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American Capital Agency Corp. Message Board

  • bighairybutt bighairybutt Jun 13, 2013 11:17 AM Flag

    Why Mortgages can't get more expensive

    And here are some additional thoughts on the issue of the housing recovery via Doug Kass:

    I expect last week's "rally" in applications will be short lived relative to history.



    Here is why:



    Home affordability is overstated today when compared to the last cycle.



    The bubble from 2003-2007 was all about "leverage-in-finance", I.e.: popular, exotic loan products of each period, terms, allowable DTI, documentation type, start/qualifying interest rates etc. For example, from 2003 to '05 a 5/1 interest only loan allowed 50% DTI qualifying at interest only payments. From 2006 to '07 Pay Option ARMs allowed 55% DTI at a 1.25% start rate.



    This made the "cost" of buying a house HALF of what it is today.



    Then when the leverage-in-finance all went away during a short period of time from late-2007 to mid-2008 house prices quickly "reset" to what people could afford to pay on a fundamental basis...30-year fixed mortgages, fully documented, 45% DTI, at a 6% interest rate.



    Because 70%+ of homebuyers use mortgage loans -- and the monthly payment trumps the "purchase price" of the house with respect to purchase ability and decisioning -- then it stands to reason that the monthly payment rate of popular loan types of each period relative to house prices would determine whether or not house prices are once again bubbly.



    Bottom Line: the popular loan programs during the bubble years -- which allowed for rapid and large house price appreciation -- were not 30-year fixed loans like today. Rather, exotic interest only loans, negative amortizing Pay Option ARMs and high CLTV HELOCs. Thus, comparing the "affordability" of houses using today's 30-year rates and program guidelines vs 30-year rates and guidelines from 2003 to 2007 is apples to oranges.



    Based on "cost of ownership" for the 70% who need a mortgage loan to buy, CA houses are more expensive today than from 2003 to 2007. This is why first-timer buyer volume has plunged to 4-year lows recently. And if not for the incremental buyer & price pusher -- the institutional "buy and rent or flip "investor" that routinely pays 10% to 20% over the purchase price / appraised value treating a house like a high-yield bond -- present house prices cannot be supported.



    On this basis, back in 2006 a $555k house "cost" as much as a $325k house does today.

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