Republicans writing their party platform for their upcoming 2012 convention in Tampa next week inserted language specifying their support for the mortgage interest deduction. As described in a piece in the Wall Street Journal today, the language says that, “if the GOP failed on tax reform it would favor the retention of the mortgage-interest break.”
This is a clear victory for home buyers, home owners, and the economy, because it specifies that Republican lawmakers favor the retention of MID.
Based on the WSJ report, the first part of the provision suggests Republicans will pursue some type of tax reform. Whether that would include changes to MID can’t be known, but the fact that they specifically expressed support for MID is certainly an endorsement of this 100-year-old tax benefit.
The Wall Street Journal sees the language as something less than a win for home owners, because sponsors of the endorsement originally wanted it separate from any talk of tax reform. Given the climate today, in which lawmakers will be facing the enormous job of trying to put the federal budget on a path to balance, the fact that an explicit endorsement of MID was included in the platform is a victory, pure and simple.
The Journal goes on to point to the federal government’s historic support of home ownership as an underlying factor in the housing bust several years back. That’s an argument it’s made before. But the assertion has never made much sense, since MID has been around for 100 years—that’s 17 presidential administrations—and throughout that time the housing market on a national basis has been an indisputable source of stability in the economy.
That’s something delegates to the Republican platform committee clearly recognized in expressly endorsing the preservation of MID.
The Wall Street Journal today says the housing market nationally is bottoming out, the essential first step before it can start rising again. But the Journal is a little pessimistic that the upward bounce is coming any time soon. It says the market could drag along the bottom for a while, thanks in part to the uncertainty over how banks’ “shadow inventory” will be handled over the next few years and the continuing trouble borrowers are facing getting financing.
“There are more signs than there were a year ago that housing isn’t getting any worse,” the paper says, “and that it may slowly be getting better.”
But how slowly? The Journal says prices nationally are still falling. It cites February data from CoreLogic that prices fell 2 percent from a year earlier. Recent Case-Shiller data also show prices continuing to fall. NAR data, which draws directly from MLS data, differs from these two data sets. In February it showed prices with a slight, 0.3 percent gain, and in March with a more substantial 2.5 percent gain. These figures take into account distressed sales, which comprise about a third of all existing-home sales today and have a dampening effect on prices, so price gains would be higher if these sales were taken out of the data.
Time will tell which data set is more accurate. Several months will need to go by before we can look back and see what’s actually happening today with prices, but in any case, NAR Chief Economist Lawrence Yun is optimistic about what the market will look like later this year.
First, distressed homes are getting snapped up by bargain hunters, both investors and owner -occupants. That softens the impact that banks’ shadow inventory will have on markets in the months ahead as more properties are released. Second, inventory levels are down to six months, which historically has been the level at which prices stabilize.
To be sure, inventories have been down to six months only for a short amount of time, so it’s too soon to say there’s a trend here. But if inventories stay down at this level for several more months, the stage could be set for better news on prices.
One point made by the Journal that is certainly the case is the continuing trouble borrowers are having getting loans. As the paper says, banks are maintaining tight credit standards in part because of their concerns that Fannie Mae and other secondary market entities will make them buy back any loans that go bad. So, their standards are ratcheted up, and that’s causing even creditworthy borrowers headaches.
It’s safe to say that, until the difficulty of getting financing eases back to a more normal level, even today’s brightening picture can’t be taken for granted, and the Journal’s concerns about a prolonged stay at the bottom could prove true.
Coverage in much of the media of NAR’s latest pending home sales index, whch was released on Monday, has focused on the improvement we’ve seen over last year.
The Wall Street Journal, for example, in its front-page “Vital Signs” info graph for today (March 27, 2012), features data from NAR’s pending home sales index and says “Americans are buying more homes this year than in 2011.”
Bloomberg Businessweek says, ”Pending sales of U.S. existing homes [are] at near two-year high.”
Focusing on the improvement over last year is positive, because month-to-month fluctuations can make it hard to see the big picture. In yesterday’s NAR release, the forward-looking indicator was actually down, although almost imperceptibly—0.5 percent—but, as the news coverage said, it was up a strong 9 percent from a year ago.
Even with the monthly dip, the index suggests markets are in an extended period of stabilization. On a national basis, sales have been at about the same level since 2009, sometimes moving up a bit and sometimes dropping back down, but always hovering in the same territory, roughly 4.2 million sales. But for the last two months they’ve been at about a 4.6 million pace, which, if that persists, would be the highest level in five years, according to Lawrence Yun, NAR’s chief economist.
Yun thinks the big-picture view is looking up after what’s been a tough several years, in large part because of what’s happening in the broader economy. Rental rates are rising, making home ownership more attractive, jobs are heading up, and the stock market has been strong, too. What’s more, the improved sales picture is broad-based. Unlike last year, when sales improved for a while because of strong activity in a few markets, like Las Vegas, this year improvement is happening in all parts of the country: Pittsburgh, Syracuse, Dallas, Kansas City, Minneapolis, Seattle, and so on.
Maybe most important of all, the improving economy might help unleash the pent-up housing demand we’ve been waiting for. Yun has been talking about this for several years now. The population has continued to grow (it’s around 310 million now, maybe a little more), but home sales have been stuck at levels we last saw 10 years ago, despite the country having more people.
Its not just that people are renting rather than buying; it’s that young people haven’t been moving out and forming new households or they’re moving out and doubling up with friends. Yun thinks people might have the confidence now to start forming households, setting the stage for improved housing conditions in the years ahead.
By Robert Freedman, senior editor, REALTOR® Magazine
An op-ed that the Wall Street Journal ran earlier this week (on the eve of the REALTORS® 2011 Conference & Expo in Anaheim) dismisses concerns of NAR and other organizations as well as members of Congress over the drop in FHA and conforming loan limits at the end of September. The editors say the new high-cost loan limit of $625,500 (down from $729,750) has led to only a 1.3 percent drop in transactions, suggesting that concerns over the lower limits’ impact haven’t been borne out. In support of their point they cite House Financial Services Chairman Spencer Bachus (R-Ala.) as saying “the lower loan limits only affect a very small slice of wealthier homeowners in high-cost areas.”
But The WSJ editors paint a partial picture of the issue at best, because that 1.3 percent only appears to represent impacted transactions as a result of the high-cost limit drop.
What they don’t address is the impact of the change in the loan-limit formula to 115 percent from 125 percent of the area median home price. When that part of the drop is factored in along with the impact on move-up sellers who can’t sell, the impact on home sales is probably three times as high, about 6 percent, NAR researchers calculate. And that’s on a national basis. Obviously some markets are being hit much harder than others.
The editors also dismiss NAR’s point that the higher limits are only intended to be in place for another year or so to give housing, and therefore the broader economy, a chance to recover. They say once the temporary limits expire, real estate interests will just return to Congress seeking another extension. But the higher limits were passed in 2008 as part of emergency legislation, and that emergency isn’t over yet. As NAR President Ron Phipps says in a letter that appeared next to the WSJ op-ed on the day that it ran in the newspaper (although it was in response to an earlier story about McMansions, not the op-ed), “People across the country are trying to gain a foothold in these trying times. We need to give them the resources to do so.”
The WSJ editors are clear they don’t want the loan limits to go back up to their emergency level. It would be helpful, though, if they talked about the full impact of the loan-limit drop and not just the impact of the high-cost area drop, as they appear to be doing.
By Robert Freedman, Senior Editor, REALTOR® Magazine
The Wall Street Journal in an attention-grabbing half-page article and graphic (“Sellers Brace for New Mortgage Caps”) in its July 6 issue showed just how hard expensive markets in the U.S. would be hit if Congress allows Fannie Mae, Freddie Mac, and FHA loan limits to expire on September 30, the end of the federal fiscal year. Currently, limits are set at $417,000, although for expensive areas they can go up to $729,750. Should the limits be allowed to expire, the limits would drop to $271,050 for FHA and remain at $417,000 for Fannie and Freddie, but for expensive areas, the high-cost limit of $729,750 would drop to $625,500 for Fannie and Freddie as well as for FHA.
The Journal’s graphic is particularly illuminating because it illustrates the problem of expiring mortgage caps as largely a coastal matter, with 80 percent of markets facing the biggest hit in two states: California and Massachusetts. The other 20 percent are scattered largely along the rest of the eastern and western seaboard, the Mountain West, and parts of the Midwest. Virtually no areas would be affected in the country’s heartland.
As far as high-cost loan limits are concerned, that portrayal is surely accurate, and it shows a lot of pain for borrowers in expensive areas like Boston, where federally backed financing (now 90 percent of all loans made) would only be available for loans up to $625,500. That means any house that households want to buy above that price will require more than 3.5 percent down, because FHA won’t be available to them, and will come with a higher interest rate, because Fannie Mae and Freddie Mac won’t be available to them. Especially for first-time buyers, coming up with as much as 20 percent down or paying another 100 basis points or so for financing will be extremely hard. Many buyers simply won’t be able to do it.
The problem with the Journal’s take on the issue is that it doesn’t address what real estate practitioners around the country say is the far bigger problem with expiring loan limits. And that’s a related change in the loan formula to 115 percent of area median home price from 125 percent. According to a chart put together by Fannie, Freddie, and FHA, this change would mean a decrease in loan limits in 669 counties in 42 states. Only eight states (Ark., Iowa, Kans., , Miss., Neb., N.D., S.D., and Okla.) will see no decline because they are already at the FHA floor of $271,050. Continue reading »
By Robert Freedman, senior editor, REALTOR® Magazine
A piece in the Wall Street Journal yesterday took issue with a recent Time cover story calling into question some of our most cherished beliefs about homeownership. Much of what the Journal talks about isn’t new. In fact, it recites benefits of homeownership that you already know better than anyone. But in pulling them together in the way it does, it makes you realize just how compelling homeownership is from just about every standpoint. If you haven’t seen the piece, by Brett Arends, here’s a thumbnail sketch of its 10 points:
Why is now a great time to buy?
1. You can get a good deal. Prices are down 30 percent on average. They’re at a level that makes sense for people’s income.
2. Mortgages are cheap. At 4.3 percent on average for a 30-year fixed-rate mortgage, your costs to own are down by a fifth from two years ago.
3. You can save on taxes. When you add up the deductions for mortgage interest and others, the cost of owning can drop below renting for a comparable place.
4. It’ll be yours. The one benefit to owning that never changes is that you can paint your walls orange if you want (generally speaking; there might be some community restrictions). How many landlords will let you do that?
5. You can get a better home. In some markets, it’s simply the case that the nicest places are for-sale homes and condos.
6. It offers some inflation protection. Historically, appreciation over time outpaces inflation.
7. It’s risk capital. If the economy picks up, you stand to benefit from that, even if you’re goal is just to have a nice place to live.
8. It’s forced savings. A part of your payment each month goes to equity.
9. There is a lot to choose from. There are some 4 million homes available today, about a year’s supply. Now’s the time to find something you like and get it.
10. Sooner or later the market will clear. The U.S. is expected to grow by another 100 million people in 40 years. They have to live somewhere. Demand will eventually outpace supply.
[Editor's note: To learn about the issues being raised in the media about homeownership, buying today and what the facts are, REALTOR® Magazine is hosting a webinar Tuesday, Sept. 28, at 3 p.m. Eastern Time, with NAR Chief Economist Lawrence Yun and housing policy analyst Howard Glaser of the Glaser Group. Registration link.]