Mortgage Credit News by Louis S Barnes - April 23, 2021

In a week with very little economic news, long-term rates have held the new, slightly lower level, the 10-year T-note about 1.55%, mortgages still above 3.00%. So, the agenda below: a little on rates, then housing and its alleged bubble.
Rates. One reason offered for falling rates has been geopolitical risk. Not. Russia has announced retreat from Ukraine foolishness. China’s aggressiveness is making nothing but enemies: Australia this week rejected “belt and road” enticement. If bonds were worried about those power plays, rates would have increased at the Russia retreat.
Stick with basics: the rumor that the administration will attempt to jack capital gain taxes from 20% to 39.6% for the wealthy yesterday pulled the plug on the overextended stock market. The US economy is doing better, better than anyplace, but global recovery is in question, which reduces fears of inflation. A good marker overseas: the German 10-year is trading -0.25%, negative one-quarter percent.
Housing Bubbleology. Macbeth, Act IV, Scene I. Thunder, enter three Witches:

Double, double toil and trouble;
Fire burn, and cauldron bubble.
In the cauldron boil and bake;
Eye of newt and toe of frog,

Housing prices are rising fast, very little for sale in a nationwide pattern -- although concentrated in metro areas rich with IT jobs and migration to them from the countryside. Is this a bubble?
In the unlikely event that you have not seen this viral beauty on housing, follow this link. No serpent, no Eve, but the forbidden fruit is an apple.
The first and last rule of bubbleology: real data -- neither envy nor moral judgment.
Old Metrics. Some work, some don’t. If you find one of these in a publication asserting “bubble,” read something else and maintain future suspicion of that author.
1. Price to rent ratio. Long ago, most neighborhoods were more mixed with owners and renters, work and incomes more homogenous. Entire subdivisions for 20 years after WW II were financed by FHA or VA. In a more unequal world, the 35% of us who rent differ from owners: lower-income, less stable and low-ceiling jobs, and not credit-capable or able to save. In the great credit bubble, 2000-2008, the fraction of ownership rose above 70% and then quickly reversed, the new fraction not ready to own. The top of the rental market and the bottom of condos, especially old conversions do interact, market rent a primary component of value. In the red-hot single-family markets today, rent is irrelevant.
2. Second homes. Perhaps the worst fable of this cycle asserts large numbers of households buying second homes to escape Covid, numbers so large that they have bubbled housing markets. Last month Fannie and Freddie capped mortgages for second homes and rentals, total numbers combined to 7% of deliveries. That’s little changed from the current volume, except in areas already with a lot of rentals and second homes, and too small to move prices except in ultra-tight resorts.
3. Prices moving far faster than median incomes. As above, one-third of the nation rents, and by definition correlates with the lowest one-third of incomes. Many studies have found, painfully, that rental households often spend more than half of their incomes on rent (although the studies can’t capture non-reported income -- cash and barter). The competition for single-family homes within commuting distance of job-rich metros is among the higher two-thirds of incomes,
4. ...and those with assets. Half of America cannot cover a $400 surprise expense. The housing competition is among the 20% of us with substantial savings, accumulated home equity, and transfers from parents, emboldened by 401K riches. Medians say nothing.
5. Covid unemployment is slow to recover, says Fitch Ratings, and housing thus 5.5% overvalued. Covid damage to jobs has been uniquely focused on low earners forced away from their face-to-face jobs -- retail, restaurant, lodging, nursing home care. The big housing driver, IT jobs rarely suffered harm.
6. Affordability is a big and hurtful deal to households struggling to afford a home. But in these home auctions, prices jumping above asking price, affordability is a phony issue, circular nonsense. If the auction prices paid today were not affordable, buyers would not pay them.
7. Prices rising faster than the real, inflation-adjusted trend. Good grief. Building sites for single-family detached homes in attractive metro areas have been in short supply for a decade or two, let alone versus today’s rising demand from migration to metros and IT incomes.
Good metrics are regional questions, not conclusions:
8. Wherever you are, are more people moving in than moving out?
9. How is the supply of land for building? Not just finished lots, but substantial acreages for subdivision into single-family lots?
10. How and what is your job market? Expanding, and attractive to relocating businesses? Are your employers IT and leading-edge? Or old age manufacturing, facing fatal competition from overseas? Or obsolete products, like coal and steel?
Gas for the bubble, or not?
11. Credit. Credit, credit, credit. Are mortgages today too easy to get? No way -- the Covid advent in March ’20 tightened credit. Rates too low? They were last year, and the Fed happily allowed long-term rates to rise a full percentage point in only four months.
12. Over-building? A few regions will, most cannot even construct adequate supply, especially not single-family.
Bubble or not, how does this end? Historically, boom prices tend not to retreat. Individuals who got carried away can be marooned for many years, unable to resell at the price that they paid, but markets as wholes tend not to retrograde.
In financial markets, when liquidity dries up, sellers outnumbering buyers, prices go down and quickly to a new equilibrium. Often during the same day. Also, any strong move up or down is almost guaranteed to “retrace” partway -- history says by one-third.
Housing is different. Housing has utility beyond price: we can live in one longer than planned. People even underwater versus a loan, and more commonly underwater versus a boom-price paid tend to “live through” the following slowdown instead of selling at a discount. Many housing markets tend occasionally to ascend in price quickly, in a few years, and then sit for several years on price-flat plateaus. While ascending, nothing for sale; while on a plateau, many for sale but few sellers willing to concede price.
Big price booms end badly only by force: the fire sale of overbuilt homes, economic distress, a spike in rates, bad credit offered and taken -- not just because prices rose fast.
Thus the oldest and best lesson for buying a home, market hot or cold: plan on a hold appropriate to the past cycles of the location, often five years or more. And prepare for longer the hotter the market when you buy.

Double, double, toil and trouble;
Fire burn and cauldron bubble.
Cool it with a baboon's blood,
Then the charm is firm and good.
And every one shall share i' the gains.
And now about the cauldron sing,
Like elves and fairies in a ring,

The 10-year T-note in just the last year. Note “retracement” after a violent move, as mentioned above. The next move will depend on the heat of economic recovery, and actual news of inflation, not the threat:

Global vaccination: the best engine is from Oxford, pick your nations or regions. I would never have guessed the wide dispersion among nations that can afford the vaccines:

Colorado is a good example state, and our data is sound. We are six million people, urban-suburban-resort-rural, high travel, and all over the political spectrum of virus response and resistance. In the top chart, whatever caused the hospitalization bulge in early April from 50 to 75 daily is receding, and mortality is below 5/day and declining. Fingers crossed that the pattern is an early sign of vaccine success.