Mortgage Lending Loosens, Nowhere Near Bubble Levels

Mortgage Lending Loosens, Nowhere Near Bubble Levels

Mortgage Lending Continues to Loosen….Nowhere Near Bubble Levels by Valueplays

“Davidson: submits:

The MCAI (Mortgage Credit Availability Index) is a new index designed by the Mtg Bankers Assoc to measure the availability of home mortgages to home buyers. While this index currently shows an uptrend, the level today 116.4 (see 1st chart) remains well, well below the peak of ~875 (see 2nd chart) reached in March 2006 during the lending build-up to the sub-prime crises.

Screen Shot 2014-08-11 at 3.06.24 PMScreen Shot 2014-08-11 at 3.06.34 PM

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There has been considerable media chatter about rising home prices and lending being in another bubble with numerous forecasts for 30%-50% stock market collapses likely in the months ahead. The reasons offered are based on perceptions of excessive lending to the housing market which in turn has become over priced. I disagree!! Housing has only recovered to 2006 pricing levels for the most part and this is not terribly over valued if one considers that prices today are where they were 8yrs ago.

Lending has remained nearly as tight today as it was in 2012. We are so far below the 2006 period of excess that lending could double or triple from current levels and still not be excessive. New home building is in the ~600,000 units per year range when historically the average the past 60yrs has been ~1,200,000 units per year. Housing construction still has a long way to go before we return to historical averages. If you have not noticed, we are now in the range of 318mil in population growing at ~1% each year and demand for certain level of housing has only grown over the decades.

My take on the Fed is that its attempt to keep mtg rates low to spur housing has had entirely an opposite effect. This is because low mtg rates mean low bank profits while the costs of meeting regulatory costs have roughly doubled from $35bil to $70bil estimated(for the top 6 banks) in a recent Wall Street Jnl article. Before banks can expand lending, they require higher mtg rates(wider credit spreads) to cover operating costs, regulatory costs, build a reserve against future defaults  and make a profit. This is why I have stressed that wider credit spreads will lead to broader bank lending and economic expansion. We should all cheer for higher 10yr Treasury rates on which mtg rates are based.

Bank lending remains very tight due to Fed and regulatory activity, but it is improving. Higher mtg rates should see a more active home building market, higher employment, additional economic expansion and higher equity markets.

Now, before anyone gets hysterical and starts yammering on about “another housing bubble”, the chart below offer some perspective. The chart from 2004 on……

Screen Shot 2014-08-11 at 3.06.40 PM

Yup, anyone even mentioning bubble in the current lending environment ought to be summarily ignored……..

Updated on

Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.
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