2022.07.18

Subaru Impreza RS WallStreetBets WSB stonks market indicators

It seems like everyone is on the lookout for catalysts and indicators. One of the recent ones was vehicle repossessions. Sure enough, that was a thing in 2008:

NPR 2008 vehicle repossessions article fuel prices

And 2008 didn't have a one-time massive jump in vehicle prices due to supply chain issues. The 20% (?) higher prices we saw last year might just be a drop in the bucket of car value depreciation.
SARK

Cathie Wood tweet federal reserve rates Volcker
Source. I just can't.
Housing

CNBC Jerome Powell inflation
CNBC calling the bottom. Lol.

Here's why this housing downturn is nothing like the last one, or so CNBC says. Let's check it out:

CNBC Is today's housing market in the same predicament that it was over a decade ago, when the 2007-08 crash caused the Great Recession?

The short answer is: no. America's housing market is in far better health today. That's thanks, in part, to new lending regulations that resulted from that meltdown. Those rules put today's borrowers on far firmer footing.

Regulations are written in blood, as they say. But I'm not sure tighter lending regulations will have me sleeping soundly. From May:


/u/catbulliesdog
There is not a repeat of the 2008 sub-prime debacle with NINJA (No Income, No Job, no Assets) loans. What is new - and whenever you get a financial crisis it's always, ALWAYS driven in large part by a "new" type of financial instrument (read debt)

The simple fact SPACs exist after the RTO scandals of the early teens leads me to believe that home lending regulations may not be airtight. It would, at least, be foolish to underestimate the inventiveness of financial institutions.

/u/catbulliesdog suggested that the margin borrowing is the phenomenon that will lead to another crisis (and would undercut CNBC's warm fuzzy), so I looked into it a little more.

Alternative financing

Pew Trust Roughly 1 in 15 current home borrowers—around 7 million U.S. adults-currently use alternative financing.
- Among borrowers with active home financing debt, those with annual household incomes below $50,000 were more likely to use alternative financing.

It's difficult to find stats on asset-backed home loans, but 'alternative financing' is pretty well documented. I presume this covers margin borrowing as well as a host of other financing instruments. From last September:

WSJ So [the example family] turned to Flyhomes Inc., which helps buyers with less cash on hand make all-cash offers. The Seattle-based startup bought a three-bedroom house in San Ramon, Calif., for $1.525 million in May on the Eugenios' behalf, then sold it to them at the same price a few weeks later when their mortgage closed.
...
Cash-offer companies are paid through commissions, fees or both. In some cases, the companies act as the buyer's real-estate agent or mortgage lender and are paid through sales commissions or origination fees. Other companies charge a flat fee, often between 1% and 3% of the purchase price.

Apparently realtors and lenders solved the cash-offer problem they helped create. Now there's another entity collecting 3% on your home purchase. Snark aside, this form alternative financing doesn't seem particularly risky since it's more or less a flat fee on the transaction.

So what about actual mortgages?

WSJ Americans took out more mortgages than ever before in 2020. Most of them didn't come from banks.

Nonbank mortgage lenders in the U.S. issued 68.1% of all mortgages originated in 2020, up from 58.9% in 2019, according to industry research firm Inside Mortgage Finance. That is their highest market share on record and their biggest yearly gain since 2014.

'Nonbank mortgages' refers to companies like Rocket Mortgage that are smaller and less regulated than banks but still probably resilient to the occasional default.

So what's the verdict on alternative financing and asset-backed home loans? I have no idea, but I will keep tabs on it.

Back to the CNBC article

CNBC Home prices have soared, as well, due to pandemic-fueled demand over the past two years. That gives today's homeowners record amounts of home equity. So-called tappable equity... hit a record high of $11 trillion collectively this year... That's a 34% increase from a year ago.

I'm not sure a spike in anything is particularly reassuring. If it weren't for slightly more analysis below, I'd think this was written by a CNBC 'affiliate' pushing HELOCs.

CNBC Total mortgage debt in the United States is now less than 43% of current home values, the lowest on record... Compare that to the more than 1 in 4 borrowers who were under water in 2011. Just 2.5% of borrowers have less than 10% equity in their homes. All of this provides a huge cushion should home prices actually fall.

While the distribution of mortgage debt could be skewed, it's hard to complain about record-low debt. Having equity runway in the case of a pullback sounds nice, but borrowing our way out of trouble isn't particularly appealing. And, well, the 2011 stat for underwater mortgages is three years later than where we should be looking.

CNBC There are currently 2.5 million adjustable-rate mortgages, or ARMs, outstanding today, or about 8% of active mortgages. That is the lowest volume on record.

In 2007, just before the housing market crash, there were 13.1 million ARMs, representing 36% of all mortgages.

This is good news with QT happening.

CNBC There are, however, about 300,000 borrowers who have exhausted pandemic-related forbearance programs and are still delinquent. In addition, while mortgage delinquencies are still historically low, they have been trending higher lately, especially for more recent loan originations.

"We'll want to keep an eye on this population moving forward," Walden said.
Housing in China

Bloomberg China mortgages article July 2022

The real estate story across the Pacific is also interesting, though it's difficult to find reliable information. The most dire portrait of the investment property market in China is basically Celsius with unbuilt apartments.


/u/Thencewasit
You owe the bank a million, you have a problem.

You owe the bank $100 billion, the bank has a problem.

But in all seriousness. EG was just early to the party and they had lots of problems. In addition to outright fraud, EG also had a lot of $ denominated debts, but nearly all assets were Yuan denominated. Similar to the S&L crisis in the 80s, there was an asset/liability mismatch for EG.

/u/randomannon1234
So this is like evergrande+ ?

/u/justaddedmorehops
EverVenti