Is the era of buying homes for cash over? Lowest since August, 2008

Cash sales are slowly turning into the endangered species of the industry, reaching the lowest share since August 2008.
Tumbling 35.9% from July 2013, cash sales made up 32.9% of total home sales in July 2014, according to CoreLogic’s latest report on July’s cash sales.
On a monthly basis, the cash sales share was mostly flat, falling only one tenth of a percentage point from June 2014. But it's important to note that cash sales share comparisons should be made on a year-over-year basis due to the seasonal nature of the housing market.
Cash sales have fallen each month since January 2013, and prior to the housing crisis, the cash sales share of total home sales averaged approximately 25%.
The peak occurred in January 2011, when cash transactions made up 46.3% of total home sales.
“A trend to watch is the cash share of re-sales, which has fallen almost 15 percentage points from its peak cash share of 47.1% in February 2011,” the report said. “This category will determine the direction of cash sales going forward, since re-sales make up the largest share at 81% of all sales.”
(Source CoreLogic, click to enlarge)

Student debt costs housing $83B a year-Skyrocketing higher ed costs create enormous drag

For more than a year HousingWire has been reporting on the link between high levels of student loan debt and the struggling housing recovery.
Now John Burns Real Estate Consulting has quantified the true measure of this dismal reality: Student debt will cost the housing industry approximately $83 billion in sales in 2014.
With college debt increasing by about 6% every year, there is every reason to believe this trend will continue, and probably worsen, the firm reports.
Their report estimates that heavy college debt will reduce real estate sales by 8% for this year, and that households that pay $750 or more for college loan debt each month are priced out of the housing market entirely.
Given how important debt-to-income ratios are now with the Qualified Mortgage rules.
Another recent study found that when parsing mortgage applications of those with student loan debt, approved borrowers had monthly college loan payments of about $300.
Mortgage applicants paying nearly $500 per month, however, were usually denied.
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Source: John Burns Real Estate Consulting
“The analysis was quite complicated and involved a few assumptions, but we believe it is conservative, primarily because we looked only at those under the age of 40 with student debt,” analysts Rick Palacios Jr. and Ali Wolf wrote.
Here is the math:

Student debt has ballooned from $241 billion to $1.1 trillion in just 11 years.

29 million of the 86 million people aged 20–39 have some student debt.

Those 29 million individuals translate to 16.8 million households.

Of the 16.8 million households, 5.9 million (or 35%) pay more than $250 per month in student loans, which inhibits at least $44,000 per year in mortgage capability for each of them.

About 8% of the 20–39 age cohort usually buys a home each year, which would be 1.35 million transactions per year.

“Using previous academic literature as a benchmark for our own complicated calculation, we then estimated that today's purchase rate is reduced from the normal 8% depending on the level of student debt—ranging from 6.9% for those paying less than $100 per month in student loans to less than 1% for those paying over $1,300 per month. Other factors contribute to even less entry-level buying today,” they wrote.
John Burns Real Estate Consulting raised the red flag on student debt back in 2011 and continues to believe that this debt will delay homeownership for many, or at least require that they buy a less expensive home.

Fannie Mae to raise modification interest rate-New rate effective on Oct. 14

Fannie Mae is set to raise the benchmark interest rate for its Standard Modification program. Beginning Oct. 14, Fannie Mae will raise its required interest rate for standard modifications from 4.375% to 4.5%.
The rate was lowered from 4.5% to 4.375% on Sept. 15, but will now rise again in one week.
Fannie Mae announced the change on Tuesday in an email sent to its servicers.
According to Fannie Mae’s website, the Standard Modification program is “designed to help those borrowers who are ineligible for the Home Affordable Modification Program.”
When the program began in Jan. 2012, Fannie’s benchmark interest rate was 4.625%. Fannie lowered the interest rate to 4.25% in Sept. 2012, before dropping it to 4% on Dec. 1, 2012.
The interest rate stayed at 4% until Sept. 2013, when Fannie raised it back to 4.625%, before dropping it back to 4.5% in July of this year.
“The Fannie Mae Standard Modification interest rate is not determined on a preset schedule,” Fannie said in the note to its servicers. “The interest rate is subject to periodic adjustments based on an evaluation of prevailing market conditions.”
Fannie also noted that any loan modification requests that were approved at the previous rate are not eligible to be resubmitted for approval under the new modification rule

Is mortgage credit loosening or not?-Myth or reality, the debate continues

The Federal Reserve Board's Quarterly Senior Loan Officer Survey of credit conditions indicates that mortgage credit loosened in Q2 2014.
BofA Merrill Lynch Global Research 4 Comments score trends of actual purchase mortgages closed on a monthly basis, and they find the opposite is true: aggregate FICO scores for purchase mortgages continue to move higher.
“We think the explanation of the difference is that while FICO trends are lower in all financing channels (such as conventional or government), the highest quality channels are increasing share of mortgages closed, hence the aggregate score is rising,” BAML analysts say.
James Frischling, President of NewOak, weighed in Monday in a note to clients, and he says it’s too tight.
“The housing recovery continues to face challenges, and the imposition of stricter mortgage rules has created a very tight credit market. It’s of course understandable that banks should only lend to people that have the wherewithal to pay them back, but the obsessive focus on income, as opposed to assets or the overarching ability-to-repay, is going to shut many people out of the housing market,” he says in the note.
American Bankers Association’s chief executive Frank Keating spoke about some of the issues that are keeping credit tight recently, and he said that in addition to federal mortgage rules that are hindering the recovery and the importance of a strong jobs market, heavy student loan debt burdens will inhibit many from buying a home.
“Current mortgage rules have created a standardized and automated world of mortgage finance that borrowers must be able to meet, and have left banks little flexibility under the qualified mortgage/ATR rules,” Fischling says. “The concept of ‘character lending,’ which requires the lender to gain an understanding of the specific borrower, is dead."
Now even former Federal Reserve Chairman Ben Bernanke, who was recently turned down for a refinancing of his mortgage, says he feels the banks may have gone a little too far on mortgage credit conditions.
“The banks are being extremely cautious in response to the new mortgage rules and the mountain of mortgage litigation they’ve faced since the financial crisis. As a result, nonbank lenders will continue to find their place in the mortgage market because, even if bank credit standards are tight, the demand for mortgage loans remains high,” Bernanke said.

Foreclosure inventory down 32.8% from August 2013-CoreLogic: 45,000 foreclosures in August

There were 45,000 completed foreclosures nationally, down from 58,000 in August 2013, a year-over-year decrease of 22.2%, according to the latest data from CoreLogic.
On a month-over-month basis, completed foreclosures were up slightly by 1.1% from the 44,000 reported in July 2014.
Before the housing crash, completed foreclosures averaged 21,000 per month nationwide between 2000 and 2006.
“Clearly there has been a large improvement in the market the last few years, but five years into the economic expansion the foreclosure inventory remains at nearly three times the normal level,” said Sam Khater, deputy chief economist at CoreLogic. “Since homeownership rates peaked in the second quarter of 2004, there have been 7 million completed foreclosures, which account for 15% of all mortgages.”
Completed foreclosures are an indication of the total number of homes actually lost to foreclosure. Since the financial crisis began in September 2008, there have been approximately 5.2 million completed foreclosures across the country.
As of August 2014, approximately 629,000 homes nationally were in some stage of foreclosure, known as the foreclosure inventory, compared to 936,000 in August 2013, a year-over-year decrease of 32.8%. The foreclosure inventory as of August 2014 made up 1.6% of all homes with a mortgage, compared to 2.4% in August 2013. The foreclosure inventory was down 2.6% from July 2014, representing 34 months of consecutive year-over-year declines.
“The number of foreclosures completed during the last 12 months is at the lowest level since November of 2007,” said Anand Nallathambi, president and CEO of CoreLogic. “At current foreclosure rates, the shadow inventory could fall below 500,000 units by year-end which could provide a solid boost to the recovery in housing in 2015.”
Highlights as of August 2014 from CoreLogic:

• August represents 19 consecutive months of at least a 20% year-over-year decline in the national inventory of foreclosed homes.
• All but two states posted double-digit declines in foreclosures year over year. The District of Columbia saw a 2.5% decline and the state of Wyoming saw a 13.4% increase in foreclosures year over year.
• Twenty-eight states show declines in year-over-year foreclosure inventory of greater than 30%, with Utah and Idaho experiencing the largest declines at 46% each.
• The five states with the highest number of completed foreclosures for the 12 months ending in August 2014 were: Florida (121,000), Michigan (43,000), Texas (36,000), California (32,000) and Georgia (28,000).These five states account for almost half of all completed foreclosures nationally.
• The four states and the District of Columbia with the lowest number of completed foreclosures for the 12 months ending in August 2014 were: South Dakota (65), the District of Columbia (110), North Dakota (296), West Virginia (462) and Wyoming (650).
• The five states with the highest foreclosure inventory as a percentage of all mortgaged homes were: New Jersey (5.8%), Florida (4.6%), New York (4.2%), Hawaii (3%) and Maine (2.7%).
• The five states with the lowest foreclosure inventory as a percentage of all mortgaged homes were: Nebraska (0.4%), Alaska (0.5%), Arizona (0.5%), North Dakota (0.5%) and Wyoming (0.5%).

More signs of a sliding housing market

What a “coincidence” it is that the 2Q GDP estimate of 4.6% was reported last week by the Bureau of Economic Analysis so close to election day. Just as was the case in late 2012… just ahead of the national elections, economic “news” comes out that the recovery is strengthening. Really?
Oh, I won’t quibble about there seeming to be a general sense that the economy is improving, but a temporary feeling of relief does not change reality. And the most important piece to seeing longer-term growth and steady improvement in the general economy (and therefore the housing market) will only happen when the jobs picture improves significantly – accompanied by a rise in middle-class wages.
I would also like to state the obvious here: one quarter’s GDP numbers does not a trend make.
There are still enough indicators out there that suggest that another round of foreclosures is near (and the general economy is weak): Affordability issues; looming interest rate hikes as have been predicted by Federal Reserve Chairman Janet Yellen; too many FHA loans being made (this is the “new” sub-prime market); federal emphasis being placed on low-income borrowers, and other factors are causing house prices to decline once again in many markets.
Take, for example, this news reported by Trey Garrison in HousingWire on Sept. 30, “ZeroHedge: America’s most important housing metro flashing red,” that the Chinese housing bubble has burst and ZeroHedge’s long-stated belief that “San Francisco is the canary in the American housing coal mine, and after a double round of bad housing news, that canary is looking green around the gills.”
Garrison goes on to quote ZeroHedge as saying that San Francisco’s proximity to both Silicon Valley and China has helped it benefit not only from the Fed-driven liquidity bubble, but also two other bubbles: tech and the behemoth Chinese $25 trillion financial debt that caused Chinese money to pour into the San Francisco market. House prices had been driven up significantly as a result.
But, and that is a BIG but, as Garrison’s article notes, there is data now out that indicates there is little if any doubt that the San Francisco housing price “bubble” is losing air. Prices are no longer rising at a breakneck pace and could actually decline for the first time in several years.
This appears to indicate that now even the ultra-high end of the U.S. housing market, San Francisco at least, which has seemed to those blinded by housing price increases in recent months to be impervious to price corrections, is now on the verge of coming back to reality.
In other news, Case-Shiller has reported that their home price index fell 0.5% in July, which is the steepest drop since late in 2011 and the third consecutive month of declines.
There are numerous reports out there about the housing market today. Without reading as much information as you can to help you make up your mind as to whether it is trending up or down, I don’t know how anyone could claim to know in which direction the market is actually headed. Suffice it to say here that it depends on which housing market or markets you are talking about. In some markets prices are still rising, but in others quite the opposite is true. Local housing markets vary across the country for numerous reasons, but chief among them are the state of the local job market and the level of available inventory. Did I mention jobs?
When it comes to home price growth, even members of the National Association of Realtors expect house prices to increase only modestly over the next 12 months, according to data collected from the August 2014 Realtor Confidence Index Survey, as reported recently in HousingWire. And when NAR puts out information that doesn’t scream “Now is a great time to buy or sell real estate,” but instead speaks the truth, it is certainly worth noting — especially so close to another election day.

Trulia: Home prices 3% undervalued by historic measure-Only 7% of 100 largest metros are more than 10% overvalued

Trulia (TRLA) Chief Economist Jed Kolko says that despite the current deceleration in home prices worrying some, and claims from others that home prices are too high, home prices nationally are actually 3% undervalued in the third quarter of 2014.
“In 2006 Q1, during the past decade’s housing bubble, home prices soared to 34% overvalued before dropping to 13% undervalued in 2012 Q1,” Kolko writes. “One quarter ago (2014 Q2), prices looked 5% undervalued; one year ago (2013 Q3), prices looked 6% undervalued.”
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Source: Trulia Bubble Watch
This is his conclusion in the latest Trulia Bubble Watch. Bubble Watch shows whether home prices are overvalued or undervalued relative to their fundamental value by comparing prices today with historical prices, incomes, and rents.
When home prices are overvalued relative to fundamentals, the housing market approaches a bubble, with the consequent bigger risk of a price crash.
“Sharply rising prices aren’t necessarily a sign of a bubble. By definition, a bubble develops when prices look high relative to fundamentals,” Kolko says.
Kolko says that three out of five Housing Barometer measures are getting close to normal. But the two measures that hitch housing to the broader economy are still struggling, so the job market and housing market aren’t helping each other as they should.
The Bubble Watch report posts the following conclusions:

Texas and California Metros Look Most Overvalued

The most overvalued market is now Austin, at 19%, followed by the California metros of Los Angeles, Orange County, San Francisco, and Riverside-San Bernardino. The California metros on the top-10 list were all significantly overvalued during the past bubble, ranging from 46% overvalued in San Francisco to a dizzying 87% in Riverside-San Bernardino. By contrast, Austin and Houston are the only metros out of the 100 largest that look more overvalued today than in 2006. Texas markets avoided the worst of the housing bubble during the past decade. Recently, they’ve had double-digit home-price increases.

Almost all of the most undervalued metros today are in the Midwest and New England, led by Dayton and Cleveland. One year ago, Las Vegas and two Florida metros, Lakeland-Winter Haven and Palm Bay- Melbourne-Titusville, were on the most-undervalued list. Since then, price gains have lifted them off this list. In the past year, price gains in the undervalued Midwestern markets like Detroit have outpaced price gains in the undervalued New England markets like New Haven.

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Source: Trulia Bubble Watch
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