Sustainable Homeownership is the Key to Wealth-Building, Middle Class

The ususal suspects lobby for lowered lending standards and unsustainaable homeownership

Sustainable homeownership is the “gateway to the middle class” for many Americans and is the primary source of wealth creation for many, which is why increasing the homeownership rate is so critical to a healthy economy, according to a panel at a housing forum in Washington, D.C. on Tuesday.

In the “Achieving the American Dream” housing forum, hosted by First American Financial Corporation, three members of Congress addressed the audience while a panel of experts discussed primarily how to increase the homeownership rate among Latinos and African Americans.

Panelist Gary Acosta, Co-Founder and CEO, National Association of Hispanic Real Estate Agents, declared to the agreement of the panel that the gateway to the middle class in America is sustainable homeownership—and that lenders do not need to lower the bar, but instead need to open the credit window.

“What that essentially means is we’re not trying to qualify people who probably shouldn’t qualify for a mortgage,” Acosta said, “but we want to widen the criteria that we use and the metrics that we use to identify successful homeowners of the future.”

One way to open the credit window without lowering the bar, which will in turn increase the country’s homeownership rate, is to find new and inventive ways to determine creditworthiness and subsequently lend to the group that is “credit invisible,” or have no credit history. The Consumer Financial Protection Bureau issued a report in May stating that 26 million American adults had no credit history, and that Black and Hispanic consumers were more likely to be credit invisible than white consumers (15 percent compared to 9 percent).

“We need to find ways to credit score these types of individuals by using things like rental payment histories, utility history, and cell phone payment histories,” First American Chief Economist Mark Fleming said. “If they’ve established a creditworthiness through making monthly rental payment and timely payments on their cell phone bills, then you know there’s a good chance that they’ll also be capable of making a mortgage payment on time.”

Whether They Want to Rent or Buy a Home, Millennials Are Basically Out of Luck

It’s hard out there for a millennial navigating the housing market.

If you’re an American man or woman under the age of 35, there’s a historically large chance that you’re living with your parents. And if not, you’re very likely to be renting, and paying too much for the privilege. Only 34.8 percent of young adult households actually own their home, the smallest fraction since at least 1994, and among those who are forking over cash to a landlord, nearly half are considered “rent burdened”—meaning housing eats up around a third or more of their income.

And what about those who’d at least like to buy? Well, there’s a pretty good probability they’re getting boxed out of the market. On top of the challenges posed by tough post-crash mortgage standards, Bloomberg reports Thursday that prices for typical starter homes have been on a tear due to a lack of supply, and are now actually above their past bubbly heights:

Prices for the least expensive previously owned homes—properties at 75 percent or less of the median—were up 10.7 percent in August from a year earlier and now represent the only one of four price tiers to surpass the peak reached during the housing bubble, according to a housing index from CoreLogic Inc. The August pace was 5.9 percent above its pre-recession high in October 2006.
Why are cheap houses getting so expensive? Because nobody’s building them, for starters. In the years immediately following the recession, there was a sense among many urban planners and others in the real estate industry that developers would have to shelve their McMansion blueprints and start marketing smaller, more affordable new homes—possibly in slightly urban or at least walkable settings—in order to adjust to millennial tastes and finances. But that hasn’t really happened, even as more young adults have hit home-buying age. Instead, builders, convinced that all the market really craves is size, seem to have gone back to erecting large houses in far-out subdivisions. The median new home hit a record square footage in the first quarter of 2015, and shrank only slightly in the spring.

Developers might start turning their attention to first-time buyers soon. The Wall Street Journal has certainly suggested so much recently. (Then again, it made a similar prediction about a year ago). But for now at least, the market seems to be geared toward the more affluent, older customers. And so the least expensive older homes are getting costlier. “You’ve got the front end of a big wave of first-time homebuyers but the supply of affordable housing is not there to meet that wave,” Sam Khater, CoreLogic’s deputy chief economist, told Bloomberg. “What you’re seeing in the housing market is a reflection of the polarization of income. The builders are looking at it from that perspective: ‘If I have a choice of going up- and down-market, I’ve got to go up-market.’ ”

And up-market means out of reach for most millennials.

Millennials: Forever Renters?

One of the most frustrating truths about the current housing market is that, month to month, it’s still significantly cheaper to own a house than it is to rent, and that’ll remain the case as mortgage rates stay low and rental prices climb ever higher. Yet despite this fact, the rate of homeownership remains below what it was a decade ago. And the rate of young people buying their first home is in an even bigger slump. Why aren’t more people flocking to an ostensibly cheaper housing option?

The answer is more complex than simple calculations comparing owning and renting let on. The real-estate analysis firm Trulia—which, as a company that makes its money from people buying houses, might have an interest in promoting homeownership—recently released a report that found that for young adults ages 25 to 34 buying was nearly 25 percent cheaper than sending in a monthly rent check. Trulia made a number of assumptions to figure out what this choice looks like for young adults, who tend to have less income and less wealth to throw at a home purchase. Trulia assumed a 10 percent down payment (instead of a more traditional 20 percent figure), that new owners would move every five years (more frequently than older Americans), that buyers were in the 25-percent tax bracket, and that their interest rate on a 30-year mortgage would be around 3.85 percent. After plugging in all that data, Trulia found that buying was still cheaper than renting in 98 out of 100 of the largest metro areas in the U.S.

That might be true, but that argument overlooks one of the biggest reasons young people aren’t buying houses: Most of them simply don’t have enough money saved to clear the hurdle of a down payment. A mortgage might well be cheaper overall, but the one-time cost of becoming a homeowner is simply too high for most of them. While the job market is slowly getting better, Millennial wage growth remains pretty slow and student-debt loads continue to rise. On top of that, they’re expected to save up the little they can spare as they continue paying rent that’s only getting more expensive.

Millennials’ top competition for condos might be their parents

Millennials have tough new competition for the condominiums and apartments heating up the nation’s housing market: Mom and Dad.

Roughly 10,000 baby boomers are retiring each day, and recent data shows that half of those who plan to move will downsize when they do. Many are seeking the type of urban living that typically has been associated with young college graduates — so much so that boomers are renting apartments and buying condos at more than twice the rate of their millennial children.

“There’s not one thing I miss about my house,” said Abby Imus, 57, who recently moved with her husband into a condo in downtown Bethesda, Md., three miles and a lifetime away from the house they lived in for more than two decades. “I was so ready to leave.”

This new generation of empty nester is reshaping the recovery in real estate after the industry suffered its worst setback in half a century during the Great Recession. Boomer demand has helped fuel a surge in high-end housing that features two-bedroom units and large kitchens reminiscent of boomers’ suburban homes. That could have big implications for cash-strapped millennials, who had hoped to snag affordable studios in buildings developed to house 20-somethings.

The data suggests that boomers who are downsizing are relatively well-off. Harvard University’s Joint Center for Housing Studies found that those ages 55 and older accounted for 42 percent of the growth in renters over the past decade. In addition, the wealthiest tier of American households made up about one-third of new renters between 2011 and 2014.

Home Prices Soaring Out of Reach of Millennials

David M. Blitzer, managing director and chairman of the Index Committee Spins the Data

Home prices continued to rise across the country in August 2015 as the economy improves and housing demand outweighs supply.

The S&P Dow Jones Indices released its results of for the S&P/Case-Shiller U.S. National Home Price Index (HPI) Tuesday, showing that home prices experienced year-over-year gains of 4.7 percent in August compared to a 4.6 percent increase in July.

According to the index, which covers all nine U.S. census divisions, the 10-City Composite rose 4.7 percent in the year to August compared to 4.5 percent in July, and the 20-City Composite’s year-over-year gain was 5.1 percent, up from 4.9 percent in July.

Among the cities with the highest year-over-year increases were San Francisco, California and Denver, Colorado with home prices gains of 10.7 percent and Portland, Oregon with a gain of 9.4 percent. The HPI report also found that fifteen cities had greater year-over-year price increase in August 2015 compared to July 2015.

On a month-over-month basis, the index rose 0.3 percent in August prior to seasonal adjustment. The 10-City Composite and 20-City Composite increased 0.3 percent and 0.4 percent month-over-month, respectively. After seasonal adjustment, the index rose 0.4 percent from the previous month, while the 10-City and 20-City Composites both increased 0.1 percent.

“Home prices continue to climb at a 4 percent to 5 percent annual rate across the country,” said David M. Blitzer, managing director and chairman of the Index Committee for S&P Dow Jones Indices.

Blitzer also noted that other housing indicators have shown strength recently:

*Housing starts topped an annual rate of 1.2 million units in the latest report with continuing strength in both single family homes and apartments.

*The National Association of Home Builders sentiment survey, reflecting current strength, reached the highest level since 2005, before the housing collapse.

*Sales of existing homes are running about 5.5 million units annually with inventories of about five months of sales.

*September new home sales took an unexpected and sharp drop as low inventories were cited as a possible cause.”

“A notable part of today’s economy is the continuing low inflation rate; in the year to September, consumer prices were unchanged,” Blitzer concluded. “Even excluding food and energy, the core inflation was 1.9 percent. One result is that a 5 percent price increase in the value of a house means more today than it did in 2005-2006, the peak of the housing boom when the inflation rate was higher. The rebound from the recent lows was faster than the 1997-2005 housing boom, and also much less driven by inflation.”

Fed Holds Off on Raising Interest Rates, Citing Insufficient Economic Improvement

Is anyone surprised by this?

As the Federal Open Market Committee (FOMC) reconvened Wednesday, results from their October 27th and 28th meeting placed yet another hold on the rate hike, leaving the federal funds rate at the current 0 to 1/4 percent target range.

The question on everyone’s mind in the mortgage industry remains: When will the Federal Reserve raise rates?

With just one more meeting left this year in December, the Fed has just one last opportunity to raise rates, but many are wary that it will may not occur this year.

A statement from the FOMC showed that household spending and business fixed investment rose at solid rates in recent months, while the housing market continued to improve.

On the downside, government officials saw net exports fall soft, job gains slow, and the unemployment rate held steady. In addition, inflation remains under the Committee’s objective of 2 percent, reflecting falling energy prices and prices of non-energy imports.
With all of this taken into account, the Committee decided to hold off on the rate increase until maximum employment, price stability, and inflation goals are reached.

“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate,” the statement said. “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation.”

The National Association of Federal Credit Unions’ (NAFCU) Chief Economist Curt Long predicted that the rate increase would not occur prior to the official FOMC statement.

“December is a possibility, but one has to ask if the situation has really improved since September,” Long stated. “At this point, the answer would seem to be no, as the risks to inflation continue to be stacked to the downside. Early 2016 seems far more likely.”

Hillary Clinton says she’d let big banks fail

Does anyone, anywhere believe she means this?

Over the last few months, Democratic presidential frontrunner Hillary Clinton has gone out of her way to position herself as a non-supporter of the country’s biggest banks, perhaps as part of a plan to woo those on the left who would rather see Senator Elizabeth Warren running in Clinton’s place.

Clinton continued her push against the big banks on Tuesday night when she was a guest on “The Late Show with Stephen Colbert.”

During her appearance, Colbert asked Clinton what she would do as president if there were another financial crisis, and she used the opportunity to plant her flag on the issue of the big banks.

According to a Reuters report, Clinton said she would not bail out the banks again.

From Reuters:

“If you’re president and the banks are failing, do we let them fail?” asked Colbert.

“Yes, yes, yes, yes… ” Clinton said.

She added that she would not hesitate to break apart banks that were “too big to fail.”

Earlier this month, in an article written by Clinton on Bloomberg View, the former Secretary of State said that she is also in favor of having more accountability for those on Wall Street.

“People who commit serious financial crimes should face serious consequences, including big fines, disbarment from working in the industry and the prospect of imprisonment,” Clinton wrote.

“As president, I will seek to extend the statute of limitations for major financial crimes, enhance whistle-blower rewards, and increase resources for the Department of Justice and the Securities and Exchange Commission to investigate and prosecute individuals,” Clinton continued. “We should also hold financial executives accountable for egregious misconduct by their subordinates. They need to lose their bonuses and, in some cases, their jobs.”