Are homebuyers going to hit the pause button?

Mortgage Consultant Bob Schwab posed an interesting question on his blog recently: is purchase demand softening? He writes that over the last several years, buyer demand has far exceeded the housing supply. This has led to home prices appreciating by an average of 6.2 percent each year since 2012.

The Foot Traffic Report, Realtors Confidence Index (both National Association of Realtors), The Showing Index (ShowingTime), and The Real Estate Broker Survey (The Z Report by Zelman and Associates) are the four major reports used to measure buyer activity. Three of the four have revealed that the purchase demand may, in fact, be softening:

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The Foot Traffic Report

Latest reports say buyer demand remains strong, due to supply and new construction remaining unable to keep up with buyer demand – despite a healthy economy and labor market.

The Showing Index

In July 2018, the Showing Index recorded buyer interest deceleration compared to the previous year for the third month in a row. They think buyer demand is softening.

Realtors Confidence Index

This measure reported slower homebuying activity in July 2018, down from the same month one year ago. It is the fifth straight month they’ve seen a decline, so they agree buyer demand is softening.

The Real Estate Broker Survey

The Z Report also finds buyer demand to be softening, stating that “a level of “pause” has taken hold in many large housing markets.” Their buyer demand rating of 69 (1-100 scale) is above average, but down from 74 last year.

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When most of the major measures of buyer activity report that demand is softening…it may just be true. According to Bob, the strong buyers’ market directly after the housing crash was followed by a six-year stretch of a strong sellers’ market. If demand continues to soften and supply begins to grow, as expected, there will be a return to a more neutral market. Though that wouldn’t favor buyers or sellers immediately, it is a better long-term look for real estate.

A direct quote from Bob: The era of cheap money might be coming to an end. Interest rates on mortgages are up three-quarters of one percent in the last year. The Federal Reserve is expected to raise short-term rates one-quarter of one percent at their September meeting and another one-quarter of a percent in December. Come October, bonds will have to stand on their own feet again as the Fed will officially end its “quantitative easing.” There are also some early signs of wage inflation as the unemployment rate continues to improve and businesses struggle to find employees. As I always remind my clients, mortgage rates are still fantastic from a historical perspective. They are still sitting in the mid to high fours. If you are considering buying a home or refinancing a mortgage this would be a great time to make a move.”

And my take: As rates and prices have increased, we are starting to see homes sit on the market longer and sell for less than they did six months ago. It really depends on the home and location. In Parkmead, buyers seem to want single story homes with current updates and a flat yard, as with the sale of 1691 Lilac. We still have an inventory shortage, but buyers are now taking their time, and a shift isn’t necessarily a bad thing. We will see if the lull is seasonal, but it most likely we will see the rate of appreciation slow down and sellers may have to adjust what they believe the value of their home is and buyers may not get as good of a deal as they expected. 

Today’s housing market vs. 2008’s market

Consultant Bob Schwab has a few interesting thoughts on the difference between the housing market in 2008 and the housing market today. He essentially points out that the landscape of today’s market is radically different than 10 years ago, so comparing the two era’s – even if numbers look similar – is tricky. Here are his thoughts below:

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Some are attempting to compare the current housing market to the market leading up to the “boom and bust” that we experienced a decade ago. They look at price appreciation and conclude that we are on a similar trajectory, speeding toward another housing crisis.

However, there is a major difference between the two markets. Last decade, while demand was being artificially created by extremely loose lending standards, a tremendous amount of inventory was coming to the market to satisfy that demand. Below is a graph of the inventory of homes available for sale leading up to the 2008 crash.

A normal market should have approximately 6 months supply of housing inventory. As we can see, that number jumped to over 11 months supply leading up to the housing crisis. When questionable mortgage practices ceased, and demand dried up, there was a glut of inventory on the market which caused prices to drop as there was too much supply and not enough demand.

Today is radically different!

There are those who believe that low mortgage rates have created an artificial demand in the current market. They fear that if mortgage rates continue to rise, some of the current demand will dry up (which is a possibility).

However, if we look at supply again, we can see that the current supply of homes is well below the norm of 6 months.

Bottom Line

We will not have a glut of inventory like we did back in 2008 and home values won’t come tumbling down. Instead, if demand weakens, we will return to a normal market (approximately a 6-month supply) with historic levels of appreciation (3.6% annually).

Separate from the Schwab blog, NAR Chief Economist Lawrence Yun says, “It’s important to note that despite the modest year-over-year rise in inventory, the current level is far from what’s needed to satisfy demand levels. Furthermore, it remains to be seen if this modest increase will stick, given the fact that the robust economy is bringing more interested buyers into the market, and new home construction is failing to keep up.”

And First American Chief Economist Mark Fleming says, “Millennials’ lifestyle and economic decisions are some of the main reasons we currently have a lower homeownership rate than expected, based on our Homeownership Progress Index. Yet, it is reasonable to expect homeownership rates to grow as millennials continue to make important decisions, including attaining an education and, later in life, getting married and buying a home.”

Glen Bell, a very analytical realtor in Berkeley, shared some charts with us, which also give additional insights into the disparities in the market:

Zillow_June_Numbers

Bell says he predicts a recession in 2019 or 2020, and that the real estate market will be a minor factor in it. Rising interest rates may offset some buying opportunities. It’s also hard to predict how much tax reform will play into this. Prices continue to rise and might be causing more people in the middle class to flee the Bay Area.

Months_Supply

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Glen's Numbers pg 1

Glen's Numbers pg 2

Why bank statements are so important!

Our friend Jay Vorhees at JVM Lending has shared another important blog recently: why bank statements are so important for borrowing and financing for a home. You’ll want to read on to see what Jay says, especially if you’re in the market for a new home. You’ll find a copy of the (slightly re-formatted) blog copied below:

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STRONG BORROWER DENIED FINANCING – WHY?

We once had a borrower who qualified for financing in every way (income, assets, credit, etc.) but she was denied financing. The reason?  She had five unexplainable overdraft charges on her bank statements that indicated she could not manage cash.

Every borrower has to provide bank statements for every account used for “cash to close” (down payment and closing costs). There are no exceptions because lenders have to ensure that down payment funds were not recently borrowed or obtained through illicit means.

“Borrowed” down payment funds are not considered “seasoned” and they create debt ratio issues b/c they need to be paid back. In any case, lenders are required to go through every bank statement with a fine-toothed comb to look for every irregularity. Irregularities include overdraft charges, unusually large deposits, and unexplained regular monthly deposits or withdrawals, among other things.

Unusually large deposits have to be paper-trailed and explained or they are assumed to be borrowed funds (and they can’t be used for a down payment/closing costs funds). And unexplained regular monthly deposits and withdrawals often indicate the existence of undisclosed side businesses, support payments or other liabilities.

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In any case, borrowers often get frustrated when we ask them to explain so many things that are buried in their bank statements. But, we have to ask because bank statements tell lenders so much more than meets the eye.

This is, in fact, often one of the most time-consuming aspects of the loan approval process.

**

On a related note, Jay discusses something at the footnote of this blog: rates have climbed recently after a stretch of stability. President Trump’s comments about the Fed raising rates too quickly were the primary cause, but, according to the Wall Street Journal, the Fed may now be more likely to raise rates than it was prior to the President’s comments. This is because it will want to prove its independence from political pressure. How ironic!

CoreLogic’s State of the Nation’s Housing 2018

Bob Schwab shared CoreLogic’s State of the Nation’s Housing 2018 report recently, and I wanted to pass that information along to you. This is the 30th anniversary of the report, which features CoreLogic’s home price and rent growth information. This year’s report article was authored by Molly Boesel, and you can see it in its entirety below:

From the State of the Nation’s Housing 2018 Report

The State of the Nation’s Housing 2018

On June 19, the Joint Center for Housing Studies of Harvard University released their 30th anniversary edition of the State of the Nation’s Housing report. The 2018 report highlighted some major themes including lack of housing supply, rising home prices and rents, and housing affordability.

The U.S. housing market continues to be plagued by a lack of supply of homes for sale. Months of supply available for sale is a key measure of housing supply, and is at levels that are below where they would be for the housing market to be balanced. The Harvard report points out that negative equity as reported by CoreLogic no longer appears to be a drag on sales. Negative equity shrank from 12.1 million mortgages in 2011 to 2.5 million in 2017. Rather, a factor in the low housing supply is slow growth in single-family construction that has not kept up with demand.

Low housing supply has contributed to increases in home prices. Home prices, according to the CoreLogic HPI were up by 5.9 percent for all of 2017. Prices for the lowest-cost homes (those homes priced at 75 percent or less than median) were up by 8.5 percent, compared with 4.7 percent for the highest-cost homes (those homes priced at 125 percent or more than median). Along with home price increases, there have also been increases in rents. The report highlights the CoreLogic Single-Family Rental Index (SFRI). While the SFRI is still showing increases in rent through the beginning of 2018, there has been a deceleration in the rate of increase.

Living in the Bay Area, we know the increases in home prices and rents have outpaced increase in incomes and have contributed to affordability problems. High prices and low supply constrain access to homeownership, but affordability issues are more immediate for some households. The CoreLogic SFRI shows that the lowest-cost rentals are showing the fastest rent growth, adding to affordability challenges to low-and-moderate income households. The Joint Center reports that in 2016, 38.1 million households were cost-burdened, meaning they spent more than 30 percent of their incomes on housing. While this number was down by 800,000 from 2015, it is still 6.5 million higher than it was in 2001.

I also believe the low supply in California has multiple factors.  People are not moving up, but remodeling because they don’t know where they would move. Seniors also have the same problem and if they stay in California, some counties will not accept their current tax base and they often have to sell in order to buy.  It is a domino effect.

I’ve included the graph above for context, and have the entire PDF report available if you’d like to see it. For any housing-specific questions, shoot me a note!

What can bring down house prices and rates?

What could bring house prices and rates down? According to my friend Jay Vorhees at JVM Lending, it could be something called “monetary tightening,” or an experiment conducted by The Fed to infuse the economy with cash. Basically, what Jay is getting at, is that you’ll never know exactly when to buy or sell (or when a market dictates that decision), and that assuming you know the market intimately trying to time the market may be a mistake. Read on for more from our slightly-edited version of Jay’s blog:

Dude Sells Too Soon!

I was at a graduation party yesterday and the host told me how his law partner sold his Silicon Valley home two years ago because he was convinced the market had peaked.

It hadn’t. The poor guy’s former home has gone up another 20% since he sold, and so has his rent. The host made the further point that people should never try to time a market they are not intimately familiar with.

I like to remind everyone that nobody should ever try to time a market, no matter how much they know, because there are so many variables they have no control over – especially when those variables involve the Fed.

Elephant in Room: Monetary Tightening

There is a huge elephant in the room that nobody is talking about: Massive Monetary Tightening via Higher Rates and Quantitative Tightening.

After the meltdown, the Fed engaged in a massive experiment known as Quantitative Easing, where the Fed bought trillions of dollars of government bonds and mortgage-backed securities. These bond purchases increased the money supply by flooding financial institutions with cash in an effort to increase lending and liquidity. The Fed also lowered the rates to unprecedently low levels.

The low rates and huge capital infusion pushed up asset prices, particularly with respect to stocks, bonds and real estate. This is what usually happens when the Fed increases the money supply, and this is partially why we see such high asset prices now. Many people believe high prices are just a function of too much demand chasing too little supply, but that is not always the case.

Excess demand is often driven by excess capital in an economy; people want to park their capital somewhere, as opposed to letting it sit in bank accounts, so they buy assets. In any case, the Fed created about $4 trillion of new money up through 2016, and in 2017 they reversed the policy! They are now not only pushing up rates but also selling bonds with the intention of vacuuming about $2 trillion out of the economy.

This will likely have an adverse effect on asset and housing prices at some point. Do I think real estate prices will tank? No. I still like real estate because the fundamentals are so strong in many areas. But, I don’t think we’ll continue to see such strong appreciation, and now might be a good time for Silicon Valley lawyers to sell their homes.

Fed Could Reverse Again

Nobody is more aware of this than the Fed, and they are watching closely. If Fed policymakers see the economy showing excessive signs of softening, they could very likely change course again – and lower rates. Again, nobody knows what will happen because we have never seen anything like this before! We are in the midst of one giant experiment, and we all get to be the lab rats.

Interest rates remain a gift

Recently, we’ve talked a lot about the rising interest rates. Everyone seems to be in panic mode over it, and my friend Jay Vorhees of JVM Lending is here to explain – in a historical context – why the reaction is overblown. He says the only people who should really be worried are businesses and companies that focus only on refinancing.

We’ve already touched on why higher interest rates are good, but an interest rate under 6 percent is amazing when put in a historical context, and should be treated as such. Here is a graph from Freddie Mac that shows an in-depth breakdown of interest rates over the past 30 years, but we’ve also shared JVM’s table on interest rates:

DATE                                      RATE                      COST
 
March of 2017                    4.2%                     0.5 Points

April of 2014                      4.34%                   0.6 Points

2008 (entire year)           6.03%                   0.6 Points

2000                                      8.05%                   1.0 Point

1995                                      7.93%                   1.8 Points

1990                                     10.13%                  2.1 Points

1985                                     12.43%                  2.5 Points

This shows that not only are rates much lower than they have been at the highest points of the market, but that loans are also much lower than usual – yes, I know our prices are higher than most of the country, but higher interest rates, always hurt you in the pocket book more than higher prices.  Anytime you can lock in a rate below 6 percent, you are doing quite well. So maybe now is the time to get into the market!

Owners have the largest mortgages in history!

It’s no secret that the housing market has been unbalanced over the past few years. Prices have been rising, and with them, so have average home loans.

mw-average mortgage size

According to The Mortgage Bankers Association (MBA), the average home loan size is the largest its been in the history of its survey, which began in 1990.

Additionally, the median mortgage size was only about 3.3 times the median annual income in 1990 – now, it’s more than 5 times as big. This is likely due to the increase in housing prices, buyers getting bigger homes and lower interest rates over the years.

Here’s a look at some housing market characteristics for select years.

Housing market data points
Courtesy Realtor.com (link in text above)

According to Mike Ervin of Supreme Lending, people are just waiting and waiting for mortgage rates to go down. People who are using securitizers like Fannie Mae and Freddie Mac have to wait until the Fed buys up more mortgage bonds so that rates will go down. It is unknown if that will happen, but rates have dropped in 2017.

Multiple factors can affect the bond and mortgage markets. The most recent major event was the Trump election and presidency, which saw a large immediate increase in mortgage rates, which have since rebounded, even with the Fed raising rates.

In California, we are in the wealth-building business and real estate in the Bay Area is going to be a good investment for years to come. I am here to advise, provide insight and help you build wealth through real estate.

Pending home sales are down in CA – what does it mean?

According to the California Association of Realtors, pending home sales have dialed back and marked the weakest February in three years.

Courtesy mcar.com.

Low housing inventory, eroding affordability and rising interest rates made pending sales on a year-over-year basis for the month of February suffer after a good start to the year in closed escrow sales. Also, sellers simply aren’t selling.

They did see elevated market activity, but the Bay Area pending sales specifically were down year-to-year for the fifth straight month. According to the release, the Bay Area has been plagued by a shortage of homes on the market and poor affordability.

We have seen an increase in listings starting in April, but with pent-up demand, buyers are getting frustrated losing out in multiple-offer scenarios and with ever-increasing prices.

If you want to know more about the market, give me a call!

Market tidbits, inspired by The Big Short

The other day, I wasn’t feeling well and ended up on the couch for most of the day watching The Big Short. It was much more insightful the second time around – I highly recommend watching if you haven’t already!

After seeing the movie and getting a spam voicemail market update from a lender (that was a first; the phone never even rang), I was prompted to blog about these tidbits:

  • Did you know that for every 8 applicants for home loans, 1 does not get approved? That proves the importance of getting pre-approved prior to house hunting.
  • Mortgage Rates saw a small decrease the week of Feb. 6th-11th and the stock market is showing signs of stalling. In speaking with my Degalis Advisor about my SEP, I asked if I should get out of Bonds. His advice was that we are due for a correction, so keep the Bonds for now.
  • The MCA index (which stands for “mortgage credit availability”) increased for the 5th month, which means we have looser mortgage standards. This has been needed because of strict regulations after the crash (we went from one extreme to another), but it still makes me nervous after re-watching The Big Short.
  • The 2017 year in real estate has been coined as “Modernization” and we should see a continued strong pace of growth and above average appreciation.
  • The West will lead the way in appreciation at 5.5 percent, compared to 4.5 percent nationwide.

So on that note, Have a Happy Valentines Day

How rate increases affect your payments

We’ve seen rates increase since Donald Trump won the election. Now, the Fed is saying they’ll do three rate hikes instead of the expected two in 2017. This caused rates to bump up about half a percent. What do interest rate increases mean in regards to a buyer’s payment and the overall market?

interest-rate-hike

According to The Wall Street Journal, if we adjust for inflation since 2006, housing prices are actually 16 percent below their 2006 peaks in most areas.  Many economists are saying the demand for housing remains as strong as ever and that recent rate increases will have a minimal effect.

However, people usually make home purchases based on payment. So as interest rates increase, somebody thinking of purchasing should know a 1/2 percent increase in rates for a $500,000 loan, increases the payment about $140-$150 (and even less after “tax benefits”).

bear-and-bull-market

Should buyers and borrowers wait to see if rates fall before moving forward with transactions? Jay Voorhees of JVM Lending says absolutely not. Borrowers can easily take advantage of no-cost refi’s if rates fall.

And, as Gary Shilling wrote in a Forbes column on Dec. 6, he thinks the markets massively overreacted to Trump’s election. He points out that the root causes of weak economic growth (that have kept rates low) will remain. He also says that Trump’s proposed tax cuts and stimulus programs will be watered down by Congress; the expectations of an economic boom are overblown.

What do you believe? Are you bullish or bearish? This election reinforced the notion that nobody has a crystal ball and sitting on the fence waiting for one outcome or another may be the worst thing you can do.