Jan272014
Long-term weakness in housing: a generation of missing homebuyers
The housing bubble pulled forward a generation of buyers; the housing bust cost these buyers their homes and their good credit, removing many of them permanently from the housing market.
Lenders succeeded in manipulating market prices by restricting supply; however, for a true recovery in housing, the market requires resurgent demand from first-time homebuyers and move-up buyers. These two groups are typically the largest source of housing demand, with the first-time homebuyer the bedrock of the housing market; without first-time homebuyers, no move-up market exists.
The first-time homebuyer market propels upward by job growth and household formation; when the economy is strong and creating good-paying jobs, young people form new households and use their new income to bid for real estate, displacing existing homeowners who then execute a move-up trade, often buying a nicer home.
That’s how the market is supposed to work, but the collapse of the housing bubble destroyed the fundamentals underpinning a strong housing market. Household formation dropped from 1.5 million households per year to 500,000 per year. The first-time homebuyer market dried up, and as a result, rather than comprising 40% of sales, today they only make up 29%. Further, with 25% of existing homeowners underwater and another 20% effectively underwater and unable to sell and execute a move-up trade, demand from the move-up market is also down by a third or more. Only investors are keeping the market afloat. Without the manipulation of inventory by desperate bankers, the housing market would almost certainly see a dramatic downturn.
What happened to the first-time homebuyer cohort? In The Great Housing Bubble, I wrote about the perils of 100% financing, which most young buyers used:
Besides stopping people from saving for down payments, 100% financing harmed the market by depleting the buyer pool. In a normal real estate market, first-time buyers are saving their money waiting until they can make their first purchase. This usually results in a steady stream of first-time buyers that enter the market each year. When 100% financing eliminated the down payment requirement, it also eliminated any need to wait. Those who ordinarily would have bought 2-5 years in the future were able to buy immediately. This emptied the queue. This type of financing appears periodically in the auto industry, especially in downturns when it is necessary to liquidate inventory. The term for this is “pulling demand forward,” because it reduces demand for new cars in the next few years. This might not have been a problem if 100% financing would have been made available to everyone forever; however, once down payment requirements came back those who would have been saving were already homeowners, so there were few new buyers available, and any potential new buyers had to start over saving for the down payment they thought would never be required. The situation was made worse because those late buyers who were “pulled forward” from the future buyer pool overpaid, and many lost their homes. This eliminated them from the buyer pool for several years due to poor credit and newly tightened credit underwriting standards. Thus, most who thought 100% financing was a dream come true found it to be a nightmare instead.
Housing analysts crunching numbers confirmed what I wrote six years ago. Apparently, this didn’t occur to them as they seem surprised by the outcome.
The Subprime Generation
Chris Porter, John Burns Consulting, January 2014
Talk about an amazing reversal of fortune! This may be the most amazing, underreported demographic fact today.
- 30-34 year olds in 2012 had the lowest homeownership rate of any similarly aged group before them!
- Five years prior, this exact same group had the highest homeownership rate at 25-29 years old than any group before them!
It is exactly what I described in the book. The demand was pulled forward, the buyers were wiped out, and now they are absent from the ownership pool and the potential buyer pool — which is really the bigger story here because those former owners, the hoped-for boomerang buyers, historically only one-third ever regain home ownership. (See: Pent-up demand from boomerang buyers may not materialize)
Using homeownership-by-age data from the Census Bureau, we compared households by years of birth to examine how homeownership changes over consumers’ lifetimes.
- Lowest ever in 2012: 30-34 year-olds in 2012 (born between 1978 and 1982) had a 47.9% homeownership rate. This is a full 6.5 percentage points lower than those five years older had achieved at the same age and lower than any group before them! (This is based on data available beginning with those born in 1948.)
- Highest ever 5 years prior: Those same 30-34 year-olds had a 40.5% homeownership rate 5 years prior when they were 25-29 years old in 2007. This is 6.2 percentage points higher than 25-29 year-olds in 2012 and higher than any 5-year cohort before them.
Our consulting team has been pointing out a real dearth of entry-level buyers over the last several years, which is counterintuitive when you consider that this has been the most affordable time in generations to buy a home. What we learned is that a huge percentage of households bought a home earlier than usual, and that same group has gone through more foreclosures than any generation before them.
The data and analysis are excellent. The generation pulled forward by 100% financing, the group least likely to have a down payment, purchased homes in large numbers and obtained the highest home ownership rate that group ever recorded; the bust wiped them out.
What does this mean? It is more difficult than usual to sell entry-level homes today,
That’s the truth of the matter. (See: When will first-time homebuyers return to the market?)
but the pent-up demand for entry-level housing is huge.
That’s merely wishful thinking. The largest study ever conducted on the behavior of people who lost homes in foreclosure revealed that less than one-third ever buy again (See: Credit Access Following a Mortgage Default) Analysts may hope this demand pent-up, but there is no evidence to suggest this generation of foreclosed former owners will behave any differently than previous generations did, and there is ample reason to believe they will be turned off ownership in favor of renting for the rest of their lives.
Stay tuned as we continue to unearth the future of housing for the Subprime Generation.
In the post Bold California housing market predictions for 2014, I stated my contention that boomerang buyers will not materialize in 2014. I stand by that prediction.
[dfads params=’groups=164&limit=1′]
More than 5 years squatting
The former owner’s of today’s featured REO bought back in May of 2004 with no money down. They refinanced again shortly thereafter with an Option ARM with a 1% teaser rate. Since they didn’t have anything in to the property, they quickly bailed when prices stopped going up, and the first NOD on the property was served in September of 2008. The property wasn’t auctioned until October 2013 — a full five years later.
WTF took the bank so long?
[idx-listing mlsnumber=”PW14015559″]
5039 East WOODWIND Ln Anaheim Hills, CA 92807
$572,000 …….. Asking Price
$505,000 ………. Purchase Price
5/28/2004 ………. Purchase Date
$67,000 ………. Gross Gain (Loss)
($45,760) ………… Commissions and Costs at 8%
============================================
$21,240 ………. Net Gain (Loss)
============================================
13.3% ………. Gross Percent Change
4.2% ………. Net Percent Change
1.3% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$572,000 …….. Asking Price
$114,400 ………… 20% Down Conventional
4.41% …………. Mortgage Interest Rate
30 ……………… Number of Years
$457,600 …….. Mortgage
$112,610 ………. Income Requirement
$2,294 ………… Monthly Mortgage Payment
$496 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$119 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,909 ………. Monthly Cash Outlays
($433) ………. Tax Savings
($613) ………. Principal Amortization
$185 ………….. Opportunity Cost of Down Payment
$163 ………….. Maintenance and Replacement Reserves
============================================
$2,211 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,220 ………… Furnishing and Move-In Costs at 1% + $1,500
$7,220 ………… Closing Costs at 1% + $1,500
$4,576 ………… Interest Points at 1%
$114,400 ………… Down Payment
============================================
$133,416 ………. Total Cash Costs
$33,800 ………. Emergency Cash Reserves
============================================
$167,216 ………. Total Savings Needed
[raw_html_snippet id=”property”]
I know a few people that should be first time buyers. For years, the left leaning media, who has an agenda for social justice, has been smearing the quality of home ownership as an investment. The media thinks anyone, regardless of income, should be able to live in any zip code of their choosing, so lower home prices are a step in this direction. So, the entry generation did not get ready for home ownership, partly because the media brainwashed them into believing home ownership is a loosing proposition. So, the few people I know are smoked that the prices are going up … they have been lied to. They are scrambling to get ready for a purchase, but that takes years. Good job left wing media.
I think the rapid increase in prices caught a lot of people off guard. The message that you heard repeatedly in the financial media and RE blogosphere was that there was plenty of time to purchase as prices were not going anywhere for a very long time, maybe decades. Unfortunately, too many people believed that nonsense.
In California, real estate is cyclical and I did my best to convince people to buy from 2009-2011 before the next cycle took off. Some listened, but most didn’t because they believed the negative headlines. I think the average joe is reactionary and doesn’t want to buy an asset that might go down in value. They want to wait until prices are showing increases before they feel safe purchasing real estate. The problem is that once prices have increased, you’ve already missed the bottom, and at that point everybody is scrambling to jump on the bandwagon. It’s human nature.
None of that would have been a problem if the bottom hadn’t been manufactured by the manipulation of inventory. Typically, after a bust supply would be coming to market a bit more slowly, but the long tail of dwindling distressed inventory should have gone on for years. Waiting until prices bottom is the right decision because even after the bottom is in place, prices don’t shoot up without significant market manipulation.
Your comment makes it sound as if you, or anyone else, could have foreseen a 50% to 75% decline in inventory due to changes in lender foreclosure policy. I’m sorry, but that’s nonsense.
Well, I do work for people that set that kind of policy, but that doesn’t really matter. The government is the entity dictating what the policies will be. HAMP was announced in early 2009 and the reduction in inventory was the inevitable result of complying with that program, along with every other housing program and foreclosure prevention law that has come along since.
The decline in inventory wasn’t an event, but rather a long process over many years, so we were debating this on the Lansner blog for years prior to 2012. The bears’ idea was that this tidal wave was going to show up and suddenly make all kinds of distressed inventory reappear, but it never happened.
Dude, get a grip…. fyi, ‘game theory’ is all about playing the player, NOT the cards.
Clearly, it’s gonna be a rough ride on the way down. Again!
We agree on that. Buy when there’s blood in the streets and sell at the moment of peak euphoria. We’re not there yet.
[…] evolve or perish – China Daily The Tale of a House, and an Entire Market – NY Times A generation of missing homebuyers – OC Housing News Gundlach Counting Rotting Homes Makes Subprime Bear – Bloomberg […]
The Second Subprime Bubble Is Bursting, Gundlach Warns
About 32 percent of seriously delinquent borrowers, those at least 90 days late, haven’t made a payment in more than four years, up 7 percent from the beginning of 2012, according to Fitch analyst Sean Nelson.
“These timelines could still increase for another year or so,” Nelson said, leading to even higher losses because of added legal and tax costs, and a greater potential for properties to deteriorate.
For subprime prices to make sense, recoveries must improve but won’t because of the backlog of loans, Gundlach said.
“The housing market is softer than people think,” Gundlach said, pointing to a slowdown in mortgage refinancing, the time it’s taking to liquidate defaulted loans and shares of homebuilders that have dropped 14 percent since reaching a high in May. D.R. Horton Inc., the largest builder by revenue, fell 1.9 percent to $21.54 at 9:43 a.m. in New York trading, extending its drop since May to 22 percent.
Survey of realtors Results in Delusional Optimism
Mortgage rates may be rising, but the housing market doesn’t seem to mind. In fact, several indicators have improved alongside rising rates, according to the HousingPulse Tracking Survey released by Campbell Surveys and Inside Mortgage Finance this week.
The lending atmosphere is becoming friendlier, especially to first-time buyers. Simultaneously, the average time on market for non-distressed properties and the average sales-to-list price ratio both improved year-over-year in December, according to the survey.
“Six months after the May-June 2013 rise in interest rates, the housing market is showing remarkable resilience,” said HousingPulse research director Thomas Popik.
“[U]nderwriting standards are getting a little looser” at Fannie Mae and Freddie Mac, as well, according to Campbell and Inside Mortgage Finance.
The average credit score for GSE loans in the fourth quarter was 743, down from 758 a year earlier. Loan-to-value ratios at the GSEs rose from 75 percent to 76 percent year-over-year in the fourth quarter.
Fannie Mae and Freddie Mac increased their share of the purchase market as well as their share of the first-time homebuyer sector. In fact, the GSEs posted survey highs in both categories, according to the four-year HousingPulse survey. The GSEs accounted to 19.2 percent of purchase loans originated over the last three months of 2013, up from 16.5 percent a year earlier. The GSEs’ share of the first-time buyer market reached 19.5 percent, up from 14.1 percent a year earlier.
Looking at the broader market, time on market over the last three months of the year averaged 9.7 weeks, a decline from 12.4 weeks recorded at the end of 2012. The average sales-to-list price ratio increased from 95.5 percent at the end of 2012 to 97.1 percent at the end of 2013.
“A year-over-year comparison of key metrics points to a housing market that was stronger at the end of 2013 than it was at the end of 2012,” Popik said.
The HousingPulse Tracking Survey relies on input from 2,000 real estate agents each month and calculates its metrics on a three-month moving average.
Zillow: Rising Mortgage Rates Creates Affordability Issues
While the housing market is still far from “normal,” it is inching that way, according to a report released Thursday from Zillow. Last year’s skyrocketing home price appreciation, frenzied demand from investors, and high tide of negative equity are all expected to subside somewhat this year, according to the real estate company.
Nationally, home prices increased 6.4 percent year-over-year in the fourth quarter, but annual price gains are expected to fall to 4.8 percent by the end of this year.
On a quarterly basis, prices rose 1.4 percent in the fourth quarter, according to Zillow.
“Below the surface of last year’s market, a number of unsettling trends started to emerge as a result of rapid and ultimately unsustainable appreciation, setting up a bit of a mixed bag for 2014,” said Stan Humphries, chief economist at Zillow.
However, some of the markets that posted the highest price gains last year are already slowing, which according to Zillow, is “a welcome sign in markets that risk crossing over into bubble territory as rising mortgage interest rates create affordability issues for homebuyers.”
Markets such as those in California and the Southwest that experienced rapid appreciation this year may stall this year due to affordability issues, leading to “volatility that could potentially cause whiplash for homebuyers and sellers,” according to Zillow.
Nationally, price appreciation is already tapering off, according to Zillow. After reaching a high of a 7.1 percent annual price gain in August, price gains remained below 7 percent for the entire fourth quarter.
However, local markets will vary widely this year with a 16.1 percent anticipated gain in Riverside, California, and a 0.4 percent gain anticipated in Kansas City, according to Zillow.
All but three of the nation’s 35 largest metros experienced price growth in 2013, and all but one are expected to experience price gains again this year, according to Zillow.
After posting a 3.8 percent decline last year, St. Louis, Missouri, is the only metro expected to experience falling prices this year with an anticipated 3.1 percent decline.
In two of the 35 markets Zillow tracks—Denver and Pittsburgh—home prices surpassed the peaks they reached before the housing downturn.
While home prices rose 1.4 percent in the fourth quarter to $169,000, rents rose 0.7 percent to $1,302.
“…100% financing harmed the market by depleting the buyer pool…”
Even if this event had never come to pass, the depth and breadth of student loan debt is so vast that it makes you wonder if the next couple of generations (short of an inheritance) will *ever* be able to buy a house.
They won’t be able to fund the baby boomer’s retirement by paying inflated prices for homes, which is what they are being asked to do in addition to repaying their own onerous debts.
Makes you wonder how popular reverse mortgages are gonna become in the next decade.
Sadly, I think they will become very popular as Boomers everywhere take on a financial cancer designed to enrich lenders will impoverishing senior citizens.
What Happens When They Pull The Plug?
A new report from the brain trust at Capital Economics asks a question that stopped us short in the HousingWire newsroom.
Paul Diggle, property economist at Capital Economics, looked at several months worth of existing and new home sales, and made a simple but bracing observation:
“Given that existing home sales make up more than 90% of all home sales, a key question is whether the current slump will prove temporary or permanent.”
Diggle goes on to consider various factors that could hurt sales. Most are well known but one no one looks enough at is housing prices. Combined with slowly rising rates, inflated home prices have reduced mortgage availability.
“The share of respondents to Fannie Mae’s monthly housing survey who think that now is a good time to buy a home dropped from 76% in May to 64% in November, while NAR’s index of buyer traffic declined from 72 to 53 between April and October,” Diggle reports.
Whether housing is in a bubble depends on how a bubble is defined, of course, but there are some startling disparities in home prices and incomes.
The current spike in prices is not being driven by first-time homebuyers entering the market.
“Those who ordinarily would have bought 2-5 years in the future were able to buy immediately. This emptied the queue.”
So what is the status of the cue today? If the only issue were a pulling forward of demand by 2-5 years, and this occurred 6 years ago, we should have plenty of willing and able first time buyers by now. There is plenty of low-down financing out there for qualified buyers. With FHA you only have to put 3.5% down, you can roll the UFMIP into the loan, and get 6% seller concessions. If a buyer wants to buy, cash savings isn’t any more of an issue now than it was back in the 90s.
Getting a seller to accept their bid, however, is problematic given the amount of investor money crowding out primary residential buyers. This is especially true at the lower end of the market where first-time buyers are looking to purchase.
The queue hasn’t refilled because the borrowers pulled forward lost their homes, and now they have bad credit. The boomerang buyer meme posits that these people are eagerly waiting to renter the queue at their earliest opportunity.
And the buyers who didn’t lose their homes and credit scores, lost tens of thousands of dollars or are still underwater. We’ll be in the queue for another 2-5 years after our sale at a loss, rebuilding savings and paying off student loans.
“…rebuilding savings and paying off student loans…”
At that’s assuming those buyers have jobs with commensurate earnings capable of servicing new [inflated levels of] debt.
Jobs with high pay are rare. When I think back, we haven’t had a strong economy since the 1990s. We had an illusion of a strong economy in the 00s created by massive debt creation and Ponzi borrowing. Since then, we’ve had only printed money and more debt. We’re working on 15 years of either a crappy economy or a complete illusion. And I don’t see it getting better in the next few years either.
Indeed, the last housing bubble pulled forward a generation of future buyers. However, the current housing bubble (QE) has pulled forward a generation of future price gains, so the next housing bust will not only cost recent buyers their homes, but their good credit as well.
Did you hear that??? It’s the sound of inevitability.
The big difference with today’s buyers is that most of them have amortizing mortgages with stable terms. Over time, paying down that mortgage will bail them and bankers out.
Problem is, in an era of structurally accelerating deflation, over time, the ‘ability to pay’ does NOT come with a guarantee.
stable mortgages matter not as we leave the economic eye of the hurricane. the real crash will not be kind to those buying into this sucker’s rally.
My biggest issue regarding the economic crisis and what has came since the collapse, has been the Federal Reserve’s persistence to protect the fluffed up “equity owners” at the expense of pissing all over free markets and threatening the American way of life. Here we are, 6 years after the collapse in the economy, still facing major challenging head winds. I know this ponzi economy will end bad … the commentary below thinks we’re starting the next stage down right now … Commercial Real Estate is the camel in the tent.
Should The Fed Stop The Dominoes From Falling?
http://www.zerohedge.com/news/2014-01-27/should-fed-stop-dominoes-falling
(Excerpts)
“Here’s the key issue at stake: propping up failed private enterprises with Fed or Federal money throws up roadblocks to the real growth of our economy. Rather than bail out more banks and save over-valued, over-leveraged mall owners from the consequences of the economy changing, we should be casting off what’s been holding the economy back–phantom assets, debt that should be written off and failed financial sectors bailed out with taxpayer funds and Fed trickery.”
“Yes, the Fed can print up another $1 trillion and buy every CRE loan that’s worth $1 for $1 million and bury the defaulted loan away from public view. But should it be allowed to do so? Should the Fed’s role of savior of every crony-capitalist in America who loses a leveraged bet go unchallenged”
As many have pointed out, each time gamblers are bailed out, next time around, they increase their bets. Moral hazard grows with each successive bailout.
I really like the analysis in today’s post, but I have to disagree slightly with the conclusion. The first time buyer segment seems to be going strong, but the mid-tier move-up market is taking a hit from the lack of buyers that should be in a position to buy, but can’t due to being wiped out financially over the past 5 years.
The condos in my HB complex are still setting new highs (for this cycle) and showed no signs of slowing down over the holidays. The investors that bought from 2009-2012 are liquidating for 50-60% more than their entry price.
On the other hand, houses where I live showed a considerable increase in DoM that led to a flattening or slight drop in prices over the holidays.
This bifurcation of the market should continue and get worse. Properties priced where GSE of FHA financing can close the deal will continue to do well, and those prices requiring jumbo financing will not.
As you noted, and as the analysis in this posts suggests, an entire generation of what would be move-up buyers was wiped out, and a significant number Ponzi borrowed themselves into oblivion, so the equity to sustain a move-up market simply isn’t there.
About a 1/3 of our housing stock is available to first-time homebuyers, and about 1/3 is perpetually in a move-up market, but about 1/3 that’s currently priced as move-up housing needs to be repriced to get below the conforming limit where first-time homebuyers can afford them. It won’t happen now because of all the market manipulations prevented market clearing and the repricing of assets to reality on the ground.
While they manipulate in the market with prices, banks are also so eager to gain clients, that they go for various tricks to provide mortgages to those rare customers ready to buy and to risk. On the one hand it may really help the home buyers, on the other they risk to fail in handling their debt later.
Jull from Personal Money Service website
This seems to be happening in my condo complex as well. Each unit sells for more than the last and it has continued into January.
When I see properties like this one where the bankers allowed the former owners to squat for five years, I can’t help wondering what took them so long to foreclose. They must have been pretty desperate to avoid a loss to allow people to live there for nothing for so long.
I can hardly wait until a squatter goes the “adverse possession” route.
(RE: OCHN Forget eminent domain, invoke squatter’s rights! 24-Jan-14)
Adverse possession = financial enema for housing!
Goldman Sachs Group Inc. says this year’s price rebound will end.
” That won’t be enough to stem the metal’s slump according to Morgan Stanley, while Goldman Sachs Group predicts bullion will “grind lower” over 2014.”
“Goldman expects bullion to fall to $1,050 in the next 12 months as the Federal Reserve reduces monetary stimulus, analysts led by Jeffrey Currie, the bank’s head of commodities research, said in a report Jan. 12. Precious metals are Morgan Stanley’s “least preferred” commodities, and physical demand won’t be enough to buoy prices, analysts Adam Longson, Bennett Meier and Peter Richardson said in a Jan. 17 report. The bank cut its 2014 target 12 percent to $1,160 on Jan. 22.”
“Prices are likely to drop further as global economic conditions are stabilizing and tapering worries continue,” said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $110 billion of assets. “There is no doubt that physical demand has improved, but it will not be enough to support prices.”