by Dave Allen, The International Forecaster:
The average mortgage rate is up 80bps or 50% in just over one week. As a result, applications for a mortgage are now roughly half the level they were one year ago.
Homebuilder sentiment is at a two-year low. And online real estate companies Redfin and Compass have announced layoffs of 8% and 10% of their workforces, respectively.
What can go wrong in the housing industry?
Despite mortgage rates rising as fast as a Usain Bolt 100-meter sprint, the once red-hot housing market is now cooling off.
Home prices are still historically high, but there’s growing concern that they will ease up as well.
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Buyers had better hope so – the average price of all homes in the U.S. have risen 29% since the start of the pandemic to $348,000.
The median price for a newly built home is over $450,000. We’re not talking our grandparents’ housing market anymore…far from it.
All this has people asking, is today’s housing market the same as it was over a decade ago, when the 2007-08 crash caused the Great Recession?
CNBC’s Diane Olick says the short answer is no. She argues the country’s housing market is in far better condition 15 years after the last housing bubble burst.
That, she adds, is thanks partly to new lending regulations that resulted from that meltdown, which intended to substantially reduce subprime loans. As a result, those rules put today’s borrowers on far firmer footing.
For the 53.5 million first lien home mortgages in America right now, the average borrower FICO credit score is a record high 751.
It was 699 in 2010, two years after the financial sector’s meltdown. Lenders have been much more stringent about lending, much of that reflected in the credit quality of borrowers.
Home prices have soared as well because of pandemic-fueled demand over the past two years. As the Zebra.com chart above shows, they’re up 88% over the past decade and up over 125% over the past two.
That’s given homeowners record amounts of home equity. The amount of cash a borrower can loan against their home while still leaving 20% equity on paper (tappable equity), hit a record high $11 trillion this year – a 34% increase from a year ago.
At the same time, leverage, which is how much debt the homeowner has vs. the home’s value, has fallen significantly.
Olick points out that total mortgage debt in the U.S. is now less than 43% of current home values, the lowest on record.
And negative equity, which is when a borrower owes more on the loan than the home is worth, is virtually nonexistent. She says compare that to the more than 1 in 4 borrowers who were under water in 2011.
Just 2.5% of borrowers have less than 10% equity in their homes. All of this provides a huge cushion should home prices actually fall.
Not As Many Risky Loans on the Books
There are 2.5 million adjustable-rate mortgages (ARMs), outstanding today – about 8% of active mortgages. That’s the lowest volume on record. ARMs can be fixed, usually for terms of 5, 7 or 10 years.
In 2007, just before the last housing crash, there were 13.1 million ARMs – 36% of all mortgages.
Back then, as Olick reminds us, the underwriting on those types of loans was “sketchy, to say the least, but new regulations following the housing crash changed the rules.
These days, ARMs aren’t only underwritten to their fully indexed interest rate, but more than 80% of today’s ARM originations also operate under a fixed rate for the first 7-10 years.
Today, 1.4 million ARMs are currently facing higher rate resets, so given higher rates, those borrowers will have to make higher monthly payments.
That’s definitely a bigger risk. But, in 2007, about 10 million ARMs were facing higher resets.
Not too Many Mortgages in Arrears
Mortgage delinquencies are now at a record low, with just under 3% of mortgages past due.
Even with the big jump in delinquencies during the first year of the pandemic, there are fewer past-due mortgages than there were before that period.
To be sure, the government’s pandemic-related mortgage forbearance programs helped millions of borrowers to stave off foreclosure and recover, but there are still 645,000 borrowers in those programs.
But Olick notes that about 300,000 borrowers have used up pandemic-related forbearance assistance and are still delinquent.
Plus, while mortgage delinquencies are still historically low, they’ve recently started to trend higher, especially for more recent loan originations.
Mortgage credit availability is well below where it was just before the pandemic, according to the Mortgage Bankers Association, suggesting still-tight standards.
But banks and other lenders have lost about half their business since rates began rising, and that could mean they’ll become more active in lending to less creditworthy borrowers.