Everyone is cheering the bottom of the housing market, and the false assumption is that all properties will rise in price at a rapid rate as housing “recovers.” Properties priced below the conforming limit will almost certainly continue to rise thanks to restricted inventory and record-low interest rates, but the move-up market is a different story entirely.
As I pointed out last week, Delinquent jumbo loans in Coastal California pollute bank balance sheets. But it’s not just Coastal California that will feel pain in the jumbo market. The jumbo market is not supported by government-backed loans, and as Mike pointed out over the weekend, these loans are subject to new more stringent regulations regarding amortization, appraisal, and debt-to-income requirements. But beyond the supply pressures lingering in shadow inventory, the move-up market will be hurt by a lack of equity among potential buyers.
How the move-up market works
Most first-time homebuyers don’t have 20% down for a house, particularly at today’s high prices, so most opt for a 3.5% down FHA mortgage or a 5% or 10% down conventional mortgage with private mortgage insurance. Over time, assuming they don’t refinance or add more debt with a HELOC, a homeowner will build equity by paying down an amortizing mortgage. With wage growth in the area, house prices will rise 3% or 4% per year, and presumably, the borrower will have a higher income as well. So after 5 to 7 years, a prudent homeowner will have sufficient equity to cover the closing costs of a sale and have 20% to put down for a move-up purchase.
The collective action of all homeowners who purchased at the same time provides the demand for a move-up market. The equity ported from a previous sale is used to bid up prices in the most desirable neighborhoods which is why markets like Newport Beach always trade at a healthy premium to rental parity. However, the current move-up market is broken because potential move-up buyers don’t have the equity to make the move.
The down payment barrier
High prices make the down payment hurdle onerous to cross. Jumbo loans require 20% down because private lenders won’t take the risk on lower down payments. In Coastal California the houses beyond the reach of conforming loans or FHA financing start at $900,000. That requires $180,000 down plus extra financial reserves. Coming out of a deep recession, few have saved that much on their own.
Most move-up market sales get their equity from the profitable sale of a previous home. With the crash of house prices, those who bought over the last 10 years have no more equity than they originally put down, and most are underwater. This potential buyer pool is dead. As we know from the chart on originations, the number of buyers who purchased at the bottom is relatively small.
Plus, many more buyers than usual are either small investors or hedge funds. In a normal market about 35% of purchases are for investment (the inverse of a 65% home ownership rate). Over the last few years, about 50% of home purchases have been investors. Investors don’t sell their properties to complete a move-up trade, so 15% of the market that ordinarily would have been move-ups will not be over the next decade.
As I pointed out in One man’s mortgage debt is an entire neighborhood’s equity, the equity that would otherwise be accruing to homeowners is instead recollateralizing the bad loans on underwater properties. With 25% of properties underwater, a huge portion of the move-up market won’t have equity because that money will instead be going to a bank.
With 15% of the move-up market removed by investors and 25% removed by recovering underwater loanowners, 40% of the demand for future move-ups is gone.
The rebuilding of a move-up market will likely take a decade or more, and that’s assuming interest rates remain super low to keep the market under the conforming limit affordable. And of course, it also assumes the conforming limit is not lowered by political pressure from politicians who are tired of the enormous losses at the GSEs and the FHA.
When the banks finally get around to foreclosing on the legions of squatters in the jumbo market, who are they going to sell those houses to?
So much for their move-up equity
The former owners of today’s featured property weren’t prudent with their mortgage, and they won’t be participating in the move-up market again any time soon.
They purchased the property on 8/6/2004 for $1,218,000 using a $975,164 first mortgage and a $243,836 down payment, probably from a previous sale. On 6/13/2007 they refinanced with a $1,165,000 first mortgage and obtained a $185,000 HELOC. Whatever equity they had was extracted and likely spent. They lost the house in foreclosure, and now they have bad credit, so they won’t be buying another home any time soon.
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Proprietary OC Housing News home purchase analysis
21540 CASINO RIDGE Rd Yorba Linda, CA 92887
$1,301,000 …….. Asking Price
$1,218,000 ………. Purchase Price
8/6/2004 ………. Purchase Date
$83,000 ………. Gross Gain (Loss)
($104,080) ………… Commissions and Costs at 8%
============================================
($21,080) ………. Net Gain (Loss)
============================================
6.8% ………. Gross Percent Change
-1.7% ………. Net Percent Change
0.8% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$1,301,000 …….. Asking Price
$260,200 ………… 20% Down Conventional
3.96% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,040,800 …….. Mortgage
$262,171 ………. Income Requirement
$4,945 ………… Monthly Mortgage Payment
$1,128 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$325 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$375 ………… Homeowners Association Fees
============================================
$6,773 ………. Monthly Cash Outlays
($1,240) ………. Tax Savings
($1,510) ………. Equity Hidden in Payment
$356 ………….. Lost Income to Down Payment
$183 ………….. Maintenance and Replacement Reserves
============================================
$4,561 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$14,510 ………… Furnishing and Move In at 1% + $1,500
$14,510 ………… Closing Costs at 1% + $1,500
$10,408 ………… Interest Points
$260,200 ………… Down Payment
============================================
$299,628 ………. Total Cash Costs
$69,900 ………. Emergency Cash Reserves
============================================
$369,528 ………. Total Savings Needed
The property above is available for sale on the MLS.
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26 Responses to “The move-up market will suffer for another decade”
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Unfortunately, since the stage is set for the next cycle of deleveraging and losses (system still corrupt from within), many hedge funds and seasoned speculators who’ve bought into opportunitites of the past are going to suffer as well.
The hedge funds and cashflow investors may do well, but their success is to the detriment of the move-up market. Every dollar that goes to a hedge fund is a dollar not being used to sustain prices in a move-up market.
Investors will not suffer. As interest rates rise, investors will stop buying and will watch their cash flow increase as rents rise.
I saw an article yesterday how a lot of home builders are now building multi-family projects. I don’t know about the macro environment in Orange County, but nationally rents are going to stall with all this supply coming in the market in 2013 and especially 2014.
Apartment buying is one of the many distortions caused by zero percent interest rates. The rates of return on these investments, assuming they perform as planned, are not that great. However, the returns are better than competing investments right now, so money pours in. Without the federal reserve flooding the markets with printed money, many of these apartment deals would never happen.
It would take unbounded naivety to think
investorsspeculators will not suffer.1) wages are not indexed to inflation
2) you can only raise rents by what the local economy can support
3) the current price model is based on the continuance of negative real rates
4) RE is a fixed target
You can’t expect a gold speculator to understand what you’re talking about. It goes against the very nature of his being.
NAR: Pending Home Sales Index Records Sharp Drop as Inventory Falls
The Pending Home Sales Index (PHSI) fell 4.3 percent to 101.7 in December, the sharpest month-over-month drop since April, the National Association of Realtors reported Monday. Economists had expected a smaller 0.3 percent decrease to 106.1 from November’s originally reported 106.4. The November index was revised down to 106.3.
The December index reading was the lowest since September.
The PHSI is a supposed to be a leading indicator of completed transactions, though it’s not always accurate. The index rose in eight months in 2012 (on a two-month lag), but existing home sales rose in only six. Following the 5.5 percent drop in pending sales in April, existing home sales in June fell 250,000, the steepest monthly decline in 2012.
Nonetheless, the NAR expressed optimism, noting the index was above year-ago levels for the 20th straight month in December.
NAR economist Lawrence Yun blamed a tight inventory for the weakening index.
“The supply limitation appears to be the main factor holding back contract signings in the past month,” he said, adding a separate NAR survey “shows that buyer foot traffic is easily outpacing seller traffic.”
Indeed, the inventory of homes for sale dropped sharply in December, according to the NAR’s home sales report released last week, falling to 1,820,000. The months’ supply of homes for sale—computed against the sales pace—dropped to 4.4 months in December, the lowest since May 2005, when it was 4.3.
Yun acknowledged price may be another factor holding down sales.
“Supplies of homes costing less than $100,000 are tight in much of the country, especially in the West, so first-time buyers have fewer options,” he said.
SIGTARP: Treasury Failed to Control Excessive Pay for Bailed-Out Firms
Once again, Treasury has failed to control excessive executive pay at the expense of taxpayers, according to a report from the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).
After a previous evaluation on executive compensation, SIGTARP found Treasury approved “excessive” pay packages and salary increases for executives at three firms that received bailout-funds: American International Group (AIG), General Motors (GM), and Ally Financial.
After investigating pay in 2012, SIGTARP reported Treasury approved pay packages worth $5 million or more for 23 percent of the top 25 employees at AIG, GM, and Ally. The figure represents 16 out of 69 employees, with 9 from AIG, 3 from GM, and 4 from Ally. Treasury also approved pay ranging from $3 million to $4.9 million for 21 out of the 69 employees, with 12 employees from AIG, 4 from GM, and 5 from Ally.
In addition, Treasury also approved all 18 proposed pay raises from the companies in 2012. According to the report, the pay raises ranged from $30,000 to $1 million. GM and Ally each proposed nine pay raises, while AIG proposed one pay raise worth $1 million for the CEO of its subsidiary, Chartis.
Though, AIG has paid the full $182 billion owed to Treasury and its bailout led to a positive return. On the other hand, GM and Ally still owe a combined $36.2 billion to taxpayers, according to the report.
Thanks for the mention.
If they would have just let strategic default take it’s course, we could have started the move up market cycle by now. It’s been 5 years and banks/feds are still creating affordability products through HAMP and HARP. If there is little wage growth right now and we looking at 15 plus years for it to return, if tax laws change. It could be in the late 2020′s before we get a normal market.
One of the reasons recessions are helpful is because bad debts get purged. Since we didn’t purge the bad mortgage debt this cycle, it will linger on as a weight over the housing market for another decade. Its effects will be most noticeable in the move-up market because it depends on equity to survive. The equity would have been there if the debt was purged. Instead, that increase in value will go back to the banks.
ASF 2013: Fannie Mae and Freddie Mac are here to stay
Although the housing market has posted a shift in positive momentum, many factors within housing finance will likely remain for quite some time, and reform is not expected any time soon.
Experts on the U.S. housing finance sector generally concluded that Fannie Mae and Freddie Mac are here to stay, providing a limited window of opportunity in market involvement for private market players, according to a panel discussion at the American Securitization Forum on Monday.
Government sponsored-enterprise reform will not be a concerning factor Congress this year and as a result, “the center for change is going to be very low,” said Shareholder Robert Bostrom of Greenberg Traurig.
Both GSEs are reporting recent hefty profits, which is not surprising given the rise in guarantee fees. As a result, these profits are going to the U.S. Department of Treasury, providing more incentive to keep both around, said Vice Chairman James Lockhart III at WL Ross & Co.
As Congress deals with bigger issues such as the fiscal cliff, the chances of seeing GSE reform in 2013 is very slim, Lockhart noted.
Resident Fellow Edward Pinto at American Enterprise Institute stated that he expects Fannie and Freddie to remain dominant in the market for the next eight years due to the qualified mortgage rule.
With the potential of both GSEs continue dominance in the market, the private sector will remain on the sidelines, Pinto noted.
I know just one family that has moved-up since 2007. They timed the bubble perfectly selling a 2 bed Irvine condo for $550k in 2006, banking $200k, and renting til 2012. The only problem during the period of perfect “housing timing,” was that the husband’s income didn’t increase much at all, and the wife’s considerable income has been absent nearly 3/4ths of this Recession due to extended job loss periods.
We’re stuck right now and won’t be moving-up for at least two years. Just like everyone else, it’ll take that long to for us to recover from the equity lost.
Perspective,
And the pool of the move up keeps shrinking from ZeroHedge.
0.8% of the US population has over $100,000 in student loans, compared to 0.2% in 2005
Nice – we’re down to ~$100k in combined grad school loans. That number is half what it was at graduation and represents only government-subsidized loans at fixed at ~3.5%. With other competing priorities, these loans will be receiving the minimum payments for some time…
Shevy has been involved in 400 or more transactions over the last five years, almost none have required the sale of a previous home to purchase another one. The only action in the move-up market is as Perspective mentions, people who sold then rented for a while while adding to their savings/equity.
And we could add to Shevy’s stats. If our townhouse’ FMV increases 10%+ more this year, we’ll seriously consider selling and renting for a year or two.
Just to Recap 25 years of easy credit
Year Rate
1986 10.19
1987 10.21
1988 10.34
1989 10.32
1990 10.13
1991 9.25
1992 8.39
1993 7.31
1994 8.38
1995 7.93
1996 7.81
1997 7.60
1998 6.94
1999 7.44
2000 8.05
2001 6.97
2002 6.54
2003 5.83
2004 5.84
2005 5.87
2006 6.41
2007 6.34
2008 6.03
2009 5.04
2010 4.69
2011 4.45
2012 3.66
Look in 2007 mortgage rates where 6.34% now it’s 3.55%. The affect ZIRP and QE has been decreasing the mortgages by half and increase purchasing power by 40%,
Ops, this was supposed to be post # 9
Bernanke Seen Buying $1.14 Trillion in Assets in 2014
By Joshua Zumbrun, Jeff Kearns & Catarina Saraiva – Jan 29, 2013 7:29 AM PT
Federal Reserve Chairman Ben S. Bernanke’s latest round of bond buying will reach $1.14 trillion before he ends the program in the first quarter of 2014, according to median estimates in a Bloomberg survey of economists.
Bernanke will push on with purchases of $40 billion a month of mortgage bonds and $45 billion a month of Treasuries, according to the survey of 44 economists, even as some Fed officials warn his unprecedented balance-sheet expansion will impair efforts to tighten policy when necessary.
“To get to the point where Bernanke would be comfortable letting up, you have to have a good solid string of economic reports that you’re just not going to get” this year, said Eric Green, global head of rates and FX research at TD Securities Inc. in New York and a former New York Fed economist.
The Federal Open Market Committee will renew its commitment to asset buying during a two-day meeting starting today after determining the benefits from the program exceed any risk of inflation or financial instability, according to economists surveyed Jan. 24-25. Bernanke has said the policy will continue until there are “substantial” gains in employment.
Fed officials have a brighter outlook for the economy than many private economists. FOMC participants forecast growth this year ranging from 2.3 percent to 3 percent, while economists in a separate Bloomberg survey have a median estimate of 2 percent.
“The economy is not going to be able to generate growth above 2 percent” as it faces headwinds from federal tax increases and a weak global expansion, Green said.
Job Creation
Fed asset purchases will probably do little to help reduce 7.8 percent unemployment, economists said, with 57 percent of them predicting the program won’t help boost the number of jobs created this year.
Economists who expect gains from so-called quantitative easing say it will account for an increase of 250,000 jobs during 2013. Last year, the economy added 1.8 million jobs.
Employers probably hired 160,000 workers in January, after a 155,000 increase in December, based on Bloomberg News survey of economists before the Labor Department reports the figures on Feb. 1.
In the first round of purchases, begun in 2008, the Fed bought $1.4 trillion of housing debt and $300 billion of Treasuries. In the second round, beginning in November 2010, the Fed bought $600 billion of Treasuries.
Mortgage Bonds
In the current round, the Fed’s total purchases will be split between $600 billion of mortgage-backed securities and $540 billion of Treasuries, according to the median estimates of economists in the survey.
Asked what would prompt the Fed to halt its bond buying, 63 percent of economists said the central bank will act in response to substantial improvement in the labor market.
Only 13 percent said the Fed will end its purchases because of accelerating inflation or a rise in inflation expectations.
Inflation for the 12 months ending in November was 1.4 percent, according to the Fed’s preferred gauge. That’s below the central bank’s longer-run target of 2 percent. Investors expect inflation of 2.24 percent over the next five years, compared with 2.1 percent when the FOMC met Dec. 11-12, as measured by the spread between Treasury Inflation Protected Securities and nominal bonds.
Participants Differed
At the FOMC’s meeting last month, participants differed over how long the bond purchases should last. Fed officials who provided estimates were “approximately evenly divided” between those who said it would be appropriate to end the purchases around mid-2013 and those who said they should continue beyond that date, according to minutes of the gathering.
A number of policy makers are concerned the size of the Fed’s holdings “could complicate the committee’s efforts to eventually withdraw monetary policy accommodation,” according to the minutes.
The percentage of economists who consider monetary policy “somewhat too easy” rose to 40 percent compared with 27 percent in a survey prior to the FOMC’s Dec. 11-12 meeting.
Boston Fed President Eric Rosengren, an FOMC voter this year, sees Fed accommodation working, citing recent improvement in the housing market and in auto sales.
“The most interest-sensitive sectors have been responding to the monetary stimulus from the Fed, and this stimulus has provided a major source of strength for the economy last year,” Rosengren said in a Jan. 15 speech in Providence, Rhode Island. “And it is likely to be a source of support in 2013.”
Menendez, Boxer plan bill to help struggling homeowners
on January 29, 2013 at 12:03 PM, updated January 29, 2013 at 12:20 PM
Underwater homeowners may get additional federal assistance for refinancing government-backed loans under a proposal being revived in the U.S. Senate.
Democratic Senators Robert Menendez of New Jersey and Barbara Boxer of California plan to introduce a bill as soon as this week that would expand the existing Home Affordable Refinancing Program by promising lenders they won’t be forced to absorb the loss on refinanced loans that default, according to a person with knowledge of the matter. The person asked not to be identified because the timing is not final.
The bill is the first of a series of measures planned by the White House and congressional Democrats to promote refinancing as a way to spur a recovery of the housing market.
The Menendez-Boxer bill, a new version of a measure that failed to advance in the last session of Congress, would include a one-year extension of HARP, which is aimed at helping borrowers who are current on their mortgages but unable to refinance because their home values have dropped. The program, which applies to loans backed by U.S.-owned mortgage finance companies Fannie Mae and Freddie Mac, is set to expire at the end of this year; the bill would extend it through 2014.
“We believe the legislation — if it could be adopted — would be positive for the mortgage originators by giving them more time to find borrowers eligible for HARP,” Jaret Seiberg, senior policy analyst at Washington Research Group, a unit of Guggenheim Securities LLC, wrote in a market commentary today.
Banks including JP Morgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Bank of America Corp. could benefit, Seiberg said.
U.S. residential real estate lost about a third of its value after home prices peaked in 2006. Prices are now rising again, shrinking the number of underwater properties, worth less than the mortgages on them. There are now about 7 million underwater properties, down from 11 million in 2011, according to JPMorgan.
The Obama administration has been pushing widespread refinancing for homeowners who have been unable to take advantage of historically low interest rates because they are underwater on their mortgages.
The effort got a boost last October from changes to HARP that allowed homeowners with loans backed by Fannie Mae and Freddie Mac to refinance no matter how much their loans exceed the value of their homes.
In a letter supporting the new bill, the National Organization of Realtors said it “offers relief to homeowners who continue to meet their mortgage obligation during this on- going period of economic unrest.”
Menendez and Boxer were unable to pass the bill during the last session of Congress because they were unable to garner Republican support without opening up the measure for amendments.
Passage also is not assured this session, Seiberg wrote.
“We detect little support among House Republican leaders,” he said. “So even if it can pass the Senate, it may well die in the House.”
About 1.8 million homeowners have used the HARP program to refinance since the program began in 2009.
That will be an upcoming post. The bullshit about helping borrowers is ridiculous. They are transferring losses from banks to the US taxpayer. That’s what this bill is really about, and the Republicans will kill it because it’s too costly. The only hope this bill has is if the banking lobby can convince a few Republicans that their campaign dollars depend on transferring more losses to the US taxpayer.
This is “Look! A squirrel!” distraction from Menendez, so you don’t ask too closely about those underage hookers.
http://www.dailymail.co.uk/news/article-2226182/Senator-Bob-Menendez-paid-women-100-sex-exclusive-Dominican-Republic-resort.html
For Babs Boxer, it’s just the usual mindlessness from the winner of the Even A Moron Can Be A Senator From California! reality show. The crook and the fluffball — what else would you expect? One can only hope cooler and less empty Democratic heads prevail, if there are any left.
Unfortunately, the Demcratic leadership in the Senate needs some serious distraction from the fact that the House bill raising the debt ceiling is going to be tied to the Democratic Senate producing — after failing to do so since 2009 — an actual Federal budget, with actual real numbers the public can see, and on which Congress can vote like they’re supposed to.
http://www.nydailynews.com/news/politics/house-passes-bill-suspend-debt-limit-article-1.1245925
That bill and the debate on it is going to throw a harsh light on the dereliction of the Senate Democratic leadership, so they and their friends in the media really want to scare up some preliminary distraction. Hence the recent flurry of activity on illegal immigration and bailing out “struggling homeowners,” both of which are surefire hot-button issues that will convince the base (and low-information centrist votesr) that the Democratic Senate is doing very, very important things, which might excuse their not getting around to a budget in four years, and should definitely not be run out of town next year for being a bunch of irresponsible clowns.
it will probably work, unfortunately. We live in the Youtube Age: the reality of a dysfunctional Senate can’t possibly compete with a cool media video mashup of a pretend Senate “solving” illegal immigration and the decline in house prices.
[...] market below $660,000 is so active while the market over $750,000 survives based on squatting (See: The move-up market will suffer for another decade). The transition zone between $660,000 and $750,000 is about to become more expensive and harder to [...]
[...] market below $660,000 is so active while the market over $750,000 survives based on squatting (See: The move-up market will suffer for another decade). The transition zone between $660,000 and $750,000 is about to become more expensive and harder to [...]
[...] Yes they are. We know from the oft-repeated chart on mortgage originations that owner-occupant buying across the spectrum is down, and the move-up market will suffer for another decade. [...]