“Crash, Correct, or Chill” examines economic and housing trends that offer clues to the depth of housing problems.
Buzz: California mortgage origination fell this summer as soaring interest rates made most loans unaffordable.
Source: My trusty spreadsheet analyzed Q3 mortgage trends compiled by Attom. These statistics, from 2000, examine lending in 210 metropolitan areas across the country, including 19 areas in California.
Californians in 19 metropolitan areas took out 177,566 mortgages from July to September.
It is the second slowest of the three months of the century. It’s also a staggering 63% drop from the year-ago period, making it the steepest 12-month drop on record.
Yes, this mortgage crater is deeper than anything we saw during the collapse of the housing bubble in the mid-2000s.
How did it happen?
The Federal Reserve hiked rates to fight soaring inflation. Over the past 12 months, the average 30-year loan has risen from 3.1% to 6.9%, according to Freddie Mac.
Skyrocketing rates slashed a house hunter’s potential borrowing power by 35% in one year and surpassed the 33% drop of 1980, another period of high inflation when rates rose from 10 .5% to 16.3%.
Thus, this summer, mortgage loans granted to buy a house fell by 53% compared to a year ago. And homeowners refinanced 82% fewer loans.
Surprisingly, homeowners took out 74% more home equity loans. This tactic has become the preferred way to get money out of a home without losing the great rates of an older mortgage.
By the way, this isn’t just a California trend. Every U.S. Metro tracked by Attom has seen fewer mortgage deals cut in the past year.
The nation, minus California’s metros, saw 1.8 million mortgages this summer — a 44% year-over-year drop, also the biggest drop on record. There were 30% fewer purchase loans and 66% fewer refis, but 45% more home equity loans.
Crash, fix or chill?
Accident: If you’re doing mortgages to make a living, it’s a huge disaster. No loans. No paychecks.
Mortgage broker Jeff Lazerson, a contributor to the Southern California News Group, recently wrote that he had laid off two-thirds of his staff“Business has virtually ceased for mortgage lenders. And, yes, it’s far worse than the collapse in mortgage volume I remember from the Great Recession.
Correction: For the housing market as a whole, this is part of a return to normal after a boom fueled by the Fed’s cheap money policies at the start of the pandemic. This year’s rate hike is designed to slow down the overall economy as well as housing.
Coldness: Looking at the bigger picture, this dramatic slowdown in lending is a relatively minor annoyance.
The loss of home sales is an economic minus. But, remember, thanks to 30-year fixed-rate mortgages, the Fed’s gift to any homeowner who has refinanced in recent years remains in place.
This extra money from lower mortgage payments is still being spent. It’s an overheated, inflation-filled slice of the economy. And improved household cash flow can provide a financial cushion against any significant downturn.
Lenders have been very cautious about who gets mortgages in this cycle. It is therefore a safe bet that the increase in home equity loans is being done with caution. (Crossed fingers!)
But if the rise in home equity lending is due to financial pressure from borrowers, it’s a worrying trend for the overall economic picture.
How mortgage origination is slowing in some of California’s biggest housing markets, ranked by the magnitude of the year-long decline in lending over the summer…
San Jose: 8,114 mortgages granted in the third quarter, down 71% (the #1 drop among all US metropolises). This comes from 60% fewer closed purchase loans, 89% fewer refinance transactions, but 46% more home equity loans.
San Francisco: 22,048 mortgages, down 67% (#5 out of 210) – 56% fewer purchase loans, 86% fewer refis, but 35% more equity loans.
Ventura County: 4,212 mortgages, down 65% (#8) – 54% fewer purchase loans, 86% fewer refis, but 85% more equity loans.
San Diego: 16,835 mortgages, down 65% (#9) – 56% fewer purchase loans, 84% fewer refis, but 79% more equity loans.
Los Angeles-Orange County: 51,431 mortgages, down 64% (#12) – 55% fewer purchase loans, 83% fewer refis, but 82% more equity loans.
Sacrament: 15,422 mortgages, down 62% (#18) – 49% fewer purchase loans, 83% fewer refis, but 94% more equity loans.
Inner Empire: 28,247 mortgages, down 60% (#22) – 49% fewer purchase loans, 78% fewer refis, but 127% more equity loans.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be contacted at [email protected]