Nov122014

realtors predict rising home sales and rising mortgage rates

The National Association of realtors predicts home sales will rise in 2015 despite rising mortgage rates — not going to happen.

Lawrence_Yun_bullshitA project manager is concerned with time, quality and price, and in any project it’s only possible to get two of the three. To obtain high quality work quickly, the price will be high; to obtain high quality work and a good price, it will take longer; and to finish the job quickly for a low price, quality will suffer. It isn’t possible to maximize all three.

Similarly, in real estate markets, there are three related variables: mortgage rates, sales price, and sales volume, and it’s only possible to obtain two of the three. In order to obtain higher prices and higher sales volumes, mortgage rates must go down. If the NAr is correct that home sales and mortgage rates will go up, then prices must be lower. If the NAr is correct that home prices and mortgage rates are higher, then home sales will necessarily suffer.

Mortgage rates, home sales, and home prices can only rise together if wages rise or if buyers sacrifice quality. In fact, wages must rise more than enough to offset the reduced buying power caused by higher mortgage rates. While wages may rise next year, it seems unlikely they will rise enough to offset an increase in costs if mortgage rates go from 4% to 5%, which is what the NAr expects.

The only other way for mortgage rates, home sales, and home prices to rise together is for buyers to substitute down in quality.  Today’s buyers no longer fear being priced out, and they don’t believe they will make a fortune on appreciation, so they are far less motivated to substitute down in quality just to get into the market. Buyers resist the quality of housing they find at today’s prices, which is why sales are down so much. What good reason is there to believe buyers will accept far less next year?realtor_bla_bla_bla

In the past, there was one other tool lenders commonly used to cause home sales and home prices to rise irrespective of mortgage rates: affordability products. However, these were banned by the new mortgage rules, and as a result, housing markets don’t work like they used to. If realtors count on financial innovation to make their predictions come true, they will be disappointed.

Realtors forecast more home sales but higher mortgage costs in 2015

By STEVE BROWN, Published: 07 November 2014

NEW ORLEANS — The prospect of higher mortgage rates in 2015 won’t put the brakes on home sales, Realtors hope, provided that lenders loosen their purse strings.

realtors hope? Isn’t wishful thinking the dominant feature of an NAr forecast?

It certainly isn’t accuracy.

I anticipate that mortgage rates will rise to 5 percent next year and to 6 percent in two years,” Lawrence Yun, chief economist with the National Association of Realtors said Friday. “Rising mortgage rates are always negative to housing.”

A rise in rates to 6% over the next two years will be a catastrophe for housing. Either prices will drop, or sales will plummet. It’s highly unlikely aggregate wage growth over the next two years will compensate for a 50% increase in mortgage rates (6 – 4 / 4 = 50%).realtor_know_nothing

Long-term home finance rates have averaged about 6 percent over the last decade. …

Yun said that he’s hopeful that a move by mortgage companies to relax their lending standards will make up for any decline in buyers caused by higher finance costs.

How is that supposed to work?

Let’s say you have a group of buyers able to finance today’s prices to buy modest single-family homes. If you suddenly increase the size of this group 20%, but simultaneously reduce the amount they can finance, the only way to sustain pricing and increase sales is for this group of buyers to dramatically substitute downward in quality. The group that’s now 20% larger must be willing to substitute down from a single-family home to a duplex or condo, and pay more than comparable rents to do it.

It isn’t going to happen.

Buyers are already turned off homebuying by current pricing. If they must sacrifice quality, they will be even less motivated. Remember, the old “buy now or be priced out forever” meme is dead. realtor bullshit and manipulation can only carry the market so far, and we are already at the friction point where buyers just say no.

realtor_kool_aid

In a rising interest rate environment, if we can open up the credit box the housing market momentum can continue,” he told thousands of real estate agents meeting this week in New Orleans. “That can provide potentially a 15 percent boost to home sales.

This prediction will prove embarrassingly wrong, assuming a group that is always wrong can be embarrassed by being wrong again.

“Lenders can dial down their underwriting standards modestly.”

Lenders would have to abandon all standards are return to bubble-era lending for this to happen.

The Realtors group is predicting that nationwide preowned home sales will be down about 3 percent this year for a variety of factors, including tight supplies of houses on the market. …

Tight supply of homes on the market? That meme needs to die and be buried along with the bad weather excuse from earlier this year. For example, Irvine inventory is up more than 50% this year, and yet sales are down more than 30% over last year. (Thanks, Dom) This clearly demonstrates the lack of sales is not caused by a lack of inventory.

“Next year we will be up about 7 percent, in my opinion, and further up in 2016,” Yun said. …

Perhaps inventory will be up that much, but neither home sales volume or prices will be up that much in 2015 or 2016.

“Home price growth over the next two years annually will be about 4 percent,” Yun said. “That’s pretty much in line with historical growth in home values.

Predicting the average condition is not predicting anything, but it provides cover when he is “unexpectedly” wrong.stop_realtor_bullshit

“I do not want to see 10 percent home price increases.”

Does anyone believe he means that?

“Some markets are moving wildly,” Yun said. “It’s almost impossible to buy a home in San Francisco unless you have stock options from Google or Facebook.

A sad truth caused by the lack of new construction creating a chronic shortage of housing.

“Some cities are in a better position than others,” Yun said. “These will be areas where you will see a burst of young people buying homes when the credit box opens up.”

Wishful thinking.home_price_appreciation_fairy

“I firmly believe that the banks are going to have to start making more loans,” said Arkansas real estate agent Chris Polychron, who is the new president of the Realtors association. “They say they are, and I’m going to take them at their word.

More wishful thinking.

“There is widespread concern that today’s credit market has swung from the excess lending of the past to the opposite extreme,” Melvin L. Watt, director Federal Housing Finance Agency, told the Realtors. “No one wants to return to the excess and abuses of the past.

realtors, homebuilders, and mortgage brokers would be delighted to return to the excess and abuses of the past — they made a lot of money back in the day.

“But the message we have tried to send is that we need to find a way back to responsible lending to creditworthy borrowers across all market segments,” said Watt, whose agency oversees mortgage giants Fannie Mae and Freddie Mac.

We have returned to responsible lending to creditworthy borrowers. That’s why lending is prudently tight right now.loan_application

“… lenders have to be in business to do something,” Watt said. “Making money requires them to make loans.“I think over time we are going to get back to a new normal.”

Today’s market conditions are the new normal, a market characterized by the following:

  • Low mortgage rates
  • Low MLS supply
  • Low owner-occupant demand
  • Home prices expensive by affordable

Unfortunately, this new normal is a recipe for low sales volumes, which isn’t what realtors, homebuilders, and lenders want to see. Stories like this one give everyone hope that 2015 will be a better year, and I hope it is too, but anyone who takes a realistic view sees reason to expect disappointment.

[listing mls=”PW14238046″]