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Irvine Housing Blog

Irvine Housing Blog

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Housing demand surprisingly low while payment affordability at record highs

Posted: 02 Jun 2011 03:30 AM PDT

Despite the best house price payment affordability on record, housing demand and mortgage demand is near record lows.

Irvine Home Address ... 2 SOLANA Irvine, CA 92612
Resale Home Price ......  $465,000

Get on up when you're down
Baby, take a good look around
I know it's not much, but it's okay
Keep on moving anyway

Five -- Keep on Movin'

Despite gargantuan efforts by government policy makers and the federal reserve to prop up the US housing market, low prices in many markets, and low interest rates, buyer demand is still very low. The reason is simple, the buyer pool is depleted, and many who would ordinarily be in the market for housing are unable to qualify for the loan necessary for them to purchase.

Tighter lending standards are often blamed, but it is both a combination of higher lending standards and fewer people who meet those standards because they have credit or savings problems due to unemployment, short sale, or foreclosure. The only fix to this problem is time. People need to go back to work, pay their bills, save money, and wait for their credit score to improve. Until all of those things happen, mortgage demand will remain low, and sales will suffer.

House Affordability in U.S. Rises to Record Levels, Tight Financing Still Constrains Sales

Posted by Michael Gerrity 05/25/11 10:27 AM EST

According to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI) report released this week, nationwide housing affordability during the first quarter of 2011 rose to its highest level in the more than 20 years it has been measured.

The HOI indicated that 74.6 percent of all new and existing homes sold in the first quarter of 2011 were affordable to families earning the national median income of $64,400. This eclipsed the previous high of 73.9 percent set during the fourth quarter of 2010 and marked the ninth consecutive quarter that the index has been above 70 percent. Until 2009, the HOI rarely topped 65 percent and never reached 70 percent.

Low interest rates are making houses in most markets in the US very affordable on a payment basis. Of course, prices in many markets are still too high, but the ability to obtain extremely cheap debt is making the large mortgage balances manageable.

Despite how inexpensive it is to borrow money right now, nobody seems to be doing it.

Mortgage originations down 35% in first quarter

by KERRI PANCHUK -- Tuesday, May 31st, 2011, 3:08 pm

Mortgage originations in the first quarter fell 35% to $325 billion, breaking three consecutive periods of growth and threatening to plunge the market back to 2000 levels, according to a report from Inside Mortgage Finance.

The first-quarter drop is the worst experienced since the onset of the recession when mortgage originations plummeted 31.5%, according to a new research report from Federal Reserve Bank of Cleveland researchers Yuliya Demyanyk and Matthew Koepke.

The same report cites Mortgage Bankers Association projections which estimates mortgage originations could fall to $1.05 trillion in 2011, the lowest level in 11 years.

The report blames a decline in refinancings for the dip in originations. Since refinancings generally contribute to higher origination activity, a drop-off in that segment negatively impacts originations as a whole.

The Cleveland Fed Bank report concludes that the only way around declining activity in the refinance segment would be to generate more activity in new home originations—a development the report doesn't foresee when considering the current lull in home starts and the state of the overall housing market.

Write to Kerri Panchuk.

With a long and deep recession at the conclusion of a massive borrowing binge my US consumers, very few people qualify for mortgages. Since interest rates have been low for a long time now, everyone who can refinance already has. As the Cleveland Fed noted, the prospects for increasing new home originations isn't very promising.

Americans Shun Cheapest Homes in 40 Years as Ownership Fades

By Kathleen M. Howley -- April 19, 2011, 9:12 AM EDT

April 19 (Bloomberg) -- Victoria Pauli signed a one-year lease last week to stay in her rental home in Fair Oaks, California. She had considered buying in the area, where property prices have slumped 57 percent since a 2005 peak.

In the end, she decided it wasn’t worth it.

“I know people who have watched their home values get cut in half, and I know people who are losing their homes,” said Pauli, 31, who works as a property manager for a real estate company. “It’s part of the American dream to want to own your own home, and I used to feel that way, but now I tell myself: Be careful what you wish for.”

Those are the kind of statements that bring out my contrarian instincts. In markets down more than 50% from the peak, prices are generally much lower than rental parity. People in those markets are paying a premium to rent to avoid what they fear is downside risk. Most of the decline has already occurred, and saving money versus renting is a strong inducement to purchase a home. People in beaten down markets are reacting in fear when they should be seizing opportunity.

In markets like Irvine where prices are off by about 25% and most properties are still trading above rental parity, renters still save money, and the likelihood of further declines is higher. An attitude of wait-and-see is appropriate particularly since the financial incentive favors renting rather than owning.

The most affordable real estate in a generation is failing to lure buyers as Americans like Pauli sour on the idea of home ownership. At the end of 2010, the fourth year of the housing collapse, the share of people who said a home was a safe investment dropped to 64 percent from 70 percent in the first quarter. The December figure was the lowest in a survey that goes back to 2003, when it was 83 percent.

After five years of falling prices, I am amazed that 64% of respondents still perceive a house as a safe investment. What would it take for those people to say it's unsafe?

“The magnitude of the housing crash caused permanent changes in the way some people view home ownership,” said Michael Lea, a finance professor at San Diego State University. “Even as the economy improves, there are some who will never buy a home because their confidence in real estate is gone.”

Worse Than Depression

Historically, homes have been a safer investment than equities. During 2008, the worst year of the housing crisis, the median U.S. home price declined 15 percent, compared with a more than 38 percent plunge in the Standard & Poor’s 500 Index.

Americans stay in their homes for a median of eight years, according to the National Association of Realtors in Chicago. Someone who bought a home in 2002 and sold in 2010 saw a 4.8 percent increase in value, based on the annualized median price measured by the group. The average annual gain in the past 20 years was 4.2 percent.

There is another NAr statistic that serves their purposes now, but in years to come, it will not. Wait until we have the 2006 to 2014 comparison. That one will be brutal.

Falling prices have made real estate the best buy in at least four decades. Housing affordability reached a record in December, according to National Association of Realtors data that go back to 1970. The group bases its gauge on property prices, mortgage rates and the median U.S. income.

Despite the fact that much of the NAr data is manipulated bullshit, housing affordability is near its record high, particularly in markets like Las Vegas where you have the unique combination of prices from 15 years ago and very low interest rates.

The median U.S. home price tumbled 32 percent from a 2006 peak to a nine-year low in February, data from the Realtors show. The retreat surpassed the 27 percent drop seen in the first five years of the Great Depression, according to Stan Humphries, chief economist of Zillow Inc., a Seattle-based real estate information company.

For real historical accuracy, the big plunge in real estate prices occurred prior to the Great Depression during the severe recession of the 1910s. They fell again during the mid 20s when the Florida land boom went bust. And during the Great Depression, many people lost their homes in foreclosure, but prices were already beaten down from the turmoil of the two decades preceding. The Robert Shiller chart shows the decline of the 1910's clearly.

Ironically, it was financial innovation of a sort that propelled prices back to their historic trendlines after World War II. What was that innovation? The widespread use of the 30-year fixed rate mortgage with a 20% down payment. Prior to that most loans were interest-only with a 50% down payment requirement. If the real estate community is complaining about 5% down payments, imagine what would happen to the housing market if 50% down became the norm.

Not Risk-Free

“If we’ve learned anything from this mess, it’s that housing is not a risk-free investment,” said Michelle Meyer, a senior economist at Bank of America Merrill Lynch Global Research in New York. “Everyone knows someone underwater in their mortgage or struggling to sell a home.”

About 11 million U.S. homes were worth less than their mortgages at the end of 2010, according to CoreLogic Inc., a Santa Ana, California-based real estate information company. An additional 2.4 million borrowers had less than five percent equity, meaning they’ll be underwater with even slight price declines, according to the March 8 report. The two categories add up to 28 percent of residences with mortgages.

Nearly one in three. It reminds me of the speech they give incoming freshmen in college. Look at the person sitting to your left and to your right. One of those people will not graduate. Well, any homeowner who isn't underwater need only look at his neighbor to the left or neighbor to the right to see someone who is underwater. 

... Improving Employment

“We expect that purchase activity will pick up slowly as the improvement in the job market eventually leads to greater willingness to buy,” the mortgage bankers group said.

Willingness isn't the problem: meeting the qualification standards is. The unemployed must find work, then they must maintain it for two years before someone will give them a loan. And that assumes they didn't wipe out their reserves while they were unemployed and damage their credit.

Borrowing costs are at historic lows. The average U.S. rate for a 30-year fixed mortgage was 4.69 percent last year, the lowest in annual data going back to 1972, according to mortgage financier Freddie Mac, based in McLean, Virginia. The rate in March was 4.84 percent, the company said.

By 2012’s fourth quarter, the average fixed rate may rise to 6 percent, according to the Mortgage Bankers Association.

I've been predicting higher interest rates for quite some time, but the lack of demand and ongoing mortgage debt deflation is forcing rates downward.

I have been contemplating the meaning of the chart above. As long as mortgage debt levels are elevated about collateral value, banks have two options: (1) write off the debt to reduce it to the value of the housing stock, or (2) make debt so inexpensive that people can afford to keep their bad debt alive. Obviously lenders are choosing the latter. It's the approach the Japanese took since the early 90s, and housing has been deflating there ever since.

Since lenders are trying to minimize their losses on paper, they are offering debt at super low prices. They can underwrite loans at low rates as long as the federal government guarantees it all and investors don't find a better place to park their money. Right now, competing investments with more risk are not attractive to investors, so they are putting their money into 4.5% loans. Investors will probably stop doing that once there are more economic opportunities. I thought the October 2010 selloff was a sign that the economy was mending and interest rates would keep rising. So far, that has not been the case.

“If you can jump through the hoops to get a mortgage, and there will be hoops, then this is an amazing time to purchase real estate,” said Robert Stein, a senior economist at First Trust Portfolios LP in Wheaton, Illinois, and the former head of the Treasury Department’s Office of Economic Policy. “There are going to be a lot of people kicking themselves a few years from now because they didn’t take advantage of the low prices and the low mortgage rates.”

Tighter Lending

Cheap financing hasn’t done enough to boost home sales in part because lenders are being more selective with applicants, according to Federal Reserve Chairman Ben Bernanke. Fed policy makers have described the housing market as “depressed” in statements following their last eight meetings.

More selective with applicants! LOL! You mean banks aren't loaning home to anyone with a pulse? Shocking!

“Although mortgage rates are low and house prices have reached more affordable levels, many potential homebuyers are still finding mortgages difficult to obtain and remain concerned about possible further declines in home values,” Bernanke said in Congressional testimony last month.

The share of banks reporting tighter mortgage standards in the first quarter rose to 16 percent, the highest since 1991, according to the Fed’s Senior Loan Officer Survey.

Standards are tightening and will continue to tighten until houses are affordable under conservative lending metrics. Bankers don't become aggressive until they stop losing money. The credit cycle exacerbates the economic cycle by making booms larger and busts worse.

Federal regulators are proposing rules that may make lending even more stringent, including a requirement that banks and bond issuers keep a stake in home loans they securitize if the mortgage borrowers have imperfect credit and down payments of less than 20 percent. Borrowers who don’t meet the criteria would pay higher rates to compensate lenders for risk.

Fannie Phase-Out

As mortgage requirements rise, rates could follow as Congress and the Obama administration consider phasing out government-controlled Fannie Mae and Freddie Mac. The companies hold federal charters mandating they increase the availability of mortgages through securitization. In Fannie Mae’s case, that order goes back to the Great Depression, when it was created as part of President Franklin D. Roosevelt’s New Deal.

“There are a lot of unsettled policy issues on the table right now that, if they’re not handled right, could further set back the housing market,” said Richard DeKaser, an economist at Parthenon Group in Boston. “Fannie and Freddie have historically lowered interest rates, and eliminating them will increase the cost of home ownership.”

I'm not sure if that is an argument to keep them or eliminate them. I think he was trying to make the case for keeping them around, but providing artificial props to the housing market with risk to the US taxpayer is a bad idea, and the GSEs should go away.

Lowest in Decade

The U.S. home ownership rate dropped to 66.5 percent in the fourth quarter, the lowest in more than a decade, according to the Census Department. The rate probably will retreat another percentage point by 2013, according to Meyer, of Bank of America Merrill Lynch, and Lea, the finance professor. That would put it back to a 1997 level.


“People will still aspire to own their own homes,” Lea said. “They’ll just be a lot more practical about it.”

Pauli, the California renter, said she has no such aspirations, at least for now. She pays $1,500 a month for her three-bedroom, single-family home with a two-car garage, granite kitchen countertops and stainless-steel appliances. Her neighbors who bought before the housing crash typically have mortgage payments of about $2,800 a month, Pauli said.

“I don’t see myself purchasing, even with all the great prices I see,” Pauli said. “Going to bed every night worrying about your home value doesn’t sound like a good time to me.”

And Pauli will continue to feel that way until owning becomes less expensive than renting. Rental parity is a tipping point, and once prices fall below that level, fence sitters get off the fence and buy properties. The specter of price declines is less powerful than the desire to lower monthly housing costs, except for those people with a short ownership tenure.

Not a short sale... yet

A property owned for the last 15 years by one family would not ordinarily be a short sale candidate. With the $169,000 sales price and a $152,100 first mortgage, it is reasonable to believe their mortgage balance should be less than $100,000.

Of course, this is Irvine, California, so their loan balance is over $100,000; in fact, the last mortgage on the property was for $399,000. Instead of having $300,000+ in equity, these owners have limited ability to lower their price before they will be a short sale statistic.

When a HELOC abuser makes a sale for a $268,100 profit and only gets a $26,810 check at closing, how do they feel? Does it cross their mind that they pissed away a quarter million dollars? Any regrets?

Irvine House Address ...  2 SOLANA Irvine, CA 92612     

Resale House Price ......  $465,000

House Purchase Price … $169,000
House Purchase Date .... 10/1/1996

Net Gain (Loss) .......... $268,100
Percent Change .......... 158.6%
Annual Appreciation … 6.9%

Cost of House Ownership
$465,000 .......... Asking Price
$16,275 .......... 3.5% Down FHA Financing
4.54% ............... Mortgage Interest Rate
$448,725 .......... 30-Year Mortgage
$97,899 .......... Income Requirement 

$2,284 .......... Monthly Mortgage Payment 
$403 .......... Property Tax (@1.04%)
$0 .......... Special Taxes and Levies (Mello Roos)
$97 .......... Homeowners Insurance (@ 0.25%)
$516 .......... Private Mortgage Insurance
$384 .......... Homeowners Association Fees
$3,684 .......... Monthly Cash Outlays

-$368 .......... Tax Savings (% of Interest and Property Tax)
-$587 .......... Equity Hidden in Payment (Amortization)
$27 .......... Lost Income to Down Payment (net of taxes)
$78 .......... Maintenance and Replacement Reserves
$2,836 .......... Monthly Cost of Ownership 

Cash Acquisition Demands
$4,650 .......... Furnishing and Move In @1%
$4,650 .......... Closing Costs @1%
$4,487 ............ Interest Points @1% of Loan
$16,275 .......... Down Payment
$30,062 .......... Total Cash Costs
$43,400 ............ Emergency Cash Reserves
$73,462 .......... Total Savings Needed

Property Details for 2 SOLANA Irvine, CA 92612
Beds:  2
Baths:  2
Sq. Ft.:  1404
Property Type: Residential, Condominium
Style: One Level
View: City Lights, Park/Green Belt, Trees/Woods
Year Built:  1975
Community:  Rancho San Joaquin
County:  Orange
MLS#:  S659422
Source:  SoCalMLS
Status:  Active
Location!Location! Enjoy warm southern sun exposure, amazing golf course views, magnificent large old trees and endless golf course lawns. Charming home in the prestigious golf course community of Rancho San Joaquin. Premium private corner, ground location on the Green Belt single story home boasting amazing views and a very light spacious open floor plan. Two spacious Master Bedroom Suites. Two patios to enjoy while entertaining and relaxing. Enjoy a quiet Community Pool and Spa, inside washer and dryer and detached two car garage. Close to Mason Park, Shops, Restaurants, UCI, University High and much much more. Award Winning School District! Washer, Dryer and Refrigerator included. STANDARD SALE! A MUST SEE! 

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