Talking about tight mortgage lending, lack of inventory, affordability, home prices, foreclosures and much more!
Mortgage Lending Tight
One reason for continued weakness in real estate is the tight lending conditions according to the San Francisco Fed:
The housing sector has been one of the weakest links in the economic recovery, and the latest data continue to show only modest improvement. One obstacle to a pickup in housing demand has been tight mortgage credit standards. Indeed, loan standards for borrowers with lower credit scores have shown few signs of easing.
None of this comes as a real surprise to those of us in the trenches. Yes it is harder to get a mortgage now than it was before the housing market crashed. In some ways this isn’t a bad thing since it means some of the mistakes of the past won’t be repeated.
Yet we have to wonder how many people are unable to buy that are truly capable?
How many people are not taking advantage of the low mortgage rates due to stories about the tighter lending standards?
It is understandable that some mortgage lenders are scared to lend. Lenders could be forced to buy back mortgages from Fannie Mae, Freddie Mac and the FHA for minor paperwork errors that have nothing to do with loan quality or repayment. I am not saying this is a bad thing, just that it is a legitimate reason for lenders to be super strict when it comes to mortgages.
And despite Federal Housing Finance Agency (FHFA) Chairman Mel Watt’s call to lower credit scores for potential borrowers, many lenders said that will not make it easier to get a mortgage. According to a new survey by The Collingwood Group, 71% of lending professionals said it was “somewhat” to “extremely” unlikely that they would lower credit scores for borrowers. 89% of those surveyed said that regulations are hurting their business.
Whether it is existing rules such as QM/ Ability to Repay or impending regulations such as Closing Disclosure requirements, its clear that the Consumer Financial Protection Bureau (CFPB) is having a negative impact on lending and real estate. Some of those surveyed wonder if the CFPB rules serve the interest of the borrowers or if the CFPB is too focused on “fault finding” and “fining.”
Lack of Inventory
One reason for the still weak real estate market is low number of homes for sale. This could be due because many home owners are still underwater and cannot sell their homes according to research from the St Louis Fed:
As long as home prices continue to rise, we will see the number of underwater home owners improve. Which will lead to more people looking to sell and help to ease the tight inventory conditions that still plague some areas / price ranges.
Less Affordable or Still Affordable?
According to the latest National Association of Home Builders/Wells Fargo Housing Opportunity Index, firming home prices contributed to a slight dip in nationwide housing affordability in the third quarter of 2014. They said that 61.8% of homes sold between the beginning of July and the end of September were affordable to families earning the U.S. median income of $63,900. They also said that the US median home price increased from $214,000 in the second quarter to $221,000 in the third quarter.
Check out the chart:
NAHB Chief Economist David Crowe said:
Even with nationwide home prices reaching their highest level since the end of 2007, affordability still remains fairly high by historical standards.
NAHB Chairman Kevin Kelly said:
Low mortgage rates, strong job growth and affordable home prices make this a good time to buy a home.
I have to agree with Kelly but would add that rising mortgage rates and home prices could make affordability decrease even more in 2015. The old saying if you snooze you lose comes to mind…
October 2014 Housing Data Wrap Up
Here are a few tidbits from the latest Housing Data Wrap-Up from Wells Fargo. They are like me and point out that housing needs strong job growth to fully recover. While overall employment has surpassed its pre-recession level, much of the rebound in employment has been in part-time jobs as this chart shows:
They also pointed out that new home sales in September are up 22.6% from where they were one year ago. Existing home sales are up only 1.9% from their year-ago level:
Existing home inventory is still low:
Probably the most revealing chart in the report is this one showing home ownership levels:
You can see when home ownership levels started increasing, peaked and where we are today. Draw your own conclusions…
RealtyTrac just released their October 2014 U.S. Foreclosure Market Report and sadly, there was disturbing news about the number of foreclosures increasing.
RealtyTrac reported that the number of foreclosure filings increased by 15% from September to October, the largest month-over-month jump since the peak of foreclosure activity in March 2010. However, this is a 8% decline in the number of foreclosure filings from October 2013
Foreclosure starts totaled 56,452 in the U.S. in October, a month-over-month increase of 12% but a year-over-year decline of 4%. The month-over-month increase was the largest since August 2011.
Daren Blomquist, VP at RealtyTrac said:
The October foreclosure numbers are not a complete surprise given that over the past three years there has been an average 8% monthly uptick in scheduled foreclosure auctions in October as banks try to get ahead of the usual holiday foreclosure moratoriums. But the sheer magnitude of the increase this year demonstrates there is more than just a seasonal pattern at work. Distressed properties that have been in a holding pattern for years are finally being cleared for landing at the foreclosure auction.
Obviously, we are NOT out of the woods yet…
Distressed properties sold at an average 14% discount in the past year, according to a September report by the National Association of REALTORS. Properties in “above average” condition were discounted by 10-12%, while “below average” properties were discounted by 14% to 20% according to NAR.
It never ceases to amaze me the condition of some foreclosed homes. Some are in move in condition and some are massive stinking piles of poo.
Home Prices Rise
We did get some good news from Quicken Loans recently when they said that US home prices continued to climb in October. They said that their monthly Home Value Index increased 2.03% from the previous month. On a year-over-year basis, the index increased by 3.35%
Bob Walters, chief economist at Quicken Loans said:
The vast majority of the country is seeing steady, single-digit home value increases. This is the healthy momentum we look for in a stable housing market.
I think that stable and sustainable gains in home prices are better than some of the “bubble like” gains we have seen since the housing market started recovering. Remember, Quicken Loans is talking about home prices for the entire US and this may NOT be true or realistic for the value of your home.
Small Business Confidence Increases
More good news this week came from the National Federation of Independent Business. The NFIB Small Business Optimism Index crept back to its August level of 96.1 with a gain of 0.8 points led by a modest increase in the net percent of owners who plan to increase capital spending and more who expect higher sales in the next 3 months. Historically, readings this high only occurred in periods of strong growth.
Gallup Economic Confidence Increases
Gallup reported that their Economic Confidence Index increased to the highest weekly level since June 30 2013. Gallup’s Economic Confidence Index is the average of two components: Americans’ views of current economic conditions and whether they think the economy will get better or will get worse. Overall, Americans are still more negative than positive about the state of the U.S. economy.
REALTOR Confidence Plunges
REALTORS Confidence in September fell to its lowest mark in 2.5 years:
Q3 2014 Residential Remodeling Index Increases
Metrostudy announced the release of their Third Quarter 2014 Residential Remodeling Index (RRI) detailing activity in the remodeling and replacement industry. The Metrostudy Residential Remodeling Index is a quarterly measure of the level of remodeling activity in 381 metropolitan statistical areas (MSA) in the U.S., with the national composite reflecting the national level of activity.
On a seasonally adjusted basis, the index posted a gain of 3.3% year-over-year in the third quarter. While the rate of growth was slower than the prior quarter, the RRI has now posted ten consecutive quarters with positive year-over-year gains since the market bottomed at the end of 2011 and is on track to reach full recovery (a reading of 100.0 or more) in third quarter 2015. By fourth quarter 2015, the index is expected to surpass the previous peak recorded in early 2007.
Brad Hunter, Chief Economist of Metrostudy said:
The remodeling market thus far in 2014 is mimicking the muddling along of the overall housing market. Despite the moderation seen in current 2014 growth, our forecast for the remodeling market to reach full recovery in third quarter 2015 has not changed, mainly due to continually positive job and economic reports that point to a firming in housing fundamentals over the near term.
I am glad to see this increase in economic activity and hope it continues.
The Conference Board Employment Trends Index Increased
More good news was that the Conference Board reported that their Employment Trends Index increased in October. The index now stands at 123.09, up from 121.91 (an upward revision) in September. This is 7.7% higher than a year ago.
Gad Levanon, Managing Director of Macroeconomic and Labor Market Research at The Conference Board said:
The Employment Trends Index continues to increase rapidly, with all eight components improving in October. The index is signaling solid job growth through the winter. As a result, we could see the unemployment rate reach its natural rate of 5.5% by early Spring.
I will share more about jobs in this weekend’s Mortgage Rate Update!