Jul162014
Immobilized Americans cause economic weakness and slow housing sales
Americans are moving less than ever before causing a weaker economy and slower home sales.
America has long benefited from a mobile population capable of moving to take new jobs and delivering their skills and expertise where it’s needed most. Over the last 25 years, Americans have been moving less, and the mobility rate continues to hit new lows. Some of this may be a sign of changing lifestyle choices, but with 9.7 million Americans trapped in their homes because they owe more on their mortgage than the house is worth, many Americans are immobilized by the banks, and that is a drain on our economic efficiency.
Americans Aren’t Moving
Mamta Badkar, Jul. 10, 2014, 5:41 AM
The household mobility rate, or the percent of the population that moves into a new home in a year, has been in a long term decline. This trend has been unfavorable for the housing market, which in turn has been a drag on GDP.
According to Michelle Meyer at Bank of America Merril Lynch, the household mobility rate has been slowing since the mid-1980s,
A key driver of this trend has been the rise of homeownership in the 1990s. Homeowners are less like to move than renters. It’s much more expensive for homeowners to move because of broker fees, transaction costs, mortgage fees, insurance and so on.
A study from 2013 showed a strong correlation between high home ownership rates and high levels of unemployment in industrialized economies, partly due to the lack of mobility of homeowners.
From 2000 on, aging population and changes in the labor market have also been negative for household mobility.
Retirees don’t like to move. Most people’s vision of a happy retirement is to live in the same house until they die. Once people retire, they have no need to move for employment opportunities, and by that time in their lives, they generally have deep roots in a community, or they move to a retirement community where they bond with others their own age.
There Are Two Reason Why Household Mobility Could Improve
In the short-run two factors could cause household mobility to pick up: the decline in homeownership rates and rising home prices.
“The homeownership rate has plunged from the peak in late 2004, and we think the risk is that it continues to slide,” writes Meyer. “Homeowners are less mobile than renters — from 2012 to 2013, 25% of renters moved compared to 5% of owners. The shift toward greater renting should boost the aggregate mobility rate.”
Negative equity, in which a borrower owes more on their mortgage than their home is worth, also reduces household mobility. ” As home prices continue to rise, a growing number of homeowners will move into positive equity, allowing for greater mobility,” she writes.
Analysts seem to think house prices will rise forever and everyone who’s currently underwater will have equity again soon. 
That probably isn’t going to happen. Most markets, including ours, have hit the ceiling of affordability at price levels far below peak pricing from the housing bubble, and as rising interest rates harm affordability, the prospect of steadily rising prices is questionable at best.
Longer-Term Trends Remain Unfavorable
In the long run however, an aging population and the end of ultra-low mortgage rates will curb household mobility.
The aging population will curb mobility, but ultra-low mortgage rates will not — at least not in the way economists think. The imobility will not be due to homeowners being unwilling to surrender their low-rate mortgages. Rising interest rates will hurt mobility because it will prevent the appreciation necessary to lift loanowners out of their debtor’s prisons.
“The greatest propensity to move is when people are in their late 20s. The mobility rate steadily declines thereafter as people age,” according to Meyer.
“We should also be concerned that mortgage ‘lock-in’ will reduce mobility over the medium term. We expect rates to head higher in the coming years, increasing mortgage payments. It will be difficult for those homeowners who bought or refinanced to a fixed-rate mortgage over the past few years to give up the record low rate.”
Meyer told Business Insider in an email interview, that in the short-run an uptick in household mobility will help boost residential investment as a share of GDP. In the longer-term however “residential investment may struggle to return to the historical average of GDP, suggesting lower multipliers from housing to the rest of the economy going forward.”
The weakness in the economy will also be a reason fewer Americans move. Millennials are living at home more than generations past, not because they want to, but because they can’t find jobs — no job, no reason to move — and no ability to move either. When the economy picks up, we will likely see an uptick in mobility as Millennials move out of their parents homes and rent. As renters, they will move more frequently to take job opportunities as their careers advance; however, they probably won’t become homeowners for many years, and most Millennials won’t qualify for a mortgage until 2019 anyway.
Mobility is most often a sign of lifestyle choices of an aging population, but the current lull in mobility is partly due to the weak economy that isn’t producing enough jobs, and partly due to the millions of underwater homeowners that couldn’t move even if they had a job opportunity. The latter reason is most concerning because if the most qualified job candidate likely to add most value to a company is unable to move to take the job, economic efficiency suffers. Multiply that problem by 9.7 million, and it impacts the whole economy.
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“..but with 9.7 million Americans trapped in their homes because they owe more on their mortgage than the house is worth, many Americans are immobilized by the banks…”
Employers certainly are aware of this trend. I suspect its one of many reasons why wages are not increasing. They (employers) know that the are in a superior negotiating position.
A solution? Perhaps an enterprising entrepreneur will set up an exchange (not unlike a MLS) that would allow underwater loan-owners to swap long term houses with other underwater loan-owners.
Such an exchange would operate much like vacation house swaps.
With a pool if 9.7 million underwater loan-owners available, it would seem that the numeric pool is large enough to make such a scheme viable.
Interesting idea. Unfortunately, I suspect the number of loanowners whose life circumstances match up enough to make a swap is very low.
Your comment did make me realize something: loanowners are barred from selling, but many are on loan modifications that are probably less expensive than comparable rentals. They could move to take a job and rent out the underwater house. It would actually give them more leverage with the bank when it came time to renew the modification at the low payment rate because they will be far more inclined to strategically default if the no longer live there.
“…They could move to take a job and rent out the underwater house…”
A very viable idea also.
Since the banks now treat housing as nothing more than a fungible commodity, why shouldn’t loan owners take the same point of view?
If an entrepreneur created a website to make end to end transactions easy and secure, distressed housing could be treated as just a abstract form of currency, kinda’ like bitcoin.
They would be engaging in fraud, considering they signed docs swearing that the home was owner-occupied.
That’s only for the first 12 months. After that, it’s fine to move and rent the place out.
I question whether or not the lender would care. At this point, they just want to get some cashflow out of the property until prices rise enough they can force the owner to sell or pay more. I suspect they would turn a blind eye even if renting it out was against their policy.
It would have been so much better just to allow the reset to happen back in 2008. The govt and the Federal Reserve have not addressed the main problem that is now sucking our economy dry. The govt statistics (which are one sided) have even turned negative, yet the equity markets race to new highs as Wall Street anticipates another, larger, round of free money.
I’ve said it before, and I’ll say it again … America cannot, and will not, have a legit economic recovery without the private debt burden declining, or without wages increasing. PERIOD!
The scum at the Fed are trying to fight economic laws, and it WILL NOT work. History shows a long trail of failed states, who have tried to centralize economic and political power. It simply does not work. And this is the very reason why we do not have a real recovery.
I think their policies may succeed in nominal terms. If the pump enough money into the system, they may be able to prevent a decline in prices on almost everything. Of course, flooding that much currency into the market would cause inflation, so the inflation-adjusted values will drop even as nominal values remain steady. IMO, inflation is the only alternative for debtors, including the US government. The huge debts can’t be paid off in today’s dollars, but if you reduce the value of the dollar 30% to 50%, and the debt becomes manageable.
The reset could happen via inflation as well as deflation. Everyone keeps worrying about the deflation scenario because despite the increased money-printing, the federal reserve has not been able to generate much inflation or trash the dollar, which is really their goal.
Mortgage applications drop sharply as purchases plummet
Mortgage applications decreased 3.6% from one week earlier, according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending July 11, 2014.
This week’s decline comes after applications rose almost 2% last week, following two weeks that saw a 0.2% reversal and a 9.2% freefall in late June.
The Market Composite Index, a measure of mortgage loan application volume, decreased 3.6% on a seasonally adjusted basis from one week earlier.
The Refinance Index decreased 0.1% from the previous week. The seasonally adjusted Purchase Index decreased 8% from one week earlier to the lowest level since February 2014. The unadjusted Purchase Index increased 16% compared with the previous week and was 17% lower than the same week one year ago.
The refinance share of mortgage activity increased to 54% of total applications from 52% the previous week. The adjustable-rate mortgage (ARM) share of activity remained unchanged at 8% of total applications. The average loan size for purchase applications was $268,500, the lowest amount since February 2014.
“While we try not to put too much focus on week-to-week fluctuations, it can be disappointing to see any substantial drop in purchase activity,” said Quicken Loans vice president Bill Banfield. “But based on the where the July 4th holiday fell this year, it’s possible many homebuyers were enjoying a vacation with their family instead of applying for a mortgage. With the slightly increased inventory and falling to steady interest rates, there are still many opportunities to buy available.”
Artificial holiday adjustments are responsible for these wild swings. Next week it will be back to a boring low single-digit change.
20% of nation’s homes are now losing value
The nation’s home prices are still on the rise, but the rate of growth is slowing considerably. According to VeroFORECAST from Veros Real Estate Solutions, home prices are expected to rise 2.5% in the nation’s 100 top metro areas between now and June 1, 2015.
That’s down from the last VeroFORECAST, released in May, which projected homes to appreciate by 3.4% for the 12-month period ending March 31, 2015.
This marks the eighth consecutive quarter where the index has shown forecast appreciation, but the pace has continued to slow down, according to Eric Fox, Veros’ vice president of statistical and economic modeling and developer of VeroFORECAST.
In Veros’ previous forecast, the rate of home price appreciation dropped to 3.4% from 5.1% in the previous quarter.
According to Veros’ data, homes in approximately 80% of the country’s real estate markets are expected to appreciate in value in the next 12 months. The remaining 20% of the markets are expected to depreciate in the next 12 months.
Additionally, all but the most upbeat markets are slowing in their value improvements, Veros said.
All five of the markets that Veros projects to the strongest in terms of price appreciation over the next 12 months are in either California or Texas.
“San Jose housing supplies are down and San Francisco is seeing a serious housing shortage,” Fox said. “Inventories in both are down 70% from their peak in 2008 and demand is outstripping supply, leading to price run-ups and decreased affordability despite low interest rates. There just aren’t enough houses available that people can afford to buy, so those that remain are hotly contested.”
Here are the five markets that Veros thinks will appreciate the most in the next year:
1. San Jose-Sunnyvale-Santa Clara, California – 10.6% increase
2. San Francisco-Oakland-Fremont, CA – 10.5% increase
3. Austin-Round Rock, Texas –10% increase
4. San Diego-Carlsbad-San Marcos, CA – 9% increase
5. Houston-Sugar Land-Baytown, TX – 8.9% increase
You gotta love how a prediction gets turned into fact by the headline writer. I’m really starting to lose respect for HousingWire.
That headline was bad. It should read that 20% of homes are projected to lose value, not that they currently are.
“Double-Whammy Coming When HELOCs, Loan Mods Reset in 2015”:
Mortgage Servicing News
Interest rate resets on many home loan modifications and home equity lines of credit seem to be on a collision course that may create a hardship for many borrowers who didn’t expect to be so vulnerable.
HELOC originations peaked in 2005 and most of those second liens are due to reset in 2015. The peak year for first-lien modifications was in 2010 and most of those proprietary and government-sponsored modifications are also due to reset in 2015.
A simultaneous hike in the monthly payments of both first and second liens is “sort of a double whammy,” says Aaron Horvath, a senior vice president at Springboard Nonprofit Consumer Credit Management in Riverside, Calif.
Homeowners will have to tighten their budgets to afford the higher payments, which is where housing counseling can play an important role, says Horvath. But for some borrowers who have been barely able to make reduced mortgage payments, the resets “could be the straw that breaks the camel’s back,” he says.
The Treasury Department launched its Home Affordable Modification Program in 2009 and modification activity peaked in 2010, when servicers completed 512,700 workouts. At the time, the prevailing mortgage rate was 5%, but servicers reduced the borrowers’ rates to 2% to make payments more affordable. The terms of HAMP mods include rate resets after five years, in 100 basis point annual increments — meaning that by 2015, those HAMP mods from 2010 could experience the first of three annual 100-basis point resets to bring the interest rate up to 5%.
With a 100-basis point step up in the rate, the median monthly payment increase is about $95 each year, with the majority of HAMP borrowers experiencing two to three rate increases, according to Treasury estimates.
“This step-up concept works well when borrowers are experiencing income growth,” Horvath says. “But many borrowers have not experienced wage increases and some are still underwater on their mortgages.”
Meanwhile, a HELOC rate reset could add another $100 to $300 to a borrower’s monthly mortgage obligations.
The Hope Now Alliance of mortgage servicers completed 1.2 million proprietary mods in 2010. Most of these proprietary modifications have HAMP-like features with a five-year reset and 100-bp step up in annual rates, according to Hope Now executive director Eric Selk. “As investors and lenders did more modifications, the features of later vintage modifications changed over time,” he says.
A spokesman for Wells Fargo, the industry’s largest servicer, says the bank is “currently reaching out to customers five months prior to the effective date of their interest rate change and then send a reminder communication two and one half months before the change becomes effective” under HAMP.
Under Consumer Financial Protection Bureau rules, servicers must notify borrowers of a reset 120 days in advance. This notice must include contact information for borrowers to contact housing counselors for advice and assistance.
“There are going to be millions of people dealing with these resets” over the next few years, Horvath says. “The good news is that the servicers’ infrastructure is in place. The housing counselors are staffed up. All that stuff is in place. It will not be quite the chaos that we dealt with in 2009.” Springboard has provided one-on-one counseling to over 300,000 homeowners across the country.
In May, Hope Now servicers completed 11,770 new HAMP mods and 24,900 new proprietary mods. The Treasury Department recently extended the HAMP program through year-end 2016.
Many HAMP borrowers facing rate increases may qualify for alternative modifications, including a HAMP Tier 2 which offers borrowers a fixed rate based on the current mortgage rate and a new 40-year term. The current mortgage rate on a HAMP Tier 2 mod is 4.25%
Treasury officials wanted to keep this option open for the borrowers facing resets, which is one reason the department extended the HAMP program through 2016.
http://www.nationalmortgagenews.com/news/servicing/double-whammy-coming-when-helocs-loan-mods-reset-in-2015-1042147-1.html?utm_medium=email&ET=nationalmortgage%3Ae4010451%3Aa%3A&utm_campaign=-jul%2016%202014&utm_source=newsletter&st=email
I can’t help thinking this will just result in more can-kicking. As long as these properties are still underwater, they will cut owners deals. The moment they aren’t underwater, then they will allow these resets to occur because the owner will either pay at the higher rate, or the bank will get their money back to loan it to someone else at a higher rate.
Some of the borrowers under HAMP have such low payments that even a 3% rate increase would keep their payment below comparable rents. I remember being in shock when I first saw people getting payment reductions of 60-70% of their original payment amount. That’s when I knew defaults on HAMP would come in much lower than people were predicting. If you can rent from the bank for half of what it would cost to rent from a landlord, you are going to keep paying on that mod if you have any sense at all.
As the article points out, the borrowers that are facing rate increases will be qualified under HAMP Tier 2 if they can’t afford their payment and the five year clock will begin again.
The HELOC recasts aren’t going to lead to any new foreclosures because defaulted 2nd liens without equity backing will just be charged off. The expenses of foreclosure add up to about 8% of the property’s value on average, so you would need the HELOC balance + the 1st lien balance to come in under 92% of the property’s value before a bank would even think of foreclosing on the delinquent HELOC.
HAMP payments were reduced by 60 to 70 percent???
I hasn,t heard that before. And how many mortgages were modified?
5 million or so?
Wow. This thing is going to drag on forever.
Not every HAMP mod decreased by that much, but that was the higher end of what I was seeing. The most recent report shows that the median payment reduction was $535.86 from an original payment of $1,427.99 so that is a 37.5% median reduction and half of participants had a reduction greater than that.
See page 6:
http://www.treasury.gov/initiatives/financial-stability/results/MHA-Reports/Documents/May%202012%20MHA%20Report%20FINAL.PDF
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