Realtors & Mortgage Brokers: Toughest Year for Housing Markets Since 2010 Ahead
Our housing markets are now heading directly into the perfect storm and those in the real estate and mortgage industries would be well advised to get prepared for the downturn now.Â I dislike being an alarmist, but I am officially sounding the alarm.
This past September signified the fourth straight month of a decline in existing home sales, while mortgage interest rates hit two-year highs.Â The Mortgage Bankers Association index of mortgage activity is now at its lowest point since November of 2008, which was probably the nadir of the financial crisis and resulting Great Recession.
In the early part of September, Bloomberg reported that Bank of America, the second-largest U.S. lender, had announced that it was eliminating about 2,100 jobs and shutting down 16 mortgage offices citing lower loan demand as the reasons for the layoffs. Â And Wells Fargo & Co., the biggest U.S. home lender, plans more than 2,300 job cuts, announcing in September that it expects to originate 30 percent fewer home loans this quarter.
The bottom-line is that, according to a recent study by Goldman Sachsâ€™, purchase mortgage origination has fallen from $1.5 trillion in 2005, to around $500 billion in each of last two years.Â Aggregate demand is simply down for what should be obvious reasons (that Iâ€™ll describe anyway,) and now that the pressure is on to reduce stimulus programs, prices will soften and once again begin to fall.
And thatâ€™s the good news.
What is pushed downâ€¦ must go back up.
And when it does, what went upâ€¦ must come back down.
As I explained in an article this past August, at the end of 2010, the interest rate on a 30-year mortgage was 4.97%.Â Over the next 28 months actions taken by the Fed pushed that rate down and as of last April, it reach a low of 3.42%.Â Quite predictably, not only was this last refi boom bornâ€¦ but in addition demand for homes went upâ€¦ and prices followed.
But thatâ€™s all over nowâ€¦ in fact, it ended last July.
It was the third week of June when Fed Chari Bernanke dropped the infamous and not-so-subtle hint that the Fed would soon be â€śtaperingâ€ť off on its quantitative easing program, and almost overnight, interest rates started rising.Â June was also the month that FHA loans became more expensive and somewhat harder to get.
On August 23, 2013, the Census Bureau reported that in July, new residential sales dropped like a hot rock, falling by 13.4%, and about that decline Bloomberg said, â€śLast monthâ€™s decline was the biggest since May 2010,â€ť which was when the homebuyer tax credit stimulus program came to an abrupt end causing the housing market to fall off a cliff the last time around.Â Are you seeing a pattern here (because you certainly should be)?
By September of this year, the index of pending home sales recorded the largest monthly decline (down 5.6 percent, month-over-month) since June of 2010 as well.Â This index, referred to as the â€śPHSI,â€ť tracks home re-sales under contract, and because the majority of these become existing home sales a month or two later, this index is the one to use when predicting actual home sales activity.
The bottom-line is that weak existing home sales combined with the precipitous drop in pending home sales is more than just a â€śleading indicator,â€ť as economists would call itâ€¦itâ€™s what youâ€™d call a lead pipe cinch.
And thatâ€™s far from all of the bad news for 2014â€¦
Even if Chairman Bernanke wanted to goose the markets as he did beginning in December of 2010, this time out he wouldnâ€™t be able to get it upâ€¦ or actually get it down low enough, which is what long-term interest rates would have to do to change anything in any significant way.
Last year was a fantastic year for refinancing, but thereâ€™s just no way weâ€™re going to see rates back down at 3.5 percent, like they were last Aprilâ€¦ let alone lower, which is where theyâ€™d have to go to stimulate another such boom in refinancing.Â No, Iâ€™m afraid youâ€™ve refinanced everyone who could refi at least once over the last few years, and thatâ€™s the end of that for quite some time.
You also have to keep in mind that since 2009, cash sales to investors represented a third of all sales on average, and in some areas investors were responsible for up to 60 percent of all real estate transactions.Â In the past, investors were responsible for only 10 percent of home sales, so as Iâ€™ve been saying since 2009â€¦ this is not a real estate market at least not in the normal sense of the word, â€śmarket.â€ť
That level of investor activity is not anywhere close to sustainableâ€¦ and investors are herd animals, when something else comes along they tend to depart en masse.
It wasnâ€™t a â€śrecovery.â€ťÂ Fooled by stimulusâ€¦ again.
To call what weâ€™ve been through these last 28 months or so a â€śrecovery,â€ť is almost like referring to a patient in the hospital â€śrecovering,â€ť because his doctor just gave him a shot of morphine.Â Oh, heâ€™s feeling better, thereâ€™s no question about that, but â€śrecovering?â€ťÂ No.Â In fact, itâ€™s just as likely that heâ€™s dying.
Do you remember May/June of 2010, when the homebuyer tax credit ended and the housing market went off a cliff just like they did in the final scene of the movie â€śThelma & Louise?â€ťÂ I wrote about it at the time: â€śWorst June Ever for New Home Sales.â€ťÂ Among other things, I saidâ€¦
â€śFor the last year, at least, Iâ€™ve been saying that there is no real estate marketâ€¦ that homebuyer tax incentives and the Fedâ€™s buying of mortgage backed securities, along with FHA acting as the new sub-prime, were propping things up artificially and that when that stimulus ended, housing prices would commence falling through the floor.â€ť
Well, just as we saw in June of 2010, the market hasnâ€™t recovered, itâ€™s merely been a propped up mirage of a market made possible by Fed-inspired ultra-low rates, unprecedented numbers of all-cash sales by investors who bid up limited inventories kept artificially low by REOs not yet on the market.Â There simply havenâ€™t been many normal market buyers or normal market sellers.
Now, with rates headed only higher, investors pulling back fast as home prices soften before their inevitable fall, and inventories retracting even furtherâ€¦ down 3.3 percent year-over-year in the third quarter, according to Realtor.comâ€¦ and it doesnâ€™t take much of an economist to read the writing on the wall the housing market has already hit.
Even in California, already the median price for a home fell 2.8 percent since last month, and September sales of existing homes were down 2.6 percent year-over-yearâ€¦ down 5 percent as compared with the prior month.Â On the East Coast, the numbers were marginally worse.
Where is the inventory?
Well, a fair amount of it can be found in the number of vacant homes.Â The vacancy rate of 10.2% is high relative to pre-bubble vacancy rates at both the national level and in 86 of the 100 largest metro areas.Â Itâ€™s also still close to the peak vacancy rate from Q3 of 2010, which was 11%.
High vacancy rates matter to the housing market, because it makes builders hesitant or unwilling to build new homes, and in fact, in the 10 metro areas with the highest vacancy rates, construction is running at only 48% of its historical norm.
According to the Census Bureau, about 53.5 percent of vacant homes are currently being held off the market.Â No one seems to know exactly why, but from what Iâ€™ve been told by my servicer contacts, in many instances itâ€™s because they are in need of significant repairs before they can be put on the market (my guess is that people were not happy when they moved outâ€¦ surprise, surprise.)
Eventually, some percentage of those homes should come onto the market, but Truliaâ€™s chief economist, Jed Kolko, is warning that demand may not materialize in line with the numbers of homes.
Where has the demand gone?
First of all, the demand hasnâ€™t gone anywhere recentlyâ€¦ it left the building in 2008 and it hasnâ€™t returned, nor will it until we fix what was so badly broken.Â The percentage of underwater mortgages is still off the charts.Â Different groups like to spin this situation to varying degree, but everyone pegs the percentage between 25 and 50 percent.
The point here is that the numbers are all averages.Â Ever see the cartoon of the man drowning in the middle of a large lake, while the sign by the shore reads: â€śAverage Depth 3 Feet?â€ťÂ No?Â Well, thatâ€™s because I made it up, but the point is the same.Â The guy is drowning in 100 feet of water, and yet the lakeâ€™s average depth is only three feet.Â Averages can be deceiving.
Underwater homeowners are gone from the housing market and since normally, â€śbuy-up buyers,â€ť those selling a home in order to buy another, represent roughly two-thirds of home buyers, you donâ€™t need a calculator to figure out that demand for housing has been dramatically reduced by the number of homeowners that remain solidly underwater.
And then there are those that are â€śeffectively underwater,â€ť meaning that when you factor in real estate commissions, theyâ€™re underwaterâ€¦ and then the rest that simply canâ€™t sell for enough to provide them with enough to make the requisite 20 percent down payment in order to qualify for their next loanâ€¦ assuming their credit score and income are high enough to get that next loan.
No matter how you want to slice it, there are a whole lot of people that have been removed from the aggregate demand for residential real estate in this country.Â Itâ€™s as if theyâ€™d been abducted by aliens and transported to the planet Trantorâ€¦ if you remember your Isaac Asimov.
What about first time buyers?
There are those who will tell you that some combination of first time buyers and investors will make up for the demand whatâ€™s been lost, but thereâ€™s simply no chance of that happening.
The just released U.S. Census data shows that in 2013, household formation totaled about 380,000 year-to-date in the third quarter.Â And thatâ€™s significantly lower than the historical annual norm of about 1.1 million.
Do the mathâ€¦ household formation is running just under 35 percent of what itâ€™s been anytime in recent history.Â I mean, I knew intuitively that it was low, but I had no idea it was that low.
In case that doesnâ€™t sufficiently frighten you, consider that household formation is what makes our GDP what itâ€™s always been, because itâ€™s when people form a household that they really start buying stuff.Â Until then, most guys are eating hot dogs over the sink.Â Once we form a household, we start buying things we never even considered buying before like carpeting, washers and dryers, tile, drapes, food processors, new cars, guest linensâ€¦ you knowâ€¦ stuff.
The fact is, homeownership among those between the ages 25-44 has declined at double the rate of the overall decline since 2008.Â Why?
Well, thereâ€™s the issue of student loan debt, the need for 20 percent down payments and 760 credit scoresâ€¦ unless weâ€™re talking FHA loans, in which case weâ€™re talking about increasing insurance premiums and tightening underwriting requirements.
Thereâ€™s also the relatively higher unemployment numbers among the younger demographics, twice as high as the national average and worse, in many areas.Â And then thereâ€™s the fact that young people ARENâ€™T STUPID, so one might imagine that since millions of them have watched their elders either lose homes or be at risk of losing homes, Iâ€™d have to venture a guess that many are in no hurry to repeat the apparent mistakes of the past.
Iâ€™m sure a large part of this drop in household formation is related to student loan debt and the lack of decent paying jobs.Â I mean, you really have to be in some fairy-tale-Tom-Hanks-Meg-Ryan kind of love to marry someone who tells you he or she is coming into the marriage owing $150,000 in student loan debt.
Basically, youâ€™d be starting your married life with a partner who owes as much as a mortgage, but thereâ€™s no home to live in thatâ€™s attached to the debt.Â If it happens, itâ€™s either true love, or sheer idiocyâ€¦ thereâ€™s just no middle ground there.
Now a look at the median income, unemployment and under-employment in America today.
According to the just released report from the U.S. Census Bureau, the median household income in this country, which for many has been flat at best for well over a decade, has steadily declined for the last five consecutive years.
According to the report, the high point for median household income was back in 1999, when it was $56,080, and it almost returned to that level in 2007 when it reached $55,627.Â Now check out whatâ€™s its done since thenâ€¦
Â 2007: $55,627
Thatâ€™s a drop of roughly $400 a month in the median income, and itâ€™s happened as the cost of just about everything has increased.Â Oh, I knowâ€¦ Chairman Bernanke claims that inflation is low, but have you been shopping lately?Â Obviously, Mr. Bernanke has not.
By the way, according to the brilliant ShadowStats.com, if inflation were calculated the same way it was in 1980â€¦ our inflation rate today would fall between 8-10 percent, which basically means that every decade prices for things doubleâ€¦ while our incomes are in decline.Â Maybe thatâ€™s why three-quarters of the country is living paycheck-to-paycheck, and all but the top one percent or so, have close to no savings.
Unemployment and under-employmentâ€¦
The unemployment picture in this country is horrific, and even more troubling is the fact that weâ€™re doing essentially nothing about it.Â The dialog in Washington continues to be centered on how to reduce spending in order to cut the deficit, and job creation certainly isnâ€™t a byproduct of reduced federal spending.
Meanwhile, not only do we have millions more unemployed than weâ€™ve ever had following a recession, but weâ€™ve got over 8 million under-employed, meaning that they are working part-time, but want full-time jobs.Â In August alone, private sector jobs fell by 278,000, and yet to hear the administration tell itâ€¦ weâ€™re recovering more and more every day.
Forget about the â€śheadlineâ€ť unemployment rate of 7.3%, because it would be over 10%, except that what is referred to as â€śthe participation rate,â€ť is now at its lowest point in 35 yearsâ€¦ the lowest point since 1979.
So, that means that the drop in the unemployment rate that weâ€™ve seen over the last two years has largely been, as Mish Shedlock phrases it, â€śa statistical mirage.â€ťÂ Itâ€™s not that more people are working, itâ€™s that more people have stopped looking for work, and therefore are no longer counted in the headline unemployment rate.
According to Mishâ€¦ â€ś…if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is calculated in U-6.â€ťÂ
(Headline unemployment quotes the percentage from â€śU3,â€ť by the way.)
â€śU-6 is much higher at 13.8% and both numbers would be much higher still, were it not for millions dropping out of the labor force over the past few years.â€ť
A very technical paper written by researchers from the Federal Reserve Board, Recent Developments and Implications for the Conduct of Monetary Policy in the U.S. which was presented at a research conference hosted by the International Monetary Fund last weekâ€¦ showed convincing and credible evidence that by tolerating high unemployment for so long in this country, we have inflicted enormous damage to our long-term prospects for economic growth.
The paper begins by statingâ€¦
â€śIn the United States, the collapse of a housing market bubble and the ensuing financial crisis led to the steepest drop in real GDP and the largest increase in the unemployment rate since the Great Depression. The fallout from these events on credit availability, balance sheets, and confidence continues to weigh on aggregate demand, restraining the pace of recovery in the housing market, firmsâ€™ willingness to hire and invest, and spending by consumers and state and local governments. In addition, these demand effects have probably diminished the productive capacity of the economy.â€ť
I canâ€™t really recommend that everyone read itâ€¦ as I said, itâ€™s highly technical writing, but you can take my word for it that itâ€™s as horrifying a thesis as I could ever imagine reading about this country.Â Paul Krugman attended the conference and, writing for The New York Times, had the following to say about the paperâ€™s conclusionsâ€¦
â€śIs there any chance of reversing this damage? The Fed researchers are pessimistic, and, once again, I fear that theyâ€™re probably right. America will probably spend decades paying for the mistaken priorities of the past few years.Â Itâ€™s really a terrible story: a tale of self-inflicted harm, made all the worse because it was done in the name of responsibility. And the damage continues as we speak.â€ť
Anything else?Â Unfortunately, yes.
Remember HELOCsâ€¦ Home Equity Lines of Credit?Â They used to be quite popular.Â Essentially, they are second mortgages with flexible withdrawal terms and floating rates, that start out requiring only interest payments, but after 10 years, have mandatory re-sets that require repayments of interest and principal.
The reset payments on these credit lines can result in payments that go up $500 to $600 or more per month in some cases, and if borrowers canâ€™t make the fully amortizing payments the bank can demand full payment and foreclose on the house.
According to federal financial regulators, about $30 billion in home equity lines are due for resets in 2014.Â In 2015, there are $53 billion worth of these loans resetting, and in 2018, there are a jaw-dropping $111 billion in HELOCs that will see payments increase.
As reported by the Miami Herald, Amy Crews Cutts, chief economist for Equifax, calls this a looming â€śwave of disasterâ€ť because large numbers of borrowers will be unable to handle the higher payments. This will force banks to foreclose, refinance the borrower, or modify their loansâ€¦ and we know how thatâ€™s likely to go, donâ€™t we?
And that is on top of the ongoing foreclosure crisis that continues to see no meaningful abatement, regardless of what nonsense you may read in the press on any given day.Â Iâ€™ve been writing about the foreclosure crisis for five years now and the numbers donâ€™t indicate any meaningful reduction in the number of foreclosures ahead, nor have I experienced any sort of decline in the numbers of call and email I receive from homeowners at risk of foreclosure who are trying to save their homes.
Just consider that although itâ€™s universally acknowledged that HAMP has failed in numerous ways, essentially nothing has been done to address its shortcomingsâ€¦ for the most part, it remains the same as it was in 2009.Â So, what else would anyone expect but more of the same outcomes going forward?Â When you fail to fix something, it remains brokenâ€¦ it doesnâ€™t just fix itself.
You knew this would happen, didnâ€™t you?Â You knew that as a result of the mortgage meltdown that began in the second half of 2006 and got much worse as time went by, that weâ€™d end up with some overly draconian rules governing the origination of mortgages, didnâ€™t you?
Well, I sure did.Â It was inevitable.Â You donâ€™t go through what weâ€™ve been through these last five years without passing some overly onerous legislation that ends up hurting as much or more than it helps.Â The pendulum always swings too far after a crisis.
So, enter the new QM and QRM mortgage origination rules.Â Iâ€™m sure youâ€™ve heard quite a bit about them, and this isnâ€™t the place to go into details, but letâ€™s just say the following about the Consumer Financial Production Bureauâ€™s new rulesâ€¦
- They wonâ€™t make it any easier for borrowers to get mortgages.
- They will likely end up costing borrowers more for their mortgages.
- The 43% back-end Debt to Income ratio will take some borrowers out of market in 2014.
- The promise of more paperwork and tougher underwriting may scare some away.
- Ability-to-Repay ruleâ€™s requires that lenders obtain and verify a wide range of documents to ensure borrowers have the means to repay their loans.Â This new rule, in particular, is especially hard on self-employed and others whose income is harder to verify.
- Due to the legal protection offered by either safe harbor or rebuttable presumption, depending on the loan pricing, thatâ€™s available to lenders, itâ€™s likely that many will stay within the QM boundaries for most of the loans they originate.
- Will examiners and the secondary market, both of which may favor QMs, cause some creditworthy borrowers with a debt-to-income ratio above the QM’s 43% limit to be passed up or pay more for a mortgage?
- Will creditors providing only QMs under ability-to-repay be at risk for fair-lending lawsuits?
- What will the impact of the 3% cap on points and fees be to mortgage brokers.
- Will the new rules affect the availability of jumbo loans, which, because they donâ€™t conform with the Fannie and Freddie loan limits, would not be considered qualified mortgages if the borrowerâ€™s debt-to-income ratio exceeded 43 percent?
Most of these questions canâ€™t be answered with any certainty today, although there are certainly no shortage of opinionsâ€¦ but sweeping changes like these implemented at times like these, donâ€™t make anyone think lending will be getting any easier in 2014â€¦ that much is certain.
To give you an indication of things to come, American Banker recently conducted a survey of lenders and it showed that 60% of respondents reported that they plan to suspend certain mortgage loan product offerings at least until they are assured they are in compliance, or take more severe action to delay or reduce mortgage activity, pending their ability to comply.
n addition, as to qualified mortgages, 21% of respondents say they will reduce nonqualified mortgage loans, and 20% said they would only offer QM loans.
All told, there should be no question about itâ€¦ whatâ€™s ahead for the housing and mortgage markets is going to be anything but business as usual.Â
Up until now, weâ€™ve survived on a fairly steady diet of stimulus, the lowest of interest rates, investors flush with cash that had nowhere else to go, and FHA as the new sub-prime, but that was never a true housing marketâ€¦ it was never going to last forever.
So, now the change is upon us.Â And not that itâ€™s the end of the world, by any means, but it is going to get harder for a while before it gets any easier.Â Better to be prepared.Â
SO, WHATâ€™S YOUR PLAN?
How are you, as a Realtor or mortgage broker planning on getting through 2014?Â Just hoping for the best?Â Because â€śhopeâ€ť is not a strategy.
You need to do more than just hope.Â Youâ€™re going to need to do more to earn each clientâ€¦ provide more valueâ€¦ differentiate yourself from othersâ€¦ be memorableâ€¦ establish yourself as a true expertâ€¦ build loyalty.Â So, how are you going to do itâ€¦ perform above the rest in a tough market?
Well, obviously thereâ€™s not one answerâ€¦ thereâ€™s no silver bullet.Â But, you can do it by being that better in two key areas:
- â€śKnowledge Transfer,â€ť a term used and skill mastered by the largest and most sophisticated professional service firms in the world.
- â€śValue Add Philosophy,â€ť a concept that all successful enterprises learn to embrace in order to compete effectively in a crowded space with similar products and services.
Â 1.Â Â Â Â About Knowledge Transferâ€¦
Information todayâ€¦ is free.Â It has no value.Â With a few clicks on my smart phone I can call up more information than is contained in the Library of Congress.Â But, when information is processed by the human brain it becomes knowledgeâ€¦ and knowledge is very highly valued, especially during times of significant change.
Given the option, your customers donâ€™t want to just rent your services, for the same money, theyâ€™d much prefer to buy the transfer of knowledge, because that makes them smarterâ€¦ that increases their own capabilities.Â When interaction with a professional makes us smarter we return to that person again and again, and we refer others to that professional as well.
Think about going to an accountant to have your taxes prepared. Â If that accountant just prepares your returns, thatâ€™s fineâ€¦ as long as it doesnâ€™t cost too much.Â But, the accountant that in addition, transfers knowledge to you and thus makes you smarter about tax planning in the future, youâ€™ve received far more value than merely getting your tax returns prepared for filing.
Chances are you wonâ€™t go anywhere else to have your returns prepared after that, even if you see an ad for another accountant that offers to prepare your return for less, and it becomes much more likely that youâ€™ll recommend your accountant to others.
The same sort of thing is true about doctors, lawyers, insurance agents, investment advisorsâ€¦ all types of professionals benefit from being more highly skilled at knowledge transfer.
Â 2.Â Â Â Â About a Value Add Philosophyâ€¦
A Value Add philosophy in business dictates that you are always looking to compete by delivering more value to your customers than what is provided by your core product or service.
Car dealerships offer free oil changes or loaner cars for use by customers when their cars are in for serviceâ€¦ the Apple Store provides its Genius Bar to help people better use their hardware and software productsâ€¦ physicians and medical groups offer all sorts of educational programs, such as weight loss and smoking cessation clinicsâ€¦ or Starbucks offering wireless Internet accessâ€¦ today, all sorts of businesses have recognized the need to deliver value to customers beyond what it delivered by their core products and services.
When it comes to Realtors and mortgage loan originators, however, historically they only work with buyers and sellersâ€¦ or rather, people who are ready and/or qualified to buy or sell a home.Â An individual not ready to transact business for whatever reason is simply not viewed as a customer, and therefore generally receives no value from interacting with a Realtor or mortgage broker.
Maybe that was fine in the past, when there was no shortage of buyers or sellers, but going forward, thatâ€™s not going to be the case.Â Weâ€™re going to be in a period of reduced supply and demand and a transition to new lending rules.Â And if you donâ€™t think about the ways that you could deliver additional value to prospective customers, someone else will.Â And as a result, they will be taking away your future customers without you even knowing about it.
To develop your own value add, you need to think about what your customers in this more difficult market would wantâ€¦ what would they get value from that you could provideâ€¦ and what knowledge that you have and theyâ€™d want, could you develop ways to cost-effectively transfer?
Itâ€™s not easy to develop or master knowledge transfer or to create an effective value add program.Â But, these are things that that the most successful professionals learn to do, and often when market conditions left them no choice.
Of course, I have several ideas in that regard.Â In my professional life, Iâ€™ve developed hundreds of such programs for some of the largest companies in the world.Â You can contact me to talk about this issue further by sending an email to Mandelman@mac.com.Â And Iâ€™d like to hear what youâ€™re thoughts are about whatâ€™s to come as well.
Other than that, all I can say about whatâ€™s ahead isâ€¦ good luck is one thingâ€¦ but being smarter always makes you luckierâ€¦ at least thatâ€™s been my experience.