Weekly Mortgage and Real Estate Report – Week of May 22, 2017

The Pendulum Moves
Our economic growth is very cyclical. And the last few cycles we have experienced have been some of the most severe we have seen in history. In the early 2000’s we had a very strong economic boom fueled by an explosion in real estate values. From late 2007 to the middle of 2009, we were subjected to a very severe recession, led by the collapse of the financial and real estate markets. Our latest cycle has been much less severe, as we have witnessed a very gradual recovery. But the length of the recovery has been extraordinary and is now approaching the longest recoveries in history, which have ranged from 80 to 120 months.

There are other types of cycles that typically occur concurrently with these economic cycles. For example, during the real estate boom, just about anyone could qualify to purchase a home. During the recession, credit standards tightened tremendously, and at that time only those with pristine credit could qualify for a home loan. Now, during the recovery, we have seen a gradual swing of the credit pendulum on the other side. No, we are not approaching the days in which anyone who breathed could get a loan.

However, if you look at many aspects of qualification, we have come a long way over time, just as the economy has. For example, FICO score minimums have come down. There are also more programs which require lower down payments. Though verification of income is almost universally required, there is more flexibility with regard to income qualification. As rates have moved up, lenders have become more adventurous regarding qualifying more prospects. Again, we don’t believe we are moving back to the cowboy days of the real estate boom. But we do believe that many who don’t believe they could qualify to purchase a home, now might very well be able to do so.

  Fifty-six percent of consumers recently surveyed believe that a standard homeowner’s policy covers flood damage. But they’re mistaken, and their assumption could be a costly mistake. The survey by insuranceQuotes of about 1,000 consumers shows a lot of misunderstandings when it comes to home insurance and what’s covered and what’s not. “Being misinformed about your home policy can be an extremely expensive mistake—especially when a few inches of water in a 1,000 square-foot home can easily cost over $10,000 in repairs,” says Laura Adams, senior insurance analyst at insuranceQuotes. “There are a number of widespread myths ranging from coverage for dog bites to items stolen from your car that frequently trip up policyholders.” Consumers tend to overestimate the amount of coverage they have when it comes to flooding protection, according to the study. Further, 81 percent of survey respondents knew that valuables stolen from their home were covered under most standard homeowner’s policies, yet only 28 percent knew that renter’s insurance would cover valuables stolen from their cars. “It’s critical for consumers to thoroughly explore their options and really understand the protections that are included or excluded with a standard renter’s or home insurance policy,” says Adams. “Don’t wait until right before a big storm is headed your way to get coverage because there may be a waiting period.” Source: REALTOR® MagazineNew homes are getting larger, but their lot sizes are getting smaller. The median size of a new home increased from 1,938 square feet in 1990 to 2,300 square feet in 2016, but lot sizes during this same period decreased from 8,250 square feet to 6,970 square feet. That amounts to about a 16 percent decrease. However, the trend hasn’t been consistent: Between 2006 and 2011, home buyers were showing demand for larger homes and larger lots. As home prices dropped during the housing crisis, greater affordability gave buyers opportunities to seek larger outdoor spaces. Today’s pullback in lot sizes come as builders look to cut costs. “When home prices appreciate at a fast pace, the land value rises even faster, which, in turn, drives the cost of homes higher,” according to CoreLogic’s Insights blog. “In order to mitigate the high cost of the land value, home builders reduce the size of the lots to bring the cost of the new home down so they can price these homes at a reasonable level.” Indeed, the data shows that sizable price gains on large homes between 2014 and 2016 put pressure on builders in the cost of acquiring and developing land. More builders responded by building larger homes but on smaller lots. Source: CoreLogic InsightsMillennials may often get all the attention, but members of Generation X are really the ones who have been driving the housing market lately. Gen Xers, who are between the ages of 37 and 51, make up the second largest share of home buyers, comprising 28 percent in 2016, according to data from the National Association of Realtors®. They also are buying the largest, most expensive homes compared to any other generation. The median price of homes purchased by Gen X buyers is $261,000, and the median size of the homes is 2,100 square feet, according to the NAR. Further, Gen Xers boast a median household income of $106,600, higher than any other generation. Some Gen Xers are drawn to previously owned homes for their charm and character, while others prefer new homes in order to customize design features, NAR data shows. Gen X buyers are also the most likely to purchase a home in neighborhoods that are convenient to schools. But they’re willing to compromise: 21 percent of Gen Xers indicate a willingness to make concessions on the condition of a home, more than any other generation. Source: NAR


Weekly Mortgage and Real Estate Report – Week of May 15, 2017

The Listing ShortageWe have had a decent recovery for the real estate market over the past decade. The recovery has been slow, but steady. While slow and steady may be frustrating for some, it is actually a good thing when you compare it to the real estate boom of 2001 to 2005, which created a housing “bubble” because of rapidly escalating housing prices. A steady increase is more sustainable in the long run.

However, there is no doubt that the market recovery is being held back by a listing shortage, especially in the lower price ranges. The Millennials are coming of age and are ready to buy. However, the Baby Boomers are working longer than ever and are not quite ready to give up their homes. If a Baby Boomer has not paid off their home as of yet, they are likely to have exceptionally low interest rates through refinancing and thus living in their home is typically cheaper than renting. The question is–how will this “stalemate” be broken?

The answer is — gradually. Builders continue to slowly increase their production and this new inventory is sorely needed in most areas of the country. Again, a slow increase is more orderly than a building boom, even though we are not building enough to satisfy present demand. And the Baby Boomers will gradually retire and have to leave their properties as they age. Some of these homes will be handed down to heirs and others will hit the markets. In the long run, the listing shortage will be resolved. In the short run, purchasing a home in the lower-to-moderate price ranges is a very competitive game for those entering the market for the first time.

  New buyers are gradually increasing their stake in the housing market. First-timers comprised 32 percent of existing-home sales in March, up from 30 percent a year ago and 29 percent in 2014. The looming threat of interest rate increases may be prompting more buyers to enter the market this year. But also, sustained job and income growth is playing a role, according to last month’s Realtors® Confidence Index. The aging of the millennial generation may also be modestly increasing buying behavior; the report notes that first-time buyers are most likely to be between the ages of 25 and 34. “Realtors® in most markets are saying interest from first-timers is up this year, but competition is stiff for listings in their price range,” says William E. Brown, president of the National Association of Realtors®. The good news is those who do find a home in their price range aren’t having to bring their life savings to the closing table. Sixty-three percent of first-time buyers put down anywhere from zero to 6 percent to secure a mortgage. That said, the report notes that the impact of these measures in attracting first-timers is modest due to a general lack of knowledge about the opportunities available. Only 13 percent of those aged 34 years or younger believe they can purchase a home with a down payment of 5 percent or less, according to NAR’s 2016 Third Quarter Housing Opportunities and Market Experience (HOME) Survey. Source: NARResidential construction accounted for more than 15% of GDP growth in the fourth quarter of 2016, according to data from the U.S. Commerce Department. The National Association of Home Builders (NAHB) noted that by building 100 single-family units in a metro area, 297 full-time jobs are created and $28 million in wage and business income is generated, as well as $11.1 million in federal, state and local taxes. “Home building is a key driver of the American economy,” said Granger MacDonald, NAHB chairman. “Housing creates new income and jobs, purchases of goods and services and revenue for local governments.” “Our builders remain optimistic about the market for newly-built single-family homes and consumer confidence is strong, which should set the stage for a strong spring home buying season,” MacDonald said. “Americans continue to place a high priority on homeownership and work hard to achieve this goal for their families.” Source: NAMB

Baby boomers say first impressions count when they enter a new community. They are closely sizing up neighborhood amenities like the pool, clubhouse area, and walking trails. They’re also looking at the location of the community, judging how near it is to shopping, dining, medical services, and entertainment. Hanley Wood and home builder Taylor Morrison identified what the 55-plus age group of home buyers are searching for in a home through surveys and focus groups. At 77 million strong, baby boomers are expected to continue to have a major impact on the housing market for years to come, and builders are closely paying attention to what they want in their home. Baby boomers say that space is very important to them in their home-buying decision, and they seek a home with openness and flow. What’s more, 81 percent say they find more space in a less populated community more appealing than having less space in a more populated community. Baby boomers also are looking for large common spaces with open floor plans, high ceilings, and natural light, the surveys showed. Integrated indoor and outdoor space also was important as well as sheltered areas, native plants, sustainable and energy efficient technology and materials, and sufficient storage space. Source: BUILDER

Weekly Mortgage and Real Estate Report – Week of May 8, 2017

Economic OverloadThe first week of the month is always busy with data announcements because the employment data is released on the first Friday of the month. But this month we started out firing on all cylinders because we had a meeting of the Federal Reserve’s Open Market Committee the same week, plus April was a short month and some end of the month data was pushed into May. This included personal income and spending, which are key economic indicators.

So how did we make out with all of this data and activity? Personal income and spending came in lower than forecast. The fact that personal spending did not rise at all was certainly of concern because stagnant consumer spending was a major factor contributing to the disappointing preliminary estimate for economic growth in the first quarter, which was released the previous Friday. Spending will likely need to increase for economic growth to pick up.

The announcement from the Fed came on Wednesday and, as expected, there was no action on interest rates. The announcement indicated that the Fed was comfortable with previous statements regarding future activity, despite the slow rate of growth in the first quarter. The Fed did not have the ability to see the employment numbers for April when they met and the release showed that jobs increased by 211,000, slightly more than forecast, though the job creation was partially offset by a downward revision of the previous month’s numbers. The unemployment rate fell to 4.4%, which puts us very close to what economists consider full employment, but does not consider those who are working part time or out of the workforce, which gives us some room to grow before inflation sets in. Wages grew by 0.3%, which was right on forecast. These numbers would support the Fed raising rates in June; however, there will be another jobs report released before they meet again.

  The spring home-buying market is shaping up to be one of the most competitive in recent memory, and is even tougher for first-time homebuyers, i.e. Millennials. The market as a whole continues to struggle with low housing inventory, but a recent report from Trulia shows the dwindling inventory is especially acute for starter homes or even trade ups, while the number of premium homes actually increased. A major reason many Millennials are delaying homeownership is because about 38% have subprime credit, according to TransUnion’s consumer credit database. In that case, there are several steps Millennials can take toward improving their credit scores. TransUnion Vice President Heather Battison passed along these tips that Millennials should consider when preparing to buy a home:

  • Check your credit early: TransUnion recommends all homebuyers check their credit report three to six months before shopping for a home to allow time to build credit if needed.
  • Talk to your landlord: Renting Millennials should ask their landlord to report existing rent payments to TransUnion and the other bureaus to demonstrate positive payment history.
  • Get pre-approved: Knowing the loan size a financial institution is willing to approve can prevent people from falling in love with homes they can’t afford.
  • Have a contingency budget: There are a lot of financial unknowns when buying a home so it’s important for homebuyers to have money set aside for any surprises upon move-in. Source: TransUnion

Sales of newly built single-family homes increased for the third consecutive month, posting a strong showing to the spring selling season, the Commerce Department reported. Single-family new-home sales rose 5.8 percent in March to a seasonally adjusted annual rate of 621,000 units. “The March sales numbers are the second highest on record since the Great Recession, which is especially encouraging considering the poor weather conditions throughout many parts of the country,” says Robert Dietz, chief economist of the National Association of Home Builders. “With tight existing-home inventory, rising household formations, and continued job creation, we can expect further growth in new-home sales moving forward.” In March, the inventory of new homes for sale was 268,000, a 5.2-month supply at the current sales pace, the Commerce Department reports. The median price of a new home sold in March was $315,100. “This month’s increase in new-home sales is aligned with solid builder confidence and shows that the spring homebuying season is off to a strong start,” says Granger MacDonald, NAHB chairman. “However, builders are concerned that ongoing increases in building material costs will hurt housing affordability.” MacDonald says the association is concerned about an announcement from the U.S. Commerce Department proposing a 20 percent countervailing duty on Canadian lumber imports. Thirty-three percent of the lumber used in the U.S. last year was imported with the bulk of it coming from Canada, the NAHB reports. Source: NAHB

Weekly Mortgage and Real Estate Report – Week of May 1, 2017

Which Report Was Right?This week we will get evidence of which jobs report was an accurate depiction of the current employment picture. The January and February jobs report showed major increases of over 200,000 jobs. The March jobs report showed a relatively modest increase of just under 100,000 jobs. The average for the past 12 months has been about 180,000 jobs per month and, therefore, the quarterly numbers were right on target in this regard.

The question is, will we return to the strong numbers of January and February, stay with the lower figure for March, or move back to the norm? If you are confused as to where the true numbers lie, imagine what the Federal Reserve Board must be thinking when they meet this week. They don’t get the benefit of April’s numbers because they meet before the employment report is released. And yet they must decide whether to raise rates again at this meeting.

Most are predicting that the Fed will hold steady at this week’s meeting. Until last week, the stock market had cooled significantly since their last meeting, international tensions are higher and the inflation data released recently was decidedly tame. Of course, we can’t predict their decision, but the evidence supports this hunch. As we have pointed out in the past, the Fed controls short-term rates and if the Fed acts when the markets are not expecting it, volatility in the bond and stock markets can follow. It will be an interesting week.

  Fannie Mae has moved to help the 44 million Americans that have student loan debt and want to own homes or use their homes to lower their student loan burden. It’s no surprise this debt inhibits many borrowers from becoming homeowners, even though homeownership can be an important step toward building wealth. The new policies are designed to help borrowers qualify for a home loan and reduce student debt. The policies are effective immediately and will empower lenders to:

  • Offer borrowers an option to pay off debt and get a better interest rate. Lenders can offer homeowners who have at least 20 percent equity in their homes a cash-out refinance to pay off one or more student loans. Borrowers will have an opportunity to convert higher interest rate student debt to a lower interest rate and potentially reduce their monthly debt payments. When at least one student loan is paid off directly to the student loan company, the lender can offer a lower interest rate through Fannie Mae.
  • Exclude debt paid by others, potentially making it easier for a homebuyer to qualify. Lenders can exclude a borrower’s non-mortgage debts that have been paid by others for the past 12 months from the ratio calculation, with proper documentation. Examples of debts that qualify would include credit cards, auto loans and student loans.
  • More flexibility on calculating student debt payments.Lenders can accept the monthly student debt payment amount listed on the credit report as opposed to using a percentage of the outstanding balance for the payment which must be used in qualification calculations.

Though the new guidelines are “effective immediately” upon the issuance of Fannie Mae’s Lender Letter on April 25, there may a short lag time for pricing changes as the markets adjust. Source: Fannie Mae — For more information on these changes, feel free to contact us.
Millions of students planning to attend college in the fall are scrambling to find enough money to pay for their education. Financial aid and federal loans don’t always cover the staggeringly high cost of higher education. To bridge the gap, many families take out private loans. That can be a big mistake, financial experts warn. Most private student loans require a cosigner — typically a parent — who must put their good credit on the line to get the loan approved. Cosign a loan and you’re a co-borrower, but many parents don’t seem to understand that. “It’s portrayed to them as if they’re going to simply be a reference or endorser, when the truth is they’ll be obligated to pay this loan if something happens and the primary borrower can’t pay,” said Seth Frotman, Student Loan Ombudsman at the Consumer Financial Protection Bureau (CFPB). “We now see more and more cosigners going into retirement facing unprecedented levels of student debt.” A report from LendEDU, a website that specializes in private student loans and student loan refinancing, quantifies the risk to cosigners. The survey of 500 parents who had cosigned student loans found that a third admitted they did not fully understand the potential consequences. Thirty-five percent said they now regret doing it. About 57 percent of the cosigners said they believe their credit scores were negatively impacted as a result. And that makes sense, since cosigning a loan adds debt to your credit file, and that extra debt can lower your credit score. More than a third (34 percent) said these lower credit scores hurt their ability to qualify for a home loan, auto loan or other type of financing. Source: NBC News