Archive for July, 2013

Real estate news and analysis from The Wall Street Journal
July 8, 2013, 4:27 PM

Why Home-Price Gains Will Slow Amid Higher Mortgage Rate

By Nick Timiraos

Weekly data through June

Home prices moved up at a torrid pace during the first half of the year, but don’t expect them to keep pace during the second half.

The big spike in mortgage rates over the past two months has reset the housing market and figures to take a bite out of demand at a time when more sellers have listed homes for sale and when price gains have tested investors’ purchasing appetites.

Mortgage rates, which stood at a low of 3.59% at the beginning of May, jumped to 4.58% during the last week of June, according to the Mortgage Bankers Association. Rates rose even more last Friday, after a strong jobs report firmed up investors’ expectations that the Federal Reserve would begin to curtail its bond-buying program later this year.

A rule of thumb holds that every one percentage point increase in interest rates reduces affordability by 10%, so the recent move in rates just made homes about 10% more expensive to buyers who need to finance their purchase.

“There’s no one in the business right now who doesn’t think the market hasn’t taken a step back. The evidence is all around us,” said Glenn Kelman, chief executive of real-estate brokerage Redfin. The number of Redfin customers who requested tours during the last week of June was down 5% from the average for the previous three weeks, while the number of customers making offers was down by 8% and the number of new customers edged down by 2%.

Here’s a look at seven areas to watch during the second half of 2013:

1. What will higher mortgage rates do to housing demand? Rates are now at their highest level in two years. For borrowers with less than a 5% down payment, the effective mortgage rate is at its highest level since mid-2009 because loans backed by the Federal Housing Administration now carry higher annual insurance premiums.

Economists say that even at a 4.5% or 5% mortgage rate, housing is still affordable by historical standards. Analysts at Bank of America BAC +1.05% Merrill Lynch note that prices would have to rise by 20% or rates would have to climb to around 6% before housing would look unaffordable. Also, they say that housing demand is shaped heavily by expectations of future affordability. That is, homeowners may be more eager to buy at a 4.5% mortgage rate when prices are rising than they were two years ago, when rates were lower but demand was soft because prices were falling.

But the bad news is that the level of rates may matter less than the speed of any increase. A sharp spike in interest rates—even to a level that is still historically low—represents a large payment shock to home shoppers. Many buyers shop for a home based on their monthly mortgage payment, which just shot up. The monthly payment on a $200,000 home with a 10% down payment just went up by $100 every month, almost a 13% increase. The monthly cost of a $450,000 home just went up by $250.

2. Don’t higher mortgage rates help in the short run by bringing more buyers off the fence? Not really. There’s little evidence that higher rates create newdemand, even if they accelerate purchases from households that had already decided to purchase. Pending home sales in May rose sharply by 6.7% from April to their highest level in six years, but that spike could easily be reversed in June and July.

3. Who is knocked out of the market by rising rates? The jump in rates should be felt everywhere, but the entry market and the high-end market could see a bigger pinch. First-time buyers and others who were already stretching to qualify for a loan and scrape together the down payment could find themselves unable to buy the house they thought that they could back in April.

An entirely separate class of buyers—Mr. Kelman calls them “buyers of opportunity”—didn’t really need to buy a house, but they were willing to consider a $1-$2 million home-purchase back when rates were at 3.5%. Now, it may be less compelling, and these would-be buyers may simply spend money to renovate their existing residence.

4. What does this mean for investors? If anyone gains, it could be investors that have been buying up cheap homes as rental properties. “I see investors licking their chops,” said Redfin’s Mr. Kelman. “Investors were really getting frustrated this spring trying to compete against all this funny money” from low rates. Also, to the extent that rising rates freeze would-be buyers out of the market, that should help increase rental demand.

There have been signs, however, that higher home prices have prompted investors to dial back their purchases because it’s become more difficult to dig up bargains, even before rates began to rise.

5. How fast will inventory rise? Even before rates increased, the number of homes offered for sale was rising at a slightly faster pace than it normally does during the spring, even though inventory in May was still around 10% below last year’s level. One sign that inventory has picked up is that competitive offer situations are dropping. The share of offers written by Redfin agents that faced a competing offer fell to 69.5% of offers in May, down from 73.3% in April. One year ago, some 69.3% of offers faced at least one competing bid.

Markets that have seen larger increases in listings have seen even bigger declines in multiple-bid situations. In Orange County, Calif., where the inventory of homes for sale is up by more than one third since March, some 84% of homes where Redfin agents wrote an offer in May had competing bids, compared to 94% in April. In San Diego, some 73% of offers in May had multiple offers, compared to 87% in April.

6. Is this the end of the housing rebound? It depends on how much higher rates rise. For the last 18 months, home prices have shot up against a backdrop of fewer homes for sale—particularly distressed properties—and stronger demand. Housing bulls have argued that this recovery has been driven by fundamentals such as household formation, even if it has been accelerated by low rates. Bears have argued that the recovery has been mostly artificial, driven by cheap debt. The gyrations in bond markets are going to pull back the curtain on just how much the current recovery has depended on ultra-low mortgage rates.

The speed of national home-price gains in recent months—in the spring, various indexes showed they were rising by about 12% compared to one year ago—have stoked fears of a bubble. Rising mortgage rates are actually a positive, says John Burns, chief executive of John Burns Real Estate Consulting, because they should produce more sustainable price increases. “I don’t think it’s the end of price increases, but I think they’re going to moderate significantly,” he said.

7. When will we know how much rising rates have reset the market? New home sales will provide the first barometer of the impact on rates because they measure contracts signed. Still, they’ll be an imperfect gauge because many home builders are likely to buy down interest rates for buyers—something that many ordinary home sellers won’t be willing to do. Existing-home sales for June, which will be reported in two weeks, will show sales of many homes that went into contract in May, before the rate spike, so the true magnitude won’t be seen until next month’s report on July’s existing-home sales is released.

Any hit to home prices won’t show up for even longer. The Case-Shiller index is reported with a two-month delay, meaning that July prices won’t be reported until the end of September. Much of the price data out over the next two months won’t reflect the impact of rising rates.

Falling Inventories and Rising Prices Span Nation and West Coast


Inventories are declining, and prices are rising, according to arecent report from Movoto Real Estate, a brokerage with a presence in 30 U.S. states.

Examining data from Multiple Listing Services in 34 cities across the nation, Movoto found year-over-year declines in June’s inventory in 32 of the 38 cities it tracks. The most drastic declines took place in Sacramento (-54.5 percent), Detroit (-47.1 percent), and Boston (-46.7 percent).

Over the same time period, price per square foot increased in all but two of the cities Movoto observes. The exceptions were New Orleans (-2.2 percent) and Chicago (-3.2 percent). Sacramento topped the list with a 68.1 percent price-per-square-foot increase.

Highlighting just the West Coast, Movoto found a year-over-year decrease in inventory but a month-over-month increase.

A composite of 14 major metros on the West Coast reveals

an 11.9 percent yearly decline in inventory in June, according to Movoto.

In contrast, listings rose month-over-month from 12,218 to 13,698.

West Coast cities with the steepest inventory decreases year-over-year in June were Salem, Oregon (-25.4 percent), Bellevue, Washington (-24.5 percent), and Los Angeles (-24.5 percent).

San Jose, California (19.2 percent), and San Diego, California (3.6 percent) were the only two of the 14 cities in the index to experience rising inventories over the 12-month period.

As inventory declines, price per square foot is on the rise. However, the two cities with growing inventories are not left out of this trend. San Diego and San Jose take the second and third places, respectively, in the ranking of cities by price increase over the year.

Price per square foot increased 20.8 percent in San Diego and 18.4 percent in San Jose.

The only city to beat these two was Los Angeles with a 28.6 percent increase. As of last month, the price per square foot for a home in Los Angeles is $432. This is the second-highest price per square foot on Movoto’s June index for the West Coast.

However, San Francisco outpaced all other cities with a price per square foot of $655.

Prices were also generally up over the month, according to Movoto, rising from $251 per square foot to $253 per square foot.

Researchers: Monetary Policy Not Enough to Prevent Bubbles


National monetary policy alone cannot reliably prevent or reverse housing bubbles, according to a recent report from the Lincoln Institute of Land Policy. The downfall lies in the fact that housing prices and housing markets vary widely across the country, stated the researchers in the report, Preventing House Price Bubbles: Lessons from the 2006-2012 Bust.

“Indeed, the evidence strongly suggests that the idea of a national housing market is fiction,” the researchers stated. “There are in fact hundreds of housing markets, albeit with some interconnectedness or shared features.”

Monetary policy and large national programs such as the Home Affordable Modification Program (HAMP) may help some markets while hurting others, according to the report.

The researchers turned to a quote from Nassim Taleb—scholar and author of The Black Swan —to illustrate their point: “Never cross a river because it is on average four feet deep.”

After illustrating the shortfalls of national policies in addressing housing market bubbles, the researchers from the Lincoln Institute of Land Policy offer a solution: local countercyclical capital policies.

“The basic idea is straightforward: when prices for a particular asset or sector are rising much faster than market fundamentals justify, bank regulators would increase the capital ratios for that asset,” the researchers explained.

Higher capital reserves make a bank safer and increase mortgage costs, dampening demand, according to the report. “[C]ountercyclical capital requirements offer two major benefits: they better enable financial institutions to withstand severe shocks, and they lower the likelihood of an extreme event,” the report stated.

The researchers detailed the effect countercyclical capital could have had on Fannie Mae leading up to the Great Recession. Fannie would have had to maintain higher capital, thus decreasing the amount of loans it acquired “that ultimately resulted in excessive losses.”

At the same time, Fannie would have been forced to raise prices on home loans, which would have decreased demand, “thereby reducing the magnitude of the house price bubble,” according to the report.

The countercyclical capital policy the Lincoln Institute on Land Policy recommends would rely on regional market models that would take into account home prices and economic indicators, including employment rates and household income, which affect home prices.

One of the obstacles to such a policy, the researchers stated, is “[t]here will always be resistance to raising capital requirements when times appear to be good.”

Thursday, 04 July 2013
Rise in Mortgage Rates Cut Into Homebuyer Demand Last Week
Expectations the Federal Reserve will slow its economic stimulus program by the end of the year pushed mortgage rates higher last week, sapping demand from potential home buyers, data from an industry group showed on Wednesday.
Rates measured by the Mortgage Bankers Association jumped to the highest level since July 2011, which also cut into refinance activity. The share of refinance applications fell to the lowest level in more than two years.Interest rates on fixed 30-year mortgage surged 12 basis points to average 4.58 percent in the week ended June 28, the MBA said.

“At these rates, many fewer homeowners have an incentive to refinance,” Mike Fratantoni, MBA’s vice president of research and economics, said in a statement.

“Purchase application volume also declined, but not nearly to the same extent, as affordability remains strong.”

However, a separate report from mortgage financier Freddie Mac, covering the week ending July 3, showed average rates for 30-year mortgages heading slightly lower. Market concern about an early reduction of Fed stimulus eased somewhat during the period, an economist said.

Rates have been rising since early May, with the increase accelerated by comments from Fed Chairman Ben Bernanke last month that the central bank expects to wind down the pace of its quantitative easing program later this year if the economy improves as expected.

The Fed has been buying $85 billion a month in bonds and mortgage-backed assets to keep borrowing costs low and stimulate economic growth. The historically low mortgage rates have helped lure in buyers as the housing market gets back on its feet.

The recent higher cost of mortgages has raised concerns that the increase could dampen demand and slow the housing recovery, though most economists do not expect it to be derailed. Even with the increase, rates remain historically low.

While the rise in rates had appeared to cause some potential buyers to get into the market earlier in June, MBA’s seasonally adjusted index of loan requests for home purchases decreased 3.1 percent last week.

Refinancing activity was hit much harder and the index tumbled 15.6 percent last week. The refinance share of total mortgage activity slumped to 64 percent of applications from 67 percent the week before. It was the lowest level since May 2011.

The overall index of mortgage application activity, which includes both refinancing and home purchase demand, slid 11.7 percent.

The survey covers over 75 percent of U.S. retail residential mortgage applications, according to MBA.

The Freddie Mac report showed average 30-year fixed rate mortgages for the week ending July 3 falling to 4.29 percent from 4.46 percent last week. At this time last year the rate averaged 3.62 percent.

The Primary Mortgage Market Survey also showed that the 15-year fixed-rate mortgage averaged 3.39 percent this week, down from last week’s average of 3.50 percent.

“Fixed mortgage rates fell over the holiday week as market concerns over the timing of the Federal Reserve’s pullback in bond purchases eased somewhat,” said Frank Nothaft, vice president and chief economist for Freddie Mac.
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