Take two things for certain. First, there’s never been nor ever will be a housing bubble without a corresponding bubble in mortgage credit.
Second, no matter who may yap about credit being too easy (usually complainers about the federal role in mortgages), stick with the Fed’s quarterly accounting of U.S. financial flows, Z-1.
We just got the 1st Quarter 2016 report — it lags because it’s a huge effort to compile accurately. Buried in it, 125 pages deep, are all of the mortgage accounts.
Total U.S. home loans outstanding grew by $19 billion, 0.19 percent to $10.008 trillion — that’s the first time over $10 trillion since 2011. A growth rate like that…no bubble. Impossible.
The sustained rise in U.S. home prices at a slope of 5 percent to 6 percent is fueled by a lot of cash (thank you, stock market), and concentrated in the healthiest metro areas and probably overstated nationally.
Mortgage equity withdrawal
Since the mortgage bubble blew for good in 2007, mortgage accounting has been odd. Every foreclosure results in subtracting the loan amount from Z-1, as does a write-off anticipating loss (one or the other, not counted twice). We have been making new loans, but a constant subtraction has been underway as well.
Another calculation is mortgage equity withdrawal (MEW): net of home sales and purchases, loan payoffs and new loans, and refinances, is mortgage lending turning home equity into cash and adding it to the economy, or not? By how much?
MEW in this last quarter is still negative about 1 percent. In normal times, as far as records go back (late 1970s) until 2002, MEW added 2 percent to 4 percent to disposable U.S. household income. In the suicidal glory days of the mortgage bubble, 2003-2007, MEW supercharged household income, averaging 8 percent per year!
MEW has been a drag ever since, a net drag on the U.S. economy.
MBSs and HELOCs
Z-1 sub-accounts tell more juicy stories. Total subprime MBSs (mortgage-backed securities) are now down from $2.2 trillion in 2007 to $580 billion (including a couple of hundred billion in good Jumbo MBS), and still writing down $20 billion every 90 days.
The cumulative subprime loss is twelve times the total TARP (Troubled Asset Relief Program) assistance to Fannie and Freddie, long since repaid. Do not believe the propaganda that Fannie and Freddie were the cause of the bubble.
Home equity lines of credit are still falling, now more because of pinched underwriting standards than write-offs. The remaining balance now is $625 billion versus $1.1 trillion at the top. The second mortgages used in 100 percent subprime lending blew a big hole in the top total.
Total loans for apartments are barely $1 trillion, one-tenth of single-family, condos and townhouses. Some have expressed worry about an apartment bubble, and it’s not there either — we have built a lot of them, but annual growth in credit has been about 7 percent.
Commercial real estate loans can be a dangerous, bubbling playground, $2.5 trillion outstanding, but the annual growth rate is only 3.5 percent.
There is no housing bubble out here. Nor real estate bubble, period. Instead, these mortgage growth rates are so low that real estate has not really contributed at all to this overall economic recovery. So there.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
