Housing bubble poised to burst as mortgage applications to buy a home fall to lockdown lows, ‘bad time to buy’ hits record amid sky-high prices and soaring mortgage rates

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Mortgage refinance applications plummeted to their lowest level since 2000.

This is getting worse: Mortgage applications to buy a home fell 7% on the week and were down 21% year-on-year, the Mortgage Bankers Association reported today. An indicator of future home sales: prospective homebuyers are trying to get a mortgage preapproved, set a mortgage rate, and then start house hunting.

Mortgage rates have skyrocketed this year, and home prices have risen to ridiculous levels for years, causing layers and layers of potential buyers to exit the market amid what the MBA called “deteriorating affordability challenges.” . And those home applications hit their lowest levels since the depth of the lockdown in April 2020 (data via Investing.com):

The MBA’s Purchase Mortgage Applications Index has now slipped below the lows of late 2018. As of November 2018, the Fed had been raising rates (slowly) for years and its QT was in full swing and mortgage rates had risen over 5%, which was just over 5% enough to shake up the housing market. The volume of home sales slowed, prices began to fall in some markets and stocks sold off. But with inflation below the Fed’s target and Trump, who had taken over the Dow, constantly throwing darts at Powell, in December 2018 the Fed signaled it was going to back down and immediately mortgage rates began to fall, and volumes and prices again removed.

Today, raging inflation is the number one economic problem and the Fed is chasing it with the support of the White House, so this problem simply has to make itself felt in the housing market.

Holy-Moly Mortgage Rates.

The average interest rate on 30-year fixed-rate mortgages with matching balances and 20% down rose to 5.40% this week, according to MBA today, after being in the range of 5.4% plus or minus a little since late April, its highest since 2009

I call them Holy Moly mortgage rates because that’s the reaction you get if you apply that rate to calculate a mortgage payment on a house at current prices and then accidentally look at the resulting mortgage payment (data from Investing. com):

“Bad time to buy a house.”

It turns out that sky-high house prices, which are supposed to be funded by mortgage rates, combined with uncertainty about the economy, falling stock prices and inflation eating everyone’s luncheon, make a toxic mix for homebuyers.

The percentage of people who said now was a “bad time to buy a home” rose to 79%, another record high in 2010 data, according to Fannie Mae’s National Housing Survey for May. Sentiment has deteriorated since February 2021:

“Consumers’ expectations that their personal financial situation will get worse over the next year hit an all-time high in the May survey, and they expressed heightened concerns about job security,” according to the Fannie Mae report.

“These results suggest to us that rising mortgage rates, high home prices and inflation are likely to continue to squeeze potential homebuyers — as well as potential sellers with lower, fixed mortgage rates — out of the market, supporting our forecast for home sales through the end of this year.” and will slow significantly over the next year,” Fannie Mae said.

Falling share prices are repeatedly blamed.

The stock market is on the front pages every day. Only a small percentage of Americans own stocks of any note, but that doesn’t matter. Stock market declines, with many high-flying stocks plummeting 70% or 80% or even 90% since February 2021, have unnerved many. That’s partly why Fannie Mae pointed out that “consumer expectations that their personal financial health will get worse over the next year have reached an all-time high.”

The MBA had also previously pointed to financial markets as one of the reasons for the decline in purchase mortgage applications.

In the tech and social media sectors, the sharp declines in stock prices have now triggered the first hiring freezes and some layoffs. And even that – just the idea that Nirvana is somehow over – shakes some people up.

A surge in stock portfolios, employer stock options, or cryptos empowered prospective homebuyers, allowing many to borrow against their portfolios to make down payments. This option has either disappeared or looks very shaky to many.

Refi applications plummeted to their lowest level since 2000.

Mortgage applications to refinance an existing mortgage fell another 6% this week and are down 75% from a year ago to their lowest level since 2000, according to the MBA’s Refinance Mortgage Applications Index. The MBA obtains this data from a weekly survey of mortgage bankers.

At these Holy Moly mortgage rates, the only reason to refinance is to extract cash from the home via a cash-out refi (data from Investing.com):

Cash-Out Refi Mortgage Applications.

According to the AEI Housing Center, which tracks mortgage applications by the number of freezes, non-disbursement refi applications are down 92% from a year ago. But cash-out refi requests are primarily driven by a desire to extract cash from a home, with mortgage rates a secondary concern — and so they continue, but at a slower pace.

The payout of refi requests in the week ending May 30 (black line) is down 42% from the same week in 2021 and has stabilized around 2019 levels:

A payout refi offers the homeowner a large lump sum to spend on everything from cars to home improvement projects. They are also used to pay off expensive debts like credit cards so that those credit cards can then be used to make further purchases. The slump in disbursement refi reduces the availability of these lump sums and therefore reduces the stimulus to the economy they provide.

No-payout refi mortgages at lower mortgage rates also boost consumer spending as the lower interest rates reduce payments, which then leave a little more each month to spend on other things. But the rise in mortgage rates and the subsequent 92 percent collapse in no-cash-out refi mortgage applications are ending that program.

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