Since Q2 2020, US homeowners have been big winners in terms of home price gains and equity in their homes. Unfortunately, this means that renters are big losers. Once again, The Federal Reserve is benefiting once segment of the population while punishing the other segment.
*Homeownership mortgage source: 2016 American Community Survey.
National Homeowner Equity
In the second quarter of 2021, the average homeowner gained approximately $51,500 in equity during the past year.
California, Washington, and Idaho experienced the largest average equity gains at $116,300, $102,900 and $97,000 respectively. Meanwhile, North Dakota experienced the lowest average equity gain in the second quarter of 2021 at $10,600.
10 Select Metros Change
CoreLogic provides homeowner equity data at the metropolitan level, in this graphic 10 of the largest cities, by housing stock are depicted.
Negative equity has seen a recent decrease across the country. San Francisco-Redwood City-South San Francisco, CA, is the least challenged, with Negative Equity Share of all mortgages at 0.6%.
Loan-to-Value Ratio (LTV)
The graph represents National Homeowner Equity Distribution across multiple LTV Segments.
Since growing home equity lead to lower default risk (or at least losses to the mortgage holder), we are seeing mortgage delinquencies fall after the Covid surge.
This is the Steve Urkel economy where The Federal Reserve and Federal government screw everything up with their policies (or follicies) and say “Whoops! Did I do that?”
(Bloomberg) — U.S. consumer sentiment rose slightly in early September but remained close to a near-decade low, while buying conditions deteriorated to their worst since 1980 because of high prices.
The University of Michigan’s preliminary sentiment index edged up to 71 from 70.3 in August, data released Friday showed. The figure trailed the median estimate of 72 in a Bloomberg survey of economists.
Buying conditions for household durables, homes and motor vehicles all fell to the lowest in decades. The report said the declines were due to complaints about high prices. Consumers expect inflation to rise 4.7% over the coming year, matching the highest since 2008.
September’s UMich Buying Conditions for Houses fell to 60 … thanks to superheated house prices.
I can just picture Fed Chair Jerome Powell channeling Steve Urkel and saying “Whoops!! Did I do that?”
The Covid epidemic hit the single-family mortgage market hard in early 2020, leading mortgage lenders and servicers to offer FORBEARANCE to borrowers who were having trouble making their mortgage payments due to loss of hours or a loss of job.
The good news? Active forbearance plans are much lower today than at their peak after the Covid epidemic struck in early 2020 with active forbearance plans peaking in May 2020.
Forbearance plans are due to expire in
What is forbearance, you ask? Forbearance is when a mortgage servicer or lender allows a borrower to temporarily pay their mortgage at a lower payment or pause paying your mortgage. The borrower will have to pay the payment reduction or the paused payments back later.
Despite forbearance, Fannie Mae still reported $7.2 billion in net income in Q2 2021. Notice the difference between single-family SDQ and the SDQ rate without forbearance. Freddie Mac reported $3.7 billion in Q2 2021 net income.
Here is a look at Fannie Mae’s net income over the past year and SDQ rates.
Under the existing seller/servicer eligibility requirements, the Agency SDQ Rate is defined as 100 multiplied by (the UPB of mortgage loans 90 days or more delinquent or in foreclosure for Fannie Mae, Freddie Mac, and Ginnie Mae/Total UPB of mortgage loans serviced for Fannie Mae, Freddie Mac, and Ginnie Mae). Beginning with the financial quarter ending Jun. 30, 2020, the Agency SDQ Rate will include an adjustment for mortgage loans in a COVID-19-related forbearance plan that are 90 days or more delinquent and were current at the inception of the COVID-19-related forbearance plan. The UPB of such mortgage loans shall be multiplied by .30 and added to the UPB for SDQ mortgage loans for the purposes of determining the numerator in the calculation of the Agency SDQ Rate.
Not only after home prices screaming at near 20% YoY growth, but apartment rents are surging as well.
(Bloomberg) — Apartment rents were up in August from a year earlier in all the top 30 U.S. metro areas, the first time that’s happened since the start of the pandemic, according to a new report by Yardi.
The national average rent inmulti-family buildings rose 10.3% from a year earlier to $1,539 — the first double-digit rise in the dataset’s history — after a $25 increase in August, the real-estate firm said. Over the past 10 years, the average pace of growth has been 2%.
Zillow’s rent index of all homes is growing at 9.25% YoY.
Fed Chair Jerome “Inflation is Transitory” Powell.
(Bloomberg) — Orchard, which offers cash to homebuyers upfront so they can purchase a new residence before selling their old one, raised $100 million to fuel growth in an ultra-competitive housing market that’s pushing shoppers to find new ways to stand out.
The fundraising round values the startup at more than $1 billion, making it the latest unicorn company to tackle the challenge of simplifying the process of buying or selling a home. Boston-based Accomplice led the round, with existing investors FirstMark, Revolution, First American and Juxtapose also participating.
“We can say we’re a unicorn, which feels good for about five seconds, and then it’s back to the real world of building a business,” Chief Executive Officer Court Cunningham said in an interview. “We’re trying to create a modern way to buy and sell homes, and that’s capital intensive.”
Cunningham, previously CEO of online marketing company Yodle, started Orchard in 2017 to take on what he viewed as a ripe opportunity: Consumers were frustrated with the traditional way of buying and selling homes, and the $1.7 trillion U.S. housing market was big enough to make tackling the problem worthwhile.
Orchard focuses on people who are trying to buy their next home while selling an existing one, a nerve-wracking process that can cause a transaction to collapse or result in households carrying two mortgages. In addition to offering cash to help clients buy their next home, the New York-based company provides funds to make light repairs before listing the existing home on the market. Orchard seeks to profit by operating as a brokerage and earning commissions.
There have always been services that purchase homes from you. Typically, there firms simply pay off your mortgage, so if you have a higher mortgage balance relative to you home value, you may not like what you are offered. But Orchard is not that model.
If you “List with Orchard,” and your home doesn’t end up selling on the open market, Orchard will buy your home. Sellers in some markets also have the option to sell immediately to the company. Orchard wants you to list for 30 days before selling to them for their backup cash offer price. If you sell directly to Orchard, you’ll also pay an additional 1% convenience fee on top of the 6% you’re already paying commission.
When home prices have been rising at a 17-18% YoY pace, this seems like a good model. But what if The Federal Reserve removes it massive monetary stimulus and/or The Federal Government slows down it fiscal stimulus? Then Orchard, if they purchase your home, will likely lose considerable amounts. Being aware of this possibility, Orchard is likely to buy homes at a considerable discount.
But there is still worries about inflation. Here is the Citi Inflation Surprise index.
Publicly traded companies known as iBuyers are pioneering a high-tech approach to home-flipping intended to make selling properties easier. Those firms include Opendoor Technologies Inc., Redfin Corp., and Offerpad Solutions Inc. A fourth, Zillow Group Inc., recently raised $450 million by issuing bonds, backed by the homes it buys and sells.
According to Deutsche Bank, 85% of the US High Yield market has a yield below the current rate of inflation.
Its not only high-yield bonds that have negative REAL yields, but even The Fed Funds Target rate is negative at -5.12%. The real 10-year government bond yield is -4.01% and the REAL Freddie Mac 30-year mortgage survey rate is -2.5%.
Headline! “Fed’s Kaplan says delta variant could cause him to rethink his tapering view”
Face it, the Federal Reserve may alter its growth path on asset purchases of Treasuries and Agency Mortgage-backed Securities, but it is doubtful that they will pare back their balance sheet. Call it “A Never-ending balance sheet for you” world.
Why? Seemingly never-ending Covid crisis, etc.
Let’s look at US Treasury yields today. The 10-year Treasury yield is up slightly to 1.25% as of 10am EST.
Here is a chart of the 10-year Treasury yield, Fed Funds effective rate, Fed Balance sheet and reverse repos since the Covid outbreak and Fed massive intervention. Bottom line, the have repressed the short-term interest rates and put downward pressure on the 10-year Treasury yield.
As the 10-year Treasury yield remains repressed DESPITE HIGHEST INFLATION RATE SINCE 2008, the Freddie Mac 30-year mortgage rate remains repressed as well. Yes, that mean NEGATIVE REAL MORTGAGE RATES.
This produces a REAL mortgage rate of -2.56%.
The spread of mortgage rates over the 10-year Treasury yield is about 173 basis point since 1971.
Where will Treasury yields go from hear? If we believe technical analysis like the Ichimoku Cloud, the 10-year Treasury rate will likely rise.
And The Fed’s Dots project also see rates rising (at least on the short-end.
Negative real mortgage rates and blistering home price growth?
Will the attendees at the KC Fed Jackson Hole conference discuss these matters? Or will it just be a Federal Reserve Soul Shake (dance)?
United Wholesale MortgageUWMC has announced plans to become the first national mortgage lender to accept cryptocurrency for home loans.
What Happened: CEO Mat Ishbia previewed the Pontiac, Michigan-based company’s expansion into the cryptocurrency realm during the second-quarter earnings call on Monday.
“We’ve evaluated the feasibility, and we’re looking forward to being the first mortgage company in America to accept cryptocurrency to satisfy mortgage payments,” Ishbia said. “That’s something that we’ve been working on, and we’re excited that hopefully, in Q3, we can actually execute on that before anyone in the country because we are a leader in technology and innovation.”
In an interview with the Detroit Free Press, Ishbia offered more details on which cryptocurrencies would be considered in transactions.
“I think we’re starting with Bitcoin, but we’re looking at Ethereum and others,” Ishbia said. “We’re going to walk before we run, but at the same time, we are definitely a leader in technology and innovation and we are always trying to be the best and the leader in everything we do.
“That’s the plan,” he added. “Obviously there’s no guarantees – we’re still working through some details. But absolutely.”
Why It Matters: One of the first homebuying deals in the U.S. involving cryptocurrency took place in 2014 with the $1.6 million sale of land in Lake Tahoe for a home site. The transaction was completed with payment via Bitcoin (CRYPTO: BTC).
However, the heavily regulated and risk-averse mortgage industry hasn’t embraced cryptocurrency. The government-sponsored enterprises that dominate the industry’s secondary market, Fannie MaeFNMA+ Free Alerts and Freddie MacFMCC+ Free Alerts, will not accept any transaction in a digital asset.
If UMC plans to package its cryptocurrency-based loans for secondary market sale, the borrower’s cryptocurrency payment would have to be converted into dollars and the borrower would need to provide documentation to verify ownership of the digital assets as part of the loan underwriting process.
(Bloomberg) — Last week was notable for the tsunami of agency mortgage bonds offered to the Federal Reserve during its routine purchase operations on Friday.
The central bank’s quantitative easing schedule called for it to buy $2.9 billion of 30-year uniform mortgage bonds Friday, and that was nothing outside of its usual pattern. However, mortgage investors flooded the Fed with $15.06 billion of bonds for sale, the largest daily amount offered during a single operation since April 1, 2020.
In terms of how that compares to the total amount purchased, investors offered 5.2 times as much as were eventually taken down by the central bank. That is well above the 2.3 times average for 30-year uniform mortgage bond operations seen during all of this round of quantitative easing, and the second-highest overall. The highest submission ratio was the 5.5 times seen on July 16, 2020.
There are a number of reasons this could have happened. Investors may have wished to lighten their positions before the summer doldrums of late August, when many desks are lightly staffed due to vacations. Also, tight sector valuations or concerns about a sooner-than-expected taper may have played a part.
While this may simply be a one-off event and no reason for concern, it is certainly something to keep an eye on in case it heralds a change in investor sentiment.
In related news, the Treasury’s overnight reverse repos purchases remain about $1 trillion.
There will be more housing inventory hitting the market soon. As home prices are up and most are no longer in negative equity situations, some will decide to sell into this hot market. Obviously not paying your mortgage for 12, 14, 16, or even 18 months is a nice bonus that party is coming to an end.
Zillow’s research found that most are not going to bring their mortgage current. Assume someone took a forbearance and their monthly mortgage cost was $2,000 per month, some may be behind by up to $36,000 when the forbearance period ends. Okay, well what if you can’t make it current? You can defer the payments to the end of the mortgage but you still owe that and many got used to not even paying the regular monthly payment. So a sizable portion will be selling
Could this be the end of the 16.6% YoY growth rate in home prices? Or will Congress and/or The Biden Administration extend the forbearance? Or will The Fed expand their balance sheet even further??
Confounded Interest - Anthony B. Sanders 
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