A weekend topic starting with Bloomberg. “The US mortgage industry is seeing its first lenders go out of business after a sudden spike in lending rates, and the wave of failures that’s coming could be the worst since the housing bubble burst about 15 years ago. ‘The nonbanks are poorly capitalized,’ said Nancy Wallace, chair of the real estate group at Berkeley Haas, the business school at University of California, Berkeley. ‘When the mortgage market tanks they are in trouble.’”
“A mortgage made in January and not eligible for government backing could have traded in early August somewhere around 85 cents on the dollar. Lenders usually try to make loans worth somewhere around 102 cents to cover their upfront costs. For a lender whose loans dropped to 85 cents, the losses can be debilitating, even if they aren’t realized yet. On top of that, business is broadly plunging. Overall mortgage application volume has plunged by more than 50% this year, according to the Mortgage Bankers Association. These business conditions are spurring banks that provide lines of credit known as warehouses to make margin calls and cut credit.”
From Credit Union Insights. “According to Corelogic, home prices nationwide, including distressed sales, increased year over year by 18.3% in June 2022. In general terms, a first mortgage originated in June 2021 at 80% LTV would have a 67.6% LTV as of June 022, even if they didn’t make any principal payments. If we saw an immediate 27.9% drop in home values, the LTV would increase to 93.8%, still above water. If that home originated at 80% in June 2022, it would have a 111.0% LTV. Not great for a first mortgage, but also wouldn’t break the bank on foreclosure. A second mortgage, however, could be a total loss under those same order of events.”
WFMY in North Carolina. “According to Redfin, Greensboro homes are selling after only 20 days on the market which is about the same as last year’s hot market. In 2020, the housing market boomed. Mike Carter says it’s all about supply and demand. Mortgage rates fell dramatically that year and lots of people were taking advantage of those low prices, so demand was up.”
“‘In the heat of things some sellers would come to you they want to get top dollar for their property obviously they want the most money that they can get in so if they want X number then you can throw it out there for that crazy number and more than likely you’re going to have people coming in and paying that or offering beyond that but now we just had to have conversations with sellers to not price aggressively,’ Carter said.”
WTHR on Indiana. “Real estate broker Amy Clark at Capstone Realty told 13News the slowdown is mainly due to higher interest rates and inflated prices. Current interest rates are now as high as 6.75% compared to where they previously stood at just under 3%. Clark said she wouldn’t be surprised if rates hit 8%. That’s driving the home prices down. Clark is concerned for clients who already bought high.”
“‘I’m afraid we’re going to see a lot of people filing bankruptcy or not be able to pay their mortgages,’ Clark said. ‘How many people are going to be sitting on homes with no equity, in fact, negative equity in the home? So, that’s one of my biggest concerns about the market. I worry about some of my clients that I’ve had because they were so desperate to get a home.’”
From WWLP Springfield. “Sky-high prices and rising mortgage rates have put a bit of a chill on the Massachusetts housing market this summer, but the analysts at The Warren Group said that the cooling of the market might be just what it needs. Tim Warren, CEO of The Warren Group, said his actual outlook is not as pessimistic as his comments, which he acknowledged ‘sounds a bit negative.’ ‘But I actually think that a bit of cooling off is the best thing right now. A crazy real estate market for too long is a formula for a crash, not just a cooling period of time,’ he said. ‘Obviously the Federal Reserve is trying to ease us in for a soft landing instead of an explosive period of price gains.’”
The American Statesman. “Amid Central Texas’ cooling housing market, Keller Williams Realty said Friday that it has cut 23 jobs — 4.6% of the 498 employees in its Austin headquarters. The layoffs took place Thursday, the company said. Many local real estate agents and officials with the Austin Board of Realtors say the local market is merely ‘stabilizing’ and ‘normalizing’ from its previous frenzied levels — a positive sign, they say, because the red-hot market was neither healthy nor sustainable.”
“Sajag Patel, Keller Williams’ chief operating officer, pinned the layoffs on the changing conditions in an e-mail to employees early Thursday afternoon. ‘As we communicated at the last KWRI (Keller Williams Realty Inc.) meeting, the market has shifted dramatically. And, we’ve had to make some really tough decisions,’ Patel wrote.”
The Miami Herald in Florida. “Home prices dipped in July for the first time in Miami-Dade County since fall of 2021, providing a silver lining for priced-out buyers desperately trying to catch a break in an ultra-competitive housing market finally losing steam. ‘It’s gotten to a point where buyers aren’t willing to pay an astronomical price,’ said Jonathan Vega, a real estate broker with ONE Sotheby’s International Realty in Miami. ‘Some sellers think they can get whatever they want. Then you realize the market is not what it was. I am seeing price reductions and negotiations that were not happening before.’”
The Tribune. “Median home prices dropped slightly between June and July 2022 in SLO County, according to a new report from the California Association of Realtors, falling from $980,000 to $950,000. Jeff Tanaka, a sales manager with Envoy Mortgage in Cambria advised buyers looking to get into a home in SLO County to find lower down payments that work for their budget. ‘Most buyers are under the impression that they have to have a 20% down payment’ to purchase a home, Tanaka said. ‘That’s just not accurate in our county. We have programs where they could come in with as little as 3% or 5% down payments.’”
The Modesto Bee in California. “Home prices in Stanislaus County continue to dip from their highs earlier this year as interest rate hikes and ongoing inflation challenges change the Valley real estate landscape. The peak median home price in the county hit $485,000 in April but has since slid to $470,000 for July. Daniel Del Real, a broker associate at PMZ Real Estate, said he expects prices through the remainder of the year to give back almost all of their year-over-year appreciation gains — leaving home prices generally flat for 2022.”
“He said more sellers will simply decide to take their homes off the market instead of dropping their prices. ‘If rates continue to go up, sellers will stay put. They’ll be house locked,’ he said. ‘So we will naturally see homes come off the market, we will see a slower transactional market. That is unless we get a recession with job loss, then all the cards are laid out.’”
Summit Daily on Colorado. “Summit County second-home owner Rick Davis said he wishes he never bought property in the county. Davis said he and his wife, who live in Austin, Texas, have brought their sons to Summit County since 1988. The two bought a townhouse in Wildernest in March 2022. For the next month, they spent large sums of money paying local workers and companies to upgrade the home, Rick said, as it hadn’t been updated in years.”
“Now, Rick said he may be spread very thin since finding out he wouldn’t be able to rent his property, especially since he can’t rent during the peak months of November, December and January. At the Board of Summit Board of County Commissioners meeting on Tuesday, Aug. 9, both Commissioner Tamara Pogue and Commissioner Elisabeth Lawrence said they’ve heard from many second-home owners who have struggled to pay for their property without the ability to rent it short term.”
“Sara Gambino, a broker at Berkshire Hathaway HomeServices Colorado Real Estate, grew up in Summit County and has seen the real estate market change drastically throughout the years. ‘I would say, you know, 60% of our market is second-home owners,’ Gambino said. ‘And the majority of them can’t afford it without offsetting the cost.’”
From Yahoo Finance. “‘Housing used to be a very stable asset class and now it’s extremely volatile,’ Glenn Kelman, CEO at Redfin, told Yahoo Finance. ‘One reason is that institutions used to account for about a quarter of the sales, but now it’s about a third. You have real estate investment trusts (REITs) all active in the single family home market.’”
From Australian Broker. “Last year, the Financial Brokers Association of Australia conducted research which found many mortgage holders were not prepared for these hikes and are now under financial stress. FBAA managing director Peter White spoke to Australian Broker, wanting to warn people who are considering switching lenders. ‘Remember that brokers are bound by legislation to ensure they act in the best interests of the borrower, but banks are not,’ he said. ‘Lenders are not under any obligation and will act in their own interests. If this means giving you something now only to take it back later, they will and there is nothing you can do about it once you’ve signed on.’”
From Stuff New Zealand. “The Reserve Bank is blaming the public for taking the money that it cut to bargain basement prices, economists say. Governor Adrian Orr said prices were closer to what it considered a sustainable level, from being unsustainably high. ‘We have been saying to many people – think very hard before making significant large lifetime purchases such as a home,’ he said. The bank was not heartless, but ‘we were making as much noise as we possibly could to people over the last two years about ‘think wisely, there’s no such thing as a one-way bet when taking risk’,’ Orr said.”
“Economist Benje Patterson said to give Orr credit, he had warned people but not in a way that got the message through. The price of money got so cheap it would have been silly not to take it, he said.”
‘Economist Shamubeel Eaqub said people did not care what the Reserve Bank said, what mattered is what it did. ‘And what they did was they made it easier and cheaper to borrow lots of money to buy and sell houses. And that’s what people did, people respond to incentives, and [the bank] created those incentives,’ he said. ‘They can’t turn around and say, ‘but we told you not to do this thing that we’re making it much easier to do’. You can’t have inconsistent behaviour, and then turn around and say, ‘it’s all your fault for what’s happened’, it’s a bit ridiculous.’”
“The bank misdiagnosed the problem, supporting the housing market when it was businesses that were at risk. ‘No houses were ever going to die because of Covid.’”
Better Dwelling. “Canada’s real estate bubble went from a small localized problem in pricey cities to a country-wide failure. Excessively long use of low rates from the Bank of Canada (BoC) drove tens of thousands of excess home sales over the past two years. Now that rates are rising, purchase volumes have suddenly cratered and prices are beginning to come back down to normal. The BMO chart largely marks the positive flow as excess demand, but some of that demand was delayed. From April 2020 to April 2022, existing-home sales in Canada work out to just over 262,600 homes. That’s roughly 1 in 5 existing-home sales over that period, working out to an excess dollar volume of $181 billion. It’s absolutely bonkers how much demand was driven by the central bank.”
“It even set off alarms halfway through that period. In February 2021, the BoC Governor was asked if the market was overheating. ‘I think right now the economy is weak… I think we need the support. We need the growth we can get,’ replied the Governor.”
The Calgary Herald. “Imagine given a single task justifying your very existence, yet failing miserably. What’s worse, such abject incompetence is then felt across Canada. But you’re not finished. To rectify this debacle, you deliberately destroy the financial lives of countless Canadians, mostly those naively imagining you knew what you were doing originally. And what results from such abject failure? Pink slips, perhaps? No chance. We’re talking about the head honchos at the Bank of Canada and their assembled junior wannabes.”
“Meanwhile, those bankers know their jobs are safe. The biggest boss has no intention of firing anyone. Heck, Justin Trudeau isn’t even bothered about them. ‘Forgive me if I don’t think about monetary policy,’ the prime minister famously declared on the campaign trail a year ago. Apparently, he was thinking about families instead. (He must be blessed with two hearts, considering the endless bleeding he does.)”
“Still, that’s no excuse for the Bank of Canada taking its not-so-eagle eye off the only ball in play — keeping inflation around two per cent. (Psst, that’s the monetary policy our prime minister doesn’t think about; although those families he sheds tears for likely ponder it quite often nowadays.) That’s because annual inflation is running at 7.6 per cent in Canada.”
“Today they admit getting it wrong, being too slow increasing interest rates. (The massive amount of money printing to finance absurd levels of government deficit spending isn’t mentioned.) To get this inflation Genie back into its bottle, the bank’s deliberately crashing the very housing bubble it created, with that earlier, loose-money strategy, by now hiking rates with an absolute vengeance.”
“So, Canadian families encouraged to take out mortgages as large as those low rates allowed, will now see whatever equity they invested vaporized, as house prices tumble and would-be buyers vanish. (The saving grace of being Calgarian is we were on our economic knees long before the pandemic arrived so our home prices were a shadow of places such as Toronto and Vancouver.)”
“Meanwhile, inflation, unleashed by cheap-as-chips money and unreal federal spending, rampages on. First, the bank wanted more of it — two per cent being the arbitrary figure the world’s bankers pulled from their back pockets. Then, largely due to their near-zero rate interest rate policies, inflation jumped way above that arbitrary figure and started to bite regular Canucks. We were assured it was transitory.”
“And now — get ready because its arrival is as inevitable as winter — we’ll be lulled to sleep by the word peaked. Yes, inflation has stopped rising quite as fast so we should rejoice. Except, when climbers reach Everest’s peak, they return to basecamp. That won’t happen with inflation. Sure, the odd thing — gasoline, for example — might fall back, but overall there’s no return to the collective price levels of a year ago.”
“You feel poorer these days? Welcome to the club. In Alberta, annual inflation is 7.4 per cent while the average weekly wage has increased a mere 1.9 per cent during that time. You aren’t getting that 5.5 per cent drop in purchasing power back. Ever. The new, lower bar is set. All we can hope is it doesn’t fall yet further.”