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.
With 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; …
In 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. …
(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.
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.
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.
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)
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.
During 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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Mellow Ruse says:
June 28, 2013 at 12:43 pm
“el numeraire is toast.
Gold is a bubble. The selloff is not recent. It has been going on for two years. What has changed is that we’ve entered the acceleration phase of the decline.
My prediction: Gold will bottom at $500 and stay there.”
Price of gold in Euros on June 28, 2013 was 949.00
Price of gold in Euros today is 1138.00
Gold has appreciated 20% since Mellow Ruse said, “we’ve entered the acceleration phase of the decline.”
2015 bear rally in gold:
Are you sure that 2011 rise does not look more like the 1974 rise than the 1980? Why do you think it is a bear rally and not a wave 2 or 4 retrace?
Because the biggest issues facing the world’s central banks is deflation not inflation, and there is no crisis shaking the faith in fiat currencies. From what I’ve observed, gold either needs a currency crisis or fears of rapid inflation to prompt buying, and we have neither of those right now, and I don’t see either circumstance materializing any time soon. The super low bond yields around the globe tell me that investors are piling into currency-backed assets even if they have little or no current yield.
The bear rally of 1982 was caused by foolish optimism as people piled back into gold simply because it went up so much in the late 1970s. They were treated to a 60%+ loss before gold finally bottomed 18 years later. Bear rallies after the collapse of a bubble are a common occurrence as it takes time for everyone to accept the previous rally was a bubble and dismiss the foolish notions that accompanied the rally.
That being said, I could easily be wrong, and since I don’t have a dog in this hunt, I wouldn’t put much weight to my opinion one way or another.
According to Mish, “…gold has historically done well in deflation…”
http://globaleconomicanalysis.blogspot.ca/2015/01/is-faith-in-central-bankers-ending.html
The Dollar will be the last currency to crumble. Gold will have its day. Gold is a hedge against govt.
Astute²
yes
Can HAMP Borrowers Absorb Higher Payments When Mods Reset?
The answer is obviously no
Approximately half a million homeowners who received a mortgage loan modification in 2010 through the government’s Home Affordable Modification Program, commonly known as HAMP, are due to reset in 2015 – and those homeowners will be facing slowly increasing monthly mortgage payments.
Will these homeowners be able to handle the payment increases, or will there be a massive wave of re-defaults?
The U.S Department of Treasury and Department of Housing and Urban Development (HUD) launched HAMP in 2009 as part of its Making Home Affordable initiative to provide relief for homeowners facing financial hardship by reducing monthly payments to affordable levels through lowered interest rates and modified loan terms. The goal of the modifications was to reduce monthly payments to about 31 percent of the homeowner’s income. According to Mark McArdle, Chief Homeownership Preservation Officer at Treasury, HAMP has saved distressed homeowners an average of about $547 per month (about 39 percent) on mortgage payments by lowering their interest rate in many cases to 2 percent.
There are some who are not sold on the effectiveness of HAMP. One of those is Bankrate.com Chief Financial Analyst Greg McBride, who said in 2009 that homeowners receiving a modification through HAMP were simply “kicking the can down the road” and now that we are in 2015, “we’re at the end of the road” because of all the HAMP mods due to reset this year. Furthermore, he said he thinks many homeowners will be “shocked” to find out that “permanent didn’t really mean permanent” and instead meant five years.
“What happens is that payment starts to normalize – that 2 percent increases by 1 percentage point per year,” McBride said. “So what’s going to happen is these homeowners are going to see their mortgage payments go up this year, next year, and in many cases, the year after that. That’s where the potential problem is. Household incomes have been stagnant and many homeowners don’t have the additional room in their budget to absorb higher payments. Even if they can absorb the first payment increase, the cumulative increase of payments in subsequent years could prove problematic.”
[At least I’m not the only one asking these hard questions and pointing out the obvious problems.]
you forgot the cupe de gras…There end of employment as we know it in America. Check out this report by Accenture :
Accenture Report: The Rise of the Extended Workforce What is the difference between a “contingent” workforce and an “extended” workforce. Why the extended workforce is rising in corporate America and why this will accelerate in the near future. Why the extended workforce will destroy America’s middle class and their sense of job security, financial security and financial freedom much faster than you can image.
http://www.accenture.com/us-en/Pages/insight-future-of-hr-rise-extended-workforce.aspx
None of whom will be able to qualify for a home loan based on the source and instability of their income. If this becomes the norm in employment over the next couple of decades, the era of home ownership has passed.
It definitely has passed. But how long will the powers at be keep the music going? I’m happier renting with money in the bank to pursue my passions and take risks on new ventures.
Please share that episode “Ep 193: Should I Buy a Home?” I sent you with James Altucher.
Ep 193: Should I Buy a Home? (audio)
your faith in the jobs numbers is short sighted reflecting the economy. Contingent and expanded employment are counted as “jobs”.
Leading Economic Indicators Advance for Fourth Month in a Row
A measure of leading U.S. economic indicators rose again in December, advancing for a fourth straight month as most components improved.
The Conference Board’s Leading Economic Index (LEI), which gauges the near-term economic outlook based on a variety of indicators, increased 0.5 percent in December to 121.1, the group reported Friday. The increase fell between November’s gain of 0.4 percent and October’s larger 0.6 percent improvement.
Conference Board economist Ataman Ozyildirim said December’s gain was driven by growth in a majority of its components, “suggesting the short-term outlook is getting brighter and the economy continues to build momentum.”
Home Prices Flatten in November
National home prices remained largely unchanged in the fall, according to the latest FNC Residential Price Index report, released Thursday.
After 30 months of growth in the national housing market, prices dropped off in October and stayed virtually the same in November.
FNC attributes the stagnation to weak housing activity, including droopy sales of existing homes despite the fact that 30-year mortgage rates are down by more than a half percentage point from a year ago.
And while average prices did not get worse in November, the report stated that annual home price appreciation was down to 5.2 percent in November compared to 7.9 percent in June.
While the national market leveled in the fall, some metros saw good gains, and others saw notable drops in home prices. Nashville and Miami saw home prices rise 3.3 percent and 2.5 percent, respectively. Los Angeles saw a 1.9 percent rise.
At the other end of the spectrum, Washington D.C., saw a 3.1 percent drop in home prices. Prices in Minneapolis and Chicago each dropped more than 2 percent, and prices weakened in New York, San Francisco, and Portland, Oregon, as well.
Senior House Republican says housing finance reform ‘huge priority’
(Reuters) – A top U.S. Republican lawmaker will revisit a plan to reduce government involvement in the country’s housing finance system, and expects Senate colleagues to be receptive to potential changes, according to an interview aired on C-SPAN on Sunday.
Congressman Jeb Hensarling, who chairs the House Committee on Financial Services, said shepherding legislation to remove a government backstop for Fannie Mae and Freddie Mac would be a “huge priority,” adding that he is willing to compromise to get a bill passed.
“We’ve got to get off that boom-bust-bailout cycle, and I fear that under government control, we are once again repeating the same mistakes of the past,” he said.
Many analysts have put the chances of significant housing finance reform being enacted as low, after a bipartisan group of Senators were unable last year to bridge deep divisions on the issue. But Hensarling said he was optimistic after Republicans gained control of the Senate in the 2014 elections.
“I have strong beliefs about where public policy ought to go but I always stand ready to compromise…I ask myself, does this bill take a step in the right direction?” Hensarling said.
Warren to be top Democrat on Senate panel on economic policy
WASHINGTON (MarketWatch) — Sen. Elizabeth Warren will have a new leadership role that will give her oversight of federal regulators she often likes to chide — notably the Federal Reserve.
Warren, a Democrat from Massachusetts, will be the ranking member for the Senate Banking Committee’s Subcommittee on Economic Policy, which has oversight of the Federal Reserve and the Office of Financial Research, which was created under the Dodd-Frank and offers analysis of the financial system.
Warren has frequently criticized regulators for what she sees as their leniency toward banks. She led an ultimately unsuccessful fight earlier this year against a partial rollback of the Dodd-Frank law.
The subcommittee also has oversight of the Financial Stability Oversight Council, which was created under the Dodd-Frank law and works to identify risk in the financial system and can deem non-bank institutions as systemically important and subject to more regulation.
Don’t Let Oil Distract You From This Potentially Epic Real Estate Collapse
Will this be the biggest bubble burst in history?
Based on estimates from economists, as reported by The Wall Street Journal in June, China nets anywhere from 16% to 25% of its GDP from real estate investments and real-estate-related services, such as construction.
By comparison, the National Association of Home Builders in the U.S. estimates that residential investment contributes about 5% to U.S. GDP, while housing services add another 12% to 13%. Altogether, housing and related services comprise 17%-18% of U.S. GDP. I’m sure the memory of the U.S. housing collapse is still fresh in many Americans’ minds, and it’s possible that China’s could be even bigger.
A study conducted this past summer by the Survey and Research Center for China Household Finance discovered that the vacancy rate of homes in urban areas of China had hit 22.4%, or 49 million homes. Furthermore, an additional 3.5 million homes still sit on the market unsold on top of these 49 million empty homes. A survey that piggybacked on this data by China’s Southwestern University of Finance and Economics noted that outstanding mortgage loans on these properties reached close to $675 billion as of Aug. 2013 and that a 30% fall in home prices would lead one in nine of these properties to be underwater (i.e., to have a value that’s lower than the amount owed).
So long as investments in real estate are steady and property prices remain stable or rise, most people have been willing to overlook this risk. However, data from the National Bureau of Statistics of China paints a very different picture. …
Why this matters
You might be wondering why all of this even matters. I’d suggest that a collapse of China’s housing bubble could cripple global growth and affect significantly more countries than a further 50% drop in the price of oil. China is a major exporter and importer of goods, making it arguably the most important economy in the world. A dramatic slowdown in its growth could plunge a number of developed and emerging markets into a recession.
Therefore I’d suggest you focus less on oil these days and more on China’s housing market and what the government plans to do to ensure the entire industry doesn’t collapse under the weight of vacancies and unpaid mortgages.
China’s real estate bubble seems so similar to ours. Everyone seems to understand prices are insane, and the types of “investments” people are making are crazy, but the music just keeps on playing.
I just finished reading “The Big Short.” It provides insight into how the music can play for so long, because everyone’s interests are served by it continuing. The music does stop though. China’s real estate market stopped a year or so ago. The only question remaining is how big will the pop be?
No, China’s real estate bubble is not like ours at all. I remember when traveling in rural/central China, I asked the tour guide what the cost was for this terribly run down house about 15 miles from a relatively small city for China. His answer was the equivalent of $50,000. In Beijing, my host parents’ condo was worth about $250,000 and it wasn’t near the best part of Beijing. This kind of money is unreal for the average person in China, and is truly ONLY for the top 1% (although the top 1% still equals 12 million people).
Thank you Irvine renter for always giving objective real information. You are the only RE website that does not partake in the COOL AIDE addiction !
I would to hear everyones thoughts for Chinese selling off their homes and repatriating that money back to China.
What is the liklihood this will happen?
What are the reasons for thinking this may happen?
What would be the time line?
How would this affect the housing market?
Do we expect only the high end homes to be affect?
Any and all opinions are appreciated.
This was a recent comment I used in a post:
Chinese hot money is very area dependent like parts of San Gabriel Valley i.e. Temple City, San Marino, Arcadia, San Gabriel, Irvine etc…so these areas will see more price impacts due to the flow of Chinese investment money. Well they past a lot of anti corruption laws and closed down a lot of banking loopholes last year so is not so easy to move money to the states anymore plus prices is already pretty high so there aren’t that many deals. I don’t believe many that already here will sell and send the money back rather the flow of hot money has been reduced by a large percentage which stop any price advance and could cause some declines.
Again the reason why they brought the money is for insurance purposes and maybe future migration not to make a profit though that would be the icing. That is why they will buy over list price sometimes by a large amount. I suspect the homes most affected by this will be the upper to high end homes in good school districts with heavy asian (Chinese) population. I lived in San Gabriel valley for a while and have known several of my co-workers sold their homes to Chinese buyers and make a substantial profit like 2x+.
Just a quick thought on the relation between interest rates and housing prices – in my view, whether this is a problem or not depends on your time horizon. Let’s say interest rates go to 8 and pricing drops by whatever that implies. If interest is at 8%, then surely inflation must be north of 5%. in this scenario my 3% debt looks attractive. In addition, it will only be a matter of time before California experiences another bubble (possibly driven by low rates – tho not as low as the current rates or not), thus providing an opportunity to exit if one so desires.
I also like a bit of gold. Despite having fired the opening salvo in this currency war, should I really think that we will not retaliate on other currencies subsequent devaluations?
In the same way that winning at poker is mostly about knowing when to bet big and when not to rather than luck or skillful card picking, winning in investments whose prices are driven by macro economic factors (rather than unpredictable corporate fiddlery) is mostly about being able to hold until the macro pendulum is swinging in one’s favor.
If Chinese foreign cash buyers want new Irvine homes in the $900K+ range, they have quite a few options available. Most of these developments have move-in ready homes for sale today, months-away homes ready for sale today, and many more phases yet to begin construction.
The main factor that will weaken housing FURTHER in 2015 and beyond….
Speculators who’ve been/still buying based-on opportunities of the past, and are all-in simply because they ‘think they have to be’ are so absorbed in RE dogma that they will wake up one day and find themselves flat-broke. Many will be lucky to be pushing a hot dog cart in 2 years.
Sheep following the leader to slaughter. People that use good judgement with money will always be ok !
What’s wrong with pushing a hot dog cart?
Looks like a lot of risk for a small 3.4 cap rate !
Investors are buying 10-year European bonds with much lower yields than that. It is a lot of risk for the return, but given the alternative investments, people are taking what they can get.