Analysis: Investors Driving Recovery as Activity Surges

A recent analysis from John Burns Real Estate Consulting suggests that investors may be the biggest driving force in the housing recovery.

In a report from the company, senior research analyst Erik Franks noted that investors are buying homes at an increased pace and at prices that allow for a reasonable rental return.

“Investors are buying homes at a more rapid pace than ever before, and this time their investments actually make sense,” Franks wrote.

Across the 167 metro areas analyzed by the company, investor activity as a share of all transactions rose to 29.6 percent in the first quarter of 2012, up from a low of 23.6 percent in the last quarter of 2009. Furthermore, the company’s “on the ground” research leads analysts to believe this year’s second-quarter activity exceeded the first quarter’s, with investor activity spiking 2 percent.

Investor activity has returned to Stockton, Miami, Las Vegas, Riverside-San Bernardino, Sacramento, and Phoenix, all areas investors were previously reluctant to enter after their old investments crashed. According to the report, some markets are now “completely dominated” by investors, such as Las Vegas (where investor activity makes up 50 percent of total activity) and Phoenix (46 percent).

Investors also seem to be attracted to small markets-particularly those in inland California, the report notes. Second home buyers are also making their way into smaller markets, leading to large activity increases in Naples, The Villages, Tucson, and Panama City.

While Franks conceded that these signs of increased investor interest may point to a false recovery, he said John Burns Real Estate Consulting is not concerned and welcomes the return of private capital.

“Most of these investors are paying all cash and buying homes below replacement cost,” Franks wrote. “They are helping the market recover by removing supply at the low end of the market and driving real buyers to higher price points, including new homes.”

Franks also wrote that the company doesn’t foresee a scenario in which investors dump their stock on the market unless it’s clear prices are dropping again. For now, Franks said he and his colleagues feel comfortable for the near future.

“We are hyper-focused on the potential positive result, which is that rising prices get fence-sitting consumers off the fence. We are seeing this occur in some pockets around the country.”

I forget which Libertarian candidate it was, probably Harry Brown, but when asked what he would do if elected he said, “I will get ride of the IRS, get rid of the Federal Reserve, get rid of the Depts. of Education, Health and Welfare, etc., cut the military by 2/3, and then I will break for lunch.

The reality: the actual number of new homes sold in July was 34,000, the same as in June, and the lowest since March. Where things get worse is when one looks at the number of new homes for sale. At 142,000 (of which just 38,000 actually completed), this was the lowest number. EVER.

the median new home price slid to $224,200, down from $229,100 in June, and the lowest since January, while the average home price declined from $266,900 to $263,200. This was the lowest average price posted so far in 2012.

http://www.zerohedge.com/news/spot-housing-bottom-new-homes-sale-drop-lowest-ever-average-new-home-price-plunges-2012-lows

In the Great Housing Bubble, I proposed a limit on the allowable debt-to-income ratio as an effective way to prevent future housing bubbles. Four years later, the federal reserve has finally figured this out.

Research: Loan-to-income guidelines could have “forestalled much of the housing boom”

Fed Working Paper by Paolo Gelain, Norges Bank, Kevin Lansing, Federal Reserve Bank of San Francisco and Norges Bank, and Caterina Mendicino, Bank of Portugal: House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy

The researchers looked at the house bubble and several possible policy responses. It appears the most effective policy – for limiting the bubble – would have been to require lenders to focus more on loan-to-income.

From the paper:

Our final policy experiment achieves a countercyclical loan-to-value ratio in a novel way by requiring lenders to place a substantial weight on the borrower’s wage income in the borrowing constraint. As the weight on the borrower’s wage income increases, the generalized borrowing constraint takes on more of the characteristics of a loan-to-income constraint. Intuitively, a loan-to-income constraint represents a more prudent lending criterion than a loan-to-value constraint because income, unlike asset value, is less subject to distortions from bubble-like movements in asset prices. Figure 4 [see below] shows that during the U.S. housing boom of the mid-2000s, loan-to-value measures did not signal any significant increase in household leverage because the value of housing assets rose together with liabilities. Only after the collapse of house prices did the loan-to-value measures provide an indication of excessive household leverage. But by then, the over-accumulation of household debt had already occurred. By contrast, the ratio of U.S. household debt to disposable personal income started to rise rapidly about five years earlier, providing regulators with a more timely warning of a potentially dangerous buildup of household leverage.

We show that the generalized borrowing constraint serves as an “automatic stabilizer” by inducing an endogenously countercyclical loan-to-value ratio. In our view, it is much easier and more realistic for regulators to simply mandate a substantial emphasis on the borrowers’ wage income in the lending decision than to expect regulators to frequently adjust the maximum loan-to-value ratio in a systematic way over the business cycle or the financial/credit cycle.
…
… the most successful stabilization policy in our model calls for lending behavior that is basically the opposite of what was observed during U.S. housing boom of the mid-2000s. As the boom progressed, U.S. lenders placed less emphasis on the borrower’s wage income and more emphasis on expected future house prices. So-called “no-doc” and “low-doc” loans became increasingly popular. Loans were approved that could only perform if house prices continued to rise, thereby allowing borrowers to refinance. It retrospect, it seems likely that stricter adherence to prudent loan-to-income guidelines would have forestalled much of the housing boom, such that the subsequent reversal and the resulting financial turmoil would have been less severe.

Read more at http://www.calculatedriskblog.com/2012/08/research-loan-to-income-guidelines.html#xmkL27kAJlautusp.99

Will short sales hit home prices?

On Tuesday, the Federal Housing Finance Agency announced new guidelines that are supposed to make it easier for home owners to sell their properties in a short sale — when a home sells for less than the borrower owes on the mortgage.

In addition, the new guidelines, which kick in on Nov. 1, allow owners with a Fannie Mae or Freddie Mac mortgage to pursue a short sale even if they haven’t fallen behind on their mortgage payments but have a hardship, such as a job loss or divorce.

Consumer advocates say the changes will help some of the borrowers who’ve been unable to sell the estimated 11 million U.S. homes worth less than the value of their mortgage, according to CoreLogic. However, not all homes would qualify in this new program.

And while the changes provide new hope to distressed home owners, experts say they could negatively affect prices in neighborhoods that get an influx of new short sales. A rise in short sales will result in “downward pressure on home prices until we clear out the majority of these distressed properties,” said Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.

Home prices had been rising in recent months, a trend experts say is due to the limited inventory and the smaller number of distressed properties on the market.

In June, median home prices were up 8% from a year prior, according to the National Association of Realtors. That marked the fourth back-to-back monthly increase in home prices — the longest streak since 2006. Inventory was down 24% from the prior year. And distressed sales — including short sales and foreclosures — accounted for 25% of all sales, down from 30% in June 2011.

For its part, the Washington-based NAR says it’s called for an expedited short-sales process to help boost inventory. The Federal Housing Finance Agency says that it expects short sales to settle at market prices and that they’ll help avoid foreclosures and long vacancy periods that result in declines in home values.

Still, data suggest that the impact on home owners who aren’t in distress could be lower values for their properties in the near term. Even if short sales fly off the market, they’ll likely go at a discounted price. According to the NAR, short sales sell at prices that are 15% lower than regular home listings, on average.

Instead, the benefits for homeowners could be bigger in the long term. “It’s a better idea to clear out the backlog of distressed homes rather than delay the process in the name of supporting [home] values,” said Brad Hunter, chief economist at Metrostudy, a market research and consulting firm.

Tighter lending standards are not bullish

Fannie Mae Tightens Mortgage Standards for Some Home Buyers

Fannie Mae, the largest source of money for U.S mortgages, told lenders that it’s tightening some of its qualification standards for people buying homes or refinancing loans.

The changes include a reduction of the maximum loan-to- value ratios for some adjustable-rate mortgages to 90 percent, from as much as 97 percent, and an increase in required credit scores for certain loans, the Washington-based company said yesterday on its website. Fannie Mae also will start demanding more tax returns from self-employed borrowers, according to Matt Hackett, underwriting manager at New York lender Equity Now Inc.

“This can knock a decent portion of borrowers out of the picture who had a rough year in business two years ago,” Hackett said of the tax-information demand, tied to an update of its underwriting software used by originators. Two years of personal and business returns will be required to verify incomes, up from one year of personal returns. “You’d be surprised how much of an effect this has,” he said.

Tougher guidelines from Fannie Mae (FNMA), which along with smaller rival Freddie Mac guarantees mortgage-backed securities financing about two-thirds of new loans, may add to challenges for a housing market that’s showing signs of recovering after a six-year slump. Pacific Investment Management Co., manager of the world’s largest mutual fund, said in commentary yesterday that while “record-tight” credit standards are impeding real- estate sales, they “will not last forever.”
Home Sales

Sales of existing homes rose 2.3 percent to an annual rate of 4.47 million in July from an eight-month low, National Association of Realtors figures showed today. The median forecast of 73 economists surveyed by Bloomberg called for an increase to a 4.51 million rate.

Andrew Wilson, a spokesman for Fannie Mae, declined to comment on the changes to its standards, most of which will start being applied in October. The company told lenders that the adjustments were part of regular reviews of data and loan performance.

The firm, which along with Freddie Mac has tapped almost $190 billion of U.S. capital since being seized in 2008, will need to provide annual reports on actions they are taking “to reduce taxpayer exposure to mortgage credit risk.” The requirement is part of changes to the companies’ bailouts agreements the Treasury Department announced Aug. 17.
Credit Scores

Fannie Mae’s tightened standards include an increase of minimum credit scores for adjustable-rate mortgages not vetted by its Desktop Underwriter computer software. Scores will need to be at least 640, up from a previous minimum of 620, on a scale ranging from 300 to 850, according to the memo. It is also eliminating a policy that provided lenders the flexibility to accept scores 40 points below its normal requirements for specific products if borrowers had other strengths.

Changes to its guidance on so-called underwriting exceptions also will eliminate the concept of a “benchmark” ratio between borrowers’ income and housing costs of 36 percent, according to the memo. Instead, 36 percent will be the “stated maximum,” though the ratio can be as high as 45 percent if the borrowers meet credit score or cash reserve thresholds.

The new approach “provides more transparent requirements with regard to how compensating factors must be applied,” Fannie Mae said.

The company will end its FannieNeighbors product that offered underwriting flexibility for borrowers in so-called underserved areas. The loans were part of a program that also offers the aid to low-income individuals or public safety, education, military and health-care professionals.

Borrowers without traditional credit will be limited to loans for one-unit homes that they plan to live in, and the company will no longer accept “exterior-only” property appraisals for mortgages run through its computer software.

Fannie Mae is loosening some standards, according to the memo. The loan-to-value ratio allowed for some fixed-rate loans on two-unit properties will increase to 85 percent, from 80 percent. Down payment requirements also will fall for certain co-op loans, according to the document.

48% of loanowners under 40 are underwater. In other words, half of the nation’s young families are living in debtors prisons of their own making…

http://money.cnn.com/2012/08/23/real_estate/underwater-mortgage-borrowers/index.html

IR, May I ask you a question: What’s going to happen to mortgage borrowers when GSE winding down? Is it harder to get loan, like higher cost, more tightening standard, for example? Thank you!

“I forget which Libertarian candidate it was, probably Harry Brown, but when asked what he would do if elected he said, “I will get ride of the IRS, get rid of the Federal Reserve, get rid of the Depts. of Education, Health and Welfare, etc., cut the military by 2/3, and then I will break for lunch.”

He’ll be JFKed before he makes it to lunch.

“Also, they’re typically heavily leveraged in other venues and when margin calls hit their inboxes, they will offload ‘stat’ and that’s when ‘things’ will get interesting with regard to inventories/pricing.”

I’m dying to know the profile of these cash buyers. Can they weather a downturn? The profile of the current buyers will determine whether this is another bubble or not. We can truly get an idea what we are in for. What are these people’s assets, liabilities, incomes, income sources, etc?