CoreLogic: Most U.S. housing markets have returned to peak levels not seen since before Great Recession

The team at CoreLogic recently came out with a report covering the housing market from the Great Recession:

"Residential home prices began to peak in some parts of the country as early as 2005. Home prices collapsed in 2007, when Wall Street began to back out of residential mortgage-backed securities. 

After falling 33 percent during the recession, prices in most markets have returned to peak levels, growing 51 percent nationally since bottoming out in March 2011.

The average home price is now 1 percent higher than it was at the peak in 2006, and the average year-over-year home equity gain was $14,888 in the third quarter of 2017. This indicates the housing market has widely recovered."

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The (Slow) Housing Recovery: Tighter mortgage financing is to blame

I’ll never forget the time I was visiting a new home sales office near Los Angeles in the height of the boom years.  The agent was attempting to explain to the potential buyer how an Option ARM could help them qualify for a higher loan balance that could easily be refinanced into a standard 30-year fixed rate program down the road.  As the alarm bells started going off in my head, I decided to re-visit the first model rather than risk challenging the agent’s presumptuous thinking.  It was at that point that I was pretty sure our industry was firmly in bubble territory.

Fast forward to 2014, and we now have the opposite problem of not enough credit due to often overly stringent underwriters who prefer to approve only the best candidates with near-perfect credit scores and reliable W-2 income.  In fact, the problem has become acute enough that the Mortgage Bankers Association recently revised their 2014 forecast downwards due to “a combination of rising rates and regulatory implementation, specifically the new Qualified Mortgage Rule.”  The new forecast predicts annual refinancings this year to be down 60 percent from 2013 (largely due to higher interest rates) but purchase originations to still rise by 3.8 percent.  During the fourth quarter of 2013, the mortgage businesses for Wells Fargo and JPMorgan Chase were reportedly down by 60 and 55 percent from a year ago, respectively.

As noted in my column last month, the reasons for the tighter credit are two-fold:  an incomplete Dodd-Frank Act which means regulations are unclear, and new Qualified Mortgage Rules which went into effect on January 10^th.  Qualified mortgages are those which are no longer than 30 years, charge fees and points no more than three percent of the loan amount and don’t include any negative amortization or interest-only programs.  For adjustable rate loans, underwriters now must take into consideration the potential maximum rate and payment amount over the life of the loan instead of approving based on the teaser rate alone.  This would seem to disproportionately impact younger buyers who were previously willing to take a gamble that their paychecks would improve along with their careers, thus making higher monthly payments in the future feasible.

Also now largely shut out of the mortgage market are the newly self-employed, as evidenced by nationally syndicated housing columnist Lew Sichelman’s disappointing experience to refinance a rental property despite a credit score of 760 and an LTV of 70 percent.  With less than two years of history of 1099 income, Lew’s equity in several other properties simply wasn’t relevant under today’s underwriting criteria.

There may, however, be a signs of a thaw in this somewhat frozen market.  Many eyes are now on former congressman Melvin L. Watt as director of the Federal Housing Finance Agency, which oversees both Fannie Mae and Freddie Mac.  As opposed to Edward DeMarco, the agency’s acting director for the past four years, Mr. Watt has already indicated a clear shift in direction which includes delaying a series of higher loan fees announced in December and putting access to mortgage credit front and center ahead of other goals, especially that of scaling back the federal government’s role in propping up the residential mortgage market.

What this means in the short run is that those buyers without perfect credit and large down payments will not face higher upfront loan fees charged by Fannie and Freddie.  In the long run, there remains a larger policy disagreement on the role of private capital in our nation’s mortgage market, one that would be completely separate without any connection to government.  And yet in a lending environment of mortgage rates below five percent, private capital has stayed on the sidelines because there are too many other competing options which offer higher yields.  Add in the considerable interest rate risk that an investor takes with a traditional 30-year fixed-rate loan and it’s not surprising that lenders continue to be picky.  Eventually, however, lenders which rode the now-declining refinancing wave of 2013 will have to make up that lost business with new loan originations.

To spur lending, three things should happen.  Firstly, Fannie and Freddie will have to expand the range of mortgages they guarantee without lowering standards.  Secondly, the re-emergence of private capital should occur before government fees are raised.  And thirdly, Mr. Watt should ensure that the 30-year fixed-rate loan remains a bedrock of housing finance given its historic role as the best way for homeowners to slowly build wealth without worrying about future interest rate shocks.  

BuilderBytes' MetroIntelligence Economic Update for 10/11/13

Please click here to see the edition of BuilderBytes for 10/11/13 on the Web.

In this issue of the MetroIntelligence Economic Update, I covered the following indicators:

• 52 housing markets have now returned to or exceeded pre-recessionary levels
• Consumer credit rose in August but credit card use declining

Want to advertise in the newsletter and reach over 130,000 readers? Contact National Sales Manager Nick Cosan at nkosan@penpubinc.com.

BuilderBytes' MetroIntelligence Economic Update for 1/16/12

Please click here to see the edition of BuilderBytes for 1/16/12 on the Web.

In this issue of the MetroIntelligence Economic Update, I covered the following indicators:

• Consumer confidence rises to highest level in eight months
• Trade deficit rose in November as imports increased more than exports
  

Want to advertise in the newsletter and reach over 100,000 readers? Contact National Sales Manager Nick Cosan at nkosan@penpubinc.com.

Want to make sure your company or event is included in the events calendar? Contact editor Dani Smith at dsmith@penpubinc.com.

My interview with Jon Lansner of the OC Register now online

On Monday I was interviewed by Jon Lansner with the Orange County Register, who runs the "Lansner on Real Estate" blog and has recently added BlogTalkRadio.com podcasts to his site.

We mostly discussed what builders are doing today to cope with the housing market, the fact that cheaper will land will eventually lead to more affordable new housing, and when we can expect a rebound to a more normalized market.

You can listen to that interview here.

Could the states hit hardest by the housing downturn bounce back faster?

Here's an interesting theory: Luke Tilley, a senior economist with IHS Global Insight, thinks that the states hit hardest by the downturn in housing -- namely California, Arizona, Nevada and Florida -- could recover faster than states in the mid-west -- such as Michigan, Ohio, Illinois and Ohio -- which have lost manufacturing jobs that may never return. From a story at BuilderOnline.com:

In a twist of irony, the states hit hardest by the now-burst housing bubble could be among the earliest to recover from the devastating recession that resulted, outpacing the rest of the United States as soon as 2011.

“They’ve had a steeper decline, but they will have a stronger recovery,” predicted Luke Tilley, senior economist for IHS Global Insight’s U.S. regional service, in a recent online presentation. He was, of course, referring to the “housing states” of California, Arizona, Nevada, and Florida, which benefited mightily in terms of tax revenue, population growth, and new jobs during the boom...

The good news is that in terms of home prices, California and Florida may be reaching the bottom in terms of home prices in the first quarter of this year, according to Tilley. (Other regional economists have less rosy projections, particularly for Florida.) He anticipates that Arizona will reach its low point in 2009’s second quarter, followed by Nevada in the third quarter.

Unfortunately, the jobs situation—always a lagging indicator for the economy—won’t crater until later this year, at the earliest, according to Tilley’s analysis. Nevada will be the first to slide to the bottom, with an unemployment rate of (ouch) 10.1% in 2009’s third quarter. Tilley expects the other three housing states—California, Arizona, and Florida—to reach the bottom as far as jobs in 2010’s first quarter, with “trough” unemployment rates of 10.5%, 8.8%, and 9.5% respectively.

When employment does rebound, though, these states should be able restart their economic engines relatively quickly with their choice of workers. In contrast, manufacturing states such as Michigan, Indiana, Illinois, and Ohio may never recover the factory jobs they have lost during this recession, said Mike Lynch, an economist with IHS Global Insight’s U.S. regional service...

A housing recovery must first start with land values

For many people working in the business of developing and selling residential land, they’re hoping that 2009 is the year that buyers and sellers will finally be able to agree on a price and thus plan ahead for an eventual rebound. To be sure, the year 2008 was a terrible year to be in the land business: according to Real Capital Analytics in New York, the dollar volume of land sales in 2008 was just a fraction of the $37.07 billion reported in 2007.

One major reason for the sharp drop-off in activity – estimated at 75% through August of 2008 versus the same period of 2007 – was that buyers and sellers were not able agree on prices and terms. At the same time, potential buyers such as land developers, builders and hedge funds remained in ‘wait-and-see’ mode as they devoted most of their energy to simply holding onto what they already had.

Moreover, since many land sellers in 2008 were home builders looking to book losses before the end of the year in order to carry back tax losses for 2007 and 2006, objective price discovery became impossible when companies such as Lennar and D.R. Horton were getting rid of land holdings for as low as 25 cents on the dollar. Finally, with private capital hibernating, the few buyers out there with the capital to invest are looking to invest for long-term gains and are thus unusually patient to find the best deals.

That patience may be about to pay off.

According to Erik Christianson at The Hoffman Company in Irvine, California, land values for a standard 7,200-square-foot finished lot in the high desert of Los Angeles County, the low desert of Riverside County and various submarkets of the Inland Empire have fallen from 55% to 70% since the market last peaked in the fourth quarter of 2005. Similar declines have been reported in other sun belt markets such as Phoenix and Las Vegas. With raw land selling for close to its value for agricultural uses, the best potential deals today are for finished lots, entitled lots that are not yet improved and even standing inventory of home builders cut off by their lenders.

Moving into 2009, some brokers think that values have fallen almost low enough to capture the interest of not just the usual suspects, but vulture funds armed with nine-figure war chests set up especially by land development veterans to pounce at the right time. But for inexperienced hedge funds and private equity companies located far from where the land is located, they often must outsource their due diligence, purchase decisions and the development of their land portfolios to others. For them, the term ‘caveat emptor’ has rarely been more true.

For example, argues Les Whittlesea of Whittlesea-Doyle, which specializes in Southern California’s Inland Empire, a fund which insists it is only interested in larger parcels including 500 or more lots could easily miss better opportunities with fewer lots that are located closer to existing jobs and city infrastructure. Consequently, when the market rebound does happen, it will likely favor certain submarkets over others, but only a thorough analysis will separate the winners from the laggards.

Instead of finding the deals first and then conducting the analysis, it might be smarter for buyers to first rank a region’s submarkets before falling in love with a specific parcel and then having to justify it with economic smoke and mirrors. After all, sometimes the best opportunities come in smaller packages, but you wouldn’t know it unless you have your own – and objective -- guides to show you the way.

Good news/Bad News

LA Times came out with a pretty even-handed article on the latest bit of good news on the economy:

U.S. gross domestic product increased at a brisk 3.3% annual pace in the April-June quarter, according to the Commerce Department. That was the best showing since the third quarter of 2007, beating the government's earlier estimates of a 1.9% growth rate and topping economists' forecasts of 2.7%.

And more good news:

Exports grew at a 13.2% rate in the quarter, more than double the first-quarter rate. Consumer spending rose 1.7%, the biggest increase in nearly a year, as government rebate checks of as much as $600 per person sent shoppers scurrying to malls and big-box retailers.

Here’s the reality check:

However, some economists questioned whether those factors could sustain economic growth through the second half of the year and into 2009.

And this is cause for concern:

The GDP report also showed that businesses cut investments in equipment and software by 3.2%, more than in the first quarter, and investment by home builders fell 15%, although this was an improvement over the first-quarter drop of 25%.

After-tax corporate profits, meanwhile, fell 3.8% in the second quarter after increasing 1.1% in the first three months of the year.

MSNBC’s article is less realistic, though the subtitle does back off from actually calling a bottom.
And the basis for calling the bottom? Home prices are still dropping, just not by as much:

"If you look at the year-over-year numbers they are still going down but not accelerating to the downside quite as much as they had been in a number of cities,” said David Blitzer, chairman of the index committee at Standard & Poor’s. “So we are seeing hints of bottoms.”

(psst. If I were one of the rating agencies that screwed the pooch rating worthless mortgage backed securities as triple A, I would hesitate going out on yet another limb. Then again, they don’t have much credibility to lose. And ‘seeing hints of bottoms’ sounds more like a peeping tom than an economic analyst.)

The recovery in the housing market is being slowed by the availability of credit, now that lenders have substantially tightened up guidelines on approving loans. The supply of mortgage money has also been crimped as the two government-sponsored mortgage finance companies, Fannie Mae and Freddie Mac, struggle to cope with mounting losses from foreclosures.

Ending the practice of loaning money to completely unqualified people is not what’s slowing the recovery in the housing market. Whatever impediment is in place keeping home prices wildly out of whack compared to everything else, is what will slow the recovery in the housing market. And that includes bailouts.

The heavy pace of foreclosures has also been a major force pushing home prices lower, as lenders aggressively price their backlogs of repossessed real estate, hoping to unload them before prices fall further. Once the pace of foreclosures begins leveling off, the pressure on prices will ease.

As far as I have seen, the majority of banks have done anything but ‘aggressively price their backlogs of repos’. In fact, relatively few repos are priced to today’s market and even fewer banks can actually move quickly enough to close the deal. However, the ones that do have been rewarded with fast sales.

Let’s hope that trend changes.