For housing, it was a tale of two halves in 2013. During the first half, unusually low supplies of homes and low rates spurred bidding wars, pushing prices up sharply. During the second half, the frenzy cooled amid a sudden spike in interest rates. While more markets are now reporting increases in inventory, the number of homes for sale remains quite low.
The bull case for 2014 goes something like this: those low inventories will support rising prices.
Below-average levels of household formation, the argument goes, must ultimately pick up, boosting construction. Mortgage rates, while higher, are still historically low. Credit standards will stop getting tighter, and might loosen as home prices rise. Finally, mortgage delinquencies are dropping. While some states still have elevated foreclosure inventories, the worst of the distressed-housing problem is in the rear-view mirror.
The bear case, meanwhile, says that the recovery is a mirage built on the back of the Federal Reserve’s stimulus that has done little more than inflate asset values, including home prices.
Record low interest rates, the argument goes, unleashed demand from both borrowers and all-cash investors seeking returns on something—anything—with a decent return. These investors built large rental-home companies that remain untested at scale. How can first-time buyers take the baton from investors at a time when prices are up almost 20% in two years and when interest rates are rising?
Other problems loom: Mortgage rates could jump, choking off housing demand and curbing new construction that remains mired at 50-year lows. Investors could unload their homes if the rental-home thing doesn’t pan out. And don’t look for much help from mortgage lenders that face a cocktail of new regulations, which could keep credit standards stiff.
So which view will carry the year? Here are five wild cards to watch this year:
1 Will Inventory Rise?
Prices have risen largely because of shortages of homes for sale. While there is growing evidence that inventories hit bottom last year and that some markets are moving back in favor of buyers, the number of homes for sale remains relatively tight still. Foreclosure-related listings have plunged, and traditional buyers haven’t flocked to list homes—at least not yet. New construction, meanwhile, won’t be back to normal historical levels for years. The consensus view is that price growth continues at a somewhat slower pace, but that consensus view could be wrong—for the third year in a row—if there aren’t more homes for sale.
2 Where Is the Home-Construction Recovery?
While home prices have recovered strongly, new construction activity hasn’t. Part of this may have to do with the fact that home prices are still too low to justify construction, particularly given land, labor, and materials costs. For smaller builders, credit may also be harder to come by. Some economists say new-home demand could remain muted because many move-up buyers don’t have enough equity to “trade up” to that new home. Key issues to watch here: What happens to household formation, and do builders begin to throttle back price gains in favor of selling more homes in 2014?
3 What Happens to Mortgage Credit?
Lenders could begin to ease certain “overlays”—or additional credit and documentation checks—that have been imposed over the past few years. Mortgage insurance companies are getting more comfortable insuring loans with down payments of just 5%. So don’t be surprised if, at the margins, it gets a little easier to get a mortgage—especially if you have lots of money in the bank.
Even if it gets easier to get a loan—by no means a given—borrowing costs and fees could rise. Banks also face new mortgage regulations that could keep most of them cautious. Borrowers with more volatile or harder-to-document incomes, including the self-employed or those who make a lot of money on commissions, bonuses, or tips, could continue to face tough sledding.
4 What Will Investors do With Their Homes?
A handful of institutional investors have purchased tens of thousands of homes that are being rented out. These homes tend to be concentrated in a few of the regions that have been hardest-hit by foreclosures over the past five years. Investor purchases played key roles in stabilizing prices, especially because investors were wolfing up homes at a time when supplies were already dwindling. A key question now is what happens after the initial rush to invest subsides. More lenders and investors are extending debt financing to some of these property owners, which should help boost returns. Can owners perfect the expense management associated with maintaining and leasing tens of thousands of individual homes?
Can owners perfect the expense management associated with maintaining and leasing tens of thousands of individual homes?
5 When Does Housing Hit a Tipping Point on Affordability?
Rising home prices are a double-edged sword, especially in pricier coastal markets such as San Francisco and Los Angeles. On the one hand, rising prices are giving many homeowners equity in their homes again—an extremely positive development to the extent it means these borrowers are less at risk of foreclosure.
But price inflation is making housing less affordable. This will be a bigger problem if cash buyers retreat from the market in 2014 and/or if interest rates rise in a meaningful way. Consider: In Los Angeles, prices have jumped by nearly 30% in the past two years, to a median of $448,900 in the third quarter. Assuming a 20% down payment, the monthly payment of principal and interest on the median priced home has jumped from $1,255 in the third quarter of 2011 to $1,823 in 2013—a 45% increase.
Nick Timiraos - WSJ
In an effort to stabilize the mortgage market after the housing crisis, lending has become a constantly evolving practice, where old rules are thrown out and new ones – often aimed at protecting the consumer – are put in, such as the rules recently enacted by the Consumer Financial Protection Bureau.
According to the CFPB website, these new rules have a goal of “safer mortgages with fewer surprises.” To get there, the CFPB developed Qualified Mortgages, a new type of mortgage that has standardized terms and a stricter qualification process.
Qualified Mortgage Rules
As of Jan. 10, a mortgage must meet certain qualifications to be considered a qualified mortgage, or QM. According to the CFPB, to be considered qualified a mortgage must have:
These new rules will add a level of standardization to the mortgage process, which CFPB hope will make mortgages easier to understand and manage on a consumer level.
While qualified mortgages offer advantages to consumers, the approval process is also tougher. Before the housing crisis, some lenders were known to approve mortgages without verifying the borrower’s income and ability to pay. Now, “QMs will generally require that the borrower’s monthly debt, including the mortgage, isn’t more than 43 percent of the borrower’s monthly pre-tax income,” according to the CFPB.
Your lender must assess your finances to determine if your income-to-debt ratio qualifies for a QM. That means tougher background checks into your income, bank accounts and debts.
Exceptions and Marketplace Concerns
Not all mortgages are “qualified.” Under the new rules, lenders can choose to issue their own mortgages and some will still continue to offer mortgages under their own terms. However, the lender must still verify that your debts do not exceed 43 percent of your monthly pre-tax income. Before opting for a non-qualified mortgage, make sure you fully understand the terms and fees associated.
Smaller lenders and credit unions are worried the new rules will be difficult to comply with and will make it harder for them to approve mortgages to potential home buyers. At a recent House Financial Services subcommittee meeting, Jack Hartings, president and CEO of The Peoples Bank Company in Coldwater, OH, said his bank would no longer be able to offer certain loans once made to new customers, adversely affecting the bank’s business and its community’s access to credit. Daniel Weickenand, CEO of Orion Credit Union told the committee that 10 percent of the credit union’s loans issued in the past now qualify as non-QM and are no longer offered, negatively effecting future customers who could have benefited from those loans.
Some smaller lenders also told the Wall Street Journal that they may not have the manpower to ensure their mortgages meet the new regulations.
All of which means you may have fewer options when shopping for a mortgage in the coming months.
Angela Colley - Real Estate News
The rebound of the Phoenix-area housing market continued losing steam in November, which saw the weakest sales numbers in several years and the once-explosive price increases slow to a trickle.
There were 5,846 single-family home sales in November in the Phoenix area — a 27 percent plunge from a year ago, according to the latest Arizona State University housing report released today. The luxury market, or homes priced above $500,000, was the only price range that saw sales increase (by 14 percent), while sales of those priced below the $150,000 took a 52 percent nosedive.
Overall, the November sales figure was down 17 percent from October.
“Demand is drastically lower in a slide that started in July,” said Michael Orr, the report’s author and housing expert at ASU’s W.P. Carey School of Business. “By the beginning of January, demand had weakened enough to drop even below the limited supply here, despite the fact that we have 15 to 20 percent fewer active listings than normal.”
Derek Jarr, managing partner of Green Street Realty in Phoenix, noted the fourth quarter is typically a slow time of year for residential real estate. He also pointed to the fact that foreclosures and short sales are almost a non-issue today.
“The sales reduction is a result of the fact that you don’t have as much distressed inventory in the market anymore,” Jarr said. “There aren’t as many people that have to sell ... now it’s people who want to sell.”
Orr has attributed the decline in demand mostly to poor consumer confidence, which Jarr said the housing market is extremely sensitive to.
“At the end of the day, residential real estate is driven by emotion ... and we overreact a lot,” Jarr said.
As demand wanes, the dramatic price increases the Valley was seeing in the first half of 2013 have slowed substantially.
The Valley’s median price reached the $200,000 mark in October, but didn’t budge at all in November. It was still, however, up 23 percent from a year ago.
Orr said home builders were also pretty disappointed with the end of 2013, noting that new-home permits in the Valley, according to the U.S. Census Bureau, took a sharp 35 percent drop from October to 667 in November.
“Despite all of this, time has shown us the Greater Phoenix housing market is very volatile,” Orr said. “Conditions could quickly change during the first quarter of 2014, and we could see some surprises.”
Kristena Hansen - Phoenix Business Journal
The U.S. regulator for Fannie Mae and Freddie Mac on Wednesday instructed the two taxpayer-owned mortgage finance companies to delay the increase in fees on government-backed loans that the agency announced last month. Mel Watt, the new director of the Federal Housing Finance Agency, said he would postpone the price changes until further study is done on the loan-fee hikes.
"The implications for mortgage credit availability and how these changes might interact with the new ... mortgage standards could be significant," said Watt (pictured at right). "I want to fully understand these implications before deciding whether to move forward with any adjustments."
Fannie Mae and Freddie Mac were scheduled to increase their guarantee fees in 2014. The fees often trickle down to borrowers, and result in higher mortgage rates. In his fist policy decision as FHFA director, Watt, who was sworn in on Monday, is signaling that maintaining borrowers' access to mortgage credit is a high priority. Many consumer and housing industry groups opposed the original fee increase when it was announced by Watt's predecessor, Edward DeMarco.
Fannie Mae and Freddie Mac, which back about 60 percent of U.S. home loans, buy mortgages from lenders and package them into securities on which they guarantee payments of principal and interest. In doing so, they serve as major sources of funding for hundreds of banks. The FHFA said it would provide not less than 120 days' notice after completing the study before making final changes.
Amy Fontinelle, Interest.com
New mortgage rules that start Jan. 10 might affect whether you can get a home loan.
The rules will limit how much debt you can carry, the fees and interest rates lenders can charge and the types of mortgages a lender can issue.
Experts say that up to 95% of all loans issued today already follow these rules after lenders tightened their standards following the financial crisis. But the new mandates still could affect both low- and high-income borrowers.
These rules could impact not only aspiring homeowners but also those who want to sell. If it’s harder to get a loan, the pool of potential buyers will be smaller. Home sales may take longer and sales prices may be lower.
Here are the new rules and how they could affect you.
Rule 1: A borrower’s debt-to-income ratio can’t exceed 43%.
When deciding if you qualify for a loan, most lenders consider your income or assets, employment status, credit history and monthly payments for mortgage-related expenses such as property taxes.
Going forward, you won’t be able to get a so-called qualified loan if the proposed monthly mortgage payment, plus your existing monthly debt payments (like your car payment, student loans and credit card bills), will exceed 43% of your gross (pretax) income. That's called your debt-to-income ratio.
This rule is supposed to prevent lenders from offering more mortgage than you can afford to repay.
The new ratio is slightly lower than what Fannie Mae (45%) and Freddie Mac (50%) — the two giant government-owned companies that finance most of today's loans — currently allow. FHA loans have a maximum debt-to-income ratio of 41%, unless a borrower has a substantial down payment or significant cash reserves.
Many lenders already require borrowers to have a debt-to-income ratio of 43% or lower.
Those most likely to be affected by the new rule include borrowers who are self-employed, whose incomes fluctuate or who rely on investment income or savings. They will qualify for smaller loans because of the way lenders will have to evaluate their income, says Brian Koss, EVP of Mortgage Network in Danvers, Mass.
Low-income home buyers who qualify for assistance from certain state and local agencies and nonprofits won’t be affected by this rule.
Ability-to-repay guidelines are less strict for borrowers refinancing from higher-risk to lower-risk loans, such as from interest-only loans to fixed-rate loans.
Rule 2: Lender fees will be capped.
Lenders will be able to charge no more than 3% of the loan amount in points and fees. Mortgage broker Todd Huettner of Huettner Capital in Denver says this regulation is intended to make home ownership more affordable.
"Points and fees" includes discount points, origination points (also called origination fees) and other fees that compensate the lender.
It does not include third-party charges like those for escrowed taxes and insurance, notary fees, appraisal fees, flood hazard reports, pest inspections, document preparation, title insurance or credit reports, as long as these fees all come from independent companies not affiliated with the lender.
Origination fees average 0.87% and usually aren’t higher than 1%, according to a Bankrate.com study, so most borrowers aren’t likely to be affected by this rule.
If lenders can’t charge more than 3% on certain loans, though, they may be less willing to offer those loans because they won’t generate enough revenue.
Newsday reports that loans of $100,000 to $160,000 are the most likely to be affected. Loans of less than $100,000 can have lender fees exceeding 3%.
Because of the way the 3% limit on fees will be calculated, banks will easily be able to comply, but mortgage brokers will not, Huettner says. That means brokers might not be around to help consumers find the best deals, especially on loans smaller than $200,000.
Another unintended consequence is that brokers might get squeezed out of the market, giving borrowers fewer options and less bargaining power.
The government’s analysis suggests that brokers might be able to shift fees around to comply with the rule.
Increases in compliance costs from the new regulations could force smaller lenders out of business, further limiting consumer choice.
Rule 3: Exotic loans will be harder to find.
During the housing boom, interest-only, negative-amortization and balloon mortgages made people think they could afford homes that they really couldn’t. These are the kind of loans in which your initial payments are low, but your debt grows, not shrinks, over time.
During the housing bubble, many borrowers didn’t understand what they were getting themselves into and lost their homes.
Regulators want to keep these riskier loans from being resold as investments so they can’t contribute to any future housing crisis. Lenders can still offer them, but they’ll have to keep them in their own portfolios.
Huettner says that many lenders will probably stop offering these loans, and those that do will charge unattractive interest rates.
Some states have already passed laws banning negative-amortization mortgages. And lenders typically only offer interest-only loans to borrowers with high credit scores, substantial assets and at least 30% equity.
The new rules also ban loans with terms longer than 30 years. Such loans don’t reduce the borrower’s monthly payment by much, but they dramatically increase how much interest he or she pays.
Adjustable-rate mortgages are still allowed, but the ability-to-repay rule could restrict how often they’re approved.
Lenders won’t be able to give you the mortgage based solely on your ability to pay the ARM during its first few years, when it has a low introductory rate. They’ll only be able to give you the loan if you can afford to pay what it's estimated to cost after the rate resets.
Rule 4: Borrowers won’t be able to sue lenders who follow the rules.
If lenders follow the new rules, a mortgage will be considered qualified. That means the mortgage company can sell the loan to Fannie or Freddie, who will then package them as investments.
Lenders who issue a qualified loan will be shielded from a lawsuit if a homeowner is foreclosed upon. The borrower will not be able to argue that the lender shouldn't have issued the mortgage.
Borrowers will still be able to sue a lender who violates other federal consumer protection laws, such as those banning discrimination.
And lenders will still be able to issue riskier mortgages that don’t meet qualified mortgage guidelines, but they’ll expose themselves to more liability.
To compensate for the additional risk, some lenders will charge borrowers a higher interest rate, perhaps half a percentage point higher, says Mark Feder, president of Pacific Home Mortgage Funding in Solana Beach, Calif.
FRAUD: A false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.
Far too often in the Arizona real estate market, we find listings that are for sale on the Multiple Listing Service (MLS) but where the seller refuses to provide a Seller's Property Disclosure Statement (SPDS), or an insurance claims history (or similar CLUE Report). Both items are required in the Residential Resale Real Estate Purchase Contract, yet sellers regularly demand that the requirement be waived. Despite this attempt to avert their responsibility, sellers are obligated by Arizona law to disclose all known material facts about a property to the buyer, and their agents serve them well by reminding them of this requirement.
So why do sellers do this? Banks, when they are the sellers, often do this because they actually have no idea what the condition of the property is or has been. Typically these are Real Estate Owned (REO) properties that have been foreclosed upon and taken back by the bank, which are often located out of state. In cases such as those, it would be difficult for a bank to make any disclosures about a property they've never seen, and that makes logical sense. There are other cases where disclosures are difficult, such as in an estate sale, but these are much less common and not what I'm referring to here.
I'm specifically referring to properties that have been partially or completely remodeled by a seller and yet the seller claims to know nothing about the property, even if it's ever had an insurance claim during their ownership. I would submit that a seller who has remodeled a property over three months likely knows far more about a property than someone who may have lived there a few years and never touched a thing in the house. Remodels often include myriad repairs and upgrades. Floor coverings are often replaced, thus exposing cracks in the foundation. The seller never saw those? Plumbing is often updated, yet the seller did the updating in his/her sleep and doesn't remember? Wiring is also often upgraded, along with the electrical panels. Do sellers expect us to believe this was done with magic? They install new cabinets, counter-tops, carpet, drywall, outlets, insulation, garage doors, paint, tile, light fixtures, disposals, hot water heaters, HVAC units, pool pumps, garage door openers, or any combination of the aforementioned. And sellers expect us to believe they know nothing about the property they are selling? Do they think we're all stupid??
Apparently so. And all too often,
tragically, buyers waive the right to learn about the property they are
buying. They don't want to waive that right, mind you, but they are led
to do so out of fear of losing the opportunity to purchase an identified
property. Good agents will persist in acquiring the disclosures even after
the contract is signed - and there are smart ways to go about that - but there
is no guarantee. Ultimately, no seller
should be able to even attempt to circumvent state law and hide material facts
about a property.
Ironically, hiding material facts can be very problematic legally for the seller AND real estate brokerage/agent in the long run. It doesn't take a jury of rocket scientists to determine if a seller was falsely claiming ignorance about something that should have been obvious and disclosed in the first place. It's much easier to avert legal issues by giving a full and honest disclosure up front.
What can buyers do? First, hire a competent Realtor. A good Realtor will counsel buyers on the perils of buying from sellers willfully hiding material facts about a property, and steer them away if possible. If it's a property a client "has to have," then the Realtor can advise his/her client what to look for regarding things that are often concealed, and direct them to professionals who can help uncover those things. Most Realtors are not trained to uncover such things on their own, and should not be relied on to do so.
Why can't this be stopped? It can be, and real estate agents can help immensely by not taking listings where a seller will not make full disclosures. I would never take such a listing, and most of the good Realtors I work with wouldn't either. There are legislative ways to stop it as well, but that is more difficult. And of course buyers can put a stop to it by ignoring properties whose sellers refuse to follow the law.
Over time, I hope such deceptive practices will cease to exist, but in the mean time, buyers are advised to hire among the vast majority of honest and capable Realtors who put their clients' best interests first, and who can help them steer clear of problematic situations. In any case, as always, buyers need to beware.
David Roney is a former Designated Broker, currently working with Coldwell Banker Residential Brokerage.
From Eddie Knoell at Signature Home Loans:
As you may know, non-essential Federal government operations have been at a standstill since October 1st. The shutdown will directly affect mortgage lending for some borrowers.
Be careful with your purchases that are currently in process. The following borrower files could be indefinitely affected by the Shutdown until the legislators in the House and Senate resolve the budget. These are the borrowers who will be most affected:
These borrowers are targeted due to IRS tax transcripts needed in the file. The IRS department that processes transcripts is not open. Borrower files that do not have the above characteristics should proceed through the loan underwriting without issues or delays.
This is a very important chart, as it shows that historically, rates are still near an all time low. What that means is that if rates rise, and they have fluctuated lately, sellers will have fewer buyers able to buy their homes, and buyers will qualify for smaller loans. Thus, if you're considering buying or selling, this may be the time. Those who know me know I don't always advise this action.
In addition, killing a potential deal now for a $10,000 difference may end up costing you many ten of thousands of dollars more over the course of owning your home if rates rise. Food for thought...