Feb232017
Below median for-sale home inventories remain low
Inventories of below-median homes are well below historic norms due to the large numbers of underwater borrowers, leaving first-time homebuyers frustrated.
Back in late 2012, I predicted that Below-median home inventories may not recover for years, which it has. My reasoning was simple.
For home inventories to recover, sellers must come back to the market. Since so many homeowners are underwater or lack the equity for a move up, particularly at lower price points, very few organic sales occur on below-median properties.
Since lender can-kicking kept the foreclosures off the market, what was once a source of supply actually became a restriction of supply. Given these circumstances, it will be several years before inventories of below-median properties recover and provide opportunities for owner-occupants to enter the market.
Here’s the inventory crisis smothering Millennial homebuying
3 factors blocking homeownership
[The three mentioned are not important, and the lack of equity, which is the real cause, is not mentioned.]
February 22, 2017, Brena Swanson
Whether Millennials want to buy a home or not, there first has to be a home available to purchase. In an interview with HousingWire, Daren Blomquist, senior vice president at ATTOM Data Solutions, identified three key factors keeping housing inventory in a drought, barring entrance for aspiring young homeowners.
The current inventory shortage isn’t new though. The same challenges plagued housing in 2016 are predicted to stick around through 2017.
Beyond the standard explanations for why Millennials put off buying a home, such as student debt, tighter lending standards and simply not wanting to sacrifice everything to buy a home, young home shoppers have to choose from a shallow pool of home options and compete with millions of other young buyers trying to do the same. It’s a hard situation.
In my opinion, the lack of kool-aid intoxication among Millennials is the bigger issue. 
Before the housing bust, the fear of being priced out was nearly universal. Everyone, everywhere felt they must buy a house at their earliest opportunity. The housing bust changed all that.
People learned a number of valuable lessons:
- house prices could go down,
- priced out is a myth,
- substituting down in quality just to own isn’t wise,
- priced out can quickly turn to priced in, and
- buy when it’s right for your family.
In short, the urgency is gone. There is no better evidence of this fact than the noticeable change in buyer psychology over the last decade.
(See: The surprising change in buyer behavior caused by the housing bust)
Before assuming Millennials don’t want to buy a home, take a look at the three factors they’re facing regarding limited inventory.
1. Average homeownership tenure:
Since the early 2000s, there’s been a significant shift in the average homeownership tenure, nearly doubling in time length. In 2007, the average tenure came in at 4.08 years, compared to 7.88 years a decade later in 2016.
As a result, Millennials can’t buy as much since fewer homes are being listed on the market for sale.
This is exactly what we would expect to see since so many are trapped in their homes due to their bubble-era mortgage.
2. Everyone refinanced
Blomquist went on to explain that thanks to historically low interest rates, everyone who could has already refinanced into a low rate and they want to keep that rate.
Although this is great for everyone who secured a low rate, it’s also stopping homeowners from leaving their starter home and upgrading into a new home.
And rates are only projected to rise. In the two weeks after the election, the 30-year mortgage rate jumped 40 basis points, surging to 3.94% and now sits above 4%.
This is a red herring. If homeowners with low rates had the equity and the desire to move up, they would. The fact is they don’t have the equity because when many of them refinanced, they took this money out and spent it.
People also remain in their homes longer because even with the newfound equity from reflating the old housing bubble, without increases in pay, they face limitations on borrowing enough to complete a move up. While their house increased in value, the move-up house they desire also increased in value, and unless they earn more money to borrow enough to make a trade, they gain little by moving. Since the last decade witnessed anemic wage growth, fewer people can borrow enough to move up.
3. Investors are going after starter homes
Investors are picking off a lot of the ideal homes for first-time homebuyers.
Blomquist said ATTOM Data Solutions looked at more than 23,000 properties owned by Blackstone Group’s single-family rental operator, Invitation Homes, which is about 48% of their total portfolio, and found a lot of their inventory is what Millennials would be interested in: 3-bed, 2-bath homes with average square footage of 1,871 and value of below $250,000.
Investors are a convenient scapegoat, but they represent a tiny fraction of the housing market. Nearly 5,000,000 houses a year sell on the MLS. If hedge funds acquired even 100,000 of them over a multi-year stretch, this represented far less than 1% of the transactions in the market.
4. Lack of equity is the real reason people don’t move on and move up
Most people who bought in 2005 are only now above water — and that assumes they had an amortizing loan and dutifully made all their payments. Those with loan modifications had the fees and missed payments tacked on to their mortgage balance, and many (if not most) private loan modifications don’t amortize, so those borrowers are likely still underwater. Those borrowers are still trapped in their entry-level homes 10 years later.
For many homeowners, the last ten years in borrower purgatory felt more like borrower hell, trapped beneath their debts. Any remedies for their situation carried negative consequences. Many people opted to strategically default, and I openly encouraged this action for years because it immediately relieved the emotional distress and put people on a path toward building a new future. However, those who strategically defaulted had to pay a price of a lowered credit score and lingering debt collection issues. Many others borrowers opted to sell short, but this too had credit implications. A few even sold the house and paid the shortfall out of savings, but these sellers were the exception rather than the rule.
US existing home sales hit 10-year high in January
U.S. home resales surged to a 10-year high in January as buyers shrugged off higher prices and mortgage rates, a sign of growing confidence in the economy.
The National Association of Realtors said on Wednesday existing home sales jumped 3.3 percent to a seasonally adjusted annual rate of 5.69 million units last month. That was the highest level since February 2007.
December’s sales pace was revised up to 5.51 million units from the previously reported 5.49 million units. Economists had forecast sales rising 1.1 percent to a 5.54 million-unit pace in January. The NAR also revised sales data going back to 2014. The revisions were minor and had no impact on the characterization of the housing market.
Sales were up 3.8 percent from January 2016. Demand for housing is being underpinned by a strengthening labor market, which is improving employment opportunities for young adults and, in turn, boosting household formation.
A persistent shortage of properties available for sale, which is lifting house prices, remains an obstacle to a robust housing market.
House hunting? Here’s where you’ll find what you want, and where you won’t
The only thing standing in the way of more home sales is the lack of homes for sale. In local markets across the nation, there are too few listings to meet the strong buyer demand. That means more competition, which drives higher prices. More homes usually come on to the market ahead of the spring season, but so far that is not the case.
“We are not hearing of any spike in seller movement,” said Lawrence Yun, chief economist at the National Association of Realtors. “We are just hearing of normal conditions — some sellers who need to move, so they’re putting their homes on the market, but nothing drastic.”
Supplies were depleted even more by an unexpected rush of homebuyers in November and December, following the presidential election. Some are calling it the Trump rally in housing, but it may be the mixed result of consumer confidence and smart shopping.
“It’s likely that a combination of tight inventory and low mortgage interest rates is pushing some buyers into the market early this year, both to capitalize on low mortgage interest rates while they can and to get a jump on the competition to come in the busy spring home shopping season,” said Svenja Gudell, chief economist at Zillow.
As home prices rise, fewer homes are affordable to fewer potential buyers, and that is only getting worse. Listings are now down more than 7 percent versus a year ago nationally
Trump’s crackdown on illegal immigration could drop home prices
President Donald Trump signed an executive order Tuesday that directs his administration to enforce immigration laws more aggressively.
This new order could lead to a much higher rate of deportations in the coming months. One article by Prashant Gopal for Bloomberg points out this could lead to a cool-down in home prices.
From the article:
“If Trump gets the immigration plan he wants, the housing market will get hit harder than any other,” said Alex Nowrasteh, a policy analyst for the libertarian Cato Institute. If “millions of people get deported and more people don’t come in to take their place, then you’ll have downward pressure on home prices, especially in urban areas.”
The immigrant housing market is often underappreciated, in part, because undocumented workers and the companies that cater to them sometimes like to fly below the radar.
Trump’s order announced it would not target immigrants under the Deferred Action for Childhood Arrivals, however even DACA immigrants are now struggling with the idea of homeownership.
From the article:
Even immigrants who marry U.S. citizens are losing faith. The 36-year-old Brazilian nonprofit executive, whose husband is an American, is six months away from a permanent green card, one step behind citizenship. After the travel ban and the ensuing chaos, she abandoned plans to bid on a Maryland home only a 15-minute drive from her office.
“I just don’t want to take my life savings and commit to a house because even if things go my way with the green card, what if the climate here continues to get more and more aggressive toward immigrants?” said the executive, who is working with real estate brokerage Redfin.
What a terribly written article. First it assumes a drop in home prices is a bad thing (which it is not) and then it uses an example of somebody who isn’t even affected by the order. My guess is the number of “illegal” immigrant household who are trying to purchase a house is a negligible source of demand. The greater issue with the crack down would be the massive loss of aggregate demand for all goods and services in cities like Los Angeles, New York, and Chicago. I believe if there were actually mass deportations (unlikely) in a short period of time those cities would be plunged into recession immediately.
I was at a model complex today, and as I pulled up, a food cart drove down the street blaring Mexican music, and many of the laborers came out to get lunch. The stereotype of the Hispanic construction worker is true. If we deported all the illegals (not many were illegals), who would build our houses, harvest our crops, and clean our toilets?
Cash-Out Refinancing During Bubble Years Will Lead to Disaster
Nearly all analysts who write about the housing bubble have focused on the purchasing madness that occurred. While this is important, it overlooks the refinancing insanity of 2004-2007. This refinancing lunacy will devastate mortgage and housing markets for years to come.
You may wonder why I choose to focus on bubble era refinancing. After all, refinancing happens all the time.
Here is why: California was the nation’s epicenter for the refinancing madness. During the bubble years, roughly five times as many refinanced first liens were originated there as were purchase loans.
Millions of homeowners refinanced once, twice, even three times or more while their homes soared in value. These became known as “cash-out refis,” where the borrower refinanced for a larger amount than the previous loan. A California home that may have been purchased for $200,000 in 1997 could easily have had a $600,000 refinanced loan in 2006. When home prices began to tumble, they found themselves trapped in a badly underwater property.
There were roughly 20 million homeowners who refinanced during the bubble years. At least one-third of them also had second liens on their property. When housing markets weaken, millions of them will face significant debt burdens. This horde of refinanced homes will cause the debacle of 2008-2010 to resume.
Serious Delinquency Rates Tick Up
Serious delinquency rates on 1-4 family mortgages rose over the 4th quarter of 2016 from the previous quarter. According to the National Delinquency Survey (NDS) released by the Mortgage Bankers’ Association (MBA), the proportion of mortgages seriously delinquent, those that are 90 or more days delinquent or starting the foreclosure process, rose 17 basis points to 3.13 percent. Despite the increase, the current rate of serious delinquency remains closer to its 10-year low than its recession-era peak.
http://eyeonhousing.org/wp-content/uploads/2017/02/Presentation11.jpg
“…The fact is they don’t have the equity because when many of them refinanced, they took this money out and spent it…”
The spend money you don’t have mindset is alive and well.
Tagline from current re-fi radio spot “Your home is your bank”
I used to think it was impossible for something to go on forever.
I might be wrong, because it looks like this one will.
“There is no dignity quite so impressive, and no one independence quite so important, as living within your means.”- Calvin Coolidge
I’m glad I didn’t hear that. It might have made my head explode.
That is a great quote from Calvin Coolidge. I’ve never seen that before.
Coolidge got a bad rap from history given we plunged into the depression under his watch. That quote does help redeem him in my eyes.
I have two neighbors that were 2005 buyers that moved up the minute they had equity (June 2016). They both believe the market this time will never go down (quoted their realtor to me). I listened in silent horror. Thanks to a coworker (real estate investor) suggesting information he gained via Bruce Norris and his insight I have a home almost entirely paid off with a 2.7% interest rate. Question: Where do we (OC) go from here? I’m at a loss. I’d had plans to buy a second home when we could finally swing it and we can now. But nope to a $700K crap shack.
I doubt we will see a big crash again like the last one. Banks learned it was in their best interest not to foreclose even if it meant getting no income from their bad loans. If prices get inflated like that again, the next bust will be mostly of sales volume. Houses will remain priced in the clouds where nobody can afford them, and nothing will sell.
It is concerning that so many are starting to show signs of kool-aid intoxication. Perhaps prices won’t drop in a meaningful way again, but that doens’t mean they will appreciate at the rates most people expect. Most people who buy in a strong market because they believe it’s a great investment will be disappointed. It’s the people who buy in a weak market that do the best.
Article says: Inventories of below-median homes are well below historic norms due to the large numbers of underwater borrowers, leaving first-time homebuyers frustrated.
Could be some of that. But I know a lot of people keep their old home as a rental, then purchase a replacement home with a larger mortgage. I know so many people that have done that over the last 3 or 4 years.
I know other people who refuse to trade up because the mortgage qualification rules are too restrictive so they just stay put.
Those are very different circumstances. In the former, the person qualifies for TWO mortgages, in the latter the person does not even qualify for a new mortgage in place of the current.
What is consistent between the two is that both probably have a good prop 13 tax rate and a good loan rate. Those are two things hard to give up.
We kept our first home purchased in 2006 as a rental. At first, it was out of necessity (underwater). Now it’s to see how much we can make from continuing to hold it.