Bloomberg reports that that staple of mortgage funding, the 30 year fixed rate mortgage, has seen its interest rate increase from 3.48% a month ago to 4.16% as of yesterday. By contrast, the highest rate the 30 year mortgage reached in the previous year as of mid-March had been 3.85%.
One analyst, Mark Hanson, sees evidence that the dropoff in refinancings has been impressive:
After 5 years of interest rates being forced incrementally lower each year — and everybody that qualifies refinancing over and over again allowing the banks to originate and earn several points off of each gov’t loan churn — the jig is up for a while at least…..three large private mortgage bankers I follow closely for trends in mortgage finance ALL had mass layoffs last Friday and yesterday to the tune of 25% to 50% of their operations staff (intake, processing, underwriting, document drawing, funding, post-closing). This obviously means that my reports of refi apps being down 65% to 90% in the past 3 weeks are far more accurate than the lagging MBA index, which is likely on its way to print multi-year lows in the next month.
Now refis provided some stimulus, since lower mortgage payments means more money to spend. But the effect is likely not as great as you might think. The big winners are the banks and the other fee extractors. As MBS Guy explains via-e-mail:
The refi market is, in reality, a vampire business. It’s a way for lenders, brokers, lawyers and other hangers-on to extract substantial fees, over and over, from borrowers, while giving a modest benefit in return. I have no doubt that the stimulus effect of lower rates was substantially less than many people expected because of all of the refi fees extracted along the way. If most loans were adjustable rate, the stimulus effect of falling rates on borrowers (rather than mortgage brokers) would have been much greater.
And those fired workers? Almost all would be low level clerical staff, and in many cases temps/contractors, working in a high pressure, low discretion, production driven environment. So those job losses in and of themselves is a hardship for those workers, but not a biggie economy-wide.
Now how much any borrower benefitted from a refi depends on how big a rate reduction he got. People who refied repeatedly on the way down (which is common) would give away a lot of the gain, as MBS Guy stresses. The people who may well have fared the best, ironically, were those who had been barred from refinancing in the early years of the rate decline by being underwater but later got access via HARP. HARP refis were just shy of 1.1 million in 2012 and were 440,000 in 2011.
Remember that personal income fell in January, and the growth in subsequent months has been so weak as to be insufficient to make up for the decline, and the sequester is putting a further brake on the economy. So the rise in rates is yet more drag.
The media is finally waking up to the extent to which the housing “recovery” is driven by investors, as opposed to end buyers. On top of that, as we’ve pointed out, some of those buyers are effectively warehousing properties, either by major re-dos or simply inventorying them for now. So the unexpected rise in rates, when you add that to the very conversion of home to rentals already leading to more tenant-favorable conditions in some of the hottest market, is certain to put a damper on speculator appetite.
On the one hand, the cooling of appetite by investors will aid some end-buyers who are mortgage financed and have been unable to compete with “cash” buyers (who may also be using leverage, just not via a mortgage). But higher rates means less buying power, unless lenders start loosening terms. They’ve been pretty stringent up to now. Are they going to help facilitate this investor pump and dump, or will a lot of speculators be left holding the bag?
The bigger fish in the rental business are trying to get out via IPOs of operating businesses. Reuters flagged Colony Capital’s IPO of a portfolio of nearly 10,000 homes, expected to fetch $260 million, and a new filing by American Homes 4 Rent looking to raise $1.25 billion (hat tip Scott). But these plans are already hitting roadblocks with the Fed’s talk of tapering spooking both the mortgage and the stock markets, a double whammy to private equity exit plans. Per the Financial Times:
Colony American Homes has postponed a US float as the sudden jump in market interest rates has damped investor appetite for newly issued shares in real estate investment trusts…
Colony had garnered enough interest from investors to price its shares near the low end of a $11.50 to $13 per share range, according to a person familiar with the offering.
The company decided that an IPO fundraising was not vital to its day-to-day operations and felt it could hold off until the credit markets stabilise, the person added. Colony declined to comment…
Bankers have said the recent downturn in shares of publicly traded Reits would hurt valuations for companies in the sector preparing for initial public offerings and secondary share placements….
That pressure has been acutely felt by newly issued shares in Reits with similar business strategies to Colony. Silver Bay Realty Trust has fallen 6 per cent since raising $281m in December, while American Residential Properties has dropped 11.7 per cent since it raised $287.7m from a May float.
This de facto withdrawal of an IPO scheduled to launch (as opposed to repricing or taking an extra day for more book building), particularly for a modestly-sized deal, is major blow to the hopes of promoters for a fast and profitable exit. Unless the Fed does the housing market a favor by talking mortgage rates back down, it will be telling to see whether more IPOs get out of the gate as the fundamentals for the rental play come into question.