Despite the 30-year fixed rate mortgage remaining unchanged at 5.34%, the seasonally adjusted mortgage purchase application index jumped 6.7% to 285.6 for the week ending July 3rd.
This is the highest the index has been since the week of April 3rd when it rose to 297.7 and the 30-year fixed was at 4.73%.
Additionally, the four-week moving average for the purchase index, a more consistent indicator, shows that the purchase index is up 1.4% despite the fact that mortgage rates have spiked this past month.
New data continues to reveal that demand for real estate has been unaffected by rising rates, much in the same way the market never actually benefited from the plunge in rates over the past couple of months.
Here is a comparison between NAR's seasonally adjusted existing home sales and Freddie Mac's 30-year fixed rate mortgage survey over the past several months, this data reveals that record low mortgage rates have had no meaningful impact on demand. You can call it the law of diminishing returns, price inelasticity, beating a dead horse, whatever, this is a concept that I have wrote about on more than one occasion.
Sep 2008: 5.10 million sales / 6.04%
Oct 2008: 4.94 million sales / 6.20%
Nov 2008: 4.54 million sales / 6.09%
Dec 2008: 4.74 million sales / 5.29%
Jan 2009: 4.49 million sales / 5.05%
Feb 2009: 4.71 million sales / 5.13%
Mar 2009: 4.55 million sales / 5.00%
Apr 2009: 4.66 million sales / 4.81%
May 2009: 4.77 million sales / 4.86%
In order to stimulate new demand for real estate so that the excess inventory can be absorbed and home values can stabilize, it is going to require fiscal policy, not the Fed's funny money monetary policy.
According to Jack Healy in an article he wrote in The New York Times, based on a survey conducted by the National Association of Counties, "76 percent of large counties said that falling property tax revenue was significantly affecting their budgets".
This doesn't surprise me at all. In fact I have written about it more than once. The housing market is intimately intertwined with local municipalities both in terms of existing property tax revenue as well as new property tax revenue which is a product of new homes being built.
Unfortunately for local municipalities, home values on average have fallen over 20% from their peak in 2006 and new home sales are down nearly 75% from their high in 2005.
It is no wonder that according to The Center on Budget and Policy Priorities that 46 out 0f 50 states are experiencing budget stress.
California certainly is one of the states making the most headlines, not surprisingly they are also one of the states with the hardest hit real estate markets in terms of home value declines. And yet despite their budget crisis they understand the positive impact that a robust housing market can have on an economy. California has taken it upon itself to have their own $10,000 home buying tax credit in addition to the $8,000 Federal one.
The first priority of this economic crisis which is devastating municipalities, banks, consumers, and the stock market, is that you need to stop home value declines by increasing demand for real estate through fiscal policy and absorb the excess supply of homes.
Let me be the first to admit that I wish every American could own a home if they chose to, homeownership is a good thing for families and communities. Pride of ownership, tax deductions, and home equity are just a couple of the major benefits of owning a home. Unfortunately, for multiple reasons, not every American is going to own a home. Maybe it is a lack of credit, or a down-payment, or they simply can't afford the expenses, whatever it is, there is usually a good reason why about 1/3 of Americans don't own a home, it is not economically viable for everybody all of the time.
And yet despite historical evidence that supports this, especially in our recent history with the sub-prime fiasco, the government continues to try to shove homeownership down our throats.
Their latest efforts includes an $8,000 first time home buyer tax credit and a reckless Fed monetary policy of plunging mortgages rates below 5%, all in the name of housing affordability and homeownership.
The results so far for Washington's most recent homeownership initiative have been disappointing at best. Despite record housing affordability and a first time home buyer tax credit, home sales remain anemic.
Washington is trying to fix the most recent sub-prime/homeownership fiasco with....more homeownership.
As the chart above illustrates, during the modern era of the secondary mortgage market with Fannie and Freddie, home ownership rates have hovered between 62-65%. As of the 1Q of 2009 the ownership rate, according to the U.S. Census Bureau, was 67.3%, well above historic norms.
Rather than incentivizing Americans to invest in real estate, absorb the excess inventory, and stop home value declines, Washington is once again trying to pursue a failed homeownership housing policy through first time buyer tax credits, low FHA down-payments, falling home values, and reckless mortgage rates.
Agree or disagree with the politics of Joe Biden, the one thing that most people, including myself, like about Biden is that he doesn't pull any punches.
And that was certainly the case when he said this week that, "We misread how bad the economy was".
Indeed, Washington has swallowed their economic compass. And it hasn't just been the Democrats. Let's not forget the "token" stimulus checks that the Bush administration mailed out in the Spring of 2008. Or the $7,500 first time home buyer tax credit/loan that was intended to stimulate the housing market out of a depression. There is a long list of failed housing and economic policies that have been rubber stamped in Washington over the past year.
The problem of course is that while admitting you made a mistake is noble and honorable, it appears as though they are not going to do anything to correct the mistake.
Whoever said, Jim Cramer, that the housing market has bottomed doesn't know anything about Option ARMs. Those loans are represented by the light yellow bars in the graph below, the ones that surge in 2010 and 2011.
Never mind that a record 12% of all mortgages are 30 days late, or that the real unemployment rate is 16.5% and that there is a relationship between job losses and foreclosures, the Option ARM loans represent the next major obstacle to a housing recovery, and the problem with them is that they are not easily diffused with a refinance. Sorry, President Obama.
By design, Option ARMs were created as an affordability product that would defer interest payments into the loan balance. The phenomenon is known as negative amortization.
In other words, most owners of these products made a monthly payment that was less than the interest-only payment. Refinancing these Option ARMs into a historically low 30-year fixed rate mortgage will actually increase the payment.
The longer the loan was held, the larger the loan balance would be. Now the problem is that the longer the property is held, the more the home value declines. Rising loan balances and falling home values don't mix well.
During a rising tide in the housing market these products were risky, during a housing depression with falling home prices, they are radioactive.
Admittedly, while the volume of Option ARMs is smaller than the sub prime tsunami that we saw in 2007 and 2008, keep in mind that we didn't have 467,000 people a month losing their job in 2007 and 2008 either.
President of Mark MacKenzie Real Estate Planning, a real estate research and investment services brokerage; author of "It's The Housing Market, Stupid!"
He's been featured as an "Innovator" by the Phoenix Business Journal and a "life-time advisor" by REALTOR Magazine.
Mark MacKenzie has contributed to articles in the Wall Street Journal, the Arizona Republic, national REALTOR Magazine, and he has a regular feature in Personal Real Estate Investor Magazine which is available in Borders & Barnes & Noble bookstores throughout the country.
Mark MacKenzie Real Estate Planning is a real estate research and investment services brokerage. They track local supply and demand trends for over 75 markets throughout the country.
Mark has written and published three books, "It's The Housing Market, Stupid!", "Marketopoly", which debuted on Amazon.com as the #1 real estate and investment book, as well as "The New Gold Rush - Real Estate".
It's The Housing Market, Stupid! is the name of Mark's latest book and economic policy that would stimulate investment demand for real estate and subsequently provide a back-stop to declining home values, foreclosures, and economic conditions.
The fiscal stimulus has its origins in the Tax Reform Act of 1986 as well as the Gulf Opportunity Zone Act of 2005. The policy would allow for more Americans to be eligible to receive greater tax benefits when investing in real estate. The result would be an increase demand for real estate, the excess supply of homes would be absorbed, Americans would receive a tax cut, and banks would be provided with a good source of new loans and income.
"Clearly demonstrates the author's thorough understanding of how tax law and legislation impacts the housing market. Little changes can make a huge difference and that's the very valid premise of this book. I think everyone who has ever considered themselves a real estate investor, or thought about being one should read this very important book."
Diane Kennedy CPA, Bestselling Author - Loopholes of the Rich
"What we need is incentive in the form of new found confidence in free enterprise and capitalism, not another bailout. Mark MacKenzie expertly illustrates the way out of the real estate depression is through renewed interest in investing in the most stable commodity since the 1930's - real estate."
Real Estate "Artist" Frank McKinney
5-time bestselling author, including Burst This! Frank McKinney's Bubble-Proof Real Estate Strategies and The Tap
"Refreshingly grounded in the fundamentals of impacting demand in today's housing market."
John Foltz, President - Realty Executives
"If you're looking for a real estate professional, someone who uses proven techniques and hard work to help you achieve your goals, then Mark is your man. From locating the property, securing financing, closing escrow, setting up property management, and beyond, Mark was right there with us. We often felt as if we were his only clients! Honesty, integrity, and dedication aren't easily found these days, but that's what Mark is all about!"
-Greg & Patty Spears
"Before we started using Mark MacKenzie a few years ago we always thought of real estate agents as a necessary evil, but he has completely changed our mindset. Since then he has become one of our biggest assets in our financial planning. Now, whenever we hear that any of our friends and family are making any sort of real estate decision we give Mark our highest recommendation. Each time we've been thanked and now Mark is one of their biggest assets too. He's not only been beneficial in our home buying but every stage in between. We feel tremendously blessed to have found someone like him at this early stage in our lives. His integrity, work ethic and friendship is something that we know we will enjoy in the many years to come."
-Clint & Kim Rowley
"I would like to express my sincere gratitude, respect and admiration I have for Mark, and his innate ability to assimilate and support my investment initiatives, on both a professional level and a personal level. Mark MacKenzie Real Estate Planning has provided me the means, I feel, to move forward with a plan to personal wealth and eventual financial security.
After contacting Mark initially, he understood my business /real estate plans, with the immediate focus to be on rental properties with positive monthly cash flow. This has been accomplished within the first few months, with an initial purchase of a rental, duplex home in Mustang, Oklahoma.
Mark worked diligently for months with the Sellers, Lender, and Property Management organizations to close the deal, as the properties were still under construction. The purchase of the property was contingent upon the properties being rented upon completion of construction. This provided the immediate cash flow, and not the typical initial vacancy with myself to carry the credit float.
I would like to add that Mark is always available via phone to answer questions or provide his Real Estate expertise. He was patient as he mentored me on many Real Estate disciplines. Where else can you find expert advice at no charge. I look forward to many successful, future real estate transactions with Mark MacKenzie Real Estate Planning."
-Timothy D. McManus
"We are very impressed with Mark's real estate knowledge in forecasting what markets he thinks are going to be a good investment. Over the past three years we have developed a great working relationship and have purchased three investment properties with Mark's tremendous help. His devotion in finding us exactly the right properties and giving us all the information we needed helped make our decisions and the buying process very comfortable and smooth. We appreciate his attention to detail and tireless work ethic and look forward to working with him on all our future real estate endeavors."
-Kurt & Kathy Dodge
"Mark's knowledge of Real Estate investing starategies has been a tremendous help to my wife and I. We are following the 10 year plan outlined in his book and are on our way to financial independance!"
-Jason & Danielle Bliss
"We recommend working with Mark to any buyer or seller. Whether you are a 1st time buyer, or a seasoned investor, Mark is an excellent listener, very knowledgeable about real estate, and will always put your needs first. We worked with Mark in purchasing an investment property in New Mexico, and plan on doing so again. Further, Mark will also help evaluate and advise you on how to achieve not only your short term, but long term real estate goals as well."
-Bryan & Kimberly Lynch
"We have known Mark now for several years. We have worked with him in the purchase of rental properties and continue to do so.
We have found his honesty and expertise to be unsurpassed. He has been of the utmost help to us and others we know. He is an extremely professional individual and takes excellent care of his clients. Mark is always easy to contact, immediately returns phone calls and provides superb real estate market information. We plan to continue to do business with him as we have great respect for his knowledge of the market.
One of the things that we truly appreciate about Mark is the way he looks at all of the real estate market information before we even start searching for a property. Once we have that information it is much easier to choose an area to invest in and feel confident about the purchase that we are making. We can later follow up on our investments by using Mark's web site to access current market information on each property we have purchased. The web site, with use of our password, shows pictures of our properties with a link to the property values which Mark updates quarterly. Mark is licensed in Arizona as well as other states which allows us the opportunity to invest in multiple markets.
We consider Mark to be more than just someone with whom we do business with. We now consider him a friend as well."
-Tim & Andrea Rattenbury
"My wife and I had talked about investing in real estate for a long time (years) but we just didn't know how to get started. We bought our first home in 1990 and it seemed like a nightmare. The ever changing figures, too many meetings and back and forth negotiating.
A couple of years ago we heard about Mark MacKenzie from a mutual friend. We contacted Mark and within 30 days we had purchased our first invesmtent property. Mark makes it easy and stress free that I can't wait to do it again.
Mark went so far as to walk the property for us and even set up a property manager. We gained more than an agent, we gained a friend.
Mark gained our trust, friendship, and lifelong investments. I still can't believe how easy and worry free Mark made our investment and the lengths he graciously went to just insure we were comfortable. We look forward to our next investment."
-Jay & Jeannette Giles
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