Oct032016
Four unique features of the new normal in housing
The four unique features are (1) low mortgage interest rates, (2) low MLS inventory, (3) low owner-occupant demand, and (4) high but affordable house prices.
Prior to the housing bubble, the normal state of affairs for the housing market was slowly but steadily rising prices that matched the growth in rents and incomes. From the early 1980s through the early 2000s, house prices rose a bit faster than incomes due to steadily falling interest rates, but generally the rate of appreciation was gentle and predictable.
A normal housing market exhibited a balance between supply and demand. Millions of individual homeowners possessed the equity to sell when they pleased, and banks owned very few properties. Prior to the bust, lenders exerted very little direct impact on the housing market through short sale approvals or REO sales.
The demand for housing also came from millions of individuals, about two-thirds of whom borrowed around 80% of the purchase price to acquire property. New household formation from high-paying jobs prompted builders to provide more rental units and for-sale products wherever job growth occurred, and low unemployment kept house prices steady even in areas of temporary economic distress.
The new normal in housing is very different from the old normal.
1. Low Mortgage Interest Rates
The first unique characteristic of the new normal is very low mortgage rates. For the last several years, the housing market has been subject to one temporary abnormality after another. First, lenders inflated a massive housing bubble by burdening borrowers with nearly double the debt their incomes could support. 
The inevitable credit crunch caused a sudden and dramatic reduction in loan sizes, requiring direct intervention in the mortgage market by the Federal Reserve, who bought mortgage-backed securities to bring mortgage rates down. The Federal Reserve’s activities lowered mortgage rates from 6.5% in mid-2006 to 3.5% in early 2013, significantly raising the amount borrowers could finance on sustainable loan terms.
Looking back to 1971, mortgage rates average about 8%; only looking back 25 years brings this average down to between 6.5% and 7%. The current regime of sub-4% rates is very low by historic standards, but given the need for lenders to reflate house prices to recover on their bad loans, it’s likely below-average mortgage rates will persist for a very long time. This is a feature of the new normal.
2. Low Supply of For-Sale Homes on the MLS
The second unique characteristic of the new normal is unusually low MLS supply. When the housing bubble first burst, lenders followed their standard loss mitigation protocols and initiated foreclosure, mostly on the subprime borrowers whose loan reset first. These standard practices that work well in normal times flooded the MLS with bank REO and initiated a dramatic house price decline in every market loaded with subprime borrowers.
Lenders finally realized in late 2008 that they needed to remove the distressed inventory before their sales pushed house prices back to Great Depression levels, so they lobbied lawmakers and regulators to suspend mark-to-market accounting in favor of mark-to-model accounting so that they could report their bad loans as good assets and alleviate the need to foreclose and liquidate the REO. Unfortunately, this wasn’t enough.
From 2009 to 2011, lenders still foreclosed and liquidated many more REO than the seriously depleted buyer pool could absorb. Finally, lenders embarked on a more aggressive policy of loan modification to obtain income from their bad loans and remove distressed properties from the market. The final piece of the puzzle came together in 2011 when most lenders stopped approving short sales if the borrower possessed tangible assets.
As lenders modified loans and denied short sales, borrowers remained in their homes and kept their homes off the market; thus inventory plummeted, and by early 2012, supply was so depleted that even tepid demand caused bidding wars and forced the housing market to bottom.
The problems and solutions that lead to our current state of low MLS inventory is also likely to persist for quite some time. Both lenders and underwater borrowers don’t want to lose money on the bad deals they made a decade ago. Lenders can kick-the-can indefinitely, and they can compel borrowers to play along. There are still millions of homeowners who are underwater, so low MLS inventory will be an issue for a very long time. This is a feature of the new normal.
3. Low demand from owner-occupants
The third unique characteristic of the new normal is low demand from owner-occupants. When the housing bubble burst, several million people lost their homes in foreclosures, and several million more ruined their credit scores by defaulting on their loans to obtain loan modifications. This removed several million potential borrowers from the buyer pool, and despite hopes that these boomerang buyers would return in large numbers, they haven’t, and they won’t.
Further, first-time homebuyers, typically the largest demand cohort with an average 40% share, is barely 30% today. With the low wages and excessive student loan debts, the Millennial generation won’t be major housing market participants for another few years.
The housing market enjoyed a brief boost in demand from institutional investors, but now that prices are too high for their return thresholds, that component of demand is absent unless prices go down again.
The boomerang buyers and the first-time Millennial buyers either can’t or won’t participate in the housing market for the foreseeable future. They have bad credit, too much debt, and too little savings — which won’t be changed quickly or easily if at all. Further, those with good credit often can’t finance a large enough sum to pay today’s prices. Owner-occupant demand will be weak. This is a feature of the new normal.
4. Home prices expensive but affordable
Market InSite publishes monthly market reports that document rents and ownership costs for most cities and many zip codes in Southern California, making it possible to determine market trends and gauge relative affordability from the county level all the way down to individual properties.
Relative to rents, house prices stabilized across Southern California at prices very similar to the stable equilibrium from the mid-1990s – and not by accident. The lack of MLS supply caused prices to rise quickly in 2012 and early 2013, but prices hit the ceiling of affordability and stopped dead. Buyers simply can’t raise their bids any higher with the current incomes.
In the past, mortgage affordability products would have restarted the Ponzi scheme, but since these products are effectively banned by Dodd-Frank, rather than restart the Ponzi scheme, sales volumes declined, and many buyers gave up. Unless mortgage rates tumble again, or unless incomes rise significantly, house prices will only rise as fast as wage growth will allow.
After almost of dozen years of volatility, the market has reached a stable equilibrium where prices are high but affordable. Since we aren’t likely to get an influx of supply, and since the lack of affordability products means we aren’t likely to get a surge in demand, we will maintain this equilibrium for the foreseeable future. This is a feature of the new normal.
What’s old is new again
The variety of policies supporting housing today will remain in place for the foreseeable future because the health of the banking sector and housing market depends on it. Despite the overhanging issues, when you look carefully at where we are and how the market is reacting, the new normal looks much like the old. Prices will rise slowly from here always being expensive but attainable, not unlike they were in the 1990s.
Welcome to the new normal.
[listing mls=”OC16716127″]
How Section 8 Works
Local housing agencies handle several Section 8 rental assistance programs, the most common of which is the “housing choice” voucher.
Under this program, a qualifying household is free to choose any dwelling that meets program requirements and accepts the subsidy.
Here’s how it works:
Q: Who pays for this?
A: The federal government pays for subsidy, with funding from the U.S. Department of Housing and Urban Development, or HUD. Tenants pay the balance, with their share representing at least 30 percent of their income.
Q: Who qualifies?
A: A household earning 50 percent or less of the area median income ($48,750 a year for an Orange County family of four) can qualify, although three-fourths of the vouchers are reserved for households earning 30 percent of the area median income (or $29,250 for an Orange County family of four).
Tenants also must be legal U.S. residents and not have been convicted of recent felonies or of abusing drugs or alcohol.
In some cases, preferences are given to families who are homeless, living in substandard housing, or paying more than half of their income on rent.
Q: Who finds the housing?
A: The tenants. When they move, they can take their rent benefits with them. The exceptions are for “project-based” vouchers, which stay with a building when the tenants move out.
Q: What kind of dwelling can tenants rent?
A: The housing agency determines how many bedrooms the tenant can rent based on family size. The housing agency also determines total rent can be paid by the tenant and the voucher. “Payment standards” are based on the market rate for moderately-priced apartments.
Tenants can rent more expensive units, paying the difference out of pocket, so long as their share of the rent doesn’t exceed 40 percent of their income on a new rental.
Q: What happens when a landlord agrees to rent to a voucher recipient?
A: The housing agency must inspect the unit to make sure it’s safe, habitable and that the rent is reasonable.
Q: How long can tenants keep their subsidy?
A: For life, so long as 30 percent of their income remains below their total rent. But should the tenants lose their housing or chose to move, they typically have two months, with two 30-day extensions, to find suitable housing elsewhere, or they lose their subsidies.
Pending Sales of Existing Homes Fall to Seven-Month Low
Contracts to purchase previously owned homes fell to a seven-month low in August, held back by a tight supply in the housing market, the National Association of Realtors said Thursday.
Pending home sales fell 2.4% (the median forecast was for no change) after a revised 1.2% increase in July. The index dropped to a seasonally adjusted 108.5, the lowest since January, from 111.2 in July. Contract signings rose 4% from August 2015 on an unadjusted basis.
The fall in contract signings was the third in four months, adding to signs that a relative paucity of available homes is holding back the market. Recent data have shown that new U.S. home construction fell more than projected in August, while home prices are rising at a solid pace. Borrowing costs remain near historic lows while jobs and wages are gaining, factors that will continue to support housing.
Outside of the Northeast, where higher inventories are giving people more options, “an increased number of prospective buyers appear to be either wavering at the steeper home prices pushed up by inventory shortages or disheartened by the competition for the minuscule number of affordable listings,” Lawrence Yun, NAR’s chief economist, said in a statement.
“There will be an expected seasonal decline in new listings in coming months, which could accelerate price appreciation and make finding an affordable home even more of a struggle for would-be buyers.”
Troubling Signs of Lender Foolishness
Here are the top five new loan programs that I found from wholesale lenders:
1) Put 10 percent down on an owner-occupied property. Qualify using 24 months of your personal bank statements as your income for self-employed borrowers. Go down to a 620 middle credit score. Nice!
2) Put 25 percent down and get a home loan where you don’t put any income down on the application. This is named a no-income home loan. Holy Toledo!
3) Using the lowest middle FICO score of all borrowers is so old school. Instead, average the borrowers’ middle FICO scores and use that average score to price out your conventional Freddie Mac rates.
Example: Borrower number one has a 740 FICO and borrower number two has a 630 score. The average score is 685. This is hugely better pricing than using the lowest middle score of 630, maybe0.25 percent or more difference in rate. Or, even the difference between approval and denial.
4) Been out of the work force for awhile? Or a long, long while –like 10 years or more? Don’t fret. You earned yourself a well-priced conventional loan.
As long as you’ve worked in a salary or hourly position for two years before you left the workforce, we can use your new income from your new hourly rate or salary job on your very first day back to work. You do not have to go back to the same line of work you were in. Oh my goodness!
5) Condo litigation or non-warrantable condo for Fannie Mae approval purposes? Don’t lose any more sleep over those issues. Lenders are lining up to sign you up.
These types of articles used to really influence people’s perceptions during the housing bubble. Remember when they would put the median sales prices on the front page every month? You didn’t have to be a Register subscriber to notice the headline as newspapers were still pretty prevalent in people’s homes and offices, creating a false sense of urgency that you were falling further behind if you didn’t own a house. Now I wonder if the Register still has the readership for this type of hype-based reporting to have any effect.
Are these still fringe programs with high costs? I worry far less about these products if they are so expensive that they don’t impact the market much. I worry much more if they become mainstream. It was when the Option ARM went mainstream that high prices became a full-blown housing bubble.
I think all of the programs listed above are within the scope of Fannie/Freddie conventional guidelines, with the exception of #2. I’m not sure who is offering no doc with 25% down.
How to Whitwash a Failed Government Program
Runyon explained that to date, TARP dispersed a total of $433.7 billion, and as of Aug. 31, cumulative collections under TARP, together with Treasury’s additional proceeds from the sale of non-TARP shares of AIG, total $442.1 billion, exceeding disbursements by $8.4 billion.
The program, as Runyon stated, was once feared to possibly cause taxpayers to lose hundreds of billions of dollars, but it instead generated a positive return.
Runyon spotlighted three clear takeaways from TARP:
TARP was instrumental in turning a collapsing economy around
Treasury disbursed less in TARP support than was initially anticipated and even generated a positive return for taxpayers
TARP housing programs helped millions of Americans get back on their feet after the greatest economic downturn since the Great Depression and will continue to help homeowners in the years to come.
However, TARP has run into trouble along the way. Most recently, a report from the Office of the Special Inspector General for the Troubled Asset Relief Program (also called SIGTARP) found that the state-designated contractor in charge of Nevada’s portion of the government’s Hardest Hit Fund wasted $8.2 million that was designated to pay for the administration costs of the program, all while dramatically cutting the number of struggling homeowners that the program actually helped.
TARP was wasteful but I don’t see how you can argue that it failed in achieving it’s mission. Due to the interest that banks were forced to repay, regardless of whether they wanted the funds or not, the program was able to turn a profit and be net neutral for taxpayers.
P.S. I remember when Chase took over the WaMu branches somebody joked that the tarp program was in effect, because they used to cover the old signs up with a Chase-branded light blue tarp.
I think TARP was flawed in its purpose. Bailouts send the wrong message to everyone in the market. Thanks to TARP many incompetent people in finance earned huge bonuses and promotions for taking our financial system to the brink.
THE BACK-TO-THE-CITY MOVEMENT ISN’T ALL POSITIVE
There’s been a mass wave of migration into large city centers in the last 10 years, perhaps because the recession made people look for homes closer to job centers and millennials started tackling their big city dreams. It’s brought on a wealth of sustainable living innovations and denser living solutions, but it’s also the source of gentrification and lack of affordability.
In this article for CityLab, Richard Florida dives into a new study from University of Toronto and the Federal Reserve of Chicago, which traces the back-to-the-city movement across the U.S. it found three main takeaways:
1. Moving to U.S. urban centers picked up near the turn of the millennium.
2. Amenities and jobs have drawn the affluent, educated, and white to the urban core.
3. The people who leave or are pushed out drive demographic changes as much as, if not more than, the people moving in.
It’s funny how gentrification is painted in a bad light regularly these days, yet if you asked the same authors they would probably say that ‘white flight’ was also a bad thing.
Why Silicon Valley Is Wading Into Local Housing Issues
The growing civic involvement doesn’t come out of the blue. In San Francisco, a city of less than 850,000 residents, the average rent of a one-bedroom apartment has increased by about 45 percent over the past five years, according to rental market trends website Rent Jungle, to $3,367 a month. Housing costs are also notoriously high in South Bay cities like Palo Alto.
Evictions in San Francisco increased about 53 percent over a similar period, to 2,134 between March 2015 and February 2016, from 1,395 between March 2011 and February 2012, according to the San Francisco Examiner.
Increases in rent are largely attributable to an influx of high-earning employees of tech companies in the area, and the impact has been felt most intensely by those who don’t make tech industry-level salaries. San Francisco faces a crisis of public school teachers struggling to remain in the city because of the cost of living, for example. But concerns about costs are starting to get louder from people in higher income brackets as well.
Will California real estate experience the toughest year yet in 2017?
The trials that plagued the California housing market in 2016 aren’t expected to get too much better in 2017 as the real estate market is projected to face another year of supply shortages and affordability constraints, according to the “2017 California Housing Market Forecast” released by the California Association of Realtors.
CAR predicted that 2016 would face a shortage of available inventory and continued high costs that would limit the state’s improvement, a predication that ultimately came true according to the state’s real estate agents.
Affordability is only projected to get worse, which is currently already California real estate agents’ No. 1 concern for the market.
“Next year, California’s housing market will be driven by tight housing supplies and the lowest housing affordability in six years,” said CAR President Pat “Ziggy” Zicarelli.
However, he added, “The market will experience regional differences, with more affordable areas, such as the Inland Empire and Central Valley, outperforming the urban coastal centers, where high home prices and a limited availability of homes on the market will hamper sales.”
“As a result, the Southern California and Central Valley regions will see moderate sales increases, while the San Francisco Bay Area will experience a decline as homebuyers migrate to peripheral cities with more affordable options,” said Zicarelli.
Inland areas always recover last and crash first.
Yep. One of our brokers said that the city of Coachella issued 4 building permits all last year, but a builder just opened a new community there, so building permit issuance is due to increase about 4000%!
When they start building in Coachella, the recovery is fully expanded.
Mortgage Rates Mixed, But Closer to Recent Lows
Mortgage Rates were mixed today, with some lenders in slightly weaker territory while others offered modest improvements versus yesterday. The dichotomy has to do with the timing of yesterday’s market movements. Bond market began the day in weak territory yesterday but improved noticeably by the end of the day. Some lenders sent out updated (better) rate sheets while others stood pat. Lenders whose rates increased today tended to come from the group that offered improvements yesterday afternoon. Long story short, there was a brief window of the week’s best rates for some lenders yesterday with everyone getting mostly back on the same page today.
Fortunately, that page is still a good one. While rates aren’t quite as low as they were earlier this week, they’re still much lower than they were earlier this month. 3.375% is still the most prevalent conventional 30yr fixed quotes on top tier scenarios. That’s the lowest stably-held rate of all time (there have been lower rates, but only for a few days here and there), even though the upfront costs are slightly higher than they were in early August. That’s splitting hairs though! The point is that, unless you’re examining day-to-day rate movement under a microscope, rates have been holding steady near all-time lows.
FIVE EXTREMELY LOGICAL THEORIES ABOUT HILLARY CLINTON’S DEBATE PERFORMANCE
1. It wasn’t Hillary up there; it was her body double, Helen Scaffler.
You can tell it was Helen and not Hillary because Helen’s face is slightly more pear-shaped, and her hair is bouncier than Hillary’s. Also, it’s a known fact that Hillary is physically unable to “shimmy” due to a shoulder injury she sustained while deleting e-mails, so it must have been Helen doing the smile and shimmy. If you look up “Helen Scaffler” on the Internet, you’ll see it was definitely, a hundred per cent Helen Scaffler, and not Hillary Clinton.
2. Hillary wore a wire.
Take a glance at the back of Hillary’s suit. Do you see? That, my friends, was a snake-shaped wire. What does the wire connect to? Possibly an earpiece, or possibly to something even more sinister: an electronic brain. People don’t realize that electronic brains are a thing, but they are. You plug them into your own brain and they act as a second, smarter brain, constantly feeding you knowledge. This is a fact. You can look it up, also on the Internet.
3. Hillary wore a cough-suppressing suit.
If you think Hillary’s suit was made of fabric, you are sorely mistaken. Her suit was very likely made of tiny Sudafed pills, threaded together like beads, piping fresh Sudafed into her bloodstream to keep her from coughing. Also possible: A suit of Claritin? We’re not sure, but it was definitely one of those. I have a doctor friend who told me that Sudafed suits are extremely common these days, especially among political influencers, specifically at Presidential debates.
4. Hillary’s microphone was louder than Trump’s.
If you go back and watch the debate, as I have, more than two hundred and sixty-three times, there are clear moments when Trump’s mouth is moving but you can’t hear any sounds coming out of it. What if, one of the seventy-six times he was licking his lips, he was actually making a complex statement about the rise of isis? It’s possible that one of the forty-nine times he was sipping water, he was also quietly relating a story about a young crippled boy he met who cried when he heard about the details of the Iran deal. These are statements we didn’t get to hear, because Trump’s microphone was turned way down.
5. The debate didn’t actually happen.
This is something many people are saying, and I’m beginning to believe it’s true. Think about it: Did you actually watch a debate? Do you even have a television? The truth is that television has always been a construct, created by the Clinton campaign, to distract you from the real issues facing America today, and this “debate” (or whatever dream-state images were projected before you by your mind) was its fictional climax. Also, Trump wasn’t even in New York; he was in Ohio, so he couldn’t have been there. Also, Helen Scaffler is my mother.
Her debate performance was awful, especially in the first half. She looked as if she was about to keel over. She got very flustered, and clearly was just robotically spouting lines. Oh, and that red pant suit? Don’t even get me started. What a horror show.
Do you feel that Trump came across well?
Republicans Wonder If Trump Can Recover From ‘Worst Week’
The worst week of Donald Trump’s presidential campaign began with a widely criticized debate performance and ended with a bombshell report that he could have avoided paying federal income taxes for 18 years.
In between, the blustery Republican lashed out at a Latina beauty queen in a series of 5 a.m. tweets, faced opposition from conservative editorial boards, went after Bill Clinton’s history of infidelity while refusing to discuss his own, was found to have appeared in a Playboy soft-core porn film, mocked Hillary Clinton’s recent battle with pneumonia, and told a crowd she “could actually be crazy.”
“This could be the worst week in presidential history for any candidate,” said Rick Tyler, a Republican strategist and former communications director for Texas Senator Ted Cruz’s presidential campaign. “I certainly wouldn’t know how to top it.”
Many Republicans were left wondering whether Trump could recover or if he had effectively lost the race in the past seven days.
“The hole that Trump has dug for himself is very deep,” said Joe Watkins, a former aide to President George W. Bush. “Given the large viewing audience for the first debate and week of big missteps by Trump, it’s possible that it could be too late to turn it around.”
His last “worst week” was when attacking the gold-star Khan family, and he recovered just fine from that, tying Hillary in national polls just prior to the recent debate. If he goes back to what made him successful over that late-summer stretch, he will recover, but the question is does he have the discipline and desire to do so?
I think the press overplays how bad he’s doing as well. They want to see him lose so bad that most reporters can’t be objective.