Nov242015
House poor: when the house fails as an investment
Paying too much for a house can leave the family with too little disposable income to satisfy other desires or meet important family obligations.
Housing is often touted as an investment you can live in. The dual purpose nature provides twice the utility, so people feel comfortable paying twice the price.
Buying a home is always an emotional decision. When people fall in love with a property, if either spouse bothers do perform a financial analysis, it’s generally biased toward the answer they want to hear. Rather than an objective look at the costs and benefits, the analysis becomes a flimsy justification for an emotional decision already made.
Sometimes, that leads to costly mistakes.
Live & Learn: Buying a home left her house poor
Kelley Holland, Wednesday, 18 Nov 2015
“I wanted to have my own house. It was part of the American dream, having my house.” Azula–Altucher found a house she loved, but it was a stretch financially, and it turned out to be a bit of a money pit.
As soon as she bought it, she said, “every penny I made went into the house so I had no money to eat, just money to go to work, eat whatever I cooked, and then every weekend I was in my house fixing things.”
Even as she became adept at home repair, Azula–Altucher was racking up debt, and soon she had no financial wiggle room. Then, in 2009, she lost her job. With five months’ severance and ongoing mortgage and car payments, Azula–Altucher was in trouble. …
First time homebuyers like Azula–Altucher are often surprised by the true costs of home ownership, from necessary repairs to ongoing maintenance, take time to look for the most Affordable Home Services who can also do a quality job.
One of the main reasons I put the detailed cost of ownership for every for-sale property on this site is to avoid this problem. I even published a detailed guide on home ownership costs.
Azula–Altucher and her husband have no plans to buy a home, however. “I don’t want to buy a house,” she said. “I want to rent because I realize maintenance is a lot of work, there are hidden fees, taxes can go up and I’d rather spend all that energy writing and using my talent rather than worrying about a house.”
My loanowner inspiration
Prior to my writing publicly about housing, my wife was close friends with a woman who lived in the Cottage neighborhoods in Woodbridge. This family bought their house for about $400,000 in 2001, and by 2006, it was worth about $725,000. When I told them houses can’t possibly appreciate that quickly and sustain the gains, they told me I didn’t understand California real estate. The woman’s mother was a real estate agent, and she knew this market better than I ever could — or so I was told. 
Despite my long conversations with them on the subject, I could not convince them there was a housing bubble. These conversations provided much of the early energy to write. Maybe I couldn’t save them, but I could try to save everyone else.
The family who was my inspiration decided to execute a move-up in November of 2007. They only had $100,000 because the breadwinner borrowed the rest of their equity to start a successful business (the only use of HELOCs I can understand and endorse).
They took their $100,000, borrowed $1,000,000 in a first mortgage, borrowed $100,000 in a HELOC second mortgage (maximized their tax write offs), and bought a $1,200,000 trophy home in Woodbridge. After launching their new business, they quickly took on an $8,000 per month mortgage payment on a property they could have rented for $4,000 a month.
They struggled with this payment for over six years. Finally, in May of 2013, values had come back to where they could sell the house, pay the commission and get out with a small profit. The traded down to a cottage home very similar to the one they left six years earlier. It couldn’t have been an easy decision.
They had to pay $40,000 more than they sold their cottage for back in 2007, and they put about $100,000 down, so the last six years had no net loss, but no gain either. Their new mortgage payment is at least 60% less than their previous one.
My wife asked me if perhaps they did it right. They got to live in that beautiful house for six years and feel like they owned it. They got to impress their family, friends, and neighbors and live the good life — at least that’s what was seen from the outside. I pointed out to my wife what you didn’t see was the emotional cost the breadwinner of the family endured trying to make that $8,000 per month payment.
Since they could have rented the house for $4,000 per month and since they ended up with no additional equity, the extra $4,000 per month they were spending was “throwing their money away on mortgage interest.”
That $4,000 could have funded many family trips and vacations, possessions for their teenage daughters, savings for their retirement, savings for their children’s education, and a plethora of other benefits they gave up to “own” that house.
Even after the tax breaks, this family flushed $200,000+ down the mortgage toilet.
I give this family credit for finally making the right financial decision when they sold the big house. The discussions about selling their dream home to take a step down the property ladder could not have been easy, but it was clearly the right choice. They cut their housing costs by 60%, and now they will have the extra money to do all the things they gave up to own that huge home loan.
Don’t be these people
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Four reasons to stay invested in US housing
The stock market’s wild ride over the last couple of months may have introduced a measure of uncertainty into the investment outlook for some sectors of the global economy. However, US housing was not one of them.
America’s housing market is continuing to grow faster than the economy overall. We are seeing a number of opportunities and remain constructive on the sector. Here are four reasons why.
1) Strong job growth and consumer confidence
We expect that more jobs and higher incomes will lead to rising consumer confidence and demand for homes, even in the face of modestly higher mortgage rates.
2) Low inventories and rising pent-up demand
Both the absolute level of inventory of new and existing homes (now 2.5 million units total) and inventory as a percentage of households (now 1.6%) are at or near 15-year lows.
3) Willingness to lend and expanding demand for credit
Banks are finally lending again! In reviewing second quarter 2015 earnings details, we noticed that mortgage origination growth at all four of the largest US banks rose by double digits.
4) Relative affordability
At this juncture, owning a house is incredibly cheap—both from a historical affordability perspective and relative to the cost of renting.
LOL!! FAIL!
If… “owning a house is incredibly cheap—both from a historical affordability perspective and relative to the cost of renting”… the home ownership rate would be skyrocketing instead on doing ‘this’ …
https://s3.amazonaws.com/dp-site-files/wp-content/uploads/2015/09/01022109/Graph__Homeownership_Rate_for_the_United_States_-_FRED_-_St__Louis_Fed.jpg
Facts are stubborn things.
I’m with you. If housing were so cheap, demand would be higher and homeownership rates would be climbing.
Pimco sponsored that article, so they probably have an agenda to sell some housing related products.
Were homes affordable in 2011? Hindsight is 20/20. Four years from now, people will still be buying homes – probably in the same numbers, even with substantially higher rates. Relative affordability 2019/2015 will depend on how median incomes, median prices and rates change. People will still be buying, so homes will still be affordable in 2019.
Households who bought in 2011 are in better financial shape than those who bought in 2015. Based on current economic indicators, the same should be true for 2015 buyers over 2019 buyers.
So why didn’t anyone see how affordable homes were in 2011, and why don’t people choose to see this today? I think the below article touches on the subject, but doesn’t discuss in depth the relationship between present affordability, future affordability, and the effect of these two on market price stability. A lot of this is material we have covered before, but it bears repeating.
Present affordability is based on the availability of affordability products, qualification standards, rates, and incomes. During the housing bubble Pay-Option ARMS made unaffordable homes seem affordable. Lax qualification standards, and zero enforcement of those lax standards, allowed households to state higher incomes than they actually had, qualify homes they couldn’t afford, and bid up prices. Rates also fell into the 5%. Incomes rose as HELOC spending drove up revenue in different economic sectors.
Future affordability depends not just on how these above standards will change over time as laws are enacted or repealed, but also on how current loan terms will impact current buyers over the course of their loans.
The very nature of some of the affordability products guaranteed that loans would become less affordable during the course of their performance. The worst were NegAM loans that would recast after the initial lock period, often with higher rates, shorter terms, and ballooning principals. There were also zero interest loans with balloon payments due after so many years.
Buyers with no jobs, income, or assets also had bleak prospects — but they did have squatter’s rights — which lent a degree of stability to home prices. Bubble incomes popped along with the HELOC economy inverting the income/price relationship.
Contrast that with today, where affordability products are currently out-of-favor, qualification standards are based on ATR over the life of the loan, ARMs are less prevalent (rates are fixed), and incomes are no longer being inflated by equity being converted to cash. In other words prices are once again tied to incomes, so median incomes and median housing prices will show the same affordability tomorrow as they do today. Houses may not ever be truly cheap, but prices are stable, and likely to remain so. That is all one can hope for in California.
http://www.ritholtz.com/blog/2011/04/cheapest-homes-in-40-years-not-even-close/
“… Rather than rely on their silly, indefendable model, I suggest you compare median income to median home prices (see NDR chart below).
That metric shows that homes are way off of their boom highs, but still remain somewhat overvalued relative to the buyers ability to pay for that home. If you were to measure affordability BUT ignore that metric (of ability to pay), what you will end up with is lots of new homeowners who cannot afford to pay for those homes. Which in turn leads to lots of foreclosures — which is exactly what has occurred here.
By comparing Homes costs with buyers ability to pay for them, we can instead develop a sustainable model with periods of over and undervaluation — something the NAR model seems incapable of doing. That would render the NAR methodology, as a valuation measure, to be without any redeeming factors; (I believe the phrase I used in 2008 was “Worthless.”)
I would argue the measure of Median income to Median home price a much better gauge. It tracks people’s ability to pay for homes — an important data point if you want to see a measure of affordability that also imagines not being foreclosed upon is a relevant part of affordability.
Further, consider this perspective: How ownership ran up when money was free and lending standards had disappeared. That was obviously unsustainable. The latest home ownership data more likely reflects typical mean reversion to normalized ownership rates, rather than a paradigm shift in home ownership. At least, that is the my conclusion, relative to the ownership data and reversion to normal lending standards.”
… aka, prepare to lose some home equity…
https://confoundedinterest.files.wordpress.com/2015/11/csincsep.png?w=736
Tip: ignoring reality (housing is a proven boom/bust asset class) won’t protect you from it.
Great comment. Thanks for sharing.
I used to be a big fan of the relationship between median home price and median income. However, in a restricted supply environment like Coastal California, this relationship tends to break down as the lower rungs on the property ladder get priced out. When supply is unable to meet the demand, the median house prices can persistently be out of reach of the median wage earning household.
I try to capture this by looking at the stable period in the 1990s when the supply constraints created an equilibrium that can be compared to today. If the supply imbalance is even worse, then this relationship can break down too, but it serves as a more accurate starting point.
BTW, in most of the US, the relationship between median household income and median house price holds up pretty well.
I was trying to convince you of this five years ago
It’s gets even worse as wealth disparity widens while supply is constrained
If housing were so cheap, demand would be higher and homeownership rates would be climbing.
That would be true if buyers were highly rational, but counter intuitively demand is at its lowest when prices are cheap, and at its highest when prices are most expensive. As prices become less and less affordable demand increases because buyers want to take part in the appreciation gains and avoid getting priced out.
A lot of people, including el O, gave me flak for buying when I did during the bottom of the market. Some of the reactions from my family were also comprised of shock and fear. So many people don’t understand the dynamics of what drives the housing market, so conventional wisdom is to wait for prices to level out and then increase for a year or two before jumping in, but the problem is you’ve already missed the boat if you wait that long.
In short, most people are crowd followers and they take their cues from others about whether or not it’s a good time to buy. That’s why home prices and demand are asymmetric.
Ouch! That stings muchacho. I’ve never given anyone flak for buying a home, let alone a friend. Not my style.
In fact, I’ve wished you well over the years on your home purchases/acquisitions; ie.,
Mellow Ruse 09-10-2014, 11:04
I have a rental property under contract for $64,000 as of last night. That means I’ll be going into debt another $48,000 if all goes well. The cash-on-cash return is projected to be 17% at this point. Of course, vacancy is the big X-factor with that, but I have faith in the property manager that I plan to use.
Irvine Renter 09-10-2014, 13:05
Please keep us posted as to how this turns out. I’m thrilled that the tools on this site helped you find a property you purchased.
Reply
el O 09-10-2014, 13:15
Congrats on your acquisition. All the best to you/the fam!
That was certainly true in 2011. I remember trying to convince people to buy homes in Las Vegas when they were at 1995 prices, and people extrapolated the short-term trend and told me house prices were going to zero there.
Once house prices bottomed in 2012, I don’t think people were afraid to buy any longer. Demand was still depressed because the economy was depressed.
I’d prefer an article titled “Four Reasons You Shouldn’t Freak Out About Buying a House Today.” The article would be boring though, repeating the same stuff everyone’s heard – “Buy something when your family is ready and keep your DTIs much lower than the creditor will allow.”
Sounds like something I could work with and jazz up a little.
1. Housing is affordable relative to rent.
2. Rents are rising faster than home ownership costs.
3. Fixed-rate mortgages at low interest rates amortize quickly.
4. Lack of affordability products means market is stable.
I think you missed the best part:
“Our view based on the most recent data is that home ownership is cyclical: As housing prices rise, people become more confident, credit becomes more available. The most recent data on housing starts suggests a shift toward single family home construction. Home builder sentiment is at the highest level it’s been since November 2005. We expect companies tied to housing will see earnings growth much higher than the markets overall.
Investors seeking to capitalize on these trends should consider increasing their allocation to US housing and housing-related sectors.”
Translation: There is a bubble forming in real estate. Chase it now while you can!
Realtors, light the beacons!
Yes, and chase it by purchasing some investment product from PIMCO!
A broken clock is right twice a day. It seems to me that rejecting the message because of the messenger is unwise. The NAR has always said it’s a great time to buy, even when it actually was.
PIM(P)CO is notorious for talking their book though.
Lawrence Yun spins bad housing data
Total existing-home sales decreased 3.4% to a seasonally adjusted annual rate of 5.36 million in October.
Lawrence Yun, NAR chief economist, said a sales cooldown in October was likely given the pullback in contract signings the last couple of months. But he never made such a prediction publicly.
“New and existing-home supply has struggled to improve so far this fall, leading to few choices for buyers and no easement of the ongoing affordability concerns still prevalent in some markets,” he said.
“Furthermore, the mixed signals of slowing economic growth and volatility in the financial markets slightly tempered demand and contributed to the decreasing pace of sales,” Yun said.
On the cash sales side, Yun said, “All-cash and investor sales are still somewhat elevated historically despite the diminishing number of distressed properties. With supply already meager at the lower-end of the price range, competition from these buyers only adds to the list of obstacles in the path for first-time buyers trying to reach the market.”
TRID hasn’t caused any major lending delays
Slowdown in sales not a result of TRID implementation
Unlike some predictions, the mortgage industry did not implode once the Consumer Financial Protection Bureau’s Know Before You Owe mortgage disclosure rule, also called the TILA-RESPA Integrated Disclosures rule, went into effect on Oct. 3.
In reality, according to results from the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, there was no clear trend of an impact across loan types, though many of the sales weren’t necessarily subject to the new TRID requirements.
HousingPulse tracks the share of home sales that close on time and the total average closing time for a variety of loan types.
“While there was apprehension about TRID, so far impacts are minor,” said Tom Popik, research director of Campbell Surveys.
According to the most recent Origination Insight Report by Ellie Mae, TRID has yet to significantly dent the origination process.
“It is still too early to see if there will be impacts stemming from the Know Before You Owe changes that went into effect just last month,” said Jonathan Corr, president and CEO of Ellie Mae.
“The time to close loans remained a constant 46 days for yet another month, while the closing rate on purchased loans has stayed above 70%. We may begin to see time to close increase in the November data as the new closing disclosures are utilized for the first time,” Corr said.
Companies such as Guaranteed Rate and Movement Mortgage have already come out and said official TRID loans have made their way through their origination process.
“We were ready for the TRID implementation and it has not slowed us down at all. Our loan officers have continued to close loans in less than 30 days,” said Victor Ciardelli, president and CEO of Guaranteed Rate.
The time to close is 46 days which means the loans being measured were applications taken pre-TRID. It shows that loans under the old system have not been delayed, but doesn’t illustrate the disruptions to applications taken in October due to the changeover.
Here’s a differing perspective:
http://www.stltoday.com/business/columns/jim-gallagher/gallagher-new-mortgage-rules-tell-more-cause-delay/article_b0147a80-5afb-5202-a50c-2a1f52a0cf3b.html
The rule took effect early last month, meaning that the first deals are closing now, and Rood is seeing problems.
“Closings are being postponed, locks extended at a cost to lender or borrower, sellers’ plans disrupted,” says Rood, who makes loans as far away as the West Coast.
The new rules do cause a problem for people who want to close quickly, he says. Lenders can no longer rush a deal through.
“We’re asking agents to set 45-day closings instead of 30-day closings,” says Russ Nolting, CEO at Keller Williams Realty. “We’re purposely giving the title companies more time so there won’t be problems.”
Berlin Models How Cities Can Push Back Gentrification And Keep Housing Affordable
Ten years ago, Berlin’s housing was dirt cheap. So cheap that you could rent an entire, huge apartment just for yourself. Then word got out, the city got cool, and the influx of hipster migrants drove rents up, pushing locals and regular immigrants to the outskirts.
It’s a clichéd story, one which has been told from New York to San Francisco, from London to Barcelona. But unlike those cities, Berlin is doing something about it. A new law goes into effect on January 1, 2016, capping rents for the quarter of a million people who live in the city’s public housing. In Berlin, rents for public housing are often higher than in the private market (more on that in a second), and the new law will reverse this.
The city’s poorest residents will pay no more than one third of their income on rent. Apartments must be under 540 square feet, and the maximum subsidy will be $2.68 per 11 square feet, and if the heating costs are unusually high, the cap is lowered to 25% of income. Other than that, the rents will be linked to the wages of the people who live in them, which seems very sensible.
The law has come about, says local newspaper the Berliner Zeitung, because the companies that administer public housing are often charging more than the regular private market. This happened because, in order to incentivize private companies to build more public housing, Berlin offered a big subsidy on rents, enabling the companies to effectively overcharge. When the subsidy was cut, the companies were allowed to charge the tenants instead.
This change won’t have a direct effect on city-wide rent rises, but it does apply to tenants of privately-owned “public” apartments, so they won’t get priced out of the market. This offers the kind of rent security that people on low income seldom enjoy. It also proves that Berlin is serious about reforming the rental market.
This year, several new laws have been passed to address the problem, and hopefully to head off unsustainable rent hikes before Berlin turns into another Manhattan or Central London, where only the rich can afford to live. At the beginning of the year, the courts ruled that landlords could evict tenants for subletting their apartments on Airbnb, although in terms of curbing rent rises, it might be better to stop landlords renting their own apartments via the service.
And at the beginning of this month, November, a new law came was passed regulating the Anmeldung, Germany’s residence registration, making it harder for tenants to do off-the-books subletting.
Taken together, these changes make it trickier for people to drop in and out of the city, pushing rents up as they do so, while making little difference to long-term residents. Like most German bureaucracy, it is slow, methodical, and relentless, and will probably end up working.
Momentum Builds to Tax Consumption More, Income Less
But the broad direction of their proposals — toward taxing spending rather than income — is one that many economists in both parties applaud. It is also one that politicians, of necessity, may eventually embrace.
But other Republicans would also move, if less directly, toward taxing consumption (what economists call spending) and away from taxing income. Mr. Trump says his plan would eliminate income taxes for more than half of American households. Jeb Bush, the former Florida governor, and Senator Marco Rubio of Florida would let businesses immediately write off capital investment. Mr. Rubio would eliminate taxes on investment income.
“Every one of the Republican plans I have looked at closely has more of a consumption basis,” said Leonard Burman, a former official in President Bill Clinton’s administration who directs the Urban-Brookings Tax Policy Center.
Democratic politicians typically oppose taxing consumption on fairness grounds; lower earners spend a greater proportion of their income than higher earners. They favor what are called progressive taxes, those that tax a higher proportion of wealthier people’s income. That instinct is especially acute in an era of stagnant middle-class wages and widening income inequality.
Yet Democratic economists, like their Republican counterparts, say taxing consumption encourages savings, investment and greater economic growth. Moreover, the very income trends Democratic politicians point to with alarm complicate their ability to raise enough revenue to finance government programs without increasing burdens on the middle class as well as the affluent.
“We’ve come close to maxing out the amount of progressivity we can get from the existing tax system,” said Peter Orszag, President Obama’s first budget director.
*Applause*
Qualification – Rubio’s elimination of tax on investment income is silly. Why should someone pay a ~45% tax rate on income derived from slaving at a desk for 60+ hours weekly, while paying a 0% tax rate on the gain from a sale of Apple stock?
Because the gain from sale on Apple stock encourages investment. Investment in Apple creates jobs! Mostly in China though, but also in the US.
On the other hand it’s ok to slave away at the desk, because you have no choice but to slave away. In fact taxing it more will make you slave away even more because you have many fixed costs. More slaving away is also good for the economy.
So, a 0% tax on investment income, because it creates jobs; then a heavy tax on labor, to discourage people from working those jobs. Makes sense.
It would be interesting to hear Rubio define “investment income.” Are we solely talking about capital gains (short and long term)? Theoretically, a person “invests” in their earning potential by attending college and maybe grad school. Every dollar earned above the median income could be viewed as a return on that initial investment of time and money. Should this “investment income” receive a 0% tax rate too?
I really like the idea of a consumption tax because it encourages and rewards saving. Our current system encourages debt over savings, and it’s one of the reasons we have problems with Ponzi borrowing.
I like the idea of everyone saving more, but not really behind higher taxes to accomplish this. Charging higher sales tax will decrease commerce and increase costs to consumers. Hard to see how higher unemployment and lower discretionary income is going to increase savings.
It would have very little effect if the taxes on consumption are offset by tax free income.
Continuing yesterday’s convo, can anyone provide an example of how a creditor could consider and verify a borrower’s non-W2 income, any way other than tax returns?
The only other reasonable proxy is bank statements, which is what the IRS looks at in an audit. Of course, this still leads to the problem of mis-categorizing expenses to inflate income as the borrower would report one set of expenses to the IRS and a different set to the bank for loan qualification.
Why the Housing Rebound Hasn’t Lifted the U.S. Economy Much
Hint: No HELOC abuse
American homeowners are finally digging out of the hole created by the housing crisis. But their housing wealth is playing a much smaller role in the overall economy than it did before the downturn.
Home equity has roughly doubled to $12.1 trillion since house prices hit bottom in 2011, according to the Federal Reserve. As a result, a key gauge of housing wealth—homeowners’ equity as a share of real-estate values—is nearing the point seen a decade ago, before the downturn.
Such a level once would have offered a double-barreled boost to the economy by providing owners with more money to tap and making them feel more flush and likely to spend. But today, that newfound wealth has had little effect on behavior. While the traditional ways Americans tap their home equity—home-equity loans, lines of credit and cash-out refinances—are higher than last year, they are still depressed.
In the first half of the year, owners borrowed $43.5 billion against their homes with home-equity loans and lines of credit, according to trade publication Inside Mortgage Finance. That was 45% higher than in the first half of 2014, but scarcely a quarter of the amount seen when equity was last as high in 2007.
Meanwhile, cash-out refinances, which let homeowners take out a new mortgage and tap some of the home’s value at the same time, were up 48% in the three months ended in August from the year-earlier period, according to Black Knight Financial Services. But they remain below the level seen in the summer of 2013. The average cash-out refinance in the three months ended in August left the borrower with mortgage debt of about 68% of the home’s value—not a risky level by any stretch.
Home equity’s effect on consumer spending is at its lowest ebb since the early 1990s, according to Moody’s Analytics. The research firm estimates that every $1 rise in home equity in the fourth quarter of 2014 would translate to about two cents of extra consumer spending over the next 1 to 1½ years. That was a third of the impact home equity had before the bust, Moody’s said.
http://si.wsj.net/public/resources/images/NA-CH911_OUTLOO_9U_20151122135106.jpg
Subprime Makes a Comeback, Despite Dodd-Frank’s Impediments
http://www.nationalmortgagenews.com/news/voices/subprime-makes-a-comeback-despite-dodd-franks-impediments-1066512-1.html
An avowed goal of the elephantine Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is the contraction of available credit to residential mortgage borrowers. Borrowers with blemished credit have seen the shrinkage of credit available to them, and Dodd-Frank has reversed a decades-long federal mandate of increasing residential home ownership.
For those borrowers impacted by restricted credit access, budding non-Qualified Mortgage niche products are leading the reemergence of a nonprime residential market. This, in turn, is augmented by stabilizing housing prices and a more discernible demand for credit by consumers.
The centerpieces of Dodd-Frank relating to residential mortgages, the Ability-to-Repay rules promulgated by the Consumer Financial Protection Bureau and the six federal regulators’ final Credit Risk Retention rule, create powerful incentives for lenders to lend to borrowers with the highest credit.
The adoption of the Credit Risk Retention rule issued by six federal regulators on Oct. 21, 2014, as mandated by Section 941 of Dodd-Frank, creates a number of difficulties for the emergence of a viable, broad-based, nonqualified-mortgage market.
The drafters of the statute, longtime critics of the residential mortgage industry, believed that in the go-go years preceding the financial crisis too many lenders recklessly extended mortgage credit to consumers on terms that they did not understand and in certain instances, could not repay.
Implicit in the drafters’ reasoning is that too many irresponsible consumers were assuming the arduous task of homeownership, which was beyond their means.
Under the risk retention rules, a sponsor of a securitization (or originator) of residential mortgage-backed securities not backed solely by qualified residential mortgages must retain a collective retained interest in the securitization of not less than 5%. Subject to certain exceptions, the rules prohibit the sponsor from helping or transferring this retained interest.
Although the risk retention rules permit the sponsor and the originator to allocate the 5% retained risk between each other, few parties except for real estate investment trusts, certain hedge funds and depository institutions will be able to hold such retained risk.
The final rule became effective Feb. 23, 2015, but asset-backed securities collateralized by residential mortgages must comply with the rule beginning on Dec. 24, 2015.
For securities backed entirely by residential mortgages, the prohibitions of transfer or sale (without the requisite risk retention) would expire beginning five years after the date of closing, if and when the unpaid principal balance of the mortgages has been reduced to 25% of the unpaid principal balance at closing, but in no event later than seven years after the transaction closes.
Further, under Dodd-Frank, a Qualified Residential Mortgage could be no broader than a Qualified Mortgage, and in earlier proposals, the qualified residential mortgage contained a number of additional criteria not found in qualified mortgages, such as a 20% down payment and front-and-back-end debt-to-income requirements.
Fortunately, with certain exceptions, in the final risk retention rule, the six regulators aligned the qualified residential mortgage.
More Young Adults Live With Their Parents Now Than During the Recession
The share of 18-to-34-year-olds living with their parents was 31.5% as of March 2015, up from 31.4% last year, according to a report from the Commerce Department on Monday. In 2005, just 27% of young adults lived with their parents, a number that has climbed pretty steadily since then.
That the percentage at home has barely moved from last year is particularly notable because many economists expected young people to start moving out as the economy has improved and unemployment among young people has dropped significantly. The housing market is relying on those new households to drive future demand.
But the trend of young people continuing to live at home is unlikely to significantly reverse course any time soon, even as the economy improves, says Jed Kolko, an independent economist and senior fellow at the Terner Center for Housing Innovation at the University of California, Berkeley.
Instead, Mr. Kolko says that the rise in children living with their parents is largely related to the fact that people are marrying and having children later, not to the weak economy and housing market. Single people without children are more likely to continue living at home much later.
Earlier this month, the Pew Research Center showed that more young women were living with their parents in 2014 than any time since the 1940s. Researchers noted that young women traditionally left home to get married, which they are now doing later and later.
Because young people aren’t likely to leave home in large numbers as their job prospects improve, the surge of pent-up housing demand they were expected to create will be more like a slow, steady trickle, Mr. Kolko said.
That helps explain why the share of first-time homebuyers remains low.
“What I think it means is that the boost to housing from young adults will come more slowly than people expect,” Mr. Kolko said. “The long-term demographic shifts suggest this might be the new normal, with young people living with their parents longer and more permanently delaying household formation and homeownership.”
“The long-term demographic shifts suggest this might be the new normal, with young people living with their parents longer and more permanently delaying household formation and homeownership.”
Can we expect Millenials to buy in mass 5-10 years from now after they have saved up down payments and paid off student loans? Household formation will occur, either an orderly progression or a stampede as the biological ticks louder. While delay may be preferable to error – delay is not denial. Millenials will buy homes. The ones who buy first will do the best.
“Generations” don’t exist in an economic sense and are a device magazines such as Vanity Fair use to clump like aged people together espousing trends.
Economically there are roughly the same amount of kids pumped out of their mothers bellies on a daily basis with a slight upward trend in total numbers in the USA.
It is true people have delayed procreating longer than previous generations, but the biological limits of this trend are already being reached. There are just as many people in there 20s and 30s who are yearning for household formation as there will be in 5 or 10 years from now
There will never be a “stampede” from a “generational” shift because they don’t exist.
I’m not an economist or anything, but I’m thinking sales will increase as housing affordability relative to income increases (see lower interest rates). Affordability may cause a stampede but not the aging of a fictional population segment.
I do enjoy clumping all of the youngsters together and pointing out how they are all slackers and wusses, but truth is they are going to be the smartest and most economically savy people in human history climbing the backs of all the hard earned knowledge of those before them that now has been collectively composed and categorized on the internet. That and they like riding bicycles.
Millennial vs Baby Boomers generation summary:
Housing costs: ↑↑
Student loan debt costs: ↑
Starting salary: ↓
Homeownership: ↓↓↓↓
Interest rates ↑
Baby Boomer retirement ↑↑
Unfilled jobs ↑↑
Salaries ↑↑
Millenials forced to launch due to parents selling house and moving to Florida ↑↑↑
Housing sales ↑↑↑
Prices ↑↑
conjecture
[kuh n-jek-cher]
noun
1.
the formation or expression of an opinion or theory without sufficient evidence for proof.
At the risk of having a conversation myself, here’s the graph I imagined in my head. It was hard to find total births as almost all the charts online were birth rates which have tumbled in modernity.
Birth rates as imagined have slowly climbed with some interesting variation at the margins since the baby boom (also interesting is baby boom started before WWII at the completion of the depression, but WWII was a speedbump). Most notably the mini-boom of ‘89 based upon the prevalence of rap music causing boomers to “get down” (my version of correlation equaling causation) 6-7% surge.
Looks like graph originally came from Calculated Risk:
http://theredish.com/imgs/showimg?v=index&img=http://www.cocklelegalbriefs.com/wp-content/uploads/2011/01/Birthsperyear.jpg&org=http://www.cocklelegalbriefs.com/blog/opinions/boomers-as-civic-elders/&ti=of%20the%20graph%20is%201957.%29&layout=1&src=Blueish%20||%201147%20x%20695%20||%20http://theredish.com/img/us%20birth%20rate%20chart%20by%20year
One reason I really like this graph, is it shows that we will have increasing retirements over the next 10 years, which really could finally put some wage pressure upward at skilled labor jobs. Also shows why immigration has had so much of a pull the past 30 years to cover the baby boom gap, but population growth has finally caught up to declining birth rates, so pull could be gone soon.
At any rate I don’t see any hordes of house hunters surging from these data even considering the rap music conceived babies.
http://www.vanityfair.com/culture/2015/09/james-wolcott-millennials
Great chart. Thanks for sharing.
This is also one of the causes of the cyclical decline in the labor force participation rate:
http://ochousingnews.g.corvida.com/housing-headwind-nobody-saw-coming/
http://ochousingnews.g.corvida.com/wp-content/uploads/2015/03/Participation-Rate.jpg
Fine. Change Millenial generation to “those of child bearing years.” If less than a normal number of those are buying because of adverse economic circumstances, then, over time, a housing shortage develops since homebuilders will only build for the demand.
Unless they intend to remain there forever, then eventually they will look for new accommodations. Given the fact that a lack of jobs has continued for a long time, the number of affected individuals has been accumulating.
There is historical precedence for this after WWII. It was called the baby boom. Where do you think all the 2-3 bedrooms built in the 50s in SoCal came from? Desire is not demand, but desire coupled with a recovering economy can quickly change to demand. Fewer buyers now means more than average number buying later.