Los Angeles County is becoming a renter’s paradise: Building permits for multi-unit properties in Los Angeles soars to meet renting demand.

People are surprised to hear that Los Angeles County is the most unaffordable location in the entire United States when it comes to renting. Isn’t San Francisco or New York more expensive? Of course they are but affordability is based on income and Los Angeles has a much lower household income base to draw from. Unlike creative mortgage financing, you actually need to pay your rent out of your net income each month. What has happened since the housing bubble popped is that more families in Los Angeles are now renters and rents have soared causing a rental Armageddon in the area. Families are being squeezed in what I would like to call housing purgatory. They have no way of buying an inflated crap shack but at the same time are unable to do anything about rising rents. For those with Taco Tuesday baby boomer parents, many Millennials are opting to move back home. And builders realize this trend is only going to continue and that is why builders are going after multi-unit permits at a much higher rate than single family permits. Los Angeles County is now becoming a renter’s paradise assuming you like cramped living areas, high traffic, and sky high rents. I don’t see permits for new freeways coming online at the rate of multi-unit permits.

The rental revolution continues

First let us back the assertion that Los Angeles renting households spend the largest portion of their income on housing. The figures show a very clear picture:

The majority of renting households in Los Angeles spend at least 50 percent of their income on housing. That is simply insane and gives very little room to saving for retirement or even for a financial emergency. Of course San Francisco has higher rents but again, households make more so this metric is relative. And what is more important to note is that Los Angeles County with 10 million people is a massive micro universe of what is occurring across other areas in the country. The vast majority of those in the county rent. Today with creative financing, low down payment loans, and crap shack inventory out there people have the option of buying. But they are not in large overarching trends. In some places the big demand is from investors, domestic and foreign. We’ve done deep analysis of streets in Culver City and Torrance and what you find is the vast majority of people living in these hoods have no chance of affording their own home today if they had to buy. So the few home sales that go through suddenly set the market. This goes both ways of course.

… people are just not buying in mass because first, inventory is also tight and many local families are broke or can’t compete at these prices. So if you are part of the house humping brigade that crap shack is getting more appealing to you. I was talking with a few colleagues in the industry and they were saying for the last year or so it has become more common for people to wave contingencies like not having the damn place inspected! What if the place is termite invested, or has asbestos, or has major problems with the foundation? These are expensive fixes. But who cares right! Housing only goes up. Builders look at balance sheets and household economics and realize there will be more demand for renters even though the housing cheerleaders want to make it seem like there is a giant amount of people waiting to buy in the wings. The facts don’t show this. So what we have is Los Angeles becoming more and more a renter’s paradise with the most unaffordable rents in the entire country. You wonder why traffic is getting worse? Housing density is only going to get worse.

Majority of Renters Plan to Stand Pat

Rents may be rising and consumers may be feeling the crunch when it comes to their personal finances, but 70 percent of renters still believe that renting is more affordable than owning a home and 55 percent of renters plan to continue renting for at least the next three years, according to a quarterly survey of online renters by Freddie Mac released on Wednesday.

Attitudes toward renting were similar across generations, according to the survey: 70 percent of millennials, 61 percent of generation xers, and nearly three-quarters (73 percent) of baby boomers surveyed said that they believed renting was more affordable than homeownership.

“Renting is becoming a popular choice among many age groups,” said David Brickman, EVP of Freddie Mac Multifamily. “While most renters still have favorable views toward homeownership and aspire to it, many choose to rent because they view it as more affordable and a better fit for their lifestyle right now.”

The perception of renting among millennials was more positive than that of overall respondents: 54 percent of millennials said they believe that renting is a good choice for them now, regardless of whether they can afford to buy later or whether they want to buy later. Overall, 46 percent of respondents said that renting was the best choice for them now.

The most likely future home buyer is the single-family home renter, according to Freddie Mac, with 52 percent of renters in single-family homes (compared to 36 percent of apartment renters) saying they plan to buy a home at some point in the next three years—consistent with the results from Freddie Mac’s October 2015 survey. Millennials ages 25 to 34 were the most likely age group to buy in the next three years, at 56 percent. Nearly half of generation xers (49 percent) said they intend to buy in the next three years, followed by millennials ages 18 to 24 (44 percent) and baby boomers (31 percent).

Affording a down payment was perceived to be the biggest hurdle among those who plan to buy a home in the next three years (36 percent), but credit history was a close second at 35 percent, according to Freddie Mac. Thirty percent of those who plan to buy in the next three years said they do not make enough money, and 23 percent said they had too much debt.

Lifestyle preferences, in addition to financial factors, influenced the decision to rent over buying. Among younger millennials, the most popular reason for renting was the fact that renting allows them to save money (42 percent), while 39 percent of them said renting was the best fit for their lifestyle. For gen-xers and baby boomers, the most popular reason was not having to worry about home maintenance (28 percent for boomers and 41 percent for gen-xers). Almost half of survey respondents whose rent had increased in the last two years said they liked where they live and they plan to continue renting regardless of rent increases, according to Brickman.

The most popular non-financial factor to consider when choosing a place to rent is safety and security (27 percent), according to the survey.

GSEs’ Expenses Are Way Up; Where Did the Money Go?

Fannie Mae and Freddie Mac returned to profitability in 2012, four years after requiring a combined $187.5 billion taxpayer bailout. The year 2012 also marked the beginning of a four-year period in which the GSEs’ expenses increased by a combined $1.1 billion, and a white paper released by the Office of Inspector General of the Federal Housing Finance Agency (FHFA OIG), the Enterprises’ conservator, gives a detailed account of where the extra $1.1 billion went.

The paper is part of an effort by FHFA’s OIG to emphasize transparency in its oversight work “to the fullest reasonable extent to foster accountability to stakeholders,” given the taxpayers’ enormous investment in the GSEs, their critical role in the secondary mortgage market (a 70 percent market share of newly-issued mortgage-backed securities), the unknown duration of the conservatorships, and the uncertain future of Fannie Mae and Freddie Mac to remain profitable. Despite the GSEs’ high leverage, lack of capital, conservatorship status, and uncertain future, they have grown in size under the conservatorship, which is now in its eighth year.

Expenses for Fannie Mae increased by more than 30 percent during the four-year period, from $2.366 billion in 2012 up to $3.092 billion by the end of 2015. The net increase in expenses over the four-year period amounted to $726 million.

The majority of the increase for Fannie Mae went to the implementation of specific FHFA strategic goals and initiatives ($476 million) and implementation of Fannie Mae’s strategic goals and initiatives ($369 million). Consulting services and miscellaneous items such as Enterprise Risk Management, human resources, multifamily expenses, and legal fees accounted for a combined increase of about $60 million.

3-11 FHFA GraphThe FHFA’s strategic goals and initiatives that accounted for much of the increase were pension plan termination ($315 million), Common Securitization Platform (CSP) Integration ($145 million), and reduction of retained portfolio ($16 million). Fannie Mae’s goals and initiatives that resulted in an increase in expenses were critical safety and soundness ($267 million) and other modernization efforts ($102 million).

The factors that led to decreases in expenses for Fannie Mae were Credit and Making Home Affordable ($41 million), Underwriting, Pricing, and Capital Markets ($62 million), and miscellaneous ($76 million), which included extraordinary litigation, customer engagement, communications, and marketing services, maintenance, and corporate expense.

For Freddie Mac, expenses rose from 2012 to 2015 by 24 percent, from $1.561 billion up to $1.937 billion, a net increase of about $376 million.

Trump’s anger can fix housing?

Do you want to know who can really fix housing?

Donald Trump.

Or at least his anger can fix housing.

Dan McSwain of the San Diego Union-Tribune offers the presidential front runner’s raw emotion as a potential solution to the nation’s housing problems.

McSwain offers two supporting points, in his article “Trump-like anger required to fix housing crisis.”

One is exploiting the outrage of renters in California.

Second is Trump’s track record of being a real estate developer.

Most of the article is nothing more than clickbait, but here is the crux for those who are less than inclined to read the article itself:

“To be clear, nothing suggests that Trump could fix California’s housing crisis. We’re not even sure he makes much money, given his reluctance to disclose tax returns. Instead, his power resides in Trumpkinism itself.

For better or worse, Trump has reminded people that, by getting fed up and voting, they really can grab power from the incumbents who ordinarily pull the levers of government.”

Of course, Donald Trump doesn’t actually put any skin in the game when it comes to real estate; instead allowing others to fail while he cashes in on licensing. But maybe it’s his anger that can help, as McSwain opines.

And let’s face it, Californians are pretty angry about the lack of affordable housing.

Homebuyers Quit Making Offers in January. Why?

For more than a year, homebuyers have been playing defense as good houses get harder to find. In places like Denver and Seattle, sellers command top dollar and bidding wars are the norm as house hunters lock horns over a limited supply of homes. In January, though, we saw something new.

Prices rose 7.7 percent last month, according to a Redfin analysis of the nation’s biggest markets. The National Association of Realtors said their measure of January prices showed the biggest annual gain since April. Thanks partly to a lack of supply, the market has posted 47 straight months of year-over-year price increases.

Now there are early signals that high prices and low inventory are taking a toll . A report from S&P/Case-Shiller this week showed monthly price growth slowing at the end of 2015. And Redfin’s Housing Demand Index fell in January compared to a year ago.

No, buyers aren’t losing interest. In fact, the ranks highly engaged buyers have been growing rapidly for 14 straight months. In January, the number of Redfin customers requesting tours rose more than 13 percent compared to a year ago.

The problem? They can’t find anything to buy. As more people toured last month, purchase offers took an abrupt turn, falling 6.4 percent. It was first year-over-year decline since December 2014 and it dragged the Demand Index down with it.

U.S. housing starts rebound as single-family projects soar

U.S. housing starts rebounded more than expected in February, hitting their highest level in five months, as builders ramped up the construction of single-family homes in a sign of confidence in the economy.

Groundbreaking increased 5.2 percent to a seasonally adjusted annual pace of 1.18 million units, the highest level since September, the Commerce Department said on Wednesday.

January’s starts were revised up to a 1.12 million-unit rate from the previously reported 1.099 million-unit pace.

Economists polled by Reuters had forecast housing starts rising to a 1.15 million-unit pace last month.

The rebound in groundbreaking activity could lift first-quarter gross domestic product growth estimates, which were cut on Tuesday following February’s weak retail sales report. The housing sector is being supported by a firming labor market, which is encouraging young adults to leave their parents’ homes.

The increase in household formation has largely benefited the multi-family segment of the housing market as many young adults have student debts and little savings to purchase a home.

Labor and land shortages, however, remain a challenge for builders, a survey showed on Tuesday.

Last month, groundbreaking on single-family housing projects, the largest segment of the market, surged 7.2 percent to an 822,000-unit pace, the highest since November 2007.

Lender Production Profits Down 60% Thanks to TRID

Lenders need to improve efficiency and get better at doing their jobs

The new Truth-in-Lending disclosure (TRID) rule is being blamed for a sharp decline in the per loan profitability of mortgage lenders. The Mortgage Bankers Association said that its fourth quarter survey of independent mortgage banks and mortgage subsidiaries of chartered banks found a drop in profitability from $1,238 per loan in the third quarter of 2015 to $493 in the fourth. TRID, the so-called “Know Before You Owe” rule went into effect for loans for which applications were received on or after October 3, 2015.

“Production profits dropped by over sixty percent in the fourth quarter of 2015 compared to the third quarter,” said Marina Walsh, MBA’s Vice President of Industry Analysis. “With the Know Before You Owe (TRID) rule going into effect last October 3rd and declining production volume compared to the third quarter of 2015, mortgage bankers saw their total loan production expenses climb to $7,747 per loan, from $7,080 per loan in the third quarter.”

Walsh added, “The fourth quarter marked the second highest level of production expenses per loan since the inception of our report in the third quarter of 2008. However, the average production volume per company was nearly double the first quarter of 2014, when production expenses reached a study-high of $8,025 per loan. The increase in total production expenses per loan in the fourth quarter of 2015 cannot be explained solely by volume fluctuations.”

Loan Closings Back to Pre-TRID Timelines

Ellie Mae’s Origination Insight Report published on Wednesday by Ellie Mae shows there was a sharp decline in the time it took to close a loan in February. Average closing timelines rose with the introduction of new Truth-in-Lending (TRID) disclosure rules for loans applied for on or after October 3. It took an average of three or four days additional days to take a loan from application to closing for all loans that closed in November than it did in October and those timelines remained elevated through January. The drop in February brings most closing days back to levels that prevailed before TRID became an issue.

Ellie Mae reports that the time to close all loans dropped from 50 days in January to 46 in February, the shortest timeframe since last May. The average time to close a purchase decreased from 51 days in January to 48 days in February, while time to close a refinance decreased from 48 days to 44, the shortest period in exactly a year. FHA and VA loans also had shorter timelines with the average for FHA decreasing by four days to 47 and the VA shortened from 53 to 50 days.

Forty-six percent of loans closed in February were refinances, down one percentage point from January. Conventional loans had a 65 percent share of all loans, FHA had a 22 percent share, and VA loans 9 percent.

Ellie Mae said closing rates across loan types were the highest since they began tracking them in 2011. The average closing rate for all loans increased 1.5 percentage points to 69.9 percent with 66 percent of refinances closing and 74 percent of purchase loans. Closing rates for conventional purchase loans have increased nearly every month for the last year and were at 74.3 percent in February compared to 68.8 percent in February 2015.

“For the first time since October 2015, we’re seeing a substantial decrease in days to close from 50 days in January to 46 days in February,” said Jonathan Corr, president and CEO of Ellie Mae. “This could be due to lenders becoming more familiar with the new loan estimate and closing disclosure forms and business process around Know Before You Owe. We’re also seeing closing rates continue their upswing, increasing one percentage point to 69 percent. This is the highest we’ve seen closing rates since we began tracking data in August of 2011.”

OC median home price down from January

Orange County home prices continued to rise through February but at a slower pace than in recent years, new housing figures show.

Meanwhile, sales volume hit its highest level for a February in nine years, despite a big decline in the number of homeowners listing properties for sale.

Irvine-based market data firm CoreLogic reported Wednesday that last month’s median home price – or price at the midpoint of all sales – was $610,000, down $8,500 from January, but up by $20,000 from the previous February.

That’s a year-over-year gain of 3.4 percent, the second-lowest price appreciation rate in almost a year. It’s also just the ninth time in the past 29 years the median home price dipped from January levels.

Local housing market watchers said February numbers may reflect buyers’ reaction to stock volatility in January, when escrows for most February closings were opened, as well as a reaction to the lack of affordable homes for sale.

Meanwhile, home sales here jumped 9.2 percent from February 2015 levels to 2,315 transactions, the most for any February since 2007.

Last month’s sales were up 1.6 percent from January.

Although sales were higher, buyers had fewer homes from which to choose.

Orange County averaged less than 4,500 homes listed in the Realtor-run database at the start of the year, the lowest number since 2013, according to figures from ReportsOnHousing.com.

Steve Thomas, author of ReportsOnHousing, said the middle and bottom of the market are “on fire,” while sales gains are more sluggish for luxury homes.

“When you get into higher price ranges, it slows down,” Thomas said. “Also there’s a hangover from the stock market.”

Los Angeles housing economist G.U. Krueger agreed, saying studies show a strong correlation between the housing and stock markets.

“When the stock market is down, people don’t feel as wealthy or as comfortable to buy in a pricey neighborhood, so they’re pulling back a little bit,” Krueger said.

CoreLogic figures bear that out to some extent. For example, condo sales were up 17.2 percent from February of last year, while sales of houses, which generally are costlier, were up a mere 3.5 percent.

CoreLogic figures also show the biggest sales gain occurred in the $500,000 to $600,000 price range. Transactions in that slice of the market increased 21.5 percent, although there also were big gains (up 15 percent) for sales of $700,000 or more.

Krueger and some local real estate agents also noted many buyers struggle with affordability.

“During the next two years, there will be big internal migrations … to lower-priced neighborhoods,” he said.

“Let’s say you’re looking in Irvine, and it’s too expensive in Irvine. So you switch to looking at Tustin, Anaheim, Santa Ana and other areas.”

Realty One broker-agent Sherry Bahrami said buyers are balking at high asking prices, and sellers are giving in.

“Sellers … softened their response and negotiated an under-asking (price) contract,” she said.

30-year mortgage rates heading up

What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.

RATE NEWS SUMMARY

From Freddie Mac’s weekly survey: The 30-year fixed rate averaged 3.73 percent, 5 basis points higher than last week’s 3.68 percent. The 15-year fixed was 3 basis points more expensive at 2.99 percent compared to last week’s 2.96 percent.

BOTTOM LINE: Assuming a borrower gets the average 30-year conforming fixed rate on a $417,000 loan, last year’s rate of 3.78 percent and payment of $1,938 was $12 more than this week’s payment of $1,926.

The Mortgage Bankers Association reports a 3.3 percent decrease in loan application volume from the previous week.

WHAT I SEE: From rate sheets hitting my desk that are not part of Freddie Mac’s survey: Locally, well qualified borrowers can get the following zero cost, fully amortized fixed rate loans: A conventional 10-year at 3.25 percent, a 15-year at 3.375 percent, and a Federal Housing Administration (FHA) 15-year fixed at 3.125 percent (excluding the upfront FHA mortgage insurance premium).

In addition, borrowers also can get a 30-year fixed at 3.75 percent (again, fully amortized with no cost), an FHA 30-year at 3.50 percent, a high balance ($417,001 to $625,500) conventional 30-year fixed at 4.0 percent and an FHA 30-year high balance fixed 3.50 percent.

Holding up more housing in H.B.

As I’ve asked in a couple recent columns: Where are people supposed to live? The Huntington Beach City Council this month gave its answer: Nowhere.

The Register reported on a March 7 council meeting at which “more than 200 residents filled City Hall’s auditorium and an overflow room to once again voice their disapproval of a proposal to amend the housing plan to add state-required high-density and low-income housing.”

The council then voted 7-0 “to scrap the latest plan to meet the state requirements and lay the groundwork to fight the number of low-income housing units the city must have.”

The crisis began last “May when the City Council stopped plans to allow up to 4,500 housing units in the Beach Boulevard/Edinger Avenue area.” Complaints led to a cap of 2,100 units.

My Editorial Board colleagues told me that, in meetings prior to the 2012 and 2014 elections, before I returned to the Register a year ago, candidates for all seven council seats pledged to respect property rights. They’re not doing it.

I understand the importance of following the wishes of constituents. “I think the citizens spoke, and the citizens were heard,” said Councilman Billy O’Connell. The Register reported he “received raucous applause when [he] introduced the motion to reject the amendment” to allow construction.

But America is not a democratic dictatorship. It’s based on the rule of law, beginning with the U.S. Constitution. The 14th Amendment guarantees, “[N]or shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”

This was passed after the Civil War to guarantee the “equal protection” of the newly freed slaves. It applies to all Americans and their “property.”

The California Constitution reiterates, at the beginning of the Declaration of Rights, “All people are by nature free and independent and have inalienable rights. Among these are enjoying and defending life and liberty, acquiring, possessing, and protecting property, and pursuing and obtaining safety, happiness and privacy.”

So if I own a piece of “property” and my “happiness” includes developing it into homes or apartments, I have a right to do so. Certainly, it is reasonable to take account of “externalities,” as economists call them, such as abating noise, pollution and traffic. But that just means making accommodations for current property owners, not banning property development entirely.

There’s also an old saying in property economics that my late colleague Alan Bock used to cite: You have a right to property, but not to property values. A beach example is if your house has a great view of the sunset. You do not have a right to ban someone from building in front of your house and blocking your view, even if that reduces your property’s value.

Otherwise, where would the limitations end? Would Huntington Beach residents get to ban developments in Riverside because they don’t want more “909ers” driving nosily down Beach Boulevard and hogging the sands?

The council action against low-income housing is going to generate resistance because of state mandates. Ironically, it’s other state actions, such as the California Coastal Commission’s Soviet-style restrictions on growth, which are an even bigger cause of scarcity than anything local governments have done.

And better than state low-cost-housing mandates, which also are a market manipulation, are free-market solutions to help the poor. But what do people expect when the violation of property rights raises rents prohibatively high, not just for the poor, but the middle class? According to Zillow.com, the current anti-property rights regimen by the city and the state aleady has helped jack up Huntington Beach median home prices to $730,000.

The way things are going, the only people who can afford to live in Surf City will be millionaires and the homeless.