Harvard University’s Joint Center for Housing Studies released its annual State of the Nation’s Housing report for 2012 and it very closely tracks comments made by NAR Chief Economist Lawrence Yun earlier this week at a CRE conference on what’s holding back the housing recovery.
The Harvard report, which always does a good job laying out in plain language what’s happening with the market, points to the increasingly strong market fundamentals and says home sales really could see serious improvement this year.
The main weakness is tepid job growth, which Yun talked about as well earlier this week. The overhang of distressed properties is also a continuing problem.
Other issues include the unusually slow pace at which young people today–the Echo Boomers—are leaving their parents’ homes and forming their own households. That’s a big missing link in home sales growth, and it’s certainly related to the weak job picture. Unless young people feel confident about getting a good job, they’re going to remain hesitant to start a new household.
The big beneficiary of the last several years has been the multifamily housing sector. It’s booming. As the report puts it, “the number of renters surged by 5.1 million in the 2000s, the largest decade-long increase in the postwar era.” More rental growth is expected.
It’s in part because of this rental growth that home ownership is poised to improve. The report includes an informative graph (see below) that shows how much more affordable mortgage payments have become relative to rental rates. At some point, renters are going to realize they’re losing money each month they continue to rent.
Another interesting point made by the report is the critical role older home owners have played in preventing the U.S. home ownership rate from falling more than it has over these last few years. The rate today stands at about 66 percent, which is about 2 percent lower than it was a few years ago. Households 65 and older are the only age cohort that has continued to increase its share of ownership; all of the others, including the important middle-aged move-up cohort, have declined.
The bottom line: It’s been a rough few years but the analysts at the Joint Center think the recovery will begin in earnest this year.
[Fun Fact: Have you ever wondered why the Harvard Joint Center for Housing Studies has the word "Joint" in it? It's because the center used to be a joint project of Harvard and MIT, but in 1989 the center was taken over entirely by Harvard, but the original name was retained.]
Pieces are in place for housing to continue on its road to recovery but there remain plenty of uncertainties that can derail the market, NAR Chief Economist Lawrence Yun said at a conference earlier this week.
Yun told more than 800 attendees at the CRE Finance Council annual conference in Washington on Tuesday that for the last four years home sales have been essentially flat, at roughly 4.2 million homes, but NAR is forecasting a solid increase by the end of this year to about 4.6 million sales.
The reason: affordability remains at an all-time high, interest rates remain low, foreign buyers and investors remain interested in residential real estate, and the U.S. economy is strengthening, albeit modestly.
At the same time, corporations continue to sit on strong profits, the stock market is still heading up, and inflation remains relatively subdued. What’s more, pent-up demand continues to build and rentals are getting pricier. Home prices nationally have appeared to stabilize and all major home price trackers show prices going up in many areas, a trend that should help boost confidence among buyers and sellers.
All of these are positives, but there remain challenges holding back a more robust recovery in the housing market. Aside from continuing concerns over the financial health of Europe and other parts of the world, the improvement in the U.S. economy remains modest at best, job gains still have a long way to go before the U.S. makes up for the 8 million jobs lost during the recession, home mortgage lending remains tight, and the federal budget deficit continues to weigh down on the country’s prospects.
The other area of uncertainty is what Washington will do. Until the real estate industry gets clarity on the rules and legislation coming down the pike in the next year, lenders are unlikely to restore their underwriting standards to something more normal. For example, the qualified residential mortgage (QRM) rule: will regulators publish a rule next year with a minimum downpayment requirement on “safe” loans? Will other provisions implementing the massive Dodd-Frank Wall Street reform law from two years ago chill lenders’ willingness to lend? What tax law changes, if any, will Congress talk about over the next year?
Then there’s the massive federal tax expenditures expiring at the end of this year. How Congress handles these $4 trillion or so in provisions could have a major impact on how well the economy does.
The bottom line: Despite all the favorable pieces in place for a meaningful housing recovery, the economy continues to be beset by uncertainty, and that’s leaving it an open question how much the housing market can recover in the next year.
Insufficient staff to process loan applications and to get timely and accurate appraisals are two of the reasons lenders say are impeding their ability to originate and purchase more home loans, results from the Federal Reserve’s most recent quarterly lender survey shows. the report was released at the end of April but it has some interesting findings that are important today.
The Fed surveys lenders every three months to find out if lending standards are tightening or loosening, and in this latest three-month period they’re loosening, but not by much. As the Fed says in its inimicable prose, “A moderate net fraction of banks reported anticipating increasing their exposure to residential real estate assets over the next year.”
What’s interesrting about the report is that lenders say larger down payments aren’t that big of a deal to them for making more loans to borrowers with lower credit scores. Assuming borrowers with a FICO score of 620 made a downpayment of 20 percent rather than 10 percent, only a “moderate net fraction of banks” would make more loans, the Fed report says.
The idea that doubling the downpayment won’t lead to that much change in bank lending practices is consistent with what NAR has been saying for years in connection with federal banking regulators’ proposed qualified residential mortgage (QRM) rule. Regulators in drafting the rule have talked about imposing a stiff downpayment requirement to help ensure the rules create a class of loans that are considered safe, and thus can be sold 100 percent to investors. (If they’re not considered “safe,” lenders would have to retain 5 percent of the loan amount on their books, making the loans more expensive for borrowers.)
NAR has been saying all along that Congress never wanted banking regulators to impose a minimum downpayment requirement and has also been saying that larger downpayments aren’t what’s key when it comes to making safe loans. Rather, sound underwriting is the important factor, and this latest data from the Fed appears to back that up pretty clearly.
For borrowers with higher credit scores, in the 720 range, lenders said doubling the downpayment to 20 percent from 10 percent would likely induce them to make loans to these borrowers at about the same rate as they would have back in 2006, which would represent a “somewhat” higher percntage of loans than if borrowers put down 10 percent. Again, that sounds like anything but an endorsement of the idea that large downpayments equate to safe mortgages.
The survey also indicates that lenders continue to hold back in their residential lending in part because of regulatory uncertainty, which likely includes uncertainty over what that QRM rule will look like once its finally published, and what another lending rule, the so-called QM rule, will look like. The QM rule is the qualified mortgage rule and it’s a broad rule that the Consumer Financial Protection Bureau (CFPB) is writing to require lenders to ensure all borrowers who receive mortgage loans have the ability to repay the loan.
NAR has been saying that this QM rule needs to be broad and non-prescriptive so lenders can look at each loan application individually and make a lending decision based on the facts in each applicant’s file rather than be constrained by a cookie-cutter approach to evaluating applicants.
In any case, this latest Fed survey makes clear that lenders are not looking to big downpayments to improve loan quality, and at the same time, they don’t like all this uncertainty that these and other pending rules are imposing on the market. QRM and QM stem from the big Wall Street reform law that was enacted after the mortgage meltdown and now here we are two years later and lenders remain in a holding pattern.
Perhaps once they get some regulatory clarity they’ll start staffing up more to address the problem of insufficient staff for processing loans. But while regulatory clarity is important, it’s no doubt more important for the federal government to get the policy right, which means not releasing QM and QRM rules that are overly prescriptive.
Read the Fed report for yourself. It’s called the Senior Loan Officer Opinion Survey on Bank Lending Practices, April 30, 2012.
With baby boomers now well into their retirement years and many of them with elderly parents who are ready to move into a nursing home or assisted living facility, the likelihood of you listing or selling a home with a reverse mortgage is pretty good. About 700,000 of the loans have been made in the last decade or so, up from much smaller numbers before that, so you can see that the mortgages, which allow older home owners to extract the equity from their house, are a growing part of the residential real estate landscape. So, what do you need to know about them?
The biggest concern is that borrower continue to maintain the house. The lion’s share of reverse mortgages are federally backed by FHA, so there are minimum standards the borrowers have to meet to stay in good standing on their loan. For example, they have to continue to pay their utilities and property taxes, but they also have to keep the house in good repair. If they don’t. that could be grounds for the lender to foreclose on their loan.
But you could see a situation in which the elderly household has received all the proceeds of their reverse mortgage in a single lump sum. For lenders who offer fixed-rate reverse mortgages, the proceeds of the loan are provided in a lump sum. That’s so the lender doesn’t have to manage the interest-rate risk. For households in this situation, if they spend their money down quickly and are left with little income afterward with which to maintain their house, then when it eventually goes on the market it could be in poor shape. That will effect its potential on the market.
If the borrowers move out of the house to go into, say, an assisted living facility, the borrowers’ children might take over custody of the house and put it up for sale. Thus, if you’re listing or selling the house, you won’t be working with the owners but, in a sense, their surrogates. If the children grew up in the house they’ll be as familiar with the house as their parents, although if they haven’t lived in it for many years, they’ll have to get up to speed on its condition. At the same time, they’ll be trying to get a handle on their parents’ financial situation, which might not be entirely clear to them. Meanwhile, they might not have a full understanding of the reverse mortgage. Exactly how much equity is remaining in the house? That might not be as clear-cut as it seems, because the lender is charging interest against the loan every month. If the house sells for less than the remaining equity, are the children suddenly responsible for the difference? (No, that’s what the FHA insurance is for.) Only if the children switch gears and decide to keep the house do they have to come up with the balance if the equity in the home is insufficient to satisfy the mortgage.
In short, you can expect all sorts of perplexities surrounding a transaction in which children are selling the house and trying to sort things out themselves.
It’s with these matters in mind that we asked a reverse mortage lender and two executives of the National Reverse Mortgage Lenders Association to participate in a webinar with REALTOR® Magazine. They’ll be talking about the mechanics of paying off a reverse mortgage. And they’ll also touch on a program called HECM for Purchase, which is an FHA-insured reverse mortgage that can be used to by a house. HECM stands for home equity conversion mortgage, FHA’s name for a reverse mortgage.
The webinar is Thursday, June 28, at 3 p.m. Eastern Time. Register now for the event, called Reverse Mortgage Payoff Mechanics and HECM Purchases.
Speakers are Jerry Tomlin of Atlantic Bay Mortgage Group in Virginia Beach, Va., and Peter Bell and Steven Irwin of the National Reverse Mortgage Lenders Association.