One long term indicator changes to Yellow
by New Deal democrat (Bondadd blog)
One long term indicator changes to Yellow
One long leading indicator has turned from green (positive) to yellow (caution): mortgage rates.
Since middle class wages peaked in the 1970s, the ability to refinance debt at lower interest rates has been an important coping mechanism. Particularly since the 1980s, whenever
- real wages have stagnated,
- the effects of refinancing debt have dwindled, and
- the ability to cash in an appreciated asset has stalled,
the middle class has retrenched by curtailing its debt load, thereby bringing about a recession.
(You can read a post from me on this, dating from the blogosphere’s primitive era, here.)
As the below graph shows, each of the last 3 recessions has occurred after a period of 3 years (red) where mortgage rates have failed to make a new low:
The failure of mortgage rates to make a new low is not the *signal* for a recession. Rather, it has been a necessary predicate.
As the below graph of mortgage rates and refinancing applications from Mortgage News Daily shows, we just passed the 3 year marker since rates made a new low during the week of November 19, 2012:
As a result, refinancing applications are stuck near their lows. The boost to consumer spending from the last bout of refinancing has run its course.
In the 1980s and 1990s, the great long term bull market in stocks gave rise to the ability to cash in that asset. But stocks have failed to make a new high in 6 months and have been basically flat all year:
In the 2000s, of course, it was home equity that was cashed out. The below graph of the Case Shiller index shows that, in an apples to apples comparison of pair counts, house prices have gained little this year, and are well below their 2006 highs:
Fortunately, largely due to the collapse in gas prices, real wages have made new highs several times this year:
On a YoY basis, gas prices have continued to decline. And we are now finally at the point in the labor market recovery where some upward pressure on wages should start to materialize.
Through the 3rd quarter, there is no sign of household debt retrenchment:
So there is no sign of any imminent downturn. And so long as real wages continue to improve, the economic expansion should continue.
But the fundamentals underlying improvement to the lot of the middle class have moved into the yellow, “caution” zone.
Originally published at Bondadblog
Maybe we have just reached the point where anyone who could refinance already has refinanced.
true, at 3.3/8% how much lower can you go and not pay points, etc.?
Absolutely.
I mean people have had five years to take advantage of low rates. If they haven’t by now, there are other reasons.
EM and Run you have to remember there are two reason to re-fi. Lowering your debt service is one: and that responds to rates. And cashing out equity is the other: and that responds to appreciation. There is no reason to believe that those drivers work in the same direction at the same magnitude. People will re-fi as rates go up if the market is sufficiently bubblicious.
I was working for a sub-prime lender right as the bubble blew and back then the key was to make the loan work however you could, as long as you were getting the lender to go ‘owner-occ’.. That was where the fraud was, not in the level but in the spread.
A dirty secret about “liar loans” back during the bubble. In many cases and in many markets the reason for going “stated income, stated assets” was not to exaggerate your ability to carry the loan but actually to conceal it. Many our our clients were wealthy east coast investors taking out “owner occupied” loans for 3 BR 1 1/2 bath houses in western
Washington. Not because they ever had any intent of moving out of their mansion in Westchester or wherever but because the only way to get a ‘Prime’ mortgage and the subsequent break in rates was to go “owner occ”. Because that was what Fannie and Freddie’s remit was: encouraging home ownership. And not in financing would be slumlords. So wealthy clients with six digit incomes and huge houses on the East Coast would “state” a lower income and “state” lower assets that were just enough to justify the loan while not being so fraudulent on the down side that you would get caught for mortgage fraud.
I wasn’t actually in the lending side of the business, I was a researcher. Because otherwise I might have shared the fate of my former boss: who rumor has it is fighting extradition from some Central American country
The point being (if any) is that the mortgage business doesn’t necessarily yield its secrets to a straight market analyis of macroeconomic conditions and interest rates. Sure it is all about maximzing your own self-interest but real estate even in the best hands has more to do with the Chicago business model of Al Capone than the later Chicago model of Milton Friedman. There are wheels withim wheels of those deals.
Bruce:
Understand the owner occupied. I was the recipient of an Alt loan as I was self-employed. It took two years before I could shed it and go to a prime loan as I had to prove I was credit worthy even though my credit was good, great, excellent. Lots of fun and fortunately I had a reputable broker who stuck with me.
Bruce,
I will agree the fraud part of the bubble was, in large part, mislabeling property use. I knew of a guy in Phoenix who had 15 mortgages, all of them owner-occ.
But I disagree that the low rates for owner-occ were lower due to the GSEs in any way, shape or form. Owner-occ are obviously safer than 2nd homes or investment properties, that is why the rates are lower.
BTW,
I had a nephew that was an underwriting supervisor for Countrywide in 2003. He called me one day to tell me his “favorite” credit denial that was overturned by the VP of Sales(like 95% of his denials).
Guy got a mortgage on a second home. Thing was, it actually backed up to his owner-occ home. Something like 6 Second Street and 7 Third Street. Nephew quit in 2004 cause he was certain he, and everyone else, was going to go to jail.