Mortgage “Refi Boom” Crashes To Lehman Lows

While mortgage applications tumbled across the two-week holiday period – even seasonally-adjusted…

 

It was the complete collapse in the refinancings that is most notable. Down over 60% since August, the refi index crashed over 22% over the xmas/new year period to its lowest since the post-Lehman collapse in Oct 2008.

Complete bloodbath in mortgage apps…

 

And judging from the taper tantrum in 2013 (which saw applications collapse over 70%) there is more to come…

 

Of course, this is no surprise, as we recently explained…

The Rate Surge Changes Housing Affordability Statistics

Redfin.com did a purchase market survey of 2400 ready-buyer users between Nov 7 and 11 – right when rates first started surging and were much lower than today – on how a 1% jump in interest rates would impact their purchase decision, if at all.

Note, today rates are 50 bps higher than when the survey was done and up greater than the 1% referred to in the questioning.

Bottom line: A 1% rate surge changes everything. Especially, considering the macro housing market – demand and prices – is controlled by the incremental buy or sell pressure.

  • 68% weigh rates heavily into their purchase decision; only 11% don’t care.
  • 72% of buyers would have to change strategy on a 1% rate-surge; 29% wouldn’t.
  • 46% OF BUYERS WOULD HAVE TO BUY A LESS EXPENSIVE HOUSE.

The metric I highlighted red is what I find the most important. It is exactly why I always assume most people buy as much as they can afford using contemporary mortgage rates and guidelines.

It’s important to remember, however, that a RATE-SURGE OVER A SHORT TIME-PERIOD actually creates a month or two of higher numbers followed by a sharper give-back period, which portends a much weaker than a year-ago Spring and Summer (when yy comps haven’t been so steep since 2006).

PART 2) AFFORDABILITY LOST ON THE RATE SURGE (from my recent note on post rate-surge affordability).

Bottom line: The rate surge took away 11% of purchasing power, which will drag on house prices. It comes as houses cost the most ever to the end-user, shelter-buyer (see FOUR charts below).

 

ITEM A) MOST EXPENSIVE HOUSING EVER

BUILDER HOUSES

1) The average $361k builder house requires nearly $65k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $65k is needed.

For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper.

Bottom line: Reversion to the mean can occur through house price declines, credit easing, a mortgage rate plunge to the high 2%’s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.

 

The following chart compares Bubble 1.0 (2004 and 2006) to Bubble 2.0 on an apples-to-apples basis using the popular loan programs of each era.

Bottom line: Builder prices are up 19% from 2006 but the monthly payment is 43% greater and annual income needed to qualify for a mortgage 83% more.

 

RESALE HOUSES

2) The average $274k RESALE house requires nearly $53k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $53k is needed.

For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper.

Bottom line: Reversion to the mean can occur through house price declines, credit easing, a mortgage rate plunge to the high 2%’s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.

The following chart compares Bubble 1.0 (2004 and 2006) to Bubble 2.0 on an apples-to-apples basis using the popular loan programs of each era.

Bottom line: Resale prices are down 1% from 2006 but the monthly payment is 32% greater and annual income needed to qualify for a mortgage 68% more.

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Deutsche Bank’s Top “Crime Fighter” Quits After Only Six Months At The Job

It will probably not come as a big surprise that the head of Deutsche Bank’s global anti-financial crime unit, a post also known as the bank’s top “crime fighter”, plans to leave that position after just six months at the bank, and will be replaced as soon as next week, Germany’s Manager Magazin first reported.

Peter Hazlewood, who joined Deutsche Bank to oversee anticrime compliance as recently as July 2016, could stay at the German lender in a different position, but that hasn’t been determined, the WSJ reports

Considering the ongoing barrage of civil and criminal accusations lobbed relentless at the German lender, which over the past few years has been accused of manipulating and rigging virtually every market, culminating with the recent RMBS settlements with the DOJ which briefly sent its stock price to all time lows amid concerns of bank failure in late 2016, it is perhaps more surprising that he lasted as long as he did.

The job includes overseeing controls to prevent money laundering and assuring compliance with other financial laws and regulations. The anti-financial crime chief reports to Sylvie Matherat, Deutsche Bank’s Chief Regulatory Officer and a member of the management board.

It was not immediately clear what the reason was behind the accelerated transition.

The WSJ added that Deutsche Bank execs plan to name a replacement as soon as next week, pending management approval of an internal candidate who’s likely to take the position.

Hazlewood, whose official title is global head of anti-financial crime and group money-laundering reporting officer, previously worked at JPMorgan, as well as HSBC Holdings and Standard Chartered PLC, two other banks embroiled in allegations of global impropriety.

Deutsche Bank has faced a series of legal and regulatory hurdles including improving its policing of trades and controls to avoid violations of sanctions and money laundering. After a high-level management shake-up in 2015, which included the appointment of John Cryan as chief executive and a near-complete makeover of the management ranks, senior executives have focused in part on overhauling compliance, seeking to end a series of legal missteps that have cost Deutsche Bank billions of dollars.

Cryan is trying to resolve the bank’s remaining legal battles, following last year’s $7.2 billion settlement with the U.S. over its role in the sale of mortgage securities in the run-up to the 2008 financial crisis. Deutsche Bank is still being probed by U.S. and U.K. authorities over whether it failed to catch transactions that may have moved billions of dollars out of Russia from 2012 to 2015, Bloomberg added.

After settling the U.S. case last month, Cryan said in a memo to staff that an internal investigation by the bank had found “no indication of a breach of sanctions” in Russia. The probe did detect “deficiencies” in the bank’s systems and controls that were being addressed, according to the memo.

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Peso Plunges To Record Low After Trump Tweet

The Mexican Peso is plunging once again this morning – very close to all-time record lows – as fears spread that Ford’s decision yesterday may become the norm following president-elect Trump’s tweet that “this is just the beginning.”

Thank you to Ford for scrapping a new plant in Mexico and creating 700 new jobs in the U.S. This is just the beginning – much more to follow

— Donald J. Trump (@realDonaldTrump) January 4, 2017

Bloomberg notes that Ford’s move, which follows a similar decision by United Technologies Corp.’s Carrier in November, makes it all the more important for Mexican President Enrique Pena Nieto to dissuade other foreign companies from following suit in the face of Trump’s wrath. Mexico’s northern neighbor buys 80 percent of the Latin American nation’s exports, and luring U.S. companies is a cornerstone of the government’s plans to modernize industries from construction to oil.

“A lot’s at stake, considering that since 1999 close to 46 percent of foreign direct-investment flows into Mexico originated in the U.S.,” said Alonso Cervera, chief Latin America economist for Credit Suisse Group AG. “Investors will likely be anxious to see which other companies may do the same.”

The damage caused by companies buckling under political pressure offers a preview of the ripples that could jolt Mexico’s economy should Trump also follow through with threats to tear up free-trade agreements and to build a border wall. Economists in Bloomberg surveys have already cut their median forecasts for GDP growth in 2017 to 1.7 percent from an estimate of 2.3 percent before Trump was elected.

 

But, as Bloomberg details, the economic outlook for Mexico remains challenging after disappointing results in 2016. Tighter global financial conditions and uncertainty about the future of bilateral relations with the U.S. since the election of Donald Trump in November are a drag on investment. Potential trade and immigration-policy changes in the U.S. may prompt additional downside risks for activity and external accounts in 2017. Tight monetary and fiscal policy to contain accelerating inflation and rising public debt should also weigh on growth.

A weak and more competitive peso already support net exports, but the relief could be limited if bilateral trade with the U.S. comes under pressure from potential protectionist measures. Higher oil prices are also positive, but the upside is limited by falling output and lingering problems in Pemex.

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This “Rogue” Oil & Gas Nation Just Set A Slew Of Output Records

With 2016 now closed out, we’re getting the first looks at year-end data. And numbers from one nation in the energy space have been particularly eye-catching this week. Russia. Over the last 15 years, Russia vaulted upwards in oil and gas production — challenging for the world’s top producer of crude. A fact that’s especially critical given this big producer is a “rogue” nation that lies outside the purview of OPEC. And 2016 was another big year for Russian oil output. With stats showing the country’s production…

This “Rogue” Oil & Gas Nation Just Set A Slew Of Output Records

With 2016 now closed out, we’re getting the first looks at year-end data. And numbers from one nation in the energy space have been particularly eye-catching this week. Russia. Over the last 15 years, Russia vaulted upwards in oil and gas production — challenging for the world’s top producer of crude. A fact that’s especially critical given this big producer is a “rogue” nation that lies outside the purview of OPEC. And 2016 was another big year for Russian oil output. With stats showing the country’s production…

Separatist Group Claims Attack On Oil Pipelines In Iran

A separatist group from Iran’s southern province of Kuzhestan has claimed it has bombed two pipelines in the oil-rich province, warning more attacks will follow. The Arab Struggle Movement for the Liberation of Ahwaz, which says it fights for the independence of the Arab Ahwazi minority, said the attacks were carried out by its armed division called the Brigades of the Martyrs al-Nasser Mohiuddin and that it led to “massive fuel loss”. One of the pipelines, according to the militant group, was a facility operated by Iranian state…

Nigeria Awards 2017 Crude Oil Term Contracts To 39 Companies

State-held Nigerian National Petroleum Corporation (NNPC) has awarded the 2017/2018 crude oil term contracts to 38 companies to lift 32,000 bpd each and an NNPC unit to load 90,000 bpd, NNPC said on Tuesday. Nigeria had received 224 bids by companies seeking to purchase and lift Nigerian crude oil grades in 2017. Contracts were awarded to 18 Nigerian companies, 11 international traders, 5 foreign refineries, 3 national oil companies (NOCs) and two NNPC trading arms, the state-run oil company said. According to Reuters estimates, the deals are worth…

US Ends 2016 With $19.98 Trillion In Federal Debt; Up $1,054,647,941,626.91

On the last day of calendar 2016, total US public debt jumped by $98 billion, mostly as a result of end of quarter Social Security debt allocation, which accounted for $70.4 billion of the daily increase. As a result, total US government debt on December 30, 2016 was $19,976,826,951,047.80.

This compares to $18,922,179,009,420.89 on the last day of 2015 and means that the increase in US federal debt in 2016 was just over $1 trillion, or $1,054,647,941,626.91 to be specific.

Putting this increase in context, during Barack Obama’s time in office, federal debt has increased by $9,349,949,902,134.72, or 88%, rising from $10,626,877,048,913.08 on Jan. 20, 2009, the day of Obama’s inauguration to $19,976,826,951,047.80 on the last day of 2016.

That equals $78,553.84 for each of the 119,026,000 households in the country as of September.

Our condolences to anyone who doubted that Obama would be able to hit $20 trillion in Federal debt before leaving the White House.

* * *

For a somewhat amusing take on this disturbing statistics, here is Simon Black with: “US national debt soars by $100 billion. . . in just 8 hours”

According to the latest statement issued yesterday afternoon by the Department of Treasury, the US national debt has reached $19,976,826,951,047.80.

That’s $19.976 trillion, as of the close of business on Friday December 30, 2016.

(The government is typically a day or two behind when it sends out these reports.)

balance

That number itself is obviously remarkable, just shy of $20 trillion.

But what’s even more astounding is that, according to the Treasury Department’s own figures, they STARTED the day with a debt level of ‘just’ $19.879 trillion.

So literally in the span of a single 8-hour workday, the US government amassed an astonishing $97 billion in debt.

That’s simply incredible– $97 billion is larger than the entire GDP of New Mexico or Luxembourg. In 8 hours.

I review these reports every single day. Needless to say, an increase of this magnitude occurs… almost never.

And when I saw it yesterday afternoon, the “Holy Shit!” that came out of my mouth caused a rush of staff into my office asking “What happened?!?”

As I recovered from my shock, I explained that the US federal government had increased its debt by nearly $100 billion in a single day, to which one of them asked,

“What did they buy?”

I thought it a brilliant question, almost child-like in its simplicity. Indeed. What did they buy?

How many aircraft carriers did they purchase?

How many colonies on Mars did they build?

Did President $20,000,000,000,000BAMA acquire a controlling stake in the Walt Disney corporation on behalf of the taxpayers of the United States?

Did Congress suddenly recapitalize the FDIC, or any one of the half-dozen insolvent US trust funds?

Perhaps they fixed a decent portion of the nation’s crumbling infrastructure.

Or maybe they just decided to send a check for almost $1,000 to every household in America.

Nope. None of the above.

The reality is that these people indebted every single taxpayer, including future generations of taxpayers who won’t even be born for decades, with a massive bill that has almost no mathematical probability of ever being paid down.

And despite this prodigious debt, the government has absolutely nothing to show for it.

What’s really amazing is that this isn’t even unusual anymore.

The national debt in the United States is already much larger, and is growing much more quickly, than the US economy.

Plus, interest rates are rising from their historic lows.

In fiscal year 2016 (which ran from October 1, 2015 through September 30, 2016), the government’s total interest bill was $432,649,652,901.12.

This works out to be an average interest rate of 2.204%, according to the Treasury Department’s most recent data from November 2016.

But it wasn’t that long ago that interest rates were MUCH higher.

Back in January 2008, for example, the average interest rate on US government debt was 4.785%.

And even that was considered quite low by historical standards.

Today’s rates are less than half that level. And it’s reasonable to expect rates to increase. In fact, that’s already happening.

In late December, the Treasury Department sold $28 billion worth of 7-year Treasury notes at a yield of 2.24%.

2.24% is still pretty cheap. But it’s nearly double the rate from just six months ago.

Back in July, the 3-month T-bill rate was just 0.02%. Now it’s more than 25 TIMES greater at 0.51%.

This is a significant increase in a short period of time.

If the government’s average interest rate returned to 2007 levels, they would be spending nearly $1 trillion each year just to pay interest.

That’s more than they currently spend on Medicare or the US military.

So as you can see, the US government is not only increasing the debt level at an astonishing rate (with absolutely nothing to show for it), but they’re going to have to start paying a LOT more interest.

Remember that they already borrow money just to pay interest on the money they’ve already borrowed.

So higher interest rates mean that they’ll have to borrow even more money to pay interest, which will cause the debt to go up even higher, requiring them to borrow even more money to pay interest.

It’s a never-ending cycle that only ends one way: default.

The idea of ‘growing their way out’ of debt is a total fantasy.

The debt level is growing much faster than the economy, so each year the hole becomes even deeper.

They’ll either have to default on their creditors, causing a massive catastrophe across the global financial system…

… or they’ll have to default on the promises they’ve made to taxpayers.

You might be thinking– “Can’t they just cut government spending?”

No. Again, not without defaulting on taxpayers.

The three biggest line items in the budget that mop up almost ALL government spending are:

– Debt interest
– Social Security & Medicare
– Military

Everything else COMBINED is trivial by comparison.

So cutting spending quite literally requires a default on the promises they’ve made to taxpayers.

This includes everything from Social Security to maintaining a stable financial system without resorting to major inflation or capital controls.

None of this means there’s going to be some spectacular collapse tomorrow morning.

The sky is not falling.

In fact, despite this debt madness, we’re living in a world full of incredible business, investment, technological, and lifestyle opportunities.

It’s truly an incredible time to be alive.

But the rapid rise in interest rates coupled with an astonishing increase in the debt creates an obvious long-term trend with major consequences that anyone would be foolish to ignore.

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