December 30, 2005

Inverted yield curve to cool housing market (sorry condo flippers - party's over)


The easy credit spigot is getting cranked a bit tighter

Of course, that means less buyers, longer listings, and declining prices

The bond market is popping the dreams of home ownership for some Americans.

Home buyers who can only afford to buy homes with lower adjustable-rate mortgages (ARMs), those who can scrape into a house with more "exotic" loans with low teaser rates, and some investors contemplating second home purchases could be soon shut out as short-term rates rise, analysts said.

Higher ARMs rates will next year further crimp housing demand, which has shown signs of fatigue in recent months.

ARMs have allowed more people, including risky borrowers with spotty credit histories, to buy homes for the first time

While ARMs have been instrumental in expanding home ownership, their rapid growth in recent years worried regulators because speculators have used the more exotic types of ARMs to buy and quickly sell properties, especially condominiums.

"I think people who were trying to get into investment properties and trying to flip them won't see those financial advantages with the short-term rates being higher than the long-term rates," said Bob Moulton, president of Americana Mortgage Group in Manhasset, New York.

13 comments:

Anonymous said...

This is classic … a realtor from Orange County comes clean on the rapidly changing market sentiment.

God I love this:

“MARKET UPDATE
In the last 30 days I am seeing more homes sitting on the market for longer periods of time.
I am also recognizing that there are more homes expiring, less homes selling, and the ones that are selling are not selling at their full list price. PLEASE DON'T SHOOT THE MESSENGER.”

http://realtytimes.com/rtmcrcond/California~Orange_County~rossmclaughlin

Anonymous said...

LOL where did that sign come from, if you know the guy who ginned that one up I want to buy a couple

Dogcrap Green said...

So which is it?

One day you are pounding your chest about mortgage rates rising.

Then comes the dropping of long term rates, or better known as the inverted yield curve.

Now you are concern about people with interest only mortgages and short term arms.

If these people are in their program to make the interest rates as low as possible and be able to pay down the debt fast. They actually did the right thing. Each time they roll the rates over their interest is still lower than it would have been on a 30 year loan.

I will be the first to admit that the normal personality of the person in these programs are there because they over bought, not because they are smart. But at least recognize the dumbass were lucky.

If your rate was 3.5% instead of 6.25% and all else was equal the house that would have taken you 30 years to pay off will take 10. In 5 years you have enough money down to where if the rates did rise to 7% (which there is absoulutly no indication they will) you are still way ahead in the game.

When done right these programs could have taken the people who bought in 2001 to the safety of 50% equity today - 70% if they put 20% down.

But of course the real problem is people that should be buying a $75,000 house in a good ole blue collar neighborhood where real estate won't crash because it never bubble, are buying that dream house for $600,000 in the bloated subarbs.

Philip John said...

dogcrap green,

higher mortgage rates: people stop taking out loans / default on loans they have already. This leads to lower demand / higher supply, respectively.

Inverted yeild curve: BOND yields, not mortgage rates. Personally, the whole emphasis on them crossing over is narrowsightedness - the fact they are even close to being identical should be enough to sound warning bells. Anyway, an inverted yield curve tells you people are expecting short term mishaps (the premium for long term debt is gone - there is no longer any demand to hold bonds for 2 years vs. 10 years). Some poeple (like this site) believe this signals market awareness of the housing bubble pop or further economic potholes. Greenspan is running his usual "new economy" line and says its all to do with foreign demand for long term debt. (this time its different - yeah right)

Increasing the rate on NEW loans: leads to decreased demand (less people will take out loans, especially as housing prices are starting to fall).


In short, they all point towards the end of the housing buble. Maybe I am not understanding you correctly, but I see no inconsistency in any of this.

By the way, it would have to be a pretty cheap house to get to 50% equity in 4 years just by 3.5% lower mortgage rates - can you show your working please? Even with compounding 4 x 3% discount does not equal 50%.

Phil

PS I agree with anonymous - LOVE that sign. :D

Dogcrap Green said...

Phillip,

Sorry I did crunch the numbers wrong.

Going back and check with today's arms and 15 year loans. The arm cuts off 3 years on the mortgage by lower the rate and using the same payment as with the 15 year mortgage.

Fannie may does offer a 1 year arm with a 10 year payment plan. Which i do like because it forces people to buy a cheaper house and pay it off more quickly.

The 30 year mortgage was the worse thng ever invented.


I still don't think you get the whole inverted yeild curve issue. First off the long term notes dropped below the short term. Mortgages are tied to the long term. THEY DROPPED - NOT RISEN!!!

I beleive the inverted yield is more of a repersentation of banks revisting the corpoorate credit crunch. In 2000 to 2003 when banks started refusing to buy corporate junk bonds their extra money help pushed mortgage rates down.

It appears the banks are pulling the brakes on the corporate world again. They then choose the safe route and pump money into the 10 year notes, dropping the return on the 10 year notes below the short term rate. But that money doesn't stay there forever.

When the banks regroup I do so it going back into housing.

ColumbusOH said...

dogcrap gree,

Precisely. That's what in my thought and you publish right before I just did it.

I have been thinking about the same conflicting situation -- long term rates is going down, and with housing bubble burst, the rate sure went further down as demand dropped. But if rate goes down enough, maybe housing will not burst.

anyway, I cannot remember where I see an article, maybe UCLA Anderson school, which I truely agree. It pusblishes the long term growth rate of Adult with respect to the housing price growth. It shows a perfect correslation -- whenever adult population growth rate drops below the home price appreciation, very soon the housing bubble pops. This is what happend in the recent years, and that's why it concludes that the housing is in a bubble, and it will burst soon. I think this is the most accurate analysis of the housing fundamentals.

Robert Pretcher once said, sometimes a commodity bubble (like the real estate) will burst on its own weight -- when greater fools runs out.

Don't forget, interest rate is not the only driver of the housing growth; when others factors pull it down, interest will no longer help it anymore. Look at Japan, whose housing has burst for over 15 years including this year, EVEN THOUGH the Japaneese has probably the Highest Savings in the world. They just don't want to buy house, even when the interest rate stays at 0% !!!

Anonymous said...

longterm notes didn't drop! Short term rose to the level of long term!

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