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Housing Collapse Coming Right Up

Mortgage rates are high and rising. Refinancing opportunities are nonexistent; home affordability has collapsed.

The latest Black Knight Mortgage Monitor is worth a very close look.

Here's what the report says about the feature chart.

  1. Recent rate jumps coupled with climbing home prices have increased the cost to purchase the median home by $67/month (+6 percent) over the past six weeks.
  2. Overall, it costs $1,141 in monthly principal and interest to purchase the median home using a 30-year fixed mortgage with 20 percent down, the largest monthly payment required since late 2008.
  3. It currently takes 23 percent of the median income to purchase the median home, the highest share since 2009.
  4. However, overall affordability remains better than long-term historical averages, even taking the recent rate jump into consideration. Purchasing the median home requires one percent less of the median income than 1995-1999, three percent less than 2000-2003 (before the sharp run-up in home prices) and two percent below those combined benchmarks (1995- 2003).
  5. Average incomes are more than 20 percent higher today than in 2006 (according to the Census Bureau) and interest rates 2.3 percent lower. As such, affordability remains much better than at the pre-recession peak, even though today’s home prices have surpassed 2006 levels.
  6. Assuming all else remains equal, to return to 2006 affordability levels, interest rates would have to climb north of 8.0 percent or the median home price increase to $420K.

Statistical Nonsense

Black Knight is correct on points 1-3. Statistically, it is correct on points 3-6. However ...

Regarding point 5: It's not average incomes that matter, it's median incomes.

Regarding points 4 and 6: Those who want a home and can afford a home have a home. The rest struggle because incomes have not kept up with home prices.

Notions of affordability are statistical nonsense. Black Knight does mention some of these issues in relation to other charts.

Home Price Appreciation by Tier

  1. Rising interest rates may put more pressure on borrowers with below average incomes buying below average priced homes.
  2. Affordability is lower in those segments compared to long-term benchmarks, and rising interest rates put more strain on affordability.
  3. The annual rate of appreciation on Tier 1 properties (lowest 20 percent by price) is 1.9 percent higher than the overall market average.
  4. Although the margin has declined in recent months, as of December 2017, the Tier 1 annual rate of appreciation was 75 percent higher than that of Tier 5 (a difference of 3.6 percent).
  5. Tier 1 home prices have now been the fastest appreciating quintile nationally for 67 consecutive months. The same trend holds true in 45 of 50 states and 90 of the nation’s largest 100 metro areas.
  6. Larger overall increases in value among lower-priced homes is not just a recent trend, though; the same dynamic is observed when looking back over the past 15 years.

Bingo!

Black Knight is six for six on that analysis.

It gets worse.

Refinancing Opportunities

Wants vs Needs

Anyone seeking to refinance will discover the opportunities have essentially vanished.

Anyone needing to refinance to lower their payments is in outright trouble.

Refinance Woes

Affordability Silliness

Brush aside affordability silliness.

It's not the the average income that matters. Not even the median income matters.

It is the median income of those looking to buy a home that matters!

On that there are no stats. But take another look at the lowest tier home price appreciation charts.

Compare tier one housing prices to real median wages, down seven of the last 11 years as noted in How the Fed's Inflation Policies Crucify Workers in Pictures.

Next, factor in millennial attitudes towards debt coupled with their desire to remain mobile, and you know where housing is going based on this data.

Expect a Housing Collapse

The more hikes the Fed gets in, the bigger the collapse and the bigger the resultant deflation.

Mike "Mish" Shedlock

I think “collapse” might be a little overdoing it. 23% of median income is close to the long term average for housing (maybe a little under really). I think some of it depends on how much mortgage rates go up. The six weeks increase of $67 example was commensurate with about .5 a point increase (to 4.5%) in 30 year rates. So, assuming it goes up another 1% in the next year that means an additional $134 per month which I would guesstimate would take the share of median income to about 25-26% — still in the well in the reasonable range. Based on this housing isn’t looking quite as bubbly (at least compared to say the stock market whose valuations based on fundenmentals are off the charts).

A big key is inventory is low. Extremely LOW in places like Seattle, CA, Denver. And no easy way to add inventory (labor shortages, cost of materials, cost of land, cost of permits, NIMBY's). Inventory went up a lot in 2006 and 2007 two years before the housing crash in 2008. Inventory is still going down. Housing starts/completions are below prior recession bottoms still. Millennial's are hitting their 30's and some will buy, and they will buy into a record LOW inventory environment. But rates going up could definitely put a hitch in things. But I have heard the "rates are about to go up" story for years and years....remember the 10 yr hit 3% back in 2014 and its below 3% now. Can you have a real estate bust with record low inventory?

I recall Bob Reich on "median" numbers, he said, "together Shaq ONeil and I average six feet tall.." Disparity in incomes has acerbated and if you consider housing to be a market of scale, more buyers are stressed than in 2006.

Median is the point where 50% of the people are above or below a certain height. Mean is the average. Put Bill Gates in a room of 20 people and he sure will change the average net worth by a huge amount but he will do almost nothing for the median net worth.

What are the options for a family that is looking for a place to live? Either rent or own. As long as the rents remain high, housing cannot collapse. Only when the rents are more affordable compared to expenses for owning a home, the collapse may occur. That was the case in 2008 housing collapse. Renting was way cheaper than owning back then.

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