Aug022016
Cuts to FHA insurance premium failed to activate first-time homebuyers
The cuts to the FHA insurance premium had little impact on sales overall, but more borrowers used FHA insurance. Was the policy a success?
Lowering the FHA insurance fees was the right idea at the right time. Due to the losses sustained and expected at the FHA insurance fund, the fees were raised to very high levels, making FHA the new subprime.
When first-time homebuyer participation rates hit a three-decade low, I predicted that Pressure would mount to lower FHA insurance fees to revive home sales. Shortly thereafter FHA loan fees were cut in half, and I stated that Lowering FHA insurance fees will spur the housing market.
Why was lowering the FHA insurance fee so important? My market studies showed the housing market was relatively affordable, yet home sales were weak, particularly among first-time homebuyers. My reports measure affordability based on conventional mortgages with a 20% down payment because those terms don’t require mortgage insurance, a costly add-on that has varied in price significantly over time.
The super-high cost of FHA mortgage insurance increases house payments for first-time homebuyers significantly; thus the first-time homebuyer market is dead.
With such an important market segment participating at very low levels, any policy that offered hope was worth trying.
As it turned out, the policy lowering FHA insurance fees pushed up prices a bit further, but it failed to spark any sustained growth in construction or sales. Because it stimulated price without sales, Lowering FHA insurance fees made housing less affordable.
Even this incentive didn’t get millennials to buy homes
Last year’s cut in FHA’s mortgage insurance premiums didn’t create more first-time home buyers
Daniel Goldstein, July 29, 2016
The federal government’s effort last year to get more millennials and first-time buyers to purchase a home doesn’t seem to have worked. In fact, according to some industry watchers, it might have made it even tougher for them to buy a house.
Last year, as part of an Obama administration-wide effort to boost Homeownership, which is close to the lowest rate on record, the Federal Housing Administration lowered mortgage insurance premiums (MIP) on its loans in most cases by $800 to $900 a year (and in higher-priced areas of the country even more), in an effort to entice first-time borrowers to become homeowners. …
The advantage of an FHA loan is the 3.5% down payment barrier. No other loan program cost-effectively delivers loans at such high loan-to-value ratios.
While the potentially low FICO barrier sounds worrisome, many originating lenders have overlays that stop them from reaching that far down to generate business.
Indeed, the volume of FHA loans jumped substantially after the mortgage insurance premiums were reduced, according to data from RealtyTrac, an Irvine, Calif. based real-estate research firm.
“There was a definite spike in volume and share shortly following the mortgage insurance premium cut in January 2015,” said Daren Blomquist, senior vice president at RealtyTrac. Data from the research firm shows that the number of FHA loans originated a month rose from about 23,000 in January of that year (an 11.9% share of all the 193,000 home loans made that month) to a peak nearly 61,000 FHA loans in July of 2015 (with the share of all home loans increasing to nearly 17% out of a total of nearly 362,000).
That number was 53% higher than the approximately 40,000 FHA loans made in July of 2014, the summer before the FHA premium cut went into effect on Jan. 26, 2015, Most recently, 49,000 FHA loans were originated in May 2016, with a market share of about 16%. “The numbers remain elevated but have fallen back a bit in recent months,” Blomquist said.
So did this rate cut succeed or not? I say yes.
The policy was selected as a tool that would stimulate home sales to buyers with low down payments and potentially lower FICO scores, the main group that uses their loans. After the policy, FHA originations increased 50% year-over-year, so it’s hard to argue the policy was not effective.
Did the policy meet some targeted demographic some activist believe needed aid? Could the policy have done more? I doubt it.
But some industry insiders say that while the volume of FHA loans increased, first-time buyers, especially millennials, weren’t convinced to jump in to the housing market.
”We’re still not seeing those first-time home buyers going to FHA,” said Bryan Sullivan, the chief financial officer of Foothill Ranch, Calif. -based loanDepot, the second-largest online lender in the U.S. “It’s still a relatively older borrower” for FHA loans, he said. Sullivan said that the drop in FHA loan premiums simply meant that other borrowers looking for a home loan opted for the FHA product, rather than bringing additional new buyers into the market. “It’s substantially just a reshuffling of the deck,” he said.
Since sales overall were not up this year, his statement is correct. However, I would counter that sales probably would have been down 5% year-over-year or more if the FHA insurance premium weren’t lowered. Prices are getting too high.
In response, HUD spokesman Jereon Brown, speaking on behalf of the FHA, said that while millennial participation is up to nearly 50% of all FHA loans, up from 26% of loans in 2006, attributing the gain to the MIP reduction isn’t easy. …
But Sullivan’s conclusion was backed up by a recent analysis by the American Enterprise Institute, a conservative-leaning think tank in Washington, D.C., which said that far from the premium reduction encouraging first-time buyers, those buyers were already in the market, and simply opted for FHA loans over other products, such as loans backed by Fannie Mae, Freddie Mac and the Department of Veterans Affairs.
In the short term, its certainly true that the buyers who used this insurance were already in the market. So what? Did the policy motivate anyone else to come to market? Perhaps, the policy certainly made it possible for more buyers to come to market because some who were formerly priced out could afford to participate again.
“Lowering the premium didn’t do anything to create more housing supply, but just created more demand in what’s already a seller’s market,” said AEI’s Pinto. …“The millennials have not been purchasing and it just comes back to lack of inventory,” Sullivan said, adding that the benefit of the FHA premium cut has mainly gone to the borrower in their mid-40s with better credit.
Indeed, the cut in the mortgage insurance premium may have just allowed borrowers to purchase bigger or better homes in more desirable neighborhoods, but the reduction in insurance premiums was negated by increased sales prices as borrowers fought over lower inventory. …
“Recipients just used the added buying power to purchase more expensive homes,” said Pinto.
Lowing the cost of FHA insurance fails to make houses more affordable because buyers quickly bid up prices to the new equilibrium price.
Lowering the FHA insurance rate did spur the low-end of the housing market as I predicted it would. The stimulus has now run its course, low-end house prices are higher, and the market rests at the new equilibrium price. However, houses are not more affordable; they are less so.
[listing mls=”OC16168562″]
Home sales are rising, so why isn’t inventory going up?
Two facts stand out in today’s housing market: rising home sales and flat/falling inventory.
Existing home sales are up 5% year over year in the first half of 2016, and in June reached a seasonally adjusted annual rate of 5.57 million units―the highest level since early 2007. But housing inventory, as measured by the number of existing homes for sale, was down by 130,000 units year over year in June.
This is a continuation of what has been happening since 2012. Between 2012 and 2015, home sales have increased by almost 600,000 units, from 4.67 million units to 5.25 million units, while housing inventory has been flat or down.
Figure 1. Existing home sales and housing inventory (Click to enlarge)
http://www.housingwire.com/ext/resources/images/editorial/BS_ticker/PDF/AAA-July/Chart1.png
The best source of information on first-time homebuyers is the mortgage insurance industry and the FHA. Both serve a large number of first-time homebuyers by lowering the down-payment hurdle.
I estimate that the industry helped around 1 million new first-time homebuyers in 2015. More importantly, our data shows that the number of first-time homebuyers increased by around 200,000 from the previous year.
This is evidence that the growing presence of first-time homebuyers was a major factor in reducing housing inventory while pushing up home sales last year. Anecdotally, I hear many stories about the lower end of the housing market being tighter. That is also consistent with more first-time homebuyers entering the market.
Data for the first half of the year suggests that we will see continued pressure from first-time homebuyers entering the housing market. Based on my estimate, the number of first-time homebuyers served by the mortgage insurance industry and the FHA combined are up by another 100,000 in the first half of 2016.
What does this mean for the housing market?
I expect rising first-time homebuyers to be a major trend in the housing market over the next few years, generating higher home sales while keeping housing inventory down or flat. The result is a tilt in favor of home sellers and a continuation of rising home prices.
The Boomerang Generation: Older Millennials are pushing increase of young adults living at home.
The latest homeownership rate figures show an interesting dichotomy to the housing market. While prices are up, the homeownership rate is down. And down significantly. The homeownership rate is now at levels last seen 50 years ago (the latest figures are the lowest in a generation – each update seems to bring a new low). This flies in the face of all the house humping that is being pushed out into the market. What we do know is that Millennials are simply not buying numbers in any “pent up demand” form. In fact, a record number of Millennials are living at home with at least one parent. The data is interesting since the drive is being pushed by older Millennials, those that should be buying. Younger Millennials are likely in college accumulating back breaking levels of debt. There has been research showing that student debt is a hindrance to buying a home. So are we simply creating a new generation of boomerang kids?
If this was true pent up demand, they would have been buying since 2009 (the recession officially ended 7 full years ago). Yet the house humping continues and in Los Angeles, the homeownership rate is even lower with the majority of people being renters. It is not even close:
http://www.doctorhousingbubble.com/wp-content/uploads/2016/08/la-household-breakdown.png
53.6 percent of L.A. County households rent. Back in 2010 it was only 51.8 percent. So the trend to renting and living at home is happening and Millennials are a big part of this change.
Home prices are still on a tear, CoreLogic says
National home prices were 5.7% higher in June compared to a year ago, data provider CoreLogic said Tuesday.
That’s up from a 5.3% yearly increase in May, and the 5.4% notched in April. During the month, prices rose 1.1%.
As always, all real estate pricing is local. Areas with “strong economic growth” like Denver are flourishing, where prices rose 10.2% in June, CoreLogic noted in a release. But some of the metros that saw the sharpest declines during the housing bust are also posting strong gains now, such as Miami, which gained 6.2% in June.
State Yearly price gain
Alabama 2.2%
Alaska 2.6%
Arizona 5.5%
Arkansas 2.4%
California 6.0%
Colorado 9.2%
Connecticut -1.7%
Delaware 1.1%
District of Columbia 2.6%
Florida 7.0%
Georgia 5.6%
Hawaii 5.1%
Idaho 6.9%
Illinois 3.1%
Indiana 4.1%
Iowa 3.5%
Kansas 3.6%
Kentucky 3.9%
Louisiana 3.3%
Maine 3.4%
Maryland 0.9%
Massachusetts 4.0%
Michigan 5.1%
Minnesota 5.3%
Mississippi 4.9%
Missouri 3.6%
Montana 6.4%
Nebraska 4.8%
Nevada 7.7%
New Hampshire 4.5%
New Jersey -0.8%
New Mexico 2.3%
New York 4.3%
North Carolina 4.2%
North Dakota 1.0%
Ohio 3.9%
Oklahoma 1.6%
Oregon 10.9%
Pennsylvania 0.1%
Rhode Island 5.0%
South Carolina 5.1%
South Dakota 2.9%
Tennessee 5.9%
Texas 6.7%
Utah 7.9%
Vermont 2.7%
Virginia 2.0%
Washington 10.3%
West Virginia 1.9%
Wisconsin 3.8%
Wyoming 2.7%
Unlike the closely-watched Case-Shiller 20-City Home Price Index, CoreLogic tracks Houston prices. They rose 3.9% compared to a year ago in June, down one tick from the 4.0% annual growth in May.
A Persistent Housing Crisis Stifles the American Dream and Economy
Plummeting homeownership rates are a worrisome sign that the American Dream remains a fantasy for millions. But they are also worrisome for another reason: they show that the housing crisis continues to afflict millions of families facing foreclosure or saddled with unaffordable, bubble-sized mortgages.
That’s a problem, because for generations of Americans, homeownership has been a gateway to the middle class and a primary source of wealth creation. What’s more, it is not just families who benefit when they own their homes: their neighborhoods and the entire economy do, too.
The housing market has broadly recovered from the 2008 crisis, but many Americans remain left behind. As of June, one million homeowners were facing foreclosure. Almost 7 million more were underwater, owing more on their mortgages than their homes are worth. For them, there has been no housing recovery. These working- and middle-class homeowners have seen their incomes stagnate — along with the value of many of their homes. What’s worse, they’re still on the hook for mortgages that are based on bubble-era valuations.
When these beleaguered homeowners see no path to financial wellbeing, they have no incentive to maintain their homes — meaning they lose even more value. And the exorbitant monthly payments they face mean that they can’t sell their house if they get sick or lose their job. They are stuck with the burdens of homeownership and none of the benefits.
This was the part of the story I agreed with. After that she pleas for principal reduction, and I couldn’t disagree more.
Why is it nobody sees foreclosure as the cure to the sickness not the disease it is made out to be.
If all these loanowners just had their homes foreclosed and moved on they would be in much stronger financial shape.
Yep. Those who took their medicine in 2008 or 2009 are much better off today. Seven years later, their FICO scores will be back to normal. If they have decent financial habits, they should be in a place to buy as well. Those people who are still trapped underwater have no good way out — at least not at this point.
Arguably, there’s a benefit to the big FICO hit for a few years – less access to credit, hopefully improving your financial state.
The reality though, is that in the auto lending market, there’s a price for everyone, and many fools gladly accept over-priced cars financed for 6+ years at rates in the teens.
That’s a high price to pay for refusing to save money.
But just look at the payment!
“And the exorbitant monthly payments they face mean that they can’t sell their house if they get sick or lose their job.”
What does the monthly housing cost have to do with the ability to sell your house?
“They are stuck with the burdens of homeownership and none of the benefits.”
While they may FEEL stuck, feelings are not fact, despite what we’re hearing lately. In fact, you are not stuck. There are many paths out of a house/mortgage.
She is referring to underwater “owners.” She is setting up an argument in favor of principal reduction.
With the reflation bubble succeeding and most people with nearly positive equity, I’m surprised these activists are still wasting so much effort on promoting principal reduction.
I am too. The disaster is long past, and she continues advocating for emergency measures long after the “need” for any such relief is abating.
These Landlords Are Making a Killing on College Students
College students aren’t famous for their tidiness, sober living, or financial prudence, to name three qualities landlords might look for in a tenant. But despite the beer-soaked carpets and general flakiness, renting off-campus apartments to undergrads is turning out to be a great business.
Shares in Education Realty Trust, a Memphis-based landlord whose earnings report met Wall Street expectations this morning, are up 54 percent in the past year. American Campus Communities, the only other publicly traded student housing landlord, is up 44 percent. By comparison, a Bloomberg index of North American apartment landlords is up 12 percent over the same period.
http://www.bloomberg.com/news/articles/2016-08-01/these-landlords-are-making-a-killing-on-college-students#media-2
Why are the student-housing landlords getting top grades?
The long-term theme is that college enrollment has boomed over the past few decades, and investment in new on-campus dorms hasn’t come close to keeping up. In the short term, the shares are likely rising because investors are looking to hedge against the possibility of a U.S. recession.
“In an environment of striking political and economic uncertainty, public investors are ascribing value to [the] certainty of cash flows in student housing,” said Ryan Burke, an analyst at Green Street Advisors. “In [the] young life of purpose-built student housing, it’s performed really well in good and bad times.”
That’s because kids keep going to college, and schools have run out of places to put them. Consider these striking data from the U.S. Department of Housing and Urban Development: 17.7 million students were enrolled in post-secondary, degree-granting institutions in 2012, up from 12 million in 1990. Over the same period, the number of students living in on-campus dorms increased by a bit more than 600,000.
This is true of some of the apts. in Downtown LA. Also the new high rise condos being built there are being marketed to Asian investors who might send kids to USC.
REIT’s in general have been killing it lately thanks to the “unexpected” drop in rates post-Brexit. The thing about these student housing REIT’s is they are benefiting from the largest generation ever attending college right now. What happens when this generation largely finishes with college and the next generation (kids of Gen X’ers) end up being much fewer in number? They will have to reposition these properties or be faced with stagnating rents and increased vacancies.
Establishment Republicans Voting For Hillary Surge As Obama Challenges Leaders To Disavow Trump
Donald Trump “is unfit to be President” according to President Obama who challenged congressional Republicans who have criticized their presidential nominee to disavow his candidacy.
“The question I think they have to ask themselves is, if you are repeatedly having to say in very strong terms that what he has said is unacceptable, why are you still endorsing him?” Obama said Tuesday at a news conference at the White House following a meeting with Singapore Prime Minister Lee Hsien Loong.
“What does this say about your party that this is your standard bearer? This isn’t a situation where you have an episodic gaffe. This is daily. Weekly.”
“There has to come a point at which you say someone who makes those kinds of statements doesn’t have the judgment, the temperament, the understanding to occupy the most powerful position in the world,” Obama said.
Never the shrinking violet, Donald Trump lashed out at Obama’s “failed leadership”…
“Obama-Clinton have single-handedly destabilized the Middle East, handed Iraq, Libya and Syria to ISIS, and allowed our personnel to be slaughtered at Benghazi. Then they put Iran on the path to nuclear weapons. Then they allowed dozens of veterans to die waiting for medical care that never came.
Hillary Clinton put the whole country at risk with her illegal email server, deleted evidence of her crime, and lied repeatedly about her conduct which endangered us all. They released criminal aliens into our country who killed one innocent American after another — like Sarah Root and Kate Steinle — and have repeatedly admitted migrants later implicated in terrorism. They have produced the worst recovery since the Great Depression. They have shipped millions of our best jobs overseas to appease their global special interests. They have betrayed our security and our workers, and Hillary Clinton has proven herself unfit to serve in any government office.
She is reckless with her emails, reckless with regime change, and reckless with American lives. Our nation has been humiliated abroad and compromised by radical Islam brought onto our shores. We need change now.”
But the list of establishment Republicans that say they are voting for Hillary Clinton is staggering…
It’s an interesting development. The most likely treatment to distance yourself from Trump, is to avoid talking about him at all. I liked Paul Ryan’s response – “We have not asked for Trump’s endorsement.”
I think most people on the left believe this. Realistically, most rational people believe this, but many of Trump’s supporters aren’t rational, and they are voting for him for purely emotional reasons.
CNBC is reporting an intervention is scheduled this weekend where Trump’s camp will try to encourage Trump to be less Trump. Maybe his “attack” on a crying baby was the tipping point?
Ally of Trump staffer Paul Manafort: The staff is ‘suicidal,’ he’s mailing it in
https://www.yahoo.com/finance/news/ally-trump-staffer-paul-manafort-020719505.html
I’m voting for his policies and lack of filter. The fact that establishment elites can’t stand him is a good thing. The last thing I would want is for Trump to sellout like Sanders/Warren.
The fact that many Republicans are openly endorsing Hillary proves what Trump has been saying all along, that they are part of an elitist club focused on enriching themselves with special interest money. The American voter has been left behind.
That’s certainly one way to rhetorically view it.
What do you mean?
I mean, I get that’s a general reason why you might vote for Trump, I just don’t agree with it. I don’t agree that “filters” are necessarily bad. In this context, Trump, filters are desperately needed. Just because “establishment elites” don’t like him, this won’t sway my support necessarily.
“Sellout” blaming is lame. This is politics in a democracy. Nobody gets everything they want, ever.
I certainly agree that special interests “own” both parties, which may be one reason to support a Democrat for President who might nominate SCOTUS Justices who might overturn Citizens United.
Last week you said calling something ‘lame’ was juvenile. LOL.. Now correctly pointing out that the liberal populist wing has sold out is blaming. I’m not blaming because I had no stake in their movement.
I think I said score keeping (when discussing topics on a blog) was lame.
“Lame” as in juvenile.
Most of my hardcore Republican friends are looking seriously at Gary Johnson. It’s nice to see them forced to vote for a fringe candidate for a change, as that’s what I’ve been forced to do for the past several elections. In 2012 I voted for Johnson and if Jeb was the (R) candidate this year I would be voting for Johnson again. Thankfully, Trump saved the country from enduring possibly another Bush presidency. He deserves my vote for that simple act alone.
My hardcore Republican friends are all ~3%ers, and their biggest issue is lower taxes. So they want Trump, but they don’t defend much of his daily antics.
The other Trump support I see (Facebook) are from one-issue voters. They either love guns or hate abortion.
No shocker here. Typical liberal ideas that some Ivy League grad wrote up and presented at a stupid 4DX meeting and eventually became policy. If you worked in government, you will know what 4DX is.
What a joke.
I actually agree. Although well intended, many of these programs designed to help alleviate certain problems may do so initially, but eventually prices adjust accordingly. Then we’re stuck with both higher prices and higher debt. I’m thinking about housing and student loan policies specifically.
There would be many more happier people in this country if their access to consumer debt were severely curtailed or completely cut off.
The CFPB is diligently working on this, and the Republican Party is fighting it every step of the way.
Any program that subsidized anything through debt is going to show the same pattern: early improvement followed by a return of the status quo at higher prices. The only success of these programs is to raise prices on the affected assets whether they be house prices, college costs, or anything else where the government wants to “help.”
Agreed. There is a lot of academic study being devoted to this. I’ll post interesting ones as I come across them.
I look forward to it.
I look forward to seeing those studies as well.
Media bias here? I heard on CNBC the other morning that Clinton described the DOJ’s decision not to indict, as “an exoneration of her email activity,” or something to that effect. I’ve tried twice to Google the story, and I can’t find one. Does anyone have a link to what she said?
Exoneration? There were many nuanced reasons they decided not to indict, but the idea that she was blameless and innocent wasn’t one of those reasons.
Bill Gross Talks His Book; Advises Investing in Gold
What should an investor do?
In this high risk/low return world, the obvious answer is to reduce risk and accept lower than historical returns. But don’t you have to put your money somewhere? Yes, of course, except markets offer little in the way of double digit returns. Negative returns and principal losses in many asset categories are increasingly possible unless nominal growth rates reach acceptable levels. I don’t like bonds; I don’t like most stocks; I don’t like private equity. Real assets such as land, gold, and tangible plant and equipment at a discount are favored asset categories. But those are hard for an individual to buy because wealth has been “financialized”. How about Janus Global Unconstrained strategies? Much of my money is there.
https://www.janus.com/insights/bill-gross-investment-outlook