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Updated: 13 hours 44 min ago

Consumer and REALTOR® Confidence

Thu, 11/13/2014 - 05:30
  • Consumers are becoming ever more confident in the economy.  Continuing job gains, lower gasoline prices, and rising home values are likely contributing to the sentiment.  Interesting though, that REALTORS® were feeling less optimistic in the past month.
  • The latest consumer confidence index reached a 7-year high mark.  In October, the index was 94.5.  The long term average is near 100.  The overall improvement in the economy is no doubt contributing to better consumer feelings.  This consumer confidence index is about the whole economy and not specifically related to home buying.  But consumers need to be confident of the general economy in order even consider making a major expenditure such as buying a home.  Therefore the rising consumer confidence portends better for the housing market outlook.
  • REALTORS® in September expressed an opposite feeling with the index falling to its lowest mark in 2 ½ years.  And the assessment of the condominium market has been consistently lower than that of the single family properties.
  • Pending contracts to buy a home have been rising in recent months (though still down from one year ago).  So unless REALTORS® are expressing their sentiment based on intangible factors, like changes in the number of client appointments or lower foot traffic at open houses, the weakening confidence by REALTORS® seems uncalled for.
  • The confidence data cannot decipher if high-producing REALTORS® are just as pessimistic as the general REALTOR® population.  We know that 20 percent of REALTORS® earn more than a six figure income while 30 percent of REALTORS® earn less than $15,000 a year (with the rest earning in-between).  It is presumed that confidence and earning are correlated.
  • The U.S. Capitol dome is currently undergoing a major reconstruction.  This dome is indeed a truly remarkable engineering feat and a thing of beauty.  But one of the best known domes in the world covers a church in Florence, Italy designed by an architect Brunelleschi over 500 years ago.  He and his crew, many of them orphans and labeled as “men without names,” built the dome without construction cranes or other modern equipment.  He built it to honor God and, possibly and more importantly, to raise hope of what people are capable of achieving.  There is nothing like confidence to get things done.


Fannie and Freddie to Back Three Percent-Down Loans, Safely

Wed, 11/12/2014 - 08:20

Recently the FHFA announced that it would begin to allow the GSEs to finance loans with as little as 3% down payments.  This news was received with mixed reviews.  Some view it as an improvement in access for entry-level buyers while others see it as a step down the path of loose lending that brought down the market in the mid-2000s.  In fact, this step is only a modest change that will likely be done under common sense restrictions to augment successful lending with a small impact on market.  However, it should provide a positive signal to lenders.

In response to rising defaults and losses, the GSEs both eliminated their 3% down payment products in recent years in lieu of higher 5% minimums.  However, roughly two weeks ago, the new Director Mel Watt announced the restitution of this program.  Critics are concerned that this change would harken a renewal of the loose lending that brought down the housing finance system in the mid-2000s.

In a speech Friday at the Residential and Economic Trends Forum at the 2014 REALTORS® Conference & Expo, the Director clarified that, “…the guidelines will require that borrowers have compensating factors — such as housing counseling, stronger credit histories, or lower debt-to-income ratios — in order to make the mortgage eligible for purchase by Fannie Mae or Freddie Mac.”  As depicted below, examination by FHFA economists suggests that FICOs scores are very important in mitigating risk and that a borrower with a 740 FICO score and only 3% down payment has on average a lower foreclosure rate than a borrower with a 660 and more than 20% down payment.  What’s more, the agency’s work has shown that foreclosure rates vary by debt-to-income ratio.   The Department of Housing and Urban Development cited research for its HAWK program that found a decline in delinquency of 19% to 50% for borrowers who went through pre-purchase financial counseling.  Finally, all loans financed by the GSEs must conform to the qualified mortgage rule.  Researchers at the UNC Center for Community Capital found that loans originated between 2001 and 2008 that met the QM standard save for the 43% back-end debt-to-income requirement experienced a 5.2% 90-day delinquency rate through 2011.  This was well below the 5.8% for all QM loans and roughly 17.6% rate for all non-QM mortgages.  In short, the underwriting the GSE’s employ will act as a foil against defaults.

But the FHFA will be in crowded company as it ventures into the lower down payment portion of the market.  The FHA offered its 3.5% down payment product throughout the recovery while the VA dramatically expanded its mortgage program that requires no down payment.  Likewise, the USDA’s rural housing program and state housing finance agency programs have been important sources of low down payment funding.

FHA financing has been expensive in recent years, though, as the annual mortgage insurance premium has increased nearly 80 basis points since 2008.  The GSEs’ entrance into this portion of the market will provide a more affordable option to the FHA, but it will be priced relative to risk by both the agencies and their private mortgage insurer (PMI) counterparties.  The GSEs do not currently price for the 3% down payment product, but they do increase loan level pricing adjustments based on DTI, FICO and LTV.  Furthermore, private mortgage insurers like MGIC do price this risk charging 1.1% in annual PMI for a borrower with a 740 FICO and 3% down payment mortgage compared to just 0.71% for the same borrower putting down 5%.  The fee jumps to 1.48% for a 660 borrower with 3% down payment versus the FHA’s permanent MIP of 1.35% and UFMIP of 1.25%.  In short, as depicted below it will make financial sense for borrowers with credit scores below 720 to remain at the FHA or make larger down payments.  These borrowers could save $25 to $40 per month with this change.

This segment of the FHA’s business is significant, though.  Based on the FHA’s Quarterly Report to Congress, FHA’s production with FICO greater than 720 and down payment less than 5% was roughly 13.7% of its purchase production in the first half of 2014, down from 18.5% in all of 2013. It would comprise roughly 4% or less of the GSE’s purchase production.  Given the low default risk and high premiums that this portion of the market generates, it could impact the agency’s bottom line.  However, the high and permanent PMI structure at the FHA and low rate environment has led to an increase in run off as FHA borrowers gain equity and seek to refinance into better, non-permanent PMI rates.  Because of this existing run off, the impact of competition in the 3% space would be limited, but more permanent.

The fact that PMIs are currently pricing this segment is important as well; it demonstrates that private capital is willing to take this risk.  Thus, this shift by the FHFA has important implications for lenders as it signals the willingness of the agency to back off its extreme risk aversion, a change that should reinforce the agency’s recent overtures on repurchase agreements giving more comfort to lenders and a potential expansion of credit down the road.

While the FHFA’s recent announcement of the return of its 3% down payment program will improve affordability for a limited number of borrowers, it will be done with compensating factors that will limit risk and the size of the program.  More important may be the signal that it sends to lenders: the GSEs are following the example of private mortgage insurers and reaching out to borrowers.

Mortgage Performance of Veteran Loans

Tue, 11/11/2014 - 10:02
  • Mortgages backed by the Veterans Affairs have generally performed better than other mortgage products, even though VA loans require no down payment.
  • In the most recent quarter, the percentage of mortgages going into foreclosure for VA loans was 0.3 percent compared 0.4 percent for all mortgages.  The differences were even more pronounced during the housing collapse with VA foreclosure starts running at around 0.7 percent during 2009-2010, half the rate of other mortgages.
  • Among the mortgages that are past due by over 3 months but not yet in foreclosure, a similar performance difference is observed. The serious late payment rate on VA loans was 1.85 percent while it was 2.31 percent for all mortgages.
  • Worth reiterating is that VA loans are zero-down payment products.  The better performance could be due to American veterans’ sense of duty of fulfilling their contractual obligation and demonstrating responsibility.   The better outcome is also likely caused by the fact that veterans are required to stay well within their budget, and not take on super-large mortgages.  Washington policy makers need to be mindful of these results and not impose artificially high down payment requirements on people stretching their budget that could tip them over.
  • USAA – an insurance company that underwrites various policies for people who had served in the Armed Forces – is said to do well financially year-in year-out.  That is because there are lower cases of accidents and insurance frauds among this group of people compared to the rest of the population.  Knowing this trend as well as that of mortgage performance, employers, lenders, and other business leaders may want to give extra consideration for people who have served.


REALTORS® Reported Distressed Sales at 10 Percent of Market in September 2014

Wed, 11/05/2014 - 16:45

With rising home values and fewer foreclosures, the share of distressed sales to existing home sales continued to decline, according to data from the September 2014 REALTORS® Confidence Index Survey:  http://www.realtor.org/reports/realtors-confidence-index

In September 2014, distressed sales accounted for 10 percent of sales:  7 percent of reported sales were foreclosed properties, and about 3 percent were short sales[1]. The decline of  distressed properties on the market explains to some degree why investment sales and all-cash sales have been on the decline.

Distressed property sold at a 14 percent average discount  for the past 12 months.  Properties in  “above average” condition were discounted by an average of 10-12 percent, while properties in “below average” condition were discounted at an average of 14-20 percent.


[1]               The survey asks respondents to report on the characteristics of the most recent sale for the month.

The Latest GDP

Fri, 10/31/2014 - 11:25
  • The broadest measurement of the U.S. economy (GDP) expanded solidly in the third quarter at a 3.55 percent annualized rate.  This  marks two straight quarters of robust growth.  Growth at this rate can accelerate future job creations.  Still, we are missing consistency.  The first quarter was negative.  For the year as a whole in 2014, GDP looks to notch up only around 2 percent growth.  That would mark nine straight years of sub-par economic growth of less than the historical average of 3 percent.
  • Real estate components slowed down in the latest quarter.  Residential investment spending (from new home construction to real estate brokerage service) grew by only 1.9 percent, much slower than 9 percent gain in the prior quarter.  Commercial real estate investment (known formally as nonresidential investment) expanded by 5.5 percent in the latest quarter, slower than the 10 percent gain in the prior quarter.  Difficulties in obtaining construction loans have resulted in slower than normal expansion in the real estate sector.
  • A big contributor the latest GDP growth came from increased business spending on things like computers and equipment and strong export growth.  Given the faster U.S. economic expansion currently versus most other countries, export growth will likely slow in the upcoming quarter while import consumption will pick up.
  • Without going into too much detail, the upcoming fourth quarter GDP is likely to grow at 2 to 2.5 percent, which is simultaneously good news and bad news.  Good that the economy is in no danger of a fresh recession.  Bad that economic growth is again slipping back down below 3 percent.
  • Long periods of slow economic growth have consequences.  Roughly speaking, $4,700 is missing from average American’s pocketbook.  That is the gap between the potential GDP had the economy grown at the 3 percent historical growth rate versus what actually happened in nine straight years of sub-3 percent growth.
  • Who to blame for the missing $4,700?  That’s easy.  Most people decided very early on as to whom to blame, with the reasons to be found and made up later.  Democrats will blame the unfettered wheeling and dealing of Wall Street that nearly crashed the whole global financial system in 2008 and the subsequent widening inequality.  Republicans will blame too many new regulations, higher taxes, and Obamacare.  Many will make their feelings known on November 4th.  Though there are some concerns about who votes and how often, it will be nothing like that of the master crook.  The Soviet leader Stalin once said what really matters in elections is not about how often one votes, but who counts the votes.

Community Banks Are Main Source of REALTORS®’ Commercial Financing in 2014

Thu, 10/30/2014 - 12:50

During 2013, commercial real estate witnessed a noticeable reversal in capital availability.  Following exceedingly stringent capital standards and overly tight liquidity in the wake of the 2008 recession, funding sources broadened.  The trends accelerated during 2014, as most major capital providers returned to the markets and actively competed, leading some investors to express concern about an overabundance of capital chasing too few deals in some markets.

For commercial REALTORS®, the main sources of funding in 2014 mirrored the trends of the past couple of years.  Local and community banks were the largest source of lending, accounting for 30 percent of deals.  Regional banks were the second largest provider of CRE loans, with 23 percent of transactions.  Over the 2013-14 period, regional banks increased their share of the market.  Private investors provided 10 percent of funding for REALTOR® deals, followed closely by the Small Business Administration, at 9 percent.


National banks were a much smaller source of CRE lending in REALTOR® markets, accounting for 8 percent of total. Credit unions and insurance companies comprised close to one-in-ten loans.  Lending sources also included international banks, REITs and CMBS, but only in a small fraction of transactions.

Underscoring the importance of the banking sector as a source of funding, 64 percent of REALTORS® indicated that bank capital for commercial real estate remains an obstacle to sales.  When asked about the main causes for the lack of bank capital, 27 percent indicated that legislative and regulatory initiatives proved the main stumbling block.  Another 22 percent pointed to the U.S. economic uncertainty as an underlying factor.


For more details on lending conditions in REALTORS® markets, visit: http://www.realtor.org/sites/default/files/reports/2014/commercial-real-estate-lending-survey-2014-10-08.pdf.

REALTORS® Reported Slower Buyer Traffic in September

Thu, 10/30/2014 - 09:40

For the first time since January 2012, the Buyer Traffic Index, which captures on the aggregate how REALTORS® viewed traffic conditions in their markets, dropped  to 44  in September  (55 in August), according to data from the September 2014 REALTORS® Confidence Index Survey:  http://www.realtor.org/reports/realtors-confidence-index. An index below 50 indicates that more REALTOR® respondents viewed their local traffic conditions as “weak” compared to those who viewed conditions as “strong” or “moderate.” The higher the index, the more respondents there are with “moderate” or “strong” outlook.

By state[1], buyer traffic strongest in North Dakota and in D.C. as well as states in the West, South, and in the Great Lakes.  Buyer traffic was generally “weak” in many states in the North East and Mid-Atlantic.


[1]               The buyer and traffic index by state is based on data gathered from the last three surveys to accumulate enough observations for each state.

Case-Shiller Home Price Numbers

Tue, 10/28/2014 - 10:05
  • Today, S&P/Case-Shiller showed that home prices grew 5.6 percent year over year in August for the 20-city index while the 10-city index showed a gain of 5.5 percent.  The newer Case Shiller monthly national index showed a gain of 5.1 percent year over year in the August.
  • Headlines seem to be focusing on the slow-down in prices as if it is a bad thing, almost as if we are beginning another housing correction.  Here is another perspective: for now, prices are still growing but at a healthier, slower pace.  There is a big difference between slow growth in prices and price declines.  In the latter situation, home owners are losing equity and the monthly mortgage payments may not help them build up equity faster than it is being lost to home price declines.  In the former situation, home owners are gaining equity from price growth AND from paying their mortgage each month, though they may not be accumulating equity quite as quickly as they did when home prices were gaining at a double digit pace.
  • The slow-down in price growth is only just now bringing appreciation back into a more normal, sustainable level of growth.  Because the housing market overshot on the downside (prices corrected to levels that were unsustainably low), it was not alarming to see double-digit price growth in housing last year, but that trend cannot continue indefinitely unless incomes grow commensurately (and in case you missed those headlines, income growth has not grown at anywhere near that pace.)
  • The good news is that no matter the measure used to evaluate home prices, we are seeing the same trend: a return to a more normal level of price growth.  This slower pace of growth is good for buyers without harming current home owners.  Market fundamentals of income growth and construction should keep supply and demand balanced enough to foster continued, normal growth of prices going forward.
  • Last week NAR released median home price information that showed gains of 5.9 percent in September 2014 home prices compared to September 2013.  These gains followed NAR’s estimate of 4.5 percent gains for the year ending in August 2014.  September was the 6th consecutive month of housing price gains in the 4 to 6 percent range, what is typically considered normal, and notably slower than double-digit price growth in summer/fall 2013.
  • Also last week, the FHFA released their housing price index data for August.  FHFA’s data, like NAR’s, showed continued but decelerating home price gains.  FHFA estimated growth of 4.8 percent for the year ending August 2014.
  • NAR reports the median price of all homes that have sold while FHFA and Case-Shiller report the results of a weighted repeat-sales index.
  • The reason Case-Shiller’s reported price growth is higher than NAR’s is likely a result of the data lag.  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 August prices include information from repeat transactions closed in June, July, and August.  For this reason, changes in the NAR median price tend to lead Case Shiller changes.
  • FHFA sources data primarily from Fannie and Freddie mortgages, transactions using prime conventional financing, and misses out on cash transactions as well as jumbo, subprime, and government backed transactions such as those using VA or FHA financing.  Sometimes, these non-Fannie and Freddie financed purchases have more volatile price trends.
  • Given recent trends in NAR data, we expect Case Shiller- and FHFA-measured price growth to continue to moderate in the next few months.
  • For those interested in the local perspective, stay tuned for NAR’s metro home price release out later next week or contact a local expert who can give you the most current local MLS information and put these national headlines in context.


REALTORS®: Six-Month Single Family Home Outlook “Moderate”

Tue, 10/28/2014 - 07:54

REALTORS’® confidence about the outlook for the next six months for single-family homes is still generally “moderate” in many states, according to the September  REALTORS® Confidence Index Survey:  http://www.realtor.org/reports/realtors-confidence-index .

The graphs below show a measure of REALTORS’® confidence for the single family residential market on a state-by-state basis.[1]  An index above 50 indicates that there are more respondents who viewed their markets as “strong” or “moderate” compared to those who view them as “weak.” The higher the index, the more respondents there are with “moderate” or “strong” outlook.

  Many states had an index greater than 50, the highest in North Dakota and the District of Columbia, states with strong economic and job growth.

REALTORS® Confidence Index: Outlook in Next Six Months for Single-Family Homes Based on July 2014-September 2014 RCI Surveys

[1]               The market outlook for each state is based on data for the last 3 months to generate enough observations for each state.

Inflation and Mortgage Rates

Mon, 10/27/2014 - 15:16
  • There is no consumer price inflation to speak of – as of yet.  Even the expectation of future inflation rates remains low.  This is the key reason as to why mortgage rates remain at historically low rates and why the cost-of-living-adjustment (COLA) for social security checks will barely rise next year.
  • The latest consumer price inflation in September was up only 1.7 percent.  This particular month is the basis for the COLA for many checks issued by the government for the year 2015.
  • Because of the falling gasoline prices in the past month, there could be further deceleration in inflation in the upcoming months.  But energy prices are always subject to volatile swings.  If energy prices measurably turn up due to unanticipated geopolitical events, then the overall inflation rate could be pushed above the Federal Reserve’s desired 2 percent ideal inflation target.
  • Another factor that could move higher and hence push up the overall inflation rate is from the housing sector.  Rents rose 3.3 percent over the 12 months to September, the highest pace in nearly 6 years.  Homeowner equivalency rents, a hypothetical number of what homeowners would receive if they were to rent out their home, are also hitting near 6-year high.  Given insufficient new home construction in relation to population and job growths, both rent components are further poised to rise.  Given that the housing is the biggest weight to the CPI calculation, the overall CPI could easily kick into high gear.
  • Though there has been massive printing of money by the U.S. Federal Reserve in the past few years (to buy government bonds and mortgage backed securities – something known as Quantitative Easing), inflation so far has been very tame.  Should inflation at some point pop out, however, then all the borrowing costs including mortgage rates will rise to compensate for the future loss in purchasing power.  The likelihood of inflation popping out to 10 percent or higher as happened during the large money printing period of the 1970s is highly unlikely.  But a higher inflation of 3 to 4 percent within a year is a distinct possibility.  In such a case mortgage rates will commensurately get pushed up.
  • The Federal Reserve has many contingency plans in place to assure that recent printing of the money does not lead to high inflation.  Just for an interesting historical anecdote and not as a possibility, even a remote one, it is worth recalling the years after the discovery of America by Christopher Columbus.  Spain experienced a long period of high inflation.  The monetary system at that time was based on precious metals of gold and silver.  The large shipments of gold and silver from the New World to the Old World resulted in too much metal-based money chasing after too few goods (since many Spaniards stopped working to live the easy life).  The result was too much inflation and Spain defaulted on sovereign debt several times.  As one historian puts it: “The new world conquered by Spain, has now conquered Spain in return.”   Common sense says that the greatness of a country is determined by how hard people work and not by how easy it is to obtain currency.


REALTORS®’ Confidence Eased in September 2014

Fri, 10/24/2014 - 12:08

The REALTORS® Confidence Index decreased in September 2014 compared to August 2014, according to data from the September REALTORS® Confidence Index Survey:  http://www.realtor.org/reports/realtors-confidence-index.

The index for single family homes dipped to 51 (60 in August).  The indexes for townhomes and condominiums remained below 50. An index above 50 indicates that there are more respondents who viewed their markets as “strong” or “moderate” compared to those who view them as “weak.” [1]

Respondents noted that the market typically perks up in September after a seasonal slack in preparation for the school opening, but reports indicated a flatter rebound this year. Difficulties in obtaining a mortgage under tighter underwriting standards and the decreased supply of “affordable” homes were the major factors cited by respondents.

[1]               An index of 50 delineates “moderate”  conditions and indicates a balance of respondents having “weak”(index=0) and “strong” (index=100) expectations  or all respondents having moderate (=50) 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.

Final QRM: Good for Consumers and Private Capital

Thu, 10/23/2014 - 11:11

After nearly three years of deliberation, regulators have finalized an important rule that impacts housing.  The Qualified Residential Mortgage (QRM) rule avoids an onerous and costly down payment requirement for consumers and gives creators of mortgage backed securities one less uncertainty on their road to recovery.  The immediate impact may be small, but another piece in the glide path for long-term recovery has been laid.

Private MBS and Home Sales

Traditionally banks purchased mortgages and held them in their portfolios.  Banks only have so much capital to lend, though.  In an attempt to expand the pool of funds, mortgage backed securities, bundles of mortgages, were created and sold to investors beyond just banks.

At its peak, the private MBS market produced nearly $1.2 trillion in MBS annually.  Today it is roughly $20 billion.  Why?  In the mid-2000s dangerous loans like interest-only, those with balloon payments or large resets, and those with no documentation of income, assets or even employment were pushed into private label MBS.  Investors who bought these MBS rarely had the details of the loans in them, but were sated by high quality grades from ratings agencies.  Eventually the MBS cratered in value as default rates on loans in them spiked.

Why is it important to restore the private MBS market?  A healthy private MBS market creates competition to government financing, expanding the total pool of funds for homebuyers and putting less tax payer money at risk.  A healthy private market can also foster innovation.

Defining Safety

The Dodd-Frank legislation specified two rules that would impact the real estate industry: the qualified mortgage rule (QM) and the qualified residential mortgage rule (QRM).  The QM rule was finalized in January and is intended to protect consumers.  It does so by restoring and canonizing traditional underwriting like requiring proof that a borrower has the Ability to Repay (ATR) a mortgage and banning certain risky products.  The QRM rule, though, is intended to protect investors.  It requires all issuers of MBS to hold 5% of what they make unless they meet a standard of quality and low risk.  Thus, combined the two rules work to protect the sources of financing funds and the recipient of those funds; homebuyers.

The final rule made the standard of quality for exemption from risk retention the QM rule.  Thus, if a loan meets the underwriting of the QM rule, then it meets the QRM rule and the MBS issuer does not have to hold a stake in it.  If it doesn’t comply with the QM rule, the issuer must hold 5% of the MBS for 5 years or until a majority of the outstanding balance is paid off.  The bulk of defaults usually occur in the three years following origination.

Impact on the Consumer and REALTORS®

What does the final rule mean for consumers and housing?  There will be a small initial impact…and that’s a good thing.  The FHA is exempted from risk retention as are the GSEs while in conservatorship and combined they account for nearly 85% of purchase mortgages.  But the GSEs and FHA produce QM loans.[1]  Research has demonstrated that QM-compliant loans originated from 2001 to 2008 performed better than conventional, prime loans through the crisis.[2]  Compensating factors like those employed by the GSEs would likely have improved that outcome.

When initially proposed, the QRM rule would have applied risk retention to any loan with less than a 20% down payment as well as a front-end DTI greater than 28% and back-end DTI greater than 36%.  Had these requirements not been scrapped 45% to 60% of homebuyers could have been impacted.  Risk-retention is costly to the MBS issuer, a 75 basis point or more cost that would have been passed onto the consumer.  That is the difference between a 4.25% rate and a 5.0% rate or $90 per month on a $200,000 mortgage financed over 30 years.  This cost would have disproportionately impacted first-time buyers as well as the trade up buyers who rely on them.

The higher costs of risk retention would have forced more lending to the FHA maintaining a large government role in the market.  Or, if the FHA were restricted by political pressure, borrowers would have been pushed out of the market entirely.  The result: fewer home purchases, slower price growth, reduced home construction, less of the expenditures that accompany a home purchase, and a drag on the economy.

Another important aspect of the final bill is that it leaves lenders unaffected as they have been familiar with and adjusting to the QM rule for nearly two years.  And with a final rule in place, issuers of private MBS gain more clarity and can focus on expanding their market.  The capital needed for risk retention can be difficult to raise, so having risk retention apply to a smaller portion of the mortgage market means that more firms can compete, which is good for consumers.

In the future, mortgages with low documentation and risky products will be limited, less liquid and require higher costs.  Non-QM lending was only 2.6% of originations in the 2nd quarter of 2014, and any MBS issuer who wants to incorporate them into an MBS will have to hold 5% of the risk going forward.

The final QRM rule may have little impact on the market in the short term due to the current reliance on government product and tight underwriting.  However, measured against the initial proposal, the impact could have been significant. Over time, this rule will prevent abuse while allowing a gradual recovery of private capital.


[1] The FHA and GSEs can produce loans that are QM compliant with a higher back-end DTI than specified under the regulation.  The agencies use compensating factors, though, to manage this risk.

[2] Roberto Quercia, Lei Ding, and Carolina Reid (2012). “Balancing Risk and Access: Underwriting Standards for

Qualified Residential Mortgages,” UNC Center for Community Capital Research Report, January 2012.


REALTORS® Confidence Index Survey: Highlights

Wed, 10/22/2014 - 08:05

REALTORS®’ assessment of market conditions  in September and their outlook for the next six months declined  in September compared to August and also for the same month last year , according to data from the  September 2014  REALTORS® Confidence Index Survey:  (http://www.realtor.org/reports/realtors-confidence-index).   

REALTORS® continued to report the difficulty of qualifying for a loan under overly stringent credit eligibility standards. Although mortgage rates continue to be the lowest in decades and homes are still more affordable today compared to the years prior to the Great Recession, REALTORS® reported that there are fewer “affordable” homes for sale for the first-time buyer. With higher inventory and slower demand, REALTOR® respondents expected modest price increases in the coming 12 months.

The Latest Housing Starts (September 2014)

Fri, 10/17/2014 - 11:04
  • Homebuilders were busier in September, digging more dirt and ready to bring more new homes to the market.  But construction was tilted towards multifamily apartment units.  Single-family home construction still remains well below historical norms.  A housing shortage is a definitive possibility next year unless homebuilders get more active.
  • In September, housing starts rose 6 percent to 1.02 million.  The figure is well below the needed figure of 1.50 million.  The laggard is the single-family construction.  Multifamily housing starts – mostly of apartments and some on condominiums – are essentially back to normal.
  • A robust rise in the number of renters and the rises in rents have led builders to focus on apartments.  However, the overall inventory of single-family homes for sale is on the relatively tight side and could quickly move to into a shortage situation if the demand picks up.  Home prices could then rise notable faster (say 7 percent in 2015), much higher than what most economists are projecting (current about 4 percent in 2015).  Housing affordability will take a hit then.  Therefore, more homes need to be built.  Ideally, housing starts need to rise by 50 percent from the current levels to reach the historical average of 1.5 million.
  • Builders generally do not have problems selling newly built homes.  The current supply situation is 4.8 months, which is already on the tight side.  But trying to obtain construction loans has been very difficult for small-time homebuilders, with lenders complaining of excessive banking regulation that hinders construction loan approvals.  The big-time homebuilders of Lennar, KB Homes, and Toll Brothers get their money to build from Wall Street and are having easy days because of less competition from small builders.
  • Another reason for sluggish recovery in the single-family housing starts is due to labor shortage.  The following anecdote perhaps says it all.  A police officer bought a new home in Florida.  He wanted to check up on the progress.  When visiting the construction site in his police cruiser, there was a scramble of workers running away.  Evidently, some of the workers were undocumented persons.  Then the question should be why aren’t more American citizens willing work in construction?


Falling Oil Prices, REALTOR® Expense

Thu, 10/16/2014 - 13:52
  • Oil prices have tumbled in the past month, and the reasons are due to supply and demand.  North Dakota is producing oil like mad, now the second biggest oil producing state after Texas, surpassing Alaska.  On the demand side, Europe is not growing and may even be slipping into a recession.  Less production means less need for oil.
  • From near $110 per barrel one year ago, the crude oil price has fallen to $84 on the London Exchange.  American produced oil is priced a bit less, at $80 recently because North Dakota oil is not getting exported and hence staying put as extra supply in the U.S. market.
  • Falling oil prices are leading directly to lower prices at the pump.  Gasoline prices are averaging $2.47 this week versus over $3 a year ago.
  • A typical REALTOR® spent $1,860 in the business use of vehicle in 2013.  (Note there were heavy users with nearly a quarter of REALTORS® spending over $5,000).  If the current low gasoline prices hold for a prolonged period then a typical REALTOR® will spend about $1530, or a savings of $330.
  • Natural gas prices are holding and not falling so do not expect a lower electricity bill for those using natural gas as a source of energy.
  • Consumers are clear beneficiaries of low oil prices.  On the flip side, lower oil prices are not good for producers.  Likewise, countries that are oil dependent for their economy will suffer.  Venezuela, Iran, and Russia are countries vulnerable to societal meltdown if low oil prices persist. Their currencies have all but collapsed already.  For example, one U.S. Dollar could be exchanged for 32 Russian Ruble one year ago.  Now, it commands 40 Rubles.  This means unpleasant inflation and social unrest ahead for Russia.


Unemployment Insurance Claims Fall to Lowest in 14 Years

Thu, 10/16/2014 - 10:14
  • Initial claims for unemployment insurance filed in the week ended October 11 dropped to 287,000, the lowest since April 2000. This puts the 4-week moving average to 283,500, also the lowest since June 2000. A number that is below 300,000 has been the rule of thumb for a level indicating normal economic activity. Fewer claims for unemployment insurance means greater job stability for workers. A solid job history is an important criteria lenders look at when evaluating a loan application.
  • With generally fewer claims filed every week, the number of insured unemployed has also been on the decline. As of the week of October 4, there were 2.4 million claiming unemployment insurance, down from about 6.6 million at the height of the housing crisis in 2009.
  • For the week of October 4, the states with the largest decreases in claims filed were Oklahoma (-191), Idaho (-123), Nevada (-82), and the Virgin Islands (-11). The largest increases in initial claims were in New York (+4,753), Texas (+1,976), California (+1,825), Florida (+1,743), and Ohio (+1,734).
  • Overall, the insurance claims data indicates an improving job market in October and is an indicator that the unemployment rate will continue to hover at 6 percent. About 2 to 2.5 million net new jobs are likely to be added over the next 12 months. NAR expects that the sustained improvement in the job market can support 5 million of existing home sales in 2014.


Housing Affordability for August

Thu, 10/16/2014 - 09:55
  • At the national level, housing affordability is down from a year ago for the month of August as higher prices make it less affordable to purchase a home despite rates having another slight decline.
  • Housing affordability is down from a year ago in August as the median price for a single family home in the US increased from a year ago but declined slightly from last month.
  • The median single-family home price is $220,600 up 5.2 % from August 2013 as year over year price gains are currently slowing down. Mortgage rates are down 17 basis points (one percentage point equals 100 basis points) from last year. Nationally, affordability is down from 159.9 in August 2013 to 157.6 in August 2014.
  • Affordability is up slightly from one month ago in all regions, the Northeast having the largest gain at 4.5%. The Northeast experienced a gain in affordability due to slower home price appreciation and favorable mortgage rates. From one year ago, affordability is down in all regions except the North east which had a 5% increase. The Midwest saw the biggest decline in affordability at 2.1 % while the South and the West had minor declines.
  •  Improvement in wage growth will be good for a change in affordability. As rents continue to rise, there is still hope that the lending restrictions loosen to make purchasing a home more attainable. A recent drop in mortgage applications should reduce the amount of bidders and competition for available inventory. Jobs are moving back to healthy stages as unemployment levels reach a low since 2008.
  • 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.

Rapidly Diminishing REO Foreclosure Sales

Thu, 10/16/2014 - 07:59
  • The number of foreclosed home sales has been rapidly falling and could essentially vanish by next year.  Those who specialize in foreclosure sales should therefore look towards other line of business.
  • In August, foreclosed sales comprised only 6 percent of all home sales transactions, down from double-digit figures last year and from near 30 percent few years further back.
  • In addition to fewer distressed properties on the market currently, there is very little in the pipeline.  The number of foreclosure starts is essentially back-to-normal with only 0.4 percent of mortgages undergoing that process.  Moreover, mortgages originated in the past four years are one of the best performing with very little defaults.
  • We should nonetheless be mindful that the overall count of seriously delinquent mortgages and those homes in some stage of foreclosure process are still above historical normal because some states have been very slow to process the required paper work.  For example, some homeowners who have not been paying mortgages for 2 or 3 years are still living in the home in Florida and New Jersey.  But the broad figure on seriously delinquent borrowers has been sliced in half over the past three years.
  • The bottom line there is that foreclosed sales could be in the 1 to 3 percent next year – essentially back the normal market conditions.  Fewer distressed properties will also help with the overall appraisal process of not using bad comparable.
  • REALTOR business tip.  From time-to-time there will be a homebuyer who takes a very long time to decide.  After viewing 30 homes, they will ask for few more, and on and on.  One way to help on the decision, according to psychology studies on human behavior, is to provide extreme alternatives that the consumer will certainly not buy.  For example, showing a home that is outside of the buyer’s price criteria or a foreclosed home can help speed the decision.  Since foreclosed homes are on the decline, one has to use other alternative extreme comparisons.
  • A similar decision process applies in politics.  Research shows undecided voters wanting to gravitate towards the middle for no other reason than not wanting to be extreme.  Therefore a portrayal of political opponent as an extremist will help get votes for your candidate.  That is why negative political advertisements, though nasty and unpleasant to view, is said to work in helping undecided voters make up their mind.


Commercial Lending Conditions Ease in 2014

Wed, 10/15/2014 - 08:59

According to the first Urban Land Institute/EY Real Estate Consensus Forecast of 2014, commercial real estate fundamentals are projected to continue improving. Vacancy rates are expected to decline for office, industrial and retail properties, while availability for apartments is estimated to rise. Commercial rents are poised to rise for the four core property types in 2014 in the 1.9 percent to 3.8 percent. In 2016, rent growth is projected to range from 2.2 percent to 3.6 percent.

As a significant portion of the data underpinning ULY/EY’s forecast is aggregated at the top end of transactions—above $2.5 million—it points to a brighter commercial environment, especially for top-tier markets. With 90 percent of commercial REALTORS® managing transactions valued at or below $5 million, and mainly located in secondary and tertiary markets, the 2014 Commercial Real Estate Lending Survey shines the spotlight on a significant segment of the economy which tends to be somewhat obscured.

Five years after the Great Recession, lending conditions in REALTOR® markets show signs of sustainable recovery. With commercial real estate fundamentals and investment prices on a solid upward trend, lending conditions eased as financing sources broadened in 2014.

For more details on lending conditions in REALTORS® markets, visit: http://www.realtor.org/sites/default/files/reports/2014/commercial-real-estate-lending-survey-2014-10-08.pdf

Affordability in Monthly Mortgage Payments

Tue, 10/14/2014 - 08:00
  • Home prices have rebounded nicely with the latest median home price on a single-family home at $220,600 in the U.S., up from around $160,000 just few years ago.
  • Such a robust price gain from the trough would imply less affordable conditions.  But data is says home buying is still attractive because price gains have been partly neutered by lower mortgage rates.  Moreover, income has grown a bit from job creation and falling unemployment rate.
  • A typical monthly mortgage payment for recent homebuyers was $867 if purchasing a middle-priced home at the prevailing mortgage rate and having put 20 percent down payment.  That translates into 15.9 percent of monthly gross family income now, compared to the average of 21.3 percent over the past three decades.
  • The overall debt servicing costs, including mortgage and everything else, have also been trending down and reached historic lows.  Low interest rates are also holding down payments on credit cards, auto loans, and other consumer borrowing costs.  Moreover, a very high percentage of cash-sales of homes in recent years have held down the overall mortgage debt for the country.
  • Are you happy today?  Incredibly, research shows one variable that has very high correlation to today’s happiness.  It’s about how well one slept the night before.  Along with this, be mindful of the common saying: “One who is careful when borrowing has but few cares and fewer sorrows.”