realtors lament low demand, low supply, and collapsing first-time homebuyer market

The tax credit stimulus of 2009-2010 prompted many potential buyers to accelerate their plans to purchase homes to take advantage of the tax credits. Many people paid 5% to 10% more just to gain the tax credit that was a small fraction of the additional price they paid. When this stimulus was removed from the market, quite predictably, housing demand collapsed, prices rolled over, and we had 18 consecutive months of falling prices.

In 2011 and 2012 in response to the lack of demand, the federal reserve launched Operation Twist to drive down long-term rates with hopes of lowering mortgage rates further to stimulate housing demand. As a result of this temporary manipulation of mortgage rates, housing demand did increase, and when combined with lender can-kicking from loan modifications, the housing market bottomed. A few analysts mentioned the manipulation of the housing market was unstable, and most notably, Mark Hanson pointed out that the removal of the interest rate stimulus was likely to result in a collapse of demand similar to the expiration of the tax credits in 2010.

Apparently, Mark Hanson was right. Even realtors are worried as they noted a dramatic decline in buyer traffic in August.

The mini-boom in housing is already over: realtors

By Diana Olick | CNBC – Thu, Sep 19, 2013 11:30 AM EDT

U.S. home sales in August rose to their highest level in six years, even higher than during the recent home buyer tax credit. This news came on the heels of the Federal Reserve’s announcement that it would continue to fuel the mortgage market, keeping rates from rising dramatically. Still, Realtors were uncharacteristically pessimistic in their predictions for sales this fall.

The definition of a gaffe in politics is when a politician uncharacteristically tells the truth. The same is true of realtors. When even the slightest hint of market pessimism comes from the pathological liars at the NAr, you know the statement was both unintended and accurate.

We are getting early signals from lock boxes that show a significant change in direction in August,” said Lawrence Yun, chief economist for the National Association of Realtors, referring to the small key boxes that hang on the doors of for-sale homes. The number of times they were opened in August dropped dramatically, signaling a big drop in potential buyer traffic.

I recently reported that it’s no longer a house seller’s market. I am shocked to see the NAr confirm my observations.

Yun claimed the jump in August sales was based on fear of rising rates. August numbers are based on closings for contracts that were likely signed in June. June saw the biggest spike in mortgage interest rates.

That hurried people into making a decision,” said Yun. “It was the last hurrah for the next 12 to 18 months.”

And this behavior was loudly encouraged by realtors who told their clients they should buy now or be priced out forever.

This is one of my main complaints against the way realtors operate. Rather than telling their clients they don’t need to fear rising rates because it will cause sellers to reevaluate their asking prices, realtors tell buyers they need to act immediately to generate a sales commission. It is clearly a case where realtors put their own self interest above their clients. This was rampant during the tax credit boom, and many of the buyers that were manipulated by realtor false urgency found themselves underwater as prices fell for 18 months.

Realtors say home buying today is less about the interest rate and more about the ability to get the mortgage. Sales are also hampered by a severe lack of listings, down 6 percent from a year ago. Inventory shortages are nationwide with some markets seeing less than a month’s supply of homes for sale.

While sales may fall, it appears home prices will continue to gain, if at a slower pace than recent months. Fewer foreclosures and, again, the lack of inventory, will prevent prices from falling. Borrowers are falling behind less and actually changing their behavior when it comes to paying their mortgages.

This is my belief as well. After the tax credit of 2010 expired, prices fell for 18 months because there was still abundant must-sell inventory on the market. This time around, this inventory has been removed by lender can-kicking. That’s the only difference between then and now, but it’s a big difference. It will likely mean sales will decline but prices won’t.

“For the first time since the housing bubble, consumers with constrained liquidity are making their mortgage payments about as much as their credit card payments,” said Steve Chaouki, co-author of a new study from TransUnion.

With rising house prices and generous temporary loan modification terms, people are more motivated to make housing payments.

During the past five years, as home values plummeted, and borrowers found that they owed more on their mortgages than their homes were worth, they turned their attention, and their payments, to their credit cards. It was a switch from historical norms, when mortgages were somehow more sacred and home ownership was considered more of an achievement than an investment.

When housing became an investment, borrowers treated it as such. Many realized there was no point in putting good money after bad, so they quit making payments. As long as we continue to foster the idea that housing is an investment, strategic default will remain a problem for lenders.

As mortgage delinquencies fall and distress moves out of the housing market, sales will depend far more on traditional supply and demand. As of now, there isn’t much of either. The first-time home buyer market has “collapsed,” according to the Realtors, due to tight credit and weak employment, and millions of potential move-up buyers are still plagued by negative and near-negative equity.

It will likely take a few more years and a lot more jobs for those dynamics to improve.

(See: When will first-time homebuyers return to the market?)

What path do you see going forward?

We will likely see a very brief drop in mortgage interest rates due to the fed no-taper, but in my opinion, it won’t take long before the market starts worrying about when the taper will finally happen, and mortgage rates will resume their upward drift. The direction of mortgage rates will likely determine the strength of demand going forward because future housing markets will be very interest rate sensitive.

Supply will continue to come onto the market, but this will be can’t-sell cloud inventory rather than must-sell shadow inventory, so there will be more selection of houses nobody can afford. I believe that’s a recipe for low sales volumes and gently rising prices.

Anecdotally, I can tell you that over the last few weeks some buyers have resumed their search for homes. We had one of our astute observers recently go into escrow, and Shevy tells me that several buyers started making offers again. The buyers have adjusted to the change in the market, and they are being much more selective. The frenzy is over, but latent demand remains from those who didn’t get properties during the frenzy.

[raw_html_snippet id=”newsletter”]

[idx-listing mlsnumber=”NP13121126″ showpricehistory=”true”]

4615 WAYNE Rd Corona Del Mar, CA 92625

$2,095,000 …….. Asking Price
$2,185,000 ………. Purchase Price
5/12/2006 ………. Purchase Date

($90,000) ………. Gross Gain (Loss)
($167,600) ………… Commissions and Costs at 8%
($257,600) ………. Net Gain (Loss)
-4.1% ………. Gross Percent Change
-11.8% ………. Net Percent Change
-0.6% ………… Annual Appreciation

Cost of Home Ownership
$2,095,000 …….. Asking Price
$419,000 ………… 20% Down Conventional
4.87% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,676,000 …….. Mortgage
$434,035 ………. Income Requirement

$8,864 ………… Monthly Mortgage Payment
$1,816 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$436 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$96 ………… Homeowners Association Fees
$11,213 ………. Monthly Cash Outlays

($2,187) ………. Tax Savings
($2,063) ………. Principal Amortization
$784 ………….. Opportunity Cost of Down Payment
$282 ………….. Maintenance and Replacement Reserves
$8,029 ………. Monthly Cost of Ownership

Cash Acquisition Demands
$22,450 ………… Furnishing and Move-In Costs at 1% + $1,500
$22,450 ………… Closing Costs at 1% + $1,500
$16,760 ………… Interest Points at 1%
$419,000 ………… Down Payment
$480,660 ………. Total Cash Costs
$123,000 ………. Emergency Cash Reserves
$603,660 ………. Total Savings Needed
[raw_html_snippet id=”property”]