Elephant In The Room Minsky Moment

[Sancho Panza]

Mish 29/9/14

'

The "elephant in the room" is debt. Try as they might, central bankers have not been able to spur credit, hiring, or much business expansion because of the elephant. Things are even worse in Europe.

Via email, this is a guest post from Steen Jakobsen, chief economist of Saxo bank.

Debt - The Elephant in the Room

‘

Interest on debt grows without rain

’ – Yiddish proverb

This proverb explains most of what goes on in policy circles these days. We are now watching Extend-and-Pretend, Episode VI: Promises for improvement amid ever growing debt levels.

Short put, we’re still working with the same dog-eared script we were introduced to all of five years ago, when markets had stabilized in the wake of the financial crisis: maintain sufficiently low interest rates to service the debt burden. Pretend to have credible plan, but never address the structural problem and simply buy more time.

But while we were able to get away with this theme for an awfully long time, the dynamic is now changing as the risk of low inflation (and even deflation) is a brick wall for the extend-and-pretend meme. Yes, interest does grow without rain, and the cost of maintaining and servicing debt grows especially fast in a deflationary regime.

Mads Koefoed, Saxo Bank’s macro economist projects US growth at around 2.0% for all of 2014. That will be the sixth year with US growth near 2.0% -

so despite lower unemployment, despite a record high S&P500, the economy has a hard time escaping that 2.0%

level. Any talk of higher interest rates is hard to take seriously when US growth is going nowhere and world growth is considerable weaker than expected in January or as recently as July, for that matter. It seems everyone has forgotten that even the US is a part of the global economy.

The fourth quarter is always the most politically interesting time of year. Countries need to get their new budgets in order. The EU, IMF and World Bank will need to pretend they agree or accept the weaker data, which has to mean bigger deficits. It’s a tiresome exercise to watch denial-in-action as EU governments and other policymakers try to make something so obviously unpalatable go down easy in their internal reporting. It’s obvious that buying more time (extending) is always the number one priority, followed by projecting (pretending) the forward looking growth will reach an ever higher trajectory in order to make the budget fit within the supposed constraints. Or in France’s case, the recent unilateral abandonment of meeting budget targets for the next two years is already a fait accompli.

Who’s next?

Such behavior would cost you your job in the private sector, but in the economic model of 2014, which reminds us more of Soviet Union than a market based economy,

its par for the course. But, many would protest, it would be even worse if we hadn’t done so much to “save the system”, right?

Well maybe, except for the fact that those economies where belief in State Capitalism is strongest: Russia, China and France, are all at the end of the line. Time has caught up. Negative productivity, capital flight and a system built on protecting the elite is failing.

France is now moving from recession to depression. China is moving quickly from denial towards a mandate for change, Russia’s future has not looked this bleak since the late 1990’s. Meanwhile the US continues on sluggish 2.0% growth. Investors and pundits seem to have forgotten that we were promised 2014 would be the end of the crisis. Instead, we are speeding towards the inflection point at which debt becomes harder to service because pretend-and-extend policy making have created a depression in investment and consumption.

The public debt loads continue to inflate across Europe:

Portugal’s public debt has ramped to a staggering 130% of GDP – up from about 70% in 2007. Greece’s public debt load, even after the restructuring of Greek debt a few years ago, has swelled to 175% of GDP. The EU now has far more systemic risk than at the beginning of the crisis.

With zero growth or as our economist Mads sees it, 0.6% with the arrow pointing down, debt levels continue to rise relative to GDP. And most importantly, the current flirt with deflation will make servicing the growing debt even more expensive. The nightmare for ECB and world is deflation as it’s a tax on debtors and a boon to net savers. The new reality is that we currently stand face-to-face with the very deflation risk that just about everyone denied could ever happen when Q1 outlooks were written.

Two other global threats, or time bombs, if you will, outside of the EU are risks from the growing costs of servicing debt in China and the USA.

In China, the governments national and local have piled up considerable debt, but it is the overall debt service costs in all of China that are the real concern, which have only grown so large with the dangerous assumption by Chinese banks, companies and citizens that they can count on a public bailout.

According to a Societe Generale analyst, total debt service costs (including maturing debt and roll overs) in China area at nearly 39% of GDP. Compare that with the closer to 25% of GDP for the USA in 2007.

In the US, interest on US government debt cost over 6% of budget outlays in 2013. This is relatively down from its worst levels when interest rates were much higher, but only because FOMC has so drastically lowered the costs for the US government to issue debt with a zero interest rate policy. And now the debt load is vastly larger than it was before the financial crisis – at 80% of GDP (net debt according to IMF) versus 45% of GDP a mere 10 years ago. So are we actually to believe that the Fed can lift the entire front-end of the curve from 0-1% (current rates out to three years) to 2-4% over the next two years without massive further stress on the deficit and only adding to the debt? Servicing 2% interest when growth is 2% means you are doing worse than standing in place if you also have a budget deficit.

Whatever the timing, the USA, China and Europe are all headed for another Minsky moment: the point in debt inflation where the cash generated by assets is insufficient to service the debt taken on to acquire the asset. The US productivity growth last year was +0.36%. The real growth per capita was about 1.5%. Anything which is not productivity is consumption of capital. So, the only way to grow an economy without productivity growth is temporarily with the use of debt – about 75% debt and 25% productivity growth in this case.

Since the 1970s, US productivity growth rates have fallen 81% - the move onto the internet has ironically made us bigger consumers and less productive. Had we remained at pre-1970s productivity, the US GDP would have been 55% higher and the outstanding debt to GDP would be easily fundable.

I just returned from Singapore on business – Singapore, to me, used to be the most rational business model around. Its founder Lee Kuan Yew was one of the greatest statesmen in history. Now, productivity is collapsing in Singapore. They are, like us, becoming the Monaco of the world, an economy based on consumption and not on productivity and growth.

The developed economies are growing old in demographic terms, but we’re still not wise enough to realize that our current model is a Ponzi scheme rushing toward its inevitable Minsky moment.

No serious policymaker or central banker is talking about the truth told by simple maths and hoping that things turn out well.

Hope is not good policy and it belongs in church, not in the real economy.

Steen'

[crashmonitor]

Well we know one answer to public debt favoured by those with no savings...get rid of the debt by monetizing it. I guess as we are struggling with debt deflation now it will become an increasingly tempting option by central banks.

As one member on here keeps saying (absolutely not me btw) 'Destroy money'.

Indeed a great option for anyone who has geared money into physical houses and has got a gold plated superannuated retirement package courtesy of the tax payer.

Edited September 29, 2014 by crashmonitor

[R K]

One way or another US/UK will raise the inflation rate.

Policy is to ignore temp. inflation up to 2.5% in the US and it's still up to 3% in UK. They'll either stick with 2% and allow it to spike higher from time to time as full employment returns, else they'll start talking about a 3% or 4% target.

China will have to take the hit sometime as they reduce over-investment.

Europe remains mired in a failed German mentality. They're attempting to maintain the illusion of order whilst they recap their own banks and reduce their Target2 liabilities. When that's complete they can either leave the Euro or start writing down more periphery debt, if the PIIGS haven't forced the issue before then.

[bankstersparadise]

Policy is to ignore temp. inflation up to 2.5% in the US and it's still up to 3% in UK. They'll either stick with 2% and allow it to spike higher from time to time as full employment returns, else they'll start talking about a 3% or 4% target.

BofE policy is already to target 2.5% on a 24 month view.....http://www.morningstar.co.uk/uk/news/111393/the-gilt-market-has-no-love-for-forward-guidance.aspx

[PricedOutNative]

This:

Well we know one answer to public debt favoured by those with no savings...get rid of the debt by monetizing it. I guess as we are struggling with debt deflation now it will become an increasingly tempting option by central banks.

As one member on here keeps saying (absolutely not me btw) 'Destroy money'.

Indeed a great option for anyone who has geared money into physical houses and has got a gold plated superannuated retirement package courtesy of the tax payer.

Nail on the head, that's why a number of smart people I know have bought property, they don't care that they rental income is small, they just want to save their wealth from the coming wipe out of cash, bonds and equities...

[winkie]

This:

Nail on the head, that's why a number of smart people I know have bought property, they don't care that they rental income is small, they just want to save their wealth from the coming wipe out of cash, bonds and equities...

What are they planning on doing spending their houses?.....did they buy them with debt or credit/cash.....there is a difference.

[Venger]

This:

Nail on the head, that's why a number of smart people I know have bought property, they don't care that they rental income is small, they just want to save their wealth from the coming wipe out of cash, bonds and equities...

Er you've got that completely the wrong way around - cash will win, lenders aren't going to close vs all that homeowner equity to be lent against at lower prices, and your victim investors are going down.

Your smart property investors made their own decisions, regardless of what the HPC trolls with their bags of excuses claim.

[zugzwang]

Here's the roadmap again:

Recession, Depression, Stagflation, Hyperinflation, Default.

The UK is at stage two. The Japanese appear to have moved determinedly onto stage three.

[Venger]

If you expect that, zugzwang, why don't you buy a house or something? I expect the exact opposite.

What are the house prices like in Japan, zugzwang? Still tight lending criteria? Ok I see land/real estate there has lifted a little recently.. 0.5%-1% range.

2014-09-19

Declines in nationwide land prices, which have been falling for 23 years, narrowed to 1.2 percent, matching the decline six years ago, the report showed.

http://www.bloomberg.com/news/2014-09-18/tokyo-osaka-nagoya-post-land-price-gains-as-boj-easing-help.html

Recession, Depression, Reflation, dumb money that has only known long wave decades of HPI/stockmarket wealth gain, entitlement, doubling down to chase yield and capital gain into housing 'that can only go up' (because of so many ridiculous weak reasons that will be proven wrong), HPC, £trillions of homeowner equity (dead money for the banks) which needs fresh debt on it, at lower house prices, to instantly put banks in good positions with solid mortgage books.

Global QE's ending... and the only hyperinflation has been in low-mid-high prime UK/US real estate... have to see what occurs next.

[Neverwhere]

Here's the roadmap again:

Recession, Depression, Stagflation, Hyperinflation, Default.

The UK is at stage two. The Japanese appear to have moved determinedly onto stage three.

They're certainly trying to, but their core CPI just dropped so it's far from a foregone conclusion:

http://www.ft.com/cms/s/0/0e52a234-451b-11e4-9a5a-00144feabdc0.html#axzz3EikFnfNt

http://www.marketwatch.com/story/japans-inflation-slips-in-august-2014-09-28

[wonderpup]

If pretty much all global economies are ****ed why haven't they just had a debt jubilee and reset the system?

I can think of two reasons- first the system is controlled by the creditors and second banking terrorists have rigged the entire thing to blow up via a 700 trillion derivative market should there be a major 'event' that wiped out a significant counter party or two.

There is no way out this mess that does not wipe out the 'wealth' of a large fraction of the current Elite- hence they will do anything to avoid such an outcome.

[Errol]

This:

Nail on the head, that's why a number of smart people I know have bought property, they don't care that they rental income is small, they just want to save their wealth from the coming wipe out of cash, bonds and equities...

Houses will not be a safe place. They will be targetted big time as a source of wealth that can't be hidden or moved across borders. Bad choice.

Edited September 29, 2014 by Errol

[Venger]

Remember Milo/Miko's (?) version of a Debt Jubiliee? Homeowners keep homes (as himself) with plans to inherit his elderley father's (London prime home to rent it out), those with mortgages get them written off (his younger sister and her jumbo mortgage), and savers get totally wiped out and can go live in caves / begin saving all over again.

Yet George Osborne's parents downsized substantially in prime London, although missing out on last year or so of extra hpi. Global elite probably more in cash than property, and so called middle class victims have had decades of hpi, and now been doubling down on more property, in expecation it will be savers to be wiped out.

Current elite having more in financial assets than real estate (imo), can't see why they wouldn't want a crash + fresh lending in volume. HTB pulled in more dumb money lower end, and given impression to some in market they will backstop all house prices. I only see ridiculously overvalued houses all around., and a need for banks to make money.

[Neverwhere]

Remember Milo/Miko's (?) version of a Debt Jubiliee? Homeowners keep homes (as himself) with plans to inherit his elderley father's (London prime home to rent it out), those with mortgages get them written off (his younger sister and her jumbo mortgage), and savers get totally wiped out and can go live in caves / begin saving all over again.

Yet George Osborne's parents downsized substantially in prime London, although missing out on last year or so of extra hpi. Global elite probably more in cash than property, and so called middle class victims have had decades of hpi, and now been doubling down on more property, in expecation it will be savers to be wiped out.

Current elite having more in financial assets than real estate (imo), can't see why they wouldn't want a crash + fresh lending in volume. HTB pulled in more dumb money lower end, and given impression to some in market they will backstop all house prices. I only see ridiculously overvalued houses all around., and a need for banks to make money.

Agreed, I don't see where people think this imminent inflationary pressure is going to come for in the short to medium term given global trends (as mentioned in the article: "Any talk of higher interest rates is hard to take seriously when US growth is going nowhere and world growth is considerable weaker than expected in January or as recently as July, for that matter"). And what other credible arguments are there for savers (as opposed to financers and speculators) to get wiped out while debtors clear up? Out and out savers are well protected under the new bail in rules, and while writing off all mortgages would clearly overwhelm these protections it would also destroy the banks, so in reality anyone who can continue to service their debt will be required to continue servicing their debt. Having said that I think Zugzwang's roadmap is likely to be the politicians' preferred route out of the current situation, though the reference to Japan implies a much longer depression/deflationary period than any politician is likely to be comfortable with.

[Venger]

And what other credible arguments are there for savers (as opposed to financers and speculators) to get wiped out while debtors clear up? Out and out savers are well protected under the new bail in rules, and while writing off all mortgages would clearly overwhelm these protections it would also destroy the banks, so in reality anyone who can continue to service their debt will be required to continue servicing their debt. Having said that I think Zugzwang's roadmap is likely to be the politicians' preferred route out of the current situation, though the reference to Japan implies a much longer depression/deflationary period than any politician is likely to be comfortable with.

Gov with heavy involvement in the banks, and so have to think 'creditor side' themselves. That's a preferred route which protects a lot of VI, and house prices, for years, and perhaps UK younger generations already approaching breaking point (unlike some Japanese who may put up with it more), who vote too.

Also central banks don't have magic powers. They can create liquidity by creating debt, but that isn't the same as creating capital. Whenever a central bank monitizes an asset by buying it (printing press money) - it creates a liability. Running the printing presses at a higher speed destroys more wealth than it creates. Only the market can create capital by valuing assets above liabilities. The forces of contraction are way too powerful to be stopped by the Bank of England, and to what end anyway? To have a broken market, all held up and kept going by protected VI who can never lose out? Sometimes it needs to be recognised a market has topped out on house prices, and lower house prices + fresh lending is what is required.... although plenty here who have only known decades of hpi, hoping for more of the same, desperately tracking signs of wage inflation.

This:

Nail on the head, that's why a number of smart people I know have bought property, they don't care that they rental income is small, they just want to save their wealth from the coming wipe out of cash, bonds and equities...

**** off.

[PricedOutNative]

What are they planning on doing spending their houses?.....did they buy them with debt or credit/cash.....there is a difference.

These people were cash buyers, near or in retirement and are worried about an economic collapse; they now have a nice income and the houses are not going anywhere, unlike what might happen to savings...

[winkie]

These people were cash buyers, near or in retirement and are worried about an economic collapse; they now have a nice income and the houses are not going anywhere, unlike what might happen to savings...

Not a problem with that their money, their choice, their risk........the problem is when people buy property/homes with debt as an investment....other investments require cash and savings or else we could all gamble on stocks and shares using debt, got nothing to lose except what is not ours.

[PricedOutNative]

Houses will not be a safe place. They will be targetted big time as a source of wealth that can't be hidden or moved across borders. Bad choice.

Where you actually wearing a tin foil hat when you wrote that? Have you not noticed the only people who will be ever more taxed as the young as they are so feckless they can't even be bothered to vote...

[Venger]

These people were cash buyers, near or in retirement and are worried about an economic collapse; they now have a nice income and the houses are not going anywhere, unlike what might happen to savings...

I've just tracked this house as it was sold, and got the full details from LR + (new mortgage from a Channel Island private bank) then got more details from Company searches running the names of the new buyers.

Sold in July 2014, at £2.35 million. http://www.rightmove.co.uk/house-prices/detailMatching.html?prop=43557127&sale=51627398&country=england

1.9% yield, 40+ days of voids: http://www.rightmove.co.uk/property-to-rent/property-47571917.html

Everything points to the new buyers being in their 50s, already owning their own very similar house on the same road. With it going up as a rental, everything points to it being your 'smart money' - and you won't find me making victim excuses for people who already had it all in life, decades of hpi, wage inflation, compound interest on savings, low wave stock market growth.... when markets turn. Your smart money 'pray for savers to be wiped out' are living in a dream world, vs what it is like for so many younger people in higher end career positions trying to even provide basics for their families.

Edited September 30, 2014 by Venger

[bankstersparadise]

Have you not noticed the only people who will be ever more taxed as the young as they are so feckless they can't even be bothered to vote...

Wrong.

48% of the UK population is under 40. 19% of the population are under 18.

That means that of the total electorate; 65% are over 40 and 35% are under 40.

If all of the young actually voted for "what was good for them" it wouldn't matter.

Over 40's need to stop being selfish. Human nature dictates this won't happen. It's every man/woman for himself/herself out there.

(EDIT: the people born post 1975 have a chance in 10 years where the vote of over 50s, vs. under 50s will be split 50/50)

Edited September 30, 2014 by bankstersparadise

[Neverwhere]

Gov with heavy involvement in the banks, and so have to think 'creditor side' themselves. That's a preferred route which protects a lot of VI, and house prices, for years, and perhaps UK younger generations already approaching breaking point (unlike some Japanese who may put up with it more), who vote too.

Also central banks don't have magic powers. They can create liquidity by creating debt, but that isn't the same as creating capital. Whenever a central bank monitizes an asset by buying it (printing press money) - it creates a liability. Running the printing presses at a higher speed destroys more wealth than it creates. Only the market can create capital by valuing assets above liabilities. The forces of contraction are way too powerful to be stopped by the Bank of England, and to what end anyway? To have a broken market, all held up and kept going by protected VI who can never lose out? Sometimes it needs to be recognised a market has topped out on house prices, and lower house prices + fresh lending is what is required.... although plenty here who have only known decades of hpi, hoping for more of the same, desperately tracking signs of wage inflation.

Sure, the government/banks will definitely want a crash and return to larger mortgage volumes, I just think that they'd much prefer stagflation and a real terms crash over a nominal one. I also think they're going to be roundly disappointed, what with their lack of magic powers and all

[bkkandrew]

Well, like another poster, I look at the UK in wonderment as to the madness of it all. Will it all crash down? Well, the young need to fight to overthrow the government, the system. Of course, that is probably what the new proposed laws on prevention of saying things like that are all about. The other problem is that the vast majority of the young are literally too stupid, too feckless and too easily satisfied by sweeties, alcopops and tokens to care.

RIP the UK (and many Western countries with it).

[Venger]

Si1's post a few days ago reminded me of this thread, and then to follow up on Mish recent blog entries..

ignoring the elephant in the room is fine if it doesn't stop you achieving stuff

but this particular elephant is juggling fireballs and riding a unicycle, it's not your average elephant

Friday, April 17, 2015 3:01 PM
Déjà Vu Weather? No, It's a Recession!

[..]I am increasingly confident in my recession call. In fact, unless data immediately rebounds and holds over the next two months, a recession has likely started.

http://globaleconomicanalysis.blogspot.co.uk/2015/04/deja-vu-weather-no-its-recession.html
--
Sunday, April 12, 2015 11:59 PM
Credit Crunch Underway: Can Recession Be Far Behind?

Last week, Alexander Giryavets of Dynamika Capital L.L.C. pinged me with an article he had written on Recessionary Level in Credit Conditions.

His article was based on data from the March Credit Managers' Index by the National Association of Credit Management. The report is pretty damning.

http://globaleconomicanalysis.blogspot.co.uk/2015/04/credit-crunch-underway-can-recession-be.html

A few weeks back I read a report that commercial finance rates were ticking up in the US.

“In economics, things take longer to happen than you think they will, and then happen faster than you thought they could.”
-Economist; Rudi Dornbusch

Hmm.. US mortgage news below.. although at around best execution 3.87%, still below the 4.625% 30 year that sent brokers worrying in mid 2013 (pre more Fed encouraged Freddie Mac 'helping' to enable lower-deposits.. but seems despite that, credit got more MMR standards to it, ... too early to tell if this is early stages of a real slide in applications / and passes.

I can't get a grasp on what they mean with bolded part below; appraised values come in below the sales price (do they mean asking price?).

Weekly mortgage applications drop as rates tick higher
Wednesday, 15 Apr 2015

..Tight credit continues to hold back the mortgage purchase business. Speaking at FSR's Housing Policy Council forum on Tuesday, Peter Carroll of Quicken Loans said the problem stems from regulations around income and appraisals. Income for borrowers who are self-employed or make much of their salary in bonuses are difficult to document. The home appraisal process is also tripping up borrowers without a lot of money for a down payment.

.."We are seeing a chronic tightening of appraised values that very frequently come in below the sales price and when you are talking about consumers with lower down-payment loans, that's going to pull a lot of people out of eligibility with these products," said Carroll.

http://www.cnbc.com/id/102587020

Mid 2013 position

Jun 21 2013, 5:49PM

Mortgage rates have had a far worse week than than you've been told anywhere else, and today was even more freakishly destructive than the previous two days. Taken together, this is the worst week for mortgage rates we have on record. Today is one of two times in the past 10yrs where the average borrowing rate for top tier scenarios moved up by at least a quarter of a point. A quarter of a point may not sound like much, but in terms of day-to-day movements in 30yr fixed mortgage rates, it's catastrophic. That leaves best-execution at a stomach-churning 4.625% today.

http://www.mortgagenewsdaily.com/consumer_rates/313878.aspx

[Neverwhere]

I can't get a grasp on what they mean with bolded part below; appraised values come in below the sales price (do they mean asking price?).

Perhaps they mean that mortgage valuations are coming in under agreed sales prices and - barring renegotiation or significantly increased deposits - effectively quoshing transactions? The VI implication being that this is putting others off from applying in the first place.

[Venger]

Perhaps they mean that mortgage valuations are coming in under agreed sales prices and - barring renegotiation or significantly increased deposits - effectively quoshing transactions? The VI implication being that this is putting others off from applying in the first place.

I see what you mean - hope so. That, and cash-investors pulling back, would set things up nicely on the HPC new-crunch side in US.

Although mortgage applications been scraping lows for a long time now... perhaps super-hot prices (not Detroit type areas) and fewer transactions making up on larger commission for some mortgage brokers. Otherwise you'd think a point would come where brokers want lower house prices. This is if you accept there has no hpc, or was little hpc then big price recovery everywhere US but Detroit type areas.

I'll have to follow up if other brokers seeing similar... 'Quicken Loans' sounds a bit on the subprime side, this rolling source is good: http://www.mortgagenewsdaily.com/consumer_rates/

San Francisco real-estate and much of other SoCal (not so much Inland Empire, but that's still bounced back a lot off 2008) are at extreme prices now.

It's a confusing picture. I know there has been an real estate investor-fest since 2009... big-name companies like Blackstone buying in. Then what looks to me a bit like pass on the parcels, rentals all put into REITs and selling them off to world-wide yield-hunters on Wall-Street. Also the reflation pulling in all the 'It's not earning anything in the bank' global private yield chasers buying into real estate recovery at extreme prices.

It's not like the mortgage banking side has been exposing itself to high debts in the market, seemingly standing aside for investors and not-earning-anything-in-the bank to use cash/other finance for buying at high prices. Low-inventory as owner side sits complacently on asset bubble side (owner side equity not much use to the banks when not getting in any mortgage payments to them). So, younger generations renters forever to satisfy lust of rentiers, or some hpc at a future point, then banks get back into sustainable (lower house prices) profitable lending at volume?

Original source (bull-leaning) analysis: WSJ MarketWatch http://blogs.marketwatch.com/capitolreport/2014/09/10/mortgage-gauge-hits-14-year-low-but-that-doesnt-mean-housing-is-dead/

And US housing (cold logic housing analyst) analysis re same data: http://www.doctorhousingbubble.com/mortgage-applications-14-year-low-housing-drops-decline-mortgage-affordability-index/

14 Jan, 2015

How often can you go back to the low rate well? That seems to be the question at least when it comes to low interest rates. I heard an analyst say that the bulk of low hanging fruit already refinanced so small basis point moves are simply not going to make an impact on refinancing activity short of home values going higher. I would also add that sales volume is not going to jump significantly because of a few basis points given current levels. The higher price amount is constrained by a variety of factors including stagnant wage growth.

Younger Americans that make up the bulk of first time buyers are largely absent from this market and many are living at home with parents. Headlines were raging that mortgage applications soared in the last reading. But when we look at the data, it looks like a blip on the radar screen. Who needs a mortgage? Anyone that isn’t the Wall Street investor buying crowd or foreigners that purchase properties with all cash offers. Given how low mortgage rates are, you would expect more people to be buying into this momentum but they are not. Why? Rates have been low for some time now and it is rather apparent that investor buying was a large push for higher prices, not regular families buying up homes.

Mortgage applications

The Mortgage Bankers Association (MBA) saw that mortgage applications jumped by 49.1 percent in the last week. Seems fantastic right? Well you have to look at the broader picture as well and factor in seasonal variability. We are bouncing off multi-decade lows in terms of mortgage originations.

Take a look at the bigger picture here:

Source: MBA

You see that little blue line deviating from the 4-week moving average? That is your massive jump in mortgage originations. The current volume of mortgage originations is on par to what we were seeing back in 1994 – 20 years ago. Only difference is that we had 263 million people in the US versus 320 million today.

So why don’t people dive in and buy every house on the market? There are two main reasons:

-1. Inventory remains very low

-2. Household incomes are still weak

So with investors pulling back from buying single family homes, the slack is now left to regular households. Of course, when you look at the crap shack filled landscape, those that have the means to buy are probably opting not to given their options. Those itching to buy are having to stretch their budgets to the maximum breaking point. You also have prime areas being heavily targeted by foreign money so mortgages are an afterthought.

Volume is low because the qualified pool of buyers is low. You have a small amount of inventory on the market and those itching to commit to a 30-year mortgage have to contend with the ugly options available. Wall Street was largely interested in turning homes into rentals. Given current prices and local area incomes, that play got weak in 2013 with massive movements out in 2014. After all, rent can only be hiked to a point where local area incomes can support the payment. This is net income and not leverage based buying where interest rates can inflate the underlying cost of an item like housing.

In a place like California where housing and the state is largely driven by the stock market and wealth gains, we’ve been on a roar since 2009. Keep in mind the state collects taxes based on the assessed price of the home so higher home values is fantastic. Also, the state collects taxes on stock market gains and wealth created by the stock market. If we look at the S&P 500, it is now up a whopping 195 percent from the lows in 2009. Every market faces a correction and of course given current valuations, one is due.

The low interest rate game is unlikely to give the market a boost similar to the last jump simply because rates have been low for a very long time already. This is why we now hear about the FHFA talking about 3 percent down mortgages (as if 5 percent was already too high of a bar). At this point, the housing market has become a lucrative place for booms and busts. Anyone looking at the housing market today is speculating for better or worse thanks to the Fed and banking policy. So go forth and buy that crap shack! The banking industry needs those mortgage originations or you might have $700,000 lying around for a glorified stucco box.

http://www.doctorhousingbubble.com/mortgage-applications-decade-lows-mortgage-rates-2015/