A weekend topic starting with the New York Times. “The last time such home price growth occurred was in the years leading up to the housing crash. But even at the height of the bubble in 2006, only about 40% of metro areas experienced greater than 10% annual home price growth. In the past year, 80% of metros have seen such spikes. And one-quarter of all metro areas have had prices rise by more than 20%.”
The Standard Examiner. “After an ultra-hot housing market in 2021, Northern Wasatch homebuyers and sellers can expect another robust real estate year in 2022, according to Jim Wood, Ivory-Boyer senior fellow at the University of Utah’s Kem C. Gardner Policy Institute. ‘Low interest rates have really brought a lot of people into the market,’ Wood said. ‘Who would have thought we’d have had historic increases in housing prices during a pandemic? To be sure that’s a paradox, and that’s exactly what happened.’”
From Havasu News in Arizona. “What led, in part, to the Great Recession was too many people being shoe-horned into mortgages they could not afford. Real estate representatives say they can get you into a house, stretching their abilities like pre-2008, leading us to wonder if we’re knocking on the burst bubble of 13 or so years ago. As we came out of the Great Recession, the quote was ‘the housing market may never again look like it did five years ago..’ Actually, it is looking more and more like pre-recession than ever before. And that’s not necessarily a good thing.”
The Ukiah Daily Journal in California. “To purchase a home, most folks get a conventional loan, either a conforming loan that stays under the limit set by federal guarantors Fannie Mae and Freddie Mac, or a jumbo loan that goes over that limit and costs a little more as a result. Until Nov. 1, 2021, the Mendocino County loan limit for conforming loans was $548,250. However, the limit just skyrocketed to $647,200 based on the sale prices of owner-occupied, single-family homes in our area.”
“What does this mean? It means more people may be able to buy homes in the $700,000 to $800,000 range. Before Nov. 1, borrowers with a 20 percent down payment were capped at $685,000 (making the loan amount $548,250). With the new loan limit, borrowers with a 20 percent down payment can now purchase a home for $809,000. Be warned: just because you can do something doesn’t mean you should.”
“The new loan limits are based on rising home prices, not rising income. So the question becomes: how much income do you need to qualify for this bigger loan? If you are an absolutely perfect borrower with no blemishes on your record, no debt of any kind, and solid, verifiable household income, you could conceivably qualify for a debt-to income ratio of 49 percent. If the loan amount is the new loan limit of $647,200 and the interest rate is, say, 4 percent (which is arbitrary, since I am not allowed to quote current rates), your monthly loan payment would be $3,089. On top of that, you’d pay approximately $810 per month in property taxes and about $200 per month for homeowners insurance, with a total of principal, interest, tax, and insurance (PITI) payment of $4,100 per month.”
“If you use these numbers and you are a perfect borrower buying a house in perfect condition, you could qualify for this home with a household income of $8,400 per month or just over $100,000 per year. Could you do this? Yes. Do I recommend it? No. Not many people are going to be happy spending half of their income on a house payment, especially when you consider that home ownership comes with more expenses than just the monthly PITI.”
“This is why I like to see people keep their loan payment to a maximum of 35 percent of their income. If you were going to max out at the conforming loan limit with $4,100 payment, I’d say your monthly household income should be at least $11,500 per month or something in the neighborhood of $140,000 per year.”
From CTV News. “TD senior economist Sri Thanabalasingam wrote in a note that buyers in some markets appear to believe price growth will continue unabated, which the Bank of Canada has warned poses an economic risk. Next week, the Bank of Canada has a scheduled rate announcement. Economists expect the bank to raise its key policy rate — which influences interest rates on mortgages and loans and can cool demand — or signal an increase is coming in March.”
“‘Regardless of the decision next week, it’s clear that we will soon be saying au revoir to rock-bottom interest rates,’ Thanabalasingam wrote. There are concerns that rising rates could strain households that have taken on large mortgages. Romy Bowers, president of the Canada Mortgage and Housing Corp. noted that Canadians owe $1.72 for every dollar of disposable income.”
From Daiji World. “Nomura estimates indicate that China’s developers owe $19.8 billion in dollar-denominated offshore debt in the first three months of 2022, the Guardian said. ‘That is almost twice as much as the $10.2bn they were faced with in the final quarter of 2021 — a burden that caused default at Evergrande and the threat of default at several other developers such as Kaisa,’ the news organization said, adding that by the second quarter of 2022, ‘they must find another $18.5bn.’”
From Fox Business. “During an interview real estate expert J. Scott Schell predicted a commercial real estate ‘bloodbath’ due to disruptions in the industry. ‘What we’re dealing with is a lot of pent-up forces that are all coming into play right now. The Central Business District Office has been devastated by stay-at-home pandemic restrictions. You know, all of the disruptions that we’ve seen there has caused all of those assets to really be in non-covenant compliance. Same thing with Class A retail that didn’t get absorbed in the last cycle. And then certainly all of your hospitality has been devastated throughout this pandemic and over the course of last couple of years that in and of itself is going to cause massive defaults.’”
“‘The good news is, is that there’s opportunities for these things to turn around for investors. But the bad news is that through the Troubled Asset Deferral Program, which is part of the CARES Act, nobody has reported on these for 18 months. We have 18 months of defaults that are all going to start hitting now. That happened, that program terminated as of January 1, 2022, and they’ve got 60 days to report it.’”
“‘So by the second quarter of this year, those things are going to start to come out and banks are going to have to deal with that. So that’s going to be a huge crisis in and of itself. And then obviously, we know that the banks, when they start to take on defaulted assets, they’re not really in a position to make loans. And so, so many of those assets that did stabilize but have now been hurt are going to be hamstrung by their balance sheets because 3 years of historic operating statements won’t really be there to support new debt with values plummeting. There’s going to be a lot of blood in the streets.’”
Two reports from Bloomberg. “‘The Federal Reserve has moved from being patient to panicking on inflation in a record period of time,’ Diane Swonk, chief economist at Grant Thornton LLP, said in a survey response. ‘This is the first time that the Fed has chased instead of pre-empted inflation since the 1980s.’”
“The last time the Fed undertook quantitative tightening, from 2017 to 2019, it chose to shrink its balance sheet by simply not replacing Treasuries and mortgage bonds as they matured. The upcoming bout of QT ‘is more about scraping the paint off the wall,’ Credit Suisse Group AG strategist Zoltan Pozsar wrote in a note to clients Friday. ‘The fresco painted during the first two years of the pandemic is out of date. Inflation is a problem and so are financial excesses.’”
From The Hill. “Over the past two years, both the Federal Reserve and the European Central Bank have created the mother of all global asset price and credit market bubbles. They have done so by a combined $10 trillion in bond purchases, which have kept interest rates on safe government bonds at ultra-low levels and have forced investors to stretch for yield in ever riskier markets. Whereas in 2006 the bubbles were largely confined to the U.S. housing and credit markets, today they are to be found in practically every corner of the world asset and credit markets.”
“A massive amount of credit has been loaned at very low interest rates to borrowers with questionable ability to repay. A particularly troubling instance of gross credit misallocation is that characterizing the emerging market economies, which now account for around half of the world economy. Over the past 18 months, these economies have been upended by the pandemic, and they have become more indebted than ever before. Yet they have continued to have easy access to the international capital market.”
“A key and present danger to the U.S. and world economies is that the global asset price and credit market bubbles are premised on the assumption that today’s ultra-low interest rates will last forever. It also must be of concern that once U.S. interest rates start rising, the emerging markets will experience a large reversal in capital flows that could once again expose them to a series of debt crises.”