Wednesday, December 03, 2014

The Fed is trapped in a jagged box.

Mortgage refinancing falls despite rates at 18-month low.

"Applications to refinance a home loan fell 13 percent last week from the previous week, on a seasonally and holiday-adjusted basis, according to the Mortgage Bankers Association (MBA). That pushed overall application volume down 7.3 percent week-to-week"

I look at interest rates almost every day now. At the moment it isn't that hard to figure this economy. If things were getting better - rates would rise. Not keep falling. It's really that simple.

Yesterday I could find a rate at 3.64%. It was hard, but it could be done. It wasn't the lowest reading in the past few months, so I didn't blog about it. It has to be close though. I'd have to look back through the blog. The rest of the rates were split 50/50 over and under 4%. It seemed generally like rates had risen a tiny bit. Today around 80% of institutions were offering rates rates around 3.8ish% range.

It's a little murky to figure out what is going on in the market right now because I read prices are still going up. From trolling the MLS, I'd say they are generally flat in my city. Agents still think they are in the zone because the markdowns still range in the 10 grand level unless you have a really expensive property.

The article goes on to say,

"Interest rates dropped through the course of last week, but the holiday likely delayed homeowners from acting on that drop in rates to refinance. We would need rates to drop back below four percent to generate substantial refinance activity," said Michael Fratantoni, chief economist for the MBA. "

I think this is a completely bullshit statement. There are still roughly 17% of homeowners underwater. I am one of them on my primary. My rental is now above water. I don't really know how many of those 17% have a reset coming up - but I'd guess 100%. The reset on my house was in early 2016. In 2006 you could not get a mortgage without a reset no matter how good your credit was. It was all they offered. If you had good credit you could at least get a 10 year reset like I did.

There is only one guy I know left that stuck it out like I did. I write about him from time to time because I know when they refi him - the market will mostly be healed. As of a few weeks ago they were still refusing to refi him and he's paying 7% interest. He's been trying all year. I know for a fact he has a reset coming too, but honestly - rates are so low that he would probably be better off if his reset hit. The stress of not knowing when rates will rise will kill him inside, but for a while he will be better off than he is now.

Just because it hasn't hit yet, make no mistake, when you have a reset coming you know you are in the foot race of your life with the bank. The Holiday season isn't deterring you. The bank is deterring you. I mean, every one's resets are in sight now. It focuses the mind. I bought my house about a year into the correction. So their resets have to be triggering super soon.

So what's next? Prices are rising so slowly now that this group is going to feel a lot of pressure. Enormous pressure. Everyone had been telling them rates will rise. If the economy was healthier they would. But most people are just living their lives and not tracking stupid stuff like interest rates. They get their information from the news. I've been saying since at least summer that the Fed would not increase rates because they couldn't. Activity in the housing market was so anemic it would send us immediately into a recession. It's only in the past few weeks the annalists are starting to understand rates probably were not going to rise until much later. The decline in oil has helped that along.

If you can't pull some of those 17% off the fence when rates are around 3.8%, you've got some serious problems. People know rates will not get that much lower. Let me tell you - when you are still paying around 7% and the rates are in the 4% range - it burns like the surface of the sun. All the deadbeats have been refi'd, and you just feel like a sucker for doing the right thing.

At any rate - lower rates are not not an option to stimulate the economy now. That tool is pretty well played out.

Now that I think about it, the fact that refi's have fallen off a cliff are probably part of the reason deflation is starting to be talked about a lot more. For the past 6 months that 17% has been pretty consistent. Likely some of the bump in inflation in 2013/14 was due to how many people they had crammed into the refi pipeline. When you have a reset - you don't spend normally. Even if you have the money to spend. That reset shapes everything you do. When that reset comes off - it's like a breath of life.

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