Harvard’s State of Housing Report Says Home Construction Now Adding to GDP

Steadier job growth and improving
consumer confidence are now boosting home sales and home prices may finally
find a bottom this year according to the latest State of the Nation’s Housing report released this morning.  The report, produced by the Joint Center for
Housing Studies of Harvard University, says further that stronger home sales
should pave the way for a pick-up in single-family construction over the rest
of 2012.

Conditions, however, will keep this
recovery “subdued.”  The backlog of
nearly 2 million loans in foreclosure means that distressed sales will remain
elevated and will keep a downward pressure on prices and another 11.1 million
homeowners are underwater on their mortgages, dampening both sales of new homes
and investment in existing units.  While
vacancies have been declining the report notes, they still remain well above
normal, holding down demand for new construction in many markets.

What the for-sale market needs most, the
authors say is a sustained increase in employment.  This might in turn bring household formation
back to normal levels.  The depressed
pace of homebuilding has been a major factor in hiring and pulled down growth
in the gross domestic product (GDP) from 2006 to 2010.  Since the beginning of 2011, however, both home
construction and home improvement spending have made a positive contribution to
GDP in four out of five quarters.

Another bright spot is the rental market;
the number of renters surged by 5.1 million over the decade of the 2000s, the
largest decade-long increase in the postwar era.  This reflects not only growth in those
populations which are historically prone to rent – the young, minority, and low
income households, but foreclosures have driven others into the rental market.

Still the rental market has not fully
benefited from the large echo-boom generation because the recession has forced
a lot of young people to put off leaving home which usually means a move into
rental housing.  Once the economy
improves the echo-boomers should give the market a significant lift.

The rising demand for rentals has
sparked rent increases in many parts of the country; 38 of the 64 markets
tracked by MPF research had rent increases that outstripped inflation and all
but one of the remainder (Las Vegas) had at least a nominal increase in
2011.  Even in some cities hard hit by
foreclosures and the economy in general (Detroit, Cleveland) rents are rising.

The increase in rents has, in turn,
helped to stabilize the multifamily property market where prices are were
reported up by 10 percent in the fourth quarter of 2011 from one year earlier
and multifamily construction starts more than doubled from its trough to a
225,000 unit annual rate, providing a welcome boost to construction.

Homeownership continues to slide,
dipping to 66.1 percent in 2011 from 66.8 percent a year earlier and 69 percent
at its peak in 2004, but it is still higher than in the period from 1980 into
the early 1990s.  Rates for older
households continue to climb as the population ages, but the homeownership rate
for younger households will probably continue to decline over the next few
years.

The number of new homes added to the
housing stock in the 2002-2011 period was lower than in any other ten year span
since the early 1970s so it is hard to argue that overbuilding is dragging down
the market.  The excess housing supply is
largely a reflection of the slowdown in housing growth which resulted from the
decline in the rate at which younger people are forming households as noted above
and also because of a sharp drop in immigration.  But over the longer run, the growth and aging
of the current population should support the addition of about 1.0 million new
households per year for the next ten years. 
Immigration remains an unknown in this calculation, but even assuming
net inflows are half what was predicted by the U.S. Census in 2008, household
growth should average 1.18 million per year in 2010-2020.

The recession took a toll on household
income but did little to lessen the burden of housing costs.  Between 2007 and 2010 the number of
households paying more than half of their income for housing rose by 2.3
million to 20.2 million.  While renters
accounted for the vast majority of the increase, the number of severely
cost-burdened owners also rose more than 350,000 as many households took on
expensive mortgages they were later unable to refinance.  In addition, this recent increase is on top
of an increase in cost burdened households of 4.1 million in 2001-2007.

These cost burdened families face a big challenge.  Among families with children in the bottom
expenditure quartile of income and with the most severe housing cost burden,
only about three-fifths of the amount is spent on food, half as much on
clothes, and two-fifth on healthcare as is spent by families living in
affordable housing.

The Joint Center said there are few
prospects for a meaningful reduction in this cost burden
.  Funding for the federal Housing Choice Voucher
Program has increased only modestly since the recession and the only
significant growth in subsidized rental housing is through the Low Income
Housing Tax Credit which continues to add about 100,000 affordable units each
year.  If the current calls for reducing
domestic spending are realized “the nation would move even further away from
its longstanding goal of ensuring decent, affordable housing for all
Americans.”

On the road ahead, with moderate gains
in multifamily and single family construction and improving sales of existing
homes, housing should be a stronger contributor to economic growth than it has been
in years
.  The rental market is back on
track, but the owner occupied market still faces the same pressures it has for
years; distressed properties which hold down prices and owners who are unable
to sell because they are underwater. 

Actions such as changes in the Home
Affordable Modification Program, the servicing settlement, and more rapid
disposition of properties where homeownership cannot be maintained are helping
the market.  However, the greatest
potential for recovery of the for-sale market is its historic
affordability.  The dive in home prices
and record low mortgages rates make homebuying more attractive than it has been
in years but the limited availability of financing that meets the needs of many
borrowers, strict underwriting guidelines, and rising fees are inhibiting
sales. “With key mortgage lending regulations still undefined, it remains to be
seen to what extent and under what terms lenders will make credit available to
lower income and lower-wealth borrowers.”

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Shadow Inventory Drops to 4-month Supply

Lenders
appear to be getting a grip on the nation’s foreclosure inventory according to a
report released Thursday by CoreLogic. 
The foreclosure or “shadow” inventory represents the number of
properties that are seriously delinquent, in foreclosure or owned by mortgage
servicers and lenders (REO) but not currently listed for sale on a multiple
listing service.   

The
inventory fell to 1.5 million units in April, a four month supply at the
current rate of attrition.  This is approximately
the same level that existed in October 2008 and a decrease of 14.8 percent from
April 2011 when there were 1.8 million units in inventory or a six-month
supply.  Shadow
inventory is typically not included in the official metrics of unsold inventory
and the current figure represents just over half of the 2.8 million properties
currently seriously delinquent, in foreclosure or REO. 

The dollar volume of shadow
inventory was $246 billion as of April 2012, down from $270 billion a year ago
and a three-year low.

The flow
of new loans that are seriously delinquent
, that is 90 days or more, into the
shadow inventory has now been approximately offset by the equal volume of
distressed property sales including both sales of REO and pre-foreclosure or
short sales.

Of the 1.5 million properties currently
in the shadow inventory, 720,000 units are seriously delinquent (two months’
supply), 410,000 are in some stage of foreclosure (1.1-months’ supply) and
390,000 are already in REO (1.1-months’ supply).  The foreclosure inventory does not include
loans that are not yet seriously delinquent but may become so. 

“Since peaking at 2.1 million
units in January 2010, the shadow inventory has fallen by 28 percent. The
decline in the shadow inventory is a positive development because it removes
some of the downward pressure on house prices,” said Mark Fleming, chief
economist for CoreLogic. “This is one of the reasons why some markets that
were formerly identified as deeply distressed, like Arizona, California and
Nevada, are now experiencing price increases.”

Serious delinquencies, which are the
main driver of the shadow inventory, declined the most in Arizona (-37.0
percent), California (-28.0 percent), Nevada (-27.4 percent), and Michigan
(-23.7 percent.)

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NAHB Says Improving Markets Fragile, Shift through Small Changes

The National Association of Home Builders (NAHB) list of
improving housing markets
continued to show sizeable shifts as small changes in
the metrics over the last month knocked some metropolitan areas off of the list
while others improved enough to be included. 
The June list however shrunk to 80 metropolitan areas from 100 in May.  The list includes 28 new names and there is
at least one metro area from each of 30 states and the District of Columbia.

NAHB defines an improving market as one which has shown
improvement from its respective troughs in housing permits, employment, and
house prices for at least six consecutive months.  Improvements are measured by data gathered from
the Census Bureau, Department of Labor Statistics, and Freddie Mac.   While 28
cities were added to the list and 52 areas made return appearances NAHB noted
that 48 fell off of the list.   

“Though today’s IMI reflects a decline in the number of improving markets from
May, the list continues to show significant geographic diversity, with 31
states represented and roughly one quarter of all U.S. metros included,”
said NAHB Chairman Barry Rutenberg.

“The shifting of some markets off the IMI in June underscores the fragile
nature of the housing recovery as well as the fact that many locations that
previously made the list had recorded only marginal house price gains, which
were easily wiped out by small downward changes,” noted NAHB Chief
Economist David Crowe. “However, the fact that multiple new areas are
showing up on the list each month is encouraging, and highlights the degree to
which local economic and job market conditions are what drive individual
housing markets.”

More detail on the NAHB list of improvement markets can be
found here.

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MBA Hikes 2012 Origination Forecast by $200 Billion

The Mortgage Bankers Association (MBA) is projecting that mortgage originations in 2012 will be $200 billion higher than was originally anticipated.  Almost all of the increase will be coming from a boom in refinancing, but none of the additional originations are pegged to the Home Affordable Refinance Program (HARP 2.0.) 

MBA said it now expects that the industry will do $1.28 trillion in business in 2012, up from $1.26 trillion in 2011.  The new number is an upward revision of $188 billion from the number MBA put out in April, driven by an increase in the pace of refinance applications and originations.   Refinancing is now expected to generate $870 billion during the year, virtually the same amount as in 2011.

At the same time, MBA revised its estimate of purchase loan origination downward by $6 billion to reflect lower than expected home prices and weaker than expected home sales.  This puts the expected volume of purchase originations at $409 billion rather than $415 billion.

Mike Fratantoni, MBA’s Vice President of Research said “Scenarios we have consistently highlighted that could drive rates down and rifis up have materialized, primarily due to market turmoil in Europe.  Deterioration of the debt situation in Spain and Greece and a new regime in France that is a weaker proponent of European austerity, along with slower economic growth globally, have driven the US Ten Year Treasury yield down.  Thus, we are projecting lower U.S. mortgage rates for the rest of the year and raising our refinance forecast as a result.”

Fratantoni said the revised estimate is largely independent of the HARP 2.0 initiative.  “We factored HARP lending of roughly $100 billion in both 2012 and 2013 into our April forecast, and the HARP share of refinance activity has remained relatively constant over recent months.  However, mortgages rates below four percent and regular media coverage showcasing ‘record low mortgage rates’ provide sufficient incentive and impetus for borrowers to examine their current rate.”

He said that MBA has also revised estimates for the first and second quarters of 2012 based on additional information from GSE securitization data and a refinement in pull-through assumptions from the associations Weekly Applications Survey.

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Mortgage Rates Steady At All-Time Lows Thanks To Europe And The Fed

Mortgage Rates are steady to slightly improved today following as Europe’s fiscal woes continue providing downward pressure on US interest rates.  The forces at work keeping rates low were joined today by “minutes” from the most recent FOMC meeting.  All told, several notable lenders are offering their all-time lowest interest rates while others remain close.  

Markets actually got off to a shaky start as far as rates were concerned.  Had it not been for the European headlines and the FOMC Minutes, we’d likely be looking at slightly higher rates today.  Mortgage-backed-securities (aka “MBS,” the most direct influence on mortgage rates) and US Treasuries began the day in weaker territory until news that the European Central Bank had ceased it’s normal interactions with several Greek banks, and the ECB President essentially wasn’t willing to bend over backwards to make sure Greece stays in the Euro-zone.  We discussed the implications of a Greek Euro-zone exit in yesterday’s post.  

The ECB-related news helped bond markets bounce back into stronger territory and FOMC Minutes added to that momentum.  Though there were no major surprises out of the Fed, the Minutes indicated that the Fed remained in sort of uncertain territory with respect to further quantitative easing, which thus far, has been a major boon for rates.

Markets were perhaps guarded against the possibility that the Minutes would indicate a shift AWAY from an accommodative stance.  The fact that the minutes did no such thing, combined with the consideration that this meeting took place BEFORE the most recent bout of Euro-drama was enough for markets to infer a slightly economically bearish bias from the Fed, and the Fed combats economic bearishness by keeping rates low.  

For only the 3rd time since early February, the Conventional 30yr Fixed Best-Execution Rate is arguably straddling 3.75% and 3.875%.  Some lenders’ rate sheets are structured such that 3.75% is clearly Best-Execution.  More have moved down into that territory, though many remain at 3.875%.  (read more about Best-Execution calculations)

Until and unless mortgage rates actually break into NEW all-time lows (which they are very close to doing), we’ll likely keep reiterating that which has already been said:

We see two diametrically opposed forces pushing and pulling on mortgage rates here at these key levels.  The European component is the obvious force pushing rates down, but less obvious is the underlying structure of the Secondary Mortgage Market providing resistance to moving lower.  The latter is what has prevented rates from getting any lower now and in the past.

That said, if the economic outlook remains fairly dim and if European concerns continue to fuel that “flight-to-safety” demand for long enough, the Secondary Mortgage Market CAN slowly evolve to accommodate lower rates.  It remains to be seen whether or not it will actually happen.  Global economic panic is not our favorite justification for thinking rates will move predictably lower.

Investors in the secondary mortgage market have demonstrated that they tend to feel the same way, having clearly avoided a quick move down into uncharted territory with respect to the “buckets” on the secondary mortgage market.  Read more about “buckets” HERE.  Without a more stable motivation for low interest rates, we’d expect ongoing progress in creating a market for even lower rates to continue to be slow and small.  

Today’s BEST-EXECUTION Rates 

  • 30YR FIXED –  3.75-3.875%
  • FHA/VA -3.75%
  • 15 YEAR FIXED –  3.125 edging down to 3.00%
  • 5 YEAR ARMS –  2.625-3. 25% depending on the lender

Ongoing Lock/Float Considerations 

  • Rates and costs continue to operate near all time best levels
  • Current levels have experienced increasing resistance in improving much from here
  • Rates could easily move higher or lower, but given the nearness to all time lows, there’s generally more risk than reward regarding floating
  • But that will always be the case when rates operate near all-time levels, and as 2011 showed us, it doesn’t always mean they’re done improving.
  • (As always, please keep in mind that our talk of Best-Execution always pertains to a completely ideal scenario.  There can be all sorts of reasons that your quoted rate would not be the same as our average rates, and in those cases, assuming you’re following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).

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