People restrained from getting mortgages in the past week. Applications to buy a home dropped 5 percent from the previous week, even after accounting for normal seasonal patterns. From the start of the year, these home purchase applications have been running around 10 to 15 percent below last year’s figures.
Home buying momentum is no longer there for now. Some snow and cold winter weather might be a factor. But the primary reason is likely caused by less affordable conditions. Home prices have been rising much quicker than income in many markets. Additionally, institutional investors are most likely stepping far from buying (though not yet selling). It would not be a negative thing if institutional investors begin to unload in fast appreciating markets since Los Angeles, Phoenix, Las Vegas, and Ft. Myers are facing acute inventory shortages.
An additional reason for this year’s downturn could be because of new federal mortgage regulations. One of which caps mortgage origination fees. Price control leads to less being available. For some mortgage lenders, the 3 percent cap does not allow enough of a payment to originate low dollar amount loans. The new mortgage rules that took up effect early this year could also be giving pause to lenders, as they would not wish to deal with lawsuits for heading outside the policies.
There is also a possibility that the data is not capturing the full market. Mortgage Bankers Association, that gathers the data, suggested an oversampling of large lenders and under-representation of smaller-size lenders. So the decline in mortgage purchases might not be as huge.
All-cash deals for home sales still remain extraordinarily high– approximately one-third of all sales. Home sales can still hold despite falling mortgage approvals if cash deals can fill the gap.
Refinance activity was also low in the last few weeks. Compared with one year ago, refi business has fallen by over 60 percent. Higher rates are not favorable for refinances. At least in relation to home sales, lenders are giving a second and deeper look at all home purchase requests since the refinance volume is dying off.
Though the new federal mortgage rules were well-intended, the effect is a broadening split in wealth. Tenants have little net worth. Homeowners have wealth tied mostly to their homes, with a common homeowner building up $32,000 in housing equity over the past two years. A good renter who converted to a homeowner could accumulate that wealth. But the overly tight underwriting standards are leaving behind many good tenants, preventing them from getting a chance to participate in the housing wealth recovery. Instead, many investors and multiple property owners have benefited. Politicians and the media have been talking about the inequality in wealth distribution, but many of the new policies being put in place have the ability to make it worse.