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According the National Association of Realtors, their Pending Home Sales Index fell 5.6% from August to September 2013 (seasonally adjusted), the largest monthly drop since May 2010 after the artificial prop of the 2009-2010 federal homebuyers tax credit expiration caused contracts to drop by nearly 1/3 from bloated levels.
Removing seasonality from the results makes the year-over-year adjustment show nominally 1.1% higher contract volume from September 2013 than in 2012 rather than a 1.2% decline. Still, the results were weak.
Why did pending sales post weaker results?
Don’t blame the partial government shutdown – that came later.After the May 2013 Fed surprise announcement, fence sitters surged to the market to lock in before mortgage rates rose further, bloating contract volume over the summer (and why month-over-month seasonal adjustments to this data are so very misleading).The surge in summer sales “poached” from future organic volume that we would have seen in September so we were already expecting a slow down in volume. Didn’t we learn in 2010 what happens when unusual circumstances press volume sharply higher only to see volume fall sharply when that circumstance disappears?Weaker conditions prevail, but its really not as bad a report result as being discussed – namely because the seasonal adjustments paint a weaker picture than what actually happened, and we expected a decline in activity because the prior several months were artificially pushed higher with so many more buyers rushing to the market to beat rising rates (or the perception of rising rates).
First came the surge in negative home equity, now a surge in mortgage interest rates. Add it up, and it throws a big pail of underwater on the hope for a big spring housing surge. At face value on their own, the two reports out today shouldn't cause too much concern, but the effect they have on consumer confidence is bigger than both of them. The average rate on the 30 year fixed rate mortgage is now over 5 percent, which when you think historically is really a great rate, but that was then, and this is now. Consumer confidence and jobs are the two biggest drivers in the housing market. "Because we had rates as low as 4.25 percent last year, any increase — particularly to above 5 percent — is likely to reduce loan applications as borrowers adjust to a higher interest rate environment," says Guy Cecala of Inside Mortgage Finance. The biggest effect of course is in refis, which dropped over 7 percent last week, according to the Mortgage Bankers Association's weekly survey. Last year refis accounted for two thirds of all mortgage originations, so that will clearly change with the new rates. The question is how the rates affect home purchases. Purchase applications also dropped last week, but just by 1.4 percent. "We are at the beginning of the spring buying season, but purchase volume remains weak on a seasonally adjusted basis," says the MBA's Michael Fratantoni. Higher rates will make loans a little bit more expensive, but not all that much. The bigger driver of mortgage cost will be the new regulatory rules on the horizon and potential changes to Fannie Mae and Freddie Mac loan limits and fee structures. But rising rates also put a bigger burden on those trying to modify or refinance troubled loans, especially those underwater. The new report from Zillow notes that the foreclosure freeze from the "robo-signing" scandal put an artificially high number of borrowers in the underwater pool because many were supposed to be foreclosed and weren't. Still, as I Tweeted yesterday from Laurie Goodman of Amherst Mortgage Securities, "Home equity is the single most important determinant of mortgage default, not unemployment." Zillow's chief economist, Stan Humphries, agrees: "Once you get above 125-130 percent loan-to-value ratios, that means that you're 25 to 30 percent underwater on your house, at that point really you start to see a higher rate of strategic default, that's people actually feeling a sense of futility about making their mortgage payments and they walk away from the mortgage." And how high will rates go? "I think if the 10-year Treasury yield remains at around 3.70 percent, mortgage rates will head to 5.25 percent over the next two weeks," opines Peter Boockvar of Miller Tabak. Again, that's still historically low. "Realistically, long-term mortgage rates in the 5-6 percent range over the next few years would be affordable enough to support a “normal” housing market all things being equal," claims Cecala. Unfortunately nothing in today's housing market is normal or even approaching equal. Questions? Comments? document.write("
] , will affect the housing recovery. Then mortgage rates popped up to 5 percent overnight, thanks to the 10-year Treasury, and more folks voiced concern over today's potential home buyer and his or her ability to take advantage of this low-priced housing market. 
Owing more on your mortgage than your home is currently worth doesn't necessarily mean you can't afford your monthly mortgage payment or that you're going to go about your day any differently, other than feeling a little financially depressed. While it may make some more likely to walk away or "strategically default," most won't. It does mean that you can't use your home to pay for anything, like a new car or your kids' college tuition, and it does mean that you can't move up to a nicer home without having to take a hit by paying off your mortgage with whatever stash of cash you have. Now here's the issue: The move-up buyer (which is the market we're counting on now to get us out of this mess, given that the home buyer tax credit pulled a lot of first-time buyer demand forward to the beginning of 2010). A significant number of move-up buyers, even if not underwater on their mortgages now, may be in a negative equity position when it comes to buying a new home. Let me just preface that if you happen to be wealthy independent of your home, or a relative just died and left you a sizeable chunk of cash, this doesn't apply to you. Now here goes. Mortgage expert Mark Hanson makes an excellent point and did some math, which I want to share: "In order to sell and re-buy, a homeowner must receive enough proceeds from the sale to 1) pay off the mortgage(s), 2) pay a Realtor 5-6 percent and 3) put a 3.5-20 percent down payment on a new vintage loan," begins Hanson, and those alone may be too financially off-putting in today's economy for many potential buyers. "Effective negative-equity is the big weight on housing that has no easy or quick cure," continues Hanson. His math: Real effective negative-equity as it pertains to house selling and buying starts at: <9.5% positive equity for FHA repeat buyers (6% Realtor fee + 3.5% down payment) <16% positive equity for Fannie/Freddie repeat buyers (6% Realtor fee + 10% down payment) <26% for Jumbo repeat buyers (6% Realtor fee + 20% down payment) When lowering Corelogic's negative equity threshold to 75% on CA mortgages, 53% are effectively underwater. And I would add to Hanson's logic, that CoreLogic also noted that an additional 2.4 million borrowers are in a "near-negative equity" position, with less than 5 percent equity in their homes. That puts them out of the move-up market as well. With rising mortgage rates, even if they don't go much higher, the "effective" negative equity rate of the move-up buyer will impact recovery, slowing sales as more buyers/demand are priced out of the market. Questions? Comments? document.write("
22.5 percent of U.S. borrowers were in a