Posted by Leonard Steinberg on April 25th, 2014
The number of mortgages issued has dropped dramatically compared to a year ago fueling concerns that rising interest rates could have a negative impact on the housing market in general…..the bulk of the drop is attributed to the drop-off in re-financing. $235 billion in mortgage loans were originated during the first quarter of 2014, down 58% from the same period a year ago and down 23% from the fourth quarter of 2013. Home sales also slowed throughout the country in the first quarter.
Is this the new normal? The era of generally falling interest rates and cheap money that began in 2000 appears to have come to an end, slowing the concept of re-financing which until recently was almost certain to lower your monthly payments. The 30-year fixed-rate mortgage stood at 4.5% last week, up from 3.6% a year ago. 4.5% is INCREDIBLY low on historical standards (Rates were 18.5% in 1981!), yet just like any sale rack, once you start discounting, its only the ‘60% off’ rack that feels cheap after a while. Mortgages for home purchases were basically flat from a year ago yet down from the fourth quarter of 2013. Applications for purchase mortgages last week ran nearly 18% below the level of a year ago.
How will this news impact construction? How will it impact the Fed’s decisions? Has job creation and wages not kept up with the markets to fuel sufficient demand? Will those who own homes with very low mortgage rates be less inclined to move as they are at risk of spending much more monthly on their monthly payments not only because mortgage rates have risen but also because house pricing has gone up too…..the combination could simply make it un-affordable for many whose wages have not risen the same. In some parts of the country like Florida and Nevada a big chunk of sales over the past 5 years have been to investors and bargain hunters….more than 80% of condos have sold without a mortgage! That inventory of cheap leftovers has dried up, and now the market has to return to a more ‘normal’ setting.
The Manhattan luxury real estate market may not be as adversely affected by this news, although even the bulk of those earning $ 500k+ per year also make their buying decisions based on monthly payments. “Affordable” is not a concept exclusively for the poor. I have too often heard brokers complain that their buyers are not rich enough to buy the apartment they really want: “what is wrong with them????” The reality is we can only afford what we can afford. Critical now is that banks do not loosen up their standards too much to encourage people to live well beyond their means. Those with poor credit scores who have shown a history of fiscal irresponsibility should not be provided loans at the expense of all others: we have been there and done that before and it was UGLY!