Decoupled!

Housing and home finance are not on the same page as the U.S. economy. 

Federal Reserve Chairman Bernanke

Economic Outlook and Policy

Before the Joint Economic Committee, U.S. Congress, Washington, D.C. June 7, 2012

"The depressed housing market has also been an important drag on the recovery...Despite historically low mortgage rates and high levels of affordability, many prospective homebuyers cannot obtain mortgages..."

Semiannual Monetary Policy Report to the Congress

Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.July 17, 2012

"...a number of factors continue to impede progress in the housing market. On the demand side, many would-be buyers are deterred by worries about their own finances or about the economy more generally. Other prospective homebuyers cannot obtain mortgages due to tight lending standards, impaired creditworthiness, or because their current mortgages are underwater--that is, they owe more than their homes are worth." 

Figure 1. Growth in household formations will not be the driver of a rapid home lending recovery that the All-is-Well faction believes it will be. Purchase lending will be very slow to spring back to long-term historical growth rates, let alone recover to the 2002-2005 binge-era level of activity. 

Figure 1

Purchase volume began to decouple from population and household growth starting in early 2006. The real homeownship rate has fallen to levels last seen almost 30 years ago. A low homeownership rate in the future means purchase volumes will continue to lag behind net household growth. 

Figure 2. The disconnect between a rising GDP and flat-lined home purchase mortgages is a perfect example of economic decoupling. The historical symbiosis between U.S. economic growth and housing is not in evidence today.

Figure 2

Figure 3. The recovery of Wall Street fortunes (DJIA) has meant little, if anything to housing and home purchase financing activity.

Figure 3

Figure 4. Much more troubling for homeownership is the long-term decoupling of home purchase financing from slow job growth and high unemployment. Owner occupied purchase mortgage volumes had already started to decouple from employment levels back in 2006, well in advance of the big job collapse that began in 2008. Mortgage volumes have continued to fall even as employment started to slowly rise in 2010.

Figure 4

State and local government jobs continue to be cut in large numbers. U.S. "U6" unemployment rate might be 8.2%, but the "U16" rate -- unemployment + underemployment + marginally attached -- hovers around 15%. The employment-to-population ratio remains at crisis level. Long-term unemployed persons who become discouraged are leaving the labor force at an increasing rate. The decoupled gap between employment and home purchase volumes won't be closing anytime soon.   

Might it be that home financing demand is suppressed because households are short of the wealth, earnings, savings, credit or jobs they need in order to buy a home?

The truth is that the rate at which U.S. households generate owner occupied purchase mortgages (PMGR) had begun to decouple from economic, employment, income, wealth and demographic indicators seven years ago.

Now we're at the bottom of the cycle where weakness, instability and uncertainty are their most pronounced. Seemingly small or moderate shocks to current conditions, be they internal or external, intentional or inadvertent, economic or political, national or global, can easily send the U.S.housing and home financing sector downward again. 

Hysteresis affects on long term prospects.  

All four of these decouplings demonstrate the "hysteresis effect" that takes over when established systems are subjected to powerful internal and external shocks -- i.e. the real estate, housing, financial, banking, balance sheet and employment collapse. Forces that had driven the system in the past were upended. Historical relationships, market behaviors and economic forces within the system were radically altered in mostly negative ways. 

There are simply no forces, or combinations of forces, that appear capable of igniting a rapid purchase money recovery back to the home lending growth trends of the 1980s to the early 2000s.  And forget about a return to the hyper-growth of 2003-2006 that triggered the housing depression. 

Inverse coupling...a troubling sign of struggles ahead. 

Figure 8. The traditional purchase volume versus mortgage rate connection -- i.e. when rates fall, mortgage volumes rise, and when rates rise, mortgage volumes fall -- has been dramatically reversed.

Home purchase financing became a lagging indicator of post-recession recovery way back in 2006. The steady fall in mortgage rates has proven to be powerless to spur home buying or home purchase financing. Purchase volume has been falling with falling mortgage rates, not 

Housing has become an entrenched dragging indicator and it still remains delicately close to stall speed. When rates begin to rise or household conditions fail to improve or the U.S. economy approaches another stall, even a small shock could easily turn into a downward spiral for the housing sector.

Figure 9. Fee revenues from heavy refinance/re-refinance demand during the past three years have been crucial to the survival of many independent mortgage banks and mortgage banking units within large depository banks. But refinances are not a forever gift.

In the past, waves of refinancing closely followed the fall in mortgage interest rates, just as we'd expect. Except now, as rates continue to fall to unprecedented levels, the amplitude of successive refinance waves have also fallen. The duration of each spike has become shorter too. 

The number of homeowners in the available refinance pool has steadily dropped and apparently, so have appetites for refinancing or re-refinancing waned for those who remain in the pool. The prospect of a protracted stagnation in home financing is very real. 

A purchase demand trap (a negative cycle of low demand followed by even lower demand), is close to being coupled with a looming refinance demand trap.  Both traps have been created by low rates, tight credit, household balance sheet problems, strict lending standards, high loan fees, slow growth in housing prices and long loan processing times.  They have become inextricably intertwined. The combination will be hard to break apart going forward.

At the very least, expect a large share of U.S. households and homeowners to stand pat and remain where they are while they struggle to improve their balance sheets. 

The decouplings indicate that the home financing industry is facing a long road to recovery somewhere, at some time, in almost every community in the country. 

This should come as no surprise to anyone in the industry.