Source: OC Housing News
High house prices and rising mortgage rates will hurt affordability and offset any gains from wage growth and an improving economy.
Have you looked for a home to buy lately? They’re expensive, and although 4% mortgage rates enable buyers to finance those prices, mortgage rates only make houses affordable at levels below 4.5%.
Over the last four years, all lenders revamped their loss mitigation procedures to can-kick loans if borrowers default until house prices exceed the balance of the loan. No matter what else happens in the market, unless the banks are forced to change their policies by the government regulators or the federal reserve (a very unlikely event), lenders will continue to kick the can with loan modifications and suspend homes in cloud inventory for as long as it takes.
Since problems in the market cannot be resolved by lowering price, the inevitable problems that arise will cause sales volumes to remain weak. As a result, you can expect years of low sales volumes in residential real estate.
One of the major hurdles facing a sustained rally in real estate prices is the relative absence of first-time homebuyers, the bedrock of the market. First-time homebuyer participation is near historic lows. Banks restricted inventory to push up prices, but what happens to the market if prices are so high that first-time homebuyers can’t afford them? Some first-time homebuyers will hold their nose and substitute down to lower quality properties, but many will simply not buy and chose to rent instead. The result will be fewer transactions and low sales volumes.
There are three reasons we don’t see many first-time homebuyers. For one, many are unemployed. People without a job don’t buy homes (anymore). Further, many potential first-time homebuyers have too much debt. They have large student loan payments, excessive credit card debt, and the lease their cars. They don’t have any money left over to save for a down payment, and even if they had the savings, they don’t have the qualifying back-end debt service ratio required to get a loan.
In the recent new mortgage regulations, back-end debt-to-income ratios were capped at 43% for all qualified mortgages. If the borrower wants to max-out their loan with a 31% front-end ratio, they can’t spend more than 12% of their gross income on student loans, credit cards and car leases combined. Many young people spend that much on each of those. Any potential homebuyer with a student loan and a car payment — which is most of them — is unable to qualify for a loan. And that’s a good thing because if they got a loan, they couldn’t afford the payments anyway.
And finally, after witnessing the catastrophic collapse of home prices that trapped the preceding generation in their starter homes, many potential young buyers simply don’t want to take the risk. Perhaps rising prices and endless NAr bullshit will force kool aid down the gullet of this generation, but many will learn the hard lessons of the housing bubble and refuse to overpay for a house.
… A Trulia analysis of U.S. listings shows that 3.9 percent of homes that moved from for-sale to pending moved back to for-sale again, nearly double the rate in 2015. Such “failed sales” increased in 96 of the 100 biggest U.S. metros, with big swings in areas large and small, rich and poor. That includes Los Angeles and Charleston, S.C., as well as San Jose and Akron, Ohio.
In Ventura County, Calif., where the median home value is $548,000, 11.6 percent of prospective sales failed to close in 2016. That’s the highest in the U.S., up from 3.1 percent in 2015. Tucson, where the median home price is $176,000, had the second-highest rate of failed sales, at 10.8 percent, up from 3.5 percent the year before.
The problem of failed sales has been most acute for cheaper homes and older ones: Some 6.3 percent of sales of starter homes fell through last year, according to Trulia’s analysis, compared with 3.6 percent of so-called premium home sales. Homes built in the 1960s had the highest fail rates, while sales of newer and older houses were more likely to go through.
Trulia’s data don’t explain why listings reverted from pending to for-sale.
Why are more listings failing to close? High prices are the likely culprit. Realistically, it’s because buyers are extending themselves to the limit of their ability to finance, and any small problem is likely to kill the deal, particularly with first-time homebuyers with less savings, more debt, and limited credit histories. As mortgage rates rise and marginal deals become even more marginal, I expect the fallout rate to continue to rise.
Everyone is lamenting the lack of MLS inventory, but even if we had an explosion of cloud inventory, it wouldn’t change much. Inventory that’s priced above what people can afford is the same as inventory that isn’t there. Back in 2007, we had an explosion of inventory.
Many observers mistakenly believe the influx of inventory in 2007 pushed prices down. That isn’t the case. In 2007 the normal listings that came to market found no buyers. Prices fell steeply in 2008 despite declining inventory for most of the year. Transaction volumes dried up in 2007 because the toxic financing was taken off the market and people couldn’t finance the large sums necessary to pay peak prices (see red line below).
Since that 2007, mortgage interest rates have fallen from 6.5% to 3.5% thus allowing buyers to finance mortgage balances similar to those during the housing bubble.
Price or volume but not both
Lenders hope to have it both ways. They want the high prices of the bubble, and they want high transaction volumes so they can clear their inventory of bad loans. Unfortunately, they can’t have both. As a result, they will accept lower sales volumes and a much longer time to clear the market. By the time they are done, some borrowers will have squatted in their homes without making payments for 10 years or more. Not a bad deal for them.