The New Low Multiplier: Mortgage Purchase Applications Down 56% Since 2004 (The Subprime Effect)

The US residential mortgage market hasn’t been the same since subprime lending (and other assorted innovative mortgage financing products) peaked during the 2004-2007 period. October 2004 was the peak of the mortgage purchase applications index which now dwells at 211.70, nearly a 56% decline.

Here is a chart of mortgage purchase applications since 2000. Note the crash in the M1 Money Multiplier as The Fed massively intervened in the financial markets and subprime lending mostly disappeared. Nothing has been the same since.


But back to the current state of the mortgage applications.

Mortgage applications decreased 3.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending November 20, 2015. The previous week’s results included an adjustment for the Veteran’s Day holiday.

The Refinance Index decreased 5 percent from the previous week. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. The unadjusted Purchase Index increased 5 percent compared with the previous week and was 24 percent higher than the same week one year ago.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.14 percent from 4.18 percent, with points increasing to 0.49 from 0.45 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

So, there you have it turkey day fans! A listless economic recovery combined with mortgage regulations have produced a genuine turkey of a mortgage market.


Will Fed Raise Rates With Zero Inflation? The Zero Velocity Economy

The Federal Reserve has a target inflation rate of 2%. Whether we use CPI YoY or Personal Consumption Expenditures YoY, the US economy is no where near 2%. Currently, the core personal consumption expenditures YoY are growing at only 1.31%, no where near The Fed’s target rate for inflation.


How can this be, you ask? Look back in 2008 (left hand side of chart) where core inflation was about 2.4% and excess reserves were low. The problem is in 2013-2015. Excess deposits have been growing faster than the funds can be loaned out. This translates into declining inflation.

True, auto and student loans have been growing in recent years, but these are not enough to generate inflation. The excess reserves remain trapped in the Federal Reserve System. This is another reason why mortgage purchase applications are low.


Then there is the CRB Foodstuffs index.


Inflation? What inflation??


Case-Shiller Home Prices Rise 5.45% YoY, Over Twice Wage Growth (Miami Fast Rising City MoM)

With US GDP growth at 2.3% for Q4, it looks like The Fed will raise rates in December. In the meantime, housing still remains unaffordable for thousand of households.

What about home prices?

The Case-Shiller 20 metro home price index rose 5.45% in September. Unfortunately, that is over 2x average wage growth.


Of course, CoreLogic’s Loan Performance Index came out earlier and said the same thing.


The big winner for September MoM? Miami/. The biggest loser? Chicago. On a YoY basis, San Francisco reigns supreme in terms of home price growth. In last place? Chicago.


Both Case-Shiller and Loan Performance are at odds with the National Association of Realtors Median price index.


What effect will an increase in the Fed Funds Target Rate have on home prices? Stay tuned!

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Blastoff? Q4 GDP At 2.3% (Auto Sales And Housing Fueling The Break Past 2%)

Ralph Nader, consumer advocate, asked Janet Yellen why The Federal Reserve kept interest rate so low for so long hurting savers.

Nader may be getting his wish for higher interest rates, given that The Atlanta Fed’s GDPNOW real-time tracker has the US economy growing at 2.3% in Q4 2015.

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 2.3 percent on November 18, unchanged from November 13. The forecast of real growth has remained at 2.3 percent after Tuesday’s releases for October data on industrial production from the Federal Reserve Board, consumer prices (CPI) from the U.S. Bureau of Labor Statistics, and this morning’s release of October housing starts from the U.S. Census Bureau.

There was a large change in the reported economic number on November 5 and 6th that jolted the GDP numbers upwards, There were increases in equipment and residential investment (both 1 unit and multifamily construction).


A different view of GDP reporting:


The relative good news on auto sales and residential construction are leading investors to give a 72% probability of a December blastoff.


We shall see if the improved auto sales and housing construction is enough to give the “LAUNCH” command.


October Existing Home Sales Drop More Than Expected (Unaffordable West Hit The Worst!)

The existing home sales are out for October and they are worse than expected.


While mortgages to subprime borrowers helped fuel the increase in existing home sales (mortgage purchase applications) in the first half of the last decade, we have seen an uncoupling of existing home sales from mortgage purchase applications since 2010.


The West suffered the worst at -8.66% MoM. San Francisco, Los Angeles and San Diego are seeing near bubble-high prices … again (particularly San Francisco).


Perhaps people are starting to take notice of the California unaffordability problem, helped by Federal Reserve policies.


Michael Lewis’ “The Big Short” In Pictures And The Aftermath

Michael Lewis’s book entitled “The Big Short: Inside The Doomsday Machine” regarding the collateralized debt obligation (CDO) and credit default swaps (CDS) collapse was published in 2010 and the movie version is due to be released on December 23, 2015 The cast for the movie is exceptional: Brad Pitt, Ryan Gosling, Christian Bale, Steve Carell and Jeffry Griffin.

Here is my original post entitled “The Big Short in Pictures.”

Here is an example of a CDO so you can get an idea of what they look like. ADIRONDACK 2005-2 LTD_23.01.06_2782

CDOs, particularly those backed by subprime mortgages, suffered catastrophic losses whhen the housing bubble burst in Q4 2007. Home prices had risen 225% from 1987 to Q4 2007, then dropped 29% from Q4 2007 to Q1 2009. Real median household income (greenline) fell from $57,357 in 2007 to $52,605 in 2012, an 8.3% decline. Quite a switch from the go-go years of the 1990s to one of declining home prices AND real median household income.


When I overlay the number of subprime mortgages serviced and the percentage of ARMs, you can see the housing bubble (in the bright blue box). Declining real median household income nationally with a rise of subprime mortgages and ARMs. Not a pretty picture.


The housing bubble crash was felt particularly hard in what former MBA Chief Economist Jay Brinkmann called “The Sand States”. The sand states are California, Arizona, Nevada and Florida. Subprime and exotic adjustable rate mortgages (ARMs) were a common mortgage in these areas during the housing bubble.

What about the aftermath of the housing bubble burst?

Take San Francisco. San Francisco saw an increase in ARMs and subprime mortgages during the housing bubble, but home prices are back to bubble peak levels despite the death of subprime and exotic ARMs. Unfortunately, median family income has been falling since 2013 as home prices accelerated rapidly.


The same holds true for Los Angeles. Median family income has been falling since 2013 while home prices have risen rapidly (although not as quickly as San Francisco home prices).


Phoenix is like Los Angeles. Phoenix never regained their bubble peak while median family income has generally fallen since 2010.


Lastly, Las Vegas Nevada. Las Vegas had one hell of a housing bubble but has also seen a market decrease in median family income since 2011. Home prices are recovering, but they have a long way to go.


In conclusion, the west (SF, LA, Phoenix and Las Vegas) really bubbled-up during the housing bubble thanks to subprime mortgages and exotic ARMs. But the party ended in Q4 2007 when home prices turned down sharply and real median household income dropped. CDOs backed by subprime mortgage were devastated as were mortgage borrowers.

Here are The Big Short’s stars Jeffry Griffin and Ryan Gosling during the filming.


Preview Of Existing And New Home Sales (Sluggish After The Demise Of Subprime and Housing Bubble)

Existing home sales will be out on Monday, November 23rd and new home sales will be out on Wednesday, November 25th. Existing home sales are expected to fall by -2.7% MoM to 5.40 million units while new home sales are expected to rise by 6.8% MoM to 500,000 units.

That leaves existing home sales (white line) at lower than pre-subprime bubble levels of 2002 and new home sales (blue line)) at AND housing bubble levels. Mortgage purchase applications are back to and pre-housing bubble levels of 1998.


Of course, the spike in subprime mortgages during the last decade helped to overcome the decline in real median household income. But during the second, bigger decline in real median household income, there were few subprime mortgage products available to households. And food stamps (aka, SNAP) are helpful of course, but not a perfect substitute for subprime lending.


So unless real median household income (green line) picks up in a serious way, expect the lackluster housing recovery to continue to be … lackluster.