Housing Bubble Floating Towards Sharp Drop in Demand
On Wednesday, the Mortgage Bankers Association released data showing a sharp drop of 0.7% in mortgage applications from a week prior. The MBA’s report blamed higher interest rates on fixed-rate mortgages as the cause for the downturn. Currently, these rates are at a two-year high.
The housing industry watchdog said 30-year fixed-rate conforming mortgages averaged 4.27%, up from 4.23% the previous week. Conforming loans with balances of $417,000 or less are guaranteed by Fannie Mae and Freddie Mac; however, interest rates on “jumbo loan” mortgages greater than $417,000 were also at a two-year high.
The announcement comes on the heels of statements last week by MBA chief economist, Mike Fratanatoni, who expressed optimism for new purchase mortgages despite a recent 9.4% drop in applications. Fratanatoni attributed the downturn to higher interest rates and a 16% drop in refinances for existing homeowners.
On the new home buyer front, things are also discouraging. Millennials are delaying first home purchases until they’ve paid down the $1.3 trillion in student loans. With 11% of student loans currently in default, the deferment could impact home sales for the foreseeable future.
Overall, things are looking pretty bleak for the housing industry in the short term. Long-term interest rates have been rising with the post-election bond selloff, and are also contributing to the housing slowdown. On top of that, speculation over Donald Trump’s fiscal stimulus plans and the increasing possibility of a Fed rate hike this month is keeping the industry uncertain.
Trump’s nominee for US Treasury Secretary, Steven Mnuchin, has recently talked about privatizing Fannie Mae and Freddie Mac. True privatization of the mortgage giants would likely increase loan requirements and credit ratings, which would shrink demand further.
Last month, one of the Fed’s own economists presented data showing national home ownership rates continuing to decline, possibly to rates resembling the 1950’s.
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