Record low interest rates fail to spur demand

Interest rates are at record lows, and prices are at or below rental parity in most markets, yet demand is low and sales volumes are weak. Most real estate shills blame intransigent buyers. Many realtors believe legions of buyers are fence-sitting due to falling prices. In their world, if buyers could just be cajoled into buying, everything would be okay.

The main reason buyers aren’t buying is because they can’t. The buyer pool has been depleted by the recession. Fewer buyers qualify for loans because they have bad credit from excessive debt loads or a recent foreclosure or short sale. Plus, few people have the requisite down payments to buy a house at California prices. Prices are now affordable on a monthly payment basis, but until people go back to work, repair their credit, and form new households, demand will remain weak. Further, since the collapse of prices has wiped out so much equity, there is no viable move-up market. This will be a drag on high-end pricing for many more years. Expect to see high-end prices languish even after the bottom tier of the market finds stability.

We are in the early stages of the foreclosure liquidations. The month-to-month changes in foreclosure processing don’t mean much. Lenders have been managing foreclosures to match the rate of MLS liquidations for the last two and a half years. This is evidenced by the disconnect between mortgage delinquency rates and foreclosure rates. We won’t see a sustained drop in foreclosure activity until we get rid of the backlog of shadow inventory. That could potentially take years. Lenders and the GSEs are approaching private equity firms to buy and rent their REOs because they have so many of them.

Buyers cannot buy because they lack the credit scores, the income, and the down payment to buy at these prices. The problem in housing is a deep structural problem, not a psychological one. There are some buyers waiting out the price drop to see if they can get a better deal, but not so many as to impact the market. The real weakness in the market is caused by a depleted buyer pool and an excess of inventory. Those two problems will persist for several more years.

U.S. Mortgage Rates Hit Record Lows, Again

Posted by David Barley 02/02/12 12:00 PM EST

Based on Freddie Mac latest Primary Mortgage Market Survey (PMMS), the average mortgage rates dropping to new all-time record lows as data on economic growth fell short of market projections. All products in the PMMS survey, except the 1-Year ARM, averaged new lows.

The 30-year fixed-rate mortgage (FRM) averaged 3.87 percent with an average 0.8 point for the week ending February 2, 2012, down from last week when it averaged 3.98 percent. Last year at this time, the 30-year FRM averaged 4.81 percent.

When I prepare posts each week, I got to Bankrate.com to check the 30-year FRM rates for the cost of ownership calculations. Over the last month, rates have been less than 4%. I never thought we would see rates this low. And who knows how long they are going to last?

Published: Tuesday, 31 Jan 2012 — By: Diana Olick — CNBC Real Estate Reporter

Anyone with any cash in hand should be buying a house right now.That’s what any real estate agent will tell you, obviously, but that’s also what many investors now believe.

Unfortunately, the potential home-buying public…isn’t buying it.

January’s consumer confidence report found a drop in the number of Americans who plan to buy a home in the next six months.

People change their plans for several reasons, and many of those who said they were not going to buy a home in the next six months may simply be responding to the reality of their inability to consummate the transaction. Even those who plan to buy in the next six months might find they are unable to do so.

If, however, you take out the confidence issue, the fundamentals for buying are strong:

Home prices nationally are down 33 percent from their bubble peak, according to the latest S&P/Case-Shiller report, mortgage rates are hovering near record lows, and housing supply, while falling, is still historically high. In other words, it’s more of a buyer’s market than it’s ever been.

And yet the home ownership rate continues to fall, and rental demand, occupancies and rates continue to rise.

Rising rents will be what pushes many into home ownership. With the falling rents of the 2007-2010 period, there was no urgency to buy. Rents were falling and prices were above rental parity. With prices below rental parity and rising rents, many will get pushed to buy because the savings on their monthly expenses.

“Federal plans to sell real estate owned properties to investors might provide some relief, but rental value growth is still likely to hit 3 percent this year and average rental yields may rise to around 5.5 percent,” wrote Paul Diggle of Capital Economics, who believes the downturn in homeownership may still have further to run.

Both Diggle and Standard and Poors’ David Blitzer cite still tight credit as the major obstacle to housing demand. Rates are low, but to get those rates you need a significant down payment. The low down payment route, the FHA, has raised fees and premiums, which for some are a barrier to entry. A full third of the market is now all-cash.“We have to get the demand up, we have to tighten the supply a little bit before we will see any shift in prices and we haven’t seen that,” said Blitzer in an interview on CNBC. …

Demand will not be up in most areas due to the problems discussed at the opening of this post. Plus, it’s difficult to tighten supply when the banks already have more houses than they could possibly sell. Even with the bulk foreclosure deals on the horizon, banks are going to have MLS inventories stuffed to capacity for several more years while they liquidate their REO.

OC Housing News readers are active

Shevy tells me he and his team have been very active with buyers since the start of the year. Apparently, a chance to get a home with a cost of ownership below rental parity outweighs the risks of falling prices and rising interest rates. These buyers know the risks — because most are readers, and Shevy explains the risks to them — and they are choosing to buy despite the potential problems. Unlike five years ago when disaster was certain, today’s buyers are locking in a cost of ownership lower than rent, and for those who plan to live in the same house for several years, the savings versus renting has value. Can anyone say with certainty today’s buyers are making a mistake?