Tag Archives: housing prices

Dodd-Frank Repeal Unappealing for Homeowners

Posted on by
photo by Gage Skidmore

Congressman Jeb Hensarling

The Hill published my latest column, Why Repealing Dodd-Frank Is Unappealing if You Own a Home. It opens, 

President Trump has made it clear that he wished to dismantle the Dodd-Frank Wall Street Reform and Consumer Protection Act. Just two weeks after his inauguration, he issued an executive order to get the ball rolling by means of agency action, an effort that will be led by the Department of the Treasury. Trump will have lots of allies in Congress as he pursues this agenda. A recent memo by House Financial Services Chairman Jeb Hensarling (R-Texas) to his committee’s leadership team outlines a legislative path that leads to much the same goal.

One of the key components of the Dodd-Frank regulatory regime was the newly-created Consumer Financial Protection Bureau (CFPB). The bureau is responsible for administering a range of consumer protection regulations, some of which predate Dodd-Frank and some of which were mandated by it. Homeowners should sit up and take notice because a lot of protections they can now take for granted will be stripped away if this push is successful.

Many of these regulations protect homeowners as they obtain mortgages for their homes. Others protect homeowners over the life of the mortgages, particularly when they are having trouble keeping up with their mortgage payments because of those common life events that still knock us for a loop when they happen to us: job loss, divorce, medical bills, a death in the family.

Hensarling’s memo makes clear the extent to which he wants to weaken the CFPB. Among many other things, he wants to eliminate the bureau’s consumer education functions, bar it from commencing actions involving unfair, deceptive or abusive acts and practices, end its practice of tracking consumer complaints, and stop if from monitoring and conducting research on the consumer credit market.

Before the financial crisis, homeowners suffered from a range of abusive and predatory behaviors that were prevalent in the mortgage industry for years and years. Lenders would lend without regard to a borrower’s ability to repay a loan, so long as there was sufficient equity in the home to make the lender whole after a foreclosure. Dodd-Frank’s ability-to-repay rule keeps lenders from doing that now. Lenders would make loans that had large balloon payments at the end of the term, forcing unsophisticated borrowers to refinance with all of the fees and costs that that entails. The lenders would look at those refinancing costs as another profit center. Dodd-Frank’s qualified mortgage rule banned those abusive balloon payments for the most part.

While Hensarling claims that Dodd-Frank “clogs the arteries of capitalism,” he seems to forget that unfettered capitalism nearly gave us a fatal heart attack just 10 years ago, when the subprime mortgage crisis led us to the brink of a second Great Depression. He seems to forget that predatory mortgage lending is not only bad for the individuals affected by it, but also for the housing market and economy in general. Housing prices did not just fall for those with unsustainable mortgages—they fell for all of us.

The push to get rid of the CFPB is not being driven by the consumer finance industry. The industry has learned to live with the bureau. It has come to see that there are some benefits that accrue from primarily dealing with one regulator, in place of the patchwork of regulators that was the norm before Dodd-Frank. Rather, the push is being driven by an unfettered free market ideology that is out of step with the workings of the modern economy.

Getting rid of the CFPB will be bad for homeowners. They will no longer be able to assume that a mortgage they receive is one that has payments they can make month-in and month-out. They will need to treat lenders as predators because predatory lending will certainly return to the mortgage market. Caveat emptor.

Trump and The Housing Market

Posted on by
photo by Gage Skidmore

President-Elect Trump

TheStreet.com quoted me in 5 Ways the Trump Administration Could Impact the 2017 U.S. Housing Market. It opens,

Yes, President-elect Donald Trump may have chosen Ben Carson to lead the Department of Housing and Urban Development, but as the U.S. housing market revs its engines as 2016 draws to a close, an army of homeowners, real estate professionals and economists are focused on cheering on a potentially rosy market in 2017.

And with good reason.

According to the S&P CoreLogic Case-Shiller Indices released on November 29, U.S. housing prices rose, on average, by 5.5% from September, 2015 to September, 2016. Some U.S. regions showed double-digit growth for the time period – Seattle, saw an 11.0% year-over-year price increase, followed by Portland, Ore. with 10.9% and Denver with an 8.7% increase, according to the index.

The data point to further growth next year, experts say.

“The new peak set by the S&P Case-Shiller CoreLogic National Index will be seen as marking a shift from the housing recovery to the hoped-for start of a new advance,” notes David M. Blitzer, chairman of the index committee at S&P Dow Jones Indices. “While seven of the 20 cities previously reached new post-recession peaks, those that experienced the biggest booms — Miami, Tampa, Phoenix and Las Vegas — remain well below their all-time highs. Other housing indicators are also giving positive signals: sales of existing and new homes are rising and housing starts at an annual rate of 1.3 million units are at a post-recession peak.”

But there are question marks heading into the new year for the housing market. The surprise election of Donald Trump as president has industry professionals openly wondering how a new Washington regime will impact the real estate sector, one way or another.

For instance, Dave Norris, chief revenue officer of loanDepot, a retail mortgage lender located in Orange County, Calif., says dismantling the Consumer Financial Protection Bureau, encouraging higher interest rates, and broadening consumer credit are potential scenario shifters for the housing market in the early stages of a Trump presidency.

Other experts contacted by TheStreet agree with Norris and say change is coming to the housing market, and it may be more radical than expected. To illustrate that point, here are five key takeaways from market experts on how a Trump presidency will shape the 2017 U.S. real estate sector.

Expect higher interest rates – The new administration will likely lead to higher interest rates, which will compress home and investment property values, says Allen Shayanfekr, chief executive officer of Sharestates, an online crowd-funding platform for real estate financing. “Specifically, loans are calculated through debt service coverage ratios and a borrower’s ability to make their payments,” Shayanfekr says. “Higher interest rates mean larger monthly payments and in turn, lower loan amount qualifications. If lenders tighten up, it will restrict the buyer market, causing either a plateau in market values or possibility a decrease depending on the margin of increased rates.”

Housing reform will also impact home purchase costs – Trump’s effect on interest rates will likely depress housing prices in some ways, says David Reiss, professor of law at Brooklyn Law School. “That’s because the higher the monthly cost of a mortgage, the lower the price that the seller can get,” he notes. Reiss cites housing reform as a good example. “Housing finance reform will increase interest rates,” he says. “Republicans have made it very clear that they want to reduce the role of the federal government in the housing market in order to reduce the likelihood that taxpayers will be on the hook for another bailout. If they succeed, this will likely raise interest rates because the federal government’s involvement in the mortgage market tends to push interest rates down.”

Another Housing Bubble?

Posted on by

bubble-500130_1280

Trulia quoted me in Warning Signs: Another Housing Bubble Is Coming. It opens,

Signs show another bubble coming. Some experts have a different opinion.

When the housing market crashed in 2008, it caused what came to be known as ”The Great Recession.” When the bubble burst, it ”sent a shock through the entire financial system, increasing the perceived credit risk throughout the economy,” according to a report published in The Journal of Business Inquiry.

The crash caused homes to lose up to half their value. People became underwater, owing more than their home was worth. And who wants to pay on a mortgage that’s larger than what the home could sell for? Although some people did just that, many more opted to short sell their homes or to simply walk away and have the bank foreclose.

Present Day

Fast-forward to 2016, and we are seeing hot, even ” overheated,” housing markets; bidding wars; rising home prices; and house flippers – all the signs of a housing bubble that’s about to burst. Are we repeating the mistakes we made before? Yes and no. Let’s explore four reasons the housing bubble burst and whether we’re experiencing the same conditions today.

1. Easy Credit

Before the 2008 crash, credit was easy to get. Pretty much, if you were breathing, you could get a mortgage loan. This led to people getting mortgages who ultimately couldn’t afford to pay them back. They lost their homes, and this contributed in large part to the housing crisis. Today the situation is different. ”Credit is still much tighter than it was before the financial crisis,” says David Reiss, professor of law at Brooklyn Law School. ”This is particularly true for those with less-than-perfect credit scores.” He explains: ”There are almost no no-down-payment loans as there were in the early 2000s. Those defaulted at incredibly high rates.”

But what about Federal Housing Administration (FHA) loans? They feature ”low down payments, low closing costs, and easy credit qualifying.” Those are the very features that should sound some warning bells. But before you get too alarmed, keep in mind that the FHA has been making loans to people who do not qualify for a conventional mortgage since 1934. ”While there are low-down-payment loans available from Fannie, Freddie, and the FHA, their underwriting standards appear to be higher than those for low-down-payment products from the early 2000s,” says Reiss.

2. Low Interest Rates

Mortgage rates have been low for so long that you might not realize that was not always the case. In 1982, for example, mortgage rates were 18 percent. From 2002 to 2005, the rates stayed at about 6 percent, which enticed people to take out mortgage loans. And in 2016, we’re seeing historic lows of under 3.5 percent. If rates go up, we might see housing demand and housing prices fall.

3. ARMS

Before the housing crash when home prices were rising fast, many people were priced out of the market with a fixed-rate mortgage because they couldn’t afford the monthly mortgage payments. But they could afford lower payments that were possible with an adjustable-rate mortgage – until that rate adjusted up. In 2005, 38.5 percent of the mortgage market was ARMs. But in 2015, that amount has dropped considerably to 5.3 percent.

4. A Buying Frenzy

There’s an old story that before the stock market crash of 1929, Joseph Kennedy, Sr., sold his shares. Why? Because he received a stock tip from a shoeshine boy. Kennedy figured, the story goes, that if the stock market was popular enough for a shoeshine boy to be interested, the speculative bubble had become too big.

Before the housing crash, this country saw a home buying frenzy similar to what happened before the stock market crash. Everyone from lenders to rating agencies to investors (foreign and American) to investment bankers to home buyers was eager to get into the mortgage game because house values kept rising. Today, we are seeing a similar buying frenzy in some markets, such as San Francisco, New York, and Miami . Some experts think that the price increases of homes in those areas are not sustainable. They say that because heavy foreign investment in those areas is part of what’s driving up prices, if those investments slow or stop, we could see a bubble burst.

So what do some experts think?

David Ranish, owner/broker for The Coastline Real Estate Group in Laguna Beach, CA, says: ”There are concerns about another housing bubble, but I do not see it. The market could stabilize, but a complete collapse is highly unlikely.”

Bruce Ailion, an Atlanta, GA, real estate expert, says,” ”Five to six years ago, I was a buyer of homes. Today I am a seller.”

David Reiss says, ”It is probably a fool’s game to predict the future of the housing market or whether we are in a bubble that is soon to burst.”

Investing in Mortgage-Backed Securities

Posted on by

photo by https://401kcalculator.org

US News & World Report quoted me in Why Investors Own Private Mortgage-Backed Securities. It opens,

Private-label, or non-agency backed mortgage securities, got a black eye a few years ago when they were blamed for bringing on the financial crisis. But they still exist and can be found in many fixed-income mutual funds and real estate investment trusts.

So who should own them – and who should stay away?

Many experts say they’re safer now and are worthy of a small part of the ordinary investor’s portfolio. Some funds holding non-agency securities yield upward of 10 percent.

“The current landscape is favorable for non-agency securities,” says Jason Callan, head of structured products at Columbia Threadneedle Investments in Minneapolis, pointing to factors that have reduced risks.

“The amount of delinquent borrowers is now at a post-crisis low, U.S. consumers continue to perform quite well from a credit perspective, and risk premiums are very attractive relative to the fundamental outlook for housing and the economy,” he says. “Home prices have appreciated nationwide by 5 to 6 percent over the last three years.”

Mortgage-backed securities are like bonds that give their owners rights to share in interest and principal received from homeowners’ mortgage payments.

The most common are agency-backed securities like Ginnie Maes guaranteed by the Federal Housing Administration, or securities from government-authorized companies like Fannie Mae and Freddie Mac.

The agency securities carry an implicit or explicit guarantee that the promised principal and interest income will be paid even if homeowners default on their loans. Ginnie Mae obligations, for instance, can be made up with federal tax revenues if necessary. Agency securities are considered safe holdings with better yields than alternatives like U.S. Treasurys.

The non-agency securities are issued by financial firms and carry no such guarantee. Trillions of dollars worth were issued in the build up to the financial crisis. Many contained mortgages granted to high-risk homeowners who had no income, poor credit or no home equity. Because risky borrowers are charged higher mortgage rates, private-label mortgage securities appealed to investors seeking higher yields than they could get from other holdings. When housing prices collapsed, a tidal wave of borrower defaults torpedoed the private-label securities, triggering the financial crisis.

Not many private-label securities have been issued in the years since, and they accounted for just 4 percent of mortgage securities issued in 2015, according to Freddie Mac. But those that are created are considered safer than the old ones because today’s borrowers must meet stiffer standards. Also, many of the non-agency securities created a decade or more ago continue to be traded and are viewed as safer because market conditions like home prices have improved.

Investors can buy these securities through bond brokers, but the most common way to participate in this market is with mutual funds or with REITs that own mortgages rather than actual real estate.

Though safer than before, non-agency securities are still risky because, unlike agency-backed securities, they can incur losses if homeowners stop making their payments. This credit risk comes atop the “prepayment” and “interest rate” risks found in agency-backed mortgage securities. Prepayment risk is when interest earnings stop because homeowners have refinanced. Interest rate risk means a security loses value because newer ones offer higher yields, making the older, stingier ones less attractive to investors.

“With non-agencies, you own the credit risk of the underlying mortgages,” Callan says, “whereas with agencies the (payments) are government guaranteed.”

Another risk of non-agency securities: different ones created from the same pool of loans are not necessarily equal. Typically, the pool is sliced into “tranches” like a loaf of bread, with each slice carrying different features. The safest have first dibs on interest and principal earnings, or are the last in the pool to default if payments dry up. In exchange for safety, these pay the least. At the other extreme are tranches that pay the most but are the first to lose out when income stops flowing.

Still, despite the risks, many experts say non-agency securities are safer than they used to be.

“Since the financial crisis, issuers have been much more careful in choosing the collateral that goes into a non-agency MBS, sticking to plain vanilla mortgage products and borrowers with good credit profiles,” says David Reiss, a Brooklyn Law School professor who studies the mortgage market.

“It seems like the Wild West days of the mortgage market in the early 2000s won’t be returning for quite some time because issuers and investors are gun shy after the Subprime Crisis,” Reiss says. “The regulations implemented by Dodd-Frank, such as the qualified residential mortgage rule, also tamp down on excesses in the mortgage markets.”

New Housing and Displacement

Posted on by

Lsanburn

The Institute of Governmental Studies at UC Berkeley has issued a research brief, Housing Production, Filtering and Displacement: Untangling the Relationships. It opens,

Debate over the relative importance of subsidized and market-rate housing production in alleviating the current housing crisis continues to preoccupy policymakers, developers, and advocates. This research brief adds to the discussion by providing a nuanced analysis of the relationship between housing production, affordability, and displacement in the San Francisco Bay Area, finding that:

• At the regional level, both market-rate and subsidized housing reduce displacement pressures, but subsidized housing has over double the impact of market-rate units.

• Market-rate production is associated with higher housing cost burden for low-income households, but lower median rents in subsequent decades.

• At the local, block group level in San Francisco, neither market-rate nor subsidized housing production has the protective power they do at the regional scale, likely due to the extreme mismatch between demand and supply.

Although more detailed analysis is needed to clarify the complex relationship between development, affordability, and displacement at the local scale, this research implies the importance of not only increasing production of subsidized and market-rate housing in California’s coastal communities, but also investing in the preservation of housing affordability and stabilizing vulnerable communities. (1)

This brief takes on an important subject — the relationship between new housing and displacement — and concludes,

There is no denying the desperate need for housing in California’s coastal communities and similar housing markets around the U.S. Yet, while places like the Bay Area are suffering from ballooning housing prices that are affecting people at all income levels, the development of market-rate housing may not be the most effective tool to prevent the displacement of low-income residents from their neighborhoods, nor to increase affordability at the neighborhood scale.

Through our analysis, we found that both market-rate and subsidized housing development can reduce displacement pressures, but subsidized housing is twice as effective as market-rate development at the regional level. It is unclear, however, if subsidized housing production can have a protective effect on the neighborhood even for those not fortunate enough to live in the subsidized units themselves.

By looking at data from the region and drilling down to local case studies, we also see that the housing market dynamics and their impact on displacement operate differently at these different scales. Further research and more detailed data would be needed to better understand the mechanisms via which housing production affects neighborhood affordability and displacement pressures. We know that other neighborhood amenities such as parks, schools, and transit have a significant impact on housing demand and neighborhood change and it will take additional research to better untangle the various processes at the local level.

In overheated markets like San Francisco, addressing the displacement crisis will require aggressive preservation strategies in addition to the development of subsidized and market-rate housing, as building alone won’t protect specific vulnerable neighborhoods and households. This does not mean that we should not continue and even accelerate building. However, to help stabilize existing communities we need to look beyond housing development alone to strategies that protect tenants and help them stay in their homes. (10-11, footnote omitted)

The brief struggles with a paradox of housing — how come rents keep going up in neighborhoods with lots of new construction? The answer appears to be that the broad regional demand for housing in a market like the Bay Area or New York City overwhelms the local increase in housing supply. The new housing, then, just acts like a signal of gentrification in the neighborhoods in which it is located.

If I were to criticize this brief, I would say that it muddies the waters a bit as to what we need in hot markets like SF and NYC: first and foremost, far more housing units. In the absence of a major increase in supply, there will be intense market pressure to increase rents or convert units to condominiums. Local governments will have a really hard time overcoming that pressure and may just watch as area median income rises along with rents. New housing may not resolve the problem of large-scale displacement, but it will be hard to address displacement without it. Preservation policies should be pursued as well, but the only long-term solution is a lot more housing.

I would also say that the brief elides over the cost of building subsidized housing when it argues that subsidized housing has twice the impact of market-rate units on displacement. The question remains — at what cost? Subsidized housing is extremely expensive, often costing six figures per unit for new housing construction. The brief does not tackle the question of how many government dollars are needed to stop the displacement of one low-income household.

My bottom line: this brief begins to untangle the relationship between housing production and displacement, but there is more work to be done on this topic.

Silicon Valley’s Housing Crisis

Posted on by
photo by Smitha Murthy

Drop in the Bucket?

Realtor.com quoted me in Could There Really Be Relief Ahead for Silicon Valley’s Housing Crisis? It opens,

Finally! A glimmer of hope has appeared in Silicon Valley’s housing crisis. Amid gloomy and downright terrifying stories about astronomical home prices and tighter-than-tight inventories forcing well-paid tech workers to live in vans, pay $2 million for a tear-down shack, or ponder commuting to work from Las Vegas, there seems to be some good news for a change: City Council members in Mountain View, CA, approved plans to build 10,250 new homes in the area.

Given that Mountain View has only about 32,000 homes total, this will increase its housing inventory by a whopping 32%—all purportedly within “walking distance” (possibly a bit of a long walk) of tech giant Google, which has long been lobbying on this front and will no doubt break out the Champagne once developers break ground. Sure, it may be years before these homes become a reality, but even the idea of them may have many locals (or those moving there) daring to dream. Might this new influx of housing cause home prices to drop within reasonable reach?

As logical as this renewed optimism about Silicon Valley’s housing market might seem, experts aren’t so sure home prices will budge all that much.

“This news in itself will not drive down prices much,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “While a 10,000-unit commitment is significant, Silicon Valley as a whole has about 3 million people living there.”

So if you consider the population of the entire area—many of whom would likely kill to move to Mountain View—10,000 new houses would house only 0.3% of these people. For you math-challenged, that’s less than a measly half-percent! 

And even though the number of homes may be edging upward, so are the number of people moving there.

“Silicon Valley remains a booming economy, so it’s likely that the population will continue to grow, further driving up prices,” Reiss continues.

As further evidence that more homes doesn’t necessarily lead to cheaper home prices, Florida Realtor® Cara Ameer points to another historically hot market: New York City.

“In New York, more new buildings has had no impact on housing prices or rents,” she says. If anything, the only change New Yorkers noticed is their neighborhood got a lot more cramped. The same will likely be true for picture-perfect Mountain View.

“The biggest thing people will see is increased congestion,” says Amer, “with many more residents, cars, and the need for schools and additional services.”

In fact, fears of overcrowding might even galvanize current homeowners in the area to show up en force at future City Council meetings to fight the greenlighting of additional developments—that is, unless they’re out-muscled by employee-hungry firms such as Google.

“As key businesses realize that the lack of housing is hurting their ability to recruit and retain good employees, it is possible that Mountain View’s decision is a harbinger for more pro-development decisions throughout Silicon Valley,” Reiss explains. “Current homeowners, called ‘homevoters,’ tend to make their anti-growth views known to local officials, but once the interests of local businesses focus on the lack of workforce housing, it can change the dynamics.

“These are powerful companies. The result is that those decisions can become more pro-growth than is typical for suburban communities.”

Economic Factors That Affect Housing Prices

Posted on by

photo by TaxRebate.org.uk

S&P has posted a paper on Economic Factors That Affect Housing Prices. This is, of course, an important topic, albeit one that is an art as well as a science. While S&P undertook this analysis more for mortgage-backed securities investors than for anyone else, it certainly is of use to the rest of us. The paper opens,

The U.S. domestic housing market has experienced a 23% price increase since the beginning of the housing recovery in 2011. Many local housing markets are now close to or above their peak levels of 2006, which leads us to investigate whether the pace of home price appreciation (HPA) can continue at its current pace. In this paper, we (1) examine the economic factors that influence HPA and (2) forecast HPA for numerous geographic regions assuming various economic conditions over the next five years. While the aggregate national pattern in housing prices is an important reference, we need to examine housing prices at a more granular geographic level in order to understand regional housing market dynamics and learn how these are affected by local macroeconomic factors. This paper demonstrates that several economic variables are needed to predict average home price movements for each of 48 different U.S. metropolitan statistical areas (MSAs).

*     *      *

Factors that influence HPA can be difficult to predict. Therefore, residential mortgage backed securities (RMBS) investors frequently use a range of HPA projections to estimate their potential bond returns. With that in mind, for each MSA, we considered five separate hypothetical economic scenarios, ranging from an “Upside” forecast to an extreme “Stress 3” case. Interestingly, our Stress 3 case forecasts a 28% decline in HPI at the national level over the next five years, which corresponds roughly to the decline experienced in the last recession. Our “base case” scenario leads to forecasts at the national level of a 26% increase in HPI over five years. This represents what we believe to be the most likely economic forecast. (1-2)

S&P’s key findings include:

  • Movement in HPA is primarily influenced by up to five variables, depending on the MSA: housing affordability, changes in shadow inventory, the unemployment rate, the TED spread [a measure of distress in the credit markets], and population growth.
  • HPA in many MSAs has momentum, meaning that it depends on its level in the previous quarter of observation.
  • The mortgage rate generally appears to have little predictive power in connection with home prices.
  • Chicago, Houston, Boston, and San Francisco are projected to appreciate at a greater pace (45%, 40%, 27%, and 36%, respectively) than the 26% forecast for the nation as a whole over the next five years, and New York at a slower pace (21%). Columbus led all MSAs with a projected five-year HPA of 50%.
  • Under our most pessimistic (Stress 3) scenario, Chicago is forecast to experience a greater decline in HPI (34%) over the next five years than the nation as a whole (29%), while New York, Boston, Houston, and San Francisco are projected to experience declines that are less severe than that of the nation (19%, 3%, 17%, and 16%, respectively). Markets that have been vulnerable in the past (Las Vegas, Phoenix, and Riverside) are projected to experience the greatest five-year declines under our Stress 3 scenario (66%, 68%, and 68%). The markets that show the greatest movements are the most sensitive to the five factors and frequently show the greatest upside and downside. (2-3, emphasis in the original)

I found the first and third bullet points to be the most interesting, as many pundits weigh in on the factors that affect housing prices. It will be interesting to see if further research confirms S&P’s findings.