- Housing Has Likely Peaked: Despite a surprising jump in new home sales for October, the housing market likely has peaked.
- Interest Rate Outlook: Rates are projected to rise modestly in 2006, but with short term rates generally up by more than long-term rates. There is a chance that the yield curve could invert next year, which could be a warning sign of slower 2007 economic activity.
- Housing Outlook: As investors continue to scale back activity, home sales should fall in 2006 � slowing the rapid price gains of recent years significantly.
- Mortgage Market Outlook: Originations are projected to drop by more than 25 percent in 2006, while MDO growth slows to a still-strong 8.6 percent.
Berson ponders Mortgage delinquencies rise in the third quarter -- special factors or a trend?
According to data just released by the Mortgage Bankers Association (MBA), mortgage delinquency rates climbed by 10 basis points to 4.44 percent in the third quarter -- the highest level in a year. Since peaking in the third quarter of 2001, delinquency rates had been trending downward. Does this increase suggest that the downward trend in mortgage delinquencies is over, or is it simply a blip on the way to even lower rates?What are the risks to the above assessment by Fannie Mae?
The job market has generally been improving in the past year, and most analysts expect it to continue to expand in 2006, so this should be a positive factor for delinquency rates. Note, however, that delinquency rates have tended to be highest in those states that have had the weakest economic expansions in recent years (Indiana, Ohio, Michigan, etc). Given the record home sales and mortgage refinancings of recent years, the age of the mortgage stock is unusually low -- suggesting that there could be a rise in the delinquencies trend until enough equity is accumulated to offset the risk of negative life events. The rapid home price increases of recent years has reduced the risks of a younger mortgage stock, but now that it appears home price gains are slowing (and perhaps prices will fall in some areas) -- so the young age of the mortgage stock may be riskier. Finally, there has been a surge of borrowing in recent years using riskier mortgage products (including: ARMs, interest-only ARMs, payment option ARMs, limited documentation, investors, and simultaneous second liens). We are especially concerned about the layering of risk, as borrowers have increasingly used mortgage products with more than one of these characteristics.
On balance, we think that these three factors suggest that delinquency rates should edge up a bit in the coming year -- although what happens to home prices could have a significant impact. But there is another factor that helps to explain the third quarter increase in mortgage delinquencies: the impact of the hurricanes on the Gulf Coast states. While the majority of states had a modest rise in delinquency rates in the third quarter (illustrating the interplay of the three factors noted previously), Louisiana, Mississippi, and Alabama all had skyrocketing delinquency rates -- climbing to nearly 25 percent, more than 17 percent, and greater than 7 percent, respectively. These rates could move even higher in the fourth quarter given job losses in those areas. Over time, as job prospects improve, insurance payments are made, and perhaps additional government assistance is delivered, these delinquency rates should decline -- but they are likely to remain elevated for a while.
- Job growth stalls
- Yield curve inverts and with it a recession down the road
- Loan standards tighten
- Payments on loans rise beyond ability of people to pay
- Leverage
- Possibility of price plunge in bubble areas
Just as nearly everyone (including me) seriously underestimated how long this could last and how big the bubble would be blown, people will be underestimating both the duration and depth of the plunge once a serious contraction gets underway.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
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