Mar242014

Spring house price rally called off due to affordability problems

The spring house price rally of 2014 shows signs of weakness because buyers can’t afford higher house prices at higher interest rates.

Yellen_fed_reflationMost housing analysts predicted a robust spring rally with increasing home sales and increasing prices. In the post Bold California housing market predictions for 2014, I outlined my reasoning for why it would not come to pass. The new mortgage regulations change how real estate markets work, and real estate analysts, realtors, and financial reporters failed to grasp the implications of the new changes.

When house prices go up absent an increase in wages, affordability declines. In simpler terms, if potential buyers don’t make more money, but prices go up anyway, fewer buyers can afford to buy, and those that do must substitute down to lower quality housing. This phenomenon prices out marginal buyers, and it removes the motivation to buy from others because they don’t want to accept lower quality homes. This reduces demand, which is what we are seeing today.

The reason housing analysts missed this fact is because housing markets didn’t work that way in the past. Buyers prefer stable 30-year fixed-rate financing, but when affordability becomes a problem, they substitute to less desirable adjustable-rate mortgages to close the deal. The substitution to less desirable and less stable financing options lead to previous housing bubbles and busts. The Dodd-Frank law effectively removed these unstable loan products from the market and prevented a recurrence of the previous boom and bust cycles (at least so far).

With buyers unable to use toxic financing options because lenders won’t offer them due to the new restrictions, the barrier of affordability becomes much more rigid, and future housing markets will be very interest rate sensitive. Whereas in the past, at this point in the cycle, we would see an explosion of adjustable-rate mortgages with increasingly unstable terms, so far in this new Dodd-Frank era, the cycle is broken — and that’s a good thing; in fact, that was the whole point of Dodd-Frank’s housing regulations.

U.S. Housing Recovery Hits Hurdles

Rising Mortgage Rates, High Prices Constrain Buyers

By Jonathan House, Updated March 20, 2014 12:34 p.m. ETqualifed

WASHINGTON—A broad measure of home sales fell again in February, the latest sign of … worsening affordability undermining the housing recovery.

Sales of previously owned homes fell 0.4% in February from January to a seasonally adjusted annual rate of 4.6 million, the National Association of Realtors said Thursday. That matched a forecast by economists surveyed by Dow Jones Newswires and was the sixth decline in sales in the past seven months.

“Existing-home sales remain in a rut,” said BNP Paribas economist Laura Rosner.

Sales will increase over the next few months per its usually seasonal pattern, but when sales volumes are compared to last year, or compared to historic norms, they will be down, perhaps quite significantly.impact

The financial media will treat us to complaints from realtors about tight credit — which is really a complaint about the ban on affordability products — and we’ll hear complaints from lenders about excessive mortgage regulations — which is also a complaint about the ban on affordability products. Both realtors and lenders will lobby to relax the Dodd-Frank standards in willful ignorance to the good these regulations are doing by preventing another housing bubble.

The National Association of Realtors said the median home price in February was $189,000, up 9.1% from a year earlier, in part because supply constraints are driving up prices.

The supply constraint was caused entirely by lenders changing policies from foreclosure to can-kicking loan modifications. The other side of the equation, demand, was boosted by record low interest rates, which have since begun rising, and should continue to go up.

New guidance from the Federal Reserve on Wednesday could put further upward pressure on mortgage rates in the coming weeks.

Though the Fed’s official policy statement affirmed its plan to keep rates below their longer-run trend for the foreseeable future, the projections of individual officials did point to a slightly more aggressive path for interest-rate increases in 2015 and 2016.

None of the headwinds facing housing are going to change: the regulations preventing the proliferation of unstable mortgage products will remain; the economy will remain weak and income growth tepid; and the federal reserve will continue removing stimulus from the economy, driving up interest rates.

housing_market_forecast

Home Sales Usually Pick Up in Spring, but This Year May Disappoint

By Conor Dougherty, March 20, 2014stifle

The spring home-selling season really begins to ramp up in March, but there are signals that demand this year might fizzle.

February’s drop in existing-home sales was one ominous sign, especially since traffic reports — which are a proxy for home sales 30 to 60 days out — show a slump in buyer interest.

The spring selling season is off to a weaker start than people in the industry had been expecting or hoping for,” saidTom Lawler, founder of Lawler Economic & Housing Consulting LLC. …

“Hoping for” is the more accurate description. Other than hope for increased employment, what reason did anyone have to believe spring home sales would be strong? Higher prices and higher interest rates work against the market, not for it.

One reason for the slump in existing home sales is that fewer investors are buying. But the same forces that are pushing away investors — higher prices, less to buy — have also soured some regular homebuyers.

(See: Institutional home buying abruptly tapers off)surpassing_expectations

A February survey of buyer traffic from Credit Suisse showed a marked drop from January, with declines in 42 of the 50 markets it tracks. Unlike data from real estate agent groups, which measure closings, the Credit Suisse data give a sense of where demand will be 30 to 60 days down the line — the heart of the spring selling season.

A broad decline signals trouble in the market. While it’s possible weather may have kept some potential home shoppers from searching, it’s more likely that inability to buy due to bad credit, excessive debt, insufficient savings, and low income caused many potential buyers to stop looking.

The problem is that now that housing is getting closer to normal, the onus of the recovery has shifted to the normal issues such as job and income growth. Job growth was relatively steady in 2013, but has slowed down in the past few months.

Income growth has also been weak, and with rents continuing to rise, many potential homebuyers — particularly first-time home buyers — are having a harder time saving up a down payment.

In other words, the fundamentals of housing stink. The bank’s restricted inventory policies and the activity of institutional investors sparked a rally from 2012 through mid-2013. Christopher Whalen says, the “‘recovery’ in the housing sector is probably over”. He may be right.

raise_your_hand

[dfads params=’groups=3&limit=1&orderby=random’]

[listing mls=”OC14057830″]