Housing Correction, Then 6-YEAR REFI-BOOM ON DECK?

via mhanson.com

As a long-time, humble observer and student of the markets, particularly credit, which rules the world, I have paid close attention to a factor I dubbed the “REFI CAPITAL CONVEYOR BELT“.

In short, banks and lenders churning hundreds of billions in refi’s each quarter (to the Govt vis’ a vis Fannie, Freddie and FHA) are the grease of the macro economy and homeowner’s balance sheets, alike.

Some spend refi savings and cash-out proceeds on wine, some on women, and the rest foolishly. But, they all spend every penny, quickly.

Conversely, when refi volume plunges it’s a stiff headwind to the economy.

The Fed is raising rates, which the bond market is fighting. But the path of least resistance is higher. This will continue to pressure refi’s, house prices and the consumer until “it” breaks. Which sets up perfectly for a continuation of events in ITEM 1) (chart below).

Because rates must fall further, or credit ease more, each cycle to produce the same results as the previous cycle, the next refi-boom cycle could feature 30-yr rates in the 2%’s & loans so exotic they would make Angelo Mozillo blush.

To be sure, lender’s have already started to play “easing credit leapfrog” again. Easing credit standards is one way to combat historical, end-user, shelter buyer, house-price unaffordability and persistent, punishing, lender profit margin contraction.  In fact, easing credit was the exact tool used to combat these same pressures from 2003-06, as the Fed took funds from the 1%’s to 5.25% in “that” tightening cycle (remember, it’s never “different this time”).

This said, I remain bullish on the 5-year outlook for lending, as it ultimately transforms into something new; i.e., a hybrid of traditional lending, exotics of 2003-07, and mods. The new era of lending will come on the heels of the Gov’t owning most all mortgage risk by then. And we learned in the crash that it thinks it’s less “risky” to lower monthly payments on its loans by any methodology necessary than make people pay more than they can afford, or want to pay.

Yet, I remain bearish on mortgage and house prices over the next year to two, as the industry at large — lenders, title, escrow, legal, realtor & fintech — consolidates out of necessity before the new era of lending appears.

Preparing for the new era in mortgage finance should be top priority for lending and fintech firms, posthaste.  The new-era of mortgage lending will look much different that the past. If lenders & mortgage fintech aren’t ahead of the curve (most are presently far behind) the catch-up period will be a balance sheet killer.

With respect to house demand and prices, each one of these perfectly rythmic refi cycles were born of crisis, as depicted in Item 1) below.  The question is, will the next crisis — for which the response will be plunging rates, credit standards, and flooding the economy with mortgage capital — be damaging to jobs, income, and the consumer, who buys houses?

In times of crisis, at least until clarity of where housing may go emerges, speculators largely stick to the sidelines. In other words, the housing market will rest almost solely on the backs of end-user, mortgage-needing, shelter-buyers who in most highly-populated, economically important regions in the US would need house prices to fall at least 25% to make them “affordable” today.


ITEM 1)   Refi Applications Index at 2008-Armageddon lows. But, if past is prologue, a 6-year refi-boom cycle, born of crisis, could be on deck.




ITEM 2) Annual income required to buy a builder house has never been more diverged from household income.


ITEM 3)  New Home Sales…$15 trillion in Gov’t debt and Fed pricing aimed largely at housing only made this.


ITEM 4) Builders hit a house pricing-power inflection point 3-years ago.  A mean reversion would take builder prices down about 25%.


ITEM 5)  Weak pricing-power is why single-family starts have been flat for over 1.5 years and multi-family is dropping.  If “low supply” was really responsible for weak sales, they would build more, not less.

ITEM 6)  Purchase loan demand is down sharply YY, as end-user, mortgage-needing, shelter-buyers are maxed out.


ITEM 7)  Which is why lenders are easing credit at a furious pace.


ITEM 8) It all boils down to one thing consumers already know…HOUSES, AND MORE IMPORTANTLY, THE MONTHLY PAYMENTS, ARE TOO DAMN EXPENSIVE.