First-time homebuyers are the foundation of the housing market. Move-up buyers need first-time homebuyers to purchase their property to provide the equity to make the move up possible. With the collapse of toxic loan products from the bubble, first-time homebuyers suddenly needed to have qualifying income, and that income would only be applied to conventionally amortizing mortgages. As a result, loan balances cratered, and house prices went down with them.
To prevent further declines in mortgage balances, the federal reserve lowered interest rates to near zero and embarked on “operation twist” to bring down mortgage rates. In the process they have caused the cost of ownership to decline precipitously, at least for buyers putting twenty percent down. My reports show this conclusively. However, when I calculate the cost of ownership, I assume a 20% down mortgage with no private mortgage insurance. That’s not how first-time homebuyers generally enter the market. With high prices, 20% down is a huge barrier to home ownership, and first-time homebuyers flock to FHA loans because it’s the only way they can stretch their meager savings enough to get a home.
Unfortunately, FHA financing carries a big cost. In Friday’s post FHA = subprime, 12.4% interest cost of FHA insurance, 50% risk premium, I measured the cost of this insurance, and it is having the opposite effect of lower interest rates. In fact, the cost of FHA insurance makes the effective interest rate a whopping 50% higher. Houses are more affordable than ever for someone putting 20% down, but for the first-time buyers who aren’t, affordability is average at best. And since the market must look to first-time buyers for stability, rising FHA insurance costs are pushing prices out of reach for first-time homebuyers.
How Rising Home Prices May Actually Stall the Recovery
Published: Friday, 30 Nov 2012 | 12:20 PM ET – By: Diana Olick
Home prices have been rising steadily for the past several months, but some fear the rapid increase could actually start hurting the housing recovery.
The reason is that the rise in prices is mainly due to investors, mostly large hedge funds, that have been swooping into the most distressed markets and inhaling properties as fast as their plentiful cash will allow. They are turning those properties into rentals, and getting anywhere from 8 to 12 percent returns on their investments, thanks to still hot demand. The trouble is, as home prices rise, those returns shrink.
“The worry with investment demand is that the very recovery in prices that it is driving will eventually reduce rental yields and undermine the investment case,” warns Paul Diggle of Capital Economics.
Hedge funds will stop buying once prices rise high enough that cashflow returns aren’t enticing. Hedge funds don’t purchase as a speculative play on appreciation. They all project appreciation into their returns, but since that money is years into the future, what really drives their activity is current cashflow. In fact, the biggest worry among these investors is that their appreciation projections won’t turn out as planned. They plan to sell these houses to first-time homebuyers and those who’ve repaired their credit. But since these borrowers will almost universally use FHA financing, they may not be able to leverage enough to buy out the hedge funds at prices they hope to see years from now.
Today’s housing recovery, much like the recent crash, is like no other. While home prices fell nationally for the first time in history, they are recovering locally at drastically different paces. Some markets are still in the red, while others are surging forward with double-digit gains. Those that are seeing the biggest jumps are largely the markets that saw the deepest losses. Witness Phoenix home prices up over 20 percent from a year ago on the S&P/Case-Shiller home price index. The huge influx of investors there shrunk inventories and created bidding wars, hence the price gains.
But even outside those hot markets, this national housing recovery is dependent on investors, who are largely all-cash buyers. The mortgage market is still too restrictive to support the kind of bulk-buying that needs to occur, and many potential buyers either lack the credit scores or the confidence to jump in. Another 14 million borrowers still owe more on their mortgages than their homes are worth, according to Zillow, and are therefore unable to move.
Five million properties are either in the foreclosure process or their owners are delinquent on their mortgages. That means foreclosures will remain elevated for the foreseeable future, and investors will be necessary to absorb them.
And investors will remain as long as cashflow values make sense. Many of the markets that did well this year may flatten in 2013 as investor activity wanes. Without sufficient product and without prices that produce returns, these investors simply won’t buy.
Another concern is that home prices are rising faster than income, which could push potential owner-occupants away just as they were starting to dip their toes in again.
If past history in California is any guide, house prices rising faster than wages is actually an inducement to purchase. Everyone here fears being priced out forever.
The risk of sales dropping as investors leave is obviously higher in the markets that saw the biggest drop in home prices during the crash, again, like Phoenix. Other markets, such as Chicago, Atlanta, and even parts of Florida, where prices are still weak and distress is still a large share of the market, are still seeing improved sales, as investors shift their sights and cash to more yield-worthy ground.
Investors are not the final answer. They are a stopgap measure that will prevent the low end of deeply discounted markets from falling further. They are primed to be the source of capital recovery for the banks when they finally get around to processing their upcoming foreclosures. Ultimately, these homes need to be sold to owner occupants, and the high cost of FHA insurance will serve to keep them from bidding prices much higher in these markets, despite how undervalued they may look to those with 20% down.
Housing Recovery Is Leaving Behind First-Time Buyers
Published: Monday, 26 Nov 2012 | 11:37 AM ET — By: Diana Olick
Current homeowners are finally moving up, and distressed sales are making up less of the overall market—all signs of much-needed improvement in housing.
Homeowners accounted for 54 percent of October’s non-distressed market, up from 50 percent in June, according to a new survey by Campbell/Inside Mortgage Finance.
This as the share of non-distressed sales surged to 64.7 percent, up from 55.7 percent as recently as February.
Unfortunately, first-time home buyers are seeing just the opposite, largely left out of this surge in sales and prices. Their share of the market, usually up in the 40 percent range historically, fell to 34.7 percent in October, the lowest in the Campbell/IMF survey’s three-year history.
The National Association of Realtors put their share even lower, at 31 percent.
Without first-time homebuyers, the recovery will not be sustained. Prices will flatline just above levels the hedge funds are willing to pay, and prices will stay there until first-time homebuyers return to the market with sufficient income to borrow more and push prices higher.
Using the FHA loan to maximum advantage
The former owner of today’s featured property provides the stereotype for how people in California plan to manage their mortgages going forward. Since the federal reserve and the US government are taking an active role in encouraging people to Ponzi borrow to stimulate the economy, it’s worth taking a fresh look at exactly how to borrow and spend and pass the resulting losses on to the US taxpayer. 
- This property was purchased for $142,000 on 10/16/1998, near the bottom of the last housing bust. The owners used a $137,700 first mortgage and a $4,300 down payment
- On 12/24/1998, barely two months later, they managed to obtain a $35,000 stand alone second and withdraw their down payment plus some extra spending money. They began their Ponzi journey as quickly as possible.
- On 11/3/1999 they obtained a $75,000 stand-alone second.
- On 3/2/2001 they obtained a $32,564 third mortgage.
- On 11/27/2002 they refinanced with a $299,000 first mortgage.
- On 7/12/2004 they obtained a $50,000 stand-alone second.
- On 11/23/2004 they refinanced with a $397,045 first mortgage.
- On 6/26/2006 they refinanced with a $392,000 first mortgage and obtained a $25,000 stand-alone second.
- Total mortgage equity withdrawal was $279,300. Not a bad return from a $4,300 down payment.
For more information, please see How to game the system with FHA loans for maximum advantage.
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Proprietary OC Housing News home purchase analysis
4729 LARWIN Ave Cypress, CA 90630
$304,500 …….. Asking Price
$142,000 ………. Purchase Price
10/16/1996 ………. Purchase Date
$162,500 ………. Gross Gain (Loss)
($11,360) ………… Commissions and Costs at 8%
============================================
$151,140 ………. Net Gain (Loss)
============================================
114.4% ………. Gross Percent Change
106.4% ………. Net Percent Change
4.6% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$304,500 …….. Asking Price
$10,658 ………… 3.5% Down FHA Financing
3.40% …………. Mortgage Interest Rate
30 ……………… Number of Years
$293,843 …….. Mortgage
$86,487 ………. Income Requirement
$1,303 ………… Monthly Mortgage Payment
$264 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$76 ………… Homeowners Insurance at 0.3%
$306 ………… Private Mortgage Insurance
$285 ………… Homeowners Association Fees
============================================
$2,234 ………. Monthly Cash Outlays
($192) ………. Tax Savings
($471) ………. Equity Hidden in Payment
$11 ………….. Lost Income to Down Payment
$58 ………….. Maintenance and Replacement Reserves
============================================
$1,641 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$4,545 ………… Furnishing and Move In at 1% + $1,500
$4,545 ………… Closing Costs at 1% + $1,500
$2,938 ………… Interest Points
$10,658 ………… Down Payment
============================================
$22,686 ………. Total Cash Costs
$25,100 ………. Emergency Cash Reserves
============================================
$47,786 ………. Total Savings Needed
The property above is available for sale on the MLS.
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24 Responses to “Will the high cost of FHA financing derail the housing recovery?”
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Will the high cost of FHA financing derail the recent bounce?
There…. fixed it for ya
The mainstream media is so obsessed with using the word recovery that it forces everyone to get on the bandwagon.
If the mortgage debt relief act is not extended, the volume of short sales will fall to near zero. Our current inventory shortages will get much worse. However, these people don’t deserve any kind of tax break, and it probably should be allowed to expire.
Everyone in real estate begs to extend Mortgage Debt Relief Act
The Center for Responsible Lending, a nonprofit group dedicated to protecting homeownership, and the Financial Services Roundtable, a group of representatives from the nation’s largest financial institutions, have come together to ask Congress to extend the Mortgage Forgiveness Debt Relief Act, which will otherwise expire at the end of this year.
In nearly identical letters to the Senate Committee on Finance and the House Ways and Means Committee, the two organizations argue that the act is supported across party lines and is “critical to helping homeowners and communities struggling with the ongoing foreclosure crisis.”
The singular difference in the two letters is a word of appreciation in the first line of the version drafted for senators on the chamber’s Finance Committee, which passed a package of tax extenders at the 11th hour just before breaking for summer recess on August 2.
The package included a one-year extension of the Mortgage Forgiveness Debt Relief Act, among other tax provisions set to expire at year-end such as allowable mortgage insurance write-offs and energy efficiency tax credits. Four months later, however, and the bill sanctioning these extensions has yet to be presented to the full Senate or even considered by the House.
Passed in 2007, the Mortgage Forgiveness Debt Relief Act prevents struggling and delinquent homeowners from having to pay taxes on any portion of their mortgage debts forgiven by financial institutions through short sales, principal forgiveness, or loan modifications.
Without the act, homeowners receiving such assistance would be required to pay income tax on the amount of debt forgiven, making it “more difficult and expensive for these homeowners, who are already financially struggling, to accept short sales and many loan modification offers,” according to the 97 institutions that make up the Financial Services Roundtable and the nonprofit Center for Responsible Lending whose primary focus is to fight predatory lending practices.
While the housing market is starting to see some signs of recovery with rising prices and increasing home sales, the two organizations express concern that allowing the Mortgage Forgiveness Debt Relief Act to expire at the end of the year will hinder the budding recovery.
“Our tax policy should not result in bad housing policy that will prolong a foreclosure crisis that has already gone on for too long,” the groups state in their co-authored letter to lawmakers.
House prices fall in November despite low levels of REO
Clear Capital released a new market report Tuesday, tracking home prices through the end of November. Nationally, quarterly price gains were cut by more than half compared to readings from the month before. For November, home prices edged up just 1 percent.
Even with fewer fair market sellers put their homes on the market – which is typical during the winter season – Clear Capital says REO sales held steady at 18.4 percent of total sales. Even with the effects of winter unfolding, the company says REO saturation trends don’t yet sound any alarms. Should distressed sales hold around their current level for the next several months, Clear Capital says downward price pressure should be minimal –- but that’s barring any other outside economic stress.
Dr. Alex Villacorta is Clear Capital’s director of research and analytics. He said, “November housing trends hinted at a winter slowdown ahead. While short-term growth across the country generally slowed, the housing market has built good momentum over the last year. As previously reported, these gains coupled with reduced rates of REO saturation signal housing should be strong enough to ride out winter, barring any shocks. That said, we remain very concerned about the fiscal cliff given both the threat of uncertainty and the potential for fiscal constraint moving forward.”
The slowing rate of price growth equals falling prices?
This reminds me of this fight over “cutting spending” in Washington. There’s no actual cuts on the table, just a cut in the rate of spending increases.
Corelogic embarrassingly under-reports foreclosures by 35% in September
There were 58,000 foreclosures completed in the United States during the month of October, CoreLogic reported Monday with the release of its latest National Foreclosure Report. October’s tally was down 17 percent from last year when 70,000 foreclosures were completed during the month.
On a month-over-month basis, completed foreclosures fell 25 percent. CoreLogic says September’s foreclosure count was revised upward to 77,000 from the previously reported 57,000. While revisions are pretty standard, the company says September’s adjustment was larger than usual because of Wayne County, Michigan’s annual online auction of delinquent tax properties, which wasn’t reported when September data was previously released. Excluding Wayne County’s foreclosures, there were 56,000 completed foreclosures nationwide during September, according to CoreLogic’s calculations.
As a basis of comparison, CoreLogic says completed foreclosures averaged 21,000 per month between 2000 and 2006, prior to the housing market’s downward spiral. Completed foreclosures indicate the total number of homes actually lost to foreclosure. Since the financial crisis began in September 2008, CoreLogic reports there have been approximately 3.9 million completed foreclosures across the country.
Approximately 1.3 million homes, or 3.2 percent of all homes with a mortgage, were in the national foreclosure inventory as of October 2012 compared to 1.5 million, or 3.6 percent, in October 2011. Month-over-month, the national foreclosure inventory dropped 1.3 percent between September and October of this year.
Congress is diverting tax revenues from mortgage G-fee tax to other uses
A controversial bill that would extend an increase on guarantee fees (g-fees) on mortgages backed by the GSEs or the Federal Housing Administration (FHA) has passed in the House of Representatives.
The bill, H.R. 6429| (“STEM Jobs Act of 2012”), proposes reforms for immigrant visas offered to immigrants who possess advanced training in science, technology, engineering, or mathematics. A section added to the bill calls for a one-year extension of g-fee hikes to help pay for the program, changing the end date on the fee increases from October 2021 to October 2022.
The legislation passed 245-139. It still needs to go before the Senate.
The proposal has attracted criticism from trade groups and industry representatives. Only one day before the bill passed, Mortgage Bankers Association president and CEO David Stevens called on Congress to reconsider the use of g-fees for purposes other than aiding the housing industry, noting that “[d]ipping back into the housing piggybank to pay for unrelated policy items on the backs of America’s homebuyers sends the wrong message at a time when the housing market is starting to show signs of recovery.”
It’s news articles like these that make me think it will be very a long time before we see a private mortgages, since private mortgages don’t have G-fees. Mortgages are now tax revenues; is the take over is now complete? Are we going to fund the US Treasury in greater and greater amount with mortgages and banks will now just be servicers?
The good news is that as they raise G-fees, it increases the cost of borrowing through the GSEs and thereby encourages private lending. If Congress gets carried away with raising G-fees to increase federal tax revenues, they will kill the golden goose as people will chose the less expensive private mortgages instead.
speaking of treasury funding….
“the Fed will continue increasing its 10 Yr equivalents by roughly 12% (of the total market) per year, for at least the next 3 years, at which point it will own 60% of the entire Treasury market”.
http://www.zerohedge.com/news/2012-12-03/time-bernanke-reevaluate-his-sworn-testimony-congress
Can the Fed tell the Treasury, “Hey don’t worry, you don’t have to pay us back?” Or pay use back with in 20 years for a 10 year Note, they second 10 years is zero interest on us?
The profits from the federal reserve go right back to the US Treasury, so the interest expense on these bonds paid to the Treasury are an illusion. The government never has to pay them back, they can simply reissue new debt when these bonds expire.
Which just goes to show that the biggest Ponzi scheme of them all is still yet to unravel. Won’t those fireworks be impressive?
I wish I could be like the government, and double my income just by “selling” bonds to myself, which I solemnly promise to pay back with interest, tee hee.
Theoretically, government finance is an infinite Ponzi scheme that need never unravel. Since they have the power of the printing press, they can continue to print to ensure the Ponzi scheme never collapses. The only real restraint on a government which is also a currency issuer is inflation.
A Ponzi scheme is defined by running out of fresh meat. As long as there are births, immigration and repaired credit that agree to participate in production and taxation the show goes on. If they get disgusted and drop out the game changes. We now know the numbers on the books are irrelevant as long as the participants want to play.
Funny, except the coasts most people use the standard deduction
Obama pulls mortgage deduction into fiscal cliff debate
Posted by pjackson on 12/3/12 at 10:35pm
It’s official. It appears the mortgage interest deduction is now in play when it comes to the fiscal cliff debate. President Barack Obama signaled that the interest deduction may go away unless Republicans agree to increase taxes on higher income earners.
The exchange took place on Twitter Monday, as the President was taking to social media to drum up support for his administration’s stance that higher earners should be taxed more as part of Democrats’ proposed solution to the so-called fiscal cliff.
Here’s the Twitter exchange:
Emma Robertson @soitgoesem
As a home owner, I worry deductions for home owners are at risk. Is that the case? #My2k
3 Dec 12
The White House
@whitehouse
.@soitgoesem breaks for middle class impt for families & econ. if top rates don’t go up, danger that middle class deductions get hit – bo
3 Dec 12
The President signs tweets he personally authors with “-bo.” And with that, the mortgage interest deduction is officially in play. Will be interesting to see how this plays out in the weeks ahead.
It’s fully in-play. I think the most likely result is a cap on all Itemized Deductions ($50k?), which will limit the mortgage interest deduction indirectly for higher-earners. Placing a cap is quick and easy – there’s no extended debate about which of the many current deductions are “good” and which are “bad.” The Tax Code can remain completely as-is.
Of course, if the cap is around $25k, it’s going to hit couples making six-figures, but not $250k+, living in high-tax states like CA. This would violate Obama’s promise to not increase taxes on his defined “middle class,” but the taxes/fines in ObamaCare already created new taxes on non-higher-earners. That horse has left the barn…
“I think the most likely result is a cap on all Itemized Deductions ($50k?), which will limit the mortgage interest deduction indirectly for higher-earners. Placing a cap is quick and easy – there’s no extended debate about which of the many current deductions are “good” and which are “bad.” The Tax Code can remain completely as-is. ”
I agree. This is by far the simplest and least politically damaging solution. No one special interest group can raise a loud voice of objection.
time to buy and lease to a friend with the option to buy, then have the friend buy and lease to you with the option to buy.
Isn’t that grand? Of the many perverse things in the tax code, your example is the ideal way to hold/live in property.
Not a chance. We’re talking Barack Obama, remember? The guy whose only real talent is community organizing and demonizing his opponents. He’s never had any leverage at all when it comes to those cynical wily buggers in Congress. Can’t even control his own party, let alone cut deals with the opposition. If it can’t be done by Executive Order — and in this case, it can’t — then it can’t be accomplished by Obama, and this is just Chicago FUD.
Since the interest is so low, adding the PMI causes the high percentage increase. PMI should be compared to the total cost of house ownership. PMI is no longer private insurance, but GSE backed put option.
Same old, same old political change of definations and goals. Bush Sr.: before elections (BE):read my lips no tax increases.; after elections (AE): Is not a tax, it’s a savings fee. Clinton (BE): NAFTA must be stopped … jobs will be outsourced to Mexico, (AE); number one priority is to pass NAFTA. Obama (BE): I’m to help the little guy, the big guys have all the representation they need (AE): first priority is to pass a 3 trillion dollar increase in the bail out package for the banks (the new little guy)….
Will this spread to the coastal cities?
Thunderdome in California?
December 2, 2012
Things are getting worse in San Bernardino. The city filed for bankruptcy earlier this year, but its financial situation has continued to deteriorate. And now with what promises to be a heated court battle over payments to the state pension fund in the offing, further cuts are likely.
Things are getting so bad that at a recent city council meeting, the city attorney advised residents to “lock their doors and load their guns” because the city could no longer afford to keep up a strong enough police force. CBS News reports:
[City Attorney Jim] Penman said the city is dealing with bankruptcy, which has forced officials to cut its police force by about 80 officers. Consequently, there’s been growing criticism about the police department’s response time.
“Let’s be honest, we don’t have enough police officers. We have too many criminals living in this city. We have had 45 murders this year … that’s far too high for a city of this size,” Penman said.
The city attorney said it’s important for people to be smart about protecting themselves and their family.
“I’m not advocating that people go out, who don’t have any training, and buy firearms. I certainly strongly caution anyone who has children at home not to have a loaded gun in the house,” Penman said.
“We need to take our streets back, we need to take our neighborhoods back and we need to protect our homes, and that’s what I think Jim was trying to say,” [Councilwoman Wendy] McCommack said.
This is the dystopia where blue ultimately leads. As money gets tight, cities have to choose between paying pensioners or paying for vital services. If California’s courts rule for the pensioners, they’ll be forcing a harsh reality on San Bernardino’s residents. Fighting for scraps in the ruins of a higher civilization?
[...] slow rate of processing of foreclosures by lenders. Demand hasn’t picked up significantly, particularly among first-time owner occupants, so the chance of a self-fueling rally with escape velocity is near zero. Delaying the process may [...]