- Homebuilders were busier in September, digging more dirt and ready to bring more new homes to the market. But construction was tilted towards multifamily apartment units. Single-family home construction still remains well below historical norms. A housing shortage is a definitive possibility next year unless homebuilders get more active.
- In September, housing starts rose 6 percent to 1.02 million. The figure is well below the needed figure of 1.50 million. The laggard is the single-family construction. Multifamily housing starts – mostly of apartments and some on condominiums – are essentially back to normal.
- A robust rise in the number of renters and the rises in rents have led builders to focus on apartments. However, the overall inventory of single-family homes for sale is on the relatively tight side and could quickly move to into a shortage situation if the demand picks up. Home prices could then rise notable faster (say 7 percent in 2015), much higher than what most economists are projecting (current about 4 percent in 2015). Housing affordability will take a hit then. Therefore, more homes need to be built. Ideally, housing starts need to rise by 50 percent from the current levels to reach the historical average of 1.5 million.
- Builders generally do not have problems selling newly built homes. The current supply situation is 4.8 months, which is already on the tight side. But trying to obtain construction loans has been very difficult for small-time homebuilders, with lenders complaining of excessive banking regulation that hinders construction loan approvals. The big-time homebuilders of Lennar, KB Homes, and Toll Brothers get their money to build from Wall Street and are having easy days because of less competition from small builders.
- Another reason for sluggish recovery in the single-family housing starts is due to labor shortage. The following anecdote perhaps says it all. A police officer bought a new home in Florida. He wanted to check up on the progress. When visiting the construction site in his police cruiser, there was a scramble of workers running away. Evidently, some of the workers were undocumented persons. Then the question should be why aren’t more American citizens willing work in construction?
- Oil prices have tumbled in the past month, and the reasons are due to supply and demand. North Dakota is producing oil like mad, now the second biggest oil producing state after Texas, surpassing Alaska. On the demand side, Europe is not growing and may even be slipping into a recession. Less production means less need for oil.
- From near $110 per barrel one year ago, the crude oil price has fallen to $84 on the London Exchange. American produced oil is priced a bit less, at $80 recently because North Dakota oil is not getting exported and hence staying put as extra supply in the U.S. market.
- Falling oil prices are leading directly to lower prices at the pump. Gasoline prices are averaging $2.47 this week versus over $3 a year ago.
- A typical REALTOR® spent $1,860 in the business use of vehicle in 2013. (Note there were heavy users with nearly a quarter of REALTORS® spending over $5,000). If the current low gasoline prices hold for a prolonged period then a typical REALTOR® will spend about $1530, or a savings of $330.
- Natural gas prices are holding and not falling so do not expect a lower electricity bill for those using natural gas as a source of energy.
- Consumers are clear beneficiaries of low oil prices. On the flip side, lower oil prices are not good for producers. Likewise, countries that are oil dependent for their economy will suffer. Venezuela, Iran, and Russia are countries vulnerable to societal meltdown if low oil prices persist. Their currencies have all but collapsed already. For example, one U.S. Dollar could be exchanged for 32 Russian Ruble one year ago. Now, it commands 40 Rubles. This means unpleasant inflation and social unrest ahead for Russia.
- Initial claims for unemployment insurance filed in the week ended October 11 dropped to 287,000, the lowest since April 2000. This puts the 4-week moving average to 283,500, also the lowest since June 2000. A number that is below 300,000 has been the rule of thumb for a level indicating normal economic activity. Fewer claims for unemployment insurance means greater job stability for workers. A solid job history is an important criteria lenders look at when evaluating a loan application.
- With generally fewer claims filed every week, the number of insured unemployed has also been on the decline. As of the week of October 4, there were 2.4 million claiming unemployment insurance, down from about 6.6 million at the height of the housing crisis in 2009.
- For the week of October 4, the states with the largest decreases in claims filed were Oklahoma (-191), Idaho (-123), Nevada (-82), and the Virgin Islands (-11). The largest increases in initial claims were in New York (+4,753), Texas (+1,976), California (+1,825), Florida (+1,743), and Ohio (+1,734).
- Overall, the insurance claims data indicates an improving job market in October and is an indicator that the unemployment rate will continue to hover at 6 percent. About 2 to 2.5 million net new jobs are likely to be added over the next 12 months. NAR expects that the sustained improvement in the job market can support 5 million of existing home sales in 2014.
- At the national level, housing affordability is down from a year ago for the month of August as higher prices make it less affordable to purchase a home despite rates having another slight decline.
- Housing affordability is down from a year ago in August as the median price for a single family home in the US increased from a year ago but declined slightly from last month.
- The median single-family home price is $220,600 up 5.2 % from August 2013 as year over year price gains are currently slowing down. Mortgage rates are down 17 basis points (one percentage point equals 100 basis points) from last year. Nationally, affordability is down from 159.9 in August 2013 to 157.6 in August 2014.
- Affordability is up slightly from one month ago in all regions, the Northeast having the largest gain at 4.5%. The Northeast experienced a gain in affordability due to slower home price appreciation and favorable mortgage rates. From one year ago, affordability is down in all regions except the North east which had a 5% increase. The Midwest saw the biggest decline in affordability at 2.1 % while the South and the West had minor declines.
- Improvement in wage growth will be good for a change in affordability. As rents continue to rise, there is still hope that the lending restrictions loosen to make purchasing a home more attainable. A recent drop in mortgage applications should reduce the amount of bidders and competition for available inventory. Jobs are moving back to healthy stages as unemployment levels reach a low since 2008.
- What does housing affordability look like in your market? View the full data release here.
- The Housing Affordability Index calculation assumes a 20 percent down payment and a 25 percent qualifying ratio (principle and interest payment to income). See further details on the methodology and assumptions behind the calculation here.
- The number of foreclosed home sales has been rapidly falling and could essentially vanish by next year. Those who specialize in foreclosure sales should therefore look towards other line of business.
- In August, foreclosed sales comprised only 6 percent of all home sales transactions, down from double-digit figures last year and from near 30 percent few years further back.
- In addition to fewer distressed properties on the market currently, there is very little in the pipeline. The number of foreclosure starts is essentially back-to-normal with only 0.4 percent of mortgages undergoing that process. Moreover, mortgages originated in the past four years are one of the best performing with very little defaults.
- We should nonetheless be mindful that the overall count of seriously delinquent mortgages and those homes in some stage of foreclosure process are still above historical normal because some states have been very slow to process the required paper work. For example, some homeowners who have not been paying mortgages for 2 or 3 years are still living in the home in Florida and New Jersey. But the broad figure on seriously delinquent borrowers has been sliced in half over the past three years.
- The bottom line there is that foreclosed sales could be in the 1 to 3 percent next year – essentially back the normal market conditions. Fewer distressed properties will also help with the overall appraisal process of not using bad comparable.
- REALTOR business tip. From time-to-time there will be a homebuyer who takes a very long time to decide. After viewing 30 homes, they will ask for few more, and on and on. One way to help on the decision, according to psychology studies on human behavior, is to provide extreme alternatives that the consumer will certainly not buy. For example, showing a home that is outside of the buyer’s price criteria or a foreclosed home can help speed the decision. Since foreclosed homes are on the decline, one has to use other alternative extreme comparisons.
- A similar decision process applies in politics. Research shows undecided voters wanting to gravitate towards the middle for no other reason than not wanting to be extreme. Therefore a portrayal of political opponent as an extremist will help get votes for your candidate. That is why negative political advertisements, though nasty and unpleasant to view, is said to work in helping undecided voters make up their mind.
According to the first Urban Land Institute/EY Real Estate Consensus Forecast of 2014, commercial real estate fundamentals are projected to continue improving. Vacancy rates are expected to decline for office, industrial and retail properties, while availability for apartments is estimated to rise. Commercial rents are poised to rise for the four core property types in 2014 in the 1.9 percent to 3.8 percent. In 2016, rent growth is projected to range from 2.2 percent to 3.6 percent.
As a significant portion of the data underpinning ULY/EY’s forecast is aggregated at the top end of transactions—above $2.5 million—it points to a brighter commercial environment, especially for top-tier markets. With 90 percent of commercial REALTORS® managing transactions valued at or below $5 million, and mainly located in secondary and tertiary markets, the 2014 Commercial Real Estate Lending Survey shines the spotlight on a significant segment of the economy which tends to be somewhat obscured.
Five years after the Great Recession, lending conditions in REALTOR® markets show signs of sustainable recovery. With commercial real estate fundamentals and investment prices on a solid upward trend, lending conditions eased as financing sources broadened in 2014.
For more details on lending conditions in REALTORS® markets, visit: http://www.realtor.org/sites/default/files/reports/2014/commercial-real-estate-lending-survey-2014-10-08.pdf
- Home prices have rebounded nicely with the latest median home price on a single-family home at $220,600 in the U.S., up from around $160,000 just few years ago.
- Such a robust price gain from the trough would imply less affordable conditions. But data is says home buying is still attractive because price gains have been partly neutered by lower mortgage rates. Moreover, income has grown a bit from job creation and falling unemployment rate.
- A typical monthly mortgage payment for recent homebuyers was $867 if purchasing a middle-priced home at the prevailing mortgage rate and having put 20 percent down payment. That translates into 15.9 percent of monthly gross family income now, compared to the average of 21.3 percent over the past three decades.
- The overall debt servicing costs, including mortgage and everything else, have also been trending down and reached historic lows. Low interest rates are also holding down payments on credit cards, auto loans, and other consumer borrowing costs. Moreover, a very high percentage of cash-sales of homes in recent years have held down the overall mortgage debt for the country.
- Are you happy today? Incredibly, research shows one variable that has very high correlation to today’s happiness. It’s about how well one slept the night before. Along with this, be mindful of the common saying: “One who is careful when borrowing has but few cares and fewer sorrows.”
Looking at the interactive graph below, there is an obvious increase of people who started their home search online. Indeed, the share of people using the Internet has increased by 28% since 2004. In 2013, 48% of first-time home buyers and 40% of repeat home buyers used the Internet in their home search process.
Real estate agents are mostly preferred by first-time homebuyers for their initial housing search. Especially last year, there was an increase of the first-time home buyers who asked for the services of a real estate agent. This trend shows how increasingly important is the role of real estate agents when there is limited inventory on the market.
Hover over the line graph to see the distribution for each one of the types of home buyers. If you are interested in a particular type of home buyer, please tap on it (see list on the top right corner of the dashboard).
At state level, in Nevada (2013), Arizona (2011, repeat home buyers) and South Carolina (2004, first-time home buyers) more than 60% of the home buyers preferred to use a real estate agent when they first started their home search. Conversely, New Hampshire (2013), Kentucky (2013, repeat home buyers) and Massachusetts (2013 and 2011, first-time home buyers) had more than 60% of home buyers who started searching for home online.
Please select your state and see what the first step in the home buying process was for your state.
2014 Home Buyers and Sellers Survey will be released in November and we will look for any fresh trends in the data.
Data were used from the Home Buyers and Sellers Surveys for the period 2004-2013. The sample includes home purchases for primary residence use only. In order to be considered, a state needed to have sufficient response data for each one of the types of home purchase (first-time and repeat).
Tight supply and the difficulty in accessing credit were often cited as factors by REALTORS® who did not close a sale in August, according to data gathered in the August 2014 REALTORS® Confidence Index Survey.
About 18 percent of responding REALTORS® reported having clients who could not obtain financing in August 2014, broken down into 11 percent who reported the buyer gave up and eight percent who reported that the buyer will seek financing from other institutions. Appraisal issues were reported as accounting for four percent of failures to close a sale. About 11 percent of REALTORS® who did not close a sale reported that the buyer and seller could not agree on the price, and eight percent reported the buyer lost the bidding competition. “Other” reasons include responses such as no interested buyer or listing, that the buyer is still searching, or that the transaction is in the escrow period or a closing is underway.
The Fair Isaac Corporation recently introduced a new scoring model. The model could help to expand credit to first-time and minority groups. But there is a problem: Fannie Mae and Freddie Mac, who support the majority of the mortgage market, don’t use the new model.
In “FICO 9″, less emphasis is given to the impact of unpaid medical bills and the effect of missed payments on debts that have subsequently been paid off are eliminated. FICO estimates that the new model could improve scores by 25 basis points for the former group and by as much as 100 points for the latter group. Survey participants were asked if this new scoring model would increase accepted applications at their firm.
A 60% majority indicated that the new scoring model would increase accepted applications. Five percent indicated that it would not impact their decision to accept as they use an earlier version of the model, while 35% deferred to their investor’s model or that of the GSEs. This result was a surprise on the upside, but likely reflects the large share of small banks in the survey panel. Small banks can portfolio loans and are less dependent on the GSEs to purchase the loans they underwrite, hence a lower reliance on the old credit models. The same cannot be said for mortgage bankers and banks who originate loans to be sold to the GSEs.
The innovations in FICO 9 are not new though. VantageScore 3.0, the year-old product from FICO’s main competitor VantageScore, had these same methodologies. What’s more, these newer models incorporate utility and rental payments, information that helps lenders to evaluate younger persons and minorities who might not have a history of credit use (e.g. no car, credit card, or mortgage payments).
Work by the Harvard Joint Center for Housing Studies indicates that borrowers with lower incomes as well as minorities face higher rejection rates on their mortgage applications.  NAR analysis of mortgage data from 2007 to 2013 in the HMDA dataset indicate that the share of rejected loans due to credit scores were significantly higher for African Americans and American Indians, ranging from 2.1% to 7.0% higher for African Americans versus Whites over this time frame.
Over the coming decade, minority and first-time buyers are likely to play a more important role in the housing market. These innovative new models that exploit better information could help to usher in their participation.
Mortgages rates on conventional loans could change in the coming months. The Federal agency that regulates the GSEs, the FHFA, is re-evaluating the fees that it allows Fannie Mae and Freddie Mac to charge consumers. With mortgage rates expected to rise in the coming years and looming changes at private mortgage insurers, the outcome of the FHFA’s review could either compound headwinds for the housing market or broaden access to the conventional market.
The FHFA took comments from the public in early September as to whether the current fee structure is appropriate. Last fall, the former director of the FHFA announced an imminent increase in these fees prior to his departure. However, the new Director, Melvin Watt, called for a review of the fees and their impacts on consumers, the GSEs, and the market, which included questions suggestive of a potential reduction in g-fees.
The GSEs don’t originate mortgages. Rather, they package loans into mortgage backed securities (MBS) which they then either swap back to the banks or companies that provide the GSEs with loans or the MBS are sold to the public. The GSEs also provide a guarantee that a buyer of the MBS will receive the full and timely payment from the MBS making the MBS and loans packaged in it more attractive to the investor. This guarantee comes with a fee that is passed onto the consumer. The GSEs pass this charge onto the consumer in three types of fees: a base g-fee that is the same for all borrowers, a loan-level pricing adjustment (LLPA) that rises or falls based on the individual consumer’s risk factors (e.g. FICO, LTVs, etc.), and an adverse market delivery charge (AMDC) which reflects the risk of the local housing market in which the consumer is purchasing.
The changes proposed last fall by former Director Ed DeMarco included:
- A 10 basis point increase (e.g. 0.1% increase in rate) in the guarantee fee for all borrowers
- The current AMDC of 25 bps that applies to all markets would be dropped except for in Florida, Connecticut, New York, and New Jersey
- Finally, a range of fees that apply to specific individuals would increase based on the borrower’s specific FICO score and down payment (LLPAs)
Taken together, these changes would raise costs for every buyer, but most significantly for buyers with a down payment less than 40% and a FICO score between 680 and 740. For some borrowers rates would rise by half a percentage point.
However, Director Watt has hinted at making changes that would help to stimulate mortgage access for borrowers with less than perfect credit and for middle-class Americans. Questions in the FHFA’s request for comment on the matter hinted at a flatter fee structure that would reverse the trend of higher fees for riskier borrowers. Some have argued that as entities fully backed by the Federal government, the GSEs should focus their mission on expanding credit by accepting a lower return on equity than a private MBS guarantor would. A flatter LLPA structure could reduce fees to a significant share of consumers, while a reduction in g-fees would benefit all consumers. As depicted above, the changes proposed in the fall (blue) would raise costs for all borrowers, while a flattening of the structure (red)  could provide modest relief for 50% to 80% of conventional borrowers . For example, a prime borrower with a FICO score between 700 and 719 with a down payment of 5% to 10% would face an increase in monthly payment of $45 under the proposed plan, while a flattening of fees could reduce the cost by $26 or more. The number of consumers that benefit from a flattening of fees could rise if lower pricing draws consumers away from costly FHA insurance.
However, lower fees could also have no impact to consumers if private mortgage insurers (PMIs) raise fees by an offsetting amount as a result of changes also proposed by the FHFA. The GSE’s charter requires PMI on all loans with less than 20% down payment. PMI takes the first loss when these low down payment loans go into default. Several PMIs had issues during the housing downturn and are still paying back insurance claims long overdue to the GSEs. In response, the FHFA imposed the LLPAs and AMDC fees beginning in 2008 in part to shore up losses as the PMIs weakened, essentially taking over the PMI role. To bolster the PMIs and to prevent future losses at the GSEs, the FHFA is reviewing rules that could require the PMIs to hold more capital against potential losses.  Holding more capital increases costs to the PMIs, costs which are passed on to consumers. Compounding the issue is the fact that the PMIs require a higher return on equity for capital than the GSEs. Thus, a reduction in fees charged by the GSEs, could be offset by an increase in fees charged by the PMIs, or worse if the FHFA does not reduce its fees and/or the PMIs require high returns.
To gauge the impact of a reduction in rates charged by the GSEs, participants in NAR’s 3rd Survey of Mortgage Originators were asked whether a reduction in LLPAs targeted at lower FICO and/or higher LTV borrowers would help to expand access to credit. A robust majority of 80% felt that a reduction in rates would help to expand the credit box, while 20% felt that there would be no change.
The economy has shown steady improvement in recent months and most economists agree that this portends an increase in borrowing costs ahead. NAR forecasts the average 30-year mortgage rate to rise nearly a percentage point to 5.1% in 2015  and potential changes at the PMIs could exacerbate this increase. Entry level and minority homebuyers have been slow to join the housing recovery in this low rate environment. With rates forecast to rise, reform of GSE fees may help to improve their participation in housing.
 This is hypothetical example where the AMDC is eliminated and LLPAs for borrowers with less than 30% down payment are reduced to resemble those with a down payment of 30.1% to 40%. Thus borrowers with 35% and 5% down payments would face the same fee if their FICO scores are the same. LLPAs would vary by FICO score according to the current schedule for a borrower with a down payment of 30.1% to 40%.
 Based on estimates of current market GSE market share by Moody’s Analytics https://www.economy.com/getlocal?q=B97EB9C4-9876-47F9-AB47-527469375F89&app=eccafile
 Most of the PMIs have significantly improved their financial footing and argue for reduced LLPAs for that reason alone.
Every month NAR produces existing home sales, median sales prices and inventory figures. The reporting of this data is based on homes sold the previous month and the data is explained in comparison to the same month one year ago. We also provide a perspective of the market relative to last month, adjusting for seasonal factors, and comment on the potential direction of the housing market.
The highlights below show what the current month data looks like in comparison to the last ten August months, and how that might compare to the “ten-year August average”, which is an average of the data from the past ten Augusts.
- Total homes sold in the United States for August 2014 is slightly below the ten year average. A similar trend is seen in the Northeast and the West. The Midwest and the South are the only two regions to show current sales above the ten-year August average.
- Regionally, since the low point of sales in 2010, there had been three consecutive year-over-year gains, but that changed this year with sales declining in August.
- The median home price in August 2014 is higher than the ten-year August average median price for the U.S. and all four regions. The West leads all regions with the highest home prices.
- The median price year-over-year percentage change shows prices having a positive change for the last three years after struggling the previous six years. The West has predominately guided the direction of home prices for the U.S. and all regions over the ten-year cycle. For the U.S. and the four regions the best price percentage increase took place in 2005 except for the South, which had its best gains in 2013. The biggest decline took place in 2009 for all U.S regions except the West, which had the largest drop in 2008 when home values declined more than 20%. This August the Midwest is the only region to have a negative year-over-year price percentage change.
- Inventory of homes for sale for the U.S. is currently lower than the ten-year August average. In 2004, the U.S. had the fastest pace of homes sold while in 2010 the U.S. saw the slowest pace relative to inventory, with the months supply at 11.5. The ten-year August average months supply is 7.4. In August 2014 the figure is 5.5 months supply, close but slightly below a healthy level of homes on the market relative to demand.
View the full PPT slidedeck: August 2014 EHS Vs Ten Year Average
In response to tight mortgage credit, the FHA has announced three changes that it hopes will help to ameliorate lender overlays and broaden access to credit. Specifically, the FHA will consolidate all of its current lending rules into one document that clearly outlines lenders’ responsibilities and penalties for not complying, it plans to increase early reviews of loan files, and finally, it will reduce the fees it charges under certain conditions. In NAR’s 3rd Survey of Mortgage Originators, lenders were asked whether these changes would have an impact.
The FHA’s HAWK program will offer a discount of 10 bps in annual mortgage insurance premium (MIP) and 50 bps in the UFMIP to consumers who complete a buyer education program. The annual MIP would fall by an additional 15 basis points if the borrower is not delinquent after 18 months. The education program is estimated to cost the borrower up to $400 upfront. Respondents were asked whether the incentives are sufficient to attract consumers to the new program. Only 15% of respondents indicated that the incentives would result in increased demand for FHA insurance, while 20% felt that it would help, but could be stronger and 40% felt that they were not. Ten percent of respondents indicated that the upfront costs of the education program were too high for consumers.
In its press release for the HAWK program, the FHA cited research that shows a reduction in serious delinquency rates of up to 30% for counseled borrowers compared to similar borrowers without counseling. Survey participants were asked whether, given the evidence of reduced risk, the HAWK program would affect lenders’ credit overlays on loans originated for the FHA. A 55% majority indicated that there would be no change in access, while 20% indicated that it would ease credit tightness somewhat and an additional 20% indicated that it would reduce overlays significantly.
Finally respondents were asked about FHA’s program for earlier reviews of mortgage files. The program is intended to reduce the risk to lenders of problems in loan files that could lead to subsequent costly put-backs. FHA’s intent is to ameliorate concerns about buy-back risk and to reduce lender overlays in turn. Participants were asked whether the early reviews would impact credit overlays on loans originated for the FHA. Sixty percent indicated that there would be no change, while 15% indicated that the reviews would both somewhat and significantly reduce overlays. Ten percent defer to their investors’ rules.
Survey responses suggest that the changes the FHA is implementing will help. However, while consumer education will help to alleviate overlays, more incentive is needed to attract consumers to the program.
- After faltering in August, headline payroll employment growth snapped back in September with the addition of 248,000 jobs. What’s more, the August figure was revised upward by 38,000 jobs.
- The unemployment rate eased to 5.9% as a result, the first time under 6.0% since July 2008. This figure is derived from a different survey, which queries households about their employment position. Consequently, non-payroll jobs are counted. This survey also measures labor participation, which is a gauge of the share of persons employed or actively looking for work and provides insight into discouraged workers and underutilization. This measure slipped further to 62.7% in September. Studies suggest that the low participation could reflect an increase in early retirements, while others argue it is suggestive of slack in the labor market.
- The strongest gains in employment came in the professional and business services, retail trade, and health care sectors.
- Wage growth was revised slightly upward in August, while the September reading was flat. Tepid wage growth is a negative for home purchase affordability and could act as a headwind for price growth. However limited wage growth removes the specter of inflation giving the Fed more room to maneuver without raising mortgage rates, a more immediate threat to affordability. Prices will still grow given an expanding buyer base relative to limited supply.
- This month’s reading of the labor market was a strong reversion back to the recent storyline of steady economic expansion. Modest wage growth and labor underutilization could create an opening for improved employment and confidence without a near-term spike in mortgage rates as many have feared. However, recent weakness in manufacturing figures and consumer confidence suggest softening in October.
As reported in the August 2014 REALTORS® Confidence Index (RCI) Report, the share of sales for investment purposes in August 2014 was estimated at 12 percent, down from the average of about 18-20 percent in 2010-2013.
The chart below shows the share of sales for investment purposes to total existing home sales based on RCI data for which there was a large enough sample of REALTOR® respondents . The smaller the circle, the fewer the incidence. The share of sales to investors declined in August 2014 in most states (red) compared to the shares in July 2013-July 2014 (blue). Among the states, the highest share of investor sales are TX (21 percent), CT (21 percent), FL (18 percent), AZ (17 percent), CA (15 percent), and NV (15 percent). Prices in CT, FL, AZ, and NV still generally remain significantly below peak prices, creating profit opportunities for investors. In CA and TX, strong economic growth is fueling the demand for investor interest in homes and rentals.
 The combined sample size for the period July 2013-July 2014 was large enough for all states, but we included in the charts only states that had at least 30 respondents in the August 2014 survey.
Mortgage lending standards have been tight in the wake of the Great Recession. But recent survey work of mortgage originators points to softening in the 2nd half ot 2014. In NAR’s 3rd Survey of Mortgage Originators, nearly half of respondents expected improved access to credit for prime borrowers with FICO scores between 620 and 720 in the 2nd half of 2014. A smaller share, nearly 20%, expect access for rebuttable presumption borrowers, a rough proxy for well-underwritten subprime borrowers, to ease. Respondents were mixed with respect to non-QM lending. While roughly 30% expected improvement 10% expected weakening.
However, respondents were more sanguine about investor demand for all types of mortgage products, a change that could expand the flow of capital to these home buyers. More than 40% of respondents expected improved investor demand for both rebuttable presumption QM and prime borrowers with credit scores between 620 and 720. Interest in non-QM lending was also expected to improve, roughly in line with that of high FICO, prime lending.
- Last week, NAR released a summary of existing home sales data showing that August’s existing home sales declined despite having the second fastest sales pace of the year. August marks the first dip after four consecutive months of increased sales, with figures dropping 1.8% from last month and 5.3% from one year ago.
- The national median existing-home price for all housing types was $219,800 in August, up 4.8% percent from August 2013.
- All regions showed growth in prices except the Northeast, which had a slight drop of 1.8% from last year. The West had the biggest gain in median price at 5.4% from a year ago.
- August’s inventory figures increased by 4.5% from a year ago and it will take 5.5 months to move the current level of inventory, slightly below the six months typically seen in a balanced market. It takes approximately 53 days for a home to go from listing to contract in the current housing market.
- There are still several positive factors: less investor activity, job creation, low rates, and slower price gains are key components to stabilizing the housing market.
- The home prices of 20 large metro markets measured by Case-Shiller increased 6.7 percent over the past 12 months to July. However, there is a marked deceleration in the price growth. Price gains were in the double-digits for most of 2013 and as recently as April of this year. Increased inventory and lower home sales are factors slowing home price appreciation.
- Las Vegas, Miami, and San Francisco are the only markets to experience double-digit price appreciation in the past 12 months. At the other end, prices have slowed to less than 4 percent in Charlotte, Chicago, Cleveland, New York, and Washington, D.C.
- All markets are in a recovery mode of trying to get back to the prior peak, except for two. Dallas and Denver have blasted through the past peak prices and are still appreciating at a good 7 percent from one year before.
- Case-Shiller methodology is such that price appreciation has been stronger compared to other price measurements. But given the prominence of the professors, with the latter winning the Nobel Prize in economics, its price data gets heavily talked about. For comparison, the NAR median price rose 4.8 percent to August and FHFA repeat price index rose 4.4 percent to July.
- What is the outlook? At this week’s meeting of the National Association of Business Economists, there was an unusual consensus among the panel of housing economists on this topic, for which this author moderated. Home prices are projected to rise at around 4 percent in 2015 according to Ken Simonson, Ivy Zelman, David Crowe, and Lawrence Yun.
- This author further believes that prices will likely rise a bit faster in the next five years in states where Californians move and retire to. That is, the western states of Oregon, Washington, Utah, and Colorado will experience a better price growth because the Californians will sell their expensive homes (after having paid off their mortgages) and therefore can easily bid-up home prices in the new states. Anecdotal observations say many REALTORS® who help buyers from California are delighted with the cash they bring, though not necessarily with new residents’ personalities.
REALTORS® expected home prices to increase modestly in the next 12 months, with the median expected price increase at 3.5 percent, according to data gathered from the August 2014 REALTORS® Confidence Index Survey.  Local conditions vary with expectations anchored on factors such as the level of inventory, the state of the local job market, and credit conditions.
The map below shows the median expected price change in the next 12 months by the state of REALTOR® respondents in the June – August 2014 surveys. Respondents from Florida, Texas, Hawaii, and the District of Columbia expected prices to increase in the range of 5 to 6 percent. These states are experiencing strong job growth from the technology and oil industries. Respondents in the Great Lakes area where manufacturing (led by the automotive sector) has made a comeback also expect respectable price growth of 3 to 5 percent.
 The median expected price change is the value such that 50 percent of respondents expect prices to change above this value and 50 percent of respondents expect prices to change below this value. A median expected price change is computed for each state based on the respondents for that state. The graph shows the range of these state median expected price change. To increase sample size, the data is averaged from the last three survey months.
The Dodd-Frank act requires that originators make a good faith effort to verify a borrower’s ability to repay their mortgage and imposes stiff penalties if they do not (ATR and QM rules). This makes sense for the safety of the borrower and the market. Some originators have expressed concern, though, pointing to a need for more clear rules that define a borrower’s ability to repay. For example, a borrower may have outsized obligations that are not reflected in a debt-to-income ratio.
One suggestion is a residual income test, which has been used successfully by the VA for years. A residual income test measures how much after-tax income remains after all debt (e.g. car, house, and student debts) and non-debt obligations (e.g. childcare, alimony, utilities, and maintenance etc.) are paid. This measure provides a better estimate of how much funds a borrower would have at his or her disposal to handle regular expenditures like food, clothing, and entertainment as well as unforeseen expenditures.
Under the ability to repay rule (ATR), a residual income test can be used as supporting evidence of a borrower’s ability to repay a loan, but it is not a definitive “bright line” proof of compliance with the rule. Participants in NAR’s 3rd Survey of Mortgage Originators were asked whether the addition of a “bright line” residual income test to the QM/ATR would improve their willingness to originate in the rebuttable presumption and/or non-QM spaces. Respondents who offered these products indicated that a residual income test would be most helpful in the rebuttable presumption space, roughly the well underwritten subprime sector, with 53.0% indicating that they would be either more likely or much more likely to originate. A definitive residual income test would also help in the non-QM space, but even there, lenders displayed a reluctance to originate products of lower quality.
New regulations have helped to restore traditional underwriting. However, regulators should remain amenable to financial innovations that could help to expand credit.