To see where the U.S. housing market is headed, we really need to look at what real home buyers—those who are planning to stay in their home for the long term—are doing. Institutional investors, who came into the housing market in 2012 and bought massive amounts of homes, are speculators; they’ll quickly rush out of the housing market if they can get a profit or if they can get a better return on their money elsewhere.
Right now, real home buyers are not very active in the U.S. housing market, as they face challenges. In fact, it looks like the number of real home buyers in the housing market is declining.
Between January and December of 2013, the 30-year fixed mortgage rate tracked by Freddie Mac increased by 31%. The 30-year fixed mortgage rate stood at 3.41% in January, and it increased to 4.46% by December. (Source: Freddie Mac web site, last accessed January 15, 2014.) Higher interest costs are a real challenge for home buyers.
As we can see from the chart below, there was a sudden change in the direction of interest rates after the Federal Reserve hinted in the spring of 2013 that it would start to “taper” its quantitative easing (money printing) program. It is widely expected that the Fed will continue to taper throughout 2014 as it drastically pulls back on its massive money printing scheme.
Chart courtesy of www.StockCharts.com
Another challenge home buyers face is stagnant growth in their incomes. In 2013, average hourly earnings of production and nonsupervisory employees in the U.S. increased by only 1.85%—less than real inflation. (Source: Federal Reserve Bank of St. Louis web site, last accessed January 15, 2014.)
But while incomes have not risen, consumer costs have increased…food prices have increased and gasoline prices remain staggeringly high. The cost of living, despite what the government statistics tell us, is rising quicker than the rise in real incomes.
And we can already see the sharp decline in demand from real buyers in the housing market in mortgage originations.
Mortgage originations at the big banks are an excellent gauge of demand from home buyers. If more mortgages are being originated, it shows more home buyers are entering the housing market. If mortgage originations decline, it tells me demand from home buyers is declining.
The drop in mortgage originations has been quick and sudden…
In its fourth-quarter 2013 corporate earnings, Wells Fargo & Company (NYSE/WFC) reported that residential mortgage originations at the bank declined by 37.5% from the previous quarter. (Source: Wells Fargo & Company, January 14, 2014.)
JPMorgan Chase & Co. (NYSE/JPM) reported a decline of 54% in mortgage creation in the fourth quarter of 2013 from the same period in 2012. The quarter-over-quarter change in mortgage creation at the bank was 42%. (Source: JPMorgan Chase & Co., January 14, 2014.)
Bank of America Corporation (NYSE/BAC) reported similar results. First mortgage originations at the bank declined by 46% in the fourth quarter of 2013 compared to the fourth quarter of 2012. At its Consumer Real Estate Services (CRES) business unit, Bank of America reported a loss of $1.1 billion in the fourth quarter. (Source: Bank of America Corporation, January 15, 2014.)
That isn’t all. At the end of 2013, the Mortgage Bankers Association reported that the mortgage activity in the U.S. housing market declined to the lowest level since 2000. (Source: Reuters, January 15, 2014.) Mortgage applications are a leading indicator of where the housing market will go and how home buyers are reacting to changes.
With the sharp decline in mortgage applications and originations, I say the jig for the housing market recovery could be up; buyers beware!