Approximately 32 percent of respondents reported cash sales in April (33 percent in March), according to the latest REALTORS® Confidence Index.  Move-up buyers, investors, buyers of second homes, and foreign clients are more likely to pay cash. Baby boomers with accumulated equity gains are reported as trading down and also likely to pay cash. About 13 percent of reported sales to first-time buyers were cash sales compared to about 70 to 90 percent of buyers of property for investment purposes and international buyers.
 The RCI Survey asks about the most recent sale for the month.
- There was a surge in the number of people filing for mortgages in the first week of June. Applications for a home purchase increased 9.3 percent from the prior week after adjusting for the normal seasonal patterns. Refinance activity jumped 11 percent.
- There have been many anecdotal stories of consumers getting lender pre-approval letters but unwilling to formally file for mortgage applications because of limited and unexciting inventory selections. But the recent increases in inventory are evidently reviving consumer interests.
- With builders constructing more homes and as home prices continue to increase, the overall inventory will be rising.
- Despite the latest gain, there is much room for further improvement. Mortgage applications for home purchases are still down by 14 percent from a year ago. Good thing cash sales have been holding on at a remarkable one-third of transactions even as investors have steadily exited the market (no longer active buyers, though investors are not yet selling).
- Mortgage filings for home purchases will be rising. More inventory and more jobs are good combinations to help that trend. Policy changes will also help more mortgages get approved. The regulator of Fannie and Freddie has strongly hinted at modestly dialing-down the underwriting standards from excessively tight conditions. There are likely to be changes to the 3% cap on underwriting fees that has been in place. Any price controls limit credit availability, so lifting the artificial cap will help more consumers obtain mortgages.
- Mortgage lenders, however, will face challenging times ahead. The refinance business is already down by more than 50 percent from one year ago and will likely sink even further. That’s because mortgage rates will be rising. Expect the 30-year fixed rate mortgage to average around 5 percent by early next year from the current 4.2 percent. Aside from mortgages for home purchases, lenders should give greater focus to commercial real estate loans since the job recovery is helping reduce retail and office vacancy rates.
In a previous blog post, we took a look at the share of REALTOR® members relative to the number of employed persons nationally in the US over time.
In this post, we take a look at the share of REALTOR® members by state and thanks to some nifty visualization tools, we have the luxury of seeing this data through time and space.
What stands out in map below regardless of the year that you look is that there is geographic variation in the ratio of REALTOR® members to employed persons by state. If you take a look at this variation over time, you find that there is also some consistency in the shares by state.
Hawaii is a perennial leader, coming in with the highest share of REALTOR® members per employed persons in 19 of 34 years. Arizona is a close 2nd, coming in with the highest ratio in 15 of 34 years. These two states are the only two to rank number one in this metric from 1980 through 2013. In that time, the highest share of REALTOR® members per employed persons ranged from 0.9 to 2.3 percent.
By contrast, the state with the lowest share of REALTOR® members per employed persons has been more variable. In the 34 years observed, Mississippi, Maine, West Virginia, South Dakota, and North Dakota have all rotated in and out of this position. In every year, the state with the lowest share of REALTOR® members per employed persons has ranged between 0.2 and 0.4 percent.
Some states, such as Maine and North Carolina, started out with a lower share of members per employed person in the 1980s and now have consistently higher shares. Alaska and Louisiana saw higher shares in the early 1980s than they have in the most recent decade.
It’s beyond the scope of this short blog to get into the causes and outcomes of this variation by state and through time. This is merely the first step—understanding what the trend is. How has the share of REALTOR® membership relative to employed persons varied in your state?Learn About Tableau
- Broad inflation still looks tame, up less than 2 percent from one year ago, but could easily rise faster. The annualized inflation in April was already speeding at a higher 2.4 percent rate (that is if price gain in April was to persist similarly for the next 12 months) and then accelerated even faster to 3.2 percent in May.
- A higher inflation rate will mean higher mortgage rates. Lenders need to charge a bit more since the returned money will have lost some purchasing power. When the inflation rate was in the double-digits during the 1970s, the mortgage rates were also in the double-digits.
- One key reason for inflationary pressure, though still mild, is that housing costs are rising and rising. Apartment rents are rising at 4 percent rates according to a private sector source (REIS). But this data is not counted in the official government statistics, which captures rent differently and from more regions. According to the government, official rents are rising at 3.1 percent; though smaller compared to the private sector data it still marks the fastest rent increase in nearly 6 years.
- Home prices have been rising even faster, with a 5 percent gain according to NAR and 11 percent gain according to Case-Shiller home price index. Home prices, however, do not get counted in the inflation data. Rather, a murky homeowner equivalence rent is counted. This data is fuzzy because it tries to estimate what a homeowner would pay in rent if the current lived-in home was a rental home. Irrespective, this ambiguously imprecise measurement of homeowner equivalency rent rose 2.6 percent, the highest increase in nearly 6 years.
- NAR expects CPI inflation to be 2.5 percent in 2014 and then pick up to 3.5 percent in 2015. Home prices are expected to rise by 6 percent in 2014 and then slow to 5 percent in 2015.
- Over the long-haul, some prices will rise faster than others. Typically, prices of electronic gadgets like television fall over time. Someone with a fixed-rate mortgage will pay the same amount for the rest of the lifespan of the loan, and not a cent more. On the other hand, college tuition, if the past is a guide, could lead to not only a bankruptcy of the student but potentially also of the parents. College tuitions have risen by 200 percent in the past 20 years. Wages grew by 82 percent over the same period.
- It is worth reflecting that one of the most creative times of human minds in human history occurred during the Renaissance, particularly from Florence, Italy. Yet the most inventive minds of that time never went to college. They were simply the Renaissance Men and Women.
Despite the recent slowdown in home sales, inventories remain low, with the months supply averaging 6 months or less for 20 consecutive months. This dynamic has pressed up on prices, but new construction has been slow to respond.
Prior to 2008 and the housing bust, the long-term annual average ratio of new employment to single-family construction starts was 1.5, or roughly 1.5 jobs created for every single family home built. Over the last three years, that ratio averaged 3 jobs per home implying a large construction shortage. What’s more, 32 states and the District of Columbia averaged higher than 1.5, the historical average, over this same period.
A closer analysis of this imbalance indicates that it is correlated with REALTORS®’ expectations for prices, which suggest continued price growth over the next twelve months, and that part of builders’ reticence is linked to affordability constraints. For more about this trend and builders’ response to tight inventories, see the article “Sluggish Construction Portends Steady Price Growth”.
Commercial fundamentals continued to strengthen in REALTOR® markets, as demand for space accelerated during the first quarter. Commercial leasing rose 5.0 percent over the fourth quarter 2013, following a moderate 0.4 percent rise the prior quarter. On the supply side, new construction showed a similar acceleration, gaining 4.0 percent in the first quarter 2014, on the heels of a 2.0 percent increase last quarter.
Vacancies declined for all property types, except multifamily buildings. Office vacancies declined 90 basis points, to 16.7 percent, while industrial availability declined 150 basis points, to 13.1 percent. Multifamily vacancy reached 7.4 percent, an 80 basis point advance. Retail availability declined 190 basis points to 14.2 percent. REALTORS® expect inventory availability to remain flat over the next 12 months.
With decreasing vacancies, landlords were in a stronger position, and provided fewer rent concessions. Rent concessions declined 4.0 percent on a quarterly basis. The national average tenant improvement allowance was $4,878 per lease in the first quarter 2014.
2014.Q1 Vacancy RatesOffice 16.7% Industrial 13.1% Retail 14.2% Multifamily 7.4% Hotel 18.6%
Average rental rates rose 2.0 percent during the first quarter, following a 0.3 gain percent during the fourth quarter 2013. In terms of space requirements, tenant demand in the 5,000 square feet and below category accounted for 75.0 percent of leased properties. At a more granular level, demand for space under 2,500 feet comprised 42.0 percent of lease agreements. Lease terms remained steady, with 36-month and 60-month leases capturing 62.0 percent of the market.
For the full report along with respondent comments, please visit http://www.realtor.org/reports/commercial-real-estate-market-survey.
Note: Vacancy rate data in this report comes from a national survey of REALTORS® who identify themselves as commercial practitioners. The data does not match the historical data used to generate NAR’s Commercial Real Estate Outlook, which is sourced from Reis, Inc.
With the payroll jobs numbers released last Friday showing that a net of 217,000 jobs were added in May and the unemployment rate held steady at 6.3 percent, we thought this would be a good time to take a look at how members of the National Association of REALTORS® fit into the American workforce.
Our primary knowledge about the American workforce comes from a release put out by the Bureau of Labor Statistics (BLS) based on two surveys. The household survey, a survey of households, gives information on the number of employed persons and unemployed persons from which we derive the unemployment rate and labor force participation rate. The establishment survey, a survey of businesses, gives information on the number of employees on payrolls from which we derive the number of jobs added or lost on net.
We used membership data from the association combined with state by state data on the civilian population, labor force, and number of employed persons from the BLS. We used the household survey because surveys of our members show that roughly 8 in 10 Realtor® members are independent contractors.
REALTOR® members have made up a moderately consistent share of the number of employed persons in the US from 1980 to 2013, ranging from a low of 0.5% in 1998 to a high of 0.9% in 2006. Still, given the size of the employed population, the difference in membership from the low end to the high end of the range is more than 500,000 members. Currently, membership is near the average rate since 1980 of 0.7%. Because the number of employed persons has grown over time, the number of REALTOR® members has also grown. In 2013 the association had just over 1 million members while the number of employed persons in the US was around 140 million.
What does this mean for membership going forward? Since membership is currently near its average share relative to the employed population, barring any structural shifts, we expect the number of REALTOR® members to grow at roughly the same pace as the number of employed persons.
The median home price increased nearly 21% over the two-year period ending in the first quarter of 2014. Price gains were particularly strong in markets that experienced a sharp downturn during the recession, including markets in Arizona, California, and Nevada. Homeowners who purchased in advance of this change benefited greatly.
For a homeowner who purchased two years ago, the price appreciation coupled with principle payments has added significant equity to their property. Not surprisingly, the average owners in higher-priced markets gained more in absolute terms because of the price appreciation on what was already a high priced asset. The decline in distressed share played a role as well, but the gains are significant regardless. The buyer of a median priced home in San Jose has gained nearly $300,000 in equity over this 8-quarter period while the gains in Boulder and Orlando were more than $50,000.
Curious how your market has fared? For more information on recent trends in your state, see the Local Market Reports for the first quarter of 2014.
- Supply remains constrained
- Construction has not kept up with long-term demand
- Affordability concerns appear to be driving builder pensiveness rather than REO patterns
Much has been made of the drop in existing home sales this spring. The weather played a role in the Northern Midwest and Northeast and affordability concerns had a coast-to-coast impact, particularly in the Western markets. However, inventories remain low with the months supply averaging 6 months or less for 20 consecutive months. All of these factors contributed to the decline in sales, but it is difficult to sell homes when you don’t have homes for sale.
What drives supply? Traditionally homeowner turnover and new construction. However, the number of owners who owe more on their home than their home is worth ballooned in recent years and stood at 6.3 million as of the first quarter of 2014. Though this figure is down from 11.8 million in the first quarter of 2011, it remains well above the historic norm, preventing some would-be sellers from entering the market. But these transactions would only add to inventory if the seller is downsizing or moving in with another household as the seller would otherwise buy another home.
New construction on the other hand has been sluggish for several years. A simple measure of the impact of construction on supply is whether new construction has kept up with job creation. To this end, the ratio of jobs created over the 3-year period ending in the first quarter of 2014 relative to new single-family construction starts over this same period is graphed below. The disparity was greatest in Florida, Utah, California, Montana and Indiana where job creation has been particularly strong. In the chart below, 40 states as well as the District of Columbia have a ratio greater than 1 indicating that there were more jobs created over the last 3 years than housing starts; 32 states and the District of Columbia had a ratio greater than 1.5, the long-term average. Not all new jobs result in a new household and an increase in demand for housing, but that relationship is strong and the implication is that the lack of construction has hamstrung supply and thus home sales.
A lagging expansion of supply relative to demand growth implies price pressure. Indeed, over the last two years there has been steady price appreciation, but the current 3-year deficit in the employment to starts ratio implies a continued imbalance. Intuitively, states with tight supply would expect more robust price growth. A simple scatter plot of the ratio of 3-year employment gains to starts against price expectations from REALTORS® in the first quarter of 2014  suggests a correlation between stronger price expectations and a long-term imbalance between employment and housing starts. The lone anomaly is Hawaii with its strong investor demand and limited construction potential.
What do builder’s plans tell us about their response to tight inventories? If REALTORS®’ price expectations are well correlated with the long-term balance between employment and construction, then the REALTORS®’ price expectations should be correlated with builders’ response to a supply shortage. Indeed, there is a strong, positive correlation between the change in permits in the first quarter of 2014 as compared to the same period in 2013 and the price expectations of REALTORS®, graphed below. As Price expectations increase, so do plans for construction. This pattern is particularly evident in states that have a non-judicial foreclosure process.
At first blush, this trend is not as robust in states with a judicial foreclosure process. Though the trend is still positive, the correlation is not as tight and more outliers are present. What’s more, the bulk of price expectations are clustered between 2% and 4%, rather than between 3% and 6% for non-judicial states. The judicial states, such as Florida, New Jersey, Pennsylvania, New York, and Connecticut, have been slower to process their foreclosure inventories which would account for the weaker price expectations. Builders’ response in these states may reflect the same supply concerns affecting REALTORS’ price expectations: greater REO inventory, longer foreclosure time-lines, and higher delinquency rates. The anomalies likely reflect state-specific patterns such as strong vacation and foreign buyer demand in coastal markets of Hawaii and Florida which sit on the zero access for permit growth despite having price expectations of roughly 5.5% and 7%, respectively. Plans to build in North Dakota despite slow price growth reflect that state’s unique oil boom and plentiful land to build, while the jump in New Jersey likely reflects reconstruction efforts in the wake of Hurricane Sandy.
Builders’ plans for construction appear well anchored around inventory and price expectations, but the size of permits growth is roughly the same in judicial and non-judicial states despite the stronger price expectations in non-judicial areas. This uniform pensiveness in response to a long-term shortage suggests that some other factor(s) present in both judicial and non-judicial states, a non-distressed supply story, is affecting builders’ response. Several other issues could explain this pattern; limited access to credit for smaller builders, builder concerns about the re-emergence of entry-level consumers to the market in the face of student debt and a tight credit box, and the general decline in affordability and purchase power over the last year.
Prices rose mostly rapidly in the West at 14.0% over the 4-quarter period ending in the first quarter of 2014. The South, Midwest, and Northeast followed at 7.7%, 6.75%, and 2.25%, respectively. When the skater plot is displayed by region, the pattern is telling. Charting a line trend line of the Western states shows a nearly flat line suggesting an inelastic response by builders in response to greater price expectations. This slope for the Midwest and South is more pronounced, while that of the Northeast is most pronounced, though price expectations are weakest in there. The implication is that builders’ recent permitting pattern reflects concerns about recent price patterns and affordability. This trend might also reflect concerns about the role of investors in certain markets, though this would not fully explain the pattern in the Midwest and South.
While tight inventories will help to sustain price growth, it also limits turnover and could further erode affordability. Without a stronger response from home builders, consumers may struggle with options and affordability if income growth cannot compensate. It is difficult to discern whether builders can produce at a lower price point given frictions in the current market.
 Based on survey responses in the REALTOR Confidence Index
REALTORS® generally expect prices to increase over the next 12 months with a median expected price increase of 4 percent, according to the latest REALTORS® Confidence Index . Slower sales due to tight credit conditions, declining affordability due to the recent price growth amid modest income gains, and fewer distressed sales likely account for the modest expectations.
REALTORS® in most states expect prices to increase in the range of 3% to 5%. However, in states where inventory is very low and where cash sales are strong (e.g. FL), the expected price growth is in the range of 5% to 7%. In states that have modest income growth, the expected price growth is less than 3 percent (blue).
 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.
- Good job gains in May, with payroll jobs rising by 217,000. Over the past 12-months, 2.4 million jobs have been added. More jobs translate into more potential homebuyers and more occupancy demand for commercial real estate buildings.
- Due to demands for rental housing, jobs in rental and leasing have increased by 45,200 over the past year. The Professional Business Service sector (accounting, legal, and other office jobs) has made huge strides, with 635,000 net new jobs (3.4 percent growth) in the past year. However, due to shrinking office space per worker and greater flexible work scheduling, the demand for office space has not commensurately risen.
- An anomaly can be seen in construction jobs. No jobs were added in the construction of buildings, even though general contractor employment rose by 2,800. From the low point four years ago, jobs related to construction have risen by only 10 percent. By contrast, construction spending in dollar terms has risen by 26 percent. Some of this discrepancy is due to higher construction costs, but it appears that robust construction hirings will take place in the upcoming months.
- The average hourly wage was $24.38 in May ($20.54 for those in non-supervisory positions). Because the wage gain is only 2 percent over the past year, there is only a slight inflationary pressure coming from labor costs.
- Despite the job gains, the key employment-to-population ratio remains stuck at a low point of 58.9 percent. The reason is that an additional 2.3 million people are no longer in the labor force compared to just one year ago. Before the recession hit, 63 percent of the adult population was working. In other words, job creation needs to significantly pick up in order to raise the employment ratio.
- One sector that has been significantly lagging behind in the current economic recovery is small business start-ups. There are piles of cash at corporations. Business borrowing costs are very low. Business spending has historically been well above corporate profits as small businesses borrow money to invest. Yet, this is not the case today. The “animal spirit” of free enterprise is clearly lacking in America in recent years.
- During the Middle Ages, Vikings were fearsome in their predatory enterprise. Just a view of their horned helmets could freeze the heart of people. Among their activities, they ransacked the English coasts, plundered Ireland, and forced Kiev to pay huge ransoms. Though such activities are a definite no-no in today’s civilized world, Vikings do provide a lesson of never accepting the feudalist idea of being stuck in one economic position for the rest of one’s life. Be adventurous. Try out new things. Fail, get up, and try again. Small businesses today can be said to have such an enterprising (but not predatory) spirit. Unfortunately, far less small businesses are testing out their ideas.
A Quick Review Of “Error Correction Models Of MSA Housing Supply, Elasticities: Implications For Price Recovery”
By Nadia Evangelou, Research Economist
William C. Wheaton, Serguei Chervachidze and Gleb Nechayev have published the findings of their research in a paper titled “Error Correction Models of MSA Housing Supply, Elasticities: Implications for Price Recovery.” A summary of their findings in a sample of house price and stock data from 68 US metropolitan areas is as follows:
- It is estimated that the average market will reach 2007 price levels by 2022.
- Home prices are forecast to rise generally over the next decade. Markets with significant barriers to new supply will experience faster growth. Examples of such markets include Boston, New York, Los Angeles and San Francisco.
- Most of the markets are sensitive to a price increase in the short run (10 years) than in the long run. That is because, in the long run, new supply enters the market and relieves short run shortage.
- Land supply, land use regulation, and population affect housing supply. All three factors have a negative effect on the housing supply. Of the three, regulatory differences across the MSAs show a higher impact on the housing supply. For example, Boston displays a lower housing supply than Washington DC due to their regulatory differences, and hence, home prices in Boston are likely to increase faster than in Washington DC.
- Markets with a more inelastic supply exhibit both greater price increases over 2000-2007, and greater price declines from 2007 to 2012. The average increase in real prices over 2000-2007 was 48% and the decline from 2007-2012 was 30% – leaving the average market value in 2012 at about 4% above 2000 levels.
- Home prices in Denver by 2022 are expected to be 58% higher than the prices in 2007, while in Miami it is expected to be only 5% higher. Full coverage of all metro markets is in the table below.
Finally, the authors claim that their forecasts suggest that housing will generally be a fine investment in most cases over the coming decade. They expect the annual long run cost of owning a home to again be as favorable as it was in the late 1970s, late 1990s and mid-2000s, spurring future home ownership, housing consumption and new housing construction.
Prices Declines and Forecast Recoveries
- Twelve percent of homebuyers found it difficult to save; for first-time homebuyers, 20 percent found it difficult to save.
- Of those who had a hard time saving, 43 percent of home buyers and 54 percent of first-time buyers reported that student debt delayed saving for the purchase of a home.
- By generations, 20 percent of Gen Y and 15 percent of Gen X had a difficult time saving for a downpayment.
- Of those who had a hard time saving, 56 percent of Gen Y and 35 percent of Gen X reported student loans delayed saving for a downpayment.
Despite disappointing economic performance and severe winter weather in parts of the country, commercial REALTORS® reported broad-based market improvements in the first quarter 2014. In keeping with the upward momentum in the markets, REALTORS® rated the direction of commercial business opportunities 6.0 percent higher in the first quarter 2014, an improvement over the 5.0 percent rise from the fourth quarter 2013.
On a year-over-year basis, sales increased 11 percent in the first quarter, as prices rose 4 percent. Cap rates continued compressing with a 50 basis point decline, from an average of 8.7 percent in the fourth quarter 2013 to 8.2 percent in the first of this year. Multifamily properties recorded the lowest average cap rates, at 7.7 percent, followed by hotels, at 7.6 percent. Office and retail spaces posted identical cap rates of 8.0 percent, while industrial properties recorded capitalization rates of 8.1 percent.
The average transaction price moved from $1.2 million in the fourth quarter 2013 to $1.4 million in the first quarter 2014. In a noticeable change, commercial REALTORS® reported that the most significant concern during the first quarter was a shortage of available inventory. The second major concern was the pricing gap between buyers and sellers. After several years of topping the list of concerns, financing dropped to a distant third place, signaling a marked shift in market conditions over the past six months.
For the full report along with respondent comments, please visit http://www.realtor.org/reports/commercial-real-estate-market-survey.
- NAR recently released a summary of existing home sales data showing that April’s existing home sales increased for the first time this year. April figures showed an increase in sales of 1.3% from last month but a 6.8% decline from a year ago.
- The national median existing-home price for all housing types was $201,700 in April, up 5.2% percent from April 2013. April marks the slowest price growth since March 2012.
- All regions showed growth in prices except the Northeast, which experienced a small decline of 0.4%. The West maintained the biggest gain at 9.7% from a year ago.
- April’s inventory figures increased by 6.5% from a year ago, and it will take 5.9 months to move the current level of inventory. From the lower levels experienced recently, more inventory could translate into more sales as buyers are able to find a home that meets their criteria.
- Despite sales being up this month, April still marks the 6th consecutive month of year-over-year declines. Affordability has been a challenge in most regions, so price easing will be healthy for the housing market.
- See the full NAR Existing Home Sales press release here and data tables here.
- Find a full graphical summary of the data here.
- The next Existing Home Sales data release, covering May figures, will be held on June 23rd.
- The lowest mortgage rates of this year have not enticed home buyers to take out a mortgage. The number of people filing for mortgages for home purchase fell in the final week of May. The index that captures the trend fell for the fourth straight week. Applications for home purchase are now down 17 percent from this time last year.
- Existing home sale closings was down 7 percent in the first quarter from the prior year and trending to about the same decline in the second quarter. Home sales do not closely follow the mortgage trends because some homes are sold all-cash and also due to statistical variances between the two data series.
- Refinancing activity is just as odd. Low mortgage rates have not pushed people into refinancing, with the past week’s activity below the prior week and down nearly 60 percent from this time last year. Of course, many homeowners have already refinanced in the past two years, when the rates were even lower.
- Anecdotal stories from lenders are that they gave out a good number of pre-approved mortgage letters. However, those clients have never formally applied for a mortgage – yet. A shortage of inventory is causing many buyers to shop around longer. That is, there appears to be pent-up demand but the realization is being hampered due to too little inventory. Also, REALTORS® need to inform consumers about mortgage availability. Though credit conditions are tight, many consumers wrongly think 20-percent down payment is the absolute minimum to buy a home.
- Things surely cannot remain this low. With continuing job gains and some increases in inventory, more buyers will start to formally apply for a mortgage and make an offer on a home. The second half of 2014, therefore, should be better than the first half. For the year as a whole, existing home sales look to be lower by 2 to 4 percent. Mortgage applications, including the massive reduction on refinances, could drop by 40 to 50 percent this year.
In recent weeks, several originators have announced new programs or initiatives aimed at expanding credit to borrowers with lower FICO scores. These programs entail significant compensating factors or are geared toward niche markets. Most indicators have not shown an improvement of access for lower FICO borrowers, but one indicator may signal a recent thaw in lending at the lower credit ranges.
Over the last two months several new programs or initiatives have emerged aimed at lower-credit borrowers. These initiatives include:
- Wells Fargo reduced minimum FICO scores on GSE products from 660 to 620 and FHA products from 640 to 600
- BNP Paribus announced that it was “making exceptions to guidelines” on some loans
- TD Bank lowered down payment from 5% to 3%, raised DTI requirements and eliminated mortgage insurance on its “Right Step” product
However, the gates have not been thrown open and this is certainly not a return to underwriting by fogging a mirror. Wells Fargo plans to use compensating factors and utilize an “explanation of credit history events” and will require a demonstration of “stability of employment”.  BNP Paribus will make exceptions “for borrowers with credit dings caused by recession that don’t accurately reflect their financial situations”. TD Banks’ Right Step offering requires a 660 FICO score or higher, a 41% back-end debt to income ratio and requires the buyer to take a financial education program. This last program bears a strong resemblance to the FHA’s new HAWK program, but with much tighter requirements. Finally, Chase recently announced that it will be making changes to facilitate lending at the lower FICO spectrum, but has yet to announce details.
These programs may be too new to have shown up in market indicators as of yet. For instance, lenders’ responses in the Senior Loan Officers’ Survey for the first quarter of 2014 indicate a sustained reluctance to originate subprime mortgages as depicted below.
One data source does suggest that there has been a modest thaw in lending at the lower credit spectrum in recent months. Since 2012, there has been a steady decline in the average FICO score on accepted conventional applications and accepted FHA applications reported by Ellie Mae as borrowers shifted from FHA financing to conventional financing. This trend was blogged about earlier and reflects both the re-emergence of private mortgage insurers in early 2012 as well as a sustained increase in fees at the FHA which were recently made permanent for the life of the loans.
However, in March the average FICO score on a rejected application for FHA financing fell nearly 7 basis points to 660 and remained low at 664 in April. This decline is the first significant decline in nearly two years and is an expansion of the spread between the average FICOs of accepted and rejected applications for FHA financing; or an expansion of the outer portion of the credit box. This trend could also represent a reduced rejection rate for applicants with higher FICOs and not a true improvement for lower FICO applications, though. It will take time to develop a better picture of the credit box around the FHA program. However, a rejected FICO score of 664 is still nearly 10 points higher than the average accepted FICO in 2011.
It’s too early to tell whether this trend is in fact a modest thaw and whether it will extend, but originators appear to be turning their attention to this portion of the market. This trend represents green shoots, but not a full recovery of traditional, healthy lending.
- Jobs are plentiful in North Dakota. For the past decade, the state has been at or near the top in terms of consistently generating jobs. The latest monthly figures are no exception, with North Dakota zooming ahead at a 5.1 percent annual job growth rate.
- Nevada is making a strong comeback with a 3.7 percent growth rate, translating into 46,300 net new jobs in the state. Even with these job gains, the state is still below their prior employment peak.
- Florida, Texas, and Colorado round out the top five states for one-year job growth. Florida is in recovery mode, while Texas and Colorado are charting new employment highs.
- At the other end of the spectrum, New Mexico, Virginia, and New Jersey are struggling to create jobs.
- One consistently clear leading indicator for future home sales has been jobs. Simply, more jobs mean more home sales. Commercial real estate activity is also dependent upon job creation. Job growth also helps with a state’s budget situation, as more workers are paying taxes and fewer are receiving government services.
The steady improvement in house prices and employment coupled with the 2013 refinance boom had a significant impact on foreclosures nationally. Across the country, the foreclosure rate fell dramatically. As depicted below, no state has seen an increase in its foreclosure rate over the 8-quarter period ending in the first quarter of 2014.
However, some states fared better than others. Florida, California, Arizona and Nevada all experienced significant declines following the bust of the sub-prime market and sharp declines in employment. However, Arizona and California experienced the sharpest declines in their foreclosure rate, respectively. By contrast, the improvements in Florida and Nevada were not as strong.
What’s more so, New York, New Jersey, Maine, Connecticut and Illinois have also experienced stubbornly slow improvement form high levels of foreclosure. The common thread among these states is that they all have judicial process for foreclosures or a process that has moved closer in that direction. While the judicial process can shelter the consumer with important protections, it can also slow or stall market clearing.
Where does your state stand? For more information on recent trends in your state, see the Local Market Reports for the first quarter of 2014.
Tight credit restrictions can prevent consumers from getting a mortgage and making a home purchase. But over time, tight credit can impact a consumer’s expectations of the mortgage application process, reducing their willingness to even apply for a mortgage or to start the home search process.
In a report released this week , researchers at the Federal Reserve Bank of New York provided estimates of the change in applications for mortgages in February of 2014 as compared to May of 2013. Their estimates indicate that:
- Applications for mortgages fell sharply over this period for consumers in all FICO brackets.
- The uniform impact is likely due to the nearly 80 basis point increase in mortgage rates over this time frame.
- The mortgage application rejection rate fell for all groups except those with FICOs below 680.
When surveyed in February about their plans to apply for a mortgage over the next 12 months:
- Borrowers with FICOs below 680 indicated a drop in plans to apply for a mortgage in the next 12 months by 6%, roughly 6 times the decline among borrowers with FICOs greater than 760, while plans to apply for mortgages by borrowers with FICOs between 680 and 760 increased roughly 7%.
- Pessimism among borrowers with FICO scores below 680 increased as respondents who expected to apply for a mortgage also expected an increase in the 6% rejection rate.
- All other groups expected a decline in rejections.
In recent weeks, some lenders have indicated a willingness to return to traditional, well-underwritten lending in the lower FICO spectrum. However, these efforts may be in vain without a more fundamental recognition from consumers. Lenders may need to trumpet these efforts in order to draw well-qualified, but discouraged, potential homeowners back into the market.