Oct262015
Is shelter a basic human right, or exclusively for homeowners?
During the housing bust, every effort was made to keep homeowners in their houses. Renters were mercilessly thrown in the street with little or no fanfare.
Our real property system functioned well for centuries with very little change. Prior to the housing bubble, it was widely accepted that people borrowed money to buy houses and if they didn’t pay it back according to the terms of the promissory note, the mortgage agreement allowed the lender to call an auction to get their money back. Housing was an earned reward, not an entitlement.
The basic dilemma is simple, most people don’t have the cash to buy a house, and it would take them most of their adult lives to save for one, so lenders designed loan programs to allow people to occupy and “own” a house while they were working and earning to pay for it.
Without modern lending, demand for housing, as measured by actual dollars and not mere desire, would be far too small to accommodate population growth and household formation. The result would be either government owned housing or privately funded rental units and extremely low home ownership rates. Houses would be far less expensive, probably hovering around replacement costs, but ownership would be available only to the very few with the cash to pay the construction cost of a house.
In modern politics, Progressives want to make every human want and need an entitlement, and Conservatives want people to earn everything. Progressives want a compassionate society whereas Conservatives want an industrious one.
There is a relentless push by Progressives and Conservatives fight an ongoing but losing battle to hold back the tide. The latest battle lines between Progressives and Conservatives relates to housing. Shelter is a basic human need, and Progressives have sound arguments why this should be an entitlement; however, shelter comes in many forms, and fee-simple ownership of a private dwelling unit is a form of shelter Conservatives argue should not be an entitlement, and I for one, agree with Conservatives on this point.
Should shelter be an entitlement?
America still has a problem with homelessness largely because as a society, we have been unwilling to provide individually-controlled private shelter as an entitlement. The reason we do this is simple. The fear of homelessness is the essential motivation to get people to work to produce goods and services in our society. Take away this fear, and you create an underclass of dependency: the welfare state.
As a society we can and should debate whether or not the fear of homelessness is a desirable motivator. Perhaps we may decide to devote the resources to provide more shelters or private living accommodations for those unable or unwilling to work and produce goods and services. Until then, homelessness is a very real possibility for anyone unwilling or unable to find work. During times of full employment, the system works well and seems just. During times of persistent unemployment when motivated people are unable to find a job, the system works poorly and seems unjust.
The last five years have been very stressful for many people, certainly anyone in the real estate industry. As a renter and a sole breadwinner, I faced the very real possibility of losing my source of income and being forced to move back to my parents house or move in with friends. I am fortunate to have family and friends who would give my family shelter. If I didn’t have that support — and many people do not have those resources — if I had not been one of the fortunate ones, I could easily have ended up homeless. Any renter faced that fear during the recession, and many still do.
This is one area of public policy related to the housing bubble that angers me the most. Loan owners didn’t face the fear of homelessness. If a loan owner lost their job, they were allowed to squat indefinitely. If a renter lost their job, they were out in the street in 30 days. The endless sob stories on the internet about loan owners losing their homes because they fell on hard times never resonated with me. Each of them generally accompanied some call for a loan owner bailout — actually a banking bailout — but never was such compassion extended to renters. Do any of you remember reading a sob story about a renter becoming homeless during the recession? Apparently, renters are a subclass that really don’t matter.
Perhaps if I had been a loan owner struggling through the recession, my perspective may have been different. I might have empathized more with the other loan owners struggling with onerous payments, and like all loan owners, perhaps I too would have ignored my own bad decisions that put me in that state. However, that wasn’t my experience. I was a renter because I recognized the fallacies of the housing bubble for what they were. And for my wisdom, I faced the very real threat of homelessness. I never had the option to quit paying my housing costs and squat.
In retrospect, perhaps this stress was good for me. Faced with declining income, a shifting job situation, and the near certainty of a calamitous loss of support, I found the motivation to raise money for an entrepreneurial endeavor, and I found the strength to see it through the tough times and reach a level of success where I worry far less about paying my bills month to month. Had I not faced such dire consequences for inaction or failure, I don’t know if I would ever have attempted what I accomplished. But then again, I didn’t enjoy working as if a gun were to my head and the lives of my family depended upon what I did.
Something must be done to level the playing field for renters and loan owners. As it stands, one of the strongest reasons to buy a home, any home at any price, it to have an emergency flophouse to squat in if times get tough. This new unemployment entitlement granted only to loan owners is a huge benefit of loan ownership. To be quite honest, when I bought my first property in Las Vegas, I had a small sense of relief knowing if everything fell apart, I had a place to crash indefinitely. With a long queue of loan owners in front of me, it would be easy to get lost in the sea of delinquent loan owners in Las Vegas. However, even though I know I am taken care of, the system still isn’t right. Renters should not face such a huge disparity in treatment simply because they were unable or unwilling to sign loan documents and become a bank’s debt slave.
I believe we have two options: (1) eliminate the squatter’s benefit for loan owners, or (2) provide rental assistance for renters who are unable to find work. Conservatives in Congress are loathe to extend unemployment benefits because paying people to do nothing encourages people to do nothing. Paying them to do nothing and paying for their housing, puts moral hazard on steroids. But that’s exactly what we are currently doing for loan owners. Lenders and landlords certainly wouldn’t mind the government subsidy, but I question whether or not taxpayers are prepared to pay the bills.
Public policy debates are going the wrong way. California passed a loan owner’s bill of rights to increase loan owner entitlements. Of course, renters are not being provided for in any way. We need to eliminate the squatter’s benefits for loan owners by clearing the way for foreclosure. We need to force lenders to go back to mark-to-market accounting so they can’t hid their insolvency by pretending bad loans are good ones. If lenders had to recognize their losses, the wouldn’t fool around with squatters. Instead, lenders would foreclose quickly to recover their capital. The current system is broken, and the actions we are contemplating will break it further.
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Housing Market Improves Amid Favorable Conditions
As consumers purchase more homes, remain current on mortgage payments thanks to low rates, and employment continues to grow, the housing market continues to show improvement.
Freddie Mac’s Multi-Indicator Market Index (MiMi) showed that the U.S. housing market continued to stabilize as the national MiMi value reached 81.2 as of August 2015. This means that the market is on its outer range of stable housing activity.
The MiMi rose 0.27 percent from July to August and has shown a three-month improvement of 2.54 percent, according to Freddie Mac. Year-over-year, the MiM values has increased 6.16 percent and has rebounded 37 percent since the all-time low in October 2010. However, the value is still significantly lower than its high of 121.7.
“The nation’s housing market continues to improve riding the wave of the best year in home sales since 2007,” said Len Kiefer, Freddie Mac deputy chief economist. “With the MiMi purchase applications indicator at its highest level in more than seven years we expect home sales to remain strong. Low mortgage rates are fueling the recovery across the country”
So what happens when rates go up?
Millennial Homebuying Attitudes Mixed Due to Financial Woes
Millennials often face many obstacles when trying to purchase a home such as financial hardships and the inability to afford the down payment, a task that is much more difficult for them compared to their predecessors.
Recent survey data from Credit Karma showed that Millennials (ages 18-34) have a different outlook on homeownership than the Baby Boomer generation (ages 50-65).
According to Credit Karma, approximately 60 percent of millennials own a home, while nearly 80 percent of Baby Boomers indicated that they own a home.
The majority of both Millennials (almost 80 percent) and Boomers (almost 90 percent) noted that their spouse and/or themselves paid most of the down payment, or the entire purchase price if the home was bought in cash. On the other hand, very few of both generations said that either their parents, spouse’s parents, or another source paid for the down payment.
As far as future home purchases are concerned for those that do not own a home yet, about 45 percent of Millennials are sure they want to purchase in the near future, while almost 50 percent said they would like to buy but are not sure when.
One surprising piece of data that the survey showed was that over 80 percent of Millennials believe owning a home is an essential part of financial success, while a little over 70 percent of Boomers feel this way.
Investors Leave the Housing Market
Cash Sales Hit Lowest Point Since 2006
All-cash transactions comprised nearly 31 percent of all single-family residential home sales nationwide in July 2015, marking a decline of more than three full percentage points year-over-year, according to CoreLogic cash sales data released on Friday.
With July’s decline, the cash sales share has fallen year-over-year every month since January 2013, a total of 31 consecutive months, according to CoreLogic. July 2015’s reported share of 30.8 percent was a dropoff from the share of 34.2 percent reported in July 2014.
As has historically been the case, REO sales made up the largest portion of cash sales with 56 percent in July 2015, and resales had the second highest share at 30.2 percent (resales made up 83 percent of all home sales in July and therefore have the biggest impact on moving the overall cash sales share).
Short sales comprised 28 percent of cash sales, followed by new homes at 15.6 percent. Despite REO sales making up more than half of all cash sales, REO’s share of total home sales remained low in July at 6.1 percent. In January 2011, when the cash sales share reached its peak, REO sales made up 23.9 percent of total home sales.
Previously, much of the cash sales share could be attributed to institutional investors buying distressed properties at discounts; the continued decline of the cash sales share is a likely indicator that fewer institutional investors are buying homes, and that more buyers are obtaining mortgage credit, according to CoreLogic Senior Economist Molly Boesel.
Are we seeing the end of California’s housing juggernaut?
Except for Silicon Valley, home-price appreciation has all but stopped
The number of homes sold in the state of California continue to remain relatively low due to lack of available housing inventory and a decline in affordability, a new report from PropertyRadar showed.
According to PropertyRadar’s report, seasonal forces pushed California single-family home and condominium sales down 4.3% to 35,629 for the month of September, from a revised total of 37,227 in August.
On a year-over-year basis, sales were up 5.8% from 33,674 in September 2014.
According to PropertyRadar’s report, the yearly increase was driven by a 9.4% increase in non-distressed property sales.
In the first three quarters of 2015, sales are up 7.1% compared to the same period in 2014. Despite the increase, sales remain far below 2002 through 2007, PropertyRadar’s report showed.
“When you take a step back and look at sales volumes over a longer period of time, they remain weak,” said Madeline Schnapp, Director of Economic Research for PropertyRadar. “Lack of inventory and declining affordability are holding sales back.”
Damn you Dodd-Frank! California wants it real estate rollercoaster back!
Yes, steady and stable real estate prices are not a bug, they’re a feature.
[When you edit for spin, the facts tell everything you need to know.]
“On a year-over-year basis, sales were up 5.8% from 33,674 in September 2014.”
[Sales are up YOY. More people are buying. Hmmm…]
“According to PropertyRadar’s report, the yearly increase was driven by a 9.4% increase in non-distressed property sales.”
[Sales are up even more for non-distressed sales than the overall market. Interesting… The market is low on distressed sales inventory priced to sell; but not in regular inventory priced at market.]
“According to PropertyRadar’s report, the median price of a California home in September was $405,000…”
“On a year-over-year basis, the median price of a California home was up 3.3% from $392,000 in September 2014.”
[Prices are up YOY, too? What does that do for underwater owners, and the lack of cloud sellers?]
“The number of homeowners in a negative equity position continued its downward trend in September. Approximately 6.5 percent of homeowners, or nearly 560,000, owed more than their home was worth, down 0.2 percent for the month and 42.5 percent from a year ago.”
[I don’t know, a 42.5% drop in negative equity seems significant. I wonder how many of these homes are being prepped for the spring season?]
“In the first three quarters of 2015, sales are up 7.1% compared to the same period in 2014. Despite the increase, sales remain far below 2002 through 2007, PropertyRadar’s report showed.”
[Sales were up 7.1% thru the first three quarters? What about the lack of inventory and affordability? Sales remain far below the credit bubble heydays when loans were handed out like candy on Halloween? Sure sales are low relative to the bubble days, because buyers are required to have skin in the game, a job, and verifiable assets. Copious amounts of free credit seemed like a great thing when prices were going up, but leverage works going down as well as up. Is luring unwary buyers into homeownership with easy credit a Trick or a Treat? I suppose that depends on which side of the deal you’re on.]
[Here comes the spin:]
““When you take a step back and look at sales volumes over a longer period of time, they remain weak,” said Madeline Schnapp, Director of Economic Research for PropertyRadar. “Lack of inventory and declining affordability are holding sales back.””
[I.e. the Fed needs to hold-off on hiking rates so that buyers can afford to pay what sellers are asking. Preferably, the Fed should start QE4 and drop short-term rates to negative. Turn the bubble back on! I beseech thee!]
Your last point is right on. If the federal reserve does raise rates, I wouldn’t be surprised to see them reverse course when they see what it does to housing. Rates must remain low in order for buyers to pay the needed asking prices of cloud inventory sellers.
Home prices rise 0.3% in August
National HPI just 5.3% off June 2006 peak
Home prices were up 0.3% for the month, rising 5.5% on a year-over- year basis, according to the August house price index from Black Knight Financial Services.
This puts national home prices up 5.6% since the beginning of the year and 27% since the bottom of the market at the start of 2012.
At $253,000, the national level HPI is now just 5.3% off its June 2006 peak of $268,000.
The Black Knight HPI combines the company’s extensive property and loan-level databases to produce a repeat sales analysis of home prices as of their transaction dates every month for each of more than 18,500 U.S. ZIP codes. The Black Knight HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales.
New York led gains among the states, seeing 1.8% month-over-month appreciation, and accounted for every one of the month’s top 10 metro area movers as well.
Las Vegas, while up 62% from the market’s bottom, is still more than 37% off its May 2006 pre-crisis peak, the most of any of the 40 largest metros.
Rising Mortgage Rates to Pummel Mortgage Originations
The Mortgage Bankers Association is projecting that home purchase originations will increase in 2016 as the US housing market continues on its path towards more typical levels of housing turnover based on steadily rising demand and improvements in the supply of homes for sale and under construction.
“We expect to see $905 billion in purchase mortgage originations during 2016, a 10% increase from 2015,” say Lynn Fisher, Vice President, Research and Economics and Joel Kan, Associate Vice President, Industry Surveys and Forecasting.
In contrast, they say, gradually rising rates are expected to result in a one-third decrease in refinance originations, bringing refinance originations down to $415 billion for 2016.
On net, mortgage originations will decrease to $1.32 trillion in 2016 from $1.45 trillion in 2015.
http://www.housingwire.com/ext/resources/images/editorial/Trey-8/COTW-10-23-15.jpg
Well, As much as I love the headline “Are we seeing the end of California’s housing Juggernaut” I suspect we are just at a seasonal slowdown here in SillyCon valley. Homes still selling over asking, although there does appear a slight improvement in inventory.
Seasonal slowdown? Ha!
A big chunk of tech la-la-land is rolling over. Why? Because A LOT of big money has come to the realization that security is a myth.
There is too much easy money flowing around Silicon Valley for house prices to drop. If something changes in the private-equity funding world, then perhaps the sky-high prices might by in danger, but as long as cheap money meets a lack of inventory, house prices will only move higher.
el O,
I drive by Facebook everyday there is no slow down there yet. Dont get me wrong, I am not a social media fan.
I hear a lot of people talk about seasonal slow down. However, this seems more than just seasonal slow down. Are there any statistics that could prove or disprove this theory?
In Irvine, I am these new developments sitting on homes because they cant sell. Ive seen price drops in Orchard Hills, which I was told would NEVER be the case. I see tons and tons of brand new homes from Beacon Park (which just opened a few months ago) hitting the MLS already.
Do the Chinese have buying and selling seasons also? I only ask since the majority buyers in these new developments are Chinese.
Thanks for sharing your observations. Builders will usually increase incentives if sales are slow, but this is the first I’ve heard of actual price reductions. Interesting.
I did see that new home sales were down today, so perhaps the endless supply of Chinese money may be slowing down. The flow of money from overseas is generally not seasonal like local owner-occupant buyers, so if this money is drying up, it’s either a sign that something changed in China, or perhaps the US real estate prices are simply too high and no longer make sense for them.
Or all the houses with “good” feng shui are all gone!
The gated side of Orchard Hills has very high prices and isn’t selling well right now. I’d speculate that it’s because prices are so high relative to where they started and it’s in Tustin Unified School District. Strada on the non-gated side of Orchard Hills is selling its homes in Irvine Unified and is doing extremely well with price increases every phase and very low inventory.
Beacon Park sales are horrible, but that’s due to mainly prices being very high from the grand opening, mello roos being twice new comps in other neighborhoods AND subject to 2% annual increases, and a proposed cemetery that’s scaring Chinese buyers.
https://www.redfin.com/CA/Irvine/114-Long-Fence-92602/home/87555355
https://www.redfin.com/CA/Irvine/123-Long-Fence-92602/home/78644139
These are two that I saw with price reductions. There are tons of homes from Beacon Park and Orchard Hills that are now on the MLS.
Since overseas (Chinese) buying is not seasonal and majority of new homes sales in Irvine are by Chinese, could the bad new homes sales number be explained by seasonal patterns?
Hate to speculate on pricing, but could we be at the peak?
There are 594 homes on the market in Irvine. In the last month, nearly 200 homes closed in Irvine. If you divide 594 by 200, you get less than 3 months of inventory, which is impressive given the recent closings are from late summer deals, which is the slow season. The big question is the size of price increases in early spring. With less than 3 months of inventory, prices are only headed up,
California’s Homeowner Bill of Rights does protect tenamts. The provisions of the federal PTFA were included, which is important, as the PTFA expired at the end of 2014.
It protects tenants from eviction by a new owner if their lease predates the notice of default, but it does nothing to prevent an eviction if the tenant quits paying — which is the benefit homeowners get.
Basically, if a tenant quits paying rent, they are out on their ass. If a homeowner quits paying their mortgage, they are allowed to squat indefinitely. One or the other policy needs to change.