Jumbo Loans and the Move-Up Market
An interesting article in the Wall Street Journal today looks at the new trend of banks, and most notably smaller, regional banks, getting back into the business of jumbo mortgages(that's anything $417,000 or over in most markets, up to $729,000 and over in higher-priced markets). Big lenders like Chase , Wells Fargo and PHH have increased their jumbo volumes by a lot in just the first six months of this year.
Interesting though that the banks, big and small, are keeping the jumbo loans on their books. There just is not a good solid securitization market for them. Witness Redwood Trust, a California-based REIT, which announced last week that it would push back its second offering to next year because, "major bank originators are reluctant to sell [jumbo] loans due to their high level of excess liquidity." Redwood made the first jumbo offering in several years earlier this year.
The chatter over the jumbo market, though, makes me wonder what kind of buyer exists today for available jumbo loans. During the first six months of the year, home prices were artificially inflated by the sales boost from the home buyer tax credits. Now that prices are correcting again, we are losing the move-up market in droves. Think about it: The number of borrowers with negative equity (owe more on the mortgage than their home is worth) is rising. That immediately prices a vast number of potential move-up buyers out of the market, because they can't sell their homes for enough to pay off the mortgage. Even if the sellers aren't underwater, they likely can't make enough profit on their current home to have the 20-30 percent down payment for the move-up home.
Sales data from the National Association of Realtors show the $500,000+ market was improving steadily over the summer, which obviously had nothing to do with the home buyer tax credit, due to income caps and the fact that an $8000 or $6500 credit isn't going to mean much to a buyer considering a $500,000 home.
In August, the $500,000-750,000 buyer made up 7 percent of all home purchases.
$750-$1million made up 2 percent and $1m+ made up 1.9 percent.
Now the share was affected by the decreased volume of tax credit-induced lower-priced buyers who fell out of the market in July, but sales still rose on their own in the higher brackets. In fact, in August, it was the higher priced homes that pushed the overall sales numbers up, because sales actually fell in all price ranges, year over year, except the $750,000+, which rose 4.6 percent and the $1m+ which rose 11.5 percent.
Then came September, and the higher-priced share suddenly drops off, as regular buyers come back:
But not only does the share of total sales drop off, total sales of the $500-$750,000 range fall nearly 16 percent, $750-1m drops 2 percent and the $1m+ barely holds on at a 0.4 percent gain.
Granted, you can't make a truly valid case for something with just two months of data, but I believe that as home prices firmly fall into a double-dip, as the latest data confirms for the past three months (Clear Capital today reports prices down 5 percent y/y for the three months ending Oct. 31) the rising number of homeowners with negative equity will stall the move-up market, making the already-lean jumbo loan market increasingly leaner.