What happens when they pull the plug?
A new report from the brain trust at Capital Economics asks a question that stopped us short in the HousingWire newsroom.
Paul Diggle, property economist at Capital Economics, looked at several months worth of existing and new home sales, and made a simple but bracing observation:
"Given that existing home sales make up more than 90% of all home sales, a key question is whether the current slump will prove temporary or permanent."
Diggle goes on to consider various factors that could hurt sales. Most are well known but one no one looks enough at is housing prices. Combined with slowly rising rates, inflated home prices have reduced mortgage availability.
"The share of respondents to Fannie Mae’s monthly housing survey who think that now is a good time to buy a home dropped from 76% in May to 64% in November, while NAR’s index of buyer traffic declined from 72 to 53 between April and October," Diggle reports.
Whether housing is in a bubble depends on how a bubble is defined, of course, but there are some startling disparities in home prices and incomes.
The current spike in prices is not being driven by first-time homebuyers entering the market.
Homes are best priced relative to incomes, and that relationship is approaching 2007 bubble levels.
The median income today is about $51,000, while the median home price is $328,000. As noted in a post by Phoenix Capital Management, that means the average price is 6.4 times more than median incomes.
In 2007, when the bubble was its fattest, homes cost 6.8 times median incomes.
And while home prices have been rising (to the delight of real estate agents), incomes have been stagnant or declining. Median income today is close to levels seen in 1987.
Anthony Sanders, distinguished professor of real estate finance at George Mason University, has been sounding the alarm about this for a while.
"After decades of “affordable” housing policies from HUD and the Federal government, U.S. housing is now the most unaffordable that it even has been," he writes. "Note the decline in real median household income since peaking in 1999 and is now $5,000 lower (or 9% lower). Average U.S. house prices are, on the other hand, 68.4% higher today than in December 1999."
As Kerri Panchuk notes, it’s really hitting younger, would-be first-time buyers. They are either living at home with their parents, or else choosing to live in multifamily much longer than previous generations. It’s not because they want to but because they are priced out of home ownership.
The big driver of rising home prices has not been incomes or sales, but rather institutional investors buying up swathes of vacant properties which they turn into rentals.
That, along with an all-stops policy on the part of the Federal Reserve to keep liquidity in the market and interest rates suppressed have fueled what recovery we've seen.
"The simple reality is that there has really been very little actual recovery in housing. With five years of economic recovery now in the rear view mirror, it is clear that the average American is really not recovering as evidenced by the lowest level of home ownership since 1980," says Lance Roberts, at STA Wealth Management. "As I stated previously, the optimism over the housing recovery has gotten well ahead of the underlying fundamentals."
"While the belief was that the Government, and Fed's interventions would ignite the housing market creating a self-perpetuating recovery in the economy - it did not turn out that way. Instead, it led to a speculative rush into buying rental properties creating a temporary, and artificial, inventory suppression," Roberts says. "Despite the Federal Reserve flooding the system with liquidity, suppressing interest rates and the current Administration's efforts to bailout banks and homeowners, owner occupied housing remains near its lows."
With no wage growth in the rearview mirror or ahead, interest rates ticking up, prices being artificially pumped up, and tepid job creation, it seems obvious that the only growth we’ve seen in housing has been illusory.
The housing "recovery" is on life support. What happens to the housing market when the plug gets pulled and all those programs end?
Monday, January 20, 2014
Friday, January 17, 2014
Property Appreciation Topping Out: Veros
Home value acceleration and residential real estate appreciation continued to steadily improve for the sixth consecutive quarter.
The Veros HPI real estate market forecast for the top 100 metro areas covers more than 1,000 counties, 345 metro areas and 13,770 zip codes.
“Markets appear to be topping out for now,” says Eric Fox, vice president of statistical and economic modeling and author of VeroFORECAST.
The future HPI forecast continues to show good appreciation that demonstrates an overall healthy real estate market, but a slight quarterly increase that indicates much slowing in the forecasted rate.
Over 90% of the markets across the country are expected to see price appreciation, Fox adds. Despite currently strong appreciation forecasts, weaker increases are expected in the top five markets (typically metro areas with more than 250,000 residents) compared to the previous quarter’s top markets, which topped at 15%.
The projected five strongest markets are: San Francisco-Oakland-Fremont, Calif., at 13.4%; San Jose-Sunnyvale-Santa Clara, Calif., is 10.7%; Seattle-Tacoma-Bellevue, Wash., is 10.2%; Los Angeles-Long Beach-Santa Ana, Calif., is 9.6%; Midland, Texas at 9.5%.
Meanwhile, depreciation levels that are still present tend to be down between 1% and 2%.
VeroFORECAST finds that local population trends and unemployment rates remain the key drivers with the least populated metro areas expected to perform the worst. (Average population of the top 50 metros is 2.4 million and the average population of the bottom 50 metros is 527,000).
Nonetheless, most underperforming markets are primarily in the Northeast, with parts of Connecticut and some sections of New York, New Jersey and Maryland expected to fare poorly compared to the remainder of the U.S. due to persistent unemployment and demand factors.
The Veros HPI real estate market forecast for the top 100 metro areas covers more than 1,000 counties, 345 metro areas and 13,770 zip codes.
“Markets appear to be topping out for now,” says Eric Fox, vice president of statistical and economic modeling and author of VeroFORECAST.
The future HPI forecast continues to show good appreciation that demonstrates an overall healthy real estate market, but a slight quarterly increase that indicates much slowing in the forecasted rate.
Over 90% of the markets across the country are expected to see price appreciation, Fox adds. Despite currently strong appreciation forecasts, weaker increases are expected in the top five markets (typically metro areas with more than 250,000 residents) compared to the previous quarter’s top markets, which topped at 15%.
The projected five strongest markets are: San Francisco-Oakland-Fremont, Calif., at 13.4%; San Jose-Sunnyvale-Santa Clara, Calif., is 10.7%; Seattle-Tacoma-Bellevue, Wash., is 10.2%; Los Angeles-Long Beach-Santa Ana, Calif., is 9.6%; Midland, Texas at 9.5%.
Meanwhile, depreciation levels that are still present tend to be down between 1% and 2%.
VeroFORECAST finds that local population trends and unemployment rates remain the key drivers with the least populated metro areas expected to perform the worst. (Average population of the top 50 metros is 2.4 million and the average population of the bottom 50 metros is 527,000).
Nonetheless, most underperforming markets are primarily in the Northeast, with parts of Connecticut and some sections of New York, New Jersey and Maryland expected to fare poorly compared to the remainder of the U.S. due to persistent unemployment and demand factors.
Thursday, January 16, 2014
Foreclosure filings drop 25%
Foreclosure filings plummeted 26% from 2012 to 2013, with 1.4 million actions recorded last year — the lowest annual total since 2007.
Default data firm RealtyTrac published those numbers Thursday in its Foreclosure Market Report, noting that since the peak of foreclosure filings in 2010, completed default actions have fallen 53%.
Back in 2010, 2.9 million properties faced foreclosure filings.
"Millions of homeowners are still living in the shadow of the massive foreclosure crisis that the country experienced over the past eight years since the housing price bubble burst — both in the form of homes lost to directly to foreclosure as well as home equity lost as a result of a flood of discounted distressed sales," said Daren Blomquist, vice president at RealtyTrac.
"But the shadow cast by the foreclosure crisis is shrinking as fewer distressed properties enter foreclosure and properties already in foreclosure are poised to exit in greater numbers in 2014 given the greater numbers of scheduled foreclosure auctions in 2013 in judicial states — which account for the bulk of U.S. foreclosure inventory," Blomquist added.
The amount of housing units that had at least one foreclosure filing during the year fell to 1.04% from 1.39% in 2012.
Meanwhile, the five states with the highest foreclosure rates in 2013 included Florida (3.01%), Nevada (2.16%), Illinois (1.89%), Maryland (1.57%) and Ohio (1.53%).
In December alone, more than 1.2 million properties nationwide were in some stage of foreclosure or bank owned, down 19% from December 2012.
In addition, Florida accounted for the biggest share of U.S. foreclosure inventory, with 306,018 properties in some stage of foreclosure or bank owned — 25% of the national total.
However, Florida’s foreclosure inventory was almost unchanged from a year ago, while still down 18% from the peak of 371,216 in November 2010.
Default data firm RealtyTrac published those numbers Thursday in its Foreclosure Market Report, noting that since the peak of foreclosure filings in 2010, completed default actions have fallen 53%.
Back in 2010, 2.9 million properties faced foreclosure filings.
"Millions of homeowners are still living in the shadow of the massive foreclosure crisis that the country experienced over the past eight years since the housing price bubble burst — both in the form of homes lost to directly to foreclosure as well as home equity lost as a result of a flood of discounted distressed sales," said Daren Blomquist, vice president at RealtyTrac.
"But the shadow cast by the foreclosure crisis is shrinking as fewer distressed properties enter foreclosure and properties already in foreclosure are poised to exit in greater numbers in 2014 given the greater numbers of scheduled foreclosure auctions in 2013 in judicial states — which account for the bulk of U.S. foreclosure inventory," Blomquist added.
The amount of housing units that had at least one foreclosure filing during the year fell to 1.04% from 1.39% in 2012.
Meanwhile, the five states with the highest foreclosure rates in 2013 included Florida (3.01%), Nevada (2.16%), Illinois (1.89%), Maryland (1.57%) and Ohio (1.53%).
In December alone, more than 1.2 million properties nationwide were in some stage of foreclosure or bank owned, down 19% from December 2012.
In addition, Florida accounted for the biggest share of U.S. foreclosure inventory, with 306,018 properties in some stage of foreclosure or bank owned — 25% of the national total.
However, Florida’s foreclosure inventory was almost unchanged from a year ago, while still down 18% from the peak of 371,216 in November 2010.
Wednesday, January 15, 2014
Blackstone-backed real estate firm learns how to be a landlord
A number of big companies are betting against the American Dream. They think lots of people are going to want to rent instead of buy a home. One of the biggest bet-makers, with 40,000 rental properties under its belt, is Invitation Homes.
Realtor Jim Tice first noticed the company popping up as a buyer in a Minneapolis suburb. He was trying to sell a client's house that was headed to foreclosure. Then the client got a cash offer from Invitation Homes. Tice says the company provided a bank statement to prove it had enough cash to cover the deal. He says the account balance was eye-popping.
"A buyer usually isn't showing you millions of dollars of savings in order to buy. So it was pretty impressive in that respect," Tice says.
Invitation Homes is a subsidiary of the Blackstone Group, the world's largest private equity firm. And over the past year and a half, it has spent a whopping $7.5 billion buying those 40,000 properties—1,000 of them in the Twin Cities.
Invitation Homes largely buys low-priced foreclosures. Then it spiffs them up and rents them out. Experts say large-scale purchases of foreclosures by investors like Invitation Homes have helped housing markets heal.
"Had it not been for them, prices would've fallen further and it would've taken longer to recover," says Elliot Eisenberg, a housing economist.
Eisenberg says since the foreclosure crisis, credit standards have tightened and a lot of people can't get a mortgage. As a result, Invitation Homes and other big investors are betting that home rentals will become increasingly popular.
"It's certainly a bet. Whether it's worth making -- we'll know in a couple years how it turns out," he says.
Until recently, it's largely been mom and pop outfits that rent houses. Eisenberg says big investors could potentially run that business more professionally.
So far, Micheal Apple has had a good experience renting a four-bedroom house from Invitation Homes in a Minneapolis suburb. Apple says if something's broken, his property manager jumps right on it.
"Either I call her or I email her, and she gets back to me within a day or so," he says.
Not so for another Twin Cities renter, Brad Dukes. He's got a beef about the "throne" in his rental home. When Dukes sits on the toilet, his knees barely clear the wall in front of him.
Dukes says the house was advertised as having two bathrooms. But one was just a free-standing toilet in the basement. Invitation Homes agreed to frame up a real bathroom and dropped a few thousand dollars to add walls, a shower and a sink.
Still, Dukes is dismayed by the end product.
"The exterior of this box they put in this unfinished room is going to remain. I'm going to be looking at sheetrock," he says.
Renters in other markets have panned Invitation Homes in online reviews. But in the Twin Cities at least, the company may not have enough renters yet to establish a clear track record. I checked out a random sample of homes the company's purchased. All of them were vacant, some for more than six months.
Andrew Gallina is a spokesman for Invitation Homes. He's aware of the empty houses and complaints from renters. Gallina admits the company is still learning the ropes. It has, after all, purchased 40,000 homes in a short period of time.
"There are times we're going to be disappointing to a resident. But at the same time, we have a real commitment to getting it right," he says.
Of course, if the landlord gig doesn't work out, the firm always has an exit strategy: Sell the homes at a profit as prices rise.
Realtor Jim Tice first noticed the company popping up as a buyer in a Minneapolis suburb. He was trying to sell a client's house that was headed to foreclosure. Then the client got a cash offer from Invitation Homes. Tice says the company provided a bank statement to prove it had enough cash to cover the deal. He says the account balance was eye-popping.
"A buyer usually isn't showing you millions of dollars of savings in order to buy. So it was pretty impressive in that respect," Tice says.
Invitation Homes is a subsidiary of the Blackstone Group, the world's largest private equity firm. And over the past year and a half, it has spent a whopping $7.5 billion buying those 40,000 properties—1,000 of them in the Twin Cities.
Invitation Homes largely buys low-priced foreclosures. Then it spiffs them up and rents them out. Experts say large-scale purchases of foreclosures by investors like Invitation Homes have helped housing markets heal.
"Had it not been for them, prices would've fallen further and it would've taken longer to recover," says Elliot Eisenberg, a housing economist.
Eisenberg says since the foreclosure crisis, credit standards have tightened and a lot of people can't get a mortgage. As a result, Invitation Homes and other big investors are betting that home rentals will become increasingly popular.
"It's certainly a bet. Whether it's worth making -- we'll know in a couple years how it turns out," he says.
Until recently, it's largely been mom and pop outfits that rent houses. Eisenberg says big investors could potentially run that business more professionally.
So far, Micheal Apple has had a good experience renting a four-bedroom house from Invitation Homes in a Minneapolis suburb. Apple says if something's broken, his property manager jumps right on it.
"Either I call her or I email her, and she gets back to me within a day or so," he says.
Not so for another Twin Cities renter, Brad Dukes. He's got a beef about the "throne" in his rental home. When Dukes sits on the toilet, his knees barely clear the wall in front of him.
Dukes says the house was advertised as having two bathrooms. But one was just a free-standing toilet in the basement. Invitation Homes agreed to frame up a real bathroom and dropped a few thousand dollars to add walls, a shower and a sink.
Still, Dukes is dismayed by the end product.
"The exterior of this box they put in this unfinished room is going to remain. I'm going to be looking at sheetrock," he says.
Renters in other markets have panned Invitation Homes in online reviews. But in the Twin Cities at least, the company may not have enough renters yet to establish a clear track record. I checked out a random sample of homes the company's purchased. All of them were vacant, some for more than six months.
Andrew Gallina is a spokesman for Invitation Homes. He's aware of the empty houses and complaints from renters. Gallina admits the company is still learning the ropes. It has, after all, purchased 40,000 homes in a short period of time.
"There are times we're going to be disappointing to a resident. But at the same time, we have a real commitment to getting it right," he says.
Of course, if the landlord gig doesn't work out, the firm always has an exit strategy: Sell the homes at a profit as prices rise.
Just how seriously should we take the latest bank earnings?- don't be fooled
It's a big week for the big banks. Bank of America beat expectations with its earnings report today, $3.4 billion last quarter. Earlier this week, Wells Fargo announced record profit. JP Morgan had better than expected earnings.
"You can tell that the banking industry is recovering, and that our economy is on a recovering path," says Ken Carow, a finance professor at Indiana University's Kelley School of Business.
But, turns out these banking numbers maybe smell a little sweeter than they really are. The effects of the housing crisis linger on these balance sheets. Banks are writing fewer mortgages. They're facing lawsuits, government settlements.
One thing propping up these earnings reports—accountants. Big banks are adding billions of dollars from reserves that they'd set aside for loan-losses that never came to be. "Now they are reducing the reserve for the bad loans, and are going to have a positive income effect," says Anne Beatty, an accounting professor at Ohio State University. But, be very clear, "there's no cash flow associated related to this income being created. It is a pure accounting effect."
So what's a regular investor to do?
Fight back, with some math of your own.
"Do some accounting," says David Stowell, a finance professor at Northwestern University's Kellogg School of Management, "it's not easy to do, and you have to look carefully at the financial statements." But, he says, it's worth it. There's a lot of accounting noise in these earnings reports, obscuring the actual business of banking.
"You can tell that the banking industry is recovering, and that our economy is on a recovering path," says Ken Carow, a finance professor at Indiana University's Kelley School of Business.
But, turns out these banking numbers maybe smell a little sweeter than they really are. The effects of the housing crisis linger on these balance sheets. Banks are writing fewer mortgages. They're facing lawsuits, government settlements.
One thing propping up these earnings reports—accountants. Big banks are adding billions of dollars from reserves that they'd set aside for loan-losses that never came to be. "Now they are reducing the reserve for the bad loans, and are going to have a positive income effect," says Anne Beatty, an accounting professor at Ohio State University. But, be very clear, "there's no cash flow associated related to this income being created. It is a pure accounting effect."
So what's a regular investor to do?
Fight back, with some math of your own.
"Do some accounting," says David Stowell, a finance professor at Northwestern University's Kellogg School of Management, "it's not easy to do, and you have to look carefully at the financial statements." But, he says, it's worth it. There's a lot of accounting noise in these earnings reports, obscuring the actual business of banking.
Outlook for Originations Volume Is a Little Worse: Fannie
Originations will drop 30% in 2014 from an estimated $1.8 trillion in 2013 in Fannie Mae’s latest forecast, according to Doug Duncan, senior vice president and chief economist.
The projected decline to close to $1.26 billion is a little pessimistic than in Fannie’s December originations forecast for almost $1.32 billion in 2014, but more optimistic than the Mortgage Bankers Association’s recent forecast for just above $1.1 trillion in annual volume.
Fannie’s most recent forecast also calls for about a 37% refinancing share, a 1.7% increase in existing home sales and a 20% increase in new home sales. All these percentages are slightly more pessimistic that last month’s.
“We are cautious about the rate rise,” Duncan says.
Institutional purchases of rental housing have subsided, Duncan told editors of this publication at a meeting in New York. The apartment sector should be stable in the coming year, he says.
Monday, January 13, 2014
Ginnie Mae Mortgage Bond Issuance Tumbles
Ginnie Mae mortgage-backed securities issuance dropped 36% in the fourth quarter from the prior quarter to the lowest level since 2008, according to newly released agency data.
Issuers securitized $76 billion in Federal Housing Administration and other government-backed loans in the final quarter of 2013, down from $119 billion in 3Q.
Ginnie MBS issuance in December fell to $22.3 billion, which is the lowest level since March 2010.
The bulk of the decline comes from the sharp drop in refinancings during the fourth quarter, which is evident from Fannie Mae and Freddie Mac’s monthly reports.
Loan volumes have been declining across all single-family loan programs, but Federal Housing Administration loan production is falling at a particularly fast rate.
FHA endorsements have fallen steadily from 105,955 in July to 61,300 in November, the latest data from HUD show.
FHA purchase loan endorsements have dropped from 66,555 in July to 47,900 in November.
FHA loans along with loans guaranteed by the Department of Veterans Affairs and U.S. Department of Agriculture back Ginnie Mae securities.
Historically, the split between FHA, VA and USDA purchase originations was around 80% (FHA) and 20% (VA/USDA), according to mortgage consultant Brian Chappelle.
“It was about 66%-34% recently. I would bet it is now even closer to 50%-50%,” he says. The consultant is a co-founder of Potomac Partners in Washington.
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