Mortgage Applications Plunge to 1995 Levels

A recent article from Wolf Street discusses the recent rise in mortgage rates, with the average interest rate on 30-year fixed-rate mortgages reaching 6.91%, the highest since November. According to the Mortgage Bankers Association, this is due to high inflation rates and the growing expectation that the Federal Reserve won't cut rates anytime soon.

The rise in mortgage rates has significantly affected the spring selling season, typically a period when sales and prices increase. Applications for mortgages to purchase a home have fallen for the third consecutive week, reaching their third-lowest volume since 1995, according to the Mortgage Bankers Association.

The future of the housing market looks uncertain given the current trends. Mortgage applications are a forward-looking indicator of where home sales may head in the coming months. If current home prices and the 7% mortgage rates persist, something will have to give, and it's unlikely to be the mortgage rates. Recent data on sales volume has already shown a decrease, with increasing supply, falling volume, and longer days on the market. Investors have also started pulling out of the housing market.

Redfin confirmed that investors are withdrawing from the housing market, with purchases by investors plunging by 49% year-over-year in Q1. Areas such as Nassau County, NY, Atlanta, GA, and Charlotte, NC, saw some of the most significant year-over-year drops in purchases by investors. Redfin notes that the rising borrowing costs in May might further deter investors from the housing market in the second quarter.

The end of the spring selling season has been marked by 7% mortgages and a large-scale investor pullout, which could lead to dismal home sales going into the summer. The applications to refinance existing mortgages have dropped significantly, reaching their lowest volume since January 2000. This has affected the mortgage industry considerably, leading to mass layoffs in late 2021 and into 2022, as refinancing mortgages, a major revenue source for mortgage lenders and brokers, has virtually disappeared.

Heritage Foundation: Government Spending, Printing, Are the Problems

In a recent interview with Breitbart News, E.J. Antoni, an economist from the Heritage Foundation, asserted that halting government spending would liberate the American economy and curb inflation. Antoni expressed these views as President Joe Biden and Speaker Kevin McCarthy disclosed a provisional agreement on the debt ceiling. Antoni criticized the Biden administration's approach to the looming June 1 deadline, arguing that the federal government could prioritize payments to avoid dire consequences.

The economist maintained that terminating government spending could fuel the economy and contain inflation. He further elaborated that increased Congressional spending merely prompts rate increases. Antoni contended that the majority of current economic challenges are caused by government spending, borrowing, and money printing. By halting borrowing, spending could be controlled since the limit has been reached, easing the immense pressure on the Federal Reserve, which is attempting to increase rates to rein in these activities.

Antoni added that the Federal Reserve could reduce rates almost instantly if Congress succeeded in balancing the budget and even reducing the debt. This, he believed, could revitalize the economy and restore power to the American people, instead of leaving it in the hands of government bureaucrats. (What a brave idea?!)

The Storm before the Storm

The U.S. economy is in a dire state as inflation surges, companies conduct mass layoffs, the housing bubble starts to burst, and homelessness increases in major cities. The current economic crisis is still in its early stages, with more challenges on the horizon. The country is likely to struggle to handle this worsening situation. It's clear that economic trends are heading in the wrong direction. In May 2023, U.S.-based employers announced 80,089 job cuts, a 287% increase from the same month in 2022. This wasn't an anomaly, as the first five months of 2023 saw a 315% increase in job cuts compared to the same period the previous year.

The economic downturn is affecting even the most affluent businesses. Goldman Sachs, for instance, is planning its third round of mass layoffs in less than a year due to declining deal-making profits. The bank intends to cut another 250 workers after laying off 3,200 in January. Similarly, Macy's recently reported an 8.7% drop in same-store sales last quarter, forcing the retailer to slash prices. This decline reflects the economic pinch affecting consumers, as high inflation, especially in food, compels them to cut back on non-essential purchases.

Another retailer feeling the pinch is Dollar General, which recently cut its annual sales and profit outlook. This announcement triggered a 19.55% plunge in the company's stock in a single day. The retailer's CEO attributed the poor performance to the financial stress of their core customers, many of whom earn less than $40,000 a year and are increasingly relying on food banks, savings, and credit cards to make ends meet. This trend is also apparent in Dollar Tree's results, which fell short of investor expectations, leading the company to cut its profit outlook for the year.

The rising demand for food banks across the country highlights the extent of the current hardship. The situation is expected to worsen as more Americans lose their jobs in the coming months. If the Federal Reserve had not increased interest rates so aggressively, the situation might have been somewhat mitigated. However, its actions have led to an almost 7% average rate on a 30-year fixed mortgage. This will likely further weaken purchase demand and contribute to the steady implosion of the housing bubble, causing further difficulty for those working in the industry.

The years of debt-fueled "easy money" are over, and a period of economic hardship lies ahead. Unfortunately, no immediate rescue plan seems forthcoming from Washington. Most Americans are not fully aware of the approaching economic storm, which could amplify the impacts of this crisis. As such, it is crucial to prepare for the challenges ahead and to develop strategies to mitigate their effects.

Living in historic times

I realize this sounds like like the echo from the forest, as I have been preaching for some time the lunacy of Washington, and the Federal Reserve.

Here is the positive in all of this; while there will be fallout of all the bubbles in our economy, a new brighter day will await. Time now for patience.