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.
REALTOR® confidence in current market conditions dipped in April 2014 compared to March 2014, according to the latest REALTORS® Confidence Index. Many REALTORS® reported problems with “tight financing” and “extremely low inventory,” and some reported the lingering negative effects of the unusually harsh winter on spring sales (IN, NC, VA, NJ).
Confidence about the outlook for the next six months also edged down in April. REALTORS® remained concerned about the low levels of inventory, difficult credit conditions, and in some states the effect of higher property taxes (TX) and the uncertainty about flood insurance regulation and costs (FL, NH, HI).
- Home prices continue to rise quite strongly according to the Case-Shiller home price index. In March, prices rose 12.4 percent from one year ago. Prices have been increasing at a double digit rate of appreciation for the past 12 months.
- The latest data, however, is outdated. The purported March figure is not for a single month but rather a 3-month average covering January, February, and March. With the month of June only a few days away, the freshest information from Case-Shiller incorporates what had happened in January – a rearview mirror into the deep past.
- Even though Case-Shiller price information is not reflective of what is happening right now, the data is highly useful in confirming what had already occurred several months ago. The NAR median price, by contrast, showed a price gain of 5.2 percent in April. REALTORS® have even better information on the local market and all the idiosyncratic neighborhood factors. Therefore, it is critical for REALTORS® to lower home sellers’ expectation about the true value of their homes.
- Of the 20 metro markets covered by the Case-Shiller index, the strongest price increases were in Las Vegas and San Francisco, both with over 20 percent gain in one year. Also worth noting, but not placing too much weight, is the annualized growth in prices. This measure computes what the price growth would be over the one year period if the latest data change were to continue at the same pace. Chicago, Detroit, and Minneapolis show heating trend. Charlotte and Tampa are showing a marked decelerating trend.
- One lesson of home prices is that they will rise even after a severe fall. That’s because land is limited. The typical single-family home price was less than $20,000 in the mid-1960s. Now it is ten times higher. One can even go all the way back to the time of Thomas Jefferson. Understanding the importance of the port city New Orleans, President Jefferson offered to buy the city from Napoleon. Known for doing things only on a grand scale, Napoleon countered by offering not only the city but the vast “worthless” land of Louisiana (spanning Oklahoma to Montana) at a 2-cent per acre price. As proven frequently, buying real estate for the long haul has been a good bet.
- Contract signings for newly built homes bounced back in April after suffering two consecutive months of decline. A total of 443,000 new homes went under contract in the past month, an increase of 6 percent.
- New home sales (which are only contract signing and not closings) represent a small share of the total housing market. Currently, the existing home sales market covers over 90 percent of all sales. It was reported that existing home sales (closings) also rose in April.
- The inventory of newly built homes has been slowly rising. Still, the inventory conditions are at historic lows. Whatever the homebuilders build, it is being sold quite quickly. It took on average 3.4 months to sell a newly built home. A few years ago, it took over 10 months. This sounds like a clear signal for homebuilders to produce more homes.
- The median price of a new home in April was $275,800. Though a slight decline, the newly built home is currently carrying a hefty premium over the existing home price. Since new home prices must cover the cost of construction there is a little room for a price decline. That means existing home prices are a better bargain compared to new home prices by historical standards.
- Unlike automobiles where some consumers will only consider a new car without the old smell, Americans understand the unique value of location, location, location that existing homes are currently situated. That is why far more existing homes are sold compared to new in America. By contrast, in Japan, where people are obsessed with cleanliness (hot cleansing towels before every meal, for example), newly built homes with no history of past owners are preferred. Perhaps related to cleanliness and probably not to newly built homes, the Japanese have the highest life expectancy in the world.
- The number of people applying for mortgages for a home purchase fell in the latest week by 3 percent from the prior week. From a year ago, activity is down by 12 percent. A negative hit to housing affordability from rising home values and from higher mortgage rates has damped home buyer enthusiasm.
- Fortunately, all-cash sales are still going strong, consistently hovering at about one-third of all transactions.
- Refinancing activity is on the rise for the 3rd consecutive week as mortgage rates inched lower. However, this business line will feel great pain for much of the year. Refis are off by more than 60 percent this year. There are just not that many mortgages that can be refinanced, particularly as mortgage rates will inevitably rise.
- An announcement last week by the new boss (Mel Watts) of Fannie and Freddie regulators could meaningfully open up mortgage credit. He has expressed displeasure at the too-stringent mortgage market and seems open to lowering the guarantee fees since Fannie and Freddie are continuing to make good profits after having paid back all of taxpayer bailout money. Depending on how mortgage standards are dialed down, a boost of 5 to 10 percent additional mortgage approvals are a possibility.
- Opening mortgage credit without an increase in inventory could reignite a bidding war of more buyers without more sellers. It is therefore critical to ramp up housing starts via more accessible construction loans to bring housing supply in line with expected rise in housing demand.
- At the national level, housing affordability is down for the month of March, as the median price for a single family home in the U.S. increased due to a continued lack of housing inventory. The median single-family home price is $198,200, up 7.4 % from a year ago.
- Mortgage rates are up 72 basis points (one percentage point equals 100 basis points) from last year; nationally, affordability is down from 195.3 in March 2013 to 170.3 in March 2014.
- Income levels are up 2.1% from last year. An increase in inventory along with price stabilization will improve affordability.
- From one year ago, affordability is down in all regions. The West saw the biggest decline in affordability as a result of having the largest price gain at 12.5%.
- Interest rates are the lowest they have been since November of 2013. This break in increases should help potential homebuyers.
- What does housing affordability look like in your market? View the full data release here.
- The Housing Affordability Index calculation assumes a 20 percent down payment and a 25 percent qualifying ratio (principle and interest payment to income). See further details on the methodology and assumptions behind the calculation here.
I remember giving my mom a hard time when I was kid saying we moved too much (we did), to which she retorted “Everyone moves every six years. It’s a fact.” It was only many years later that I did find out it was indeed a fact. Looking at data from the Profile of Home Buyers and Sellers, the median tenure from 2000-2008 was six years. From 2009 to 2013 the number has incrementally increased to its present figure, a median of nine years.
There has been much discussion about the reasons why tenure has increased. It is a multifaceted issue:
• There are still underwater home sellers
• The lock in rate of first-time buyers being able to skip the starter home and jump right into their trade-up/family home
• The lock in rate of low mortgages
I’d like to address the first two issues with time series data from the annual Profile of Home Buyers and Sellers report. This year in the profile sellers were asked if they wanted to sell earlier but waited or stalled because their home was worth less than their mortgage—13 percent of recent sellers (who went on to purchase another home) were in this situation. This was most common among those who bought their home six to 10 years ago—about one in five sellers were in this situation. Those sellers who sold at that nine-year mark could have really wanted to sell after six years.
As home prices dropped, interest rates hit record lows, and housing affordability hit record levels, buyers were able to buy more home than they could in the past. This phenomenon increased the expected tenure in home. First-time buyers were buying homes that were 1,516 square feet in 2006 – this figure jumped to 1,670 square feet in 2013. Their desire to move sooner also decreased. The expected tenure in home for first-time buyers in 2006 was just six years in the home – in 2013, the expected tenure in home increased to 10 years. The difference of only 154 square feet could be the difference in having a room for a den that could transform into a room for a child in the future, making the need and desire to move less certain and pushing the idea farther into the future. Interestingly, over the same time period the age of first-time home buyers did not change, staying within a range of 30 to 32 years old.
It will be interesting to see in coming years if tenure in home stays at nine years, and a new normal is created, or if tenure will go back to the historical median of six years.
For more information on data from the Profile of Home Buyers and Sellers, visit: http://www.realtor.org/reports/highlights-from-the-2013-profile-of-home-buyers-and-sellers
The 2014 NAR Commercial Member Profile, released earlier this week, reports that Realtors® who practice commercial real estate saw an increase in sales transaction volume and medium gross annual income last year. NAR commercial members who were surveyed conduct all or part of their activity in commercial sales, leasing, brokerage and development for land, office and industrial space, multifamily, and retail buildings, as well as property management. Highlights from this year’s report can be found below:
BUSINESS CHARACTERISTICS OF NAR COMMERCIAL MEMBERS
- Fifty-eight percent of commercial members reported having a broker license and 26 percent reported having a sales agent license.
- Thirty-four percent of respondents are members of any of several commercial affiliated institutes, councils or societies.
- Investment sales are the most cited primary specialty of commercial members and is the top ranked secondary specialty area. Land sales are the second most common primary and secondary specialty area.
- Commercial members typically have been in real estate 25 years, in commercial real estate 15 years, and members of NAR 18 years.
BUSINESS ACTIVITIES OF NAR COMMERCIAL MEMBERS
- Commercial members completed a median of eight transactions in 2013.
- The median sales transaction volume in 2013 for members who had a transaction was $2,554,700—an increase from $2,507,700 in 2012.
- The median gross leasing volume was $431,600 in 2013—a decrease from the $476,400 in 2012.
BUSINESS REVENUE AND FIRM AFFILIATION
- The median gross annual income of commercial members was $96,200 in 2013, an increase from $90,200 in 2012. The median gross annual income of commercial members has increased for the past four years.
- Eighty percent of commercial members work at least 40 hours a week.
- Sixty-two percent of commercial members of NAR derived 50 percent or more of their income from all commercial real estate in 2013.
- Fifty-seven percent of members work for a local commercial real estate firm.
DEMOGRAPHIC CHARACTERISTICS OF NAR COMMERCIAL MEMBERS
- The median age of commercial members is 59-years-old.
- Seventy-seven percent of the practitioners are male.
- Sixty-four percent of commercial members have a bachelors’ degree or higher.
For more information on the latest Commercial Member Profile, visit: http://www.realtor.org/reports/commercial-member-profile
- Fewer workers claimed unemployment insurance in the week ending May 3, an early indicator that the job market continues to improve surely even if slowly. Initial claims for unemployment insurance were at 319,000, fewer by 26,000 from the previous week’s level.
- Claims are now down to their normal levels. If this trend continues, NAR forecasts about 2 to 2.5 million net new job creations this year and the next year.
- For the week ending April 26, the largest decrease in claims were in Michigan (-6,642), New Jersey (-2,269), Pennsylvania (-1,704), Maryland (-1,670), and California (-1,237). The largest increases in claims New York (+23,523), Massachusetts (+3,983), Rhode Island (+1,080), Oregon (+959), and Delaware (+956).
- Still, what matters to housing is the number of people with jobs as depicted in the graph above. Although the unemployment rate has been dropping with the April rate at 6.3 percent, the share of the population that is employed has barely nudged at 58 percent from its peak of about 63 percent. In a testimony before Congress yesterday, Federal Reserve Board Chairman Janet Yellen reported that labor market conditions are “far from satisfactory” and that “housing may be stalling and bears watching.” Existing home sales are hovering at about 4.6 million in 2014, down from last year’s average of about 5 million.
 Claims filed under the regular state programs, seasonally adjusted
- More people applied for mortgages to buy a home in the past week (8.8 percent increase). Despite the weekly increase, the overall trend to obtain mortgages has not been too encouraging. It is down by 16 percent from one year ago and has been bouncing around at 15 year lows.
- Good thing all-cash transactions are partly making up for the sluggish mortgage market. Cash sales have been running at around one-third of transactions in recent years, compared to a historical norm of around 10 percent.
- Because of huge cash reserves held by financial institutions there is abundant incentive to lend more. Recent delinquency trends at near historic lows for mortgages originated in the past four years should also be an added incentive to lend more. Moreover, we have a housing shortage situation which assures further price gains. And when prices rise, people do not default. The financial industry profit levels have been sky high of late.
- The very low mortgage default rates are the reason why Fannie and Freddie have been raking-in huge profits lately. It is unclear why Fannie and Freddie now still charge high guarantee fees even after having paid back the taxpayers’ bailout money. The extra profit is going straight to the U.S. Treasury, where money is dispensed for all government programs, such as buying fighter jets and food stamps. But why should homebuyers pay the extra fee so that government can get the extra revenue in this fashion, when the sole mission of having Fannie and Freddie is to support the real estate sector and not national defense or welfare programs?
- Meanwhile, because mortgage applications remain mostly lackluster because of excessively tight underwriting conditions, renters are not converting into homeowners. Rental households have risen by seven million in the past decade while homeowner households have increased by only one million. The homeownership rate has plunged as a result.
- Though not everyone can be nor should be a homeowner, limiting many good renters to be stuck being renters raises serious social issues. Past research has shown that children of renters compared to that of homeowners vastly underperform at school (after accounting for socioeconomic demographic factors). Renters are less likely to give to charities or get involved in community activity. Is the country moving unnecessarily towards a renter nation?
First time home buyers accounted for 30 percent of residential sales in March (slightly up from 28 percent in February), according to the latest REALTORS® Confidence Index report.
REALTORS® have reported that first-time buyers are having problems with tighter underwriting standards and required higher down payments. In some cases, financing is reported approved but for a lower amount. REALTORS® have also reported that the increase in FHA mortgage insurance costs is discouraging buyers or making loans unaffordable.
- Both exports and imports rose in the latest month, marking general growth in international trade for five straight years. Home sales therefore can be expected to rise to international buyers from greater linkage with other countries.
- Part of the growth is foreign investment in the U.S. More Germans will need a home in Greenville, SC, where a BMW factory will be expanding. Homebuyers from France can be expected in Mobile, AL in the future as an Airbus production facility gets completed. More Koreans will be buying homes in college towns across America as they send their kids to be educated in the U.S.
- After a major pullback during the recent past recession, U.S. exports have risen by more than 50 percent. Exports hit a new all-time high in March.
- Imports are also rising. But due to slower growth, imports are only matching up with pre-recession peaks. The United States is importing much less oil now than before because of massive new production in North Dakota.
- Given that trade with China has become increasingly important, expect more Chinese buyers of U.S. properties than ever before.
- As the charts below show, international trade slumps during a recession. There was a total collapse in international trade during the awful Great Depression in the 1930s as every country restricted trade by imposing high tariffs.
- Before the birth of the United States, sovereign states Virginia and Maryland signed a treaty to openly trade between the two states. Tobacco to Maryland and Crabs to Virginia. That helped improve the economies of both states. Recognizing the benefits, other states soon signed on to trade with each other as well. This type of mutual benefit is the primary reason why most countries have been reducing trade barriers over the years.
With limited inventory relative to demand, properties sold faster in March, at a median of 55 days, according to the latest REALTORS® Confidence Index. Based on reported days on market of a survey of REALTORS®, short sales were on the market for the longest, at 112 days (98 in February), and foreclosed properties were on market at 55 days (60 in February). Non-distressed properties were on the market at 53 days (61 in February). Conditions varied across areas.
 A median of 60 days means that half of the properties were on the market for less than 60 days and another half of properties were on the market for more than 60 days.
- The headline figure from today’s employment report was strong, but the underlying numbers still point to weakness. 288,000 payroll jobs were created in April according to the Bureau of Labor Statistics, while the March numbers were revised upward by 11,000 to 203,000. The 85,000 jump from March is significant but likely reflects some catch-up following several months of adverse weather. The improvement was broad-based across industries and the government.
- The unemployment rate slipped from 6.7% to 6.3% over this same period. This figure is derived from a different survey which queries households about their employment position. Consequently, non-payroll jobs are counted. While the figure is strong at face value, the decline was in part due to the departure of 806,000 workers from the labor force. Fewer workers mean fewer people earning incomes and spending, so while the jobs increase is positive, the decline in people searching for work is troubling. This portion of the report is volatile, though, so next month’s figures and revisions will be important. Because of the drop in the labor force, the labor participation rate fell from 63.2% to 62.8%.
- This month’s reading of the labor market was a mixed bag. The job gains, decline in unemployment rate, and revision point to improvement and will help consumer confidence, but the loss of 806,000 workers and drop in labor utilization suggest a schism in the labor force driven by a skills miss-match where workers with skills in demand are being hired, while others languish. The economy depends on consumer spending and if the number of persons spending declines, those with jobs must spend more, which is difficult to sustain. Better weather in May will help construction and construction employment, and the April pop will likely ease to a higher-than-recent plateau, but still far more jobs are needed to affect the large reserve of unemployed and underemployed.
About 60 percent of first time home buyers put down 6 percent or less, according to the March REALTORS® Confidence Index. This is down from about 74 percent in 2009. Under tight underwriting standards, REALTORS® have reported that buyers who pay cash or put down large down payments generally win against those offering lower down payments. REALTORS® also reported that in some cases financing is approved for a lower amount. For buyers with sufficient financial resources, a higher down payment also results in saving on mortgage insurance premium payments.
Demand for rentals remained strong in March, according to the latest REALTORS® Confidence Index. Among those REALTORS® involved in a rental, 48 percent (46 percent in February) reported higher residential rents compared to 12 months ago. Rising rents may make home ownership more attractive but also may slow the ability of current renters to save for a home purchase.
Based on information from realtor.com, NAR economists have formulated a country search index delineating which countries had the most home search contact on realtor.com in 2013.
The index is based on a count of actual house searches by potential buyers from specific countries (excluding Germany and Japan due to large numbers of U.S. citizens residing there temporarily) throughout the year as measured by traffic on www.realtor.com, NAR’s official property listing website. Realtor.com helps connect people with the content, tools and expertise they need to find their perfect home, including information on homes for sale; connections with REALTORS®; neighborhood, moving, and mortgage advice; and in terms of buying a home– how to “make it happen”.