Jun252015
Housing prices are expensive, affordable, stable, and boring
Stable house prices with low volatility isn’t very exciting, but it’s the best thing possible for residential real estate.
The norm in California housing over the last 40 years has been extreme volatility. We had one stretch in the mid 1990s when prices were closely tethered to rent, but other than that house prices were either in a bubble or over-correcting to the downside. For the most part, the rest of the US did not participate in the wild price swings characteristic of California, but starting in 2003, financial innovation in housing finance brewed up a toxic concoction of unstable mortgage products that inflated a massive housing bubble and a deep over-correcting crash.
Prior to the housing bubble, the normal state of affairs for the housing market was slowly but steadily rising prices that matched the growth in rents and incomes. From the early 1980s through the early 2000s, house prices rose a bit faster than incomes due to steadily falling interest rates, but generally the rate of appreciation was gentle and predictable.
The new normal in housing is very different from the old normal.
1. Low mortgage rates
The first unique characteristic of the new normal is very low mortgage rates largely because borrowers can’t afford current pricing at higher rates. The long-term average for mortgage rates dating back to 1971 is about 9%; only looking back 25 years brings this average down to between 6.5% and 7%. The current regime of 4% rates is very low by historic standards, but given the need for lenders to reflate the housing bubble to recover on their bad loans, it’s likely we will sustain below-average mortgage rates for a very long time. This is a feature of the new normal.
2. Low supply of for-sale homes on the MLS
The second unique characteristic of the new normal is unusually low MLS supply. In 2011 lenders embarked on an aggressive policy of loan modification can-kicking to get some income from their bad loans and get the distressed properties off the market, and they stopped approving short sales if the borrower had any assets.
The loan modifications and denied short sales kept borrowers in their homes and it kept the homes off the market; inventory plummeted, and by early 2012, there were so few homes available that even the tepid demand was enough to cause bidding wars and force the housing market to bottom.
The problems and solutions that lead to our current state of low MLS inventory is likely to persist for quite some time. Both lenders and underwater borrowers do not want to lose money on the bad deals they made nearly 10 years ago. Lenders can kick-the-can indefinitely, and they can force borrowers to play along. There are still millions of homeowners who are underwater, and the government loan modification programs and private-label loan modification programs delayed and deferred several million more distressed sales, so low MLS inventory will be an issue for a very long time. This is a feature of the new normal.
3. Low demand from owner-occupants
The third unique characteristic of the new normal is low demand from owner-occupants. When the housing bubble burst, several million people lost their homes in foreclosures, and several million more ruined their credit scores by defaulting on their loans to obtain loan modifications. This removed several million potential borrowers from the buyer pool, and despite hopes that these boomerang buyers would come back to the market in large numbers, they haven’t, and they won’t.
Further, first-time homebuyers, typically the largest demand cohort with an average 40% share, are not buying homes. Today, the share of first-time homebuyers is only 30%, and with the poor economy and excessive student loan debts, the Millennial generation won’t be major housing market participants until 2019. Owner-occupant demand will be weak; this is a feature of the new normal.
4. Home prices expensive but affordable
I create monthly market reports that carefully document rents and ownership costs for most cities and many zip codes in Southern California; this site displays the cost of ownership and comparable rental rates for every for-sale property on the MLS: between those two sources, it’s easy to determine market trends and gauge relative affordability from the county level all the way down to individual properties.
Relative to rents, house prices stabilized across Southern California at prices very similar to the stable equilibrium from the mid 1990s. In the past, toxic mortgage products would have restarted the Ponzi scheme, but since these products are effectively banned, rather than restart the Ponzi scheme, sales volumes declined, and buyers are giving up.
After almost of dozen years of volatility, the market has reached a stable equilibrium where prices are high but affordable. Since we aren’t likely to get an influx of supply, and since the weak economy means we aren’t likely to get a surge in demand, we will maintain this equilibrium for the foreseeable future. This is a feature of the new normal.
After an Era of Ups and Downs, Home Prices Return to Sanity
JUNE 17, 2015, Neil Irwin
A decade ago the market was unquestionably too hot. Four years ago it was too cold. Now, by a wide range of measures, nationwide home prices look relatively normal when compared with incomes, rents and other fundamentals — and are rising at similar low, single-digit rates.
In contrast to the periods of irrational optimism and pessimism, the market is settling into a balance in which buyers are comfortable spending what they can afford given their income and savings, but aren’t willing (or able to persuade lenders) to stretch beyond that. Among buyers there is neither a sense of desperation to buy now on the assumption prices will rise rapidly, nor of fear they will plummet.
For a while in 2013 and early 2014, national home prices were rising at a double-digit percentage rate, which if sustained could have rapidly led housing back to its bubble-era extremes. But the reality — of caution on the part of home buyers and their lenders — soon set in. In the 12 months ended in March, the S.&P. Case-Shiller national home price index rose only 4.1 percent, not much higher than the rise in Americans’ incomes and broadly consistent with longer-term trends.
“The market is coming back, but we’re not having astronomical growth,” said Thomas O’Bryant Jr., the chief executive of the Greater Tampa Association of Realtors. “We’re having the kind of growth that is going to be sustainable, and any time you have steady growth it’s much better than having bubble growth.”
Does the shape of the above chart look familiar? It should because it’s very similar to the valuation method I use in my monthly reports.
When you consider the market manipulations of mortgage rates by the federal reserve and supply by lender policy, it’s a miracle the market stabilized at all. It’s an open question as to how stable these props are, but it seems very unlikely they will be unwound any time soon because the health of the banking sector depends on it.
Despite the overhanging issues, when you look carefully at where we are and how the market is reacting, the new normal looks much like the old. Prices will rise slowly from here always being expensive but attainable, not unlike they were in the 1990s.
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Much of new construction Irvine area home pricing is stable too, despite selling well. In years past, when phase releases were similarly successful, the next release’ pricing would jump. The successive price increases I’ve seen over the last year have been negligible.
That’s reflected in the appreciation in Irvine. Due to the influx of supply from builders, Irvine home prices appreciated less than any city in Orange County over the last couple of years. This situation will deteriorate as mortgage rates rise.
They crashed less in 2008 so there was less “recovery” appreciation.
Shevy has told me that people wanting to list and sell homes in Irvine face an upper limit on how delusional they can be due to new home sales. It’s a particular problem in the newer neighborhoods where properties are directly comparable. The other neighborhoods around OC don’t face this competing supply, so the lack of listings from underwater owners is a real boon.
It underscores that the main reason prices ran up so quickly in 2012 and 2013 was the lack of competing inventory, particularly distressed inventory. This is also what allowed homebuilders to restart again. But since demand is still historically weak, wherever the homebuilders start providing supply, the additional supply immediately blunts appreciation.
Unfortunately, “boring” = complacency
The complacency will be shaken when mortgage rates rise.
Over Half of States are in ‘Stable’ Housing Market Range
More than half of the states plus the District of Columbia, along with more than a third of the nation’s largest metro areas, were categorized as in the “stable” range in April on the strength of a healthy spring homebuying season, according to Freddie Mac’s April 2015 Multi-Indicator Market Index (MiMi) released Wednesday.
Out of the nation’s top 100 metropolitan areas, 35 had a MiMi value in the stable range in April, according to Freddie Mac. The overall value of the MiMi in April was 78.7, which is still termed as weak but is only slightly below stable range (which is 80 to 120). Moreover, April’s MiMi value represented an improvement 0f 0.14 percent from March to April, a three-month improvement of 2.10 percent, and a year-over-year improvement of 3.57 percent. While April’s value of 78.7 is significantly off from the all-time high MiMi value of 121.7 reached in April 2006, it is an improvement of about 33 percent from its record low of 57.4 registered in October 2010.
“We saw a significant improvement in housing markets nationwide, with ten more metro areas and nine more states moving within range of their benchmark, stable level of housing activity,” said Len Kiefer, Freddie Mac’s Deputy Chief Economist. “The West and Southwest areas of the country continue to lead the way, especially Colorado, Oregon and Utah, and California is right there as well. Unlike a year ago, when the most improving markets were those hardest hit by the Great Recession, we’re now seeing stable markets among the most improving as well. So the strong housing markets are getting stronger, which reflects the better employment picture, rising home values and increased purchase activity in these markets with the spring homebuying season in full swing.”
The top five MiMi values among states and the District of Columbia in April were District of Columbia (97.8), North Dakota (96.3), Montana (92), Hawaii (91), and Alaska (87.4). The five metros with the highest MiMi value in April were Fresno (94.8), Honolulu (92.3), Austin (92.1), Los Angeles (89.1) and Salt Lake City (88.9).
Report Finds Bidding Wars are Pushing Home Values
The housing market has been seeing some noticeable changes this year as home values move upward. According to the May Zillow Real Estate Market Reports, bidding wars are pushing home values up in the nation’s most popular housing markets, although home values are not anywhere near their peak points during the real estate bubble in smaller markets.
According to the report, May’s economic factors such as job growth and household formation, varied across metros as the homebuying season began. Local markets are experiencing very diverse effects, with some slowing moving, some not moving at all, and some accelerating as prices and competition rise.
“What we’re seeing is the passing of the baton –as mortgage rates begin to rise and incomes and household formation rates increase–from a stimulus-driven housing market to one driven by fundamentals,” said Dr. Stan Humphries, Zillow’s chief economist.
The Zillow Home Value Index found that U.S. home values grew at an annual rate of 3 percent in May, to an index of $179,200, but values in the nation’s most popular market were rising four or more times that fast. On the other hand, national home values are still about 9 percent below the housing bubble peak of $196,400 in April 2007. This was before the housing bust pushed the country into a recession.
“This transition from housing recovery to a more normal market is a good thing in the long-term, but we can expect some bumps along the way,” Dr. Humphries said. “In the end, increasing household formation and stronger income growth should be able to overcome the headwind of rising mortgage rates and return markets to health.”
Supreme Court: Fair Housing Act claims can use “disparate impact”
In a blow to the housing and mortgage finance industry but a victory for fair housing advocates, the Supreme Court ruled in a contentious and qualified opinion that the legal doctrine of “disparate impact” is cognizable under the Fair Housing Act.
The 5-4 decision holds that there is a disparate impact claim under the FHA as a matter of statutory interpretation.
The majority opinion, which can be read here and which was written by Justice Anthony Kennedy, strongly cautions that remedial orders in disparate impact cases that impose racial targets or quotas could be unconstitutional.
“For many years, the application of disparate impact doctrine has helped to expose housing practices that may appear neutral on their face but have discriminatory effects on protected classes,” John Taylor, president and CEO of the National Community Reinvestment Coalition, an affordable housing advocacy group. “Housing discrimination today often isn’t as blatant as it was in the past, so this is a vital tool for enforcing fair housing law. We applaud the Supreme Court for making the right decision today.
“At the same time, we remain vigilant in the cause of fair housing for all Americans. NCRC and our members will continue to work hard every day to create economic fairness and fair access to housing, credit, capital and banking services,” Taylor said.
WASHINGTON (MarketWatch) — Plaintiffs can file suit under the Fair Housing Act for practices that have a discriminatory effect, even if the accused wasn’t purposely discriminating
http://www.marketwatch.com/story/supreme-court-in-key-housing-case-allows-discrimination-suits-based-on-data-2015-06-25?dist=lcountdown
HousingWire has been whining about this potential problem for months now. It will be interesting to see if this pushes more lenders out of the business. If you can’t be sure whether or not you comply with the law, why would you bother doing business?
I have to agree with the dissent. The FHA only authorizes intentional discrimination, not disparate impact – and for good reason. No matter how rational, or well-meaning the business decision, a lawsuit will be filed. What is required to pass s/j is unclear, and what constitutes a legitimate justification for the disparate impact is unknowable.
Approving developer tax credits in either low-income or high-income areas will result in a c/a. If too many credits are approved in a white neighborhood then there will be a disparate impact on African American urban areas from lack of available low-cost housing, driving up rental prices. If too few credits are approved, then there will be a disparate impact on low-income African American buyers who want to move to the white suburbs. Either way there is a law suit. How the courts will decide what the “right” ratio will be, is indeterminable. If they decide based on a quota, then that raises other constitutional issues.
The vague nature of the potential claims will make a lot of money for attorneys who file nuisance lawsuits. The barrier for bringing a suit would have to be low because there is no defined standard. Given the low barrier to pass summary judgment, and given the big-pocket developers, lenders, and other institutions that would be targets for these claims, the attorneys will make out very well. The political left should cheer this ruling. They now have a formidable weapon for extorting cash out of lenders…. well, maybe the ruling isn’t all bad.
Since fewer homes will be built at a higher cost (prices↑), but litigation costs will be built into mortgage rates (prices↓), it may be a wash for housing prices. Who really knows?
I think it will be a net loss for housing. The loans will still be originated, so I don’t see this impacting supply, but those loans will be originated with higher costs to cover the additional litigation risks. The higher costs of borrowing will have the same impact as rising mortgage rates, specifically it will lower transaction volumes and perhaps impact prices slightly.
The real problem will be for lenders, and if it pushes many lenders out of the business, this will ultimately become a problem for borrowers who are forced to pay higher fees and rates.
I haven’t read the decision, but I have to think it will have a fairly narrow interpretation. If not, the door really is wide open for spurious claims.
Subprime 2.0
Call It a Comeback for Risky Home Buyers
More Americans who recently went through foreclosure or bankruptcy are getting home loans.
A new wave of nonbank lenders is bringing these risky buyers back into the housing market some seven years after the mortgage meltdown. The lenders are targeting borrowers who have recently gone through a foreclosure, short sale or bankruptcy—but who they say are safer than their credit profiles suggest. They are sometimes approving borrowers in as little as a few months or even weeks after a foreclosure.
“Lenders are trying to carve out niches that play upon the fact that underwriting remains, by historic standards, very tight,” said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. “That’s always the way it starts out and then you keep loosening and loosening—we’re right at the beginning of that.”
Several lenders have entered this market since the housing crisis, and their numbers, while still small, have picked up over the past year. Mr. Cecala estimates that mortgage originations for borrowers who have recently been through a major financial setback and are back on their feet will total at least $5 billion this year. That’s up from around $2 billion to $3 billion last year and expected to be the highest since the housing boom, he said.
California pending home sales show gains for 6 straight months
Per the usual seasonal pattern
Pending home sales in California saw six straight year-over-year gains in May, with the last four months in the double-digits, the California Association of Realtors says.
Highlights from this week’s report:
• California pending home sales in May were up 12.1 percent over May 2014, for the sixth straight month of annual increases and the fourth straight month of double-digit growth.
• Pending sales were down on a month-to-month basis. But the month-to-month decline was below the average April to May loss of 3.6 percent for the last seven years.
• In Southern California, pending home sales rose 1.6 percent over May 2014.
The majority of pending home sales typically close one to two months later, according to the association.
In a separate market pulse survey, the Realtors’ group reports:
• In May, homes selling for more than the asking price sold for an average of 8 percent above it, up from 6.5 percent in May 2014, but down from 10 percent in April.
• Homes that sold for less than the asking price sold for an average of 7 percent below it, down for the first time in four months.
• The slice of properties receiving multiple offers fell for the first time in four months. Sixty-five percent of properties got multiple offers in May, up from 62 percent a year ago but down from 72 percent in April.
• The average number of offers per property decreased for the first time in three months, dipping from 3.6 in April to 2.8 in May.
[…] we are back to a Housing market where prices are expensive, affordable, stable, and boring, but if we do have unnecessary excitement going forward, you can comfortably rely on the fact that […]