Posts Tagged ‘Yun’

For those of you looking for cautionary notes going into 2014, I offer two items: jobs and loans.

Despite recent gains, which some of us believe are more of a mirage than an oasis, the economy still isn’t creating enough good-paying full-time jobs to drive a full recovery in the housing market. This is particularly true among the millennials, who continue to live at home with mom and dad at near record levels.

Unemployment—and under-employment—among the 25- to 35-year-old cohort continue to be stubbornly high, which is having a chilling effect on the number of first-time homebuyers—the group that historically has fueled growth in the housing ecosystem. This has led to slower-than-forecast household formation, and increasingly, when new households are formed, they’re rental households.

Some erstwhile buyers have simply decided not to enter into a long-term financial obligation for the time being. Others either don’t have sufficient funds for a down payment or don’t qualify for today’s relatively strict lending requirements.

Those lending requirements—and a lending environment that I believe is going to get more challenging before it gets easier—are the other major headwinds that could slow down housing. While most forecasts are calling for a slight uptick in purchase loans in 2014, it’s easy to build a scenario that goes terribly wrong.

The Consumer Financial Protection Bureau’s new Qualified Mortgage (QM) and Ability-to-Repay rules will exclude somewhere between 10-20 percent of borrowers who would have qualified for a loan in 2013. Most of the large banks will issue loans that fall squarely within QM guidelines, simply to avoid as much risk as possible. The one exception is likely to be jumbo loans, offered to ultra-qualified, high-net-worth individuals.

Another complication is lower loan limits proposed by Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA). These lower limits will make it more difficult for borrowers in high-priced housing markets to get loans. Those who do qualify for loans will pay more—the Federal Housing Finance Agency (FHFA) recently announced hikes in the GSEs’ guarantee fees and a new, higher payment schedule for borrowers who fall within certain FICO and down payment measures. The FHA has also increased insurance premiums, particularly on its lowest down payment products.

Some believe that by raising costs and limiting loan amounts, the government will drive private capital back into the market, but that seems unlikely until regulatory and litigation risks have subsided, and until loans can be priced appropriately to risk. At some point in 2014, private capital will probably return, along with a more functional secondary market. Then non-bank lenders can come to market with loans available to less-than-perfectly-qualified borrowers, but at significantly higher interest rates.

Higher interest rates, which are inevitable, will begin to erode affordability levels, even with home prices still well off the peak numbers reached during the housing boom. The primary culprit isn’t high interest rates or rising home prices, but lower median incomes and wage stagnation over the past five years.

So which will it be: Full speed ahead, or trouble around the bend? If nothing else, 2014 promises to be a very interesting year.

BY: RICK SHARGA, AUCTION.COM

Many economists and market observers have suggested the market is poised for continued growth as the recovery enters its third year, and there are positive elements in play that provide some reasons for optimism.

Recent loan vintages continue to perform at levels better than historical norms—the default rates on loans from 2011-2013 are virtually non-existent. This has essentially shut off the pipeline of distressed assets, finally allowing the industry to work through the backlog of seriously delinquent loans and loans already in the foreclosure process.

States with non-judicial foreclosure processes have had remarkable success in clearing out the inventory of distressed properties, which is one of the factors driving the housing rebound in states like California and Arizona.

Not coincidentally, foreclosure activity has been declining as well, and this is likely to continue throughout 2014. Unprecedented levels of short sales have been one of the reasons for the decline in foreclosures—every short sale represents one less REO coming to market. And the billions

of dollars of non-performing loan sales have connected distressed borrowers with special servicers, who have managed to modify tens of thousands of loans, preventing more foreclosures.

Investor activity at the low end of the market has had two significant effects: first, investors have gobbled up virtually all available REO homes, and begun to purchase rental properties via short sales and trustee sales.

Second, they’ve helped accelerate home price appreciation, particularly in many of the markets that were hardest hit during the downturn. This, in turn, has dramatically reduced the number of homeowners in a negative equity position, dropping the number of homes in the so-called “shadow inventory” to much more manageable levels.

As home prices have risen, more non-distressed properties have begun to enter the market, helping to ease the inventory shortage of existing homes, and dropping the extremely high percentage of distressed home sales to more reasonable levels than we’ve seen in the past seven or eight years.

Builders have noticed the drop-off in distressed property sales and limited inventory, and housing starts for single-family homes have risen dramatically in the last months of 2013.

So…home sales are up, prices are up, inventory is improving, foreclosures are dropping, and homebuilding is awakening from its long hibernation. What’s there to be bearish about?

For those of you looking for cautionary notes going into 2014, I offer two items: jobs and loans.

Rick Sharga is EVP for Auction.com. Look for the second part of his 2014 commentary on Friday.