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Economist's Outlook

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Updated: 8 hours 55 min ago

How REALTORS® Get Leads on International Buyers

Mon, 06/29/2015 - 11:09

Contacts and referrals were the most important source of leads of purchases by international buyers, accounting for about 56 percent of responses, according to NAR’s 2015 Profile of Home Buying Activity of International Clients.  Website/online listings accounted for 20 percent. Among those who found their client through online sources, approximately 37 percent of the respondents reported that the agent/firm/franchise’s website was client’s source of information. Most transactions generally have two sides.  On the buyer’s side, REALTORS® frequently have a common language and cultural heritage with the client; on the seller’s side a match-up between the client and the REALTOR® tends to be more random.

Mortgage Application Data (June 24th, 2015)

Fri, 06/26/2015 - 13:51

This blog post was written by La Shawn Skeete. La Shawn is a Summer Research Intern, and is currently studying at The University of Maryland, College Park pursuing a degree in Economics.

  •  Seasonally adjusted mortgage loan applications increased 1.6% from the week ending June 12th and 10.5% when compared to this time last year.
  • Seasonally adjusted applications for purchase increased slightly over the week by 1.2% and are 1.0% higher than the 4-week average and 17.8% higher than this time last year.
  • Applications for refinance also increased over the week by 1.9% and volumes are higher than this time last year by 4.3%. Government refinance applications are notably higher than this time last year (34.3%); likely due to the FHA fee reduction in late January 2015.
  • 30-year FRM rates remain affordable at 4.19%, a 3 basis points decrease over the week, and less than in 2014 by 14 basis points. Fixed rate mortgage applications volumes are higher since last year by 11.4%, while adjustable rate mortgage applications are lower.

  • Low housing supply continues to obstruct growth in the housing market; current unsold inventory will be depleted in 5.1 months at the current sales pace.
  • Low inventory also means near double digit appreciation in home values in many markets.

Mortgage application data serves as an indicator to homes sales and other home related expenditures such as appliances and furniture.

State Unemployment Claims Decrease in Most States

Fri, 06/26/2015 - 13:20

This blog post was written by Erin Fitzpatrick. Erin is a Summer Research Intern and is currently studying at George Washington University pursuing a B.S. in Economics and a B.A. in Political Science.

  • Initial claims for unemployment insurance increased slightly in the week ending June 20 by 3,000. However, the 4-week moving average has continued to decrease to 273,750. Analysts consider a level below 300,000 to be indicative of a healthy job market marked by fewer layoffs and greater job stability.
  • State-level data from January-May 2015 shows that claims have dropped significantly across most states compared to the same time frame last year. Claims have only increased in Texas (37,092), Louisiana (9,703), Oklahoma (8,465), North Dakota (4,726), West Virginia (3,660), and Wyoming (2,248). The increase in claims is likely associated with the drop in oil prices, given the significance of the oil-gas industry in these states.
  • With the overall improvement in the job market, NAR expects over 2 million net new jobs in 2015 and 5.3 million in existing home sales.

In What States Did Properties Sell Quickly in March-May 2015?

Fri, 06/26/2015 - 13:05

In the monthly REALTORS® Confidence Index Survey, NAR asks REALTORS® “For the last house that you closed in the past month, how long was it on the market from listing time to the time the seller accepted the buyer’s offer?” . The map below shows the median days on market of respondents about their sales from March-May 2015.

Properties typically sold within 30 days in Colorado, the District of Columbia, California, Texas, Oregon, Washington, Idaho, North Dakota, Kansas, and Texas (red).  On the other hand, properties were typically on the market for more than 90 days in Maine, New Hampshire, West Virginia, Alabama, Mississippi, and Arkansas (green). All real estate is local. State-level data is provided for REALTORS® who may want to compare local markets against the state and national summary.

Meeting the International Client’s Needs

Fri, 06/26/2015 - 11:08

Based on survey information, not all client interactions lead to a purchase of an existing home.  About 43 percent of REALTORS® who had international clients reported they had at least one client who did not purchase a property, according to NAR’s 2015 Profile of Home Buying Activity of International Clients.  “Could not find property”, “could not obtain financing”, “cost of property”, and “other reasons” accounted for many of the cases.

For example, “Could not find property” accounted for 17 percent of the cases of clients not making a purchase and may represent a case in which the REALTOR® had trouble connecting with the needs, desires, culture, or objectives of the potential purchaser.  REALTORS® have reported that meeting the needs of the international customer frequently requires an additional level of skills beyond those normally used by REALTORS®, i.e., special training regarding cultural issues, the informational needs of individuals not familiar with U.S. practices, and experience with regulations as regarding international purchases.   For example, potential foreign buyers may also be unfamiliar with U.S. practices in regards to condo and other fees and property taxes.

This may be an opportunity for the REALTOR® to educate the potential purchaser and to reduce buyer concerns. NAR can provide extensive information related to facilitating real estate transactions with foreign purchasers.  NAR’s Commercial & Global Services Group has extensive information on the NAR website concerning business practices and approaches for dealing with potential foreign purchasers, including information on the Certified International Property Specialist designation.

Return Buyers Prefer Safe, Affordable Financing

Thu, 06/25/2015 - 14:34

The share of homes purchased by return buyers or “boomerang” buyers, those who formerly short sold a home or were foreclosed on, increased significantly in recent years.  NAR Research estimates that 8% or nearly 350,000 home sales were to return buyers in 2014.  It’s important to note though, that the majority of these borrowers according to NAR Research were likely of prime quality before entering foreclosure and that they prefer safe, affordable financing for their return purchase.

 

According to NAR’s 2014 Profile of Home Buyers and Sellers, 41% of return buyers financed their home with FHA backing, while 30% used conventional financing like Fannie Mae or Freddie Mac and another 25% used VA.  The VA and FHA allow for shorter time-out periods when a buyer is not eligible for financing and for smaller down payments which likely accounts for their large share of return buyers.  That left just 2% for “other” forms of financing that may include riskier products with high interest rates and fees like non-QM and subprime loans…roughly the same share of non-QM loans as for the full market.  However, respondents indicated in the 6th Survey of Mortgage Originators that both lenders and investors remain pensive about non-QM loans, favoring higher quality and holding them in portfolio limiting the risk to the market.

 

Return buyers also favor stable products for their return purchase.  A 92% majority of return buyers used a fixed rate mortgage product in 2014, while 5% used a mortgage with a fixed period followed by an adjustable rate.  Only 1% of return buyers used a fully adjustable product.

Nearly 9.3 million former homeowners went through a foreclosure or short sold between 2006 and 2014.  Many have returned, but many more will come over the next few years.  Luckily, there is safe, sound financing waiting for these credit-worthy borrowers.

REALTORS® Outlook in the Next Six Months, By State

Thu, 06/25/2015 - 10:44

In May 2015, REALTORS® were confident about the outlook in their local markets in the next six months, according to the May 2015 REALTORS® Confidence Index Survey.[1] This report is based on the responses of 3,805 REALTORS®.

Sustained job creation at a pace of 220,000 jobs per month in 2015, lower FHA monthly mortgage insurance premium rates (resulting in a 0.5 percentage point reduction since January 2015), and the availability of three percent downpayment for loans backed by Fannie Mae and Freddie Mac since early this year are likely underpinning the improved market confidence.

The following maps show the REALTOR® Confidence Index-Six-Month-Outlook across property types by state.[2] In the case of single family homes, all states registered an index greater than 50 for the third month in a row, which means that the number of respondents who had a “strong” outlook outnumbered those with a “weak” outlook. Despite the slump in oil prices, REALTORS® generally expect the real estate market to be “strong” in North Dakota, Texas, and Oklahoma.

In the case of townhomes and condominiums, confidence is most upbeat in Colorado. Homebuying activity for condos and townhomes is also generally strong in California, Oregon, and Washington where a technology boom is fueling demand. REALTORS® are also broadly upbeat about their local markets in Texas, Florida, New York, and Massachusetts. Homebuying is expected to be generally weak in other states. REALTORS® have reported that FHA’s and the GSE’s (Fannie Mae and Freddie Mac) financing eligibility regulations make condominium financing difficult to obtain.[3]

[1] Respondents were asked “What are your expectations for the housing market over the next six months compared to the current state of the market in the neighborhood(s) or area(s) where you make most of your sales?”

[2]  The market outlook for each state is based on data for the last three months to increase the observations for each state. Small states such as AK, ND, SD, MT, VT, WY, WV, DE, and the D.C. may have less than 30 observations.

[3] These regulations pertain to ownership occupancy requirements, delinquent dues, project approval process, and use for commercial space. Read the Statement of NAR Submitted for the Record to the Senate Committee Housing and Banking Affairs on December 9, 2014 at http://www.ksefocus.com/billdatabase/clientfiles/172/1/2180.pdf

The Chinese Existing Home Buyer

Wed, 06/24/2015 - 11:43

Over the 12 months ending March 2015, buyers from China purchased U.S. properties estimated at $28.6 billion in total value, an increase from $22 billion a year ago, based on information from NAR’s 2015 Profile of Home Buying Activity of International Clients. Purchases by Chinese buyers accounted for approximately 28 percent of total international sales in dollar volume.  About half of Chinese purchasers were resident buyers. About 35 percent of reported purchases by Chinese buyers were in California. Other major destinations included Washington, New York, Massachusetts, Illinois, and Texas.  About 39 percent of purchases were for residential purposes, and another 7 percent of purchases were for residences for students while studying in the U.S.  Approximately 86 percent of properties purchased were in the central city or suburban area. Approximately 62 percent of purchases were single family detached homes. On average, Chinese buyers purchased a property valued at $831,761, the highest among the top 5 buyers. Approximately 69 percent of purchases were reported as all-cash purchases.

FHFA Housing Price Index

Wed, 06/24/2015 - 11:08
  • FHFA released their housing price index data for April which showed that house prices rose 0.3 percent from March on a seasonally adjusted basis.
  • That rate of growth is the same that FHFA reported in March. If that rate were to continue for 12 months, it would translate into a very normal annual price growth of 3.7 percent.
  • Because month to month data can be somewhat volatile and we have recently had some very strong months of growth, the year over year data shows that home prices were up by 5.3 percent according to the FHFA.  This is somewhat similar to the 8.5 percent change reported in NAR’s median price in April.
  • Both FHFA and NAR data showed that the April year over year growth in prices was higher than March growth, though the FHFA measured somewhat less acceleration than NAR.
  • Monday, NAR reported May data that showed a slightly slower 7.9 percent year over year growth, however, both April and May rates of price growth regardless of source are stronger than would be considered normal (4 percent).
  • As long as tight housing inventory persists, we expect to see upward pressure on home prices.  Recent data on new home sales show that months supply—a measure of inventory relative to sales demand—drifted lower each month from March to May.
  • In addition to national data, FHFA releases data at the Census division level.  The most robust gains in FHFA data from a year ago were still in the West.  NAR data showed the strongest April growth in the Midwest with the South and West following closely behind.
  • According to FHFA year over year prices rose 7.5 percent in the Pacific division which includes Hawaii, Alaska, Washington, Oregon, and California and 7.0 percent in the Mountain division which includes Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona, and New Mexico.  Divisions that make up the South region had growth in excess of 6.0 percent from a year ago.
  • NAR and FHFA data both showed the smallest price gains from April one year ago in the Northeast.  NAR showed that prices grew by 3.6 percent in the Northeast and FHFA showed that prices rose 3.7 percent in New England (Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut) and 2.3 percent in the Middle Atlantic states (New York, New Jersey, Pennsylvania) from one year ago.
  • NAR reports the median price of all homes that have sold while FHFA reports the results of a weighted repeat-sales index.  For this reason, the trends in the NAR median price can differ from the trends in the weighted repeat sales index—which computes price change based on repeat sales of the same property, but they typically track very closely and the timeliness of the NAR median price data makes it a good early indicator of price conditions in the housing market.
  • FHFA sources data primarily from Fannie and Freddie mortgages, transactions using prime conventional financing, and misses out on cash transactions as well as jumbo, subprime, and government backed transactions such as those using VA or FHA financing while NAR uses data reported from Realtor-assisted transactions in the MLS.

45 Percent of Properties Were on the Market for Less than a Month in May 2015

Tue, 06/23/2015 - 15:31

Approximately 45 percent of properties were on the market for less than a month when sold (46 percent in April; 41 percent in May 2014), according to the May 2015 REALTORS® Confidence Index Survey.

With tight inventory, properties that closed in May 2015 were typically on the market for a relatively short period of time at 40 days, about the same days as in May but shorter compared to last year’s (39 days in April 2015; 47 days in May 2014).[1]  Short sales were on the market for the longest time at 131 days, while foreclosed properties typically stayed on the market at 56 days. Non-distressed properties were on the market at 38 days.

[1] Respondents were asked “For the last house that you closed in the past month, how long was it on the market from listing time to the time the seller accepted the buyer’s offer?” The median days on market is the number of days such that half of the properties were on the market for those days and another half of properties were on the market for more than those days.

Latest New Home Sales (May 2015)

Tue, 06/23/2015 - 11:05
  • New home sales increased for the second straight month.  Homebuilders are now focusing on lower-priced and smaller-sized homes as evidenced by a lower median price.  But the supply is still short of demand.  Expect general push up to home prices in the upcoming months.
  • Construction of new homes was slightly below last year’s level.  But at $282,000, the new home carries a price premium of 23 percent above existing homes price.
  • Specifically, new home sales rose 2.2 percent in May from one year ago after having risen a solid 8 percent in April.  The latest pace of 546,000 annualized new home sales is the highest monthly tally since early 2008.
  • On average it took 3.9 months to find a buyer after constructing a spec home.  Moreover the all-important months-supply of inventory is at 4.5 months, implying tight market conditions.  The median price declined and was 1 percent below last year’s level.  This implies that builders are not cutting prices, but rather building smaller-sized and more affordable homes, possibly in light of the rise in first-time homebuyers.
  • The gap between new home price and existing home price still remains very wide.  It implies that existing homes provide better relative bargain in relation to newly constructed homes.
  • Even though new home sales are rising strongly in percentage terms, they are only about the half the activity as during the bubble years nearly a decade ago.  This implies, first, that today’s strong activity is not likely to be a bubble.  Second, there is more room to grow.
  • For the year as a whole, new home sales are projected to rise by about 30 percent in 2015.  It’s a good time to be a homebuilder.
  • As an aside, glass and windows are requested more often in the new home construction.  Long ago glass, because of impure materials, was never visually clear and people applied their creative skills in putting up stained glasses.  Also there was tax on the number of windows so many homes from the medieval period were dark with few natural lights.  Today, homes and condominiums have much glass and light, thereby providing the pleasant indoor-outdoor experience instantly and constantly.

Home Sales to Foreigners—Down In Number but Up in Value

Mon, 06/22/2015 - 15:41

Existing-home sales (EHS) to foreign buyers were approximately 8 percent of the total U.S. existing-home sales market of $ 1.3 trillion for the 12 months ending March 2015 according to NAR’s recently released 2015 Profile of Home Buying Activity of International Clients. The reported 209,000 transactions—approximately 4 percent of total existing-home sales—were down from the 232,600 delineated in the previous report.  However, foreign buyers are an upscale group—purchasing homes well above the average market price.  During 2014/15 the average price foreign clients paid for a house was $500,000, compared to the overall U.S. average house price of $256,000.  Approximately $54.5 billion of sales was attributed to non-resident foreigners, with resident foreigners accounting for $49.4 billion of sales.

Number of Unemployment Claims Decreases as of June 6

Fri, 06/19/2015 - 14:07

This blog post was written by Erin Fitzpatrick. Erin is a Summer Research Intern and is currently studying at George Washington University pursuing a B.S. in Economics and a B.A. in Political Science.

  • Continuing claims for unemployment insurance filed during the week ending June 6 decreased from the previous week’s level to 2.2 million, a decrease of 50,000 claims from the previous week’s level and below the previous year’s level as well of 2.6 million. The data is consistent with other labor market indicators that show an improving job market. The number of people who claim unemployment insurance on a continuing basis has been on the downtrend from its peak of about 6.5 million in 2009.  Fewer continuing claims indicate fewer layoffs and that unemployed workers are re-entering the job market. Data for continuous claims lags a week.

  • For the week ending June 6, the largest increase in initial claims occurred in California (10,917) but this comes after a large decrease in claims the previous week (-7,891). This was followed by Pennsylvania (4,130), Texas (3,489), Illinois (3,008), and Florida (2,502). The largest decreases occurred in Missouri (-827), Nebraska (-195), New Mexico (-177), Kansas (-171), and North Dakota (-149). 

  • Claims for unemployment insurance have decreased as job openings have increased. The number of job openings increased to 5.4 million in April 2015, the highest level since job openings peaked to 4.5 million in 2006.  Given the continued improvement in the job market, NAR expects 5.2 million of existing home sales in 2015, up from 4.9 million in 2014.

Mortgage Application Data (June 17th, 2015)

Fri, 06/19/2015 - 12:17

This blog post was written by La Shawn Skeete. La Shawn is a Summer Research Intern and is currently studying at The University of Maryland, College Park pursuing a degree in Economics.

  • Seasonally adjusted mortgage loan applications decreased 5.5% from the week ending June 5th thus balancing that weeks’ swell due to Memorial Day. There were 7.7% more applications made when compared to this time last year.
  • Seasonally adjusted applications for purchase decreased slightly over the week by 4.2% but application volumes are still 0.6% higher than the 4-week average and 15.0% higher than this time last year.
  • Applications for refinance also decreased over the week by 6.9% and volumes are higher than this time last year by 1.6%. Government refinance applications are notably higher than this time last year (27.5%); likely due to the FHA fee reduction in late January 2015.
  • 30-year FRM rates increased 5 basis points over the week to 4.22% and remain less than they were in 2014 by 14 basis points. Fixed rate mortgage applications volumes are also higher since this time last year while adjustable rate mortgage applications are lower.
  • The FOMC meets today and while they are not expected to alter interest rates, uncertainty around this event may still cause fluctuations in long-term rates.

  • Single family housing starts fell 5.4% from April to May to total 680,000. However, this figure is 6.8% higher than 2014.
  • Buyer foot traffic increased 13.1% from April to May 2015.
  • An expansion of supply and moderation of price growth coupled with underlying demand could help to sustain sales momentum in the face of moderate increases in rates.

Mortgage application data serve as an indicator to homes sales and other home related expenditures such as appliances and furniture.

Foot Traffic Points to Summer Strength

Fri, 06/19/2015 - 09:17

Foot traffic is a strong indicator of the demand for housing and is a leading indicator of home sales.  Every month, NAR publishes data on foot traffic as measured by the number of times SentriLock lock boxes are opened.  The data for May was the 6th consecutive month of expansion in the national foot traffic index.  Local trends bode well also with the vast majority in our sub-market panel showing expansion.

Despite a steady upward movement in mortgage rates in late April and May, demand for housing remains strong.  The diffusion index for foot traffic eased 1.8 to 59.0, 13.8 points higher than the same time in 2014.  A measure above the “50” mark indicates that more than half of the roughly 200 markets in this panel had stronger foot traffic in May of 2015 than the same month a year earlier.  But this index does not tell us how much stronger traffic is.

 

At a local level, NAR Research tracks a panel of 14 cities.  With this data, one can assess both the direction of the trend in foot traffic (up/down) and a rough magnitude of the change.  The table below depicts the change in foot traffic this year relative to the same time a year earlier, which eliminates the impact of seasonal variation:

  • Relative to last year, 10 markets expanded, while Salem, Boulder, Kingston, and Honolulu contracted.
  • With the exception of Salem, all of the markets that declined relative to last year, improved relative to last month’s year-over-year measure (not pictured).
  • The strongest improvements in traffic relative to last year were in San Diego, Iowa City, and El Paso.

While foot traffic is falling in some markets, that is not necessarily an indication of a decline in demand.  After nearly three years of low supply, traffic may fall in certain markets due to lack of opportunities for an open house.

Foot traffic continues to signal a positive summer trend for home sales.  Improvements to economic fundamentals like employment, access and pricing support current shoppers, but rising rates will create a headwind later this year.  Over the long-term, wage growth and expanded supply can help to ameliorate these factors.

Homeowner Equity as a Share of the Value of Real Estate Could Normalize Within the Year

Thu, 06/18/2015 - 15:33

 

  • Just as the rise in home prices had slowed in the middle quarters of 2014, the rise in owners’ equity in real estate slowed.  Now, however, as home prices are accelerating, owners’ equity in real estate is growing at the fastest quarterly rate since 2013.
  • Household owners’ equity—the value of real estate households own less any outstanding mortgage debt—rose by $443 billion (3.9 percent) from 2014Q4 to 2015Q1.  The total value of household equity is now $11.7 trillion or $5.6 trillion higher than the trough during the housing crisis.  This is roughly $63,000 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 first quarter data from the Federal Reserve’s Flow of Funds. Mortgage debt outstanding fell by nearly $33 billion while the market value of household real estate rose $411 billion.
  • The total value of household real estate reached $21.1 trillion, still $1.4 trillion or 6 percent shy of its value in the first quarter of 2006, near the previous value peak[2].
  • One way of judging whether we are back to “normal” 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  (56%) 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 current level of mortgage debt outstanding constant, the value of household real estate would need to grow to about $22.3 trillion to reach that share of equity, or roughly a 6 percent gain from its current level.
  • At the growth rate seen in 2015Q1, the share of equity in real estate would be fully recovered by the end of the year, but if the growth rate slows to what we saw in mid-2014, the share of equity would be fully recovered by mid-2016.

[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. The experience of any particular owner may vary notably from the average.

[2] Because the data is not seasonally adjusted, we have compared first quarter 2015 to the first quarter of 2006 in an attempt to mitigate any seasonal effects.

Latest Consumer Price Inflation (May 2015)

Thu, 06/18/2015 - 09:51
  • There is no inflation in the latest data.  However, prepare for higher inflation and likely higher mortgage rates later in the year because the impact of non-inflationary pressure from low gasoline prices will have mostly dissipated by November.
  •  Specifically, consumer price inflation was unchanged in May over the past 12 months.  The rising prices of food, medical services, apartment rents and many other items were all negated by a deep price dive in gasoline prices, which were 25 percent below last year.
  • Keep in mind that gasoline prices started to decline from November of 2014.  Therefore, by November of this year gasoline prices will no longer show a large plunge.  Consumer prices of all items will then show positive growth – probably in the 3 percent range.  Knowing that long-term interest rates generally follow inflationary trends, one should expect some upward pressures on mortgage rates.
  • One of the key components pointing towards higher inflation is related to rents.  Rents paid by renters continue to remain elevated, rising at 3.5 percent which would be essentially at a 7-year high; while the hypothetical rent a homeowner would pay if they were renting out their home rose by 2.8 percent, which is technically a 7-year high.  In short, housing costs are rising and this will put upward pressure on the overall consumer price inflation in the near future.
  • Home prices are rising at 8 percent in the latest NAR data.  But this is not part of the consumer price inflation since home is considered as an asset.  Stock prices similarly are also not included as part of consumer inflation.  For homeowners with mortgages nearly all have a 30-year fixed rate mortgages so their monthly payments are fixed and not rising.  For one-third of homeowners who have paid off their mortgages, they have zero monthly payments – a goal we should strive towards for our advanced years.
  • As an aside there is “inflation” or “deflation” unrelated to prices.  Given human nature and the forces of market to better satisfy those human desires, countable figures have changed over time.  Today’s students are said to receive “grade inflation” where we now have many high GPA students, but not necessarily more Einsteins.  When Babe Ruth hit an unheard of 29 homeruns in 1919, thereby feverishly exciting the fans, the ball was made lighter for the next season.  The Bambino then knocked 54 balls out of the park in 1920.

Will Setting Clear Rules Help Expand Credit?

Wed, 06/17/2015 - 10:57

When lenders originate a loan, they often sell these loans to investors rather than holding the loans in their portfolios.  These investors set requirements for the loans they will buy and if those requirements are not met, they may force the lender to buy back the loan.  In a similar way, the FHA sets rules for the loans that it insures.  If a lender originates a loan to be insured by the Federal Housing Administration (FHA), but the loan is later found not to comply with the rules, the FHA may ask the lender to indemnify the FHA.  In short, the FHA will not insure the loan and any losses must be covered by the lender.

Since the housing market bottomed, the FHA has increased indemnification requests, while the Department of Justice (DOJ) has sued some lenders for problem loans.  Originators have asserted that fear of indemnifications and DOJ actions have hampered lending to borrowers with lower credit scores and other non-prime factors.

 

More than half of respondents to the 1st quarter Survey of Mortgage Originators indicated that they have been asked to indemnify the FHA for improperly originated loans since 2009 and 40% indicated that this occurred multiple times.  A significant 46.7% of respondents indicated that they were never the subject of an indemnification request.

 

Despite only half of originators having had an indemnification request, two thirds indicated that they had restricted lending to borrowers with FICO scores less than 640 due to the FHA’s policy.

 

Relative to the risk of Fannie Mae or Freddie Mac requesting them to repurchase a loan, 60% of respondents indicated that FHA indemnification was of equal concern while, 20% indicated that it was of greater concern.  However, 6.7% of respondents reported that indemnifications were significantly less of a concern than repurchase risk.

Lenders have been faced with several new regulations in recent years combined with changes and perceived changes in oversight.  Fannie Mae and Freddie Mac made important changes to their representation and warranties framework at the beginning of the year to clarify and to ease the rules of the road for lenders.  The FHA proposed new indemnification rules just a few weeks ago that will hopefully help to clarify indemnification risk for originators.  Clarification will help, but lenders may still wait to see how the DOJ behaves in the future.

How Did Housing Wealth Change at Your Zip Code?

Tue, 06/16/2015 - 10:46

Based on our recent study “Widening Wealth Inequality”, we found that although there are gains in housing wealth in recent years from rising home prices, fewer people benefit because of the decline in the homeownership rate. Hence, wealth inequality increases in the United States.

But how did housing wealth change at a local level between 2011 and 2013? Based on the American Community Survey (5-year estimates of median home value), the visualization below presents estimated housing wealth gains/losses by zip code, metro area and state. The change in wealth includes the change in median home values (2011 – 2013) and an estimate of principal accumulated[1].

Much has changed since 2013.  Nationally, housing prices have risen by about 15 percent since then and much of the increase in home prices has been seen in zip codes that showed large losses as of 2013, as seen below.  Still, this study is useful in showing the geographic distribution of gains, which were generally widespread even after the housing bust, and losses, which like the largest gains were mostly concentrated.  Note, two zip codes form the San Jose metro market made it to the top-10.  At the same time, one zip code from San Jose was in the bottom-10.  Even within a metro market, there appears to be a sizable variation on which zip codes thrive or not.

From a sample of 12,763 zip codes[2], here is a summary of the zip codes with:

a)      Higher gains in housing wealth (2011 – 2013): b)      Higher losses in housing wealth (2011 – 2013):

Check below to see whether your zip code experienced gains or losses in housing wealth for the period 2011-2013:

[1] Principal is estimated using 30 – year mortgage and assuming that the homebuyer finances 80% of a median – priced home.

[2] Zip codes with median home value greater than $1,000,000 and margin of error greater than 10% of the median home value are excluded from the sample.

The Impact of Rising Interest Rates on Home Prices

Tue, 06/16/2015 - 08:01
  • Mortgage rates have been rising and are expected to increase further over the next two years.  Home sales and home prices are generally impacted negatively if mortgage rates were the only things changing.  Fortunately, there are other economic variables along with the fact that consumers are not tapped out to the maximum in borrowing capacity to suggest home prices will not fall.  Prices in fact could grow too fast in one of the scenarios.
  • A simple mortgage calculation shows a loss of about 12 percent in purchasing power from a one-percentage point rise in mortgage rates.  For example, a person taking out a $200,000 using a 30-year fixed rate mortgage at 3.75% rate would have faced $926 monthly payment (just on principal and interest).   At 4.75%, and to keep the same monthly payment, the loan amount has to be cut to $177,500.  The purchasing power has been reduced due to higher rates.
  • If everyone wanted to maintain the same mortgage payment as previously planned then one might see a general decline in home values from rising rates in order to accommodate the lower purchasing power.  It is unlikely to be an instantaneous price change given the stickiness of home prices but can occur over time as sellers find fewer and fewer buyers without a reduction in prices.
  • The real world, however, is such that home buyers generally do not quickly scale down the price points knowing that could mean a different neighborhood than what they had envisioned.  Rather, people find ways to put additional down payment.  Or people stretch their budget and will pay a higher mortgage payment as long as it is manageable.  In the current environment, there appears some room to stretch without getting anywhere near the danger zone.
  • The first graph below shows what a buyer would pay in monthly payment for a median priced home at the prevailing mortgage rates of that time, with a 20 percent down payment.  In the most recent data, it was $840 per month.  This figure essentially matches the average monthly payment since the turn of the century.  With rates rising now that figure is headed up to $920 and possibly $1000 by next year.  But it would still be under the danger condition of $1200 during the period of bubble home prices.
  • There is much talk of stagnant income of the recent times.  But the description reflects after accounting for inflation.  The raw income figures (or as economists would call it the nominal income) has been rising 1.9 percent a year from 2000.  A typical family income was $50,700 in the year 2000.  By 2014, the income has grown to $65,300.  That means, a family is much more easily able to absorb higher monthly mortgage payment today versus in the year 2000.
  • A more relevant metric is not monthly payment but monthly payment in relation to income.  And the bottom chart shows even a greater possibility to absorb higher mortgage rates.  Most recently a typical home buyer was dedicating 15 percent of her income for mortgage principal and interest.  To get us to 20 percent, as had been in the year 2000 when there was no concern about home prices being a bubble, mortgage rates would have to rise to about 5.5%.  The most weekly mortgage data show rates currently at 4.1%.  So there is still a room for rates to rise without damaging housing affordability as compared to historical norms.
  • Aside from the above number crunching exercise there are many other factors that can influence home values in addition to mortgage rates and people’s income.  For example, the London home prices is said to be in housing bubble.  But this talk has been ongoing for what seems to be the past few decades.  Yet, home prices in London continue to rise.  San Francisco home prices are another example.  The commonality of these high priced markets is the lack of new home construction.  Currently in the U.S., there is an inadequate supply of new home construction.  As long as these conditions persist then there is little prospect of home prices tumbling even in a rising interest rate environment.  It’s simple supply and demand.
  • Briefly other factors to suggest home prices would not be impacted from rising mortgage rates are
    • Higher than normal level of all-cash transactions
    • Job creating environment and hence low mortgage default rates and consequently few fresh distressed properties.
    • Large pent-up household formation of many young adults living with parents but just looking ahead to form their own separate households.
    • Very high stock market valuations, where some people can cash-out portions in order to diversify out of the stock market and put funds into real estate.
  • The most important variable for home price growth will be new home construction, provided mortgage rates do not rise too fast too quickly.  With mortgage rates anticipated to rise to 5.5% by the year-end 2016, home prices will likely change as follows:

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