Profound Commentary on Homebuying Demand From MBA President's Daughter

MND's fourth part of its summary of the Harvard Joint Center on Housing Studies' State of the Nation's Housing published yesterday looked at the impact the Millennial Generation, those young adults born between the early 1980s and early 2000s are having on the housing market.  Or maybe the impact they are not having is a more accurate way of describing it.

The article notes that over the ten years ending in 2013 the homeownership rate of Americans between the ages of 25 and 34 slipped almost 8 points.  Homeownership among the next older 10 year cohort was down 9 percentage points.  These are the age groups that usually drive the first-time housing market as well as being strong move-up buyers.  Their absence is beginning to be felt.  According to the National Association of Realtors the market share of first-time buyers has been dwindling steadily and has fallen from its historic level of 40 percent to a current 27 percent.  

Homeownership among minorities has always been and continues to be lower than among white households and the minority share of younger age groups is growing, meaning that the homeownership rate is likely to remain lower than in previous generations.  Add to that the effect of the recession on entry-level incomes, student debt, the tight credit (again a bigger problem for minority buyers) and, while the Harvard report does not mention it, the intangible shock effect of the housing collapse and recession on American attitudes today homeownership, and there is obviously a downward generational pressure being exerted on the housing market.

Lorraine Woellert, writing for Bloomberg, looked at a father and his daughter to illustrate how recent events may have altered attitudes toward homeownership.  And she didn't pick a random parent and child; she interviewed David Stevens, head of the Mortgage Bankers Association (MBA) and former commissioner of the Federal Housing Administration, and his 27 year-old daughter Sara.

Woellert says Stevens has spent his career lauding the merits of homeownership.  Sara isn't buying it. 

Six years after the housing market collapsed Woellert says "some young adults are more risk averse and view the potential upsides of status and wealth more skeptically than before the crisis, altering the homeownership calculation. It's more than the weight of student loans, an iffy jobs market and tight credit -- even those who can buy are hesitant."   In Sara Stevens' case, while she knows interest rates are low and that owning a home can build wealth, "She also had a front-row seat to the worst real-estate slump since the Great Depression."

Dad started her indoctrination early, showing driving her through neighborhoods and discussing house prices and curb appeal from the time she was a toddler.  Sara said she always figured she would buy a house when she hit her late 20's. She is there now, with a good job and engaged to a man with a good one as well; little debt, a dad who is ready to help with a down payment, yet she and her fiancée remain renters.

Sara Stevens says the world has changed but the statistics Woellert rolls out indicate it may have changed for the better.   Back in 1984 when David Stevens, now 57, bought his first house for $73,400 first time homebuyers made up 37 percent of the market.  But interest rates were at a scary 13.9 percent and the affordability index (which takes into account interest rates as well as home prices) was at a middling 64.9 percent whereas today it is 116.  Mortgage payments took up 28.2 percent of a home owner's income but Sara would be buying into a scenario where that figure has dropped to 14.2 percent.

There was also more of an urgency to get into the market back then.  Woellert quotes John Buckley, managing director of the Harbour Group, and consultant on a MacArthur Foundation survey on homeownership:   "There was a sense that the window was closing to get a good deal and be able to participate in the American dream." Today, there's "tremendous uncertainty about whether the value of that investment is going to be worth the commitment and risk."

On a very important note, Sara and her fiancée are not saying "never" to homeownership.  They surf on-line listings but even though a mortgage payment might be cheaper than their rent, they like the urban setting of their current Arlington, Virginia apartment and the convenience and amenities it affords.  Sara also notes the longer term commitment of buying and says "I'm hesitant about diving in and feeling like I'm not financially ready."

Woellert says the first of the Millennials were entering their home buying years just as the housing market collapsed and Sara, whose father was appointed to his FHA position in early 2009, had more occasion than most to witness the impact first hand.  "Part of his job was to lobby Congress not to dismantle the financial architecture that had made it possible for generations of Americans -- including himself -- to buy homes."  But Woellert said he also was trying to assist family and friends who couldn't pay their adjustable rate mortgages or sell their devalued homes.

Sara watched all this while her dad wondered out loud how the housing collapse would affect her and her generation.  Today he says the younger generation saw the effects of the housing bust and "They're clearly being more thoughtful about it and they're clearly deferring that decision."

Of course Sara and her fiancée are not typical of their generation and she acknowledges that. "I am incredibly lucky," she said. "My parents have positioned me well and they've given me resources to take on a house if I really wanted to. I think that's part of his worry. If we're still having this conversation, what's it like for a whole generation of other kids?"

And that whole generation has a student debt load totaling more than $1 trillion, triple what it was ten years ago and many have not been able to successfully launch careers.  They are also looking at a home buying landscape with higher down payment requirements and tighter underwriting criteria than before the crash.  

But a lot of the reluctance of the Millennial Generation to become homeowners might be traced to the same roots as Sara Steven's.  They are what CoreLogic's chief economist Mark Fleming calls "Channeling Grandma."  His own generation (he is 42) has weathered the financial upheaval better than Millennials who are jaded he says.  "Like their grandparents who went through the depression, they're apprehensive about overextending themselves."  

Original Story From Bloomberg: He's the Top U.S. Mortgage Salesman. His Daughter Isn't Buying It

Housing Scorecard sees Recovery Slowly Getting Back on Track

Growing equity and a rebound in sales of new and existing homes were the highlight of the June edition of the Obama Administration's Housing Scorecard.  New home purchases surged by 18.6 percent in May, to the highest level since May 2008 indicating, the report says, that home sales are rebounding from a severe-weather induced lull in the previous two quarters.  Existing homes sold at an annual pace of 4.89 million in May, up 4.9 percent from April but remain 5.0 percent below the 5.15 million pace a year-earlier. 

The Assistant Secretary for Policy Development at the Department of Housing and Urban Development, which issues the monthly update in conjunction with the Treasury Department, said the scorecard shows continued progress in the housing market as the country moved into the summer months.  Katherine O'Regan said, "Sales of new and existing homes are up, equity continues to grow, and foreclosures starts continue trending down. While these are all signs of a healthy recovery, given the severity of the housing crisis, we must stay committed to helping homeowners." 

The Housing Scorecard offers a recap of information about the housing market, summarizing statistics on construction, sales, delinquencies, defaults, and foreclosures from major sources such as CoreLogic, the U.S. Census Bureau, National Associations of Realtors and Home Builders, and RealtyTrac.  Most of this information has been previously covered in these pages. 

The report also includes by reference the monthly report of the Marking Home Affordable program (MHA) and its several initiatives such as the Home Affordable Modification Program (HAMP), and Home Affordable Foreclosure Alternatives (HAFA).

MHA reports it has initiated 2.09 million trial modifications since the program began in early 2009.  Of these a total of 2.20 million were started through HAMP and 203,480 were through Fannie Mae or Freddie Mac's standard modification programs. 

The current MHA report covers program activity in May during which there were 10,152 HAMP trials begun and 11,774 trials converted to permanent status.  There are 42,573 active HAMP trials and 954,692 active permanent modifications.

During the first year of HAMP's existence the program was plagued with huge backlogs of borrowers in trial status who had not converted their modifications.  This was the result in most cases of missing documentation - although borrowers and servicers each blamed the other for that situation.  In June 2010 HAMP rules were changed to require servicers to have all borrower financial information in place before beginning a trial.  MHA said in its current report that there is now an 89 percent success rate in converting trial modifications to permanent status.  Prior to the rule change that rate was 44 percent.

The Second Lien Modification Program (2MP) featured in the current report, provides modifications and extinguishments on second liens when there has been an eligible first lien modification on the same property.  At the end of May 136,000 borrowers had initiated modifications on their second mortgages through the program.

Homeowners in 2MP with an active permanent modification save a median of $154 per month on their second mortgage, resulting in a median total first and second lien monthly payment reduction of $784, or 42% of their median before-modification payment. Homeowners who receive a full extinguishment of their second lien receive a median total first and second lien monthly payment reduction of $1,040, or 53% of their before-modification payment.

Servicer survey data indicates that 363,613 qualifying first lien modifications have been matched with a second lien. Of these matched second liens, approximately 56% are found to be ineligible for a 2MP modification. The most common reasons for ineligibility are: Cancellation or failure of a trial or permanent first lien HAMP modification, extinguishment of the second lien prior to evaluation for 2MP, or failure of a 2MP trial modification.  In addition some homeowners with eligible second liens decline to participate in 2MP.

MHA estimates that an additional 24,000 borrowers may be eligible to receive a 2MP modification. Many of these are in process of being evaluated by servicers, awaiting homeowner response to the 2MP offer, or awaiting conversion of the first lien HAMP trial to permanent modification.  

"Although the housing market continues to improve, Treasury remains committed to helping homeowners who are still struggling to make their mortgage payments," said Treasury Acting Assistant Secretary Tim Bowler. "To date, more than 1.3 million homeowners have received a permanent modification through the Home Affordable Modification Program (HAMP), saving an estimated $28.2 billion in mortgage payments." 

Comments Invited on new PMI Provider Requirements

The Federal Housing Finance Agency (FHFA) has released new draft requirements for private insurance companies that insure mortgages purchased by the two government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae.  FHFA is inviting public comment on the draft which incorporates standards for financial capital requirements, enhanced operational performance expectations and defines remedial actions that would apply should an approved insurer fail to comply with the revised requirements.

The GSEs are required by their charters to obtain private mortgage insurance (PMI) on loans they purchase or guarantee that have loan-to-value ratios exceeding 80 percent.  Provision of this insurance is limited by the GSEs to the companies they have approved to do so.  Using private insurance from a sound counterparty, FHFA says, helps reduce the loss from default and shifts first-loss exposure from the Treasury and taxpayers to a third party.

The GSE's each maintain their own lists of approved insurers and their own criteria for approval. These criteria have not been updated since 2003 in the case of Fannie Mae and 2008 for Freddie Mac.  The existing requirements rely primarily on an acceptable rating by a major rating agency as opposed to specific counterparty risk and financial standards defined by a GSE.  They also do not adequately, in FHFA's estimation, address the liquidity of capital.

During the financial crisis and the resulting rise in defaults and foreclosures mortgage insurers and the GSEs suffered significant losses.  Several PMI companies were taken into receiverships by state insurance commissioners which regulate their operation and others stopped writing new business.

When FHFA as their conservator began the process of aligning the operations of the two GSEs it directed them to revise, expand and align their risk management requirements for the insurance and insurers.  The current draft, the agency said, is the result of a multi-year effort to produce a clear and comprehensive set of standards.  FHFA and the GSEs have consulted with state insurance commissioners and private mortgage insurers that are currently approved to do business with Fannie Mae or Freddie Mac regarding the draft requirements.

"Mortgage insurance counterparties must be able to fulfill their intended role of providing private capital, even in adverse market conditions," FHFA Director Mel Watt said. "FHFA's Strategic Plan calls on Fannie Mae and Freddie Mac to strengthen the requirements for private mortgage insurance companies that do business with them in order to reduce Fannie Mae's and Freddie Mac's overall risk exposure and protect taxpayers."

FHFA will be accepting public comment on the draft requirements for 60 days or until September 8, 2014.  The requirements, when finalized, will apply only to private insurance providers which are currently approved to write policies for GSE loans or wish to be approved to do so.

The eligibility requirements will become effective 180 after the final version is published.  In the interim any approved insurer that does not fully meet each GSE's existing eligibility requirements would continue to operate in its current status while transitioning to the new standards.  An approved insurer that does not meet all of the financial requirements would have two years to fully comply

Size and Face of Homeownership, Changed and Changing

Part 4 of the recent edition of the Harvard Joint Center on Housing Studies' report on the State of the Nation's Housing looks at the declining rate of homeownership in the U.S. which has now fallen for the seventh straight year.  The rate edged down 0.3 percentage points in the 2012-13 time period to 65.1 percent while the number of homeowner households also fell for the seventh straight year, declining by 76,000.  However these were the smallest declines since 2008 so the Center suggests that the bottom may be in sight.

Homeownership has seen the greatest decline among the age groups which usually generate the most activity in both the first-time and move-up markets.  Between 2004 and 2013 homeownership among 25 to 34 year olds slipped by nearly 8 points and 9 points for the next older group, 35 to 44 year olds.  Older groups have not been immune.  The Current Population Survey found that rates for all age groups between 25 and 54 are at their lowest point in the 39 years records have been kept.  Homeownership among those over age 75 however is near the record high.

Rates for minority households have also dropped sharply with black households down 6 percentage points from previous peaks and Hispanic and Asian/other households down 4 points while white households are down only 3.  Some minority homeownership rates may now be stabilizing; Hispanic and Asian/other rates did not change in 2013, but the gap in black/white homeownership has expanded from 25.9 points in 2001 to 29.5 points and the Hispanic/white gap grew 1.7 points from 2007 to 2013 to 27.3 points. 

These persistent gaps will put downward pressure on the national homeownership rate, particularly among younger age groups where the minority share of the population is growing while homeownership is dropping.  Of the 5.5 point 1993-2013 drop in the rate for 35-44 year olds, about 4.0 points reflect the groups shifting racial/ethnic composition.  As minority populations grow, opportunities for homeownership must grow as well in order to maintain demand for owner-occupied housing.  

This is much truer in the first-time homebuyer market where minorities make up an even larger and growing share, an estimated 32 percent.  Fourteen percent of the market is Hispanic and 49 percent of those buyers are immigrants. The minority presence is also shifting the age distribution of first-time buyers.  The median for white buyers is 29 but for black buyers it is 37; other minorities fall somewhere in-between.

Despite these demographic changes the report points out that most characteristics of first-time homebuyers are what they have always been.  They are younger and more likely to be married than are renters, especially in the 25-34 year old group.  Higher incomes are also a major determinant of first-time homebuying.  The share of first-timers with annual incomes over $75,000 is 34 percent compared to 13 percent among renter households.

But with both marriage and high incomes less prevalent than a decade ago fewer first-time buyers fit the traditional profile. What growth there has been among younger households is, in fact, concentrated in those least likely to buy a home.  The center cites the example of younger married couples where homeownership dropped by more than 914,000 households in the ten years ending in 2013 while younger single-person and non-family households increased homeownership by 1 million.

The cost of homeownership, while still relatively affordable by historical standards, is rising; the price of an existing home increased by 10 percent and interest rates by 1 point in 2013 which pushed up the monthly payment on a median priced home by 23 percent.  While the median $780 monthly payment would still have been a record low in real terms at any time prior to 2010, payment-to-income ratios rose in every metro area analyzed as incomes stagnated or fell behind the growth in housing payments.  Based on the National Association of Realtors affordability cut-off of 25 percent of income for housing payments residents earning the median income could afford to buy a median priced home in all but six of the largest metros last year.

But median incomes far exceed the income for many renters who would like to transition to homeownership.  The Center looked at the income of renters in each market and used the new qualified mortgage rule of a 43 percent debt-to-income ratio to determine who might be able to buy.  They concluded that 36 percent of renters in the top 85 metros could qualify by income for a mortgage to buy a median-priced unit in their market.  This assumes 5 percent down, 8 percent non-housing debt, and average taxes and insurance rates.

Again however, real estate is local.  In the metro areas along the coasts buying a home would still be a big financial stretch for renters.  In the 12 most expensive markets the 36 percent becomes 30 percent and in Honolulu and San Francisco only around 13 percent could afford a median priced home.  In the 15 least expensive metros, many of which are just coming out of the foreclosure crisis, a home would be affordable for more than half of renters.

Most homebuyers need mortgages to purchase and this is an era of tight credit.  There was an increase in lending in 2011 and 2012 but not all groups benefitted equally.  The increases in lending were much smaller for minorities (especially blacks) and there were also disparities across income groups - a gain of 16 percent among high income borrowers but only 9 percent among the low income.

Denials for conventional purchase mortgages were much higher among minorities - 25 percent of Hispanics and 40 percent for blacks; two to three times higher than the denial of white applications and the disparities are increasing.  Meanwhile those earning less than 50 percent of an area median income were rejected at a rate 14 percentage points higher than those with moderate incomes and three times more frequently than high income applicants.  The lowest income were also the only group to see their rejection rates increase in 2012.

Tight underwriting criteria as regards credit scores has also played a role in the sluggish recovery of the purchase mortgage market.  Data from CoreLogic shows that lending to individuals with scores below 620 effectively ended after 2009 and access to credit by those with scores in the 620 to 659 range has become increasing constrained.  While lending to that group fell by 6 points, the share of purchase mortgages to those with scores above 740 rose 8 points.

These conditions appear to have moderated in the last year. Average GSE credit scores dipped slightly and the share of mortgages acquired by Fannie Mae to borrowers with sores below 700 increased 4.3 percentage points.  Average scores for FHA loans declined from nearly 700 to about 690 and the agency reports a downward shift in the distribution of loans to the 620-719 range.  Urban Institute research indicates that much of the changes to both FHA and GSE metrics merely reflect the migration of borrowers with moderate scores from FHA to the GSEs.  Thus while the credit box may have widened, the easing of credit is more modest that the drop in scores might suggest.

For borrowers who are able to access credit, loan costs have increased steadily.  Interest rates rose to 4.46 percent at the end of 2013 and both the Federal Housing Administration (FHA) and the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac raised their loan guarantee fees (g-fees).  The average g-fee jumped from 22 basis points in 2009 to 38 in 2012.  The GSEs also introduced loan level price adjustments (LLPAs), upfront fees paid by lenders based on borrower risk.  LLPAs can total as much as 3.25 percent for the riskiest loans and are passed through to borrowers in the form of higher rates.

In 2010 FHA restructured its fees, raising its annual premiums to 85 to 90 basis points depending on loan-to-value ratios while lowering its upfront premium by 100 basis points.  Since then the FHA has tweaked these fees upward, adding substantially to first time buyer costs.

The Center says the outlook for homeownership depends on a strengthening economy which will eventually lift household incomes.  Despite recent increases, house prices and interest rates still favor the homebuyer although many younger adults will continue to find themselves in income, family, and household circumstances that do not promote homeownership.  Further, minorities will account for an increasing share of first-time homebuyers and mortgage markets must figure out how to accommodate the limited financial resources of this new generation of households.

 

MBA says New Home Sales up while Mortgage Applications Drop

Applications for new home purchase mortgages declined in June for the second month in a row the Mortgage Bankers Association (MBA) said today.  Its Builder Application Survey (BAS), taken among mortgage subsidiaries of builders throughout the US, showed that 5 percent fewer applications were made during June than in May.  There was an estimated 8 percent decline from April to May.   

Based on the application data from the survey and assumptions regarding market coverage and other factors MBA estimates that new home sales during the month were 3.2 percent higher on a seasonally adjusted basis, running at an annual rate of 386,000 units compared to 374,000 units in May.   On an unadjusted basis June sales are estimated at 38,000 units, unchanged from May.

By product type, conventional loans made up 67.2 percent of loan applications and FHA loans 17.0 percent.  VA loans had a 14.6 percent share and 1.2 percent were loans from the Rural Housing Service/USDA.  The average loan size to purchase a new home was $296,078, slightly less than the average of $296,427 in May.   

Official new home sales estimates are conducted by the Census Bureau on a monthly basis.  In that data, new home sales are recorded at contract signing, which is typically coincident with the mortgage application.  

Buyers and Sellers Not on Same Page With Housing Market Reality

A recent survey by Redfin, the Seattle-based real estate company, found some substantial disconnects among buyers, sellers, and market reality.  They are, the company said, not on the same page when it comes to the state of the housing market.  While inventories have increased, buyers are still hesitating because of hurdles presented by affordability and access to credit.  Sellers have been slow to acknowledge that the market is shifting away from them.

Redfin interviewed 707 of their agents and associates spread across 35 U.S. markets in late June about the attitudes and behaviors they see in their dual clientele. Just 24 percent of agents told the company that "sellers have all the power" in their markets, down from 35 percent three months ago.  While the trend in the sentiment was similar nationwide, there were regional differences in the degree.  In the upper Midwest only 12 percent of agents think sellers are in charge, half of the level in the first quarter of 2013.  In the West and Northeast 30 percent of respondents said it was a sellers' market, down 8 and 3 percentage points respectively.

Redfin Chief Economist Nela Richardson said sellers appeared to have not yet grasped the change.   "In May, 40 percent of sellers surveyed by Redfin said that they planned to list their homes above market value even though home sales had dropped by 9 percent since the year before."  It does take time for sellers to adjust to prices changes, she said, but this latest shift is longer than the six to nine months that is typical.   "Prices have moved down and then up so much over the past five years that it's even more difficult for sellers to have a realistic baseline for what their homes are worth in the current market."

Buyers on the other hand, she said, have shifted their mindset significantly since last year. "Buyers who have been searching for a long time may still try to win deals with aggressive offers.  However, new buyers in the market are much less willing to chase an escalating sale price to compete with multiple bids. The demand side of real estate is moving from 'please take my offer' to 'take it or leave it as you please.'  Homebuyers' willingness to walk away from a deal that's a bad fit is good for them and is ultimately healthier for the housing market."

Inventories have been edging up in recent months and Redfin said this is overall good for buyers who are now less willing to jump into bidding wars.  At the same time home prices and interest rates have been rising while access to credit remains tight - all of them factors that challenge buyers.  Forty percent of Redfin agents said it was a good time to buy, but at the same time in 2013 these responses were at 46 percent. 

Seventy six percent of agents said it was a good time to sell, down 10 points from the same time last year.  The most common challenge for sellers according to 58 percent of respondents is the unrealistic expectations they hold about the value of their homes.

Many researchers seem to feel that young people born between the early1980s and the early 2000s, the so-called Millennial Generation, are the key to making or breaking the housing market so Redfin asked its agents to describe this group's homebuying approach.  The words and phrases that came through repeatedly in the responses included "cautious," "tech-savvy" and "well-informed." Though responses varied, many said that millennial buyers were interested in homes with less maintenance, and were willing to sacrifice square footage to be closer to work and their friends.

Mortgage Apps Bounce Back Despite Slightly Higher Rates

The Mortgage Bankers Association reported this morning that its Market Composite Index, which measures the volume of mortgage applications, increased 1.9 percent on a seasonally adjusted basis during the week ended July 4.   On an unadjusted basis the index fell 19 percent compared to the week ended June 27.  The seasonal adjustments compensated for the Independence Day holiday which shortened the business week. 

The Refinance Index increased 0.4 percent from the previous week while the market share of refinancing applications fell from 53 percent to 52 percent. 

Refinance Index vs 30 Yr Fixed

The seasonally adjusted Purchase Index rose 4 percent from a week earlier but the unadjusted index was down 17 percent and was 10 percent lower than in the same week in 2013.

Purchase Index vs 30 Yr Fixed

Both the contract interest rate and the effective rate for 30-year fixed-rate mortgages (FRM) with conforming balances of $417,000 or less rose during the week to an average of 4.32 percent from 4.28 percent.  Points increased to 0.16 from 0.14.

The jumbo version of the 30-year FRM (loan balances in excess of $417,000) declined to 4.24 percent with 0.16 point from 4.26 percent with 0.06 point.  The effective rate increased from the prior week.

Thirty-year FRM backed by the FHA saw an average rate increase of 3 basis points to 4.02 percent.  Points increased to -0.03 from -0.33 and the effective rate was higher than a week earlier.

The 15-year FRM was the only product where the interest rate eased.  It had an average contract rate of 3.40 percent with 0.22 point, down from 3.42 percent with 0.16 point.  The effective rate was unchanged.

Adjustable rate mortgages (ARMs) again had an 8 percent share of all applications.  The average contract interest rate for 5/1 ARMs increased to 3.24 percent from 3.21 percent, with points decreasing to 0.31 from 0.33. The effective rate increased from the prior period.

MBA's data is gathered through its Weekly Mortgage Applications Survey which has been conducted since 1990.  The survey covers over 75 percent of all retail mortgage applications in the country.  Survey respondents include mortgage bankers, commercial banks and thrift.  Interest rates are quoted for loans with an 80 percent loan-to-value ratio and points include the origination fee.  Volume indices have a base period and value of March 16, 1990=100.

Foreclosures up Again in May, but Annual Counts Still Falling

Even as various indicators of foreclosure activity continue to tumble from their year ago levels, they still tend to bounce up and down from month to month.   CoreLogic today said that completed foreclosures were up again in May when compared to April while the foreclosure inventory fell.

Completed foreclosures numbered 47,000 in May 2014 compared to 52,000 in May 2013, a year-over-year change of -9.4 percent.  However completed foreclosures, an indication of the number of homes repossessed by a lender, rose by 2,000 or 3.8 percent from April to May.  Core-Logic said that there have been approximately 5 million completed foreclosures nationwide since the housing crisis began in September 2008, comparing this to the average of 21,000 foreclosures completed each month (an average of 252,000 per year) nationwide between 2000 and 2006.  

The foreclosure inventory, the number of homes in some stage of foreclosure, has now declined on a year-over-year basis for 31 straight months and stood at 600,000 units in May.  This is a -37 percent change from May 2013 when the inventory contained 1 million homes.  The May inventory represented 1.7 percent of all homes with a mortgage in the U.S compared to a rate of 2.6 percent a year earlier.  The April to May decline was 4.8 percent.  

 

 

"Significant gains have been made in the last year to reduce the foreclosure stock," said Mark Fleming, chief economist for CoreLogic. "Yet, these improvements are occurring disproportionately in non-judicial states. The foreclosure inventory in judicial states is averaging 2.1 percent, which is more than twice the 0.9 percent average that is occurring in non-judicial states."

The improvement in foreclosure activity is apparent nationwide.  Every state posted double-digit year-over-year declines in completed foreclosures and 38 showed annual declines in their foreclosure inventories exceeding 30 percent.  In Arizona, Utah, Nebraska, and Minnesota those declines were over 50 percent.

Some states, however, are still experiencing significant activity.  Florida has had 122,000 completed foreclosures in the last 12 months, Michigan 44,000, and Texas 39,000.  The other two states in the top five were California (34,000) and Georgia (32,000.)  These five states combined had almost half of the completed foreclosures in the country.

The five states with the highest foreclosure inventory as a percentage of all mortgaged homes were: New Jersey (5.8 percent), Florida (5.2 percent), New York (4.3 percent), Hawaii (3.1 percent) and Maine (2.8 percent).

Consumers Increasingly Expect Higher Rents and Lower Home Prices

Responses to Fannie Mae's National Housing Survey for June showed more marked changes in several categories than has been the case in recent months when data has been relatively flat.  Most of the changes indicted slowly increasing confidence in the housing market and in the economy in general, however the greatest change was in consumer expectations about interest rates.

In January 55 percent of respondents expected interest rates to rise over the ensuing 12 months, but as rates softened those responses drifted back down and in May only 49 percent expected higher rates.  In the latest survey that response shot up 6 points, returning to 55 percent.  

Fannie Mae noted that consumer confidence in the housing market has trended upward significantly during the recovery but continues to be less than needed to return to "normal" housing levels.  While consumers appear positive overall and are trending in that direction, some survey and market indicators reflect a more subdued housing market, underscoring that the recovery continues but is not yet robust.

The number of respondents who think this is a good time to buy a house rose 2 percentage points from May to 70 percent but those who think it is a good time to sell reversed a four month climb to drop from 43 to 40 percent.

The share of respondents who say home prices will go up in the next 12 months fell to 46 percent, and while expectations for that increase remained positive at 2.4 percent, that was slightly lower than in the previous two months likely, Fannie Mae said, in response to a lackluster housing picture in the first half of the year.  The share who say home prices will go down increased to 10 percent.

"Since we began collecting monthly National Housing Survey data in June 2010, we've seen substantial progress in consumer home price expectations and other key attitudinal measures as the housing recovery gained its footing," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Still, we do not expect to see 'normal' levels of new residential construction, in the region of 1.6 million new housing units per year, before the end of 2016, our original projection. Such a feat would require a pace of growth in housing starts not seen in decades."

"The uptick this month in the share of consumers expecting mortgage rates to go up and the accompanying decline in home price expectations reflect the pause of activity in the housing market so far this year," said Duncan. "Despite recent improvement, we now expect an annual decline in existing home sales due to weak volume in the first four months of the year associated with the rise in mortgage rates mid-last year and the current dearth of supply of lower-priced homes. On the bright side, the share of employed consumers who expressed concerns about losing their job dropped to an all-time survey low in June, consistent with last week's upbeat jobs report. This may encourage potential homebuyers to enter the purchase market in 2014, helping to offset some of the weakness in sales activity."

Fifty-four percent of respondents expect rental prices to rise over the next 12 months compared to 51 percent in May.  The average 12-month price change expectation increased to 4.3 percent from 3.9 percent.

Fifty-two percent of respondents thought it would be easy for them to get a home mortgage today, increasing from 49 percent and matching the all-time high. The share who say they would buy if they were going to move was slightly higher at 68 percent.

Americans seemed a bit more upbeat in June about both their personal financial situation and the economy as a whole.  The share of respondents who say the economy is on the wrong track fell by 3 percentage points from last month to 54 percent and those who expect their personal financial situation to get better over the next 12 months ticked up to 43 percent.  Those who claim significantly lower income than a year earlier was down 1 percentage point to 11 percent, a new all-time low however those who say their household expenses have increased significantly over the same period rose 4 points to 38 percent.

The National Housing Survey is conducted monthly among 1,000 Americans, both renters and homeowners.  Respondents are asked over 100 questions during a phone interview to assess their attitudes toward owning and renting a home, home and rental price changes, homeownership distress, the economy, household finances, and overall consumer confidence. The survey has been conducted since June 2010.

Two Generations will Determine Housing's Future

In the second part of the Harvard Joint Center for Housing Studies' latest update on The State of the Nation's Housing, the authors look at the nation's demographics and how they currently affect housing and will do so in upcoming years. 

This Center's report, as many other housing students, points to the sluggish pace of household growth which has languished in the 600,000 to 800,000 range for several years.  This is well behind previous decades when the average has been over 1 million.  Much of this can be attributed to younger adults who because of the economy have continued to live with their parents, continue their education, or share housing with friends.  The report extrapolates that there may be 1.1 million fewer households among persons in their 20s than history would predict.

These potential households may represent a pent-up demand that will be released when the economy improves further there could be a strong boost to the housing market when the leading edge of the millennial generation (born between 1985 and 2004) moves into the age group where household formation normally peaks. When the leading edge of the baby boom was of similar age in the 1970s household formation averaged 1.7 million units per year for the entire decade.

Higher personal income is also strongly associated with household formation and while headship rates across income groups have been fairly constant over the past 10 years, growth in each group has not.  Millions of young adults joined the ranks of the lower-income population from 2003 to 2013 and this shift accounts for more than half of the drop in household formations among 20-29 year old adults over that period.  The combination of these factors meant that some 2.5 million more adults in their 20s and a half million more adults in the 30s lived with their parents in 2013 than if 2003 household formation rates for these age groups had continued.

Millennials did form millions of independent households over the past five years and because of the size of this generation the number of households they head is actually higher than a decade earlier.  Given that headship rate typically rise sharply for adults in their 20s and early 30s, the numbers of Millennials forming households should rise significantly if belatedly in the coming years.  However stronger income and employment growth is necessary to drive this change and this group is on a lower trajectory of housing independence that earlier generations.  Given the current pace of economic growth it is hard to predict how soon they will finally be able to live on their own.

Net immigration declined considerably during the Great Recession.  The Current Population Survey indicates that the number of foreign-born households actually fell in 2009 and 2010.  Despite a drop in their inflow and household formation rates, immigrants still account for a substantial share of household formation in the U.S. and have been a major source of population growth, contributing about 25 percent of total growth in the 1990s and 35 percent in the 2000s. It was immigration that limited what could have been a sharp drop-off in housing demand that was expected to follow the baby-boom generation.

Domestic mobility is another important factor in housing.  Residential moves spur investments in home improvements and furnishings, generate income for real estate agents and lenders, and expand housing options for others but domestic mobility has been trending down since the 1990s.  The share of adults who moved over the prior year fell from 16 percent in 1996 to just over 11 percent in 2013.  This reflects the transition of baby boomers into age groups less likely to move and lower mobility among young adults who are the most likely to move.  Millennials and gen-Xers are both tending to be less footloose than their predecessors.

The renter population is a little more mobile. During 2007-2013 a slightly smaller share of renters had lived in the same unit less than two years and a slightly larger share had lived there between two and four years.  The share of renters in the same unit for five or more units was unchanged.

The housing market itself was responsible for a noticeable drop in mobility rates among homeowners.  The steep drop in house prices with the associated explosion in underwater mortgages, weak labor markets and limited access to credit all made it harder for owners to sell or trade up.  The American Community Survey found that share of owners who had lived in their homes less than five years dropped from 30 percent in 2007 to 21 percent in 2012 while those in their homes for 10 or more years increased from 49 percent to 57 percent.  The report finds this remarkable in the context of millions losing their homes to foreclosure.

Reduced residential mobility has diminished gains and losses across metro areas.  In the midst of the housing boom in 2005 domestic migration was responsible for 30 percent of population growth in the 20 fastest-growing metro areas, a share that dropped to 11 percent in 2013. The reduced mobility also stemmed outflows from metros that had been losing populations.  The top five metros with positive net in-migration in 2005 added 320,000 people while the five with the highest positive net in 2013 added only170,000.  Net outflow in the top five cities that were losing population in 2005 was 640,000; in 2013 the top five lost only 240,000 residents.

Median household income fell another 1.4 percent in real terms in 2012, to its lowest level in nearly two decades and the median incomes of younger and middle-aged adults are at the lowest in records dating back to 1970.  The median income for households aged 25-34 fell an astounding 11 percent between 2002 and 2012, leaving their real incomes below those of the same age group in 1972.

The income situation in minority households in this age group is even worse.  The median income among minorities in 2012 was $20,000 below that of a same-aged white household.  The Center said two reasons for the low incomes of young households in general is the widening gap between white and minority income and that the minority share of the population is growing. 

Meanwhile the unemployment rate for this younger group jumped from 4.7 percent in 2006-07 to 10.1 percent in 2010 and was still at 7.4 percent in 2013.  Employment in this group is essentially at early 1980s levels.

Households in their pre-retirement years also saw real income drop.  In 2012 the median for households aged 50-64 dropped to $60,000, a mid-1990s level although homeowners in that age group fared better, their incomes fell just 5 percent.  Many households in their 50's and hoping to retire are in particular trouble.  Real median incomes have fallen $9,100 among 50-54 year olds and $5,700 among 55-59 year olds since 2002.

A continued reduction of mortgage debt (by 2 percent in 2013) along with higher home prices lifted real home equity by 24 percent to $10 trillion, more than aggregate mortgage debt.  But consumer debt was up 14 percent from the end of 2010 to the end of 2013, accounting for 26 percent of aggregate household debt, the highest share since 2004.  There is concern that the combination of falling income and rising debt may be weakening housing demand.

Much of the debt is education loans which have jumped 50 percent in the last four years and more than quadrupled over the past decade to $1.1 trillion.  It accounts for 63 percent of the growth in total debt over the past year and for nearly the entire increase in non-housing consumer debt since 2003. 

This soaring student debt may play a role in the lagging household formation and homeownership rates among younger adults.  In 2010 39 percent of households aged 25-34 had student debt compared to 26 percent in 2001 and about half the current share in 1989.  Young renters allocate more of their income to student debt payments; a median of 6 percent in 2010 among those under age 30 which may limit their ability to save, particularly for a downpayment on a home. Additionally, default rates on student loans are rising at an alarming rate and this may ultimately limit the credit standing of young adults and their ability to obtain a mortgage.

The Joint Center projects that demographic forces alone will drive household growth of 11.6 to 13.2 million between 2015 and 2025.  Behind their projections are two trends which together will shift the age composition of US households and thus housing demand.  In the short run the aging of baby boomers will increase the number of households age 70 and older by about 8.3 million.  The cohort of those aged 60-69 will rise by 3.5 million adding to the aging of the population.

A 2012 survey showed that 78 percent of householders over age 65 intend to remain in their homes.  Over time many of these homes will require retrofitting to accommodate aging in place and there will be a greater need for neighborhood services to accommodate homeowners' inability to drive.  When the oldest population reaches age 85 in 2031 they will increasingly seek alternative situations offering in-house services such as assisted or group living.

The second factor, the aging of the millennial generation, will increase the number of households in their 30s by 2.4-3.0 million in the next decade but these numbers vastly understate their impact on housing demand.  They will account for most of the new households, some 24 million new households between 2014 and 2025, driving up demand for rentals and starter homes.

Millennials are much more diverse than previous generations and will increase the racial and ethnic diversity of U.S. households, magnified by large losses of older white households.   By 2025 dissolutions of boomer households aged 50-69 will reach 3.0 million and those of their preceding generation 10.0 million.  As a result minorities will drive 76 percent of net household growth in the next 10 years.

Little Change in Mortgage Apps Despite Lower Rates

Even as mortgage interest rates retreated across the board last week Mortgage application volume remained essentially unchanged.  The Mortgage Bankers Association (MBA) reports that applications for mortgages during the week ended June 27 were down 0.2 percent on a seasonally adjusted basis according to its Market Composite Index and down 1 percent on a non-seasonally adjusted basis.

The Refinance Index ticked up 0.1 percent from the week ended June 20 and the share of all applications that were for the purpose of refinancing rose from 52 percent to 53 percent. 

Refinance Index vs 30 Yr Fixed

Both the seasonally adjusted and the unadjusted Purchase Index slipped 1 percent from the previous week and the unadjusted index was 16 percent below its level in the same week in 2013.

Purchase Index vs 30 Yr Fixed

Contract interest rates declined during the week for all mortgage products as did effective rates for fixed-rate products.  The average contract rate for 30-year fixed rate mortgages (FRM) with conforming loan balances of $417,000 or less was 4.28 percent with 0.14 point.  The previous week the rate had been 4.33 percent with 0.18 point.   

The jumbo version of the 30-year FRM (balances greater than $417,000) decreased 2 basis points to 4.26 percent.  Points decreased to 0.06 from 0.12.

The average interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to 3.99 percent from 4.03 percent.  Points rose to -0.33 from -0.38.

Rates for 15-year FRM fell to 3.42 percent from 3.47 percent.  Points decreased from 0.19 to 0.16.

Adjustable rate mortgages (ARM) once again had an 8 percent market share.  The rate for the 5/1 ARM decreased 2 basis points to 3.21 percent with points increasing to 0.33 from 0.27.  

MBA collects interest rate and application data through a Weekly Mortgage Applications Survey which it has conducted since 1990.  The survey covers over 75 percent of all U.S. retail residential mortgage applications.  Respondents include mortgage bankers, commercial banks and thrifts. Interest rates presume a mortgage with an 80 percent loan-to-value ratio and points include the origination fee.  Base period and value for all indexes is March 16, 1990=100.

 

Regulators Prepare Lenders for HELOC Transition

Federal and state regulatory agencies have issued final guidance to financial institutions under their jurisdiction regarding home equity lines of credit (HELOCs) that are nearing their "end-of-draw" periods. A HELOC is a dwelling-secured line of credit that generally provides a draw period for a borrower to access a revolving line of credit and typically makes only interest payments.  When this period ends, borrowers can no longer draw on the line of credit and the outstanding principal is either due immediately in a balloon payment or repaid over the remaining loan term through higher monthly payments.

The Federal Reserve, Office, of Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA) along with the Conference of State Bank Supervisors acknowledged that both financial institutions and borrowers may face challenges brought about by the HELOC transition with some borrowers experiencing difficulties with higher amortizing payments or a balloon maturity.  Many HELOCs were originated before the housing crash and recession so homeowners may have seen changes in their financial circumstances or declines in property values.

The guidance issued today describes core operating principals governing management oversight of HELOCs during this period and describes components of risk management.  It also highlights concepts related to financial reporting for HELOCs.

Regulatory agency examiners will review financial institutions end-of-draw risk management programs for provisions addressing five risk management principles:

1.      Prudent underwriting for renewals, extensions, and rewrites.

2.      Compliance with pertinent existing guidance, including that in current regulatory publications.

3.      Use of well-structured and sustainable modification terms.

4.      Appropriate accounting, reporting, and disclosure of troubled debt restructurings.

5.      Appropriate segmentation and analysis of exposure in allowance for loan and lease losses (ALLL) estimation processes.

Financial institutions should implement policies and procedures for managing HELOCS as the draw period ends that are commensurate with the size and complexity of their portfolio. 

Regulators expect risk management procedures to include:

1.   A clear understanding of scheduled end-of-draw exposures and identification of higher-risk segments.  They should also profile draw period transition dates for all HELOCS showing aggregate maturity schedules and those of significant segments of performing and non-performing borrowers including product types, post-draw payment characteristics, borrower characteristics, and other segments where performance may vary.

2.   A full understanding of end-of-draw contract provisions.  Transitions issues such as payment changes, amortization options, debt consolidation options, and payment processing should be controlled and programmed correctly into servicing systems

3.   Evaluation of near-term risks.  Accounts that have already had draws suspended because of borrower performance or collateral value issues warrant attention.  Management should also evaluate borrowers making only the contractual minimum interest payments to assess their ability to make the larger payments that will be required.

4.      Provisions for contacting borrowers though outreach programs well before the schedule end-of-draw, periodic follow-ups and effective response to issues.

5.      Ensuring the refinancing, renewal, workout, and modification programs are consistent with regulatory guidance and expectations including consumer protection laws and regulations.

Financial institutions must insure that their regulatory reports and financial statements are prepared in accordance with accepted standards and regulatory reporting instructions and should fairly represent their condition and performance.  Institutions must also comply with applicable consumer protection laws such as the Equal Credit Opportunity Act, Truth in Lending Act, and others relevant to HELOC lending.

The guidance says that even financial institutions with moderate volumes of HELOCs nearing end-of-draw should direct borrowers to trained consumer account representatives familiar with the products and the range of alternatives available.  Management should establish and define clear loss mitigation steps so that well-trained account representatives can quickly process requests.

Borrowers having financial difficulties should be offered practical information explaining their options, general eligibility criteria, and the process for applying for a modification.  Such information should be clear, complete, and easily accessible.

Management should structure and distribute to all involved personnel periodic reports to track end-of-draw actions and subsequent account performance aggregate and by response type.  Information should be sufficient to provide timely feedback to management.

ALLL methodologies should consider potential HELOC default risk from payment shock, loss of line availability, and home value changes. Higher-risk borrowers who's HELOCs are nearing their end-of-draw periods generally pose greater repayment risk for ALLL purposes, and management should monitor them separately for appropriate consideration in the ALLL estimation process.

Commensurate with the volume of the institutions HELOC exposure, management should have quality assurance, internal audit, and operational risk management functions that perform appropriate targeted testing of the full process for managing end-of-draw transactions to confirm information such as that draw terms and interest-only periods are not exceeded without credit approval, staffing and resources are able to handle expected volume, servicing systems are able to accurately calculate and process payments and generate billing statements, borrower notifications are timely and in compliance with contract terms and management guidelines, and reports provide reliable and timely information.

While financial institutions with significant volumes of HELOCS or higher risk exposure characteristics should have comprehensive systems and procedures in place to monitor and assess their portfolios, regulators say that institutions with small portfolios of HELOCs or lower exposures may be able to use existing, less sophisticated processes.

Home Price Gains Cooling Off Quickly

Home prices enjoyed a 27^th straight month of year-over-year growth in May CoreLogic said today, but noted that those gains are no longer in the double digits.  The company's Home Price Index (HPI) including distressed home sales was 8.8 percent higher than in May 2013 and rose 1.4 percent from the April level.  The HPI excluding distressed sales was up 8.1 percent from one year earlier and 1.2 percent from April. 

 

 

The national HPI Including distressed transactions is now 13.5 percent below its peak in April 2006.  Excluding distressed transactions, the peak-to-current change in the HPI for the same period was -9.3 percent.

"The pace of home price appreciation is cooling off quickly as the weather warms up," said Mark Fleming, chief economist for CoreLogic. "May's 8.8 percent year-over-year growth rate is down almost three percentage points from just three months ago. The influences of modestly rising inventory and less-than-expected demand are causing price growth to moderate toward our forecasted expectations."

The increases were national in scope.  Every state posted in increase in both HPIs in May and 25 states and the District of Columbia were within 10 percent of their pre-recession peak home price on the index including distressed sales.  Ten states set new price peaks in May, Alaska, Louisiana, Oklahoma, Nebraska, Iowa, South Dakota, North Dakota, Colorado, Texas and New York.  Texas and Colorado have set new peaks on almost a monthly basis since last fall.

 

Including distressed sales, the five states with the highest home price appreciation were:  Hawaii (+13.2 percent), California (+13.1 percent), Nevada (+12.6 percent), Michigan (+11.8 percent) and New York (+11.0 percent).

Excluding distressed sales, the five states with the highest home price appreciation were: New York (+12.2 percent), Hawaii (+11.6 percent), Nevada (+10.6 percent), California (+10.4 percent) and Florida (+9.6 percent).

The CoreLogic Forecast HPI is for home prices, including distressed sales, to increase 0.8 percent month over month from May 2014 to June 2014 and, on a year-over-year basis by 6.0 percent from May 2014 to May 2015. Excluding distressed sales, home prices are expected to rise 0.7 percent month over month from and by 5.1 percent year over. CoreLogic bases its forecast on the CoreLogic HPI and other economic variables. Values are derived from state-level forecasts by weighting indices according to the number of owner-occupied households for each state.

"Home prices are continuing to climb across most of the country which has both positive and negative implications for the housing market," said Anand Nallathambi, president and CEO of CoreLogic. "While the rapid rise in prices over the past two years has lifted many homeowners out of negative equity, it has also become a negative factor in buying decisions for prospective purchasers weighing affordability concerns. As we move ahead, a moderation in home price increases over the next twelve months should help cool things down a bit and keep the housing recovery going."

Ninety-four of the top 100 Core Based Statistical Areas (CBSAs) measured by population showed year-over-year increases in May 2014. The six CBSAs that did not show an increase were: Worcester, Mass.-Conn.; Hartford-West Hartford-East Hartford, Conn.; New Haven-Milford, Conn.; Little Rock-North Little Rock-Conway, Ark.; Rochester, N.Y. and Winston-Salem, N.C.

Short Sales Fall Sharply in First Quarter

The Federal Housing Finance Agency said on Friday that Freddie Mac and Fannie Mae continue to complete thousands of foreclosure prevention actions in each reporting period.  The two assisted homeowners with a combined total of 88,800 loan modifications, forbearances, and other assistance. This brings the total to 3.2 million since the two government sponsored enterprises (GSEs) were put in conservatorship in 2008.  That total includes 1.6 million loan modifications. 

Foreclosure previous actions have helped more than 2.6 million borrowers stay in their homes and another half-million have been helped to exit home ownership without a foreclosure.  Those home forfeiture actions include short sales and deeds-in-lieu.  FHFA noted that short sales dropped by 26 percent in the first quarter compared to the previous one.  

Fannie Mae and Freddie Mac's foreclosure prevention arsenals include the Home Affordable Modification Program (HAMP), a joint effort by FHFA and the Treasury Department, and proprietary programs offered by each of the GSEs.  In the first quarter of 2014 there were 10,764 borrowers in active HAMP trials compared to 13,551 in the fourth quarter of 2013.  The number of active permanent modifications increased from 431,503 in the fourth quarter to 431,677 in the first. 

Since HAMP was initiated in April 2009, there have been 1.1 million trial modifications extended to troubled homeowners and approximately 620,400 of them have been granted permanent HAMP modifications.   At the end of the first quarter there were nearly 10,800 homeowners in a HAMP trial.

Non-HAMP modifications however accounted for most of permanent loan modifications in the first quarter, nearly 44,800.  Since the housing crisis began, modifications through the GSEs proprietary programs have totaled more than 844,400.

The number of seriously delinquent borrowers with GSE loans decreased 8 percent during the quarter and the serious delinquency rate fell to 2.2 percent compared to 6.7 percent for FHA loans, 3.6 percent for VA loans, and a 5.0 percent industry average. 

While the total number of troubled borrowers continued to decline, 31 percent of these borrowers remained deeply delinquent at the end of the first quarter.  Florida, New York and New Jersey have the highest number of deeply delinquent loans (365+ days).

Third-party sales and foreclosure sales fell slightly to 47,300 while foreclosure starts decreased 25 percent in the first quarter.

The GSE's inventory of real estate owned (REO) declined by 3 percent in the first quarter as property dispositions outpaced acquisitions 9 percent to 6 percent.  REO located in Florida, which comprises a significant portion of the GSEs' inventory, increased by 9 percent during the quarter.

Pending Home Sales Rise at Fastest Pace Since 2010

There was encouraging home market news from the National Association of Realtors® (NAR) this morning.  The association's Pending Home Sales Index surged in May, increasing 6.11 percent from pending sales in April.  The index, a forward-looking indicator based on home purchase contracts moved from a value of 97.9 in April to 103.9.  Sales resulting from those contract signings are generally expected to close in about 60 days.

The gain was broad based with all four regions of the country experiencing an uptick in contract signings.  It was also the largest month-over-month increase since April 2010 when an influx of first-time buyers rushed to take advantage of the homebuyer tax credit.  The gain at that time was 9.6 percent.  Still the May index remained 5.2 percent below the 109.6 reading of May 2013.

Lawrence Yun, NAR chief economist said contract signings in May could be a harbinger of a better second half of the year.  "Sales should exceed an annual pace of five million homes in some of the upcoming months behind favorable mortgage rates, more inventory and improved job creation," he said. "However, second-half sales growth won't be enough to compensate for the sluggish first quarter and will likely fall below last year's total." 

Affordability and access to credit are still concerns for first-time buyers, Yun said.  That sector of the market accounted for only 27 percent of existing home sales in May and typically are limited in their access to credit because of student loan debt and lower credit scores.

Yun expects existing-homes sales to be down 2.8 percent this year to 4.95 million, compared to 5.1 million sales of existing homes in 2013. The national median existing-home price is projected to grow between 5 and 6 percent this year and in the range of 4 to 5 percent in 2015.

"The flourishing stock market the last few years has propelled sales in the higher price brackets, while sales for homes under $250,000 are 10 percent behind last year's pace. Meanwhile, apartment rents are expected to rise 8 percent cumulatively over the next two years because of tight availability," said Yun. "Solid income growth and a slight easing in underwriting standards are needed to encourage first-time buyer participation, especially as renting becomes less affordable." 

While the PHSI increased month-over-month in every region only in the Northeast was it higher than a year earlier.  In that region the index jumped 8.8 percent to 86.3 in May, and is 0.2 percent above the level in May 2013.  

In the Midwest the index rose 6.3 percent to 105.4 in May, but is still 6.6 percent below the previous year. Pending home sales in the South advanced 4.4 percent to an index of 117.0 in May, 2.9 percent below a year ago. The index in the West rose 7.6 percent in May to 95.4, but remains 11.1 percent lower than in May 2013.

Housing Improving but Rental Crisis Looms

The U.S. housing recovery should regain its footing, but also faces a number of challenges.  Tight credit, still elevated unemployment, and mounting student loan debt among young Americans are responsible for moderating growth and keeping millennials and other first-time homebuyers out of the market according to the latest edition of The State of the Nation's Housing released today by the Harvard Joint Center for Housing Studies.

 "The housing recovery is following the path of the broader economy," says Chris Herbert, the Center's research director. "As long as the economy remains on the path of slow, but steady improvement, housing should follow suit."

The report takes an in depth look at the housing markets and their demographic drivers, homeownership, rental housing, and finally the challenges facing housing.    We will briefly summarize the report's findings here then report on each of the above categories in greater detail over the next few days. 

The report notes that even though housing started out 2013 with a bang the market slowed noticeably in the second half of the year as home starts and sales of both new and existing homes slowed.  Higher interest rates following the Federal Reserve announcement that it was considering tapering its purchases of long-term and mortgage-backed securities was partially to blame as were the retreat of investors from the market, limited inventories of homes for sale and affordability issues following rapid home price increases.  But the report says the slow recovery of single-family housing largely reflects the steady but unspectacular return of jobs.

Household growth has remained subdued both as a result of a slowdown in immigration and lower headship rates among the millennial generation, many of whom continue to live in their parents homes.  It was hoped that many of the latter group would move out and form their own households once the labor marked revived but it has not yet happened.  Still it is likely that the current generation will follow historic patterns and form households by their early 30s, providing a strong lift to the rental and starter home markets.

Homeownership rates declined for the ninth straight year in 2013 and are at their s lowest levels since 1995, but the decrease last year was the smallest since before the housing crash.  The Joint Center sees many of the conditions holding homeownership down as improving; steady employment growth, rising home values creating a sense of urgency, and a lower share of distressed homeowners.

Still the homebuying market faces headwinds; higher home prices and interest rates making a purchase more of a stretch for many families as is falling income.  In addition, many would-be homebuyers are burdened with huge levels of student debt.  Adding to these financial pressures, qualifying for mortgage loans is still a challenge-especially for those with lower credit scores.

Rental markets continue to be strong.   The number of renter households rose last year, and while the rate of the growth is slowing it still remains above long-term averages.  With this demand vacancy rates continued to fall and rents to rise  Nationwide rents rose 3 percent in 2012 but in some markets, generally the ones that have also seen rapid rises in home prices like Denver and the San Francisco Bay area, the increase has averaged twice that.

The ramp-up in multifamily construction also continued in 2013; starts increased 25 percent, surpassing the 300,000 mark the first time since 2007.  The number of these units intended as rentals was at the highest level since 1998.  While multifamily construction in almost half of the 100 largest metros is back to average 2000s levels and has set new peaks in some markets those areas that experienced the sharpest booms and busts remain depressed.

From 2010 through early 2012 apartments in investment grade properties seemed to be renting faster than new units were added, bringing down vacancies and lifting rests. Supply and demand appear to have returned to balance in the last quarter of 2013. 

The report says however there is a crisis of affordability.  The share of cost-burdened renters (those paying housing costs in excess of 30 percent of their income) rose every year but one between 2001 and 2011 and now is over 50 percent.  More than a quarter of households are severely cost burdened with half or more of their income spent on shelter. On the homeowner side the situation has improved as owners have refinanced at lower rates and many have existed homeownership because of foreclosures. However the share of cost-burdened homeowners it still higher than at the beginning of the last decade.  

Looking ahead, the Center says the future course of homeownership will depend largely on the cost and availability of mortgage financing.  Looser underwriting standards may help bolster the housing market recovery and the government appears to be taking steps to buoy the market with newly announced programs to lower FHA premiums, provide homebuyer counseling, and encourage lending to properly documented lower credit score buyers

The Center, however, views the prospects for improving rental housing affordability as bleak.  Absent income growth or an easing of rents, rental assistance is the only option. Without expanded federal funding to aid the neediest households, millions  of  US  families  and  individuals will continue to live in housing that they cannot afford or that is inadequate, or both.

Banks' Efforts to Turn Profits are Risky -OCC

The Office of Comptroller of the Currency's (OCC) National Risk Committee (NRC) pronounced the financial position of federally chartered institutions "improved" last year in its Semiannual Risk Perspective issued on Wednesday.  The federal banking system set a new record level of net income that was only $5 billion or 5 percent higher than the previous pre-financial crisis record set in 2006 and it took seven years and $1.5 trillion or a 20 percent growth in assets to achieve it.  This, the report said, highlights the slow pace of the recovery.

The Perspective presents data in five main areas: the operating environment; the condition and performance of the banking system; key risk issues; elevated risk metrics; and regulatory actions.  It focuses on issues that pose threats to the safety and soundness of banks rather than opportunities that banks may encounter at the same time. The report reflects data as of December 31, 2013.

While conditions overall showed improvement in the second half of 2013, the OCC reports that credit risk is building in supervised national banks and federal savings associations following a period of improving credit quality and problem loan clean-up. Competitive pressures, and strategic and operational risks top the list of supervisory concerns.  Essentially, the OCC is saying banks' efforts to make a profit in light of increased regulatory costs and low-volatility market conditions are risky.

Return on assets and on equity remain below their pre-recession peaks.  The federal system as a whole returned almost 10 percent on equity but small institutions are lagging behind large ones.  Revenue was down as lower net interest income more than offset slightly higher noninterest income and sluggish loan growth and low interest rates weigh on net interest margins.  Improvements in earnings are still coming more from lower noninterest and provisions expenses rather than real growth. In addition, banks continue to face competitive pressure from nonbank firms seeking to expand into traditional banking activities.

Intensifying competition for lending opportunities is causing banks to loosen underwriting standards especially in commercial loans, indirect auto, and leveraged lending.  Risk layering is also a concern in commercial loans.  While not widespread, some examiners have noted multiple policy and underwriting exceptions on individual credit decisions which OCC and Federal Reserve Board surveys of lending practices have confirmed.

The increase in long term interest rates in 2013 underscores the need to understand and quantify banks' vulnerability to rising interest rates.  Some banks have reached for yields to boost interest income with decreasing regard for interest rate or credit risk. For example, banks that extend asset maturities to increase yield could face significant earnings pressure, especially if relying on the stability of non-maturity deposit funding in a rising rate environment,

Slow economic growth is pushing banks to reevaluate business models, capital deployment, and risk appetites and some are on taking on additional risks by expanding into new, less familiar, or higher risk products.  OCC says its examiners will focus on strategic business and new product planning to monitor risk management processes.

Some banks are lowering overhead expenses, often by reductions in control functions, exiting less profitable businesses, closing offices, and outsourcing critical control functions to third parties, in some instances without appropriate levels of due diligence.

Cyber-threats continue to evolve, requiring heightened awareness and appropriate resources to identify and mitigate the associated risks.

Financial asset prices have experienced very low volatility for an extended period. As a result, measures of price risk, such as value-at-risk, are at very low levels. The reduced willingness of dealers to hold securities in inventory, due to capital and other concerns such as a change in monetary policy, could contribute to greater price swings going forward and increased price risk.

Bank Secrecy Act (BSA) and anti-money laundering (AML) risks remain serious concerns as money-laundering methods evolve and the volume and sophistication of electronic bank fraud increases.  These risks have grown among community banks during the last few years because of increases in the number of higher-risk, cash intensive customers and internationally oriented transactions.  BSA programs at some banks have failed to evolve or to incorporate appropriate controls into new products and services. 

The report makes only a few brief mentions of the residential loan sector, citing shrinking refinancing activity as a risk factor for smaller banks and that charge-offs of residential loans has decreased while delinquencies among HELOCs has increased.  The one section devoted to residential mortgages notes that the decline in new foreclosure activity has helped to offset slowing mortgage origination activity.  Foreclosure starts for both prime and subprime loans fell indicating that the market is stabilizing but also attributed in part to the improving economy and aggressive foreclosure prevention actions. 

Mortgage originations started out the year strong but rising interest rates caused activity to falter starting in May.  With improvements in job creation, income growth, and household formation lagging, demand for mortgages remains low.

Fannie Economist Sees Rates Rising to Top of Range

Almost one year ago Mark Palim, Fannie Mae's Vice President of Applied Economic and Housing Research, analyzed what impact rising rates might have on the housing recovery.  When he wrote about this for the company's website last July, rates which had recently (in May) bottomed out at 3.35 percent had increased by 116 basis points to 4.51 percent. 

At that time Palim said there was no historical precedent for knowing the impact on the housing market of an interest rate change, either up or down, because of a Federal Reserve policy of quantitative easing but we could review the history of large interest rate movements.  He examined two such periods since 1990; a 14-month period from October 1993 to December 1994, when mortgage rates increased by 237 basis points (from 6.83 percent to 9.20 percent) and a longer period with a smaller rate increase, October 1998 to May 2000, when rates increased by 180 basis points (from 6.71 percent to 8.51 percent).  Palim concluded that that rate changes don't have much impact on pries but do contribute to a decrease in home purchase volume and an increase in the use of adjustable rate mortgages (ARMs.)  That latter change, he said, might be muted this time by the new Qualified Mortgage (QA) rule.   

Rates continued to rise through that summer, reaching 4.57 percent in September.  Since then they have oscillated in a relatively low range to a low of 4.10 percent and last week stood at 4.17 percent. This week the economist revisited his analysis in an article for Fannie Mae's FM Commentary titled "Mortgage Rates and the Housing Recovery - A Year Later" to see what the impact has and will have on the housing market and if his July 2013 assessment was correct.  

Home price and sales data through last April, he said, shows a general pattern consistent with history and his expectations in 2013; a sharp adjustment to higher mortgage rates tends to precipitate a reduction in the volume of sales rather than a decline in prices. Chart 1 shows that rising rates (80 basis points from May 2013 to April 2014) were met with a drop in existing single family homes sales of 7.7 percent.  There has been an ever larger drop, 14.5 percent, from their recent high in July 2013 of 4.75 million units.

In April 2013 home prices according to several national readings including Case-Shiller and CoreLogic, were rising by double digits.  Prices have continued to rise since then but the annual appreciation is no longer accelerating.  Chart 1 shows the year-over-year change in home prices in April 2014 was 10.5 percent having peaked at 11.9 percent in February 2014 (CoreLogic HPI). The continued strong appreciation in home prices occurred during a period when mortgage rates rose by 80 basis points. 

During recent earlier periods of sharply rising interest rates, the ARM share of mortgage applications according to the Mortgage Bankers Association rose to over 40 percent by dollar volume.  This time, Palim says, the rise in the ARM share is nowhere near that.  Since April 2013, the ARM share has risen from 11.2 percent to 18.0 percent in April 2014.  "We believe this is likely due to tighter underwriting standards for ARMs, including the impact of the Ability-To-Repay rules, and recognition by some borrowers that if they opt for an ARM today, when their rate resets they are more likely to be paying a higher rate when interest rates rise to levels more consistent with historical norms."

Looking forward to the remainder of this year, Palim expects that mortgage rates will rise to the upper end of the range established over the past year as the economy recovers from what he calls a soft patch during the first quarter of 2014.  Tight inventories and investor demand kept home prices rising well ahead of the growth in household income in 2013 but he expects that dynamic to wane of the course of 2014.  The Federal Housing Finance Agency (FHFA) purchase-only home index which forms part of the Fannie Mae Economic and Housing Outlook, forecasts an increase of about 5 percent in home prices in 2014 compared to a 7.6 percent gain in 2013.  Palim said that home sales, despite the rebound from recent lows earlier this year, will post a small decline, its first in four year, compared to 2013.

Existing Homes in May: Stronger Sales, Moderating Price Gains

There were some healthy signals from the existing home market in May, as sales rose strongly and price growth moderated.  The National Association of Realtors® (NAR) said all four regions of the country experienced a month-over-month improvement in sales but prices fell slightly in the Northeast.  

Sales of existing homes, condos, and coops rose 4.9 percent to a seasonally adjusted annual rate of 4.89 million units in May, the largest month-over-month gain since August 2011.  Despite the strong showing the May rate was still 5.0 percent lower than the 5.15 million pace one year earlier.  NAR revised its original figures on April sales upward from 4.65 million to 4.66 million.

Single-family home sales rose 5.7 percent to a seasonally adjusted annual rate of 4.30 million in May from 4.07 million in April, but remain 5.7 percent below the 4.56 million pace a year ago. Existing condominium and co-op sales in May were at a seasonally adjusted annual rate of 590,000, the same figure as for both April and for May 2013.  

Lawrence Yun, NAR chief economist credited several factors for the rebounding market coming out of a weak first quarter. "Home buyers are benefiting from slower price growth due to the much-needed, rising inventory levels seen since the beginning of the year," he said. "Moreover, sales were helped by the improving job market and the temporary but slight decline in mortgage rates." 

The median existing-home price for all housing types in May was $213,400 a 5.1 percent gain from the median in May 2013.  The annual increase in April was 5.2 percent.  The May number continues the downward trend in appreciation from the double digit increases which were common last year.  In May 2013 the annual increase was 11.0 percent and during the first three months of 2014 the average increase in the median price was 8.6 percent.   

The single-family home price rose 4.9 percent from one year earlier to a median of $213,600.  The median existing condo price was $212,300 in May, which is 6.6 percent higher than a year ago.

Total housing inventory at the end of May climbed 2.2 percent to 2.28 million existing homes available for sale, a 5.6-month supply at the current sales pace.  There was a 5.7 month supply in April. Unsold inventory is 6.0 percent higher than a year ago, when there were 2.15 million existing homes available for sale.

Earlier this month, NAR reported that the construction of new homes is insufficient to meet demand in most of the country and some areas could face persistent housing shortages and affordability issues until construction catches up with local job creation.  Yun referred to this, saying "Rising inventory bodes well for slower price growth and greater affordability, but the amount of homes for sale is still modestly below a balanced market. Therefore, new home construction is still needed to keep prices and housing supply healthy in the long run."

Distressed homes sales accounted for 11 percent of May sales compared to 18 percent a year earlier.  Eight percent of sales were foreclosures which sold at an average discount of 18 percent and 3 percent of sales were short sales which were discounted an average of 11 percent.

The percent share of first-time buyers continued to underperform, representing less than one- third of all buyers at 27 percent in May, down from 29 percent in April; they were 29 percent in April 2013.  The investor share declined to 16 percent from 18 percent in April and in May 2013.  Sixty-eight percent of investors paid cash in May and cash sales accounted for 32 percent of all transactions.

NAR President Steve Brown said housing fundamentals are showing slight improvement in markets across the country. "Many potential buyers were left on the sidelines beginning last summer as affordability declined amidst rising home prices and interest rates.  The temporary pause in rising interest rates and more homes for sale is good news - especially for first-time home buyers - who likely have a better chance in upcoming months to make a competitive offer that's in return accepted by the seller."

Homes were on the market a median of 47 days in May, one day less than in April but longer than the 41 day marketing time in May 2013.  Short sales took a median of 125 days to close, foreclosures 57 days, and non-distressed homes 44 days.  Forty-one percent of homes sold in May were on the market for less than a month.

Regionally, existing-home sales in the Northeast rose 3.3 percent to an annual rate of 620,000 in May, but are 3.1 percent below a year ago. The median price in the Northeast was $256,700, down 0.9 percent from May 2013.

In the Midwest, existing-home sales jumped 8.7 percent to an annual rate of 1.13 million in May, but are still 7.4 percent below May 2013. The median price in the Midwest was $165,900, up 4.0 percent from a year ago.

Existing-home sales in the South increased 5.7 percent to an annual level of 2.05 million in May, but are down 0.5 percent from May 2013. The median price in the South was $184,800, up 4.4 percent from a year ago.

Existing-home sales in the West rose 0.9 percent to an annual rate of 1.09 million in May, and are 11.4 percent below a year ago. The median price in the West was $297,500, which is 8.4 percent above May 2013.