Homebuilders acknowledge two strange features of the housing recovery

We’re seeing signs that the current “A Lot,” 750-plus FICO, cash-flush, wants-not-needs housing recovery is getting long in the tooth. If we’ve learned nothing else about housing and real estate over the past 10 years, we’ve learned that it’s a series of linkages–supply to demand; jobs to household formation; loans to the ability-to-repay them; and the daisy-chain of household types from financially-supported living, to market rate, to the various tiers of homeownership, starting with entry-level.

We may believe-because of appearances–that these linkages are not in play. But that’s because we’re human and prone to error. They’re never not in play.

Fact is, two very strange paradoxes have showed up in the latest recovery. One is this, and it applies to square footage. Common sense might dictate that if one could divide 10,000 square feet of built residential space into 10 homes it would be worth more to the builder/developer than to divide that same 10,000 square feet into five homes.

It’s a paradox in today’s market that fewer homes with larger square footage are more profitable than greater density, smaller square footage homes.

Secondly, there’s the mental paradox around supply and demand. One doesn’t normally associate supply constraints as powerful enough inhibitors to hold back a housing juggernaut in the making. Today’s market seems–counterintuitively–to be proving that scarcity of predictably and manageably priced labor and predictably and manageably priced lots can be as potent a suppressor of gains as a lack of willing or able buyers.

Fact is, if you’re a “willing” buyer with a cap on what you’re “able” to buy, then chances are that you’re currently on the sidelines in the current market, because there’s nothing out there for you.

Lenders Offering More Second Chances With Increased Number of Subprime Loans

First mortgages, home equity installment (HE) loans, and home equity lines of credit (HELOCs) all experienced an uptick in subprime originations compared to the same period last year. The amount of first mortgage originations to borrowers with subprime credit scores increased 30.5 percent, HE loans rose 29.5 percent, and HELOCs rose 20.4 percent.

What could go wrong?

San Francisco Fed President Says Rate Hike Later in 2015 Would Be ‘Appropriate’

Federal reserve communications are transparent as mud

An influential monetary policymaker said this week that it would be appropriate for the Federal Reserve to raise the federal funds target rate later this year despite declining to do so in the September meeting of the Federal Open Market Committee (FOMC).

San Francisco Fed President and CEO John C. Williams said in an address to a symposium on China and U.S. financial systems in Armonk, New York, that he believes a rate hike would be appropriate for 2015. Williams presented cases both for and against raising rates in his speech, saying that economic turmoil overseas and low inflation made the case for the patient approach to raising rates.

“In the past, I have found the arguments for greater patience to clearly outweigh those for raising rates,” Williams said. “The labor market was still far from full strength and the risk to the recovery’s momentum was very real. As the economy closed in on full employment, the other side of the ledger started gaining greater weight and the arguments have moved into closer balance.”

When presenting the case for raising rates, Williams turned to the insight of Milton Friedman, who once won the Nobel Prize in Economics, who pointed out the long and variable lags of monetary policy.

“I use a car analogy to illustrate it,” Williams said. “If you’re headed toward a red light, you take your foot off the gas so you can get ready to stop. If you don’t, you’re going to wind up slamming on the brakes and very possibly skidding into the intersection. In addition, an earlier start to raising rates would allow us to engineer a smoother, more gradual process of policy normalization. That would give us space to fine-tune our responses to react to economic conditions; raising rates too late would force us into the position of a steep and abrupt hike, which doesn’t leave much room for maneuver. Not to mention, it could roil financial markets and slow the economy.”

The herd of economists (83%) incorrectly predicted a September rate increase. Despite their lack of credibility to speak on this issue, they were interviewed for this article.

“While the policy normalization process didn’t begin with this meeting, absent any major setback, liftoff is highly likely before the end of the year,” said Robert Denk, Assistant VP for Forecasting and Analysis at the National Association of Home Builders (NAHB). “The economic projection materials, and (Fed Chair Janet) Yellen in her comments, indicated that 13 of 17 FOMC members still anticipate the first rate increase before the end of the year. The ‘dot plots’ show seven of those members expect a 25 basis point increase by year-end, five expect a 50 point increase, and one 75 point increase.”

Because of the potential rate increase later in the year, those who are considering the purchase a home next year might want to think about doing it before the end of this year, according to one economist.

“Those planning to get into the housing market in 2016 may want consider a home purchase before the end of the 2015,” said Jonathan Smoke, chief economist for Realtor.com. “When rates go up, not only will monthly mortgage payments increase, that increase will also lessen some buyers’ ability to get approved for a home loan – due to an increased debt to income ratio.”

Dodd-Frank is not killing mortgage access for home buyers

Facts won’t stop Jeb Hensarling from claiming otherwise

New rules designed to make sure borrowers can repay their mortgages haven’t curtailed the ability to buy a home, a Federal Reserve study says.

The Fed, as part of its annual look at home mortgage disclosure data, looked at the impact of ability-to-repay and qualified mortgage rules put into affect in January 2014. The new rules were created by the Consumer Financial Protection Bureau as mandated by the Dodd-Frank bank-reform law.

The rules require lenders to make sure home buyers can afford a mortgage. Lenders have to verify a customer’s income, debt load and credit history, among other things. And in most cases buyers can’t qualify for a mortgage unless the ratio of debt to income is 43% or below.

The Fed study didn’t find any evidence of credit restriction as a result of the rules.

For instance, black and Hispanic borrowers, who tend to have fewer assets and lower credit scores, actually saw their share of mortgages rise in 2014 after several years of decline. There also wasn’t much of a change in the frequency in which debt-to-income was cited by lenders as a reason for denial (it rose slightly for purchase applications and fell slightly for refinancing).

The Fed suggests the new rules had little effect because lenders had already tightened standards after the 2008 financial crisis. Lenders may also have adjusted to the new rules prior to implementation.

California’s Housing Gold Rush Driving Demand for Jumbo Loans

I left my wallet in San Francisco.

The tech-sector gold rush in recent years has made San Francisco the nation’s most expensive place to buy a home, with a median sale price of $1,312,500, according to the California Association of Realtors (CAR).

Home prices are high in popular areas elsewhere in the state as well. In Los Angeles, the median home price is $486,310. But home buyers who want to live in L.A.’s most desirable areas will pay much more, and inventory is tight, says Eric Lavey, director of the estate division of Beverly Hills-based The Agency.

“Demand is high at every level and every price point,” he says. For homes priced at $2 million and under—even up to $3 million—the market is “insane” right now.

All of coastal California is basically insane right now, referring to real estate, of course. Yet government-backed conforming loans are capped at $625,500 in high-priced areas. So unless they can make a substantial down payment to qualify for a Fannie Mae, Freddie Mac or FHA loan, the only way many Californians can finance their mortgage will be a jumbo loan.

“California is by far the biggest lending state when it comes to jumbo mortgages—both in dollar amount and number of loans,” says Guy Cecala, publisher of Inside Mortgage Finance, which covers the industry. Bank of the West, which lends in 22 states, has its largest market share in California, says Paul Wible, senior executive vice president. “The ability to lend in the jumbo loan sizes here is critically important,” he says.

More than half of Bank of America ’s jumbo lending is originated and closed in California, and dollar volume from January through August 2015 was up 20% over a year ago, says Ann Thompson, Bank of America’s regional sales executive for Northern California.

Mortgage rates decline after Fed punts on rate hike

Average fixed mortgage rates declined following the Federal Reserve’s decision to defer a hike in the Federal funds rate, according to Freddie Mac.

The 30-year fixed-rate mortgage averaged 3.86% with an average 0.7 point for the week ending September 24, 2015, down from last week when it averaged 3.91%. A year ago at this time, the 30-year FRM averaged 4.2%.

These low rates gave a big boost to mortgage applications this past week.

“Global growth concerns and lackluster inflation convinced the Fed to defer a hike in the Federal funds rate. In response, Treasury yields fell about 9 basis points over the week, with some larger day-to-day swings along the way,” said Sean Becketti, chief economist at Freddie Mac. “In response, the interest rate on 30-year fixed rate mortgages dropped by 5 basis points to 3.86%.

“Mortgage rates have remained below 4% for 9 consecutive weeks and have remained range-bound between 3.8 and 4.1% since May. These low mortgage rates have supported strong home sales, and 2015 is on pace to have the highest home sales total since 2007,” he said.