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Updated: 27 min 13 sec ago

Lenders Optimistic on Access to Credit

Wed, 10/01/2014 - 15:34

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.

A Deeper Dive Into Last Week’s Existing Home Sales Release

Wed, 10/01/2014 - 08:28
  • 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 Latest Case-Shiller Home Prices

Tue, 09/30/2014 - 10:33
  • 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® Expect Modest Price Growth in Next 12 Months, as of August 2014 Survey

Tue, 09/30/2014 - 09:18

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. [1] 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.

[1] 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.

Change Could Ease Lender Restrictions

Mon, 09/29/2014 - 10:58

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.

Sales of Homes for Investment Purposes On the Decline

Mon, 09/29/2014 - 07:31

As reported in the August 2014 REALTORS® Confidence Index Report, sales to investors fell to 12 percent of home sales in August, from the average of about 18-20 percent in 2010-2013. One reason for the decline is that as foreclosures have eased there are now fewer available distressed properties for sale. Distressed sales (foreclosed property and short sales) have steadily declined from about 16 percent of existing home sales in 2010 to only 8 percent as of August 2014 (Chart 1).

Another reason is that home prices have been rising more rapidly than rents since 2012 (Chart 2), creating fewer opportunities for a quick profit recovery. Since 2012, the median home price of all existing homes rose by an average of 9 percent annually, while rents rose at an annual average of about 3.2 percent. As of August 2014, the median home price of all existing homes was at $ 219,800, just a few thousand shy of the peak price of $229,000 in June 2007. Although about 50 to 70 percent of investors pay all cash, rising home prices have also made it more difficult to put up only cash to purchase a home.

As investors will increasingly retreat from the market, the continued recovery of the housing market will need to be taken up by first-time buyers (e.g., the millennials) and those buying property to trade up (also millennials) or down (baby boomers).

CHART 1

CHART 2

Latest GDP and Forecast

Fri, 09/26/2014 - 14:37
  • The economy grew solidly in the second quarter, expanding at a 4.6 percent annualized rate. Business spending and residential investment from new home construction are leading the way. Such a fabulous growth rate, if it can be sustained, will mean fast-paced job creation and meaningful wage growth. Unfortunately, the latest pop in GDP looks to be an one-off event.
  • The quarterly GDP growth rates have been choppy and inconsistent. What looks to be impressive second quarter GDP growth is coming on the heels of a 2 percent contraction in the first quarter. Furthermore, the annual GDP growth rate has been subpar, at less than 3 percent (long-term historical average) for nine straight years. The uneven growth rate has therefore translated into about a $1.5 trillion shortfall in economic output versus economic potential. In other words, on average, every American would have $4,700 extra in their pocket today if GDP had been growing at the 3 percent historical average rate rather than at subpar rates.
  • The latest GDP figure was lifted by very strong growth rates in business spending (9.7 percent growth) and residential investment (8.8 percent). The all-important consumer spending component expanded at a more subdued 2.5 percent. International trade deteriorated a bit with imports rising faster than exports. Government spending was a drag due to on-going sequestration, falling 0.9 percent.
  • For upcoming quarters, the momentum is suggesting GDP growth of 3.3 percent in the third quarter and 2.8 percent in the fourth quarter. Such growth rates will mean about 2.5 million net new job creations over the 12-month period. Jobs in turn will be critical in supporting housing demand, as well as pushing up net absorption of commercial real estate spaces.
  • GDP growth has helped raise tax revenue. More jobs mean more people who are able to pay taxes. That is why the federal budget deficit has been shrinking. Some states are running a budget surplus.
  • A detailed explanation of the forecast is here.
  • GDP stands for Gross Domestic Product and intends to measure total production in a country. Interestingly, EU countries now want to modify the definition so that GDP figures get an additional boost. More specifically, they want to add to the economy the dollar volume from prostitution since money gets exchanged. This new methodology would make it easier to meet various EU countries’ fiscal budget targets. This new method, however, would appear nonsensical since romance between married and other committed couples would not be included since dollars are not being exchanged. Moreover, the most beautiful as well as the most woeful experiences, as Shakespeare would easily observe in people, are unrelated to money exchanges. Let’s hope government bureaucrats never try to tally up this emotional value of what humans feel.

Signs Suggest Looming Opportunity for First-time Buyers

Fri, 09/26/2014 - 07:48
  • CoreLogic reported Thursday that the number of underwater homes, properties worth less than what is owed on them, fell from 6.3 million to 5.3 million between the 1st and 2nd quarters of 2014. This change is large and important for the health of the housing market.

  • The decline in negative equity reduces the number of owners that are susceptible to foreclosure in the case of a health issue or loss of work. Distressed sales damage their owner’s credit scores and can weigh on local home prices and confidence as well as banks’ willingness to lend.
  • According to the report, negative equity and “near negative equity”, those with less than 5% equity in their home, are heavily concentrated at the lower end of the price spectrum. This trend holds back supply from potential entry-level buyers who have competed with well-healed investors for several years. Tight lending conditions, weak labor markets, and student debt issues have compounded the issue for first-time buyers.

  • The majority of states have negative equity of 10% or less, but a stronger majority have a near negative equity share of 2% to 4%. Steady price appreciation in a historic range of 3-5% should push more owners into a position where they could trade up, unlocking inventory that is disproportionately entry-level. This would help to alleviate supply conditions at the lower end, while providing support at the upper end of the market where investors have not been as active.
  • Investors’ share of sales in August, as measured by NAR’s Realtor Confidence Survey, fell from 16% in July to 12%. As investors pull back and inventory comes on line, an opportunity opens for potential owner occupants, a change that could help to stabilize the downward trend in homeownership.

Market Outlook in the Next Six Months for Single Family Homes

Thu, 09/25/2014 - 14:08

REALTORS® who responded to the monthly RCI survey were still generally optimistic about conditions in their local markets for single family homes in the next six months, according to the August REALTORS® Confidence Index Survey.

The map shows by state the outlook of respondents regarding the market for single family homes in the next six months, based on data from the June-August 2014 surveys [1]. Except for a few states (blue), respondents reported strong markets. REALTOR® respondents from Texas and North Dakota, which are experiencing strong economic and employment growth, were the most upbeat.

[1] An index greater than 50 indicates that the number of respondents who had a “strong” outlook outnumbered the respondents who had a “weak” outlook for the next 12 months. The higher the index, the more respondents there are with “strong outlook” who outnumber those who view market conditions to be “weak” in the next 12 months. Three months of data are used to generate enough data points for all states.

Latest Trend in Repeat Price Index

Thu, 09/25/2014 - 13:25
  • Home prices appreciated 4.4 percent on average across the country. This increase reflects a genuine price growth for a typical home as it reflects a constant quality repeat-price measurement. Such a gain would translate into about $900 billion in wealth gain for property owners in the past 12 months.
  • Specifically, in the 12 months prior to the July figures, the FHFA home price index rose 4.4 percent. Though an increase, this latest gain is softer. The increases had been 7 to 8 percent in recent prior months. But moderating price growth should be viewed as a welcoming trend for longer-term sustainable health since wages and incomes have not gained much.
  • This repeat price index provides a better measure of true home price appreciation then the median price. That’s because if only larger expensive homes get sold then the median price will get a boost, though not necessarily due to price appreciation of homes. But the repeat price index computes appreciation by examining the same property after it gets transacted twice and examining the price change over that time. And FHFA, a government agency, does that by reviewing Fannie- and Freddie-backed mortgages along with their corresponding home values.
  • From the low point in 2010, the repeat price index has recovered 18 percent. It is now off by only 6 percent from the past peak.
  • All regions of the country are experiencing price gains. But the New England states are recovering at the slowest pace. Home prices in the West South Central region (Arkansas, Louisiana, Oklahoma, and Texas) are doing the best and have been setting new highs with each passing month.
  • An influx of new people to a city can greatly boost home values. Austin, TX has consistently seen more people come to the city over the past 25 years, though not sure if they are all of the “weird” type the city prides itself in welcoming. Due to the influx, Austin did not even experience a price drop during the Great Recession and prices have steadily marched upwards.
  • Home prices in Geneva spiked during the times of European religious wars as the followers of John Calvin flocked to the city. A sudden housing shortage led to multiple bidding. Though no data are present, it is likely that home prices in Baghdad spiked during years when the city’s House of Wisdom was the top learning center of the world and drew many scholars. Algebra, astronomy, and the very erotic stories of 1001 Arabian Nights were the outcomes of that age. The ancient Greek plays were preserved in Baghdad when books were getting burned in Europe. How times have changed.

Unemployment Insurance Claims Below 300K Benchmark for Week of Sept 20

Thu, 09/25/2014 - 11:16
  • Initial claims for unemployment insurance filed in the week ended September 20 increased slightly to 293,000. The increase of 12,000 can be considered as normal volatility and does not fully wipe out the gains of the previous week, when claims fell by 35,000. Overall, claims have been on the downtrend in September, averaging 298,500 for the last four weeks, which is below the benchmark of 300,000 that most analysts consider as an indicator of 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 September 13, there were 2.4 million claiming unemployment insurance, down from about 6.6 million at the height of the housing crisis in 2009.
  • Overall, the insurance claims data indicates an improving job market in September and portends a continuing decline in the unemployment rate. 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 existing home sales in 2014.

REALTORS®’ Confidence Held Steady in August 2014

Wed, 09/24/2014 - 20:30

The assessment of REALTORS® about their local real estate markets was broadly unchanged in August 2014 compared to July 2014, according to data from the August REALTORS® Confidence Index Survey.

In the single family market, the REALTORS® Confidence Index – Current Conditions for single family homes stayed at 60, which indicates that there were more respondents who viewed their markets as “strong” compared to those who viewed them as “weak.” [1] There were reports that in some areas market activity fell in August, which respondents attributed to seasonal factors such as school openings. Inventory was reported to be improving although still generally tight, especially for “affordable” homes. Obtaining credit was the main concern reported by REALTORS®.

The indexes for townhouses/duplexes and condominiums continued to be generally weak with the indexes below 50. REALTORS® have reported that the condominium market has not recovered as strongly as single family homes because of FHA financing and occupancy regulations.

[1] An index of 50 delineates “moderate” conditions and indicates a balance of respondents having “weak”(index=0) and “strong” (index=100) expectations or all respondents having moderate (=50) expectations. The index is calculated as a weighted average using the share of respondents for each index as weights. The index is not adjusted for seasonality effects.

Latest Mortgage Applications Data

Wed, 09/24/2014 - 14:39
  • Seasonally adjusted applications to purchase homes fell 0.3% for the week ending September 19th, a sideways move from the prior week, but steady relative to a soft August. The purchase index is 15.6% lower than the same time period in 2013. Purchase application volumes have been weighed down this year by credit overlays, regulatory constriction and the high cash share of purchases.

  • The average rate for a 30-year fixed rate mortgage as reported by the Mortgage Bankers Association rose to 4.39%, the highest level since the week ending May 9th. The average rate a year ago this week was 4.62%.
  • Conventional applications led this week’s decline, while applications through government programs rose. Both programs fell sharply in mid-July and muddled through August.
  • However, contracts for new home sales surged 18.0% in August relative to July. The strongest gains were in the West and Northeast, which jumped 50% and 29.2%, respectively, while the South rose 7.8% and the Midwest was flat. The summer moderation in rates combined with sustained interest in owning appears to be driving this trend.
  • New sales only account for roughly 11% of total sales, so the August contracts figure for new sales trend would have a muted impact on mortgage applications. However, the share of cash existing purchases fell from 29% to 23% from July to August, which would imply some lift to applications in July that may have reversed in August.
  • The median price for a new home under contract rose 8.0% over the 12-month period ending in August at $275,600. The median existing home price was 20.0% lower at $220,600, roughly double the historical average spread of 10.8%, suggesting that existing homes remain a bargain by historical standards.
  • This week’s reading suggests a solid improvement in new sales which will reduce inventories relative to demand heading into the fall. It also runs counter to stories of a disinterested or burdened consumer. Tight inventories of new homes will sustain price growth there and on the existing side, helping underwater owners, and boosting both buyer and seller confidence.

REALTORS® Confidence Index Survey: August 2014 Survey Highlights

Tue, 09/23/2014 - 13:22

REALTORS’® assessments of real estate market conditions in August 2014 and the outlook for the next six months were essentially unchanged from the July 2014 survey, according to data from the August 2014 REALTORS® Confidence Index Survey.

There were reports that in some areas, market activity fell in August due to the school opening season. Supply constraints were reported to be easing in more states than reported previously (in AZ, CA, DE, FL, GA, IN, ID, MD, ME, MI, MN, NC, NV, NY, TX, VA, WI), although inventory was still generally tight especially for “affordable” homes.

Under tight credit conditions, purchases by first-time buyers accounted for about the same share of the market as previously. Given the robust price recovery and fewer distressed properties for sale, the share of purchases for investment purposes decreased significantly. As always, local conditions vary from market to market.

INTERACTIVE MAPS: Median Age of Home Buyers (2003-2013)

Tue, 09/23/2014 - 10:17

The median age of First-Time Home Buyers was 31 years old in 2013, but it differs slightly each year. The maps below show the median age of home buyers at the state-level for the past decade (2003-2013). There is an obvious increase in the median age since 2003, specifically for 2006 and beyond. In 2011, the median age of home buyers reached its highest value. In addition, First-Time Home Buyers exhibit greater stability in median age than Repeat Home Buyers.

At the state-level, here are some highlights for the median age of each type of home buyer:

All Home Buyers:

- Pennsylvania (2003) and Michigan (2008) had the lowest median age, 29 years old. On the contrary, Oklahoma (2008), Arizona (2013) and Florida (2013) had the highest median age, which was 55 years and over.

- Maine, Illinois, Minnesota and Virginia show stability in the median age of all home buyers across the years. Idaho, Arizona, Indiana and New Mexico experienced the greatest variations in the median age. For instance, Arizona’s median age for all home buyers in 2005 was 34 years old while last year it increased to 56 years old.

First-Time Home Buyers:

- Oklahoma and North Dakota had the lowest median age for First-Time Home Buyers, 25 years old in 2007 and 2010, respectively. In contrast, Mississippi’s median age was 46 years old in 2012.

-  Indiana, Illinois and Wisconsin exhibit stability in median age over the years while Nevada and Texas have a fluctuating trend in the median age for First-Time Home Buyers.

Repeat Home Buyers:

- Arkansas and Utah had the lowest median age, 30 years old in 2004. Conversely, Nevada’s median age reached the highest value in 2013 and 2011 (62 and 63 years old, respectively).

-Hawaii shows stability in the median age of repeat home buyers while Idaho, Utah and Nevada exhibited the greatest variations. For instance, Idaho’s median age was 31 years old in 2004 while last year it was 59 years old.

Next Release:

The 2014 NAR Profile of Home Buyers and Sellers will be released in early November, at which time we will look for any fresh trends in the data.

Methodology:

Data used was from the Profile of Home Buyers and Sellers (for the period 2003-2013). 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). The states with no available data are colored in gray.

Learn About Tableau

Financial Reform and Monetary Policy in the Wake of the Global Financial Crisis [REALTOR® University Speaker Series]

Mon, 09/22/2014 - 09:52

Presentation by Dr. Anthony Elson at the REALTOR® University Lecture Series
Summary by Jed Smith, Managing Director, Quantitative Research

The REALTOR® University Brown Bag monthly lecture series features presentations by leading economists, analysts, and social scientists on evolving national and regional issues of interest to REALTORS®. The objective is to highlight a diversity of viewpoints in terms of thought-leadership, recognizing that there will be a variety of possibly conflicting ideas and objectives presented. The talks are for informational purposes and may be at variance with some NAR positions.

Dr. Anthony Elson has held senior positions with the International Monetary Fund, has worked with the World Bank in the evaluation of the Bank’s analytical and advisory service to member countries, and has been a professorial lecturer at the Johns Hopkins School of Advanced International Studies and a visiting lecturer in the program in International Development Policy at the Duke University Center for International Development.

Dr. Elson discussed the financial factors that preceded the global financial crisis: bank finance intimately connected with housing bubbles, “originate to hold” converted to “originate to distribute” with Mortgage Backed Securitization, and a shadow banking system outside the scope of regulation.

He indicated that the subprime crisis in the U.S. became global, through the interconnectedness of financial institutions, reliance on leverage, and lax regulation.

According to Dr. Elson, necessary reforms of the financial system include increased capital requirements, stress tests and intrusive supervision, and Orderly Liquidation Authority.

Dr. Elson’s talk is of significance to REALTORS®, for home sales are highly dependent on financial markets. Both the talk and slides are available at realtor.org. 

Latest Data on International Trade and International Homebuyers

Fri, 09/19/2014 - 15:32
  • Both imports and exports are rising much faster than the broader economy. That means more companies are seeing faster sales growth to foreign buyers than to U.S. domestic buyers. A greater interaction with foreign economies, in turn, will mean increased demand for U.S. real estate by foreigners.
  • Imports have been rising at 9 percent a year and exports at 10 percent in recent years. Though growth rates did slow to around a 4 percent annualized pace in recent months, they still easily outpace the broader GDP economic growth. Most companies still do the bulk of their business with domestic clients, but the growth opportunities are clearly occurring on the international side. There will be more Canadian and German workers, for example, here in the U.S. to help facilitate business and, conversely, there will be more American workers living abroad. Automatically these people in new locations will need local housing.
  • Some service items are part of international trade. A foreign student studying here and paying tuition is counted as U.S. exports. A Brit getting a medical surgery in the U.S. is also counted. That partly explains why there are Chinese condo purchasers in college towns and Brits living in Florida.
  • NAR estimated home sales to international clients rose 35 percent in the 12-month period ending in March 2014 from the prior year. For comparison, the overall existing home sales over the same period rose by only 6 percent. The domestic market is still much larger, but the growth is coming from foreign buyers.
  • Given that Canada and China have been the two major countries with whom the U.S. trades, the home buying by foreigners were the strongest from Canada and China – even though a good portion of real estate purchases may have been for non-business reasons, such as for vacation and investment purposes.
  • Many countries consolidated in the past to help move goods freely without tariffs, or for strengthening defensive forces against outsiders. But there appears to be a growing desire for separation and secession in many parts of the world since free trade agreements can be made without a formal union of governmental unions. It’s worth noting that Admiral Horatio Nelson stands on a tall column overlooking the city of London to remind people of the importance of the common benefit of being united as Great Britain (including Scotland) in preventing Napoleon from invading the island. For a different reason, on this side of the Atlantic, John Calhoun stands on a tall column overlooking the city of Charleston, SC, to remind the locals of the importance of state rights (to nullify federal laws). That is why SC politicians tend to be more of a rambunctious sort and always appear to be thinking of secession.

Homeowner Equity as a Share of the Value of Real Estate

Fri, 09/19/2014 - 08:21

Homeowner Equity as a Share of the Value of Real Estate could normalize by late 2015 – early 2018.

  • After 2 years of gains exceeding 5% per quarter, growth in household owners’ equity rose by a much more modest $177 billion (1.7 percent) from last quarter to a level of $10.8 trillion.  This is up $4.7 trillion from the trough during the housing crisis or roughly $53,000 per property[1].  Home owner equity is on the rebound as a result of construction, rising prices, and a continued decline in mortgages outstanding according to second quarter data from the Federal Reserve’s Flow of Funds.
  • Mortgage debt outstanding fell by less than $10 billion while the market value of household real estate rose $170 billion.  The total value of household real estate reached $20.2 trillion in the second quarter.
  • One way of judging whether we are back to a more “normal” market would be to look at the equity that is accumulated in real estate relative to the value of the real estate.  In total, home owners now have equity equal to slightly more than half of the total value of household real estate compared to as little as 37 percent in the first and second quarters of 2009.
  • The chart below shows that the share of equity was roughly stable at just less than 60 percent from 1995 to 2005.  Holding the level of mortgage debt outstanding constant, the value of household real estate would need to grow to about $23 trillion to reach that share of equity, or roughly a further 13 percent gain from its current level.
  • At the growth rate seen in 2014Q2, it would take until early 2018 to fully recover the share of equity in real estate, but if the growth rate is more rapid as was seen earlier in the year, the share of equity would be fully recovered by late next year (2015).

[1] The Fed indicates that this includes owner-occupied housing, second homes that are not rented, vacant land, and vacant homes for sale.  Using the Census Housing Vacancy Survey, housing units meeting this description have totaled roughly 88 million for the past 8 years.

Mixed Signals as the Market Wades into Non-QM

Thu, 09/18/2014 - 11:56

Six months after the implementation of the QM/ATR rule, the market appears to be shifting modestly.  In the 3rd Survey of Mortgage Originators, which covers lending in the 2nd quarter of 2014, participants were asked about their willingness to delve into the non-QM market as well as other current issues including the FHA’s HAWK program, GSE loan level pricing adjustments, and FICO’s new scoring model.  Another change in this survey is an expansion of the respondent panel to include members of Community Mortgage Lenders of America.

Highlights of the Survey

  • The non-QM share of originations more than tripled in the 2nd quarter to an originations-weighted 2.6% from 0.8% in the 1st quarter.  Rebuttable presumption expanded as well to 12.8% from 9.8% over this same time frame.
  • Respondents were less sanguine about their comfort with the QM/ATR rules in the 2nd quarter, with just 61.9% indicating that they had fully adapted compared to 73.7% in the 1st quarter.
  • The share of lenders offering rebuttable presumption and non-QM products in the 2nd quarter improved, but willingness to originate non-QM and rebuttable presumption mortgages fell from the 1st quarter to the 2nd quarter.  Lenders were more willing to originate prime mortgages, though.
  • Over the next 6 months, nearly half of respondents expected improved access to credit for prime borrowers with FICO scores between 620 and 720.  However, the vast majority expected no change for rebuttable presumption and non-QM borrowers.  Respondents expect improved investor demand for all mortgage types
  • Half of respondents indicated that the premium reductions under the FHA’s HAWK program were insufficient or the education fees were too high, while 55% indicated that the program would not expand credit.
  • Only 15% of respondents felt that FHA’s program of early reviews would help to alleviate overlays.
  • However, 85% of respondents indicated that a reduction of LLPAs directed at high LTV and low FICO borrowers would stimulate access to credit.
  • Finally, 60% of respondents indicated that the Fair Isaac Company’s new FICO 9 scoring model would help to stimulate access to credit.  Only 35% expected no change as they either defer to their investors’ or the GSEs’ scoring models.

In this new regulatory environment, it is important for REALTORS to have a broad lender-referral network that includes originators who specialize in non-QM, rebuttable presumption, and subprime borrowers.  A deep network of lenders will help to source funding for those clients with special requirements.

Latest Housing Starts – August 2014

Thu, 09/18/2014 - 11:14
  • Disappointingly, housing starts fell measurably in August. Homebuilder confidence had risen to a 9-year high but that is not being matched by what is actually happening on the ground. The current pace of new home construction is woefully low – only about 60 percent of the norm. If new home construction activity does not pick up sizably in the upcoming months then the housing market will again encounter an inventory shortage when the spring buying season returns next year.
  • Housing starts in August were 956,000, down 14 percent from July. It is nowhere close to the 50-year average of 1.5 million a year. A large dip in multifamily starts was the reason for the overall decline. Single-family housing starts were steady but well below normal.
  • Though inventory of homes for sale and the related months’ supply have been rising recently, the situation could revert back to tight inventory conditions by early next year if housing starts do not pick up. Ideally, housing starts should rise by 50 percent soon.
  • The overall inventory needs to rise further to smooth out the market. That’s because consumers like to view 10 to 15 homes before deciding. Too few inventory leads to unenthusiastic home buyers and fewer home sales.
  • Two big reasons for the persistent slow recovery in new home construction are the difficulty of obtaining construction loans and the construction labor shortage. Construction jobs pay good salaries yet builders are having difficulty finding skilled workers. For comparison, the average construction worker’s weekly earning was $1,044 while that of retail trade workers was $534.
  • As mentioned above the long-term average for housing starts is 1.5 million per year. There is an economic logic behind the number. Generally there are about 1.2 million new households formed each year in the U.S. In addition, about 300,000 uninhabitable homes are demolished every year. Therefore, 1.5 million new housing units are needed to accommodate new households and to replace demolished units.
  • Rarely does a well functioning home get demolished. Once in Finland, however, many good homes were strategically burned to the ground when the Soviet Army invaded the country in deep winter. What was surprising to the Finnish soldiers who arrived with matches was that many homeowners had left their homes in sparklingly clean conditions. When asked why, the homeowners said they wanted to honor the last visitors to their homes: the Finnish soldiers. Economic logic would say the cleaning of the homes was wasted energy, but human emotional logic says otherwise. The homeowners wanted the very last image of their homes to be a positive and lasting one. That is, the last impression is just as important as the first impression.

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