Foreclosures Derail Housing, Interest Rate Drops, and Strength in Mortgage Applications

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Volatility in the housing market just hit a new high as prices are dropping but not as fast as rates. The spotlight is back on foreclosures with the new robo-signer mess while purchase applications soar along side home repossessions. A truly turbulent week for the housing market took place.

Foreclosure Mess to Derail Housing Market?

While Bank of America and JP Morgan have temporarily suspended foreclosures, most other banks are simply reviewing foreclosure documents and continuing with business as usual. At the same time Ohio Attorney General Richard Cordray requested an injunction that would bar GMAC from completing any foreclosure sales. Other suits are expected to following as the foreclosure mess starts replacing a “double-dip” in home prices as top news.

Attorney Generals from across the US are calling for a halt on foreclosures, meanwhile most banks argue the issues with their foreclosures processes will be resolved quickly. It’s starting to look like the “foreclosure mess” is going to blow wide open and potentially stymie the housing recovery. If you’re like me and investing in real estate, deal flow is being threatened with any significant halt in foreclosures. Ultimately this could bring additional pain to the housing market which badly needs to be out of the media spotlight.

Big Drop in Interest Rates Yields New Record Low

Freddie Mac reported another new record low in mortgage rates as the 30-year fixed dropped to 4.19%, down from 4.27% last week. The 15-year rate followed suit at 3.62% down from 3.72%. Recent economic news such as weak employment allowed long-term bond yields to drift lower spreading to interest rates.

With the Fed looking to increase inflation by providing more quantitative easing, it continues to seem unlikely that rates are sustainable more than short term at current levels. The Fed has a big interest in ensuring prices don’t go backwards. The Fed does seem very focused on ensuring that rates maintain current levels for the next 12 months.

Mortgage Applications: Further Signs of Strength

After a spike in mortgage and refinance activity, the Mortgage Bankers Association reported another week of strong application volume. Its Market Composite Index rose 14.6% from the prior week, lead by a 21% increase in refinance applications. The Purchase Index fell 8.5% allowing refinances to grow to 83.1% of total applications, up from 78.9% the prior week.

Purchase application volume decline follows the short spike the market had as borrowers got applications in before the FHA guideline changes. I still continue to be surprised by the number of refinances in the marketplace.  Recently I spoke with long time mortgage professional, Rich Storey, based in Nashville, TN.  He told me, “I”m refinancing people today that I originated purchase loans for at the beginning of the year, resulting in considerable improvement in their rate and overall payback.”   Buying a home at the beginning of the year and only 10 months later being in a different rate environment tells you just how quickly the housing market is changing.

Number of Foreclosures Rockets Past 100,000

In a week of record for housing (interest rates), RealtyTrac reported banks repossessed 102,134 homes, a new record. Just 5 states accounted for 50% of those foreclosures; California, Nevada, Florida, Michigan, and Illinois. Meanwhile foreclosures as a percentage of total home sales decreased to 24% of total sales from 27% in the first quarter.

Many people were not surprised when suspensions started as it has been rumored for quite some time that foreclosure processes were flawed. The question remains how home values will be affected. Bank of America was increasing its foreclosures significantly this year leaving some thinking that home values could be impacted. With JP Morgan Chase and Ally only halting in 23 states, it’s more likely that values will be buoyed little if at all by these banks’ move. If anything the impact will likely be more competition by investors with a few less homes per market to big on. I’m expecting more banks to announce they’re temporarily halting as well.

Volatility Reigns

This week was fitting. As I attended a talk with Mad Money’s Jim Cramer on investing in volatile markets, I couldn’t help but think how frothy the housing market is getting. Record home repossessions at the same time as rates are hitting lows, activity is being spurred in the market and foreclosures are being halted. It makes me think though the bubble burst in September 2008, things are just starting to get interest with the housing crisis. The era of finger-pointing is clearly in its early stages. While this doesn’t derail my investment strategy in real estate, one has to be cognizant that sudden changes are likely to happen with every thing from foreclosure volume to lending. If you’re an active investor, expect Hofstadter’s law to rule the near future, hurting your returns. In order to make up for the time line sliding you’ll no doubt have to do more deals.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.