Wednesday, December 9, 2015

Strong mortgage applications

We're seeing important stirrings of life in a market that has experienced little or no growth for the past six years.

As the chart above shows, new applications for mortgages (not including refinancing applications) last week and the week before were up over 35% relative to their average in the second half of last year. If we ignore the one-time jump in applications in late September—which was an artifact of major changes to banks' reporting requirements—mortgage applications last week were higher than at any time since mid-2010.

As the chart above shows, the total amount of mortgage debt outstanding in the U.S. has been declining since 2008, but looks to have bottomed. (This chart only covers data through June '15.) Outstanding mortgage debt today totals some $9.5 trillion, and has not grown at all for the past 9 years.

The chart above shows the total amount of mortgages that have been securitized, roughly $5.1 trillion. After about four years of zero growth, from late 2009 to late 2013, securitized mortgages have increased by almost 10% in the past two years.

I think it's safe to conclude that the demand for mortgage loans is once again on the rise after many years of weakness, and the financial markets have accommodated that demand by lending more. Homeowners are now more willing to borrow, and lenders are more willing to lend.

As the chart above shows, residential construction spending has increased 17% in the year ended last October. Builders are responding to the rising demand for homes (nationwide prices are up about 30% in the past four years, according to Case-Shiller) and the rising demand for new mortgages.

Housing starts have been rising for the past five years, and show no sign of slowing. Builders are building more because homes are selling. It's quite likely that housing starts continue to rise for the foreseeable future, given ongoing growth in new home formations and the need to catch up for years of very weak construction activity.

10-yr Treasury yields are the major determinant of mortgage rates, and both bottomed in late 2012. We may now be living through the early stages of a reversal of the declining trend long-term interest rates which began in 1981. 30-yr fixed rate conforming mortgages are now going for 3.84%, up almost half a point from their all-time low at the end of 2012. Strong loan demand may in part be fueled by a "get it now before rates go higher" mentality, but it may also be fueled by increased confidence and prosperity on the part of homebuyers. Plus, there are almost 5 million more jobs in the economy today than there were when the housing market last peaked.

It's no secret that markets are worried about slow growth in China, collapsing oil prices, generally weak commodity prices, and the impending "lift-off" of short-term interest rates about to be engineered by the Fed. However, the budding strength of mortgage loan demand and the ongoing rise in construction activity in both the residential and nonresidential markets constitute a substantial and arguably overlooked counterweight to the weakness in other areas of the economy. Expect economic growth to continue in the 2 - 2 1/2% range we've seen for the past several years.


Benjamin Cole said...

The real story in housing is that supply is constrained by ubiquitous zoning regulations.

Fun fact: it was only in 1926 that the US Supreme Court upheld local zoning. Before then the property owner was king of his castle, and highest and best use determined property development.

But like I always say, the Supreme Court and the US Constitution do not protect free enterprise.

Matthew Grech said...

Scott: What's your recent work on credit/risk suggest? The junk market has me more than a little concerned...

Benjamin Cole said...

Ugly week on Wall Street. Oil and commodities very soft. Copper cut in half in last five years, back to 2005 prices. Dollar rising---possible carnage in emerging markets assets.

Not sure what is inspiring the Fed---are a rising dollar and dead unit labor costs signs of an "easy" monetary policy? said...

Scott, what's your latest take on high yield bond market sell off?

I don't see the world ending. What do the latest credit default swap measurements tell you?

Kenneth said...

What is your interpretation of the latest developments in the high yield segment? Is this the tip of the iceberg as was the Bear Stearns hedge fund many months before the collapse in the fall of 2008 or are there substantial differences? Would really appreciate seeing an analysis from you on this subject. You are so good at separating fact from fear.
Thanks in advance,

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William said...

Questions about Hi-Yield Bond Market Sell Off

I have read two articles worth reading on the topic:

Via Bloomberg: "Mohamed El-Erian, Nine Lessons From Third Avenue's Liquidation"

Via WSJ: "The Liquidity Trap That’s Spooking Bond Funds"

Kenneth said...

I previously read the WSJ article. The other was new to me. Nevertheless, I would very much like to hear Scott's comments. I really value his work. He was right on with his analysis a couple months ago when we had about an 11% market decline in a few days to some extent over the same issues. But we now have oil substantially lower and the high yield market has new stresses. And of course the Fed. Scott has commented many times on the Fed so I know where he stands. But the credit markets , at least high yield, are under stress and I would like to know the significance of that stress in Scott's opinion.

marcusbalbus said...

strong. always strong.

Roy said...

If Scott would reply to this my guess is that he would say:

1. Currently there is no systemic issue.
2. It is another wall of worry according to current data.

However he already noted that:
3. The market in general is fairly valued.

(Of course, there's always reflexivity which is harder to see in the data and that's where surprises can come from.)

William said...

Maybe we should ask STEVE:

He was an investment adviser for 20+ years and posted here on August 26th that he had just purchased Hi Yield Bonds. said...

I added to VWEAX position Friday. Will tax loss sell JNK & roll back into HYG before year end. Hi yield position as percent of securities portfolio: 2%. Will dribble cash into VWEAX from time to time.

ClaytheBerge said...

new applications for home loans (excluding renegotiating applications) a week ago and the prior week were up more than 35% with respect to their normal in the second 50% of a year ago. In the event that we disregard the one-time bounce in applications in late September—which was an ancient rarity of real changes to banks' reporting necessities—contract applications a week ago were higher than whenever since mid-2010. mortgage rates vancouver