The restricted inventory condition we are dealing with here in the Southwest has caused prices to go up. However, for buying to keep pushing prices higher, interest rates must keep falling to sustain affordability at higher price levels. In a market like ours where demand is less than robust (most increased demand this year came from all-cash investors and hedge funds), any decrease in affordability is going to hurt sales. At first it will show up in decreased sales volumes. If affordability continues to crumble, prices will begin falling again.
Housing Affordability Begins to Slide
Published: Tuesday, 11 Dec 2012 | 12:21 PM ET
By: Diana Olick — CNBC Real Estate Reporter
It is a double edged sword, no doubt. Rising home prices are necessary for the overall housing market to recover and for more borrowers to get back above water on their mortgages. Rising home prices, however, cut into the historic affordability that was bringing more buyers back to the market in the first place.
After rising steadily since 2006 (with a slight blip from the home buyer tax credit in 2010), housing affordability is now dropping on an index from the National Association of Realtors. Asking prices for homes also began rising faster than rents for the first time in November, according to Trulia.
“The era of increasing homeownership affordability in big cities is ending,” researchers from Trulia wrote in a recent report. While the price recovery is choppy market-to-market, strong rental markets like Denver, Seattle and San Francisco are seeing home prices leap ahead of rents.
Rising prices can be offset by falling interest rates, but once those start going back up, either affordability will plummet or appreciation will slow or perhaps reverse.
Some pundits believe the housing market will sustain itself despite rising prices and falling affordability. Evidence from mortgage originations says otherwise.
Rising Mortgage Rates Spook Housing
Published: Wednesday, 19 Dec 2012 | 11:21 AM ET
Even with mortgage rates hovering near record lows, it doesn’t take much to send borrowers running for the hills.
A slight move up from 3.47 percent on the 30-year fixed to 3.50 percent, caused mortgage refinance applications to plummet 14 percent from the previous week, according to the Mortgage Bankers Association.
“Despite the Federal Reserve’s announcement last week that it would purchase an additional $45 billion in Treasury securities per month as part of its continuing quantitative easing effort, rates increased in the second half of the week,” said Mike Fratantoni, MBA’s Vice President of Research and Economics.
The Law of Diminishing Returns is setting in. Each round of quantitative easing is having less and less effect on the economy and on mortgage interest rates specifically.
“As a result, refinance applications dropped sharply to the lowest level in over a month.”
Applications to buy a home also dropped 5 percent week-to-week, indicating a still weak and rate-sensitive purchase market.
This is the most telling indicator of the health of the housing market. Demand from owner-occupants still has not broken out of its tight range at 1990s levels.
“A lot of money has been spent between OT [Operation Twist] and QE3 for very little incremental reward,” notes Peter Boockvar of Miller Tabak. “The true cost, yet to be determined, will of course occur when the likely market forced exit begins.”
The federal reserve is printing money to prop up nominal house prices. In the end, they may succeed, but in doing so, they will create a great deal of inflation. The result will be lower house prices on an inflation-adjusted basis, but few seem to care about that. Taxpayers aren’t the ones picking up the tab for inflation. Savers are.
They finished with a bang
The former owners of today’s featured property were Ponzis, but they at least attempted to keep their borrowing in check — at least until the end when they took out an Option ARM with a 1% teaser rate and extracted all their equity.
- This house was purchased for $275,000 on 12/2/1998. The owners used a $235,000 first mortgage and a $40,000 down payment.
- On 3/13/2002 they refinanced with a $287,000 first mortgage.
- On 11/13/2002 they refinanced with a $304,000 first mortgage.
- On 1/23/2004 they refinanced with a $378,750 first mortgage.
- On 4/11/2005 they refinanced with a $608,000 Option ARM and added a $76,000 stand-alone second.
- Total property debt was $684,000, and total mortgage equity withdrawal was $449,000.
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Proprietary OC Housing News home purchase analysis
21692 CABROSA Mission Viejo, CA 92691
$645,750 …….. Asking Price
$275,000 ………. Purchase Price
12/2/1998 ………. Purchase Date
$370,750 ………. Gross Gain (Loss)
($51,660) ………… Commissions and Costs at 8%
============================================
$319,090 ………. Net Gain (Loss)
============================================
134.8% ………. Gross Percent Change
116.0% ………. Net Percent Change
6.0% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$645,750 …….. Asking Price
$129,150 ………… 20% Down Conventional
3.40% …………. Mortgage Interest Rate
30 ……………… Number of Years
$516,600 …….. Mortgage
$118,108 ………. Income Requirement
$2,291 ………… Monthly Mortgage Payment
$560 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$161 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$39 ………… Homeowners Association Fees
============================================
$3,051 ………. Monthly Cash Outlays
($354) ………. Tax Savings
($827) ………. Equity Hidden in Payment
$136 ………….. Lost Income to Down Payment
$101 ………….. Maintenance and Replacement Reserves
============================================
$2,107 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,958 ………… Furnishing and Move In at 1% + $1,500
$7,958 ………… Closing Costs at 1% + $1,500
$5,166 ………… Interest Points
$129,150 ………… Down Payment
============================================
$150,231 ………. Total Cash Costs
$32,200 ………. Emergency Cash Reserves
============================================
$182,431 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
21 Responses to “Higher prices and rising interest rates will slow housing market appreciation”
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I’ve just given up trying to predict this market. I have been consistently wrong, because you can’t predict government intervention. I just keeping my eye on few important areas in 2013.
New FHFA person
FHA changes
Caps on deduction
QE effectiveness (or lack there of)
I really thought 2012 was going another leg down, but it didn’t happen. I also though mortgage rates would increase, but the market intervention keeps getting bigger and bigger.
There seems to be no limit to what the government or the federal reserve will do to force house prices to move higher. As bank losses keep mounting, so does the pressure to reflate the bubble to bail them out.
Galante Gains Support After Committing to FHA Reforms
Weeks after HUD Secretary Shaun Donovan defended her performance in front of a Senate banking committee Federal Housing Administration (FHA) Acting Commissioner Carol Galante may have earned a new ally on Capitol Hill.
Senator Bob Corker (R-Tennessee) announced he “feels comfortable supporting [Galante’s] bid to become FHA commissioner after receiving a letter detailing her commitment to reforming FHA’s underwriting requirements and restoring its Mutual Mortgage Insurance (MMI) Fund to health.
Both Donovan and Galante have been answering criticism in the wake of the revelation that FHA may be headed toward its first-ever taxpayer bailout. Many critics have pointed to FHA’s underwriting standards as an example of the agency’s unsustainable model, and one even accused FHA of engaging in “abusive practices.”
Galante’s letter to Corker outlines a number of steps designed to strengthen the quality of FHA’s new business, including increasing underwriting criteria for borrowers with lower FICO scores, increasing the down payment requirement and insurance pricing for high-balance loans, and beefing up underwriting requirements for borrowers who have been foreclosed on within the last seven years.
In addition, Galante plans to place a moratorium on the full drawdown reverse mortgage program while the agency examines the program’s viability. According to an actuarial report of FHA’s finances for fiscal year 2012, $2.8 billion of the agency’s currently projected $16.3 billion deficit can be traced to its reverse mortgage program.
In her letter to Corker, Galante offers her word that these reforms will be acted on by January 31 of next year.
“I’ve been working closely with Secretary Donovan and Acting Commissioner Galante over the past few weeks on ways we can put FHA on sound financial footing. While this is only a first step, I am encouraged that Acting Commissioner Galante has committed to structural reforms that we both believe put FHA in a much stronger position,” Corker said.
He added that “[g]iven the reforms she is committed to, I believe that having an accountable commissioner with her resolve and expertise will be in the best interest of the taxpayer.”
It sounds like $400K plus loans will be charged with higher insurance premiums and larger down payment requirements. This will put a little more pressure in the Orange County markets. Lenders will need to find away to restrict even more inventory from coming on the market area like Irvine.
If the tax break on forgiven debt is not extended, lenders won’t have to do anything to restrict inventory as all the short sale listings will disappear.
You are right. I didn’t even think of that. If the deductions are capped and the Mortgage forgiveness Debt is not extended.
I bet you will have some 5 year squatters.
The people who don’t get approved for loan modifications will simply wait until the foreclosure. The have no incentive to complete a short sale if they know they will face a giant tax bill. They will still ultimately get the tax bill from a foreclosure, but most will hope to hide from the bank and the tax man afterward thinking they can avoid the tax liability.
My prediction (i.e. guess) when I bought, was that if the residential real estate market began to fall, our government would do nearly anything to stop the decline. It took a lot longer than I thought, but over the last few years they’ve done this. Although they still haven’t used the nuclear weapon – widescale no-strings-attached principal reduction!
At this point, I imagine widespread principal reduction would upset you. When you were underwater, it would have been a great benefit, but now that you paid down your loan and refinanced, you would be one of the people paying the bill who get no benefit at all.
That was my last Saturday’s post. This weekend I’m listing all the bailout acts. There are a lot.
Hmmm, is something going on behind the curtain? ….. gold selling off with conviction this week + long-bond rates moving up.
Oh man….. if a ‘tightening’ of some kind is in the works, the weak dollar, print infinitas herd (and it’s a big one) is headed for a good cattle-prodding.
Stay tuned
Prices move higher on low volume
The largest counties in the country displayed strong home price growth in November, but sales were weak, according DataQuick’s most recent Property Intelligence Report (PIR).
The company’s PIR tracks valuation, REO inventory, and sales trends in the 42 largest counties on a monthly, quarterly, and yearly basis.
Among the findings, DataQuick reported prices grew in 41 of the 42 counties month-over-month in November, and all 42 counties showed quarterly and yearly home price growth.
Adding to the positive trend was the decline in foreclosures for 24 of the 42 counties from October. Quarter-over-quarter, foreclosures fell in 20 of the 42 counties, and compared to last year, foreclosures were down in 29 counties.
Sales were dismal for the most part, with sales increasing in only 13 of the 42 reported counties month-over-month. On a quarterly basis, sales were up in just 7 counties. Over the last year, sales improved in 25 of the 42 counties.
“While there is evidence that a recovery in housing is underway nationally, the strength of the housing market varies across the country,” said Gordon Crawford, VP of analytics for DataQuick. “In comparison to prior reports, we see that home price growth and foreclosure performance improved, while sales performance worsened.”
Crawford also warned of factors that could contribute to home price declines. Those factors include the potential fiscal cliff effects, decreases in federal spending, as well as the impact of shadow inventory and negative equity.
“One area of continuing concern is Florida’s Gulf Coast housing market,” Crawford explained. “While recent home price growth has been positive, the substantial increase in foreclosure rates threatens future home price growth as foreclosed properties hit the market.”
Have rents finally hit an affordability ceiling?
Home values still rose into November, marking more than a year of monthly price gains, while national rents fell flat, according to data from Zillow.
On a monthly basis, home values inched up by 0.6 percent from October, with the Zillow Home Value Index at $156,200 for November. For 13 straight months now, prices have displayed monthly gains. Compared to November 2011, home values have increased by 5.2 percent, which is the biggest yearly gain since August 2006.
Zillow also tracked home values for the nation’s 30 largest metros and found 25 saw price gains.
Sacramento led with a 1.8 percent monthly gain, and was followed by Detroit (1.5 percent). Las Vegas, San Francisco, Riverside, and Phoenix all tied with 1.4 percent increases.
Twenty-six of the 30 metros registered yearly gains. Not surprisingly, Phoenix led with a 23.2 percent increase. The metro was followed by San Jose (+13.4 percent), San Francisco (+12.1 percent), Las Vegas (+11 percent), and Denver (+10.8 percent).
The four metros to see yearly decreases were Chicago (-1.4 percent), Atlanta (-1.4 percent), Philadelphia (-0.4 percent), and New York (-0.3 percent).
Dr. Stan Humphries, Zillow’s chief economist, says he expects to see the housing market recovery continue into 2013.
“Tight inventory, courtesy of negative equity, is running headlong into high demand driven by historic affordability and renewed consumer and investor interest. This is helping home values rise in a majority of metro areas nationwide,” he explained.
As home values rose, national rents averaged a slight 0.1 percent month-over-month drop, falling to a value of $1,278 in November, according to the Zillow Rent Index. Over a one-year period, rents still increased by 4.5 percent.
Among the 30 largest metros surveyed, 21 saw rent values decline month-over-month, with the biggest decline seen in Portland (-0.7 percent), according to Zillow.
Capital flows provide the answers many seek…..
Apple Is Bringing Billions Of Dollars And Thousands Of Jobs Into….
Apple plans to start making Macs in the US in 2013/invest $287 million expanding its Austin office by another million square feet. Apple will fill the space with thousands of workers, bringing its headcount in Texas from 3,600 now to 7,100
Meanwhile, Samsung finalized a deal with the government of Texas to spend $3.9 billion expanding its microchip factory in Austin.
http://www.businessinsider.com/the-iphone-is-bringing-billions-of-dollars-and-thousands-of-jobs-into-texas-2012-12
I haven’t seen many news reports about bringing jobs to California. Perhaps our hostile business environment has something to do with that?
but, but, but….recovery
KB Home reports decline in earnings as orders slow
The stock dropped 5% to $15.82 as of 12:27 p.m. in New York. Earlier today, it fell as much as 7.3%, the biggest decline in intraday trading since June 11. The 11-member Standard & Poor’s homebuilder index gained 0.2%.
KB Home’s “order trends were disappointing,” Vincent Foley, a credit analyst with Barclays Plc, wrote in a note to investors today.
Oil Can says:Do we get a Fed implosion next year? Or QE 5, this time it’s personal!
E-man say:
What’s your relation to OCHN? Everytime he posts a topic, you post your one liner.
I remember the days of the Orange County Register, that’s before it went facebook…lol
I’m weekend guy. I would like to hang out there too, but not enough time. Here I’m known as Mike. Here’s my last post, it’s gets posted on the Patrick.net.
The final bailout of the underwater homeowners will be from the Federal Reserve
I had a old blog called North Orange County Real Estate Blog, but I had like 5 readers. Tough business to get into.
I’ll have a post tomorrow assuming no Mayan Apocalypse.
I would read your blog when ever it showed up on OCR , I was Commonsense …..Never figured out where Dumbtexan went trolling though
Hey I remember you.
The guy who was writing the posts was Larry (Irvine Renter) on the OCR. He’s the owner of this site.
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