While it appears the refi boom that began in early 2011, rising sharply throughout 2012, has tapered fully, the mortgage activity surrounding home purchases is also on the verge of joining that retrenchment. Year-over-year, mortgage applications for purchases are nearly flat and are receding to early 2012 levels.
The big banks have begun reducing staff counts, a very convincing signal that even they believe this is more than a temporary rough patch. Bank of America “leaked” plans to close 16 mortgage offices and cut 2,100 workers – 1,500 of those process home loans. Wells Fargo indicated it would cut about 2,300 mortgage-related jobs, as it predicted 3rd quarter originations would fall 29% to $80 billion. That prediction was down almost $20 billion from the expectation Wells Fargo’s CFO made just a few months ago in July. JP Morgan, already actively reducing mortgage headcounts, expects volumes in the second half of 2013 to be as much 40% below the first half.
The refi relapse has direct implications for consumer spending and household debt sourcing for non-discretionary (and even discretionary) spending levels. As for the real estate market, a drop in interest for new purchases cannot be good, though the vast majority of demand driving the mini-bubble has been investment money from institutional investment structures. The new monetary policy projection had been a massive boost to the institutional space.
But here too we see very dark clouds gathering on the horizon. As I noted in mid-June, some investment firms have been getting cold feet about maintaining purchase rates. The rapid price appreciation in 2012 cut into margins significantly, while rental rates have not risen to match that cost pressure. Further, vacancies have not been brought down quickly enough to match investor forecasts, a “headwind” that was largely unexpected given this was supposed to be such a slam dunk market trend.
In June, Colony American was expecting to offer 20 million shares to raise an additional $260 million, but the bond selloff shelved those plans entirely. American Homes 4 Rent (AMH), the poster child for the REO-to-rental scheme behind only Blackstone, announced last month that it was suddenly cutting 15% of its workforce. Further, the company has radically reduced its purchase rate, from about $300 million per month now way down to $100 million.
Part of the reason for the reduction is clearly cost pressures, but we cannot discount the new capital and liquidity pressures introduced in funding markets. Like Colony, AMH planned on going public to raise another tranche of “capital” to deploy in maintaining its mass auction takeovers. It was, however, successful in launching the IPO, but at $16 per share the firm raised only $706 million instead of the $1.25 billion it expected when it filed in June. That was a massive 44% haircut in funding.
Worse, the stock fell on its IPO day, closing at $15.60. It has traded slightly above $16 in the interim, but is currently back below the IPO price.
That’s a huge problem in the institutional world since the company raised funds in private placements late last year and early this year. In November 2012, AMH concluded a private placement at $15 per share, but in March, when things were looking much more stable, the private placement was $16 per share. Those institutional investors now own shares that are below cost. Yet we know from the July IPO prospectus that some of those March investors sold out, meaning they got out of dodge while they could, at best breaking even.
AMH isn’t the only REO-to-rental to put its “smart money” investors in this predicament. Several of its REIT cousins that IPO’ed late last year and early this year are also underwater, and often by much larger proportions. For example, Silver Bay Realty Trust offered shares in December at $18.50. The stock now trades at $16.43, having been nearly $22 in early April. The private placements and IPO’s that looked like “easy money” are now in trouble, creating paper losses that can only dampen enthusiasm further.
I think we are just beginning to see the cumulative effects of all this. If you look at the number of listings featuring a price cut in the “hottest” housing markets, there has clearly been a change in trend.
Since April, the number of listings with price cuts has risen, in most markets, significantly enough to be more than normal volatility. That has been picked up by aggregate national data as well.
For the first time since late 2011 (with the Phoenix market being an obvious outlier), the markets with largest price appreciations, particularly the CA/Las Vegas nexus, are beginning to see a price adjustment compared to sales expectations. And it coincides with this tailing activity in not just mortgages but the REO-to-rental Wall Street funnel for monetary policy.
It’s enough to create doubt as to the sustainability of the mini-bubble, but further we have to question whether it is possible for that bubble to actually burst at such a short duration. If nothing else, it may mean that the Census Bureau price data that I highlighted in August was not noisy volatility, but the beginning of a new and troubling trend.
The change in listing behavior certainly adds weight to what the Census Bureau measured. I highly doubt that the housing momentum can last given all this scaling back, and it appears as if the banks and institutional investors are starting to agree. Worse, they are actually and actively positioning as such.
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