RISMEDIA, Tuesday, December 10, 2013
Markets in 54 out of the approximately 350 metro areas nationwide returned to or exceeded their last normal levels of economic and housing activity, according to the National Association of Home Builders/First American Leading Markets Index (LMI), released recently.
The index’s nationwide score of .86 indicates that, based on current permits, prices and employment data, the nationwide market is running at 86 percent of normal economic and housing activity.
The LMI figures for November showed that 55 housing markets were operating at or above their last normal levels and the nationwide market was operating at 85 percent of normal growth. LMI data for the two months were released simultaneously because of the delay in collecting data during the partial government shutdown in October.
“This index shows that most housing markets across the nation are continuing a slow, gradual climb back to normal levels,” said NAHB Chairman Rick Judson, a home builder from Charlotte, N.C. “Policymakers must guard against actions that could impede or even reverse the modest gains of the past year.”
Noting that smaller metros accounted for most of the 54 markets on the current LMI that are at or above normal levels, NAHB Chief Economist David Crowe said that “smaller markets are leading the way, particularly where energy is the primary economic driver. Nearly half of the markets in the top 54 are in the energy states of Texas, Louisiana, North Dakota, Wyoming and Montana.”
“The fact that more than 125 markets on this month’s LMI are showing activity levels of at least 90 percent of previous norms bodes well for a continuing housing recovery in 2014,” said Kurt Pfotenhauer, vice chairman of First American Title Insurance Co., which co-sponsors the LMI report.
Baton Rouge, La., tops the list of major metros on the LMI, with a score of 1.42 – or 42 percent better than its last normal market level. Other major metros at the top of the list include Honolulu, Oklahoma City, Austin and Houston, Texas, as well as Pittsburgh – all of whose LMI scores indicate that their market activity now exceeds previous norms.
Looking at smaller metros, both Odessa and Midland, Texas, boast LMI scores of 2.0 or better, meaning that their markets are now at double their strength prior to the recession. Also at the top of the list of smaller metros are Casper, Wyo.; Bismarck, N.D.; and Grand Forks, N.D., respectively.
The LMI shifts the focus from identifying markets that have recently begun to recover, which was the aim of a previous gauge known as the Improving Markets Index, to identifying those areas that are now approaching and exceeding their previous normal levels of economic and housing activity. More than 350 metro areas are scored by taking their average permit, price and employment levels for the past 12 months and dividing each by their annual average over the last period of normal growth. For single-family permits and home prices, 2000-2003 is used as the last normal period, and for employment, 2007 is the base comparison. The three components are then averaged to provide an overall score for each market; a national score is calculated based on national measures of the three metrics. An index value above one indicates that a market has advanced beyond its previous normal level of economic activity.
For historical information and charts, please go to nahb.org/lmi.
By Mark L. Stockton | RISMEDIA, Monday, December 09, 2013
In today’s recovering residential real estate market, investors have played an important role, accounting for more than 20 percent of all purchases in recent months. As noted in an article that appeared on RISMedia.com on August 28, titled, “A New Breed of Real Estate Investor; The Value Investor,” there’s been a noticeable shift in the motivation of investors from those seeking deep discounts to those seeking sound investments in stable markets to hold for longer terms. This change in strategy signals an increasing need for good analytical tools to help investors make prudent decisions.
The abundance of properties that can be purchased for deep discounts has dwindled, which means proper evaluation of home values has gained importance as inventories have declined. As the anticipated holding period of the investments increases, the need to be able to evaluate the stability of individual markets takes on greater significance.
For example, a resident of Riverside, Calif., recently lost her home. She purchased it in May 2005 for $305,000, and at the time, the price was reasonable when compared to other homes in the immediate area. While I haven’t seen the appraisal that was done at purchase, I cannot deny that a reasonable appraised value for the property in May 2005 would have been approximately $305,000. What I can say with authority is that the appraised value at the time of purchase was unsustainable.
There are meaningful relationships in real estate markets just as there are in other markets (stocks, commodities, etc.) that must be monitored to support prudent lending and investing decisions. For example, we know there’s a relationship between rents and sale prices that should be considered—especially from the investor’s standpoint.
Another important relationship that’s been long overlooked that will help us understand the sustainability of property values is the relationship between the market value of a home and its depreciated replacement cost (RCNLD). There’s an old (often forgotten) adage that no prudent buyer would pay substantially more for a home than the cost to rebuild it on a similar site. This concept was once recognized by the appraisal industry and acknowledged in the cost approach to value. There was a time, not long ago, when appraisers had to provide commentary to support any cost approach in which the site value represented an excessive portion of the overall value. It was recognized at the time that a large disparity between the value of the improvements (depreciated replacement value) and the value conclusion (the market estimate derived from the cost approach) could be indicative of an unsustainable market value.
History has, in fact, shown us that when the gap between RCNLD and sale price begins to exceed its previous high in any given market, values are approaching unsustainable levels and we can be relatively certain that a correction in home prices is imminent.
When this individual purchased her house in 2005, the ratio between RCNLD and home prices (Market Experience Ratio©, or MER©) in the immediate area was in excess of 220 percent, meaning homes were selling for considerably more than twice their depreciated replacement costs. Her home and the neighboring homes were being sold very near the high point of what would become known as the housing bubble. For those of us who watch relationships closely and have developed a means of monitoring them on both a broad scale and granular basis, this was obvious. Each time this occurs, as it has on several occasions in the past 30 years, market prices respond by declining to a level that more closely approximates depreciated replacement cost. The current MER for homes in this area is averaging about 120 percent, and prices have reached reasonably sustainable levels for that locale.
Here’s the bad news: At purchase, this homebuyer was able to secure a 95 percent loan with payments structured to start off small and increase over time as her income and equity grew. Ecstatic at the prospect of being able to own a new home with a modest down payment, she was unaware of the danger that lay ahead. So too was her lender, apparently. She can be forgiven; she was not what is sometimes referred to as a “sophisticated investor.” How can an average consumer be expected to understand market dynamics and complex financial dealings? Isn’t that why they rely on professionals?
The lender, however, should have known better. What happened to real estate markets nationwide soon thereafter was not an anomaly. It has happened often in the past, and it will happen again in the future. Every time investment dollars become more abundant and credit restrictions relax, you can bet this same scenario will play out in real estate markets across the country.
This homebuyer then lost her job in 2010. She was forced to confront the fact that she was unemployed and would have to compete with tens of thousands of other unemployed individuals for a position that would probably pay less than her old job—if she could find employment at all. The value of her home had declined by nearly 50 percent in the years since she had made her purchase. Instead of building equity, she was underwater on her mortgage. Eventually, her home was foreclosed and she found herself in a position that is all too common today. While not homeless, she faced bankruptcy and the inevitable emotional and financial difficulties that ensue.
If the proper tools and analytics had been available to the lender in 2005, chances are things would have turned out better for all parties. It is reasonable to assume that the lender, recognizing the instability in the housing market, would have modified its lending practices, and terms offered to borrowers would have become more restrictive. In fact, there’s a high probability that the instability would have never reached such extremes; lenders and investors might have acted promptly and prudently to put downward pressure on rapidly inflating sale prices, and subsequent losses might have been significantly reduced.
This unfortunate homebuyer might not have qualified for a loan at all, and would have perhaps been forced to continue renting until she accumulated a suitable down payment. If, and when, she was ready to make a purchase, she might have had to settle for a “starter home” rather than opting to buy her dream house. These, by the way, are not bad things. Until recently, this was regarded as the appropriate path to homeownership in America.
So here’s the message: Prudent lending and investing must be based on more than just accurate appraised values. Values must be scrutinized for their sustainability as well. As all parties to this transaction discovered, an accurate value for a home yesterday might differ substantially from an accurate value for the same home today. That doesn’t make either value conclusion less accurate, but it does reveal that markets fluctuate and values must be viewed within the context of current market trends and long-term sustainability.
If your current valuation solution does not provide you with both a reasonably accurate value conclusion—supported by industry standard analytics—and a reasonable measure of sustainability, you need a solution that does.
Mark Stockton is managing partner of Valuation Research, LLC, the developer of The Valuation Research Assistant© and Value™. For more information, please visit www.valuationresearchllc.com.
By Marilyn Kalfus | RISMEDIA, Thursday, December 05, 2013— (MCT)
Some shoppers planning to buy a new home in 2014 will get more scrutiny — and likely less money.
Here’s why: A new set of rules for getting a mortgage kicks in. Interest rates are expected to rise. And loan amounts are expected to shrink.
The Consumer Financial Protection Bureau’s rules, which take effect on Jan. 10, establish a national standard for issuing mortgages and are meant to prevent the risky lending practices that led to the housing crash.
The bureau, created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, says the rules mostly codify practices that are already common in today’s more careful mortgage climate.
Many mortgage experts and consumer advocates alike applaud the bureau’s requirements. In addition to looking after consumers, the rules provide a safe harbor for lenders, shielding them from lawsuits.
“Lenders are going to be crossing their t’s and dotting their i’s like never before,” said Bob Walters, chief economist for Quicken Loans. But strict adherence to the rules could result in unintended consequences, he added. “There’s going to be circumstances where people who should get mortgages won’t get mortgages.”
Two other developments also could make getting a home loan more difficult. Some economists predict interest rates will gradually work their way up to the mid 5-percent range by the end of 2014. And there’s a good chance that limits on the size of some popular loans will be lowered next year.
Here’s what’s on the horizon and how it may affect you.
The Rules: The consumer bureau’s goal makes sense: restrict mortgages that borrowers can’t afford. The standards are listed in the bureau’s Ability-to-Repay and Qualified Mortgage Rule.
The Ability-to-Repay standard bans no-documentation loans and requires lenders to verify and document a borrower’s income, assets, savings and debt.
The Qualified Mortgage grants the creditor greater protection from potential liability. Under this rule, lenders cannot include toxic features such as negative-amortization “option ARMs” that increase borrowers’ debt with each monthly payment, or excessive upfront points and fees (these will be limited in most cases to 3 percent of the loan amount).
Qualified Mortgage loans will generally have to be made to borrowers who have debt-to-income ratios less than or equal to 43 percent, though a temporary exception allows Qualified Mortgage status for higher ratios if the loans are eligible for purchase by mortgage giants Fannie Mae, Freddie Mac, the Federal Housing Authority and some other government programs. Another exemption allows certain small lenders to issue Qualified Mortgages with ratios over 43 percent.
The new rules also help speed up the process of getting a mortgage by giving lenders the authority to reject outright credit-report information if a borrower can prove that it’s wrong. “That’s a huge deal,” said Jeff Lazerson of Mortgage Grader in Laguna Niguel, Calif. “It’s monster-good.”
Richard Cordray, director of the bureau, recently told the Mortgage Bankers Association that most of the home loans granted now would be considered qualified mortgages.
Some in the mortgage industry, however, say that getting a loan could become harder for some borrowers, especially those in lower paying jobs, retirees or entrepreneurs whose income fluctuates.
“If you’re trying to stretch to get into a home, it is going to have an effect on you,” said Ryan Grant, sales manager at Imortgage in Newport Beach, Calif. From the lender’s perspective, he added, “You will have to have some really good compensating factors to go outside of that (Qualified Mortgage rule).”
The people most impacted won’t be the wealthy, Walters said. “It’s going to be the people who traditionally are the first-time homebuyers, the ones who have the most challenge getting a loan.”
Lenders don’t have to adhere to the Qualified Mortgage rule. But if they don’t, they don’t get legal protection if the buyer defaults for a reason that should have been foreseeable.
“If the loan is originated as a (Qualified Mortgage) loan and then is later found to not be … the lender can be exposed to a possible lawsuit or repurchase of the loan, both of which very costly,” said Joe Soto, vice president of mortgage lending for Guaranteed Rate in Los Alamitos, Calif. “What we have done and what most lenders will likely do is try to keep everything the same … to make sure there is no second-guessing.
“At the end of the day, if there is more risk for the lender, then there will be more pressure on the borrower to prove the ability to repay,” he said.
Lenders, however, also will have some good reasons to grant mortgages outside of the Qualified Mortgage rule.
Let’s say a client has plenty of money in the bank and a sterling credit score. But the buyer is at a 55 percent debt-to-income ratio because he is self-employed with an irregular paycheck, or she is a savvy investor with a shifting income.
If you’re that client, Walters said, “I’m happy to make that loan to you. You’re never going to come back and sue me.”
But, he said, “I will not likely make a loan that doesn’t adhere to the (Qualified Mortgage rule) for people who have a modest down payment, have not a lot of assets, have a higher debt-to-income or maybe a middling-to-poor credit score.”
At least in the beginning, Lazerson said, lenders are likely to be overly cautious. “They’re going to err on the side of denying loans,” he said.
The Rates: While mortgages may be harder to get for some, they’re expected to cost more for everyone.
The National Association of REALTORS® predicts the 30-year fixed mortgage rate — at an average of 4.22 percent last week — will reach about 5.3 percent by the end of 2014. The Mortgage Bankers Association has said rates likely will increase above 5 percent in 2014 and then rise to 5.5 percent by the end of 2015.
What happens with interest rates, and how soon, hinges on the Federal Reserve’s bond-buying program. The Fed, which buys $85 billion of mortgage-backed securities and Treasuries each month, is expected to increase rates after paring down the monetary stimulus.
But Janet Yellen, nominated to be the next chairman of the Federal Reserve, recently said that the employment picture and the economy must improve before the Fed cuts back on the program.
Earlier this month, a Bloomberg News survey of 32 economists indicated that the Fed may begin to slow its bond-buying purchases in March.
Lazerson, however, thinks interest rates will stay the same, or could even go down.
“The economy in general is tepid, at best,” he said. “Wages are stagnant, and that’s a key driver. Things have really slowed down. If there’s no demand for money, what’s the point of raising the rates?”
The Limits: The Federal Housing Finance Agency has signaled it likely will lower conforming loan limits in the summer of 2014, according to various reports. This, too, could shut off many homebuyers from getting conventional loans.
The housing industry is urging the agency not to pull the trigger.
Conforming loans are those purchased by Fannie Mae and Freddie Mac. The two federally chartered mortgage finance companies buy the mortgages from lenders and keep them or bundle them into securities that they offer to investors with a guarantee.
Currently, Fannie and Freddie cannot back loans of more than $417,000 in most markets, though the limit ranges as high as $625,500 in some pricier areas.
If the limits are lowered, “Fewer will qualify for the home they would be able to qualify for today,” said John Stehle, vice president of mortgage lending for Guaranteed Rate’s Costa Mesa, Calif., branch.
“Borrowers that no longer qualify for conforming will have to move to high-balance (loans), and borrowers that no longer qualify for high-balance will now have to go jumbo,” he said. “The rates will be higher, and the qualifying tougher, with each higher-limit tier.”
Many politicians and real estate industry leaders have objected to lowering the limits, a move many worry could impede the housing market, though lowering the limits would fit with the Obama administration’s goal to wind down Fannie Mae and Freddie Mac. During the economic meltdown, the two enterprises ran into big trouble and were placed under government conservatorship. They have since become profitable.
©2013 The Orange County Register (Santa Ana, Calif.)
Distributed by MCT Information Services
Markets in 54 out of the approximately 350 metro areas nationwide returned to or exceeded their last normal levels of economic and housing activity, according to the National Association of Home Builders/First American Leading Markets Index (LMI), released recently.
