- One broad trend across the country has been a consistent and steady decline in shadow inventory. There is already a shortage of visible inventory. So a shorter shadow – those properties with serious mortgage delinquency or in some stage of the foreclosure process – will not help relieve the inventory situation. With new home construction still sluggish the housing inventory shortage could last longer. Home price increases in many parts of the country are nearly assured as a result. The price gains in some cases will be too fast and not good for the overall health of the local real estate market.
- The shadow made up 4.5 percent of all mortgages, down from nearly 10 percent few years ago. In terms of foreclosure starts, the latest figure of 0.46 percent is essentially back to normal. Due to the thinning out of the shadow as well as from rising home values, the share of distressed property sales is now hitting the single-digit percentage. This means, home prices will strengthen (since there will be fewer deeply discounted properties). It also means that those practitioners who specialize in foreclosures or short-sales need to start thinking about a change in business models to normal home buyers and normal positive-equity home sellers.
- Like politics all real estate is local. Some states still carry a large dark shadow. New Jersey and New York are two examples. Home prices as a result will only rise very slowly in these states with long shadows.
- Since shadow inventory will not turn into visible inventory in the future, what must occur to relieve a housing shortage? Investor-owned properties through a flip could show up on the market. However, most institutional investors who bought a few years ago are indicating a long-term hold to get rent gains which have been nice and profitable. The only true source of more supply is from homebuilders. Unfortunately, they are still not ramping up production to meet the market needs. Consequently, home price gains this year could be too fast for the country, easily rising double or triple the rate of income growth.
- Subprime lending and the consequent huge rise in mortgage delinquency rates almost took down the whole financial system and the global economy back in 2008-2009. Lending to people with little known credit history proved to carry huge downside risks. There is, however, one lending program similar in terms of lending to people with virtually no credit history that has been working well. It is microcredit lending for small-time entrepreneurs in poor countries. The sum is very small like $100 so that a person can buy cooking oil and a cart to do a ready-to-eat vendor business. After observing re-payment patterns, this micro-lending is now mostly concentrated to only one group: women. Unlike men, nearly all women repay the borrowed money. Men perhaps are more prone to rolling the dice or drinking away the borrowed money.
- Existing home sales rose 6.1 percent in March from one month prior while new home sales fell 11.4 percent. These headline figures are seasonally adjusted figures and are reported in the news. However, for everyday practitioners, simple raw counts of home sales are often more meaningful compared to the seasonally adjusted figures. The raw count determines income and helps better assess how busy the market has been.
- Specifically, 403,000 existing homes were sold in March while new home sales totaled 45,000. These raw counts represent a 37 percent gain for existing home sales from one month prior while new home sales were unchanged. What was the trend in the recent years? Sales from February to March rose by 25 percent on average in the prior three years for existing homes and by 12 percent on average for new homes. So this year, existing homes outperformed compared to its recent norm while new home sale underperformed. Note that the size of the existing home sales market is about 10 times larger than the new home sales market.
- Why are seasonally adjusted figures reported in the news? To assess the overall trending direction of the economy, nearly all economic data – from GDP and employment to consumer price inflation and industrial production – are seasonally adjusted. For example, if December raw retail sales rise by, say, 20 percent, we should not celebrate this higher figure if it is generally the case that December retail sales rise by 35 percent because of the holiday gift buying activity. Similarly, we should not say that the labor market is crashing when the raw count on employment declines in September just as the summer vacation season ends. That is why economic figures are seasonally adjusted with special algorithms to account for the normal seasonal swings in figures and whether there were more business days (Monday to Friday) during the month. When seasonally adjusted data shows an increase, then this is implying a truly strengthening condition.
- What to expect about home sales in the upcoming months in terms of raw counts? Independent of headline seasonally adjusted figures, expect busier activity in April and even better activity in May for existing home sales. For example, in the past 3 years, April sales rose by 11 to 18 percent from March and with more gains in May where sales rose by 11 to 12 percent from April. For the new home sales market, the raw sales activity in April and May tends to be only modestly better compared to those occurring in March. All in all it’s no time to be thinking of vacation during these months of the year for REALTORS®.
National Arbor Day is celebrated on April 24th, and is a time to celebrate the importance of trees. For home buyers who recognize their significance, finding a home with features such as being located on a wooded lot, having many trees, or being close to parks is important. Using the 2013 Profile of Buyers’ Home Features Preferences, 2014 Profile of Home Buyers and Sellers, and the 2015 Home Buyer and Seller Generational Trends Report we can examine which features recent home buyers considered important.
- Eighteen percent of repeat buyers and 25 percent of buyers purchasing a new home said that being on a wooded lot or one with many trees was very important.
- Twenty percent of home searchers in the South and 30 percent of home searchers in rural areas thought that having a wooded lot or many trees was very important.
- Twenty percent of single males and 18 percent of married couples thought that finding a home on a wooded lot or with many trees as very important during their home search.
- Among home searchers, 20 percent looking for a duplex, apartment, or condo with 2-4 units, and 18 percent searching for a detached single-family home thought that it was important to find a home on a wooded lot or with many trees.
- Twenty-three percent of recent buyers felt that convenience to parks or recreational facilities was an influencing factor for their neighborhood choice.
- Recent buyers living in a suburb or subdivision (28 percent) and unmarried couples (27 percent) felt that the convenience to parks or recreational facilities was an influencing factor for their neighborhood choice.
- Looking generationally, convenience to parks and recreational facilities had the most influence on recent buyers aged 34 and younger at 28 percent, and recent buyers aged 35 to 49 at 24 percent.
For more information on home buyers check out the Arbor Day Infographic, the 2013 Profile of Buyers’ Home Features Preferences, the 2014 Profile of Home Buyers and Sellers, and the 2015 Home Buyer and Seller Generational Trends Report.
Visit the Arbor Day Foundation for more information on getting involved this Arbor Day.
- Contract signings to buy a newly constructed home fell in March from the prior month. The likely reason is the lack of construction rather than the lack of demand. The single-family housing starts had been lower in February and March compared to prior months. With fewer choices coming on line, only fewer contracts can be signed.
- Diving into the numbers, the seasonally adjusted new home sales (which are technically contract signings and not closings) declined to 481,000 in March compared to 543,000 in February. One can take comfort that this year’s figure is comfortable above last year’s sales pace of 403,000. Moreover, the latest monthly decline is likely due to lower new home construction. The housing starts to build single-family homes in February and March had fallen. The demand for new homes is still there as evidenced by quick selling time. On average, it took 4 months to find a buyer after completion of construction, which is near historic lows.
- The existing home sales are a much larger market segment comprising over 90 percent of all sales. And existing home sales rose nicely in March, implying clearly that there are more buyers in the market.
- The home price of newly constructed homes has been rising more strongly than existing homes. In March, a typical new home sold for $277,400. A typical existing home sold for $212,100. The price premium for a new home over existing home is 31 percent in the latest month, compared to the average premium gap of 21 percent from the year 2000 to today. In addition, the price index of a new home (to account for different size and construction costs) rose by 13 percent.
- There is a housing shortage as evidenced by fast rising rents and fast rising home prices. Therefore more new homes need to be built. The national homebuilders like Lennar and KB-Homes are doing just that as they are able to find money from Wall Street. However, in America the bulk of new homes historically had been built by small local builders but they have been largely out of the game in recent years. Why? The local builders need construction loans and these have been very hard to obtain because of onerous new regulations arising out of Dodd-Frank legislation. Since the small lenders, unlike the large conglomerate banks, do not cause systemic risk to the economy, an exemption from new financial regulations on small banks should be closely looked at. By doing so, construction loans can be more readily made and local homebuilders can provide the necessary supply to the market. Slower home price growth and slower rent growth is what the consumers and the country needs at the moment.
The top five countries with international buyers purchasing in the United States are Canada, China, India, Mexico, and the United Kingdom. Where and why are they buying?
Where Are Foreign Buyers Searching?
Information from realtor.com (Omniture Discover) shows the U.S. cities for which potential foreign buyers have been most actively searching on-line: New York, Los Angeles, Miami, Orlando, Las Vegas, Fort Lauderdale, San Diego, San Francisco, Houston, and Naples.
Why are they Interested in Buying?
NAR’s annual Profile of Home Buying Activity collects information on why foreign buyers are interested in U.S. properties:
- Canadians tend to buy in Arizona, Nevada and Florida—apparently seeking winter vacation opportunities. Cities recently reported by realtor.com include Fort Lauderdale, Orlando, Las Vegas, Los Angeles, Miami, and Naples.
- Chinese buyers are strongly focused on the west coast, which provides geographical proximity, educational opportunities, and business and trade opportunities, for example, Los Angeles, San Francisco, Seattle, as well as New York and Houston. Many of the purchases are for business, educational, and investment purposes, although there is also interest in vacation homes.
- Indians purchase throughout the country, much less concentrated in purchases than other nationalities. Cities mentioned include New York, Los Angeles, San Jose, Dallas, and Chicago. Given the lack of areas generally mentioned as resort/vacation locales, REALTOR comments that many purchases by Indian buyers are business oriented seem to be on target.
- Mexicans are particularly interested in Texas. Cities include San Antonio, Houston, and El Paso, as well as San Diego and Miami. Both investment and lifestyle are of interest, as well as a desire in some cases for vacation homes.
- U.K. citizens focus on both vacation and work oriented areas: Los Angeles, New York, Orlando, Kissimmee, Houston, and San Francisco have featured prominently in recent searches.
In short, there are a wide variety of reasons underlying foreign purchases. At a time of rising prices and a rising dollar exchange rate, the motivation behind the purchase may drive the property decision. However, despite rising prices U.S. property appears to continue to be reasonably priced relative to properties in many foreign countries.
In the March 2015 REALTORS® Confidence Index Survey, REALTORS® reported they were increasingly more confident about the housing outlook in the next six months compared to the case in February and a year ago. The seasonal uptick in market activity during spring and summer, the low interest rate environment, and recent initiatives such as the reduction in FHA mortgage insurance premium (by 0.5 percentage points) and down payment requirements (from 5 percent to 3 percent) for GSE-backed loans are likely underpinning the higher confidence.
The following map shows the REALTOR® Confidence Index-Six-Month-Outlook by state for single family homes based on data gathered from January-March 2015. An index above 50 indicates that more REALTOR® respondents had “strong” outlook compared to those who had “weak” outlook. All states registered an index greater than 50. The local real estate markets in Texas, North Dakota, and Louisiana which are facing a slump in oil prices are still broadly strong, with the index above 75. Most local real estate markets in Wyoming and Oklahoma are also experiencing “strong” markets, with indexes above 50.
 Respondents were asked “What are your expectations for the housing market over the next six months compared to the current state of the market in the neighborhood(s) or area(s) where you make most of your sales?”
 The market outlook for each state is based on data for the last 3 months to increase the observations for each state. Small states such as AK,ND, SD, MT, VT, WY, WV, DE, and the D.C. may have less than 30 observations.
Foreigners buy houses in the United States for a variety of reasons: vacation, investment, rental, asset diversification, primary residence, and other purposes. With the dollar gaining strength against foreign currencies and inventories of available properties decreasing as prices increase, foreign buyers are finding U.S. properties becoming increasingly expensive.
Are properties in the United States still a “good buy” relative to prices outside the United States? The answer is “Yes.” Although house prices are highly variable, depending on location condition, and amenities, U.S. prices appear to be reasonable when compared to foreign properties. For example, a comparison of condo prices shows that for many foreigners U.S. real estate appears to be lower cost.
When comparing prices it is important to compare “apples to apples”. The cost of a 120 square meter foot condo was compared for a number of foreign cities based on prices reported in Global Property Guide against the median price of a condo in U.S. cities. This is a rough approximation: U.S. and foreign properties can be significantly different in terms of property characteristics, amenities, and buyer expectations. In addition, foreign buyers on average tend to purchase prices approximately valued at twice the U.S. median price. However, U.S. condo prices appear to be quite competitive with foreign prices and expectations. The graph compares U.S. prices relative to Toronto, Shanghai, Mumbai, London, and Mexico City.
The April 18th issue of The Economist also indicates that U.S. home prices tend to be attractive relative to foreign prices. The Economist indicated that U.S. prices relative to income were 11 percent undervalued– compared to Britain and Sweden (27 percent overvalued), Australia (39 percent overvalued), Canada (35 percent overvalued), and France (25 percent overvalued). Countries undervalued included Germany (11 percent undervalued), South Korea (30 percent undervalued) and Russia (21 percent undervalued). In terms of rents The Economist showed that the U.S. provided better value than did Canada, Britain, Mexico, and China, among others.
What Does This Mean For Realtors?
A typical foreign buyer probably will not face “sticker shock” when considering a U.S. purchase. However, there are many other aspects of a U.S. house purchase which may be unfamiliar to foreigners. U.S. property taxes, condo fees, real estate laws and regulations, and ways of doing business may be substantially different from those with which the potential foreign purchaser is familiar. Just as U.S. citizens find foreign practices in experiences very different form their home country, the same is true for foreigners. REALTORS® can provide value-added by educating the foreign buyer in terms of differences between U.S. and foreign real estate practices and expectations.
- There is no inflation to speak of as consumer prices did not change over the past 12 months to March. However, apartment rents continue to show heat with a 3.5 percent gain. If there were to be some rise in energy prices in the near future (after having fallen big time late last year), then the overall consumer prices could get uncomfortable and thereby nudge up interest rates.
- Diving into the numbers, the Consumer Price Index (CPI) was unchanged over the 12 months. Along with rent, some prices such as of food, medical service, and college tuition were rising but the much lower gasoline and energy prices neutralized the overall price conditions.
- Because of the volatility in food and energy prices, there is something called the “core inflation” which tries to gauge the inflation trend outside of these volatile components. The Federal Reserve monetary policy is also focused much more on the “core inflation” rather than “overall inflation”. In March the “core inflation” was 1.8 percent. This increase is still within the Fed’s comfort zone of keeping the inflation lid at 2 percent. So the Fed need not be in a hurry to raise interest rates – at least not yet.
- However, rents are rising fast. The latest 3.5 percent rise matches the fastest gain in over 6 years. With apartment vacancy rates still remaining low, the continuing gains at this heated pace is likely to continue. In other items, the service fee related to tax return preparations rose by 6.6 percent from one year ago, good thing consumers only have to do this once a year.
- Home prices are not part of the consumer inflation calculation, just as gold prices and stock prices are also not included in the inflation number. But, something called the homeowner equivalency rent – a hypothetical rent that homeowners would pay to live in their homes – is included. This component, though somewhat fuzzy in computation and assumptions, is rising by 2.7 percent. Therefore, both the renters’ rent and homeowner equivalency rent are rising fast enough to tip the overall inflation upward by the end of the year. The Federal will likely be raising interest rates later this year. September is the likely month.
Default rates jumped in 2006 and between then and 2014 nearly 9.3 million borrowers were foreclosed on, received a deed in lieu of foreclosure, or short sold their home. To date, nearly a million of these former owners have returned to the market and many more of these “return buyers” are already qualified, but waiting. Overlays and credit impairment have held a significant number back and could impact thousands more potential return buyers in the coming years. Roughly a third of formerly distressed owners will ever return to the market.
NAR Research analyzed these former owners taking into account multiple factors:
- The time a buyer must wait to be re-eligible for a financing program with timing like the FHA
- The time necessary to repair the distressed seller’s credit
- Whether the distressed seller’s credit profile, at the time of purchase, was unacceptable by historic, sound underwriting standards
- Whether the return buyer would meet credit overlays in the current stringent environment
- The time needed to build down payment for a purchase
- Whether the buyer has the desire to own again
This analysis revealed that the long time to repair credit scores, time to build down payment, and overlapping post-distress factors limit a former owner’s ability to return.
- Since 2006, 950,000 of these former owners likely already purchased a home again
- However, tight conditions in financial markets limit access to 350,000 of these FHA re-purchase eligible borrowers
- An additional 1.5 million return-buyers will likely purchase over the next five years as they become eligible, but overlays will act as headwinds for 140,000.
- As many 260,000 of current and future program eligible borrowers may not return as their former ownership was facilitated by excessively loose lending in the mid-2000s
At the state level,
- California has been the largest benefactor of return buyers followed by Florida.
- Arizona, Nevada and Georgia also made the list as markets like Phoenix, Las Vegas and Atlanta experienced sharp increases in distress among homeowners during the housing downturn.
- Despite the relatively steady housing markets in Texas and solid price growth, the sheer size of the state put it in the top 10.
Over the coming nine years, the states expected to benefit from the trend will remain the same, though some will juxtapose rankings. Florida will nearly catch California, Illinois and Georgia will rise modestly, while Nevada will ease closer to the bottom of the top 10. Virginia will leave the list and be replaced by North Carolina. The shift in the future trend will also reflect a larger share of prime borrowers that were dragged into distressed events as result of price declines and weak employment, rather than risky lending.
The large number of return buyers coming to the market will continue to play an important role in the market. This demand is in addition to nascent household formation and the normal baseline demand from trade-up buyers. While overlays will hamper some borrowers, those overlays will likely normalize in the future. Mitigating some risk to Federal programs is a stronger regime of regulation on underwriting and the fact that most return buyers are of prime quality. New credit scoring models that utilize rent and utility payments can help shed light on the risk posed by these return buyers. These innovations will improve the propensity of these borrowers to return and gain access, while reducing their risk to the FHA, VA, GSEs, and private mortgage insurers.
The country and housing market are still healing from the collapse of the foreclosure and distress sale wave. As home prices rise and the economy improves, these trends will abate, but there remains a large reserve of former owners who have the desire and ability to return to the market. New credit models and financing opportunities combined with fundamental changes to the mortgage origination process will help to ensure that soundness of the market as these borrowers return.Full Report: Return Buyers
The Distressed Wave
Foreclosures, deeds-in-lieu of foreclosure, and short sales surged from 2006 to 2014. This wave had a significant impact on the market resulting in falling home prices, transitions from ownership to rentership, loss of equity, crippled credit scores, and damaged communities. However, in time these borrowers will face many of the same realities that first brought them to ownership; a desire to own, stability, better schools, and for the long-term benefit of forced savings relative to rising rents. Lax lending in the mid-2000s resulted in many purchases by buyers who would not have met a historical standard of credit worthiness, but following the decline in home prices and rise in unemployment in the late 2000s, the share of prime borrowers entering default rose dramatically. Thus, an estimate of return buyers must consider several factors:
- The time a buyer must wait to be re-eligible for a financing program
- The time necessary to repair the distressed seller’s credit
- Whether the distressed seller’s credit profile, at the time of purchase, was unacceptable by historic underwriting standards
- The time needed to build down payment for a purchase
- Whether the return buyer would meet credit overlays in the current stringent environment
- Whether the buyer has the desire to own again
Estimating Return Buyers
The incidence of foreclosures increased significantly starting in 2006. Figures for completed foreclosures, deeds-in-lieu of foreclosure, and short sales were derived from data provided by the Hope Now program. This data is subdivided into prime and subprime borrowers. Where data was not available, they were imputed backward based on relationships with foreclosure starts from the MBA’s National Delinquency Survey and short sales from NAR’s RCI survey. To account for non-owner occupants, these figures were adjusted using estimates of 90+ days delinquency for investor-owned, first-lien mortgages from the work of Haughwout, Lee, Tracy, and van der Klaauw.
The owner occupied foreclosures, DIL and short sales figures where then separated into year-buckets based on their re-eligibility for FHA financing. As depicted below, the FHA’s waiting period is three years for both foreclosures and short sales, but can be reduced for extenuating circumstances; documented proof of hardship. Survey work by HUD of newly delinquent FHA loans provided an estimate for the share of borrowers who would qualify for extenuating circumstances. This definition changed in August of 2013 to include loss of employment making a significant number of formerly distressed owners eligible for FHA financing.
The FHA programs guidelines require less wait time, lower down payments, lower FICO scores, and a shorter waiting period for potential return buyers. Thus, the FHA program would provide a better avenue for re-entry to the market for these formerly distressed borrowers. However, not all return buyers will utilize the FHA. They may also utilize the VA or extenuating circumstances program at the GSEs that have similar timing. For shorthand we refer to the choice of program with this timing as FHA, though. No attempt is made to correct for those borrowers who pay cash rather than finance their second purchase, but all figures used in this sample are for borrowers who financed their original purchase suggesting a propensity to finance a re-purchase.
As depicted below, the choice of program and eligibility for extenuating circumstances shifts the distribution of re-purchasers significantly. A simple estimate that assumes the use of GSE programs for eligibility and/or excludes extenuating circumstances misses many borrowers who would be eligible earlier and including investors over-estimates the number of owner occupants returning.
A distressed sale has a large impact on a household’s credit standing. The Fair Isaac Corporation reported in 2011 that a short sale could lower a borrowers’ credit score by 50 to 125 points, while a foreclosure to increase that to 85 to 160 points. However, foreclosures and short sales are often a sign of a larger problem as the distressed seller may have issues with other lines of credit such as auto loans and credit cards. The cumulative impact is a larger drop of roughly 170 to 200 points in credit score that takes years to recover. Furthermore, this pattern exhibits persistence and occur for years after a foreclosure. Annual estimates of the share of foreclosed borrowers that recover to pre-event credit score levels were incorporated to adjust the year-buckets by the time for credit recovery. These estimates were based on those derived by Brevoort and Cooper and vary for prime and subprime borrowers. The authors also provide estimates for both a historically normal period and for the recent economic and housing downturn. The recent estimates were used. As depicted above, after 10 years the credit profile of nearly all subprime borrowers had recovered to ex-ante levels, while just roughly 70% of prime borrowers had recovered. For this analysis, a borrower is assumed ready to purchase once they achieve their pre-crisis credit score.
Based on survey work and literature, 82% of prime former owners are assumed to attempt to re-enter the market, though some may not. Research by Federal Reserve economist John Krainer suggests that roughly 40% of prime buyers and 10% of subprime borrowers purchase again within 10 years after foreclosure. Based on this relationship, subprime borrowers’ willingness to purchase is assumed to be 20.5%. Estimates of 77% and 21% willingness to purchase for prime and subprime return buyers, respectively, can be derived based on this model and the Krainer results. The lower willingness to buy among subprime borrowers is in line with other researchers who found that the intentions to own among lower income respondents was less predictive of behavior. Note that since the method in this study includes the credit score recovery and programmatic factors incorporated above, the ability to build a down payment and reserve are still endogenous to this estimate of willingness or desire for ownership.
Even following a programmatic waiting period, not all borrowers could have attained a mortgage in recent years. The average accepted credit scores for borrowers utilizing both FHA and GSE financing were 40 to 60 points above historic norms in recent years and remain elevated. Many lender and aggregators maintain overlays on loans with credit scores below 640, high debt-to-income ratios or other factors. In addition, some borrowers who received credit in the mid-2000s received credit as a result of risk layering and other practices that more recent regulatory changes like the ability to repay rule (ATR/QM) are intended to minimize. However, market dynamics made FHA financing unattractive during the boom and forced some borrowers into risky subprime products and high priced loans. Combined, these conditions create headwinds to re-entry for subprime borrowers and should be accounted for.
In their analysis of the 2012 HMDA data, Federal Reserve economists Canner and Bhhuta analyzed the characteristics of borrowers that originated a purchase or refinance loan in 2006. From these figures, a profile of 2006 vintage borrowers who become 60+ days delinquent within 2 years of origination was developed with four classifications. These classifications are used as proxies for formerly distressed owners:
a) Those with high priced loans and FICO scores less than 640 (41%)
b) Those without high priced loans and FICO scores greater than 640 (14%)
c) Those with high priced loans and FICO scores below 640 (23%)
d) Those without high priced loans and FICO above 640 (16%)
The authors use a breakpoint of 620, but simple mathematical averaging was used to reapportion shares to 640 in order to estimate the impact of overlays. A high higher priced loan is one in which the FICO score may be below a certain level or where multiple risk factors are present. Consequently, type D loans, which are not high priced and have higher FICO scores are viewed as most likely to be originated in the recent, tight mortgage environment.
Today, FHA requires manual underwriting for applicants with credit scores below 620 and observed DTI ratios fall dramatically as credit scores move below this level. Rather than increasing pricing to absorb the losses post by risk layer, the “FHA relies on risk-based underwriting to discourage extreme risk layering for higher risk loans while still enabling the use of compensating factors, as appropriate.” The new agency standards and lender behavior limit the risk overlays observed in the mid-2000s that are indicative of higher priced loans with low FICOs. Thus, a relaxation of lending standards to open access to the lower FICO spectrum that do not have layered risk would allow in type C borrowers.
A further relaxation to allow in borrowers with a higher FICO, but multiple risk factors would allow in borrowers with a type B profile. The risk layering may be due to borrower specific traits such as FICO score or DTI or it could be the product used. We assume that the reason for the higher pricing is the riskier loan products and lack of an FHA option.
Finally, type A borrowers, nearly 41% of the delinquent 2006 originations, are deemed too risky to be originated in the current or future environments. The 2006 distribution of risk profiles for sub-prime borrowers was overlain on all cohorts of subprime completed foreclosures, DILs, and short sales in this study. The bulk of delinquent borrowers in years since 2006 have been made up of borrowers from the 2005 to 2008 period, prior to the great tightening of credit.
From 2006 to 2014, 9.3 million homeowners were foreclosed on, received a DIL or short sold. Roughly 950,000 former distressed owners have once again become eligible for the FHA or similar financing and restored their credit to pre-distress levels and thus are likely to have bought. An additional 163,000 are both program and credit qualified, but may face overlays in the current tight credit environment. However, lax lending standards during the peak book allowed in 187,000 with multiple risk factors that, though program and credit eligible, would likely not qualify in a market with normalized underwriting standards.
Between 2015 and 2023, an additional 1.63 million former distressed owners will become both program eligible and credit quality, while 140,000 will face headwinds due to their low credit quality, roughly half of whom will not qualify in a normalized underwriting environment.
As depicted below, the bulk of the subprime borrowers have already become eligible for FHA or similar financing again, but they likely face credit overlays to varying degrees based on their pre-distress credit quality. However, nearly 260,000 formerly distressed sellers, depicted in red below, will likely not qualify in the post-crisis mortgage environment following reforms like the ability to repay rule. It’s worth pointing out that the bulk of sub-prime borrowers become eligible for FHA or similar financing again in the early years and are likely already waiting to become credit eligible, while the bulk of prime borrowers will come over the next nine years. This pattern reflects the national mortgage market experience of a subprime bust driven by poor credit quality and risk overlays that drove phantom housing demand. When the subprime market bust and demand contracted, prices fell resulting in a second wave of foreclosures that dragged millions of prime borrowers into distress events.
At the state level, California has been the largest benefactor of return buyers followed by Florida. The sheer size of these markets accounts for part of their positioning, but each was a focal point of the subprime crisis and experienced sharp home price and employment declines. Arizona, Nevada and Georgia also made the list as markets like Phoenix, Las Vegas and Atlanta experienced sharp increases in distress among homeowners during the housing downturn. Michigan and Ohio also saw an uptick in distress owners that will return or have returned, but the subprime trend augmented long term secular issues of weak and transitioning regional economies in these areas. Both trends have rebounded in recent years. Despite the relatively steady housing markets in Texas and solid price growth, the sheer size of the state put it in the top 10.
Over the coming nine years, the states expected to benefit from the trend will remain the same, though some will juxtapose rankings. Florida will nearly catch California, Illinois and Georgia will rise modestly, while Nevada will ease closer to the bottom of the top 10. Virginia exits the top ten to be replaced by North Carolina. The shift in the future trend will reflect a larger share of prime borrowers dragged into distressed events as result of price declines and weak employment rather than risk lending.
Robustness of the Analysis:
According to the Survey of Home Buyers and Sellers from the National Association of Realtors®, 6% and 8% of homebuyers had previously experienced a foreclosure or short sale in 2013 and 2014, respectively. Factoring in both new and existing home markets, this suggests total return purchases of 259,000 and 352,000, respectively, compared to modeled estimates of 254,000 and 316,000 over this time period. Thus, the survey data suggests that the model is robust.
The down payment for the FHA program is just 3.5%, and the VA charges a similar upfront fee, but for some borrowers, this may take significant time to accrue. The GSEs have larger requirements. According to the 2014 Profile of Home Buyers and sellers, 71% of home buyers took 24 months or less to save for their down payment. However, this could vary significantly for distressed sellers depending on employment situation and local debt recourse laws. Consequently, this factor was not incorporated into the analysis. In addition, the high pricing at the FHA may have pushed some program eligible candidates over an affordable DTI ratio, pushing them to the VA or GSEs or limiting their ability to return. New pricing in 2015 would allow in many more borrowers. However, lenders may have overlays specific to formerly distressed sellers that were not accounted for here.
While foreclosure starts and short sale volumes have fallen dramatically in 2014. Furthermore, nearly 6 million homeowners owe more on their mortgage than their home is worth and foreclosures remain hung up in states with judicial processes, so there may be a skew in future volume towards these states. As a result, foreclosures and short sales are likely to remain historically elevated though lower than in the late 2000s. The estimates in this analysis do not attempt to forecast post-2014 foreclosures and short sales.
In this analysis, a borrower is assumed to be credit qualified to repurchase when they reach their pre-distress even credit score level unless they face overlays in the case of a subprime borrowers. However, some prime borrowers may reach an acceptable score earlier. Or a subprime borrower may continue to increase their credit score well beyond their pre-distress level and thus be eligible for re-entry. For example, while roughly 65% of subprime borrowers attain their pre-distress credit score within 3 years of the event, their score could continue to rise in the subsequent years, perhaps even to prime levels, at which point they could avoid overlays re-enter. Likewise, a borrower could reduce their multiple risk factors which led to their high-price loan status on their initial purchase. Furthermore, the FHA program was difficult to utilize in the strong sellers’ market of the mid-2000s. Many borrowers with high LTVs and low credit scores were forced into risky products and higher priced loans. In today’s more balanced market, these borrowers might qualify for non-high priced loans and not fit in the “type A” classification. Conversely, many of these borrowers may have been selected out of the foreclosure, short-sale, and DIL route and into modification programs, leaving a more concentrated group behind. Of course, the buyer could have a cash windfall and purchase without financing. Finally, the behavior of borrowers studied in the work by Brevoort and Cooper may be specific to the 1999 to 2010 time frame of their research.
Improvements in financing programs like the FHA could increase the propensity of formerly distressed sellers to return to the market. In a similar way, credit scoring models that take advantage of rental and utility payments would help to boost the standing of the buyers ahead of the time-frames used in this model and it might also reduce the pricing these borrowers face.
Finally, with the expanding economy, many distressed owners could sell and move to take advantage of better economic opportunities elsewhere. This migration could shift the local of return buying.
A large number of return buyers have already entered the market, while an even larger group will enter of the coming nine years. The bulk of the coming return buyers will re-enter in the initial five years, but overlays have and will continue to push off a significant number. These return buyers constitute demand that is in addition to nascent household formation and the normal baseline demand from trade-up buyers.
New scoring models can help shed light on the risk posed by these return buyers. Following a foreclosure many former owners rent, pay utility and telecom bills and move. New scoring models like Vantage Score 3.0 and FICO 9 along with FICO most recently proposed, but as of yet unnamed model could help to both improve the propensity of these borrowers to return, while reducing their risk to market insurers.
Since many of these buyers will seek FHA financing, the agency will need to maintain a broad and diversified pool in order to limit the impact of losses, but the bulk of return buyers will have restored their prime credit profile. These buyers have a profile similar to trade-up buyers; further along their lifecycle and likely to prefer single family housing rather than condos or coops.
The country and housing market are still healing from the collapse of the foreclosure and distress sale wave. As home prices rise and the economy improves, these trends will abate, but there remains a large reserve of former owners who have the desire and ability to return to the market. New credit models and financing opportunities combined with fundamental changes to the mortgage origination process will help to ensure that soundness of the market as these borrowers return.
 Academic research has also documented a link to physical and psychological impacts. See Bowdler, Quercia, and Smith (2010)
 Based on desire to own from Drew (2014); Drew and Herbert (2012) showed that responses for those with familiarity with distressed event were not statistically significantly different from those who did not
 “Crude” represents an assumption that all buyers repurchase 7 years after foreclosure completion.
 Brevoort and Cooper (2010) pp. 10
 For this analysis, 85% of former owners were assumed to want to purchase again. This may be the case or not, but the timing may not match that of program eligibility. Furthermore, not all will want to purchase a home.
 Cohen, Lindblad, Paik, and Quercia (2009) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2458560
 Table C.1.A http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2328830
 A simple linear estimate was used to reapportion from buckets from 620 to 640
 Pp. 45 http://portal.hud.gov/hudportal/documents/huddoc?id=FY2014FHAAnnRep11_17_14.pdf
 See Boesel http://www.corelogic.com/research/the-market-pulse/marketpulse__2014-december.pdf and Goodman http://www.urban.org/publications/2000092.html
The changes of another recession are essentially 100 percent—at some point in time we will almost certainly have another recession. What does this mean for homeownership? In the case of homebuyers, possibly much less than one would think.
The average homeowner stays in their home for approximately 10 years. Over that time frame the homeowner with a 30 year mortgage builds equity in addition to the down payment. Most decisions to sell and move are optional (downsizing, right sizing, retiring, etc.). Absent a job loss, most homeowners appear to have the option of “riding it out”; that is staying in place. Recessions are nasty economic experiences. The graph, with recessionary periods darkened, shows that a recession can slow down employment, but even during a recession most people have jobs: raises may vanish, and there may be gloom, but life goes on. A recession should not have a major impact on homeownership if the homeowner has made prudent decisions—i.e., not getting over extended, staying within budget, not speculating, and exercising financial responsibility. Homeownership has major benefits, but also requires financial maturity.
Credit availability is currently easing—but is still tight for many people. Work by Dr. Laurie Goodman of the Urban Land Institute (summarized in a REALTOR® University presentation) shows that the proportion of potential home buyers with credit under 660 is currently much lower than was the case in normal credit markets in the year 2000 time frame. Prime credit borrowers are generally able to get credit; this is much more difficult for people with lower credit scores.
Interest rates have been relatively low, but low interest rates are not particularly valuable if one cannot get a loan. One of the more spectacular stories associated with the current levels of tight credit was the credit turndown received by Dr. Ben Bernanke to refinance his mortgage: He was Chairman of the Federal Reserve!
At this time some of the major financial institutions which were badly burned in the last credit crisis appear to have reduced their home mortgage lending efforts. Informed observers have been suggesting that regional and local banks as well as credit unions may be more receptive to potential buyers. A REALTOR® can help with questions about buying a house and may be able to make some suggestions about credit availability in the local area.
- Utah has taken the lead in job creation. North Dakota, Wyoming, Georgia, and Florida round out the top-five. At the other end, West Virginia, Montana, Maine, Mississippi, and Rhode Island are barely creating jobs.
- Due to the falling oil prices North Dakota lost its #1 ranking after many years of being on top. The other energy-producing states like Texas, Louisiana, and Oklahoma are also experiencing a deceleration in job gains – fewer job additions now compared to prior months.
- The low oil prices are a net positive for the country as a whole since consumers have additional money to spend and many companies’ bottom line improves. For example, both North Carolina and South Carolina have quickly made it into the top-10 as job creations have significantly strengthened lately.
- Among the large metro markets, the technology companies are madly hiring in the San Jose region where jobs have expanded by 5.4%. Atlanta and Louisville are speeding at 4.6%. The national average is 2.3%.
- Among the smaller markets, there are many markets that have vacation homes. Here are the numbers:
- Why is Utah doing well? This is a self-serving announcement but a factual one. The current governor of Utah is a former REALTOR® and well knows the importance of real estate to the economy. Governor Gary Herbert had served in many of NAR’s committees in the past. Utah as a state, furthermore, plays an outsized role in terms of RPAC contribution (REALTOR Political Action Committee). Something for other states to think about.
Some people who should not buy a house: for example, anyone who is planning to move in a few years. People with overextended credit are also probably not good candidates for homeownership. However, home ownership—instead of renting–appears to be a good idea for many people—particularly at a time of rising rents.
The graph from a presentation by NAR Chief Economist Dr. Lawrence Yun shows that families with homeownership have a much higher net worth than is the case for renters. Growth in mortgage equity and longer term price appreciation are the major assets for the middle class. The homeowner with a 30 year mortgage payment has a paid-off home after 30 years; the renter has a nice stack of 360 rental receipts.
And, of course, there are many lifestyle/social benefits that homeownership creates for families—better educational achievement by children, better neighborhoods, increased community involvement, among others.
These are good answers to the question of “Why not rent?”
- Due to the strengthening in the U.S. dollar the prices of imported goods are falling. That is helping the overall consumer prices to be tame. Low inflation means interest rates can remain low for a longer period.
- In the latest month, import prices fell for the 8th time in the past 9 months. As a result, import prices were 10.5 percent below one year ago. Despite much increased oil production in the U.S. in recent years, principally from new oil wells in North Dakota and Texas, America still imports about half of its oil consumptions (though not the two-third from imports as had been just a decade ago). Therefore, falling global oil price also significantly impacts U.S. import prices.
- Low import prices filters into the broad consumer prices. Today, there is virtually no inflation to speak of. The top line consumer price inflation was in fact precisely zero in February over the past 12 months. The core inflation – that is, not including the volatile food and energy prices – was also tame with only 1.7 percent growth. The core inflation rising above 2 percent on a consistent basis would cause the Federal Reserve to raise interest rates.
- The relationship between core inflation and mortgage rates are shown below. As can be seen, high core inflation means much higher mortgage rates and vice versa.
- The U.S. dollar is strong against nearly all other foreign currencies. There is one major exception. The Chinese currency – Yuan – has been stalking the dollar and is actually getting stronger. One dollar used to command 8.5 yuan at the turn of the century but now gets only 6 yuan. Given the large trade surplus China has with the U.S. the Chinese currency is likely to strengthen even further in coming years.
- It is hard to imagine not too long ago China was insignificant on the world stage. Most were living in dire poverty from communal ownership of property with no incentive to work hard. There were even trade restrictions of not importing communist Chinese products into the U.S. Once there was a big fight among State Department officials over eggs that were brought into the U.S. from Hong Kong. It was unclear whether these eggs had been originally imported from the mainland China or if the eggs had been laid in the British Hong Kong. Was it a free world egg or a communist egg? One was considered safe while the other very dangerous.
Using NAR Research to Address Prospective Buyer Concerns “What Will Housing Prices Do? Is it Safe to Buy?”
No one really knows what housing prices will do in the short run: to quote J.P. Morgan on the stock market, “They will fluctuate.” Experience during the Great Recession showed how markets become unpredictable during a crisis. However, for a number of the underlying drivers of housing prices the longer-run outlook appears good:
- Jobs: The U.S. continues to add jobs. Real estate and jobs vary together. A growing economy helps home sales.
- Households: Home sales were slightly under their year 2000 level in 2014, but the United States added an additional 17 million households over the intervening time period. As the millennials mature their demand for apartments is expected to decline as they move into homes.
- Housing Supply: The country needs to add 1.5 million housing units a year to accommodate population growth and housing demolitions. However, housing additions have recently been under 1 million a year: there are fewer available homes, which is a positive for home prices.
Three major drives of home prices seem to support current and rising home price levels. All real estate is local; in fact, in some areas of the country home prices appear to be increasing at a rate that may be too high. Put differently, everyone needs to live some place, and right now housing markets are tight in some areas—inventories of homes for sale are low. Homeowners tend to hold onto their homes for approximately 10 years after purchase. So housing market trends and an extensive holding period suggest that worries about short term temporary price fluctuations do not appear to be of great importance.
NAR’s economic outlook is at http://www.realtor.org/research-and-statistics.
Based on information gathered from the REALTORS® Confidence Index Survey in the months of December 2014–February 2015, 66 percent of first-time homebuyers made a down payment of 0 to 6 percent.  Although this is a decline from the 77 percent figure in early 2009, this is an improvement over the 61 percent figure at the beginning of 2014.
REALTORS® have reported that the reduction in FHA’s monthly mortgage insurance premium (from 1.35 percent to 0.85 percent) is likely to help homebuyers. FHA insures loans that allow a 3.5 percent down payment. Fannie Mae and Freddie Mac have also reinstated the 3 percent down payment program early in 2015, and the down payment can all come from gifted funds. Meanwhile, 100 percent financing has always been available to members of the U.S. military and their surviving spouses.
A low down payment enables homebuyers to purchase a home sooner and start building equity rather than saving up for a few more years. However, a lower down payment may not necessarily make a home mortgage more affordable because of the effective increase in the mortgage rate arising from risk adjustment fees. REALTORS® have reported that the increase in mortgage cost from the risk adjustment is blunting the intended effect of the GSE’s 3 percent down payment loan program.
 Based on the REALTOR® respondents’ most recent sales for the survey months, which altogether are viewed to be a representative sample of all sales for these months.
 GSEs charge fees on the amount of the loan for risk factors such as low down payment (loan level pricing adjustments or LLPA). On top of the LLPA, borrowers obtaining a loan with less than 20 percent equity also need to get private mortgage insurance.
Interest rates are in the news: Projected to rise from their historically low levels as the Federal Reserve winds down Quantitative Easing. Is this a major problem for the prospective buyer? The Answer: “Probably Not.”
Obviously, buying a home sooner rather than later in a rising interest rate environment may be a good idea. However, it is unlikely that changes in interest rates of the magnitude currently expected will have a controlling impact on the home purchase decision.
What do rising interest rates mean? As of March, the 30 year mortgage interest rate was approximately 3.8 percent. On a median priced $202,000 house, monthly payments would be approximately $1231 per month (P&I: $847; Taxes: $219; Insurance $75; PMI $90). A .5% interest rate increase to 4.3 percent would raise payments to $1,284.Rather than worrying about interest rates– over which they actually have little control outside of shopping around among lenders– potential home buyers need to focus on the availability of a mortgage money—typically regional and community banks and credit unions as well as national lenders–and staying within a reasonable budget.
REALTORS® can use NAR Research information to give the customer a different perspective on the question of whether to buy: the press encourages clients to think in terms of price. Price is important, but the main reason clients want a home is lifestyle—i.e., for family and living purposes. Like most economic questions, there are two answers to the question of whether it is a good time to buy: “Yes” and “No”. Put differently, “Yes, it is always a good time to buy if you need a home for your or your family.” The answer is “No if you are over-extending your financial capabilities, speculating on changing home prices, or expect to need to move in the near future: that is how people get in trouble.”
NAR has detailed the major benefits achieved by homeownership:
- Higher student test scores by children.
- Higher rate of high school graduation thereby higher earnings.
- Children more likely to participate in organized activities–less television screen time.
- Homeowners take on a greater responsibility such as home maintenance and acquiring the financial skills to handle mortgage payments and those skills transfer to their children
- Lower teenage delinquencies.
- General increase in positive outlook to life.
- Homeowners reported higher life satisfaction, higher self-esteem, happiness, and higher perceived control over their lives.
Quality of life is a major benefit from homeownership—which is why a prudent home purchase by someone who is financially responsible makes sense at almost any time.
In the February 2015 REALTORS® Confidence Index Survey, NAR asked REALTORS® what problems they encountered in their most recent contract that either went into settlement or was terminated in the past 3 months.
Among contracts that were terminated (7 percent of REALTORS® reported contracts that went into settlement or were terminated), the major problem encountered was home inspection issues, cited in 29 percent of reported contract terminations. Obtaining financing was the next major problem cited for a contract termination (25 percent). Meanwhile, only 8 percent of terminated contracts had appraisal issues, indicating that although appraisal issues can be a problem, they are less likely to lead to contract terminations than home inspection or financing problems.
What this Means for REALTORS®: Home inspection issues are the biggest reasons for contract termination. Work with the seller to fix potential home inspection issues (e.g. structural, water damage, mold, lead paint, etc.) before putting the house on sale.
Qualifying for a mortgage is still generally difficult, although becoming easier, according to the February 2015 REALTORS® Confidence Index Survey.
About 52 percent of REALTORS® providing transaction credit score information reported FICO credit scores in the range of 620-740; in 2013, the share was hovering at about 40 percent. About 2 percent of REALTORS® reported a purchase by a buyer with credit score of less than 620, up from about 1-2 percent in 2012-2014. In a normal market, the share of credit scores below 620 would be closer to 5 percent.
Potential buyers facing credit limitations might want to consider a mortgage origination by community banks, local banks, and credit unions.