What's Killing the US Housing Recovery?

Don't believe the hype about rising interest rates smothering housing market improvement. Homes are simply unaffordable

Picture it: a hopeful young couple wants to buy a house. They've been reading stories about a housing recovery, and interest rates are low. They start their search in the late spring. Things start to turn over the summer: as interest rates on 30-year mortgages suddenly rise to 3.5%, 3.7% and then 4%, they start to get discouraged. Eventually, they walk away and keep looking. The housing recovery dies as examples like this happen all over the country. Banks start laying off mortgage professionals, grousing all the time that rising rates are ruining their profits.

Some version of this narrative has been playing out in the mortgage coverage of many major newspapers.

There's only one flaw: none of that is happening.

Rising interest rates are not wrecking the housing recovery; what's wrecking the recovery is that house prices are rising faster than the ability of people to afford them. Maybe we thought we could cheat history, and that a housing recovery would bring about an economic recovery. That can't happen. The housing recovery can't start until the economic recovery begins.

Unfortunately, the economic recovery is overblown; in fact, the economy is stagnant, and there's no evidence of any progress despite years of stimulus by the Federal Reserve.

Similarly, the housing recovery was an illusion: the best housing stock has gone to large private investors, not individual homeowners.

So let's look at why the housing recovery is weak.

You can forget the idea that it's somehow due to higher interest rates. Rates are historically low. In 2003 through 2006, when the housing market was booming, the interest rate on mortgages over 30 years was around 6% or even higher, and that never hurt buying. That's because at the same time, incomes were also rising, after adjusting for inflation. The year at the height of the housing bubble, 2006, was also a peak for income growth. By comparison, look at this chart to see how interest rates are correlated to housing bubbles: it shows that they aren't, really.

So, if interest rates are still at rock bottom in historical terms, we know that "rising" mortgage rates are probably not a big enough deal to hurt the housing recovery.

So what is?

In a nutshell, what's hurting the housing recovery is that there aren't enough houses to buy, and those that are available are too expensive.

First, the supply of affordable homes has diminished. In the aftermath of the housing crash, one-third of all home sales were distressed homes, and those houses tend to be sold for affordably low prices by banks.

But, as home prices have risen, there is evidence that banks and lenders are not selling those foreclosed houses and instead holding on to some of them to sell for a higher price later. They're also not selling them now because flooding the market would result in low sale prices – and those lenders want to get high prices.

That strategy by lenders seems to be working. House prices have rocketed in the past year, rising too fast for buyers to keep up, even with a 30-year mortgage. In July 2012, home prices were still falling from the housing bust. In the past year, they have rocketed up 12%.

At the same time, rental prices have also zoomed up, which is perhaps why mortgage applications seemed to rise earlier this year: a high rent will make people think about buying a home instead.

But neither renting nor buying looks great any more at these prices, because people still don't have much money.

Personal incomes have collapsed since the recession, meaning households – many still struggling with heavy debt – can't afford the sudden rise in house prices and are not applying for mortgages any more. Anyone who manages to buy a house for the first time right now is not feeling rich: the National Association of Realtors found recently that 42% of first-time buyers have to make sacrifices to afford a new home.

This issue of home prices is a huge factor in why there's no actual housing recovery.

Affordability and home ownership are far more closely correlated than interest rates and home ownership. Interest rates may make mortgages more expensive, but they don't affect the underlying price. That price is what drives people away.

The low demand for overpriced houses may be why banks are laying off mortgage professionals. Reuters, Bloomberg, the Los Angeles Times, and, most recently, the Wall Street Journal have all written stories about the layoffs in mortgage departments. They attribute those layoffs to rising rates. That's not the whole story, however.

Laying off mortgage professionals is, at this point, an ancient trend – one that precedes rising interest rates by months and years. Demand is low, and when demand is low, banks lay off people. It has happened every year since 2008, and continued into 2011, after the crisis.

Earlier this year, Chase said it would lay off mortgage professionals because business was improving as foreclosures fell; now the bank and other rivals are suggesting that they're doing more layoffs because business is bad. They can't have it both ways. The truth is that banks will most likely continue layoffs as they slim down the incredibly bloated infrastructures they built up during the boom years and then during the foreclosure and mortgage-cleanup time of 2009 to the present day.

In order to drum up business, banks are walking down a well-worn and dangerous path. According to Bloomberg, those banks are loosening their mortgage standards, dropping the bar for down payments and income requirements in order to get more customers in the door, as Bloomberg reporters perceptively found this week.

Loosening mortgage standards? That's a fantastic idea; what could possibly go wrong? Except of course, for a replay of the last housing crisis. Weaker underwriting standards help more people get homes, but they also sow the seeds of trouble as unqualified people make their way into the system. Banks still have not proven that they know how to judge the risk of a mortgage, so they turn their spigots either all the way on, giving mortgages to everyone, or all the way off, giving mortgages to almost no one.

John Carney, at CNBC, theorizes that the rising home prices are proof of a bubble. The idea is directionally sound, but has a major flaw: bubbles require mass participation.

There's no bubble right now because many people can't get the homes they want. Paradoxically, that will create less of a bubble even though housing prices are growing at bubble rates.

What this all means is that people are going to stay locked out of the housing market until the economy recovers, they have more money in their pockets, and there's a larger supply of affordable houses. Until then, don't believe the hype about interest rates.

Source:theguardian.com, 13 September 2013

Home Prices, Sales Slip in August

San Diego County home prices and sales slipped from July to August as the market took a breather from recent increases, DataQuick reported Thursday.

The median price last month was $415,000, down from $417,500 in July but still up 20.2 percent from year-ago levels.

Sales also were lower, down 9.5 percent from July to 4,099 transactions, a not uncommon seasonal dip. The total was up 3 percent from August 2012.

DataQuick President John Walsh said the trends, generally consistent across the six-county Southern California region, reflect fewer all-cash and investor buyers, still-tight inventory and rising mortgage rates.

"There's something for everyone in today's housing data," Walsh said in a statement. "Sellers have seen an amazing price jump from just a year ago, allowing many to finally sell at a profit."

Freddie Mac's weekly primary mortgage market survey, also released Thursday, showed the 30-year, fixed-rate loan unchanged at 4.57 percent from last week, not counting origination fees. The most recent low was 3.4 percent in April.

"As we head into fall and winter, a slower time of year," Walsh said, "we'll probably see year-over-year price gains continue to taper."

Michael Lea, a real estate professor at San Diego State University, said he was not surprised by the price dip but was "a little puzzled" that sales are not rising as fast as they should at this point in the economic cycle.

"I would have thought sales would be picking up," he said.

After all, Lea noted, many homeowners have left the underwater-mortgage years, when their homes were worth less than their mortgages. They also are aging and want to move to a smaller home or are growing their families and need bigger homes.

"I would expect more of those sales to be going on," he said.

The explanation may be that would-be sellers are sitting on their homes expecting prices, which rose 20.2 percent over the last year to repeat that feat in the next year. If they did, the median price for all homes in August 2014 would stand at $499,000, not too far from the all time peak of $517,500 in November 2005.

"I don't expect that" to happen, Lea said.

Another roadblock may have to do with mortgage financing. Lea said the tighter lending rules mean buyers must accumulate 10 to 20 percent in a down payment and carry a FICO score of 720 -- both factors that are much higher than a decade ago.

"A lot of homeowners still can't qualify for a new home, particularly if they want to make a lateral move or trade up," he said.

All things considered, he said, if your finances are sound and your needs so dictate, it's better to buy now.

"If you're just the average guy that wants to buy a house," he said, "I've been telling people this is a good time because interest rates aren't going to be going down."

In DataQuick's August report, key measurements pointed to further stabilization of the housing market:

• Absentee buying stood at 26.9 percent, unchanged from July but down from the high of 31.5 percent in March. Still, it was at 16.3 percent in August 2003 and thus shows that many would-be owner-occupants still are on the sidelines.

• All-cash buying, a measurement of investor interest, stood at 27.6 percent, down from 28.2 percent in July. That's also improvement from the high of 36.5 percent in February; it was 8.2 percent 10 years ago. Investors often squeeze out buyers needing mortgages by outbidding them. The fewer investors there are, the more chances families have to buy the home of their dreams.

• Foreclosure sales -- homes sold after foreclosure in the last 12 months -- fell to 4.5 percent from July's 5.4 percent and the all-time high of 55 percent in January 2009. During the pre-recession boom, foreclosure sales ran less than 1 percent. Still, the falling rate indicates a continuing decline in the distressed housing market -- and a stabilization of prices in neighborhoods in general.

• Short-sales -- another measurement of distress in homes sold for less than their outstanding mortgage -- represented 14 percent of sales in August. That's down from 14.4 percent in July and the record 31.2 percent set in January 2012. That means more sellers are no longer under water on their mortgages and can count on positive equity when they sell.

Separately, the Greater San Diego Association of Realtors reported that as of Thursday, the number of active listing in the county stood at 6,838 , up from 6,251 in August and 5,935 in August 2012. 

However, listings regularly exceeded 10,000 per month from the spring of 2010 through November 2011.

Looking at Southern California counties, Los Angeles saw the highest year-over-year price increase, up 28.1 percent, to $429,000 in August. Riverside had the highest sales increase over the same period, up 6.3 percent to 3,740 transactions.

The overall six-county median was $385,000, up 24.6 percent from August 2012, and the sales total of 23,057 transactions up was up 2.8 percent.

San Diego sales, prices Aug. 2012-Aug. 2013

Prices	Aug-12	Jul-13	Aug-13	% chng 2012-13
Resale single-family	$375,000	$460,000	$450,000	20.0%
Resale condos	$230,000	$315,000	$315,000	37.0%
Newly built homes	$469,000	$544,000	$514,750	9.8%
Total	$345,250	$417,500	$415,000	20.2%
Sales
Resale single-family	2594	2714	2522	-2.8%
Resale condos	1,095	1,287	1,252	14.3%
Newly built homes	292	259	325	11.3%
Total	3,981	4,260	4,099	3.0%

Source: utsandiego.com/news, 12 September 2013

Appraisals Scuttle Home Sales Where Prices Rise Fast

Jonathan Miller is a frequent speaker and guest at housing-industry conferences, but lately his presence has caused some troubling reactions.

As Miller tells it, property brokers he runs into accuse him of one of the most heinous acts imaginable.

They say, "You killed my sale.

It's not personal. Rather, the brokers are railing against his profession. Miller is an appraiser, president of the well-known New York-based Miller Samuel Real Estate Appraisers.

These are challenging times for appraisers and the buyers who need appraisals to secure mortgages, especially in markets where home prices are rising rapidly. And there are lots of those markets these days. Prices in many markets in California alone are up 25% to 30% over last year, and in Miami nearly 20%.

Viewpoint A Basic Issue

Agents and buyers are increasingly complaining that appraisals are not keeping up with the changes. About 25% to 30% of transactions nationwide in the last year have had "some sort of problem with appraisals," says Jed Smith, managing director of quantitative research at the National Association of Realtors.

"In a rising market, appraisals tend to lag the market," Smith said, "because appraisals are looking backward and the market is looking forward.

If an appraisal reflects a value that's lower than the loan amount, the buyer has to put more money down or the seller has to agree to lower the price — or some combination in between. Otherwise, the deal likely falls apart.

Sometimes a second appraisal saves the day. It did the trick recently on a Brooklyn, N.Y., townhouse contract that nearly collapsed when the first appraisal came in $350,000 below the agreed-upon price of $1.65 million. The second one came in right on target.

"Getting an appraisal these days is like rolling the dice. It's hit and miss," said the listing agent Madeline Williamson of Douglas Elliman Real Estate.

Cash Buyers Not Immune

Even when a buyer puts down a large down payment or all cash, a low appraisal can prompt a buyer to try to renegotiate the price down.

"In my office, prices on three deals had to come down recently because of the appraisals," Williamson said. "It's a really big problem.

Miller says most appraisals are valid. But he says the cause of about half of problem appraisals is due to markets moving too rapidly and too "inconsistently." Many are so supply-constrained that they've caused "irrational behavior" by buyers competing for scarce inventory.

Put another way, bidding wars have erupted in sought-after neighborhoods with tight inventory, including some in Miller's own backyard in Manhattan and Brooklyn.

In such fast moving markets, valuations can change "within a couple of weeks," Miller says. Listing prices can be "the starting point.

Appraisers are supposed to take into account multiple factors. Closed contracts on comparable homes are high on the list, but they're also meant to be supplemented with some data on pending contracts and listing prices, plus information about market conditions.

Local-market knowledge is considered crucial. But often it's lacking, and that is the other main reason appraisals may come in low, Miller says.

Since the housing crisis, a lot of appraisers' local-knowledge expertise has been lost due to huge changes in the appraisal industry.

Miller and other experts trace the changes back to May of 2009. That is when former New York Attorney General Andrew Cuomo (now governor), in an attempt to rectify conflicts between brokers and appraisers during the housing boom, forged an agreement with Fannie Mae (FNMA) known as the Home Valuation Code of Conduct. The HVCC essentially became a nationwide blueprint.

During the bubble, about two-thirds of residential mortgage volume flowed through mortgage brokers, who brought deals to banks and often ordered the appraisals. That was seen as an inherent conflict because the broker would get paid only when the loan closed.

As noble as the attempt was to right the wrongs, it backfired, Miller says.

Who's Doing The Work?

Banks had already been closing in-house appraisal departments. Meanwhile, the HVCC's goal of assuring appraisers' independence unintentionally "opened a Pandora's box" by prompting the rise of appraisal management companies, Miller says. Until then AMCs were a small slice of the business.

"Think of them as very large, quite often national entities that are a clearinghouse for appraisers," Miller said, adding that appraisers working for them on fees often agree to quick turnaround times.

"The practice falls short because it encourages a lot of cutting of corners," Miller said. "Many are effectively an army of what I call form fillers.

"In Manhattan we're competing with upstate New York people who come down here and do a dozen appraisals in 24 hours and go home," he said. "There's a built-in bias to be conservative because you don't understand the market. And if you don't know the market or you're not comfortable in the market, it's going to be a lot harder to keep up with the market when it's changing rapidly.

Miller says AMCs account for about 90% of appraisals done on mortgages from big banks such as JPMorgan Chase (JPM) and Citigroup (C). His own firm has moved away from appraisals for commercial banks into other areas such as litigation support, estate trusts and foreclosures because the business has become "a commodity rather than a professional service.

Local and regional banks are more prone to use a panel of approved appraisers with local-market expertise, however.

While there are competent AMCs, others cut fees and offer quick turnarounds to gain business, practices that encourage appraisers to skimp on performance, says Richard Borges, president of the Appraisal Institute, a global association of professional real estate appraisers.

Conservative Estimates

Borges says some appraisers err on the side of caution due to their concern about liability or possible loss of work from certain AMCs.

"It's a very difficult climate because you have a changing market," he said. "And changing markets are always more difficult to both sell in and to appraise in than markets that are flat and stable.

But lagging appraisals may fade before long, he suggests, "as the evidence mounts that the market is moving positively.

"Part of it is caution, waiting to see the evidence," he said.

Source: Investor's Business Daily, 9.12.2013

Has Riverside County Hit a Sweet Spot on Home Price?

Home buyers in the Inland region may be at the threshold of finding the sweet spot on price, if the July report from California Association of Realtors is an indication.

Existing home sales in Riverside County were down 7.6 percent from one year earlier and down 1.7 percent from June. With inventory levels at unchanged 2.9 month levels for the state, but a slightly larger supply of homes in Riverside County at 3.1 months, the reason for the decline could be pinned on:

Price: The median sold price of an existing home in Riverside County rose 32.5 percent to $294,300 from $223,740 in July 2012. The sold price for a home in Riverside County is also down 1.4 percent from $298,470 in June.

Interest Rates: Mortgage rates began to spike up in June, and continued to rise in July to average 4.3 percent for a 30-year, fixed mortgage, according to Freddie Mac. The rates were 3.5 percent in July 2012.

San Bernardino County Experience: Home sales were up 7 percent from July 2012 and up 5.2 percent from June — despite the rise in lending rates.

The gain might be pinned on price. The median sold price of existing single-family homes in San Bernardino County was $180,270, up from $174,650 in June and up from $145,710 in July 2012.

The California Association of Realtors vice president and chief economist Leslie Appleton-Young said the constrained supply of homes over the last year has pumped up home price increases significantly — particularly in the coastal areas.

Looking ahead, Young is expecting to see strong price growth continue but at a less accelerated pace.

Source: http://blog.pe.com August 16, 2013

A new lifeline for would-be home buyers

The Obama administration wants to create a mortgage market that is more forgiving to borrowerswho lost their homes due to the recession, an effort that could widen the pool of potential homeowners.

A recent rule change lets certain borrowers who have gone through a foreclosure, bankruptcy or other adverse event—but who have repaired their credit—become eligible to receive a new mortgage backed by the Federal Housing Administration after waiting as little as one year. Previously, they had to wait at least three years before they could qualify for a new government-backed loan.

For the full story click the following link: http://homes.yahoo.com/news/a-new-lifeline-for-would-be-home-buyers-191050475.html

Home values rise, but millions still drown in debt

More than three million U.S. borrowers have risen above water on their mortgages so far this year, thanks to swift home price appreciation, according to a new report from online real estate company Zillow.

The negative home equity rate fell in the second quarter of this year, the fifth straight quarterly drop, but it is still alarmingly high and continues to hamper the housing recovery.

Currently, 23.8 percent of homeowners with a mortgage, or approximately 12.2 million, owe more than their homes are worth, down from 15.3 million one year ago, according to the report. Some, however, are still so far underwater that even with fast-rising prices, it will take years for them to see any home equity.

"Widespread rising home values during the past year have helped chip away at negative equity nationwide, helping many homeowners who were only modestly underwater to come up for air. For those homeowners who are deeply underwater, though, there is still a long row to hoe," said Zillow Chief Economist Dr. Stan Humphries in a release.

Nationwide, more than half of all underwater borrowers are in in the red by 20 percent or more, and roughly one in seven owes more than twice what their home is worth.

The numbers seem incredible, given that home prices are up about 12 percent year-over-year, according to the latest S&P/Case-Shiller home price index for June, but that same index shows prices nationally are still off 23 percent from their peak in 2006. In some of the hardest hit housing markets, home values are still down around 30 percent from their recent peaks.

"Negative equity will be a factor in these markets for years to come, constraining the supply of homes for sale and keeping people out of the market who might otherwise get involved," said Humphries.


Adding to the problem is the number of borrowers who have so little equity in their homes that they are unable to afford a move. This "effective" negative equity rate, defined by Zillow as less than 20 percent equity, is improving but it still stands at 41.9 percent of all borrowers.

"Unfortunately, moving from negative equity to neutral or slightly positive equity probably won't make a big enough difference financially for most recently-underwater homeowners to put their homes up for sale," said Rick Sharga of Auction.com. "Until they've had a chance to build significant equity, or increase their savings, they simply won't be able to come up with the down payment they'll need for their next home purchase."

Source: CNBC, Diana Olick, 29 August 2013

Home prices push past rising rates

Despite rising interest rates, home prices continue to surge higher.

The latest read shows values, including distressed properties, up 12.4 percent in July, year over year, according to a monthly CoreLogic report. That's higher than both May and June's annual increases.

This is the 17th consecutive month of annual gains for home values nationally. Prices were up 1.8 percent month over month, according to the report.

"Looking ahead to the second half of the year, price growth is expected to slow as seasonal demand wanes and higher mortgage rates have a marginal impact on home purchase demand," said Mark Fleming, chief economist for CoreLogic, in a release.

Mortgage rates are about a full percentage point higher today than they were at the beginning of March. The average rate on the 30-year fixed hit 4.80 percent by the middle of last week, according to the Mortgage Bankers Association. That is the highest since April 2011.

Rates have been trending higher on expectations that the Federal Reserve will begin to taper its investments in mortgage-backed securities.

Home prices are also trending higher in part due to the fact that there are fewer distressed properties for sale. Excluding distressed sales, prices were up 11.4 percent year over year. Distressed properties have seen big price jumps in the past year, as investors fight to get the remaining bargains.

Markets hit hardest by the housing crash have seen some of the biggest price gains: Nevada home prices were up 27 percent annually in July, California up 23 percent and Arizona up 17 percent. Completed foreclosures nationally were down 25 percent in July from a year ago, according to CoreLogic.




Source: CNBC, Diana Olick, September , 2013