Housing and Mortgage Outlook: Expect Declines in 2014

Housing and Mortgage Outlook: Expect Declines in 2014

Authors: Krista Franks-Brock January 22, 2014 0

 
Housing and Mortgage Outlook: Expect Declines in 2014

Following a year of fast-paced appreciation, Fitch Ratings expects home price gains to slow to a more moderate pace in 2014 in the United States, according to its Global Housing and Mortgage Outlook released Tuesday. The ratings agency also predicts mortgage volume will decline and delinquencies and shadow inventory will decrease, albeit slowly, while liquidation timelines continue to rise.

Home prices will continue to rise on the winds of “market momentum, the effects of inflation, the improving economy, and a return of buyers attracted by signs of stabilization,” according to Fitch.

However, rising mortgage rates and increasing inventory will temper price gains this year, the ratings agency said in its report.

At a national level, prices are about 15 percent overvalued, according to Fitch. A few markets in western states are leading this trend with home price growth outpacing income and other economic factors. For example, price-to-rent and price-to-income ratios in San Francisco have risen almost 25 percent since early 2012, Fitch explained.

Because of these trends, “Fitch remains concerned about regional overvaluation,” the ratings agency stated in its report.

While affordability remains high overall, Fitch says affordability will slip somewhat this year. One contributing factor is rising mortgage rates, which will likely reach 5 percent in 2014, according to Fitch’s predictions. The ratings agency says rising interest rates will also contribute to “a substantial decrease” in lending this year.

Prepayments will “remain at lower levels than historical averages for the next several years” as interest rates rise and refinances become less favorable, according to the ratings agency.

On the other hand, purchase loans will grow over the next few years, Fitch said, adding that the government will “continue to dominate market issuance through Fannie Mae and Freddie Mac.”

Although “a return to historic levels of arrears is not expected in the near future,” Fitch noted that recently-originated loans are performing strongly.

Long liquidation timelines, especially in judicial states, mean today’s shadow inventory will be slow to dissipate. While the industry’s shadow inventory will continue its current pace of decline for several years, Fitch says it will take about five years to work through the current volume of homes that make up the shadow inventory.

Housing starts have begun to pick up, and Fitch expects them to continue to rise, but they will be vulnerable to price corrections.

While U.S. prices will continue to rise this year, Fitch expects home prices in its northern neighbor to remain flat or fall slightly. This is due to Canada’s “cautious lending policies driven by government measures,” the ratings agency explained.

Fitch harbors a mostly favorable outlook for the housing markets in all 17 countries covered in its Global Housing and Mortgage Outlook.

Advertisements

Obama Answers Housing Questions from Public During Live Discussion

Following a speech Tuesday night in Phoenix, in which President Barack Obama discussed his ideas for housing finance reform, the president today took questions from American citizens during a live discussion hosted by Zillow CEOSpencer Rascoff.

During the question and answer session Wednesday, Obama reiterated his stated goals to bring a gradual end to Fannie Mae and Freddie Mac, to bring private capital into the housing market, and to offer affordable housing options—both rental options and 30-year mortgages.

Obama admitted that while it is the American dream to own a home, not all Americans are in a position to purchase a home. In particular, younger Americans with

student debt may not be in a position to accrue more debt through a mortgage loan.

In fact, Obama said one of the problems leading to the housing crisis was that many Americans who should have been renting were being offered mortgage loans.

Obama plans to combat the housing dilemmas facing young Americans in two ways—by helping ensure affordable rental housing options and by reducing the cost of college.

Money that for past generations would have gone toward a down payment on a house is now going to student debt, Obama said. Thus, helping reduce the cost of college will positively impact the housing market by allowing more young people to purchase homes instead of returning to their parents’ homes, he said.

Obama also discussed plans for the future of housing finance, including scaling back Fannie Mae and Freddie Mac’s portfolios and encouraging private capital to enter the market.

In most developed countries, the government does not have such a large role in the housing market, Obama said.

“We’re actually confident that the private market can step in, do a good job, and the government can be a backstop,” Obama said, adding, “In some ways it’s a return to earlier models.”

 

 

Rising rates have no effect on housing thus far

By Megan Hopkins

 • July 10, 2013 • 12:10pm

Compared to the 1980s, when mortgage rates hovered above 10%, today’s rates remain relatively low. In early May, the 30-year, fixed-rate shot up to 4.46%, before settling back to 4.29% last week, according to Freddie Mac

However, the recent pace at which they’ve been climbing has many potential homebuyers hesitant to buy a home. 

At the end of June, right after rates rose sharply, Trulia($33.12 -0.2%) surveyed more than 2,000 people to see what their biggest worry would be if they were to buy a home this year. 

Of all the consumers surveyed, 41% said their top fear is that mortgage rates would rise before they could actually buy a house. Second to rates, 37% of consumers said they were worried prices would rise before they could buy, and 36% said they wouldn’t find a home for sale that they like. 

So how high will rates have to get before consumers become too discouraged to buy a home? Among consumers who intend to buy a home someday, 13% said that mortgage rates of 4% were already too high for them to consider buying a home. Rates had already climbed to 4% at the time of the survey. 

Another 20% of consumers surveyed said they’d be discouraged from buying a home if rates reach 5%, while another 22% said they’d be discouraged from buying a home if rates reach 6%. Combining these groups, 56% of consumers who plan to buy a home someday would be discouraged from doing so if rates reach 6%. 

But are consumers right to worry about the effect of mortgage rates on housing costs? According to Trulia, yes. Higher rates will raise the monthly mortgage payment for a loan.

For example, with rates at 3.35%, the monthly payment on a $200,000, 30-year FRM is $881. However, once rates hit 4.46%, that payment jumps to $1009 — a jump of 14% in the monthly mortgage payment.

“This means a consumer can afford less house for a fixed monthly payment, which – all else equal – should reduce housing demand and home prices in the long term. In the short term, however, if consumers expect rates to rise further, some might rush to buy, which could boost sales and home prices temporarily,” said Jed Kolko, chief economist at Trulia, in a report. 

Surprisingly, the recent run-up in rates has not greatly affected prices or home-purchase mortgage applications as of yet. According to the Trulia Price Monitor, asking prices only rose 1.5% month-over-month in June. Additionally, the Mortgage Bankers Association index for home-purchase mortgage applications in June rose 2% month-over-month. 

“With price gains still going strong, there are few signs that the rise in rates will derail the housing recovery,” said analysts atCapital Economics

So why has the effect of rising rates on the housing market been limited thus far? Mortgage rates are rising alongside a strengthening economy, which is subsequently boosting housing demand. And while demand is on the rise, a tight inventory is forcing many would-be buyers to wait to buy. 

Additionally, rising rates could lead to expanded mortgage credit, as refinancing demand dries up. Banks might look to expand their home-purchase lending to replace the refinance activity they have lost.  

Barry Habib, chief strategist with Residential Finance, said he’s never experienced anything like what is seen here.

“In fact, it’s the largest percentage rise in interest rates and as rapid a period as we’ve seen in 53 years.”

Habib said he’s seen purchase activity drop slowly. When we see a normal lull is in July’s numbers. September’s numbers will be more telling, he said.

But demographics remain strong. The case for buying a home has never been stronger, with rent rising and affordability near its all-time best.

“You can make a strong case that housing should be strong moving forward,” he said. Habib noted that affordability is still 1% below the average for the past 10 years and 2% below what it’s been for 20 years.

Matt Weaver, senior mortgage banker at WCS Lending, told HousingWire that the main effect he’s seeing from the rise in rates is an increased sense of urgency. 

“The interest rate increase hasn’t affected any homebuyer that I’m dealing with at this point in time,” said Weaver. “Has it affected their amount of monthly payments? Certainly. But it hasn’t taken them out of the game.”

He added, “Because it happened so fast, it almost didn’t even allow enough time to think about ‘should I pull back and not look for a home?'”

Weaver said May 22 marked the start of the rate volatility. In fact, the mortgage banker said for the first two weeks in June, if he had a client come in to make a mortgage application in the morning, he would have to increase the interest rate on the application by the time the process was finished nearly an hour later.

Luckily, Weaver said he had not seen a transaction as of yet to where an interest rate stood in the way of making the purchase. 

“Going forward, from some of the studies that I read, I think that rates are going to take a much more gradual approach as opposed to this erratic behavior we’ve been seeing,” he said. 

mhopkins@housingwire.com

Housing Recovery Is Sustainable, According to Market Analysts

Despite a number of potentially damaging headwinds, the ongoing housing recovery will remain sustainable for the foreseeable future, analysts for Capital Economics say in a recently released report.

The housing industry’s rapid rebound took many experts by surprise-even the researchers who authored the report admit they “have been slightly taken aback” by the recovery’s speed. However, they point to several major indicators that show the current upturn is more than a temporary blip or a false recovery.

Sustained rises in demand, home prices, homebuilding activity, and new and existing-home sales all demonstrate that the market is seeing a lasting recovery, they say. They also forecast further price growth of 5 percent in each of 2013 and 2014.

What’s more, even as prices rise, valuation and affordability-“the cornerstone on which the improvement in housing is being built”-remain very favorable.

The major threats to the market at this juncture, the analysts say, are the potential for a new American recession (brought on by complications from the fiscal cliff and the potential of a partial euro-zone break-up) and the risk that properties in the shadow inventory will flood the market and drive prices down.

As far as the economy is concerned, Capital Economics’ working assumption is that Washington will avoid throwing the country into another downturn. Beyond that, the firm notes that trade links between the United States and Europe are relatively small, and the financial links aren’t significant enough to tip the country back into recession should the euro-zone see problems.

Turning to the shadow inventory, analysts estimate that the backlog of homes at risk of coming onto the market may be as large as 3.8 million (1.5 times the number of properties actually for sale). If those homes were allowed on the market too rapidly, supply would balloon and disrupt the price recovery-but they don’t expect that to happen.

“The signing of the $25bn foreclosure settlement has not led to a wave of foreclosures hitting the market,” the economists write. “With foreclosure timelines still protracted, and banks wary of the effects that a glut of supply would have on the recovery, we anticipate a continued trickle of homes from the shadow inventory, rather than a flood.”

Of bigger concern is the recovery’s dependence on investors and cash buyers. According to Capital Economics, “[m]ortgage-dependent buyers have made next to no contribution to the improvement in housing market demand,” mostly because of tight credit. Instead, it’s been buyers and investors-who are less dependent on mortgage finance-who have driven much of the recovery so far.

The problem, though, is that investment buying won’t last as discounts start fading. According to data from Zillow, the availability of deeply discounted foreclosures has been dropping sharply in states most targeted by investment buyers. While the trickle of properties from the shadow inventory will keep some bargains on the market, cheap, high-yielding homes are disappearing.

In fact, the analysts note, some of the most popular investment cities (such as Phoenix) are quickly becoming “no-go” areas for institutional buyers as the local markets recover. Even though the number of “overheating” cities is fairly small, there is a lesson to take away from those markets.

“What should be clear from all this is that the housing recovery cannot be driven by investors indefinitely,” the report says. “The very recovery that investors are driving will eventually price them out of the market.”

In order to keep the market healthy, credit conditions are going to have to loosen so the current heightened demand can actually make an impact.

According to a recent survey released by the Federal Reserve, one of the biggest factors keeping today’s credit market tight is the risk of put-back requests from Fannie Mae and Freddie Mac. However, as the economy shows improvement and mortgage delinquency continues to fall, Capital Economics anticipates put-back risk will fade.

“All in all, if we are right that the economy will continue growing, it’s reasonable to expect lenders to loosen the reins somewhat. The upshot is that we think mortgage-dependent buyers will gradually play an increasing role in the housing market recovery,” the report says.

“The bottom line is that the U.S. housing recovery is sustainable. The key point is that the fundamentals of housing valuations and affordability are very favourable, reflecting a market that has adjusted.”

Housing Takes Charge in 2012: Freddie Mac

The authenticity of this year’s recovery may still be in question, but according to Freddie Mac’s Economic and Housing Market Outlook for October, the housing sector is showing strength unmatched in previous years.

Over the past several years, housing has either hurt or done little to help GDP, even though historically, housing tends to lead “macroeconomic expansion,” according to the report.

“However, now we’re seeing housing resuming its traditional role of leading the recovery charge and once again being the bright spot in the economy,” said Frank Nothaft, VP and chief economist for Freddie Mac.

Based on residential fixed investment (RFI) growth, which Freddie Mac explained is the component of GDP that includes expenditures on new housing construction, additions and alterations to the existing housing stock, and broker commissions on property sales, the tide appears to be turning for housing.

According to the report, RFI was a “net drag” on GDP growth during 2006-2010, and in 2011, it contributed less than one-tenth of a percentage point to GDP growth.

But, in the first half of this year, RFI added 0.3 percentage points to GDP growth of 1.7 percent. Freddie Mac expects to see to see this trend continue into the remainder of the year.

“With QE3 in motion we should see even more pick-up in housing activity thereby providing greater benefits to the overall economy and consumers looking to refinance or purchase a home,” Nothaft added.

With the Fed’s stimulus encouraging low mortgage rates, Freddie Mac expects the low-rate environment to continue into the next year, with the 30-year fixed-rate mortgage averaging around 3.5 percent.

Low rates also prompted the GSE to project 7 million borrowers who will refinance this year, leading to an aggregate of $15 billion in mortgage payment savings over the first 12 months after refinancing.

In addition, Freddie Mac anticipates volume for single-family originations will come close to $2 trillion, a 30 percent increase from last year. However, volume is expected to drop by 15 to 20 percent in 2013 if mortgage rates rise and HARP expires.

New Short Sale Guidelines for GSEs Will Make Process Easier

Starting November 1, 2012, Fannie Mae and Freddie Mac will implement new short sale guidelines to make the approval process easier for eligible borrowers.

“These new guidelines demonstrate FHFA’s and Fannie Mae’s and Freddie Mac’s commitment to enhancing and streamlining processes to avoid foreclosure and stabilize communities,” said
FHFA Acting Director Edward J. DeMarco in a statement. “The new standard short sale program will also provide relief to those underwater borrowers who need to relocate more than 50 miles for a job.”

The changes are part of the FHFA’s Servicing Alignment Initiative and will require a streamlined approach with documents, leading to a reduction in documentation requirements. For example, borrowers who are 90 days or more delinquent and have a credit score lower than 620 will no longer be required to provide documentation for their hardship.

The GSEs will also waive their right to pursue deficiency judgments. Borrowers with sufficient income or assets can make cash contributions or sign promissory notes instead.

One major barrier that is also being addressed is the issue with second lien holders. To prevent second lien holders from stalling the short sale process, the GSEs will offer up to $6,000.

The new guidelines will also enable servicers to approve a short sale for borrowers who are not in default but face certain hardships including the death of a borrower or co-borrower, divorce or legal separation, illness or disability or a distant employment transfer.

In addition, all servicers will have the authority to approve and complete short sales that follow the requirements without first going to the GSEs for approval.

Provisions were also created for military personnel with Permanent Change of Station (PCS) orders. Servicemembers who are required to relocate will automatically be eligible for for short sales even if they are current. They also won’t be obligated to contribute funds to pay for the remaining deficiency.

“Short sales have become an increasingly important tool in preventing foreclosures and stabilizing communities,” said Leslie Peeler, SVP, National Servicing Organization, Fannie Mae. “We want to help as many homeowners avoid foreclosure as possible. It is vital that servicers, junior lien holders and mortgage insurers step up to the plate with us.”

Tracy Mooney, SVP of Single-Family Servicing and REO at Freddie Mac, said, “These changes will make it clear that Freddie Mac servicers have the authority to approve short sales for more borrowers facing the most frequently seen hardships. These changes will further empower the industry to minimize foreclosures and help Freddie Mac in its mission to minimize credit losses and fortify a national housing recovery.”

Fannie Mae will send the announcement for the new changes to servicers Wednesday. Freddie Mac sent their announcement Tuesday.

In April, the GSEs also announced they were setting requirements to have a decision on a short sale offer made within 30-60 days.

30-year, fixed-rate mortgage hits new low

The 30-year, fixed-rate mortgage fell to 3.88% this past week, hitting a new low and marking its seventh consecutive week below 4%, Freddie Mac said Thursday.

That compares to a 30-year FRM of 3.89% a week earlier and 4.74% last year.

Read more of this post

%d bloggers like this: