The explosive surge in mortgages for “second homes”: the calculation of the housing bubble


No housing market can produce enough housing when housing is heavily used as vacant investment speculation. This creates an artificial shortage.

Through Wolf richter for WOLF STREET.

The fact that the housing market has gone mad is now in the news daily with click reports of silly auction wars with ridiculous amounts paid out of already high asking prices, fueled by the new FOMO pandemic – fear to miss. The bad deals are done at the right times, as the bankers say, and these are the best times, fueled by the Fed’s policies of moving heaven and earth to inflate every asset bubble imaginable.

A side effect of the combination of soaring house prices, still low mortgage rates and FOMO is that people have bought new homes without putting their old and now vacant home on the market and with no intention of putting it on the market. the market for the moment – and so they bought a “second home” – which squeezes the offer and heats up the frenzy even more.

The share of purchase mortgage applications in February for second homes and investment properties climbed to 14.1% of total purchase mortgage applications, according to data from the Mortgage Bankers Association, cited and mapped by the the Wall Street newspaper:

I have seen people, eager to leave a big city, buying a house in a place they had always wanted to live, in remote suburbs, or in vacation hotspots in the mountains or in coastal enclaves that they wanted to live in. had fallen in love, or anywhere, and because house prices are skyrocketing and money is cheap, they are not selling their old house. And so now they own second homes.

The math is this: If they own a $ 500,000 home that they have $ 100,000 of equity in, and they think their home’s price would go up 10% over the next 12 months, their return on their home. $ 100,000 net worth would be at 50%. If they can hang on for two years, they’ll double their money. If they need more money, they can refit the old and now vacant house.

And while they’re at it, they expect the price of their new home to go up, and they make tons of money just by skiing or hanging out on the beach and skipping Zoom meetings. This is the calculation of the real estate bubble.

The number of buyers who blocked mortgage rates for second homes in February climbed 93% from February last year – but that’s a step back from the frenzy of the second half of the year. last year, when those rate locks jumped 118%. year-to-year in September, according to analysis of Redfin data by real estate analysis firm Optimal Blue, cited by the WSJ. This surge far exceeds increases in foreclosure rates for primary residences (graph WSJ):

No housing market can produce enough housing when housing is used heavily as speculation on vacant investments. This creates an artificial shortage.

But there is another aspect, which played out during the housing crisis: vacant houses as an investment speculation are prone to profit taking, when the owner wants to lock in the profits by selling them. And it could happen suddenly, for example when the housing market transforms and those highly profitable, leveraged investments turn into losing and costly albatrosses. And before the gains evaporate, homeowners put the homes on the market, whereby that phantom inventory suddenly becomes inventory for sale, without the homeowner having to buy another home.

The government has, of course, subsidized these mortgages for second homes and investment properties. But Fannie and Freddie are now starting to put restrictions on how many of those mortgages they buy from lenders. In the future, they will limit these types of mortgages to 7% of the total amount they purchase. Freddie has already imposed the 7% limit; and Fannie gave lenders until June 1 to comply, according to FHA officials as cited by the WSJ.

Remember the first graphic above? The share of these mortgages in total mortgages climbed to 14%.

These restrictions were requested by the Treasury Department towards the end of the Trump administration as part of negotiations with the FHFA, which overseas Fannie and Freddie, to reduce the roles of the two mortgage giants. The idea is that second homes and apartment buildings aren’t Fannie and Freddie’s primary mission to begin with.

The effect of the new restrictions is that mortgages for second homes and investment property outside the threshold will carry higher interest rates – which would especially occur in housing markets where second homes are available. an important factor, which are also some of the markets that have the strongest price spikes.

The purchasing power of the dollar is waning, but the CPI ignores house price inflation. Lily… America’s Most Splendid Real Estate Bubbles: “House Price Inflation” in All Its Glory. March update

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