“Crash, correction or chill” examines economic and real estate trends that offer clues to the depth of real estate problems.
Buzz: California mortgage origination hit a record slump this summer as rising interest rates made most lending unsustainable.
Source: My trusty spreadsheet looked at the third quarter mortgage lending trends compiled by Attom. These statistics, dating back to 2000, examine lending in 210 metropolitan areas nationwide, including 19 California regions.
Californians in 19 metropolitan areas took out 177,566 mortgages from July to September.
It’s the second slowest three months of the century. It’s also a stunning 63% drop from the year-ago period, making this the biggest 12-month drop on record.
Yes, this home loan crater is deeper than anything we witnessed during the bursting of the housing bubble in the mid-2000s.
How did it happen?
The Federal Reserve raised rates to combat rising inflation. Over the past 12 months, the average 30-year loan jumped to 6.9% from 3.1%, according to Freddie Mac.
Skyrocketing rates have reduced a home hunter’s potential “borrowing” power by 35% in one year and surpassed the 33% decline in 1980, another era of high inflation in which rates fell to 16 .3% from 10.5%.
So this summer mortgages taken out to buy a home are down 53% from a year ago. And homeowners refinanced 82% fewer loans.
Surprisingly, homeowners took out 74% more home loans. This tactic has become a favorite way to get money out of a home without losing the great rates on an old mortgage.
This isn’t just a California trend, by the way. Every U.S. metro Attom monitors has seen fewer mortgage deals cut over the past year.
The nation, excluding metropolitan California, had 1.8 million mortgages this summer, a 44% drop in 12 months, also the largest drop on record. There were 30% fewer purchase loans and 66% fewer refis but 45% more home loans.
Crash, fix or chill?
Accident: If you take out mortgages for a living, that’s a huge disaster. No loan. No payroll.
Mortgage broker Jeff Lazerson, a contributor to the Southern California News Group, recently wrote that he has laid off two-thirds of his staff: “Business has all but stopped for mortgage lenders. And, yes, it’s much worse than the collapse in mortgage volumes I remember during the Great Recession.”
Correction: For the broad housing market, it’s part of a return to normalcy from a boom fueled by the Fed’s cheap monetary policies from the early pandemic era. This year’s rate hike is designed to slow down the broader economy and housing.
Freddo: Speaking of the big picture, this drastically slowed down lending is a relatively minor annoyance.
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.
That extra money from the reduced mortgage payments is still being spent. It’s a slice of the overheated, inflationary economy. And improved household cash flow can be a financial buffer against any major recession.
Lenders have been very conservative about who gets mortgages this cycle. So it’s a reasonable bet that the surge in home loans has been done prudently. (Fingers crossed!)
But if the rise in home loans is due to financial strain on borrowers, this is a worrying pattern for the bigger economic picture.
How mortgage lending slows in some of California’s largest housing markets, ranked by the size of the one-year decline in lending over the summer…
San Jose: 8,114 mortgages signed in Q3, down 71% (the No. 1 decline among all US Metros). This comes from 60% fewer purchaser loans closed, 89% fewer refinancing deals, but 46% more home loans.
San Francisco: 22,048 mortgages, down 67% (#5 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.
Inland 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 reached at [email protected]