June 10, 2016
The High Cost of Living in NOLA
Occupy.com quoted me in For Struggling Renters in New Orleans, Hope May Be Coming A Bit Late. It opens,
Twenty-four-year old Stuart Marino is a finance major at University of New Orleans with $8,000 in student loan debt and 33 credit hours until graduation. But the alternative to obtaining that diploma is worse. As statistics show, those not having a college degree are much more likely to remain poor. Marino was not fortunate enough to have been born a decade earlier. Then, tuition at UNO was half of what it is now. During Republican Governor Bobby Jindal’s term, from 2007 to 2015, tuition at Louisiana public colleges skyrocketed due to massive budget cuts.
Despite having a job, Marino says he spends more than 30 percent of his income on rent and utilities. He would not be able to cover the cost of a $1,000 medical emergency. Indeed, he has delayed getting his car fixed, something vital to reaching his job and school.
“Fixing my car would be something I would be doing with that $700,” he said, referring to the monthly rent.
Marino’s story personifies what many people here and nationwide have experienced over the last decade as rents in cities and even in urban areas of less than 1 million have soared, exacerbating income inequality while disproportionately affecting racial minorities, the less educated and millennials.
In the last year alone, rents in the U.S. have increased 3 percent, according to Apartment List. In New York City and San Francisco, the median rent has climbed to $4,500 and higher. The cost of living in these cities can be understood as the price, however astronomical, of living in one of the country’s major economic centers, where industries like finance and tech pay high salaries.
But in smaller cities such as Miami and New Orleans, both of which count on tourism as a major source of revenue, more than a third of residents devote 50 percent of their monthly income to rent and utilities, according to Make Room, a campaign by the non-profit Enterprises Inc. that aims to create more affordable housing.
Factor in stagnant wages, a low supply of multi-unit housing, and higher credit requirements post-Recession, and the number of Americans paying 30 percent or more of their gross income on rent and utilities has risen by 22 percent in the past decade. This goes against what financial experts recommend: that people spend no more than 30 percent on basic monthly costs in order to have a cushion in case of catastrophic events like a job loss or a medical emergency.
Working harder is, in most cases, not an option. According to last month’s Bureau of Labor Statistics report, the number of Americans involuntarily working part-time has reached 6 million, and is showing “little movement since November.”
The Housing Crisis in New Orleans
New Orleans has undergone many changes since Hurricane Katrina devastated the city in August 2005. And not all of them have been positive. Sociological studies show that renters are more likely to remain displaced than homeowners. In areas of the city like the Lower 9th Ward, where most residents rented, fewer have returned since Katrina than in neighborhoods where home ownership was predominant – even including those areas that flooded. For those who have returned with few economic resources, many face a long wait for housing; according to the Housing Authority of New Orleans, in September 2015 more than 13,000 people, disproportionally African-American, were still waiting for housing vouchers.
Changing the current housing reality is akin to shoring up the foundation of a home; it can be done, but not easily. “Fundamentally, building housing is costly,” David Reiss, a professor at Brooklyn Law School and an expert in real estate and community development, told Occupy.com.
A free market economy incentivizes people to invest in something only in exchange for profit. That leaves the job of providing affordable housing up to government, but municipalities have moved away from programs establishing dense urban public housing.
Reiss pointed out that vertical expansion could alleviate high rents in urban areas. But many residents, particularly those in historic neighborhoods, don’t want to see large buildings built in their neighborhoods; it’s a NIMBY, or “not in my backyard,” conundrum.
June 10, 2016 | Permalink | No Comments
June 9, 2016
Building Emergency Funds
MainStreet.com quoted me in Here’s How to Build a Sturdy Household ‘Cash Crisis’ Fund. It reads, in part,
Americans aren’t big on emergency savings funds: only four in ten U.S. adults have one, according to a 2015 study by Bankrate.
But if your Jeep Cherokee needs $1,000 worth of transmission work, or you need to cover a $6,500 health care plan deductible in a medical emergency, a household rainy day fund may be one of the best insurance policies you’ll ever own.
Before we get on the path to starting a savings fund quickly and effectively, understand first that an emergency fund and a rainy day fund are two different animals. A rainy day fund is smaller in size than an emergency fund: whereas $1,000 might form a good rainy fund, a decent-sized emergency fund should have between $3,000 and $10,000 in cash.
The key to building both, however, is similar – just get started.
“Jump start an emergency fund with a windfall like a tax refund, profit sharing check, stock sale, or an inheritance,” says Sharon Marchisello, author of the book Live Cheaply, Be Happy, Grow Wealthy.
* * *
Once you have accumulated a decent-sized emergency fund, don’t take the experience for granted.
Building the perfect emergency fund calls one part diligence, one part creativity, and one part patience. Put all three together and sleep easier at night as your safety net fund grows accordingly.
June 9, 2016 | Permalink | No Comments
June 8, 2016
What If . . . Fannie and Freddie Imploded?
So, I was spending some quality time with the Federal Housing Finance Agency Office of the Inspector General’s most recent Semiannual Report to the Congress. The Federal Housing Finance Agency (FHFA) is the regulator of Fannie and Freddie as well as their conservator. Essentially, the FHFA calls all of the shots for the two companies.
It got me to wondering, does the Office of the Inspector General really have a handle on whether Fannie and Freddie are in good shape or not? The report opens with a Snapshot of OIG Accomplishments. The Snapshot contains the following categories:
- OIG Investigations Monetary Results
- Judicial Actions
- Hotline Contacts
- Audit and Evaluation Reports Issued
- White Papers Issued
- Office of Compliance and Special Projects Reports Issued
- Nonmonetary Recommendations Made
- Regulations Reviewed
- Responses to Requests Under the Freedom of Information Act
As I read through the report, I had the distinct feeling that I had got lost among the trees of bureaucratic oversight and had lost sight of the contours of the Frannie forest.
I want to know one thing — are the two companies solvent and will they be solvent for the foreseeable future? The OIG’s Snapshot is pretty backward facing and focuses on a lot of pretty minor issues, like counting hotline contacts, instead of focusing on the fundamentals.
I know, I know — if we can measure something, then we want to share it with the world, but the Snapshot actually decreases my faith that OIG and FHFA are taking care of the entire forest and not just a few of the trees they were able to measure.
That being said, the report does get to some of the important issues later on. It acknowledges that
Since September 2008, FHFA has administered two conservatorships of unprecedented scope and undeterminable duration. Under HERA,the Agency’s actions as conservator are not subject to judicial review or intervention, nor are they subject to procedural safeguards that are ordinarily applicable to regulatory activities such as rulemaking. As conservator of the Enterprises, FHFA exercises control over trillions of dollars in assets and billions of dollars in revenue, and makes business and policy decisions that influence and impact the entire mortgage finance industry. For reasons of efficiency, concordant goals with the Enterprises, and operational savings, FHFA has determined to delegate revocable authority for general corporate governance and day-to-day matters to the Enterprises’ boards of directors and executive management. (10)
The OIG clearly understands what is at stake in the conservatorships. But as I read the remainder of the report, I did not see sufficient emphasis on the range of risks that Fannie and Freddie face, such as hedging risk and operational risk. Hopefully, someone at the FHFA is paying sufficient attention to the range of risks the two companies face. If not, we can expect a new type of crisis down the pike.
June 8, 2016 | Permalink | No Comments
June 7, 2016
Buying A First Home
Realtor.com quoted me in Buying Your First Home? Better Make Sure It Has These 4 Things. It opens,
Finding the perfect starter home is a journey as well as a destination. You’ve got to know what you want, then adjust expectations to meet the reality of the market. In the end, you don’t have to settle on your “forever home”—just a place you’ll call home for at least five to seven years.
But that’s a long time in homeowner years, especially if you wake up each day in a place you wind up hating.
“You want to buy something that’s going to last,” says Carol Temple, an Arlington, VA, Realtor® who loves helping newbies find their first home.
So how do you know what’s going to stand the test of (a decent amount of) time? You’ve never done this before. You’re taking a leap of faith that you have the money, skills, and temperament to maintain the biggest purchase of your life so far.
We know—it’s scary. And overwhelming. But there is a foolproof formula to picking the right starter home.
1. Manageable monthly expenses
If you’ve been renting all your adult life, you’ll be surprised by how much owning a home actually costs. There’s a mortgage, real estate taxes (usually wrapped into your mortgage), insurance premiums, utilities, and the drip-drip-drip of maintenance costs. And here’s the fun part: All these costs usually increase with time!
“New homeowners are often not aware of how expenses can add up when they own a home,” says David Reiss, who teaches real estate law at Brooklyn Law School in Brooklyn, NY.
When calculating how much you can spend on a house, figure in all these costs, and then add a little more for unexpected expenses. Like replacing LED lightbulbs at $20 a pop. Or hiring a pro to prune that gorgeous oak in the backyard. Or maybe replacing your Grand Palais range that spontaneously combusted.
Make sure your final choice truly fits your budget. Got it? That may mean buying something smaller, older, or farther out than you originally intended.
2. Low maintenance
Maintenance costs are the great unknown in homeownership—the older the house, the more it will cost to keep running. So unless you have the handyman skills and desire to fix whatever comes up, it’s better for your starter house to be newer construction (less than 10 years old).
You may even want to consider brand-new construction, which costs more but whose parts are typically covered by a warranty. Standard coverage would be a one-year warranty for labor and materials, two years’ protection for mechanical defects—plumbing, electrical, heating, air conditioning, and ventilation systems—and 10 years for structural defects.
Whether you buy a new or existing home, don’t forget to hire a good home inspector to thoroughly identify potential problems.
“Even if the home buyers are handy, they may not want to be spending their time up on the roof looking for a leak or in the basement up to their knees in water,” Reiss says.
June 7, 2016 | Permalink | No Comments
June 6, 2016
What Are Mortgage Borrowers Thinking?
Freud’s Sofa
The Consumer Financial Protection Bureau (CFPB) and the Federal Housing Finance Agency (FHFA) have released A Profile of 2013 Mortgage Borrowers: Statistics from the National Survey of Mortgage Originations. While sounding dull and perhaps a bit dated, this document is actually an extraordinary overview of the much discussed but rarely seen mortgage borrower. And while the information is from 2013, it provides a good baseline for the post-financial crisis and post-Dodd Frank world we live in.
Historically, it has been difficult for government and academic researchers to get comprehensive data about mortgage borrowers. The impetus for this report was the Housing and Economic Recover Act of 2008 which requires the FHFA to conduct a monthly mortgage market survey. In the long term, this survey will help policymakers respond to the rapid changes that are so common in our dynamic mortgage market.
The National Survey of Mortgage Originations (NMSO) focuses on
mortgage shopping behavior, mortgage closing experiences, and other information that cannot be obtained from any other source, such as expectations regarding house price appreciation, critical household financial events, and life events such as unemployment, large medical expenses, or divorce. In general, borrowers are not asked to provide information about mortgage terms in the questionnaire since these fields are available [from other sources]. (1)
Here are some of the findings that I found interesting, albeit not always surprising:
- Mortgage shopping behavior differed significantly by borrower characteristics and by whether the consumer was also shopping for a home at the same time as the mortgage. (14)
- First-time home buyers differed significantly from repeat home buyers in their mortgage search behavior and repeat borrowers differed significantly in their mortgage search behavior depending on whether they were refinancing or purchasing a home. (14)
- Slightly more than 40 percent of all respondents reported having a difficult time explaining the difference between a prime and a subprime loan. (16)
- Overall about one- quarter of borrowers reported that they could not explain amortization or the difference between the interest rate and APR on a loan.(18)
- Roughly one in five borrowers had to delay their closing date. (26)
- In general, respondents believe that mortgage lenders treat borrowers well. (35)
- Fifteen percent of respondents expected to have difficulties in making their mortgage payments in the next couple of years. (44)
There are a lot more interesting nuggets about the subjective views of borrowers in the report. I hope that later reports offer more analysis that ties this information into other objective sources of data about borrowers and their mortgages. How well do they know themselves and how good are they at predicting their ability to maintain their mortgages over the long-term?
June 6, 2016 | Permalink | No Comments
June 3, 2016
Trump, Sanders and Housing Policy
Donald Trump
Senator Sanders
I had earlier blogged about Hillary Clinton’s housing policy positions. Today, I turn to those of Donald Trump and Bernie Sanders. Amazingly (or, perhaps, completely unsurprisingly), their housing policies present microcosms of their campaigns. Clinton came across as a well-prepared left of center policy wonk who was seeking to continue and perhaps expand a bit on Obama’s housing policy legacy.
In contrast, Trump has nothing of substance to say about housing policy on his campaign website.
Sanders, on the other hand, has a lot to say. He presents a very expensive laundry list of program expansions that would help low- and moderate-income address the cost of housing, but does not indicate how they would be funded. Here are some more details.
TRUMP
Trump has a very skeletal Positions page on his campaign website, listing just seven issues:
- Paying for the Wall
- Healthcare Reform
- U.S.-China Trade Reform
- Veterans Administration Reform
- Tax Reform
- Second Amendment Rights
- Immigration Reform
If you search the entire website, there are some passing mentions of housing, but even those are tangential to a housing policy platform (immigrants increase competition for housing, veterans get inadequate housing, the government spurred the housing bubble).
SANDERS
Sanders has a lengthy Affordable Housing platform, outlining ways to
- Expand Affordable Housing
- Promote Homeownership
- Help Underwater Homeowners
- Prevent Homelessness
- Get Lead out of Homes
- Address Housing and Environmental Justice
It struck me that nearly every one of the proposals involved an increase in funding, sometimes a dramatic one. His first proposal calls for a nearly thirty-fold increase in the funding for the National Housing Trust Fund from $174 million to $5 billion per year (the Obama Administration had asked Congress to provide $1 billion to capitalize the fund but Congress did not do so).
The Fund is currently being capitalized by contributions from Fannie Mae and Freddie Mac, as authorized by Housing and Economic Recovery Act of 2008. For Sanders’ plan to work, he would either (1) need to get these contributions to be dramatically expanded, which would likely raise interest rates on all residential mortgages or (2) get Congress to provide the increased funding. Good luck with that.
I was also struck by the fact that Sanders’ platform did not propose much meaningful reform of the housing sector. How about getting the federal government to incentivize local governments to build more housing, and affordable housing in particular?
From my review of the three campaign websites (and for the purposes of this post, on that basis alone!), I favor Clinton’s housing policy platform. It is thoughtful, constructive and realistic.
June 3, 2016 | Permalink | No Comments
June 13, 2016
Mortgage Market Overview
By David Reiss
The Urban Institute’s Housing Finance Policy Center issued its May 2016 Housing Finance at a Glance Chartbook. This monthly report is invaluable for those of us who follow the mortgage market closely. The mortgage market changes so quickly and so much that what one thinks is the case is often no longer the case a few months later. This month’s report has new features, including Housing Credit Availability Index and first-time homebuyer share charts. Here are some of the key findings of the May report:
It is worth wrapping your head around the size of this market. Total American wealth is about $88 trillion, so household equity of $13 trillion is about 15 percent of the total. With debt and mortgages at $10 trillion, the aggregate debt-to-equity ratio is nearly 45%.
This private-label securitization total is a pale shadow of the height of the market in 2007, back to the levels seen in 1999-2000. It is unclear when and how this market will recover — and the extent to which it should recover, given its past excesses
The federal government, through Fannie Mae, Freddie Mac and Ginnie Mae, is insuring 69 percent of originations. Hard for me to think this is good for the mortgage market in the long term. There is no reason that the private sector could not take on a bigger share of the market in a responsible way.
It is pretty extraordinary to see the extent to which ARMs change in popularity over time, although it makes a lot of sense. When interest rates are high and prices are high, more people prefer ARMs and when they are low they prefer FRMs.
It is hard to pinpoint the right level of credit availability, particularly with reports of 1% down payment mortgage programs making the news recently. But it does seem like credit can be loosened some more without veering into bubble territory.
Hard to keep up with all of the changes in the mortgage market, but this chartbook sure does help.
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June 13, 2016 | Permalink | No Comments