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Spread & Containment

What will housing credit look like in next recession?

We need to understand the credit channels in the U.S. today and why they’re so different than the period of 2002-2008.

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2 months ago

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With the banking crisis spurring more talk of a recession, the question now is: What would housing credit look like in a recession? Many people predicted that the U.S. housing market would crash during the pandemic. One of the main reasons for that fear was that housing credit was about to get tight, meaning fewer people could buy homes with mortgages.

Even though housing data recovered by May 2020, people didn’t want to believe the data and assumed housing was going to fall more, especially with forbearance on the horizon.

How can we be sure not to make the same mistake that millions of people made by calling for housing to crash in 2020 and 2021? We can do it by understanding the credit channels in the U.S. today and why they’re so different than the period of 2002-2008.

Credit getting tighter

What we traditionally see going into recession and during a downturn is credit getting tighter. What does tighter credit mean for housing? It means certain mortgage products might not be offered, FICO score requirements might be raised, and it can mean pricing for certain loans goes up to account for the risk.

However, the current housing market is much different than the credit boom-and-bust cycle of 2002-2008, and it’s vital to understand why.

Credit availability was booming during the housing bubble years, then collapsed epically. The MBA chart below shows what a vast collapse it was then. Now, with new regulations in place since the financial crisis, that credit expansion and collapse will be a once-in-a-lifetime event.

Why is this so important? Over the years, one of my big talking points has been that we didn’t have a massive credit housing boom in the U.S. during the last few years, nor can we ever. Because of the qualified mortgage laws of 2010, we are lending to the capacity to own the debt, which means speculative credit cycles from primary resident homebuyers or even investors can’t occur in the same fashion as from 2002-2005.

The purchase application data below clearly shows this. We had many years of much higher credit growth during the bubble years and not that much credit in the past few years.

image-13

This is important because the existing home sales market was booming during the 2005 peak; that market needed credit to stay loose to keep demand high and growing. That is not the case today. We had a massive collapse in demand in 2022, not because credit was getting tighter but because affordability was an issue.

After rates fell recently, working from a shallow level, we saw one of the most significant month-to-month sales prints in history with the last existing home sales report.

image-14

This big bounce in demand came from a waterfall dive, and we needed at least 12 weeks of positive, forward-looking data to get this demand increase, but it happened as mortgage rates fell. Mortgage credit can get tight for jumbo loans, non-QM loans and home equity lines, but general conforming Freddie Mac and Fannie Mae loans, FHA, and VA loans should be steady during the next recession.

Spreads are getting wide again

What has happened recently with the banking crisis is that the mortgage-backed securities market has gotten more stressed, so rates are higher than they should be as the spreads between the 10-year yield and mortgage rates have widened again.

As you can see below, the spreads got much broader during the great financial crisis and COVID-19 recessionary periods. There is usually a 1.60%- 1.80% difference between the 10-year yield and 30-year mortgage rate, but now we are at 3%.

The chart below tracks the stress in the mortgage-backed securities market: the higher the spread between the 10-year yield and 30-year mortgage gets, the higher the line goes. This means the dance partners, while still dancing, are creating some space between each other.

image-15

The Federal Reserve doesn’t care about the U.S. housing market. The Fed is complaining mortgage rates are returning to 6% and people buying homes might make their job harder. The Fed will rush to save a bank, but won’t whisper a word for an entire housing market to improve spreads. 

So, the risk here is that when we have a job-loss recession, spreads get even worse, as the Federal Reserve doesn’t care. I would usually think the Fed might assist the economy, but with this Federal Reserve, you never know what they will and won’t do. I talked about this Wednesday on CNBC.

We need to be mindful of this when the recession hits. The housing market might not get any assistance, even though we are getting closer to the one-year call when I put the housing market in a recession on June 16, 2022.

Homeowner balance sheets look awesome this time around

As I said above, credit getting tighter in relationship to demand is not a thing because we didn’t have a massive credit boom like that from 2002-2005 to then have a bust from 2005-2008 due to credit getting tighter.

The mortgage market can get stressed because the spreads can get wider, meaning rates can be higher than at ordinary times. However, we aren’t going to see the credit availability collapse in the same way we did in 2008.

The most significant difference between 2008 and the last 13 years after the qualified mortgage laws were implemented is that we don’t see a surge in housing credit stress before a job-loss recession. If there is one chart I would show every day, it’s the one below: housing credit stress was easy to spot years before the job-loss recession happened. Today it’s much easier to see that we don’t have similar credit stress with homeowners.

image-16

Because the U.S. has no more exotic loan debt structures, we don’t have large-scale risk tied to homeowners and banks. Over time, the foreclosure data should get closer to pre-COVID-19 levels, but nothing like the credit stress we saw from 2003-2008.

Homeowner financial data looks awesome; fixed debt cost, rising wages, and cash flow look better and better over time. As you can see below, mortgage debt service payments as a percent of disposable personal income look excellent, much better than in 2008.

image-17

This means the cash flow looks excellent! Do you want to know why people aren’t giving up homes? A U.S. home with a 30-year fixed mortgage is the best hedge on planet earth. As inflation comes down, homeowners’ cash flow gets better. During inflationary periods, your wages grow faster, but as a homeowner, your debt costs stay the same.

image-18

Unlike 2008, we don’t have a major risk of loans recasting with payments that the homeowner can’t afford even if they were still working. We will see a rise in 30-day delinquencies, and over 9-12 months, we will see a foreclosure process work. However, in terms of scale, nothing like what we saw in 2008.

Hopefully, this gives you three different credit takes on the credit question when we go into recession.

Credit tightening concerning most loans being done today isn’t a significant risk because government agencies back most loans done in the U.S. However, the mortgage-backed securities market can stay stressed longer than most people imagine when the next recession happens.

We don’t have a rise in foreclosures as we did from 2005-2008 before the job-loss recession. However, we do have traditional risk, meaning that late-cycle homebuyers with small down payments can be a future foreclosure risk if they lose their jobs.

So, we have a different economic backdrop now than in 2008 and 2020. Both recessions were very different from each other, but this gives you an idea of some of the significant dynamics around housing credit, debt and risk whenever we go into the next recession.

As always, we will take the data one day, week, and month at a time and walk this path together.

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Spread & Containment

DNAmFitAge: Biological age indicator incorporating physical fitness

“We expect DNAmFitAge will be a useful biomarker for quantifying fitness benefits at an epigenetic level and can be used to evaluate exercise-based interventions.”…

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7 hours ago

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June 7, 2023

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“We expect DNAmFitAge will be a useful biomarker for quantifying fitness benefits at an epigenetic level and can be used to evaluate exercise-based interventions.”

Credit: 2023 McGreevy et al.

“We expect DNAmFitAge will be a useful biomarker for quantifying fitness benefits at an epigenetic level and can be used to evaluate exercise-based interventions.”

BUFFALO, NY- June 7, 2023 – A new research paper was published in Aging (listed by MEDLINE/PubMed as “Aging (Albany NY)” and “Aging-US” by Web of Science) Volume 15, Issue 10, entitled, “DNAmFitAge: biological age indicator incorporating physical fitness.”

Physical fitness is a well-known correlate of health and the aging process and DNA methylation (DNAm) data can capture aging via epigenetic clocks. However, current epigenetic clocks did not yet use measures of mobility, strength, lung, or endurance fitness in their construction. 

In this new study, researchers Kristen M. McGreevy, Zsolt Radak, Ferenc Torma, Matyas Jokai, Ake T. Lu, Daniel W. Belsky, Alexandra Binder, Riccardo E. Marioni, Luigi Ferrucci, Ewelina Pośpiech, Wojciech Branicki, Andrzej Ossowski, Aneta Sitek, Magdalena Spólnicka, Laura M. Raffield, Alex P. Reiner, Simon Cox, Michael Kobor, David L. Corcoran, and Steve Horvath from the University of California Los Angeles, University of Physical Education, Altos Labs, Columbia University Mailman School of Public Health, University of Hawaii, University of Edinburgh, National Institute on Aging, Jagiellonian University, Pomeranian Medical University in Szczecin, University of Łódź, Central Forensic Laboratory of the Police in Warsaw, Poland, University of North Carolina at Chapel Hill, University of Washington, and University of British Columbia develop blood-based DNAm biomarkers for fitness parameters including gait speed (walking speed), maximum handgrip strength, forced expiratory volume in one second (FEV1), and maximal oxygen uptake (VO2max) which have modest correlation with fitness parameters in five large-scale validation datasets (average r between 0.16–0.48). 

“These parameters were chosen because handgrip strength and VO2max provide insight into the two main categories of fitness: strength and endurance [23], and gait speed and FEV1 provide insight into fitness-related organ function: mobility and lung function [8, 24].”

The researchers then used these DNAm fitness parameter biomarkers with DNAmGrimAge, a DNAm mortality risk estimate, to construct DNAmFitAge, a new biological age indicator that incorporates physical fitness. DNAmFitAge was associated with low-intermediate physical activity levels across validation datasets (p = 6.4E-13), and younger/fitter DNAmFitAge corresponds to stronger DNAm fitness parameters in both males and females. 

DNAmFitAge was lower (p = 0.046) and DNAmVO2max is higher (p = 0.023) in male body builders compared to controls. Physically fit people had a younger DNAmFitAge and experienced better age-related outcomes: lower mortality risk (p = 7.2E-51), coronary heart disease risk (p = 2.6E-8), and increased disease-free status (p = 1.1E-7). These new DNAm biomarkers provide researchers a new method to incorporate physical fitness into epigenetic clocks.

“Our newly constructed DNAm biomarkers and DNAmFitAge provide researchers and physicians a new method to incorporate physical fitness into epigenetic clocks and emphasizes the effect lifestyle has on the aging methylome.”
 

Read the full study: DOI: https://doi.org/10.18632/aging.204538 

Corresponding Authors: Kristen M. McGreevy, Zsolt Radak, Steve Horvath

Corresponding Emails: kristenmae@ucla.edu, radak.zsolt@tf.hu, shorvath@mednet.ucla.edu 

Keywords: epigenetics, aging, physical fitness, biological age, DNA methylation

Sign up for free Altmetric alerts about this article: https://aging.altmetric.com/details/email_updates?id=10.18632%2Faging.204538

 

About Aging-US:

Launched in 2009, Aging publishes papers of general interest and biological significance in all fields of aging research and age-related diseases, including cancer—and now, with a special focus on COVID-19 vulnerability as an age-dependent syndrome. Topics in Aging go beyond traditional gerontology, including, but not limited to, cellular and molecular biology, human age-related diseases, pathology in model organisms, signal transduction pathways (e.g., p53, sirtuins, and PI-3K/AKT/mTOR, among others), and approaches to modulating these signaling pathways.

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For media inquiries, please contact media@impactjournals.com.

 

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Journal

Aging-US

DOI

10.18632/aging.204538

Method of Research

Experimental study

Subject of Research

People

Article Title

DNAmFitAge: biological age indicator incorporating physical fitness

Article Publication Date

31-May-2023

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International

Martha Stewart Has a Spicy Take on Americans Who Want to Work From Home

This half-baked take might need to stay in the oven a little longer.

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8 hours ago

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June 7, 2023

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Lifestyle icon Martha Stewart has been on a roll when it comes to representing vivacious women over 60. Whether she's teaming up to charm audiences alongside her BFF Snoop Dogg, poking fun at Elon Musk, or starring as Sports Illustrated's Swimsuit Issue cover model, Martha stays busy. 

Her most recent publicity moment, however, doesn't have the same wholesome feeling Stewart brings to the table. In an interview with Footwear News, the DIY-queen had some choice words about Americans who want to continue working from home after covid-19 lockdown shut down offices.

“You can’t possibly get everything done working three days a week in the office and two days remotely," the cozy-home guru said. "Look at the success of France with their stupid … you know, off for August, blah blah blah. That’s not a very thriving country. Should America go down the drain because people don’t want to go back to work?”

Well, that's certainly a viewpoint. A lot to unpack there. Many online were confused--after all, didn't Stewart basically make her career by "working from home?"

Sitting down with The Today Show, Stewart elaborated on her controversial stance. It seems she's confusing "work from home" with a three-day workweek. 

"I'm having this argument with so many people these days. It's just that my kind of work is very creative and is very collaborative. And I cannot really stomach another zoom. [...But] I hate going to an office, it's empty. During COVID I took every precaution. We [...] set up an office at [...] my home[...] Now we're our offices and our three day work week, I just don't agree with it," Stewart tells viewers. 

"It's frightening because if you read the economic news and look at what's happening everywhere in the world, a three-day workweek doesn't get the work done, doesn't get the productivity up. It doesn't help with the economy and I think that's very important."

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International

How cashless societies can boost financial inclusion — with the right safeguards

The UK could learn a lot from developing economies about using digital payments to boost financial inclusion.

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10 hours ago

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June 7, 2023

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Accepting digital payments. WESTOCK PRODUCTIONS/Shutterstock

Cashless societies, where transactions are entirely digital, are gaining traction in many parts of the world, particularly after a pandemic-era boom in demand for online banking.

Improvements in digital payment infrastructure such as mobile payments, digital currencies and online banking, make it more convenient for people and businesses to buy and sell things without using cash. Even the Bank of England is looking into how a digital pound might work, showing the potential for a significant shift from physical cash to digital payments in the UK.

Read more: How a digital pound could work alongside cryptocurrencies

Fintech companies have accelerated the transition towards cashless payments with innovations including mobile payment apps, digital wallets, cryptocurrencies and online banking services. The COVID pandemic was also a tipping point that created unprecedented appetite for digital transactions. Fintechs emerged as a life line for many during lockdowns, particularly vulnerable populations that needed emergency lines of credit and ways to make and receive payments.

By 2021, approximately 71% of adults in developing countries had bank accounts. But this leaves nearly 30% of the population still needing access to essential financial products and services. Fintechs can provide more affordable and accessible financial services and products. This helps boost financial inclusion, particularly for the “unbanked”, or those without a bank account.

In the UK, around 1.3 million people, roughly 4% of the population, lack access to banking services. The government and financial institutions have worked together to promote the adoption of digital payments, and the UK’s Request to Pay service allows people and businesses to request and make payments using digital channels such as Apple Pay and Google Pay.

But other countries are moving faster towards a cashless society. In Sweden, only about 10% of all payments were made in cash in 2020. This move towards cashless payments in the country has been facilitated by mobile payment solutions like Swish, which people can use to send and receive money via mobile phone.

Boosting financial inclusion

India has gone even further. In less than a decade, the country has become a digital finance leader. It has also made significant progress in promoting digital financial inclusion, mainly through the government’s flagship programme, the Pradhan Mantri Jan Dhan Yojana (PMJDY).

India’s banks also participate in mobile payment solutions like Unified Payments Interface (UPI), which can connect multiple accounts via one app. India’s digital infrastructure, known as the India Stack also aims to expand financial inclusion by encouraging companies to develop fintech solutions.

Many developing economies are using digitalisation to boost financial inclusion in this way. Kenya introduced its M-Pesa mobile money service in 2007. While microfinance institutions that provide small loans to low-income individuals and small businesses were first introduced in Bangladesh in the 1970s via the Grameen Bank project.

Digital lending has also grown in India in recent years. Its fintechs use algorithms and data analytics to assess creditworthiness and provide loans quickly and at a lower cost than traditional banks.

These innovative platforms have helped to bridge the gap between the formal financial system and underserved populations – those with low or no income – providing fast access to financial services. By removing barriers such as high transaction costs, lack of physical branches and some credit history requirements, fintech companies can reach a wider range of customers and provide financial services that are tailored to their needs.

It’s the tech behind these systems that helps fintechs connect with their customers. The increased use of digital payment methods generates a wealth of data to gain insights into consumer behaviour, spending patterns and other relevant information that can be used to further support a cashless society.

Helping the UK’s unbanked

Countries like the UK could also promote digital financial inclusion to help unbanked people. But this would require a combination of government support, innovation and the widespread adoption of mobile payment solutions.

There are some significant challenges to overcome to create a true – and truly fair – cashless economy. For example, a cashless system could exclude people who do not have access to digital payment methods, such as the elderly or low-income populations. According to a recent study by Age UK, 75% of over 65s with a bank account said they wanted to conduct at least one banking task in person at a bank branch, building society or post office.

Providing more cashless options could also increase the risk of cybercrime, digital fraud such as phishing scams and data breaches – particularly among people that aren’t as financially literate.

There is a dark side to fintech: algorithm biases and predatory lending practices negatively affect vulnerable and minority groups as well as women. Even major financial firms such as Equifax, Visa and Mastercard can get compromised by data breaches, creating valid concerns about data security for many people.

Cross-border transfer of personal data by fintech companies also concerns regulators, but there is still a lack of internationally recognised data protection standards. This should be addressed as the trend towards cashless societies continues.

Two hands hold a fan of GBP banknotes: £5, £10, £20, £50.
Paying with cash. Nieves Mares/Shutterstock

Building guardrails

Regulations affect how fintech companies can provide financial services but ensure they operate within the law. Since fintech companies generally aim to disrupt markets, however, this can create a complex relationship with regulators.

Collaboration between regulators and fintech companies will boost understanding of these innovative business models and help shape future regulatory frameworks. Countries like India have shown the way in this respect. An innovation hub run by UK regulator the Financial Conduct Authority is a good start. It supports product and service launches and offers access to synthetic data sets for testing and development.

Fintech can help finance become more inclusive. But it needs policies and regulations that support innovation, promote competition, ensure financial stability and – most importantly – to help protect the citizens of these new cashless societies.

Thankom Arun does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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