The Road To A Sustainable Housing Market
The highly anticipated restoration of the USDA’s single-family rural housing program that guarantees home loans for rural buyers was passed by the Senate on July 28 and is on its way to President Obama’s desk for signature. With the support of its members, the National Association of REALTORS® has vigorously lobbied to restore funding for the rural program since last March, and hailed this development as a great victory for rural home buyers.
I couldn’t agree more.
But before I go into why I support this legislation, I’d like to provide a little background on the USDA’s Single-Family Housing Guaranteed Loan Program and why I believe it can serve as a successful model for a much needed urban down-payment assistance program.
According to Wikipedia, the United States Department of Agriculture was established by President Abraham Lincoln on May 15, 1862 in order to help out the United States economy. Through Federal funding, its purpose was the collection of agricultural statistics and other agricultural purposes; President Lincoln called it the “people’s department.” For many years, the Department of Agriculture was crucial to providing concerned persons with the assistance they needed to make it through difficult periods, such as the Great Depression; this included loans for rural landowners.
Fast forward 148 years and what we have now is a robust program that in 2009 provided over 140,000 loans and $16.6 billion in grants to achieve homeownership and improve housing in rural areas. They also funded $11.2 billion for direct and guaranteed single-family housing loans to provide additional credit for affordable home loans. USDA loans used to be considered “farmers’ loans” but that is no longer the case. Rural America is home to about 50 million people, but only 6.5 percent of the rural work-force is directly employed in farm production. This means that USDA must support not only the farms, but also the communities that surround and support them.
In 2009, the USDA enacted changes that provided assistance to millions of homebuyers who did not have the down-payment funds required by conventional loan programs. USDA loans currently stand alone as the only zero-money-down program available to borrowers who have not served in the military. And like their conventional counterparts, the USDA program adheres to strict underwriting standards, assessing each borrower’s credit, income, and cash flow. As a result, the agency’s portfolio of loans has a low default and delinquency rate of 1.72% (compared to a 2%- 5% default rate for conventional loans and 15% for subprime).
Earlier this year, the USDA exhausted its $13.1 billion funding, leaving many qualified homebuyers with few-to-no financing options and putting a squeeze on our nation’s economy. Thankfully, the Federal Government recognized this fact and responded by passing legislation that increases the Rural Housing Service (RHS) commitment authority allowing guaranteed loans. The RHS is expected to announce new guidelines shortly after the president signs the bill; one anticipated change is a higher “guarantee fee” of 3.5% that can be folded into the mortgage and will enable the program to be self-sufficient.
Homeownership is historically an instrumental part of the U.S. economic engine, so it’s critical that we take measures to ensure that the housing market has a strong foundation for sustainability. I would argue that by creating a program similar to the USDA’s for city dwellers, there is the potential to bring in hundreds of thousands of homebuyers annually and billions of dollars in state and local taxes every year, as well as higher Federal Income Tax revenue (click here to read a detailed analysis).
The success of the USDA’s Single-Family Housing Guaranteed Loan Program proves that alternatives to conventional loan products can be successful and result in responsible, long-term homeownership with low delinquency rates. Now is the time to expand the market and create a down payment assistance program for urban homebuyers who face similar challenges to their rural counterparts. Perhaps it could be called the United States Down Payment Assistance program—or USDPA. Has a certain ring to it, doesn’t it?
As always, thanks for reading.
Lennox
The Homebuyer Myth of “Skin in the Game”
Last week, I posted a link to a proposal about a national first time homebuyer down payment assistance program. I’ve received many responses – including those who originally questioned it, but have since taken a further look and acknowledged its merits. And there are others who are still undecided. Ultimately, my goal is to stimulate conversation about ways that housing can support the U.S. economy while giving people the opportunity to realize the dream of homeownership.
Homeownership is historically an instrumental part of the U.S. economic engine, so it’s critical that we take measures to ensure that the housing market has a strong foundation for sustainability. What I would like to address today is some of the feedback that I’ve received from those who question the national down payment assistance program and suggest that it will put us right back where we were with the mortgage crisis.
There is a misconception that first time buyers who have “skin in the game”, meaning cash for a down payment, are less likely to default on a home loan than those without. The truth of the matter is that for decades the USDA has offered programs with 100% financing and the default rate on those loans is only 1.7%. The VA has a similar zero-down program and their default rate is 2.5%. FHA loans require a 3.5% down payment and their default rate is under 4%. According to the National Association of REALTORS, conventional loans, which require a 20% down payment, have between a 2% and 5% default rate depending on the specific loan type. The foreclosure rates tied to the subprime meltdown are nearly 15%.
Some first time homebuyers have saved the money needed for a down payment; others are fortunate enough to have family that is willing to gift them the funds. In both cases, most buyers are left with little savings following their home purchase; thus the emphasis on ensuring that buyers are well qualified. First time buyers that need down payment assistance are no different with the exception that over a 15 year period they will repay the DPA along with their mortgage. As such, those using down payment assistance typically purchase slightly less home than their counterparts in order to compensate for the DPA effect on financial ratios. The moral of the story is that we need to focus on the qualifications of first time homebuyers, not the source of their down payment.
The moral of the story is that we need to focus on the qualifications of first time homebuyers, not the source of their down payment.
One of the main arguments that I have heard in opposition to a national down payment assistance program is that it will lead to higher foreclosures because it does not require “skin in the game,” as mentioned earlier. I think that the USDA program alone proves that even with 100% financing, responsible, qualified homebuyers who use down payment assistance are no more likely to default on their mortgage than those who use conventional loan products. In fact, according to national statistics, in some cases they are less likely to do so.
It’s important for people to enter into homeownership with a clear understanding of the financial responsibilities that accompany this kind of purchase. Unlike the time of subprime mortgages, buyers need to be responsible, have stable employment, good credit, and a healthy debt-to-income ratio. Foreclosure rates go down even more if first time homebuyers have taken a course that educates them about the responsibilities of home ownership.
As I’ve said before, my proposal for a national down payment assistance program is not about getting people into homeownership at any cost. It’s about providing opportunities and educating people about the possibilities that exist for those who are qualified and considering buying a home for the first time.
As always, thanks for reading,
Lennox
The Key To Housing Sustainability
With the expiration of the Federal Housing Tax Credit we must ensure a continual stabilization of the housing and building industries, the engine that has pulled the U.S. economy out of every recession over the last 60 years. The benefits of a strong housing market are many, but unless we ensure that responsible first time homebuyers have access to the American Dream, we will continue to see a slowdown in this sector. In order to avoid a downturn, and the subsequent economic fallout, we must establish a responsible Federal Down Payment Assistance program.
Click here to read a White Paper that outlines the benefits of an effective DPA Program.
Thanks for reading,
Lennox
The New “Normal” In A Post-Boom Era
As we look back at the real estate boom, it’s clear that many of us got used to the idea of quick home price appreciation. Real estate speculation became a game not just for investors, but for anyone with some equity and the desire to move. As we become accustomed to the post-boom market, our expectations for home price appreciation need to evolve as well.
From 1980 through 2010 (including six months forecasted for this year), home values appreciated on average 25% every five years. This average appreciation rate incorporates the post recession boom of the late 80s, the housing downturn of the early 90s, and the more recent boom and financial crisis of the past decade. The years since 2000 have been anything but normal. As a nation, we experienced extremely high real estate appreciation rates between 2002 and 2007, which were followed by historic price declines over the past three years. Though these appreciation and depreciation rates vary depending on area and price range, what seems to be true for all price points and regions is that homes are once again places of shelter—not get-rich-quick investments.
From this point forward, most homeowners will want to stay in their homes for three to five years to build up enough equity to make selling and moving a sound financial decision. This is because most major real estate economists anticipate that we will not see moderate appreciation in home value appreciation until 2011 and very gradual year-over-year improvement into the next decade.
The multi-year recoup period is historically normal: annual appreciation rates averaged 4.6 percent (compounded) per year since 1980, despite the many ups and downs over the past 30 years.
Since they will most likely want to stay in their next home for at least three to five years, today’s buyers need to consider their near-and long-term plans as they shop. Growing families, retirement, children going off to college, or any other factor that could affect their budget or the amount of space they’ll need over the next several years should be taken into account.
Many homeowners and would-be buyers are wondering if it is a good time to sell or buy. We have seen valuations stabilizing in many areas and price points, and since current historically low interest rates equal greater purchasing power, sellers and buyers need to consider their individual situations carefully.
As normal appreciation rates return and become more familiar, we must realize that while real estate is still a good long-term investment, a home is about far more than money—there are many personal riches that come with owning a home, including those that fuel a healthier family and community.
Should I Stay Or Should I Go? Trying To Time The Market
In my travels around the region, one question I hear over and over again from people is, “Should I buy now or wait till later?” It’s a great question to ask in the face of some of the lowest interest rates we’ve seen in recorded history. But, it’s a tough question to answer within the context of today’s market because conditions vary greatly from one price range to the next. In the absence of a crystal ball, I will do my best to explain how I see the market and what buyers might want to consider as they plan their next move.
More affordable prices:
This is the part of the market where homes are priced at or below the median price in a given area. For example, in Seattle that number stands at about $360,000. In Bellingham and Portland the median home price is about $240,000. For those thinking about buying in the ‘more affordable’ market, the most important thing to keep in mind is Buyer Purchasing Power. Most economists agree that interest rates are as low as they’ll go, but many of them disagree about when they’ll start to rise. The economic events in Europe helped keep U.S. interest rates at their current lows longer than originally expected, but as a result, they now represent the wild card. As a buyer who is trying to time a purchase in the ‘more affordable’ market, it’s important to understand that a 1% rise in interest rates equates to about 10% less purchasing power. Prices in this market are expected to remain relatively stable, but even a moderate drop in prices will not make up for the lost purchase power when interest rates rise. So, my advice to these buyers is that if you’re in a good position to make your move, this is a great time to check out your options.
Above the mid price point:
The next level of prices represents the middle of the pack. Conditions in this segment of the market differ somewhat from the ‘more affordable’ price ranges. Prices above the ‘mid price’ point may adjust down by about 5% over the next year. If interest rates only go up half a point during this time, it’s a wash as to when it makes most sense to buy economically. But, if they go up a full point, as many economists are predicting, that’s a 10% drop in purchasing power. On a $500,000 house, that’s $50,000 less purchasing power. If you factor in the 5% decline in home values, it adjusts to a $25,000 loss in purchasing power. If I were a motivated buyer in this market and in a good position to buy, I would shoot for sometime this summer.
Upper price ranges:
Those homes at the top of the price pyramid almost always have a set of conditions unto themselves. That’s because there are fewer qualified buyers which results in less sales. This segment of the market could see a downward adjustment in home prices of about 10% over the next year. However, as mentioned before, economists think that interest rates will rise by one point over the next 12 months, which equates to about a 10% loss in purchasing power. What this means is that if you buy a home today or if you wait six-to-twelve months from now, affordability will be about the same. If you have a home to sell in this market as well and you’re concerned about it losing value, remember that when you buy and sell within the same market timing, the next home you buy will also have adjusted down in price, so in theory, you shouldn’t leave any money on the table.
Cash buyers:
These buyers can afford to pay cash for their next home and therefore are not reliant upon interest rates. As a result, purchasing power doesn’t apply to this small segment of the market. Cash buyers usually buy in the ‘upper end’ market which means that prices are the most important factor to this group. As mentioned before, prices in the ‘upper end’ could adjust downward by 10% during the next year, so homes should only get more affordable to those not tied to the mortgage market. We also expect to see increased inventory levels which mean more homes to choose from. So, if you’re a cash buyer and you find your dream home tomorrow, make an offer, but if you decide to wait, market conditions should continue to improve over the next year.
Ultimately, buying a home is about far more than just timing the housing market. It’s a major decision made up of many factors, of which market timing is just one. And in the process of buying a home, it’s important to be well informed about everything that impacts this life changing experience.
As always, thanks for reading.
Lennox
Goodbye tax credit, hello purchase power
Well, it was fun while it lasted. The -now expired- Federal Tax Credit provided people all over the U.S. with an extra compelling incentive to buy a home. This sales activity helped stimulate the housing market and the U.S. economy. So, the end result is that the tax credit did what it was designed to do. But all good things must come to an end, right? Well, kind of. The tax credit is no longer available, but interest rates have dropped, including on FHA loans which are down nearly half a point since May 1. That means buyers using an FHA loan to buy a $200,000 home will have nearly $9,000 more purchasing power.
The following illustrates this point:
| 5/1/2010 | 5/26/2010 | Change | |
| Interest Rate: | 4.875% | 4.500% | -0.375% |
| Purchase Price: | $200,000 | $208,890 | $8,890 |
| Loan Amount: | $193,000 | $201,579 | $8,579 |
| Monthly Payment: | $1,021 | $1,021 |
Using this same scenario, buyers purchasing a $400,000 home using an FHA loan have close to $18,000 more purchasing power. In other words, for the same monthly payment, today’s buyer could purchase a home worth $18,000 more than they could have on May 1, 2010.
Who knows how long interest rates will remain this low, but for those looking to buy a home in the near future, this increase in purchase power could be their golden ticket. For specific guidelines and FHA loan limit amounts by state, please visit: http://www.fha.com/lending_limits.cfm
Lastly, here is a good article that recently ran in the Wall Street Journal about the dip in interest rates and what it means for homebuyers and the U.S. economy: Home Buyers Get Surprise Boost From Europe Crisis as Loans Drop to Below 5%
As always, thanks for reading,
Lennox
Mr. Scott Goes To Washington (D.C.)
This week I am in Washington D.C. attending the National Association of REALTORS’ Midyear Legislative Meetings and today I had the privilege of speaking on a panel with an esteemed group of people that represent varying areas of the housing industry. In attendance was NAR’s current president, Vicki Cox Golder; Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies; and Phyllis Caldwell, chief, U.S. Department of the Treasury’s Homeownership Preservation Office. Other panelists included Alfred DelliBovi, president and CEO, Federal Home Loan Bank of New York; and Jack Shakett, executive, Credit Loss Mitigation Strategies, Bank of America. It was a very informative discussion and we all walked away in agreement that restoring balance to our mortgage finance system is key to stabilizing the housing market. For more information see the press release below. You can also watch streaming video of the Town Hall Meeting online. As always, thanks for reading.
Improving Liquidity, Reducing Inventory Critical for Stabilization, Say Realtors®
Washington, May 11, 2010
Restoring balance in the U.S. mortgage finance system is essential to stabilizing the real estate market, according to Realtors®, public policy officials and others gathered at the “Realtor® Town Hall Meeting: Strengthening and Stabilizing the U.S. Mortgage System” session today. The session is part of a three-day summit during the Realtors® Midyear Legislative Meetings & Trade Expo here this week.
According to the 2010 NAR Member Profile, 34 percent of Realtors® reported that the most important factor in limiting their clients’ ability to buy a home was difficulty in obtaining a mortgage. Panelists and participants at the session agreed that fixing the current mortgage finance system will be necessary for a meaningful housing recovery.
“As the leading advocate for homeownership, the National Association of Realtors® works to make sure that everyone who wants to own a home and is able to afford one can do so,” said NAR President Vicki Cox Golder, owner of Vicki L. Cox & Associates in Tucson, Ariz. “A big part of that is ensuring access to safe, affordable mortgages.
Panelists offered their perspectives on the current state of the real estate market, mortgage financing, and what needs to happen to ensure a recovery. Veteran broadcast journalist Forest Sawyer moderated the session.
Panelists agreed that the balance of public-private involvement in the mortgage financing process is an issue that must be addressed.
“The best thing about the market today is that it’s not the market yesterday,” said Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies. “But I’m not quite ready to say the market is recovering, because it’s still being supported by the government. In the first quarter of 2010, 90 percent of mortgages were backed by the government.”
Retsinas remarked that Realtors® have the opportunity to match up first-time buyers with distressed properties, but many Realtors® expressed frustration with the cumbersome foreclosure and short sales process.
Phyllis Caldwell, chief, U.S. Department of the Treasury’s Homeownership Preservation Office, agreed that this is an important issue. “What we’ve learned through the Home Affordable Modification Program is that modifications are very hard. Modifications may not be for everyone, and we’re looking at other ways we can help homeowners avoid foreclosure,” she said. Caldwell noted that, with labor mobility at an all-time low, more must be done to help people sell their homes in a short sale, if necessary, to allow them to move to areas where more jobs are available.
“Realtors® need to concentrate on policies that help the entire American economy grow,” said James Glassman, former undersecretary of state for Public Diplomacy. “If we want markets to work, we have to let them work. Once prices come down to the level they need to, buyers will return to the market.”
“The home buyer tax credit was a compelling call to action, and it did what it was supposed to do – it produced sales activity,” said J. Lennox Scott, chairman and CEO of John L. Scott Real Estate. “Now it’s time to determine what we need to do to ensure sustainability, moving forward. We need to bring integrity back to the mortgage business.”
Other panelists included Alfred DelliBovi, president and CEO, Federal Home Loan Bank of New York; and Jack Shakett, executive, Credit Loss Mitigation Strategies, Bank of America.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.
Information about NAR is available at www.realtor.org. News releases are posted in the Web site’s “News Media” section in the NAR Media Center.
Beyond The Tax Credit – What Now?
With the Federal Home Buyer Tax Credit behind us, now it’s time to focus on the next phase of the housing market. I’ve had numerous people ask me, “what now”? So, here are my thoughts in a nutshell. The tax credit was a compelling call for action for those who took advantage of it. It also played a critical role in stimulating economic recovery. But the tax credit didn’t define the entire housing market. Even without the tax credit, the home buyer purchase power advantage remains high thanks to historically low interest rates and lower adjusted home prices.
Now it’s time to turn our attention to interest rates. Rates are currently hovering around 5% for a 30-year fixed-rate mortgage. But many economists are predicting that they will steadily rise to 6.5% by the end of 2011. As a buyer, it’s important to understand the impact that this can have on housing affordability.
To simplify the math, I will defer to the National Association of REALTORS®, who state that for every 1 percentage point rise in interest rates, 300,000 to 400,000 less home sales take place. The rule of thumb is that every 1 percentage point increase in mortgage rates reduces a buyer’s purchasing power by about 10 percent. Here’s an example the Associated Press put together that demonstrates this concept:
“Taking out a 30-year mortgage for $300,000 at a rate of 5 percent will cost you about $1,600 a month, not including taxes and insurance. But the same monthly payment at a rate of 6 percent will only get you a loan of $270,000.”
Using this same example, you can also deduce that with a 1 point rise in interest rates, a buyer’s purchasing power reduces by $30,000 on a $300,000 loan.
What we’re seeing now is a bifurcated market in which the more affordable housing markets are experiencing relatively low inventory levels and strong sales in areas close to the job centers and large-scale businesses. In the upper end markets there are higher levels of inventory due to fewer sales. In the coming year, the more affordable markets will continue gaining strength, the mid price ranges should remain fairly stable, and the upper end will likely experience some minor downward price adjustments.
Evidence that economic growth is heading in the right direction came out in a recent report by the Commerce Department which stated that the GDP increased by 3.2% in the first quarter, fueled mostly by growth in consumer spending. Furthermore, in early April, the Labor Department reported that nonfarm payrolls increased by 162,000, which is the largest gain in three years.
The home buyer tax credit brought many buyers forward that would’ve normally bought in the months ahead, so we can expect to see a temporary dip in sales along with increased inventory levels in all price ranges for the next few months. But barring any unforeseeable events, the health of the housing market can be expected to steadily improve as consumers continue to regain confidence in the U.S. economy and the American Dream.
*More affordable refers to homes priced at – or below – the median home price in a given market.
What a Ride . . .
As many of you know, April 30 marks the expiration of the U.S. Federal Housing Tax Credit. What has commonly become known as “the tax credit” originally kicked off on February 17, 2009 when President Barack Obama signed into law the American Recovery and Reinvestment Act which included an $8,000, non-repayable tax credit for first time homebuyers. This tax credit was intended to help support the housing market as an integral part of the overall recovery of the U.S. economy.
In the weeks following the passage of the tax credit, interest rates fell below 5% and mortgage applications nearly doubled. There was an immediate uptick in home sales in the “more affordable*” price ranges throughout the nation. What we soon discovered was that the tax credit – combined with low interest rates and adjusted home prices – provided buyers with a compelling reason to buy.
As we transitioned into Fall 2009 and the expiration of the tax credit drew closer, real estate professionals everywhere reported a frenzy of first-time buyers trying to close on homes before November 30. Meanwhile, the Federal Government decided to extend the tax credit. On November 6, 2009 President Obama signed into law the updated Federal Tax Credit, which not only saw the extension of the existing $8,000 tax credit for first-time buyers, but also a new $6,500 tax credit for eligible repeat buyers.
Unarguably, the tax credit has bolstered home sales over the past 16 months, proving to be most effective with first-time buyers who don’t have an existing home to sell. The National Association of REALTORS® projects the credit will spark 900,000 such purchases this year, on top of two million last year. In addition, 2010 is expected to see 1.5 million repeat purchasers. According to Moody’s Economy.com, when the previous tax credit was due to expire last fall, existing-home sales peaked at a 6.5 million annual rate. This spring, they’re expected to peak at a 5.7 million rate in May. The National Association of REALTORS® recently stated that existing-home sales rose 6.8% to a seasonally adjusted annual rate of 5.35 million units in March from February.
The positive effects of the tax credit were first felt in the “more affordable” price ranges, which represent about 50% of all home sales, and then started making their way up the price points. The $6,500 tax credit motivated many repeat buyers to jump off the fence and make their move to a new home. As a result, the mid price ranges saw an uptick in sales, followed by slight increases in the upper end.
For many generations, homeownership has been considered one of the fundamental components of a healthy American economy. This is the very reason that my Scottish, immigrant grandfather went into the real estate business nearly 80 years ago.
What it comes down to is that the tax credit did what it was designed to do; it helped with efforts to stabilize the U.S. economy. What can we expect to happen in the wake of the expiration of the tax credit? Stay tuned for my next blog entry and I will give you my thoughts.
*More affordable refers to those homes that are priced at – or – below the median home price in a specific market.
The Social Benefits of Homeownership
The benefits of being a homeowner are great in number. Of course there are the financial benefits of building equity and developing one’s own economic foundation for their family’s future. And then there are the personal riches that come with owning a home, including those that fuel a healthier family and community. It is these intangible benefits that people often forget about when one buys or owns a home, but they are certainly worth taking note of.
A few years ago the National Association of REALTORS® authored a report entitled “The Social Benefits of Homeownership and Stable Housing,” which discussed evidence regarding the personal gains that come with homeownership. This report did not focus on the financial aspects, but rather it directed its attention to the social advantages that result from being in an owner-occupied home.
The report provided further support to theories that are already well-founded in American culture. It suggested that homeownership fosters household stability, social involvement, environmental awareness, local political participation, good health, low crime, and favorable community traits.
Homeownership has long been associated with strong neighborhoods and communities. As the research indicates, homeowners are generally more committed to their neighborhoods, therefore they are more likely to make friendships with neighbors, and are more likely to participate in voluntary and political activities that go towards developing a sense of community.
The NAR research reported findings that conclude that homeownership is particularly beneficial to children. It stated that children of homeowners are more likely to perform higher on academic achievement tests and finish high school; these children also report fewer behavioral problems in school. Considerable evidence suggests that homeowners are typically more satisfied with their homes; therefore they are more likely to stay in their homes for longer periods of time. All in all this imparts a sense of security that ultimately impacts the members of that household, including children.
Buying a home is likely the most important financial and emotionally filled decision of a person’s life, but as research and history have shown, the pay-off goes far beyond tax breaks and equity—it leads to happier, healthier families, and communities.
