The qualified mortgage (QM) rule was implemented in January of 2014. The law is intended to protect consumers by strengthening underwriting standards, but some have argued that the rules will raise costs and reduce access for consumers. This survey queries a sample of mortgage lenders about the rule’s impact on their business and how the rule could in turn impact consumers.
Highlights of the Survey
- When asked about the extent of the QM rule’s impact, 55% of survey respondents indicated that the QM rule would affect 2.6% to 20% of their originations
- The 3% cap on points and fees was the feature of the new rule that most concerned respondents as 60% indicated that they were “very concerned”
- A strong majority of respondents indicated that they would defer to investors preferences on how to treat non-QM loans, but 45% indicated that they would not originate non-QM mortgages
- Roughly a fifth of respondents did not know whether or not they would charge non-QM borrowers higher rates, but the most frequently cited change for prime and near-prime borrowers was an increase of 50 to 75 basis points and 150 basis points for sub-prime
- Relative to 2013, respondents indicated a high reluctance to originate mortgages with non-QM features and their aversion toward originating non-QM loans increased as credit scores declined. They also indicated an elevated reticence to originate mortgages that fit into the rebuttable presumption definition of the QM rule and even some hesitance to originate safe harbor QM mortgages.
- A significant share of respondents indicated that they would impose buffers in advance of the 43% back-end debt-to-income ratio, the 3% cap on points and fees, and the limitation on the annual percentage rate to within 150 basis points over the average prime offer for eligibility with the safe harbor definition of the QM
- In response to the new rule, the vast majority of respondents plan to increase staff and expenditures on compliance software. In addition, 11% will shutter affiliated title insurance or other companies.
- Finally, 16.7% of respondents indicated that they had already adapted to the rule, while 44.4% would be ready within three months. Nearly a third of respondents indicated that it would take three to six months before they had adapted, but all would be ready within one year.
The Qualified Mortgage Rule and Its Impact
On Friday, January 10th, 2014, the requirements of the ability to repay and qualified mortgage (QM) rule went into effect. 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. The QM rule allows for varying degrees of assumed compliance with the ability to repay rule, which is advantageous to lenders as it allows them to minimize and to budget for potential penalties and litigation expenses. All mortgage applications received on or after January 10th are required to comply with the QM rule which includes full documentation of income, assets and employment, a maximum of 3% for points and fees, a cap of 43% on the back-end debt-to-income ratio, and limitations on the type of mortgage products that qualify and prepayment penalties among other requirements .
When asked to what extent the QM rule would impact their business, the most frequent responses were 10.1% to 20% and 90.1% to 100% with each garnering 20% shares of the responses. However, 55% of the responses clustered between an impact on 2.6% and 20% of production. The significant share of responses indicating 90 to 100% impact was likely an indication of heightened underwriting for all mortgages regardless of QM status.
Of the new rules, the 3% cap on fees and points was by far of greatest concern with 60% of respondents indicating that they were “very concerned” about that feature. Also of high concern were the limitations on the annual percentage rate relative to the average prime offer rate for the general QM standard and the FHA’s QM standards. The limitation on the back-end debt-to-income ratio of 43% garnered high concern as did the documentation requirements. However, respondents seemed to shake off the limitations on product features as 50% of respondents indicated that they were “not concerned” and no respondents indicated they were “very concerned” about these restrictions. With the exception of interest only jumbo loans, there has been little production with these features in recent years.
When asked how they would respond to the new regulations, 65% indicated that their response would depend on the requirements of investors, while 45% indicated that they would not offer non-QM mortgages. In addition, 20% would limit offerings of non-QM loans to high quality borrowers, 5% would charge higher rates and 10% would cease originating to conduits or partners. No respondents indicated that non-QM loans would be treated the same.
When asked how non-QM status would impact mortgage rates, respondents indicated that mortgage rates would rise for all non-QM borrowers, but that the rate increase would vary based on credit quality. One third of respondents indicated that rates for borrowers with non-QM loans and FICO scores between 640 and 720 as well as those with scores greater than 720 would face rate increases of 50 to 75 basis points, but the distribution of respondents suggested better pricing for prime borrowers as compared to near prime. However, 50% of respondents indicated that borrowers with FICO scores of 640 and below would face rate increases of 150 basis points or more and no respondents indicate the rate increase would be less than 50 to 75 basis points. A significant share indicated that they did not know how much rates would rise for the various degrees of credit quality, but no respondent indicated that rates would not rise for non-QM borrowers.
When asked about their willingness to lend to particular borrower types, the majority of originators indicated that they would be “much less likely” to make loans with non-QM product features as compared to 2013. Similar to results shown earlier, originators indicated that they would be much less likely to lend to borrowers with lower credit scores in the non-QM space and this reticence increased as credit quality diminished. Finally, more than half of originators indicated that they were either “less likely” or “much less likely” to originate QM loans that fell under the rebuttable presumption definition of compliance with either the QM standard or the FHA’s QM standard. In contrast, 85% and 95% of originators indicated that they would be “as likely” or more likely to originate mortgages that met the safe harbor definition of the standard QM rule and the FHA’s QM definition, respectively.
Survey participants were asked whether they would introduce precautionary buffers in advance of certain limitations of the QM rule. More than half of respondents indicated that they would not include a buffer in advance of the 3% cap on fees and points, but slightly less than half indicated that they would implement a buffer. Roughly a third of respondents indicated that they would implement a buffer of either 2.8% or 2.9% and 10.5% indicated that the buffer would be as low as 2.6%. The use of buffers on some safe harbor QM loans corroborates the finding earlier that some lenders would be less likely to originate even safe harbor QM loans relative to last year.
With respect to the maximum back-end debt-to-income ratio of 43%, 68.4% of respondents indicated that they would not have a buffer in advance of that restriction. However, 15.8% indicated that they would impose a modest buffer at 42.5%, while an additional 10.6% of respondents indicated that they would impose buffers of 41% or 42%.
With respect to the limit on the annual percentage rate to less than 150 basis points over the average prime offer rate for safe harbor eligibility, roughly 60% indicated that they would not impose a buffer on pricing, but 18% indicated that they would impose a buffer of 5 basis points for both FHA and general QM safe harbor mortgages and 12% indicated that they were not sure.
Nearly 70%, 69.2%, of respondents indicated that a residual income test would be required for borrowers that fell into the FHA’s definition of rebuttable presumption, while 84.6% would require a test of non-FHA rebuttable presumption borrowers. Just 15.4% of respondents would require a residual income test for mortgages that met the FHA’s QM definition of safe harbor, while only 7.7% of respondents would require the test for mortgages that met the general QM safe harbor. However, 38.5% of respondents indicated that they would require a test for non-QM borrowers. This low relative response for non-QM mortgages, which are also bound by the ability to repay rule and would necessitate a residual income test, is likely a reflection of the small share of originators who indicated their willingness to originate non-QM loans.
When asked how concerned they were that their systems and staff were not adequately prepared for the implementation of the QM rule only 15.8% indicated they were not concerned, 52.6% were somewhat concerned, and 31.6% responded that they were very concerned. When asked if they were prepared for the litigation risk, 5.3% indicated that they were not prepared, 52.8% responded “somewhat prepared”, 10.5% were “well prepared”, and 31.6% were unable to answer or did not know. Finally, when asked about the impact on staffing and costs, no respondents indicated that there would be little or no cost, while 42.1% indicated that the impact would be manageable and 57.9% indicated that the impact would be significant.
In response to the new QM rule, 83.3% of respondents indicated that they would add compliance staff and 72.2% indicated that they would invest in compliance software. Slightly more than 11% would close their title or other affiliated practices, which may reflect a low share that had affiliated business prior to the rule’s implementation, and 22.2% would cut staff to save costs. Only 11.1% indicated that there would be no operational changes.
Finally, when asked how long it would take to adjust to the new requirements of the qualified mortgage rule, 16.7% of respondents indicated that they were already adapted, while an additional 44.4% indicated that it would take less than 3 months. Those that felt it would take three to six months only 27.8% of the sample and 11.2% of the sample indicated that it would take either six to nine months or nine months to a year. No respondents indicated that it would take longer than a year to adjust to the changes.
Appendix A: About the Survey
In January of 2014, NAR Research sent out a survey to a panel of 53 different mortgage originating entities. The survey instrument was sent by email on Monday the 6th of January and closed on Monday the 20th. Questions in the survey instrument covered the characteristics of the originators (see appendix B), their general market concerns, and a subset of questions focused on the qualified mortgage rule. There were 27 responses to the survey for a response rate of 51% and a margin of error of 13.7%. NAR will query the sample a second time in the future to measure how firms adjust to the new regulations.
Appendix B: About the Sample
The survey was sent to 53 unique firms with relatively close ties to REALTOR® members. Mortgage bankers dominated the sample with 77.8% followed by non-mortgage banks at 7.4%. Joint venture between a REALTOR®-brokerage firm and a retail lender made up 11.1% of the sample and independently owned mortgage brokers made up 3.7%. No credit unions or savings and loans were represented in the sample responses. This sample is in sharp contrast to the universe of originators reported in the 2012 data collected in compliance with the Home Mortgage Disclosure Act (HMDA). There, 59.1% of all institutions were banking, while an additional 27.1% were credit unions and 2.9% were an affiliate of a banking operation. Just 11% of the lending institutions were mortgage companies (including mortgage banks as defined by HMDA).
Because of the close ties to REALTOR® members, the firms in this sample tend to specialize in purchase originations as 96% of the originators in the sample indicated having 70% or more of their originations as for purchase. A full 28% of the sample indicated that 90% to 100% of their lending was for the purchase market.
Though small in numbers, mortgage companies tend to dominate the volume of originations on a per institution basis. In the 2012 HMDA dataset, 50% of mortgage companies originate 1,000 or more mortgages compared to just 10% and 8% for banks and credit unions, respectively. This pattern is not new. As noted by Avery, Brevoort, and Canner, “In 2005, for example, nearly 80% of the 8,850 reporting institutions were depository institutions but together they reported only 37% of all the lending-related activity.”  In this NAR survey of mortgage originators, 92% of respondents originate more than 1,000 mortgages on average, 4% with 500 to 1,000 originates, and only 4% with fewer than 500. The latter point is important as it is one of the exemptions for compliance with the qualified mortgage rule. Finally, 24% of the sample originated 5,000 or more mortgages annually.
Mortgage originators in this sample tend to sell the bulk of their mortgages to aggregators or conduits with an average share of 84% of their production handled in this way. However, respondents designate a significant portion of their originations on average to be sold directly to Freddie Mac or Fannie Mae, 9% and 24% respectively, while only 8% on average were securitized directly through Ginnie Mae and 6% were held in portfolio. With respect to mortgage servicing rights (MSRs), the vast majority, 81.8%, sold 90% or more of their MSRs, while 9% held 10% to 30% and an additional 9% held more than 50% of MSRs in their originations.
On average, a 56% majority of originations were conventional, conforming while 26% were for the FHA. Conventional jumbos were 5% and non-conventional jumbos were 7%. VA and RHS made up 10% of production on average, while subprime production was negligible.
Regulations ranked relatively high on respondents list of concerns. However, tighter margins and higher production costs ranked at the top of the list slightly ahead of the new QM requirements and other regulations. This ranking might reflect unease over the current competitive landscape as compared to a regulatory process that is not set in stone and can be fluid to some extent. Events that would raise loan pricing, including G-fee increases, loan level pricing adjustments, and representation and warranty risk also ranked high as did stalled employment growth and troubles finding credit qualified borrowers. Lenders were less concerned about mortgage rates, perhaps suggesting that the Federal Reserve’s taper or economic growth is priced in. Concerns about investor demand were low. Likewise, there was only moderate concern for lower FHA loan limits and changes from Basel III requirements, the former reflecting higher pricing at the FHA and new alternatives for financing, while the latter may reflect the dominance of non-depositories in this sample.
Geographically, survey respondents operate in nearly all states and regions. A few states in the mountain region, North and South Dakota as well as Montana, as well as Hawaii, Guam and the Virgin Island were not represented in this sample.
Questions can be directed to:
Director, Housing Finance and Regional Economics
The National Association of REALTORS®
Kenneth R. Trepeta Esq.
Director – Real Estate Services
National Association of REALTORS®
500 New Jersey Ave, NW
Washington, DC 20001
 For a more in-depth discussion of the new rules see http://www.realtor.org/articles/summary-of-new-qualified-mortgage-qm-rule
 Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner. “Opportunties and Issues in Using HMDA Data.” 2007. JRER, Vol. 29, No. 4. 2007
In spite of rising mortgage rates housing has “good fundamentals” and is expected to continue to improve – that is the remark from the new Federal Reserve chairman.
After a little more than a week in her role as the fifteenth, and first female, Chair of the Board of Governors of the Federal Reserve, Janet Yellen testified to the House Committee on Financial Services Tuesday in a lengthy, 6-hour long session punctuated by a few recesses. The major takeaways of her testimony are (1) that monetary policy will continue on its current path of a gradual reduction in quantitative easing as long as there is no notable change in the economic outlook, (2) the current outlook is for continued economic improvement, and (3) the Fed will monitor the outlook and adjust the path of monetary policy in line with expectations.
This means that as long as the economy continues to improve, we can expect continued tapering and gradual upward movement in mortgage and other interest rates with minor fluctuations up or down. However, if the outlook for the economy improves notably, as happened last summer, mortgage rates could spike up more suddenly. If the outlook for the economy were to deteriorate substantially, the Fed would likely alter its course expected course of tapering and tightening.
As a key interest rate sensitive sector of the economy, housing was mentioned throughout the testimony and question and answer period.
More detail from the Written Testimony:
In her written testimony, Yellen confirmed much of what many analysts expected, that she anticipates a great deal of continuity of Bernanke’s legacy regarding the openness and communication of the Fed and monetary policy since she was involved as Vice Chair when much of the current policy was shaped.
Economic Outlook and Housing
As far as the economic outlook is concerned, Yellen noted that growth largely picked up in the second half of 2013 with the slowing recovery in the housing sector in response to somewhat higher mortgage rates being an exception.
Quantitative Easing and Housing
In reviewing the benefits of the Fed’s quantitative easing program, Yellen noted that rising house prices have brought buyers out from underwater situations, increased security for households, and boosted the economy with the wealth effect—as household wealth improves, households spend some of their new wealth.
Question and Answers on:
Policy Continuity and the Fed’s Dual Mandate
In the question and answer session, Yellen reiterated some of the themes in the written testimony, again saying that the Committee will be outlook driven in making decisions regarding the future course of monetary policy. In response to a question about the Fed’s mandate for full employment, Yellen acknowledged the importance of looking at broader measures of unemployment, such as the number of long-term unemployed and those employed part time for economic reasons, when considering labor market including.
Recent Economic Data and the Course of the Taper
Regarding recent economic news, Yellen admitted that she was surprised by the reported pace of job creation in December and January, but noted that weather and other factors could be affecting the data. She insisted that more data would be needed to determine whether this should affect the economic outlook since monthly data is variable. In response to a question about what might cause the Fed to slow or pause the current tapering, Yellen answered that a notable change in the economic outlook would be needed.
The Housing Market
Regarding housing, Yellen mentioned that she believed that the spike in mortgage rates in Spring/Summer 2013 was due to a reevaluation in strength of the economy (i.e. it was better than most had previously thought). Yellen said that she is hopeful that housing will continue to support the recovery as there are “good fundamentals,” and the recent slowing in housing market growth was a good sign that mortgage rates do have an effect on activity.
 “Turning to monetary policy, let me emphasize that I expect a great deal of continuity in the FOMC’s approach to monetary policy. I served on the Committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfill the Federal Reserve’s statutory mandate of maximum employment and price stability.” Chair Janet L. Yellen. Semiannual Monetary Policy Report to the Congress. Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C. February 11, 2014.
In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the labor turnover rate.
- If people stay put in one job then they are less likely to seek out a new residence. In recent years, Americans have been less mobile largely because of a lower job turnover rate. However, the number of new job openings and new quit rates has been slowly rising. The rise in quit rate in particular is a good sign regarding the economy and portends well for home sales. Most workers would only quit if they have a better job lined up.
- A total of 2.4 million workers quit their jobs in December, a steady rise from the cyclical low of a 1.6 million monthly quit rate in 2009. The increase in the quit rate is being driven by the general upward trend in job openings. In November and December, there were 4.0 million new openings in each month, compared to 2 – 2.5 million openings several years ago. There is still further room for improvement in the quit rate, however.
- The construction industry is experiencing a rise in job openings but with no meaningful change in the quit rate. That’s a good thing as more construction is needed in the homebuilding industry. Aside from the difficulty of obtaining construction loans by small local homebuilders, the difficulty of finding skilled construction workers has hindered expansion in new home construction. At least 1.5 million new housing starts are needed this year, but only 1.2 million may be possible due to the above mentioned reasons. Less than a million new housing units were added last year, which was insufficient and led to a housing shortage.
- The Winter Olympics remind us that Russia is a vast territory. This was not always the case. Around the time of Manifest Destiny in the United State and the extension of U.S. territory to the Pacific Ocean by going west, Russia also had its Manifest Destiny of reaching the Pacific Ocean, though by going east. Russia not only reached the Pacific Ocean, but claimed Alaska first. All this was accomplished by liberating Russian serfs, which allowed them to quit working for their masters (at about the same time as Lincoln’s Emancipation Proclamation speech). Many former Russian serfs then chose to participate in the Russian Manifest Destiny with some even reaching Alaska. We should be ever grateful that more people around the globe have the freedom to quit old jobs in order to seek out better opportunities.
Prices are still expected to generally increase, although at a slower pace. About 92 percent of REALTOR® respondents expect constant or higher prices in the next 12 months (90 percent in November). Prices are expected to increase modestly at a median expected price increase of 3.7 percent . Local conditions vary. See the December REALTORS® Confidence Index Survey report for more information.
Improved inventory conditions, lower volume of distressed sales, and the pick up in interest rates are factors that will create an environment for modest price growth. Some REALTORS® saw the slowdown as a welcome break to the rapid home price growth amid the modest growth in consumer incomes and jobs.
 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.
Approximately 27 percent of REALTOR® respondents reported that their last sale in December was by a first time home buyer  (28 percent in November). REALTORS® continued to report about the difficulty of home buyers in accessing credit and that first time buyers who generally use mortgage financing are finding it hard to compete against investors who typically pay cash. About 21 percent of respondents reported a sale to an investor. See the December REALTORS® Confidence Index Survey report for more information..
 First time buyers account for about 40 percent of all homebuyers based on data from NAR’s Profile of Home Buyers and Sellers.
In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the latest jobs data from the Bureau of Labor Statistics (BLS).
- Data from the Bureau of Labor Statistics (BLS) showed that 113,000 jobs were added to the economy in January—a disappointing figure after December’s sub-100,000 jobs release. Job gains had averaged 200,000 per month in the 15 months prior to December. January’s report showed only minor upward revisions to previous figures.
- In January, job growth occurred in the private sector (+142,000), while government lost jobs for the month (-29,000). The biggest job gains went to the construction (+48,000), professional and business services (+36,000), leisure and hospitality (+24,000), and manufacturing industries (+21,000).
- On net, private industries have increased payrolls by 2 percent from one year ago, but some industries have exceeded this average. Construction employment is up 3.1 percent from a year ago, real estate jobs have increased by 2.7 percent, professional and tech services have increased by 2.7 percent, and leisure and hospitality jobs are up 3.1 percent. Perhaps the biggest gainer was temporary help services, up 9.0 percent in the year in spite of relatively small gains in January. By contrast, federal government employment fell 3 percent over the year while state and local government employment grew slightly, by 0.4 and 0.1 percent, respectively.
- The household survey showed more positive figures. The unemployment rate was 6.6 percent, which the BLS classifies as essentially unchanged from last month’s 6.7 percent. This figure is notably lower from November when unemployment was 7.0 percent and also much improved from a year ago when unemployment was 7.9 percent.
- What does this mean for markets? The unemployment rate is now also closer to the 6.5 percent threshold that the Fed has set for considering rate increases in addition to the taper of asset purchases which the Fed began in December. The Fed will have to consider weaker than expected payroll data against an improving unemployment rate. Inflation expectations seem to be well anchored and inflation is, for now, under the 2 percent target. While the Fed set a 6.5 percent unemployment rate threshold for rate increases, it’s widely expected that they will taper the bulk of asset purchases before increasing rates, suggesting that the first rate increase is still about 6 months off. Mortgage rates could move suddenly higher in anticipation of rate increases, much as they did last summer when refinance and transaction activity was high, but if purchase transaction volume steadies as it has in recent months and refinance volume evaporates, mortgages rates may adjust in a more gradual fashion.
- Just last week, Janet Yellen became the first ever female Chair of the Board of Governors of the Federal Reserve System. While feminists share in the joy of her accomplishment, from a policy perspective the change may not be noticeable. Because she has been a member of the FOMC since she joined the Board of Governors in October 2010, Janet Yellen is expected to maintain much of the policy that she helped to shape as Vice Chair of the board.
Under QM regulations that took effect in January, one of the underwriting criteria for a loan to be originated as a Qualified Mortgage is that the borrower must meet a monthly debt to income ratio (DTI) of no more than 43 percent . The monthly debt payments include recurrent debt obligations such as student loans, auto loans, revolving debts, and any existing mortgages not paid off before getting a loan .
The chart below shows NAR Research’s calculations of the debt to personal income ratio for student debt, auto, and credit card debt with mortgage debt (red ) and without (blue) across age groups based on household debt and income data in 2012 . Using income data for persons with at least an Associate degree, all age groups will meet the 43% DTI except for the “21 to less than 30 year old” group. For this age group, the monthly student, auto and credit card debt payments are about 30 percent of income. Now, with mortgage payments for a starter price home of $149,425 in 2012 at 10% down payment and a 30-year fixed term , the debt to income ratio (red) increases to 61 percent.
The implication for millennials is that a home purchase may be pushed back and borrowing ability is adversely affected. Assuming that this group’s income grows at 5% per year, they will meet the 43% DTI in seven years. With an average student debt of $21,402, their current borrowing ability declines by the same amount .
REALTORS® may need to provide some insight to first-time homebuyers and options for addressing this issue.
1. Working with the buyer to get an overall financial picture of what can be done.
2. Looking for alternatives may be necessary—rentals, rent to buy, assuming a mortgage, exploring financial options.
 This blog benefited from the comments of Dr. Jed Smith, Managing Director, Quantitative Research, NAR-Research.
 The 43% DTI only applies to qualified mortgages (QM) which are mortgages that provide protection to creditors against consumer’s claims regarding inability to repay. Creditors can still provide mortgages that are not QM but must follow ability to repay guidelines.
 “Ability to Repay and Qualified Mortgage Rule Small Entity Compliance Guide.” Consumer Financial Protection Bureau. http://files.consumerfinance.gov/f/201304_cfpb_compliance-guide_atr-qm-rule.pdf
 Household debt data is from the Federal Reserve Bank of New York Household Debt and Credit Report Q3 2013 at http://www.newyorkfed.org/microeconomics/data.html. Personal income data for persons over 21 years with an Associate degree or higher is from the American Community Survey, 2012, 1 year estimate. http://www.census.gov/acs/www/data_documentation/pums_data/
 Based on NAR’s Affordability Index estimates for first-time homebuyers found on Haver.
 A $21,402 student debt translates to a monthly payment of $244.11 at 6.6 percent interest payable over 10 years. The present value of these payments at 4.1% interest is $ 23,998 and at 90% LTV, the amount borrowed is $ 21,597.80.
- Want a job? Go to the frozen tundra of North Dakota. Massive oil and gas production has helped the unemployment rate to fall to 2.6 percent. Starting wages for flipping burgers is said to run $15 to $18 an hour, while a truck driver can net near a six figure income. There is no need for complaint about the minimum wage in a state economy that creates jobs at a rapid pace.
- North Dakota is by far the leader of the pack in terms of job creation over the past 12 months. Florida, Georgia, Oregon, and Texas round out the top five job creating states.
- Though not a state, at the other end of the spectrum, Puerto Rico is bleeding badly. A total of 25,000 fewer people are working there now compared to a year ago. Its bond has not been officially classified into junk status.
- Jobs will be ever more important for home buying as affordability conditions have been coming down. Home prices are rising much faster than income. Moreover, mortgage rates will likely rise over the course of the year.
- The table below lists the full ranking of job growth rates by states and U.S. territories.
- President Obama made the following comment in his recent State of the Union speech: “One of the biggest factors in bringing more jobs back is our commitment to American energy. The all-of-the-above energy strategy I announced a few years ago is working, and today, America is closer to energy independence than we’ve been in decades.” Irrespective of whether the President or private oil producers should get the credit, America is importing much less oil now than in any recent memory. Let’s hope that some of the big oil winners do what Rockefeller, the first U.S. oil producer, did with his oil money. He gave a sizable chunk to charities, including setting up many historically African American institutions of higher learning like Spelman College in Atlanta. As a result, many African American teachers graduated from there and passed on knowledge to poor rural schools across the South. The literacy rate among African Americans went from 20% before the giving to over 80% by the time of Rockefeller’s passing.
Student loans are one of the fastest rising sources of debt. Student loans are of increasing concern in light of the regulations pertaining to qualified mortgages that require a consumer to have a debt to income ratio of no more than 43 percent.1
As of the third quarter of 2013, student debt stood at $ 1.027 trillion or about 9 percent of total household debt, up from about 3 percent in 2003. It is now the second largest component of household debt next to mortgage debt.
The net income return from a college education is reported as positive, and those with a college education are less likely to be unemployed and have higher incomes. However, the commitment to pay student debt may mean a pushing back of the timetable to purchase a home to build up savings or purchases of more affordable home. A $25,000 student debt reduces the potential homebuyer’s borrowing ability by about the same amount2. For the millennials, the home purchase may be pushed back by about seven years.
REALTORS® may need to work with the client in understanding and addressing student debt constraints:
1. Working with the buyer to get an overall financial picture of what can be done.
2. Looking for alternatives may be necessary—rentals, rent to buy, assuming a mortgage, exploring financial options.
In conclusion, the increasing level of student debt appears to be of rising concern, especially in light of regulations pertaining to ability to repay and qualified mortgages. REALTORS® may need to provide some insight on options for addressing this issue.1 Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z). A qualified mortgage is a mortgage that provides protection to creditors from liability pertaining to a consumer’s inability to repay a loan. 2 A $25,000 student debt translates to a monthly payment of about $285 at 6.6 percent interest payable over 10 years. The present value of these payments at mortgage rate of 4.1% in 2012 is $ 28,031. At 90% LTV, the amount borrowed is $25,228.72
In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses vehicle sales in January.
- Autos and trucks are typically the second most expensive item purchased by consumers after a home. Therefore, it is worth monitoring whether consumers are opening their wallets for vehicles.
- From a recent cyclical peak of 16.4 million (annualized sales rate) in November, vehicle sales fell in two straight month. Sales were 15.4 and 15.2 million, respectively, in December and January. Some portion of the decline can be attributed to the nasty weather. Recall, existing home sales had also fallen much more than what could be explained by winter seasonal patterns. The softness in both home and vehicle sales could therefore imply a shift in consumers’ taste for big outlays.
- Broadly speaking though, the auto industry has been bouncing back. Car prices are being raised and helping the car producers’ bottom line (though at the expense of consumers). Also employment at GM, Ford, and Chrysler plants in Michigan and Ohio has been rising. Jobs are also getting boosted at foreign car companies based in the U.S., such as the BMW plant in South Carolina, Mercedes in Alabama, Nissan in Tennessee, and Kia in Georgia.
- Women need to be aware in negotiating. Nearly all research shows women paying more than men for the same car. Simply kicking the tires does not impart knowledge about the car. However, since women are better drivers than men, as determined by the probability of auto accidents, insurance premiums are lower for the fairer sex. Young adolescent males, who believe they can conquer the world while listening to loud decadent music, are shown to be the most accident-prone and hence the worst drivers.
The weather is getting a lot of attention for driving the pending results in December. As an agent, you know how snow can keep you and buyers from home showings, but how do we know that the weather was responsible for the slip in contract signings as opposed to other market forces and what does it mean for sales in the months ahead? While the December pending home sales figures signal notably weaker home sales figures in January and February, the next few months of data will be better indicators of the 2014 housing market.
Winter Weather: 2012 vs 2013
How abnormal was winter 2013? These two pictures from snow analysis done by the National Operational Hydrologic Remote Sensing Center show a snowier early-December 2013 versus 2012.
It was colder, too. The National Oceanic and Atmospheric Administration keeps information on temperatures that necessitate heat use called “heating degree days”. While December 2013 was nearly normal, it was significantly colder than December 2012. This pattern continued with January 2014 having nearly 144 more heating degree days than January 2013.
Seasonal Adjustment and Winter Sales
Housing data is seasonally adjusted to smooth out the fluctuations we know exist from month to month. For example, many families with school-aged children choose to buy and sell homes during the spring and summer so as to minimize disruption to children during the school year. However, these fluctuations are not uniform and the efforts to smooth are based on estimates of typical monthly patterns than can be revised. A review of past factors suggests that a seasonal revision to an extreme historical value could raise the December Pending Home Sales Index estimate for the US by as much as 5 percent or lower it by as much as 2 percent, though the actual revision is likely to be only a percent or two higher.
Non-seasonal Potential Sources of Weakness
The housing market is entering an interesting year. After record price gains in 2013 and near-record gains in sales many factors could cause slower growth in sales and prices for 2014: implementation of Qualified Mortgage rules that could curtail access to financing, uncertainty over government policy such as tax rules for short sales and flood insurance rates, a relative affordability crunch as the rapid rise in prices has outpaced income growth making homes affordable but much less affordable than they had been in recent years. These factors could be offset by an improving economy generating jobs for potential homebuyers. However, if job creation slows, this momentum will carry over into housing.
Right now, NAR’s forecast calls for sales to be roughly the same in 2014 as in 2013—slightly below the record year. However, after months of payroll job gains near or above 200,000, December’s job gains figure was a surprise on the low end. The months ahead will reveal whether the weak payroll figures and pending home sales figures are seasonal blips, or a sign of a broader weakening.
For market analysts looking for a fuller discussion of how the transaction process can be affected by weather and more weather data, see the longer post here: <link>.
- NAR released a summary of existing home sales data showing that overall existing home sales for 2013 reached a 7 year high of 5.09 million. December showed a slight decrease of 0.6% from a year ago. Existing home sales increased by 1.0% from November 2013 to December 2013.
- The national median existing-home price for all housing types was $198,000 in December, up 9.9 percent from December 2012. Annual price for an existing home in 2013 was $197,100, up 11.5% which was the best price increase in the last 8 years.
- All regions showed growth in prices, but the West had the biggest gain at 16%. The Northeast had the smallest price again at 3.6%.
- December’s inventory figures dropped 9.3% from November, but up 1.6% from a year ago. Prices will continue to increase if there is no considerable increase in inventory. A boost in housing starts should also help to stabilize price growth.
- With sales up this month, the year concluded on a high note giving the housing market a strong year of home sales. We can still expect mortgage rates to rise as well as home prices for this new year. With the changes in mortgage rules, there is still a positive outlook for a healthy housing market for 2014. See the full NAR Existing Home Sales press release here and data tables here.
- Find a full graphical summary of the data here.
Latest EHS data, as an infographic:
Approximately 32 percent of REALTOR® respondents reporting on their last sale in December reported a cash sale. Many REALTORS® have reported that cash buyers typically win against those buyers needing to obtain a mortgage. Investors and international buyers typically make a cash purchase. About 11 percent of reported sales made by a first-time buyer were cash sales compared to above 70 percent for investors and international buyers. See the December REALTORS® Confidence Index Survey report for more information.
In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the homeownership rate.
- The U.S. homeownership rate remained roughly stable at 65.2 percent in the 4th quarter of 2013 from 65.3 in the 3rd quarter of the same year. It was also roughly the same as the 4th quarter of 2012 when the rate was 65.4 percent. If adjusted for seasonal variation, the rate has remained stable at 65.1 percent since the second quarter of 2013.
- The Census Housing Vacancy Survey, the source of this data, shows that there are just shy of 115 million households in the U.S. and slightly fewer than 75 million of those households own the home that they live in. This also means that every one percent change in the homeownership rate at this population size results in a shift of 1.2 million households from renting to owning or vice versa.
- The Census bureau actually has several estimates of the homeownership rate which are slightly different and typically show similar trends. This particular data source has been published quarterly since 1965. As shown in the graph below, this is not the first boom and bust that we’ve seen in the homeownership rate. From the beginning of the series in 1965 through 1980 the homeownership rate was on a slow and steady rise from a low of 62.9 percent. In 1980 it peaked at 65.8 percent before falling back to 63.5 in 1985.
- From its 1985 low through 1995 the homeownership rate remained in a roughly narrow range of 63.5 to 64.5. In 1995, the homeownership rate began a steady ascent that peaked at 69.2 percent in 2004. Since that time, the rate has receded, but at slightly higher than 65 percent, it remains higher than the 1985 to 1995 norm. With a year’s worth of readings around the 65 percent mark, has homeownership reached its near-term low? Will it stabilize at 65 percent for a long time as it did in the late eighties and early nineties or will it climb again? Only time will tell.
- In favor of a stabilizing homeownership rate, homeownership rates have begun to rise in the Midwest and South—regions with homeownership rates already above the US average. By contrast, homeownership in the West continues to slump and the pattern in the Northeast varies substantially from quarter to quarter.
In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the latest mortgage applications data.
- Seasonally adjusted applications to purchase homes rose 1.5% in the week ending January 24th compared to the prior week. The purchase index is roughly 12% lower than the same time in 2013. Last week’s improvement comes after a 3.5% drop in the prior week. Purchase applications have been volatile after a sharp increase in the week prior to the implementation of the new qualified mortgage rule two weeks ago.
- The Qualified Mortgage rule went into effect for all applications received on or after January 10th. The “QM” rule introduced stronger underwriting, fee and pricing protections for consumers, but those protections could also raise costs or limit credit access for some consumers.
- The average rate for a 30-year fixed rate mortgage as reported by the Mortgage Bankers Association eased five basis points from the prior week to 4.52%, and has eased nearly 14 basis points in the last 2 weeks.
- In a bit of a surprise, new purchase applications for conventional mortgages eased 0.3% following a decline of 2.9% in the prior week, but applications for government financing jumped 5.8%, bettering the prior week’s decline of 5.2%. This shift could hurt the relatively nascent revival of the private mortgage insurance business if it is sustained.
- Mortgage applications have been volatile since the implementation of the new qualified mortgage rule two weeks ago. Since then mortgage rates have eased helping to buttress applications. What’s more, the MBA’s index reflects a larger mix of retail lenders than small and mid-sized independents whose influence grew in the last two years as a result of the refinance boom. The qualified mortgage rule is likely to have a stronger impact on these small to mid-sized mortgage originators as they are not exempt from the rule nor do they have the deep legal resources to move aggressively in this new regulatory environment as many of the larger retail operations would. As a result of these two factors, this week’s reading may mask to some extent shifts in the market. Still, applications reflect the same moderate downward trajectory relative to last year as foot traffic, pending home sales and existing homes sales have displayed in recent months.
Home prices are generally still rising. About 89 percent of REALTORS® who responded to NAR’s monthly survey reported constant or rising prices (87 percent in November). Healthy demand, the drop in distressed sales, and low although improving inventory levels have supported the price growth. See the December REALTORS® Confidence Index Survey report for more information.
Approximately 11 percent of reported sales were of properties that sold at a net premium to the original listing price. In mid-2013, about 20 percent of REALTORS® reported selling properties at a premium.
In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s second update discusses the Case Shiller Home Price index.
- Case Shiller data is yet another source confirming that home price increases continued in November 2013. The 10-city and 20-city indexes each rose by 13.8 and 13.7 percent, respectively, from November 2012. NAR data released last week showed a gain of 8.9 percent in the same period and showed continued gains of 9.8 percent in the year ending December 2013.
- While this increase was the 18th consecutive month of year-over-year increases in home prices reported by the 20-city index and the 9th consecutive month of double-digit year-over-year gains, the index remains about 20 percent below the peak it reached in July 2006.
- It’s also of note that NAR data for November showed a deceleration or slowing in the rate of price growth whereas Case Shiller data shows acceleration or increase in the rate of price growth. This is probably due to the lag in the Case Shiller data.
- NAR reports the median price of all homes that have sold while Case Shiller reports the results of a weighted repeat-sales index. Case Shiller uses public records data which has a reporting lag. To deal with the lag, Case Shiller data is based on a 3 month moving average, so reported November prices include information from repeat transactions closed in September, October, and November. For this reason, the changes in the NAR median price tend to lead Case Shiller.
- NAR data showed continued price growth in December but a deceleration from the double-digit pace seen in the summer and spring, so expect Case Shiller repeat prices to follow suit.
- Case Shiller reports price indexes for the 20 cities it tracks in addition to the 20-city index. By its measure of prices, Denver and Dallas are the only metro areas to have fully recovered from housing price declines to reach recent new highs, but Denver is slightly below the high it set two months ago.
- As seen in other house price measures such as NAR’s, Case Shiller showed the biggest 1-year price growth in western cities such as Las Vegas (27.3%), San Francisco (23.2%), Los Angeles (21.6%), and San Diego (18.7%). The smallest year-over-year gains were seen in the East and Midwest in cities like New York (6.0%) and Cleveland (6.0%).
- Americans are less pessimistic than before, but not yet optimistic. The latest consumer confidence index rose to 80.7 in January from 77 in December and 72 in November. However, it has yet to reach the 100 line, the point at which it is considered neutral. For comparison, the index was in the 110s during the second-term of Ronald Reagan Presidency and in the 130s during the second term of Bill Clinton’s Presidency.
- The trend, however, is a steady improvement. At the depths of the economic downturn, the index was touching a record low of 25. Further steady improvements in the job market will continue to lift confidence, which in turn can lift people to make major expenditures including home purchases.
- Changing the mood of the country can have a measurable impact on the country while costing not a dime of taxpayers’ money. But getting a speech right or projecting power is never an easy task from the country’s leadership persepctive.
- Back during the 1930s Great Depression, FDR wanted to try everything possible to lift the spirit of the folks. He even hid his physical handicap in order to show health and strength, though being in a wheelchair would be considered a less consequential matter in today’s world. Winston Churchill also had huge confidence in America at that time just as the stock market was tanking big time (1932), saying in essence that U.S. will continue to go on living with a strong resurgence even if the rest of the world sank into sea (as he watched the menacing growth of Nazism in Germany and terror in Stalin-ruled Soviet Union). Churchill put his money where his mouth was – in the U.S. stock market – and wound up making a hefty return. Confidence matters.
Confidence about current market conditions was essentially unchanged from November to December . The REALTORS® Confidence Index for single family sales registered at 59 (same as in November). The indexes for townhouses/duplexes was at 43 (42 in November) while the index for condominiums was at 37 (38 in November). An index of 50 marks “moderate” conditions. See the December REALTORS® Confidence Index Survey for more information.
Confidence about the next 6 months saw a slight improvement in December. The 6-month outlook index for single family rose to 66 (64 in November). The index for townhouses slightly rose to 48 (46 in November) while the index for condominiums registered at 44 (43 in November). REALTORS® expressed concern about a variety of factors that can impact the market such as the new regulations pertaining to the Ability to Pay Rule for Qualifying Mortgage, the reduction in FHA loan limits, uncertainty regarding flood insurance rates, and the state of the economy.
 An index of 50 delineates “moderate” conditions and indicates a balance of respondents having “weak” (index=0) and “strong” (index=100) 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.
In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the latest in new home sales data.
- New home sales fell for the second consecutive month. Sales fell 7 percent in December following a 4 percent decline in November. Though new home sales generally reflect the degree of new home construction – that is, if more homes are built then there will be more new home sales – the latest weakness is a part of weakening demand, which has become hampered by increasingly challenging affordability conditions.
- Even with softer demand, new home prices continue to rise. In December, a typical new home sold for $270,200, up 4.6 percent from one year prior. New home prices partly reflect construction material costs, which are incorporated into the supply and demand dynamics. The gap between new and existing home prices is sizable in the current environment, suggesting existing homes could be a better buy.
- The inventory of newly built homes is essentially at a 50-year low. More new home construction is needed. Housing starts need to rise by at least 50 percent quickly to help relieve both new home inventory and existing home inventory. The speed of sale is quick. In the latest month, it took 3.2 months to sell a new home compared to over 12 months during the depths of the housing market crash.
- Details on the data are as follows. In December 414,000 new homes went under contract compared to 445,000 in November. Because the data follows the standard reporting format (seasonally adjusted and annualized), the latest two-month softness is more than the usual slowdown that occurs at the end of the year. There is no data for new home sales closings. It is only contract signings that are reported.