Mortgage Applications Down 14.2% From Previous Week. Correction Ahead.
According to the Mortgage Bankers Association (MBA), mortgage applications decreased by 14.2% from last week. Mortgage applications were down 37% from the same week last year. The current demand for mortgages is the lowest in the last 25 years.
“Mortgage rates continued to climb last week, causing another pullback in overall application activity, which dropped to its slowest pace since 1997. The 30-year fixed rate hit 6.75% last week – the highest rate since 2006,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. Kan continued, "The current rate has more than doubled over the past year and has increased 130 basis points in the past seven weeks alone. The steep rate increase continued to halt refinance activity and impacted purchase applications, which have fallen 37 percent behind last year’s pace.”
Interest rates are making monthly payments unaffordable for most buyers. Builders are slowing production and reducing prices. One in four builders lowered prices in August, up from 19% in July. To offset their inventory burden, builders have also begun offering unsold new builds to investors at discounts of up to 20%.
An economist from Redfin gave a warning to the market. He believes prices will go down as interest rates continue to rise. “It’s important to remember that much of the housing market data . . . being reported are based on home purchases that were agreed to a month or more ago when mortgage rates were a point and a half lower,” says Redfin economist Taylor Marr. “Sellers should anticipate that buyers are unwilling or unable to pay the price similar to what their neighbor’s home sold for a month ago."
Tejas Joshi, a director from Yieldstreet investment firm, expects regional market builders, like Dallas, Texas, and Boise, Idaho, to significantly cut prices. He believes significant corrections up to 20% are coming. Goldman Sachs believes the areas most vulnerable to sharp correction are the western metropolitan areas, like Seattle, San Diego, and Los Angeles, that saw sharp price increases during the pandemic. Goldman Sachs predicts the correction will hit about 39% of metropolitan areas. Areas with a low level of new construction are the markets least likely to see a sharp decline. Despite Goldman’s forecast of future declines, recent data tells another story, and the declines have already started.
Black Knight’s August 2022 Mortgage Monitor was released on October 3. Black Knight reported that July and August were the most significant single-month national price declines since January 2009. The declines in July and August rank among the eight most significant on record and are now rivaling the declines seen during the Great Recession of 2008-2011. The only months with more significant single-month declines were the months immediately following the collapse of Lehman Brothers in 2008. Nationwide, housing is down 2% from the June peak.
What Does it all Mean?
Oversimplifying it a little, there are two main types of investments: risk and safety. Risk investments are for growth, and safety is for capital preservation. Risk investments are stocks, cryptocurrencies, and other speculative assets. Risk investments have gotten crushed this year. When real estate had trouble in 2008, risk assets crashed. Safety investments tend to be bonds, real estate, and precious metals. All the writing is on the wall for U.S. real estate. A sharp downturn is coming. Bonds are down more than 17% this year since they started raising interest rates.
The Fed is committed to raising interest rates until the inflation rate is around 2%. The current inflation rate is 8.3%, and history has shown that interest rates need to climb higher than the inflation rate to bring the numbers down. The current Federal interest rate is 3-3.25%. Several future rate hikes will be needed to control an 8.3% inflation rate. As interest rates rise, housing will contract exponentially. With each rate hike, fewer buyers can afford the monthly payments. Prices will fall, and many people who leveraged their house with HELOC (home equity lines of credit) will be underwater on their loans and unable to sell. The untenable situation of people unable to sell and buyers unable to buy is precisely the outcome the Fed is trying to achieve. The Fed intends to destroy the housing and jobs markets to bring down inflation. The Fed wants a painful recession.
Unfortunately, things will get worse in both risk and safety assets. Stocks, bonds, and real estate are in the path of the Federal Reserve interest rate bulldozer. For most people, the best course of action right now is a financial defense first. Where does one find safety if bonds and real estate are unreliable safety investments? The good news is that gold has survived every market correction for the past 5,000 years and is currently unexplainably cheap. I have my theories about why gold is cheap, but it doesn't matter why it is cheap. Buy low and sell high. Gold is low. What should you do?
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