Apr272013
Average homebuyer didn’t benefit from the low mortgage rates
Since the end of 2008 the Federal Reserve has had a Zero Interest Rate Policy (ZIRP), which is the overnight rate interest rate changed to it’s member banks, it’s called the federal funds rate. This interest rates influences treasury yields, corporate bonds, and mortgage rates. The current rate is about .25% or less on a annual basis. In addition, they Federal Reserve also creates money in a program called Quantitative Easing. The Federal Reserve justifies these policies by claiming the recession is so extremely bad (and it is) that’s its necessary to set the rate to almost zero to simulate business borrowing (expansion) and and home purchasing. The negative affect of this policy is on retired people’s savings because they have been suffering by having less than 1% returns on CD’S and money market accounts. This is saving that most retired people have accumulated their entire lives to live off the interest. This low federal funds rate change was implied as a temporary measure…probably less than year. However, after 4 1/2 years of this policy the low mortgage have benefited institutional home buyers and not the average American home buyer or the retiree which depends on it’s fixed income from their savings.
Wall Street betting billions on single-family homes in distressed markets
Before the housing crash, big investors almost never wanted single-family homes, largely because of slow returns and the money-draining hassle of managing tenants in often far-flung properties.
But with prices still depressed and with low interest rates and high stock prices limiting prospective returns elsewhere, major investors see the prospect of healthy profits in single-family homes.
“Residential property is an on-fire asset class,” said Kranz, noting that his firm has plowed more than $100 million into residential real estate for investors in the past year and is on course to spend $250 million to buy an additional 2,000 homes in 2013.
Right here red flags should be noted. Typically, single family residences are considered consumption items. Home buyers don’t purchase houses for cash flow, they purchase them for shelter and here in Orange County as a status symbol. Historically, mortgage payment are more expense than rent costs. The fact that investors are purchasing homes for investment cash flow is indicator that is wrong with the yields on other traditional investments like CD’s and savings.
At Title Capital Management, nearly four dozen analysts and lawyers are glued to computer monitors — some seven days a week — hunting for deals among the flood of foreclosures that have bedeviled this state.
Aided by its proprietary software, Title Capital sizes up each home for square footage, special features and the prices and rents they can command. The firm’s legal team then scrubs each property for liens and title problems before determining a price that would allow its clients on Wall Street and elsewhere to turn a tidy profit.
The company bids on about 200 houses a day, making it one of the largest players in Florida that help hedge funds and other Wall Street firms buy distressed properties. It is proving to be a lucrative niche.
Actually, Larry Roberts documented the largest investors in single family residences are the banks themselves. In addition, these institution investors, just like smaller mom and pop investors who were the big investors 18 months ago, are purchasing homes in bulk. The Federal Reserve has pushed rates so low that homes at these prices still cash flow positive. In a normal mortgage rate environment at 6% to 9% these houses would be currently priced too high to cash flow. However, ZIRP and Quantitative Easing has distorted the market place. Please note in the last few weeks Orange County homes are sometimes entering escrow at 20% above appraisal. At these higher prices they would probably no longer cash flow. We are have to wait about 60 days to see the new comps in the OCHN Newsletter.
Last year, famed investor Warren Buffett said on CNBC: “If I had a way of buying a couple-hundred-thousand single-family homes, I would load up on them. It’s a very attractive asset class now. I could buy them at distressed prices and find renters.”
A growing number of private-equity groups have done as much. Over the past year, Blackstone has amassed a portfolio of 20,000 rental homes worth $3 billion, spokesman Peter Rose said. American Homes 4 Rent, a firm run by warehousing magnate B. Wayne Hughes, has bought about 10,000 rental properties, according to news reports.
The strategy makes sense, as a shrinking share of Americans own their homes. After more than a decade of robust increases, the national home-ownership rate peaked in 2004 at 69.2 percent. Since then, it has been in steady decline, falling to 65.4 percent at the end of 2012, according to Census Bureau figures.
The normal home ownership rate is in the low 60’s. The reason for the increase in the ownership rate was easy credit and cheap credit promoted Federal Reserve, the GSE’s and some governmental policy. Many home buyers got approved for mortgages that were well above their ability to pay if it was based on a full amortized fixed rate loan. This isn’t a elitist statement, we had a process of where prospective buyers had to save a down payment of at least 20%, keep their credit clean, and maintain their mortgage payments. In the long run this created much more stable and robust housing market. And having people also rent is good thing because it also promotes the mobility of labor and that also leads to a strong economy. It wasn’t prefect but it was a good system of homeowners and renters.
The big investor activity is pushing up prices, which is good for the large number of homeowners whose mortgages are larger than their home’s values. But for people being shut out of the biggest bargains offered by the housing market, it means a longer, slower slog to building equity. It also raises the specter of future price declines when investors lose interest or decide to dump their properties.
Did the author just admit that this recent price increase is a bubble? In addition, a lot of underwater homeowners are getting loan modifications with teaser rates. They are not paying the full amortized loan balance on a fixed rate. Many of these loanowners should have defaulted and lost their homes to foreclosures years ago, but they haven’t so hence the term cloud inventory. After July 1st enrollment in a loan modification program might be automatic in case of default. Home foreclosure is becoming a method that most banks are avoiding. Loan modifications seems the process in which banks “store” the homes.
“Clearly the investors are moving markets in some places,” said Dean Baker, co-director of the Center for Economic and Policy Research and author of a popular housing blog. “In some markets at the bottom end, you are looking at 30 or 40 percent gains year to year. That is frightening to me. At some point the music stops. The investors if they get hurt, that is their problem. But invariably a lot of other people will get caught up in that.”
The current buyers are different from the 2007 peak buyers. They are not using affordability products but cash or fixed rates mortgages. You will have defaults in this group if mortgage rates increase but, they will just added to the cloud inventory of current homeowners. But there are a group of buyers that put 20% to 30% down in this bubble and they will probably won’t default and I think it will less of impact than many people think if these mortgage rates increase.
But as things stand, many investors say the opportunities are growing, particularly in Florida. The data firm RealtyTrac reported this month that one in 104 properties in the state had received a foreclosure filing in the first three months of 2013, the highest rate in the nation. On top of that, nearly half of the homeowners with mortgages owe more than their houses are worth, which means many more foreclosures are on the way. Investors think foreclosures could surge for up to five more years.
Dallas Wharton, co-founder of Delavaco Residential Property Trust, a real estate investment firm in Fort Lauderdale, is ready. The firm, which is backed by Canadian investors, started out with 14 homes two years ago and now has 700. Meanwhile, Delavaco is preparing for a public offering on the Toronto Stock Exchange that Wharton hopes will raise as much as $40 million.
I think we are not hearing the full story and actual returns on these homes. Owning a single family residence for investment purposes is expense in the longer term. There vacancies, maintenance, and wear and tear. What is the cost for roof replacements, HVAC replacements, plumbing, flooring, painting, and many other costs? If Colony Capital which is major institutional investors in homes reports a vacancy rate of over 50% then real rates of returns are not being published.
Wharton said his company is riding a lucrative wave. It is able to scoop up many homes for $60,000 or $70,000, which is just a fraction of the building costs. After making repairs, the company rents them out for as much as $1,700 a month. The firm’s biggest client is the federal Section 8 program, which subsidizes the rents of low-income tenants. Delavaco notes that Section 8 provides “over 60 percent” of the firm’s revenue.
So, federal cheap money and federally subsidized rents are keeping these companies in the black. Ironically, Section 8 increases the costs of renting for lower economic renters that don’t qualify for Section 8. Section 8 doesn’t work like it should.
“That’s a pretty good opportunity,” Wharton said, adding that investors help stabilize communities even as they make money. “If the end-user does not have the ability to enter in the market, and they do down the road, have they missed an opportunity? Perhaps. But if it weren’t for investors, where would the market bottom be? What would happen to neighborhoods if homes were just to sit there and rot?”
First, the homes will never just sit and rot except in communities are going through a major fundamental change like Detroit. Once the cost of ownership falls below rental rates both investors and homeowners start purchasing these vacant homes. Even home building will rebound towards the end of the recession and is sometimes a factor in improvement economic conditions. But now you have ultra cheap money and a lack of supply that is causing a market distortion especially in Orange County. Large institutions are purchasing home is bulk and with the limited supply of available homes this is driving up home prices. The increase in home values is an indication that mortgage rates are just too low. In a normal business cycle potential buyers can take advantage of lower mortgage rates and lower home values during a recession. Now, the conditions exampled above are setting up a mini repeat of the housing market in 2008. By July we should see if cost of ownership is higher than cost of renting, which can really slow down sale volumes.
It’s a long article, I highlighted the points.
Battle Over Mortgage Interest Deduction Continues in House Committee
The House Ways and Means Committee heard a wide variety of opinions today at a hearing on housing tax incentives. Representatives of the housing, building and real estate industries as well as policy experts spoke both in favor and against the mortgage interest deduction (MID) tax deductions for property taxes, the real estate capital gains exemption and the low income tax credit.
Robert Dietz, assistant vice president of the National Association of Home Builders (NAHB), called on Congress to maintain its support for vital housing tax incentives. “Home building is an industry dominated by small businesses, so the idea of simplifying the complicated tax rules related to business has great appeal. At the same time, our industry remembers painful lessons from the 1986 Tax Reform Act, when the commercial and multifamily sectors experienced a downturn due to unintended consequences,” Dietz said. “Moreover, when housing fares well, it spurs job and economic growth.
Mark A. Calabria, Director of Financial Regulation Studies, Cato Institute told the committee members that a tax code that would improve both economic growth and housing affordability would ultimately be one with low, simple flat rates and few if any deductions.
He urged the committee to eliminate the MID and the local property tax deduction in a budget-neutral manner, lowering overall tax rates for the following reasons.
The MID does not have a significant impact on homeownership rate.
Its housing price impact differs dramatically across U.S. cities
Benefits are highly concentrated among the highest income and most leveraged households
Tax “savings from the non-taxation of imputed rent is almost twice that of the MID. Tax savings from the property tax deduction is much smaller than either.
Some value of the MID is actually captured by lenders via higher mortgage rates.
The value of the MID is positively relate to interest rates.
To the extent that high loan-to-value rates contributed to the recent financial crisis, removal of the MID would improve financial stability.
Because households have made investments and decisions based on the current tax code, he said, changes should be phased in over a reasonable number of years, but no more than seven.
Jane G. Gravelle, Senior Specialist in Economic Policy, Congressional Research Service (CRS) told the Committee that in considering tax reform there are three points to consider.
It is difficult it identify base broadening provisions that realistically will allow significant rate reductions.
It is even more difficult to identify provisions that would allow significant reductions of the top rate while maintaining the current distribution of tax burdens
If the objective of lowering tax rates is to lower marginal rates to encourage supply side responses, base broadening will increase effective marginal tax rates and offset in part or in full the incentive effects of lowering statutory tax rates.
Two out of three of these owner-occupied provisions are already subject to caps. Are these provisions desirable candidates for base broadening? Many economists have criticized the provisions as distorting the allocation of resources, diverting capital from other uses, encouraging overconsumption of housing, and treating renters differently than owner-occupants.
As CRS reported earlier, these provisions would be technically easy to eliminate or reduced and can be view as causing distortions, but the broad use and popularity of the provisions are barriers to major revisions. There are also arguments in favor of keeping them.
Encouraging home ownership has positive neighborhood effects and is a source of wealth building and enforced savings for middle-income families.
In terms of fairness, homeownership subsidies do favor homeowners over renters but the MID increases fairness between homeowners who mortgage and those who finance out of assets.
There are particular justifications for the capital gains exclusion. Requiring capital gains taxes would discourage labor mobility by increasing the cost of relocation, discourage older individuals from scaling down. and impose a penalty on elderly individuals who are forced to sell for health or financial reasons. This “lock-in” effect may significantly reduce the potential revenue to be gained.
There are transition issues, particularly for those in the middle incomes who have recently entered into large mortgages and may find it difficult to budget if they do not receive a full offset in in rate cuts. Grandfathering provisions would not offset effects on housing demand and phasing in would leave new homeowners with the awareness their deductions will not last
I (respectfully) disagree with this—“Now, the conditions exampled above are setting up a mini repeat of the housing market in 2008.”
This is wrong. We’re no where near 2008, mainly because the banks have not started lending to people who cannot repay their loans yet. That is the next phase—the bubble phase.
At present, we have gone about as far as we can, and prices should flatten out by the end of summer unless (and this is a Big unless) the banks can convince the CFPB to loosen the rules on a qualified mortgage. The future of housing (and whether we have another bubble) depends on that ruling.
The point is, investors don’t cause bubbles. They can push prices up by increasing demand, but many of these guys are cash buyers, so a bubble is not possible.
Remember, a bubble by definition, is a credit expansion to people who cannot service the loan. We’re not there yet, although I agree that is the direction of things.
Also, everyone makes a big deal out of “Blackstone has amassed a portfolio of 20,000 rental homes worth $3 billion”
Big whoop!
The fed spends $40 billion every month in mortgage backed securities, and guess what, existing home sales still declined last month, so what difference in $3 billion gonna make?
Of course, the truth is, it does make a difference, because Blackstone actually buys homes whereas the Fed just gives the banks money for securities that no one in their right mind would ever buy, right? The MBS purchases don’t do a darn thing except transfer more toxic junk onto the Fed’s balance sheet, which is what it is supposed to do.
Have you noticed how the Fed’s MBS purchases have increased sales?
No –neither have I , because it’s another big ripoff fraud. In fact (like I said) sales actually dropped off last month.
How would you like it if the Fed dumped $40 bil in your biz and you couldn’t even show more sales?
MBS sales haven’t lowered rates or increased sales. The Fed is ripping us off right under our noses, and no one even knows what’s going on.
Way to go, Bernanke.
“How would you like it if the Fed dumped $40 bil in your biz and you couldn’t even show more sales?
MBS sales haven’t lowered rates or increased sales. The Fed is ripping us off right under our noses, and no one even knows what’s going on.”
The scary rumors are floating around that some in the Fed want to increase the MBS purchases. There is a major split in the Fed, I think its that fact that Bernanke just has 9 months left on his term is causing this split. Wall Street is pushing for Yellen, and that would be crazy
The subprime never ended, it just move to cars, student debt, credit cards, and pay day loans.
High-cost borrowing is a new American norm, research finds
By Alejandro Lazo
High-cost borrowing through payday loans, pawn shops, auto title loans and others is no longer on the margins of U.S. consumer behavior — about 1 in 4 Americans have tapped this kind of financing, new research shows.
A new study by the National Bureau of Economic Research finds high-cost lending is now firmly rooted in the American financial system after two decades of strong growth.
“High-cost borrowing cannot be considered a ‘fringe’ behavior that is limited to a specific and small segment of the population,” economists Annamaria Lusardi and Carlo de Bassa Scheresberg wrote in their study. “Rather, it is firmly rooted in the American financial system and is common even for households who are generally referred to as ‘middle-class families.’”
The new research comes amid a renewed regulatory focus on this type of lending, particularly the payday loan industry. A recent report by the Consumer Financial Protection Bureau found that payday loans were essentially a “debt trap.”
The average payday-loan consumer took out 11 loans during a 12-month period, paying a total of $574 in fees — not including loan principal, according to the study by that federal agency. A quarter of borrowers paid $781 or more in fees.
Separately, consumer advocates backed a state bill this month that would have restricted the number of payday loans to any one borrower. Senate Bill 515, which failed to pass in the California Legislature, would have barred the high-cost, short-term lenders from making more than six loans a year to any single borrower.
The paper by the National Bureau of Economic Research goes beyond the payday loan industry to encompass the entire realm of “alternative financial services.” It notes that in 2009 alone, the Federal Deposit Insurance Corp. found this industry to be worth at least $320 billion in transactions.
The paper was based on several separate studies, including phone interviews of close to 1,500 Americans; a state-by-state online survey of about 28,000 American adults; and a military survey of 800 service members.
The study also found that about 34% of young adults have used a payday loan, pawn broker or some other form of high-cost financing. A low level of financial literacy correlated highly to the use of these loan products.
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