Jan262015

Six factors that could weaken housing in 2015

Several factors could weaken the market, but the forced repatriation of foreign investment has the potential to really flatten house prices.

Janet-Yellen-BubbleWith mortgage interest rates dropping below 4%, and with an improving economy, the housing market starts 2015 with a small boost as compared to the dismal beginning of 2014. Hopefully, this year the pundits won’t feed us bullshit about the weather.

This year may show improvement in housing sales and prices over 2014 if the economy continues to create new jobs and if wages begin to rise. However, a number of factors could weaken housing in 2015 and turn the hopeful start into yet another disastrous year of steady disappointment and endless pundit excuses.

What could derail the housing market in 2015

Diana Olick, January 23, 2015

The housing recovery began losing steam toward the end of 2014. Rising home prices and tight credit combined to sideline potential buyers, especially those considering an investment in their first home. While hopes are high for 2015’s spring market, there are several headwinds that could derail some of that optimism.

First and foremost is credit. While some claim credit is loosening, it is still far tougher to get a loan today than it was even before the heady days of the housing boom. Borrowers need higher credit scores, less overall debt, and full documentation of finances; …

credit-crunchIn other words, lenders prudently and intelligently evaluate the borrowers capacity to repay before loaning the money. Unlike past real estate cycles, the pressure to expand business by loosening standards isn’t pushing the envelope like it used to, and that’s a good thing.

Tight credit

“I believe that we are slowly moving toward more of a middle road when it comes to lending,” said Miller.

The good news in the credit market is that the Federal Housing Administration (FHA), the government insurer of low-down-payment loans, is lowering its annual insurance premiums by half a percentage point, from 1.35 percent of the loan balance to 0.85 percent of it, effective January 26. That will make it easier for borrowers with less cash to purchase a home. …

(See: Lowering FHA insurance fees will spur the housing market)

Fannie Mae and Freddie Mac are also now offering a 3 percent down payment loan, but there are strict criteria for those borrowers: The borrower must be an owner-occupant of the home so it cannot be used for a rental home. The borrower must have a minimum FICO score of 680 and must carry mortgage insurance. The loan must be fixed-rate, no adjustables (ARMs), and the loan value cannot exceed $417,000. The borrower must also have debt-related costs of no more than 45 percent of his/her monthly income. …

coastal_california(See: 3% down mortgage announcement more sizzle than meat)

Don’t those standards sound completely reasonable? I think they do.

Pricey markets

While the price gains are easing, affordability joins credit as one of the top headwinds for housing in 2015. Home prices were rising in the double digits in 2013, thanks to investor activity on the low end of the market. Even in markets where there was not a lot of investor activity, prices soared. …

Price gains are easing because there are fewer distressed properties, and therefore investors are slowing their purchases at the low end of the market. All-cash sales, which are largely by investors in single-family homes, dropped to 35.5 percent of October home sales, down from a peak of 46.4 percent but above norm of 25 percent, according to CoreLogic, an analytics company.

A lack of affordability and affordability products is directly responsible for the slowdown in sales in 2014. Sales picked up again late in the year because mortgage rates fell. Right now, despite high prices, affordability is reasonable as compared to historic norms.

OCHN_OC_Housing_Market_Report_2015-1

Low inventory

Large-scale institutional investors do not seem to be selling their properties, especially since they’ve spent vast capital creating management infrastructures for the rental market. That should keep prices stable, but it does not help the inventory situation.

The supply of homes for sale is currently very low, just a five-month supply in December 2014, according to the National Association of Realtors (NAR), given the pent-up demand from younger buyers, who have been all but absent from the recovery.

Whenever and wherever the words “pent-up demand” are printed, the speaker is spouting nonsense and desperately trying to put positive spin on a bad situation. First-time homebuyers have not participated in the so-called recovery, and it isn’t a sign of pent-up demand, it’s a sign of missing demand that is not going to return.bubble-money

That is also holding back more robust sales now and potentially in the historically strong spring market. Rising home prices have given homeowners more equity and brought millions up from underwater on their mortgages, but that doesn’t necessarily mean they have enough equity to afford a move up.

No, most of that money went back to the bank. If we had foreclosed on all the delinquent mortgage squatters, pushed prices down to reasonable levels, and purged all the debt, the recovery would be real, and the new homeowners would all have equity. This in turn would stimulate the move-up market and give us a real recovery. Unfortunately, that isn’t what happened.Unemployed-Man-Poster

Sagging income

Younger buyers are also still cash-strapped, thanks to still weak employment in their age cohort.

A slow jobs recovery for Millennials has held back household formation for them, and it will slow down home ownership in the future,” said Jed Kolko, chief economist at Trulia, a real estate sales and analytics company. “It takes a few years from when someone gets a job to when they’re ready to buy a home.”

First-time buyers made up barely one-third of December home buyers, according to NAR. They are historically closer to 40 percent of the buying market.

(See: First-time homebuyer participation hits three-decade low)

Incomes have not kept pace with rising home prices, and rents are soaring to record highs. Rents rose more than 4.5 percent in 2014, according to Axiometrics. Continued high demand and limited supply will keep rents from falling in 2015, although their gains are slowing down.

That means that while renters may want to buy a home, they are precluded from saving for a down payment on that home.

(See: How restricted for-sale housing inventory saps demand)huge_debt

Again, low mortgage rates certainly help and low gasoline prices add to consumer savings, but until wages rise more dynamically, buying a home will still be out of reach for some potential buyers, not to mention for those who might be thinking about moving up to a better home.

The foremost factors that could hurt housing in 2015 were not mentioned in the story above: rising mortgage rates, and the reversing flow of foreign money.

Rising mortgage rates

At today’s sub-4% interest rates, borrowers can comfortably leverage over five times their yearly income; however, the 30-year average for interest rates is 8%, and at that interest rate, a borrower can only leverage three times their yearly income. So what happens if those interest rates come back? Higher mortgage interest rates lead to lower sales or lower prices.

Four percent interest rates are not a birthright. In fact, interest rates have only been this low one other time in the last two hundred and twenty-two years.

As is evident in the very long term chart of interest rates above, the interest rate cycle is very long. Alan Greenspan presided over a twenty-five year period of declining interest rates, and much of the increase in value of real estate is attributable to decreasing borrowing costs over that time. Inflation was relatively tame, so Greenspan always had the luxury of lowering interest rates to increase economic activity; Janet Yellen doesn’t have that option.

Yellen_fed_reflationDuring the cycle of rising interest rates, central bankers raise interest rates to combat inflation and protect the value of the currency, but they are always one step behind. When Yellen finally does start raising interest rates, we will be embarking on the next multi-decade rising cycle where inflation is a constant problem, unless you believe the federal reserve will raise rates to cool an improving economy absent inflation, something that’s never happened before.

If interest rates go on a sustained rise, financing home purchases will become more expensive. The real question then is whether or not these rising costs due to rising interest rates are compensated for by rising wages. If wages rise as fast as interest rates do, then borrowers will still be able to finance large sums, and house prices can remain stable or even rise. However, if wages do not rise as interest rates go up, then loan balances will decline, and house prices will fall again.

Foreign buyers turn sellers

[dfads params=’groups=4&limit=1&orderby=random’]I recently reported that Wealthy Russians dump high-end US real estate. If there is any issue that has real potential to drive real estate prices down, it’s the possibility of foreign buyers, particularly the Chinese, reversing the flow of money by liquidating their US holdings to cover financial obligations back home.

Cash buyers are typically the most stable homeowners because they can never be compelled to sell at auction because they failed to pay the mortgage. However, that doesn’t mean cash buyers may not need to sell for other reasons, and if the Chinese government demands repatriation of the money that technically left the country illegally (they knew it was going on but ignored it), that one policy change could flatten the Coastal California housing market.

Think about that: the Coastal California housing market could be radically altered by decisions made by Chinese government officials.

A policy change like that wouldn’t be a minor headwind, it would be a hurricane force blast that would flatten house prices here — and don’t think for a moment that the Chinese government would be patient with sellers who want to get top dollar. If they say “bring the money home (or else)”, those houses would flood the market, prices would crater, and nobody in our government or the banking cartel could do anything about it.

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