation matches the excess of 2006-07, just before the Great Recession. Since World War II home prices have been tightly correlated to income and mortgage rates (R2 = 96%). Investors/cash purchasers, which make up 50% of home sales, have driven real estate volatility to unrivaled levels in trackable history. As public policy makers debate seminal decisions on “forward guidance” and unconventional monetary stimulus we note that each 1% increase in rates drops home valuations by another 4%; at a 2% fed funds rate, where fed officials and investors expect to be by the end of 2016, the overvaluation equals 20%. Respectfully, the United States can not afford another housing driven recession. The facts and correlations – the tenets of probabilities – suggest it is more likely than not that home prices fall 15% in the next three years.

We do know that house prices are rising rapidly (though slowing) and that increase is not associated with a rise in real median household income (which is stagnant).


What is bubbling house prices is lower interest rates that benefit investors more so than the traditional middle class homebuyer. But The Federal Reserve is forecasting a rise in The Fed Funds Rate!

Sept. 17 (Bloomberg) — Federal Reserve officials raised their median estimate for the federal funds rate at the end of 2015 to 1.375 percent, compared with 1.125 percent in June.

The rate will be at 3.75 percent at the end of 2017, the Fed said today for the first time as it included that year in its Summary of Economic Projections. That is the same as Fed officials’ longer-run estimate. The median estimate in June for the long-run fed funds rate was also 3.75 percent.

So, what if The Fed Funds Rate rises to 3.75% at the end of 2017? If wages remain stagnant, there could be “Trouble In River City.” Or Potomac City (aka, Washington DC).


We MAY have Trouble In River City if real wages don’t start rising in a serious fashion.



Got Rent? Homebuilder Confidence Rises To 9 Year High Despite Stagnant Wages And Declining Labor Force Participation

Homebuilders are the most confident than they have been in 9 years, likely because of the prospects for growth in rental demand (spurred by stagnant incomes and declining labor force participation).

Sept. 17 (Bloomberg) — Confidence among U.S. homebuilders rose in September to a nine-year high, showing the industry is gaining ground and will be a source of momentum for the economy.

The National Association of Home Builders/Wells Fargo sentiment measure climbed to 59, exceeding the highest estimate in a Bloomberg survey of economists, from 55 in August, the Washington-based group reported today. Readings above 50 mean more respondents said conditions were good.

Improvement in the job market and low interest rates spurred buying interest this month, as the group’s index of foot traffic through model homes jumped to the highest level since October 2005. Faster wage gains would provide extra momentum for residential real estate, which has seen lackluster demand from first-time buyers.

Improvement in the job market? Are they kidding us? How about declining labor force participation and stagnant wage and income growth? Not to mention flat-lined mortgage purchase applications.


I would say that the enthusiasm is more about providing RENTAL housing than single-family detached housing.


Got rent?