Wells Fargo mortgage staff brace for layoffs as U.S. loan volumes collapse
cnbc.com
cnbc.com
If you don't see a corresponding price drop of 35% then it might be too early.
If it's a cash market (bay/Seattle/NYC), might be more resilient.
A year ago I was surprised if a house lasted more than a weekend, now I'm literally shocked when I see a house sell. I can think of two houses in my area I've seen with sold signs in the last couple months and there's dozens that have been sitting on the market for that time.
> A year ago I was surprised if a house lasted more than a weekend, now I'm literally shocked when I see a house sell.
Around here it has cooled down but the market is still... volatile. Ironically I may or may not be 'up' in value compared to the start of this year. But my state has various taxes and insurance costs that have impacts on relative home value.
Basically people with 2%-3% mortgages are going to sit tight, because they can no longer afford a comparable house were they to move. Low inventory means prices won't drop as much as people hope with rising interest rates.
The only wild card here is what will happen with cash buyers, who aren't affected by mortgage rates.
https://twitter.com/RickPalaciosJr/status/158868887009456128...
https://fred.stlouisfed.org/series/ACTLISCOUUS
Listings are still very low compared to pre-pandemic levels not to mention by many metrics there was already a shortage before the pandemic stemming all the way back to the great recession. Some interesting reading:
https://usafacts.org/articles/population-growth-has-outpaced...
https://www.usatoday.com/story/money/2022/10/26/housing-mark...
https://www.pewtrusts.org/en/research-and-analysis/blogs/sta...
https://www.fanniemae.com/research-and-insights/perspectives...
Housing affordability has been demolished with these higher interest rates, so sales will drop off a cliff as we're already seeing with mortgage companies doing mass layoffs.
Certainly, but read these articles. the expert economists and firms. While that may be true it is also true that far fewer people will sell their homes and very few homes will be built exacerbating an already 20 year problem of under building. The USA will have a low demand and low supply problem in the short term but the low supply problem is likely to persist for quite some time (just as it has for the past decade).
Same thing happened when buyers disappeared in 2020 - most of the more marginal homes just got taken off the market, and either rented for a year or given a fresh coat of paint and some renovations to sell for a few hundred K higher in 2021.
Even then, these were 70 year old starter homes.
Basically - if you live in a desirable area, don't expect housing prices to reflect a 35% drop off of the interest rates increasing. Expect to pay roughly 2018-2019 prices, maybe even with 5-10% on top, adjusting for inflation.
Depends what you mean by cash buyer. There's a few different categories here and people sometimes get confused.
1) Someone who is very wealthy and has enough cash (or cash convertible assets) lying around to buy house without financing. I'd put Bill Gates in this category. I think most people assume that this is what all cash buyers are (albeit not as wealthy as BG)
2) Someone who sold a home that previously appreciated in value and is now able to use the difference (plus some savings) to pay for the next home in cash. For example, you bought in Brooklyn in 1970 and now want to retire in Miami. You can probably sell that first place and have enough liquid cash to buy in Miami. This is sort of like category 1, but not necessarily someone who is wealthy in a way that most people imagine.
3) Someone who has access to some other means of temporary financing. For example, let's say you run a company and have a close relationship with your bank. You might already have a line of credit with the bank collateralized against your business or other assets that you can draw down to get a temporary loan so that you can make a "cash offer", which you then plan to turn around and get a mortgage on. You don't need to be able to afford $600,000 in cash to buy a $600k home. You just need to be able to have some means of financing it in between when you buy the home and when you take out a mortgage. Often times this might be a family member or friend helping out.
4) A real estate investment company that buys houses in cash. Again, you may not actually have the cash around, but you have a banking relationship and the ability to get large amounts of cash on short notice and without the amount of due diligence a mortgage reuqires.
In 2020-2021 when the housing market was at its peak, I suspect that a substantial chunk of "cash buyers" probably fell in category 3. Yes, people had more money and there were lots of bitcoin millionaires, but not enough to hear about multiple cash offers on $500k homes (if you are the sort of person with $500k in cash to spare, you probably want more than a $500k home).
In any case, all of these groups are affected by the current environment. The stock market is down and there are just fewer people in Group 1 right now. Sure, Bezos and Gates are just fine, but the person who had $10M in liquid assets in 2021 might have $7M in in late 2022 and is probably a lot more nervous about taking money out of that. For group 2, the house you are selling isn't gonna sell for as much, so you'll have less money to spend on your next house. For group 3, these people were planning to use financing as a bridge, but the underlying mortgage rates still very much affect you if you plan to take out a mortgage after the sale. And of course, Group 4 is probably the most effected... what kind of person in their right mind is investing in residential real estate right now :)
If neither of those things happened, then in my opinion there isn't actually a "shortage", and the extra demand is maybe just from remote working and low interest rates. If those factors retreat and become less favorable, I presume the demand will retreat and new buyers will crawl back to wherever they were living before and this "shortage" will disappear as quickly as it came.
At the current rate of 7.5%, it's $4,545.
For that reason, I hesitate to predict a huge downward trend in house prices. In this environment, prices holding steady would be a downward trend.
https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=100&year1=2019...
House prices are set at the margins, just like any asset. Even if the folks with 3% mortgage rates sit tight and don’t sell, there will still be downward pressure on prices because prices are not determined by non-transactions. There are plenty of listings for those who need to exit the market and liquidate, driving inventory up.
Just a quick glance at Zillow and Redfin will show that Bay Area prices have already retreated 10-15% and in some cases back to 2019 levels. Every other listing has 100k+ price cuts or more.
I think large drops (40-50%) in most regions are likely.
The availability of remote work and the retreat of the HCOL population to other areas in the US is likely causing an increase in demand elsewhere, as we have seen as a macro trend since the beginning of the pandemic. This demand will keep supplies low in LCOL areas.
There is heterogeneity of sellers in how much they "must" sell (versus alternates like rent it out, not move at all if they're nearly indifferent between cities, etc). Clearly "lock in" reduces total sellers.
YES! There is a sort of delusion that has taken hold of people who became “house rich” in the past couple years. They seem to think that if they don’t sell, their house will still be worth whatever fantasy number they have in their heads.
It does get me thinking about the psychology of these economic cycles and how the transformation of that delusion to acceptance/sadness on an individual level will impact their buying habits and risk taking. On a large scale, it is easy to see this is sort of spiraling into a protracted recession.
The difference is, if you picked up a house at 2.7% you will be winning for a long time. There are fewer ARMs, which means a small more protracted "collapse". Housing supply is still non-existent and will be into the near future. Wages will need to keep pace with housing costs in order to provide anyone a chance to succeed. Even after a so-called "recession" in housing they'll still be too expensive. For example, if my house dropped 50% in value, it'd still be way over what I bought it for.
The only deluded people are the ones not holding property. Make no mistake, if you didn't buy/refinance in 2020 you lost out on a literal once in a lifetime opportunity to lock a massive short against the fed.
I don't think anyone can make claims like this, lots of people made the right decision by not buying into an inflated market with job instability around the corner. I think the correction is needed, any people who didn't overextend will be fine if they intend to stay put for 5-15 years.
The only difference is that recently I've resigned myself to the fact that maybe I'll never own in my current location - which even though may be emotionally sad, at least I don't have a crazy monthly payment for a shoebox apartment.
It is just another variation of "timing the stock market". Even if you're correct you can end up losing so much money on the upside that long-term you lose compared to people who buy into a bull market.
Depending on the exact circumstances of when you bought, your mortgage rate, how much prices fall, how long you can hold, and how much prices recover you can still end up losing by not having bought during the run-up.
Here's a made up bay area example:
A house sells for $2m in 2014. Due to rising prices over 8-10 years you end up buying for $3m at 2.5% interest in 2021. The market then tanks by 30%. That puts the house back at $2.1m. Over the following 5 years the market recovers somewhat and the house is worth $2.8m in 2026.
A naive view says "see! it was correct not to buy in 2021! waiting was the correct choice."
But that's not the whole story.
Buying in 2021 means you did not pay $5k/mo rent from 2021-2026. That's $270k. Not all of that will go to principle but some will. And you're 5 years ahead of the mortgage payoff schedule compared to not buying.
Speaking of time value of money... buying in 2021 means you got 2.5-3% interest on your 30 year mortgage. Depending on how things play out buying in 2026 might end up with 4-6% on the same mortgage:
2021 Purchase @2.5%: total interest paid $1.26m 2026 Purchase @4%: total interest paid $2.15m 2026 Purchase @6%: total interest paid $3.47m
In this scenario buying in 2021 ends up with the bank paying _you_ to take the mortgage since inflation is up. If you assume inflation says around 2-2.5% after that you more or less borrow the money for free.
Buying in 2026 costs you around $1m-$2.2m over the life of the loan.
In this example even accounting for the market dropping 30% _and_ not fully recovering it still made more sense to buy in 2021. Remember this is just one example with a lot of assumptions. I'm not saying this is what will happen. I'm merely pointing out that you can predict prices are inflated, wait for them to fall, and end up losing compared to a "sucker" who bought at the peak.
You can see the same house on Zillow list at $1.1M in Jun, and then re-list at $900k in Aug, and then at $800k in Oct.
But Redfin intentionally removed it in the past couple months, and now they only show the most recent list date and price.
Redfin: https://www.redfin.com/CA/San-Jose/1488-Sunland-Ct-95130/hom...
The history between May and August was deleted on Redfin. Either there is a way to pay Redfin to delete history or @lotsofpulp is right, or maybe a convenient bug?
https://www.zillow.com/homedetails/26-Pinewood-Ct-San-Mateo-...
This one has a listing from Jan 2022 that is missing in Redfin, but shown in Zillow:
https://www.zillow.com/homedetails/4922-Leigh-Ave-San-Jose-C...
I cannot tell if this is intentional or not, but in all cases, Zillow has shown more data than Redfin.
The houses I had favorited with the missing price changes are gone from my Redfin favorites list now (owner decided to remove listing?).
Zillow definitely has better history though, and a filter option to show price reductions.
But here's the lesson I want people to take from this: both Demorats and Republicans are cut from the same neoliberal cloth in that they both serve corporate interests. What do I mean by this? Neither pushes back on the idea that interest rates are the only way to tackle inflation.
This is false.
As we say in the GFC and the pandemic, wha tdo companies do with this money? They pay bonuses, do layoffs anyway (to cut costs) and give money to shareholders, primarily in the form of buybacks.
But what you see is corporate profits are skyrocketing. Inflation is being as an argument to raise prices, which in turns puts pressure on inflation, and all that money goes to the shareholders.
Higher interest rates increase housing costs and put upward pressure on rents (as landlords seek to recoup costs).
The other method by which this can be tackled is with taxation. Some countries have enacted windfall taxes. Taxation incentivizes investment in the business.
Yet there is no serious political will anywhere to be found for this in the US.
2) if a company is hell bent on raising prices to capture profit, there is still an incentive to reduce tax liability by re-investing those profits into the company (increasing headcount would benefit the non-ruling class)
This is not an impactful tax for any of the affected corporations. They will simply choose the method under which they pay the least and continue their tax avoidance through declared max depreciation et al, as normal. This is the USA and billionaires aren't to be inconvenienced by public policy.
How do I know this? Because of all the resistance that particular measure got from many lawmakers.
So why is that impactful with the corporate tax being lowered to 21% in the Trump administration? 15% is less than 21% so it shouldn't matter right? But it does because the 2017 tax cuts effectively (in a complicated fashion) mostly gave a permanent amnesty on offshored profits. Previously, any repatriated profits were subject to the (then) 35% corporate tax rate. That bill ended that treatment. The replacement was more complicated and a much lower effeective tax rate.
So the 15% minimum actually hits companies who are currently paying less than that on foreign income. It's a good measure.
My comment however was referring to far stronger and likely temporarly measures, such as a windfall corporate tax of, say, 60% (or even higher).
It says that the effects are "particularly [pressuring] firms like Rocket Mortgage that thrived on loan refinancings" but I don't know if it's reading in too much to assume that the WF pipeline it's talking about is including both.
(If it includes refis that's still bad news for the mortgage interest but way less indicative of soon-to-fall prices since rates have generally been below the current point for about 20 years, so no small wonder nobody would refi now.)
I'm from the UK where mortgages can fixed for a definite period, usually 2-5 years, then it changes to a variable rate mortgage (with the same provider), but there's always the option of choosing variable from the start. The variable part is a margin + the Bank of England base rate.
I now live in Europe and here it's the same, except basically nobody chooses a fixed rate mortgage. The monthly repayments are recalculated every six months using the current EURIBOR rate - which is set by a group of banks themselves, not the European Central Bank (it sounds a lot like a cartel).
Either way, I'm buying a house now when interest is the highest it's been for over a decade, but it doesn't really bother me as it will drop at some point and my monthly payments will go down.
There is a unique market for long-term rates hedging among American mortgage traders. And the government backstops the risk.
Keep in mind, too, that America uses capital markets. Most of the world uses banks. (The U.K. being a puzzling counterfactual.)
https://himaxwell.com/resources/blog/30-year-fix-3-gse-refor...
It's policy. The New Deal created a secondary mortgage market through Fannie Mae (and later Freddy Mac) that normalized mortgages to 30 year fixed. There are many ways to structure mortgages in the US and not all mortgages are fixed, but the typical mortgage is because those mortgages are the most liquid given the structure of the US secondary mortgage market.
Mortgages in the US generally don't have a payoff penalty after a certain amount of time (and some don't have one at all) so in a falling interest rate scenario you can simply refinance.
To answer your question: the ultimate buyers (or should I say ultimate lenders) are taking the interest rate upside risk in exchange for stability. Mortgages just don't lose much money. When defaults are high they lose out on future interest and may take principle haircuts but they don't evaporate. Even most of the garbage from the 2007 financial crisis eventually recovered as housing recovered - comparatively few of the actual mortgages were written off.
If you want that kind of stability you can buy US Treasuries to earn 1% (or even less). Or you can get into mortgages and earn 2.5% for almost the same risk. Those rates would be higher today of course since the fed is raising rates.
You might rightly say that LIBOR or whatever rates don't fluctuate that much... in which case the same argument applies to the risk lenders take on in the US market.
Here's the top Google result on the subject: https://abovethelaw.com/2021/05/will-we-soon-see-an-american...
https://www.cms.gov/Medicare/Fraud-and-Abuse/PhysicianSelfRe...
And buying healthcare provider groups has been very popular with private equity in the past decade, there is no requirement for owners to be doctors.
https://www.bloomberg.com/news/features/2020-05-20/private-e...
https://www.ineteconomics.org/perspectives/blog/er-doctor-pr...
How are you planning to determine when the price drop has turned around so that you don’t miss out on a great deal?
Rates are expected to peak at 4.5% to 4.75% in 2023, according to the Fed’s own projections (and might go as high as 5%).
Of course we don't know the future, and if things really go to the worst due to wars around the world etc, all bets are off. But my opinion is based on things continuing more or less in the current mediocrity for a while, rather than getting significantly worse.