Negative Equity: A New Way of Life in the Recovery

Fast-paced price increases have helped bring many underwater homeowners afloat. In the third quarter, 1.4 million homeowners rose to the surface as their home values once again outranked their equity, according to the Zillow Negative Equity Report released Thursday.

The third quarter drop in negative equity rate was the largest on Zillow’s record, which dates back to the second quarter of 2011.

The negative equity rate now stands at 21 percent, down about one-third from its peak of 31.4 percent and from 23.8 percent in the second quarter, according to Zillow.

“Rising home prices and a greater willingness among lenders to engage in short sales have both contributed substantially to the significant decline in negative equity this quarter,” said Stan Humphries, chief economist at Zillow.

“We should feel good that we’re moving in the right direction and at a fast clip,” Humphries said.

However, with analysts—including Humphries— predicting moderating price gains in the coming year, that “fast clip” is set for decline.

In fact, Humphries says negative equity will remain a persistent trait of the housing market and become “part of the new normal” for several years.

While 4.9 million homeowners have risen from underwater since the negative equity peak in 2011, one in five homeowners with a mortgage remains underwater today, according to Zillow’s data.

That’s about 10.8 million homeowners currently in a negative equity position.

The “effective” negative equity rate is even higher at 39.2 percent in the third quarter, according to Zillow.

The “effective” rate includes all homeowners who have less than 20 percent equity in their homes. This rate is significant because selling a home and purchasing a new one “requires equity of 20 percent or more to comfortably meet related expenses,” according to Zillow.

More than half of underwater homeowners are underwater by at least 20 percent, Zillow stated. Assuming Zillow’s estimate for home price growth at 3.8 percent over the next year, it will take a homeowner with 20 percent negative equity five years to rise to the surface.

Of the nation’s 30 largest metros, those with the highest concentration of negative equity are Las Vegas at 30.6 percent, Atlanta at 38.2 percent, and Orlando at 34.2 percent.

Bidding Wars Resume in Major Markets in October

Despite a softening market, competition among buyers remained fairly fierce in October, Redfin reported in itsReal-Time Bidding Wars release for the month.

Last month, 55.9 percent of offers written by the Seattle-based brokerage’s agents faced competition from other buyers, a decline from 58.3 percent in September. Bidding wars have been on a downward slope since peaking at 79 percent in February.

October was also the third consecutive month to see a drop in competition compared to the same month last year, Redfin said.

Even with the decline, though, competition last month was higher than expected, given the effects of the government shutdown on consumer confidence.

“While many Americans paused their home-buying and selling plans during the shutdown, overall demand in October was more robust than expected, with home tours and offers rebounding once the government reopened,” said Redfin analyst Rachel Musiker. “This unexpectedly strong demand paired with dwindling inventory likely kept competition from falling even further in October.”

Out of the 22 markets reporting, Boston saw the biggest drop in competition, with 61.3 percent of offers facing bidding wars—down from 70.1 percent in September. San Diego, meanwhile, experienced the biggest increase in bidding wars, with 63.0 percent of offers competing against multiple bids compared to 56.1 percent the month prior.

For the most competitive areas, interested buyers still have to adopt aggressive tactics, including offering all cash. Mia Simon, a Redfin agent operating in Silicon Valley, tells a story of a bidder vying for a home priced just above $1.4 million:

“There were only three other offers, but they were all above $1.8 million. Although my client’s offer was not the highest overall, it was the highest of the all-cash offers,” Simon said.

“Today’s Silicon Valley home buyers realize that they long missed out on the bottom of the market, but many believe that home prices will rise even more in 2014, so they will do whatever it takes to get a home under contract before the spring,” she added.

At the same time, the less competitive markets are seeing a shift in the buyer/seller dynamic. For example, in Washington, D.C.—where 44.0 percent of Redfin offers went against other bids in October—sellers are working harder to gain attention.

“I’ve recently received a few phone calls from agents whose listings I have shown to my clients,” said agent Philip Gvinter, who works in the nation’s capital. “They’re trying to gauge my clients’ interest in the home, and some simply ask what it will take to get my client to write an offer. It’s been more than a year and a half since I’ve received a call like that.”

Yellen’s Likely Confirmation Puts the Brakes on Rising Interest Rates

Mortgage rates shifted down this week, according to reports from Freddie Mac and finance websiteBankrate.com.

Freddie Mac’s Primary Mortgage Market Survey shows the 30-year fixed-rate mortgage (FRM) averaging 4.22 percent (0.7 point) for the week ending November 21, a decrease from 4.35 percent last week. A year ago at this time, the 30-year FRM averaged 3.31 percent.

The 15-year FRM averaged 3.27 percent (0.7 point) this week, down from 3.35 percent. The 5-year adjustable-rate mortgage (ARM) average also retreated, averaging 2.95 percent (0.5 point), while the 1-year ARM was unchanged at 2.61 percent (0.4 point).

The declines accompanied a week of lukewarm economic data.

“Fixed mortgage rates fell this week on reports of weaker manufacturing growth and declines in overall inflation rates,” said Frank Nothaft, VP and chief economist for Freddie Mac.

Manufacturing numbers show industrial production falling 0.1 percent in October, while the consumer price index dropped the same amount. Annually, consumer prices are up 1 percent, “the smallest increase since October 2009,” Nothaft said.

Meanwhile, Bankrate’s weekly national survey has the 30-year fixed average dropping to 4.39 percent, with the 15-year fixed falling to 3.42 percent. The 5/1 ARM was also down, falling a few points to 3.28 percent.

While Freddie Mac attributed this week’s movements to economic stats, Bankrate pointed to another cause.

“After two consecutive weeks moving to the upside, mortgage rates reversed course following Federal Reserve Chair nominee Janet Yellen’s comment that ‘there is more the Fed can do,’” Bankrate said in a release.

“Investors took this to mean that the Fed will not be in a hurry to rein in stimulus or boost interest rates,” Bankrate explained, “and that helped bring both bond yields and mortgage rates back down.”

Yellen’s Likely Confirmation Puts the Brakes on Rising Interest Rates

Mortgage rates shifted down this week, according to reports from Freddie Mac and finance websiteBankrate.com.

Freddie Mac’s Primary Mortgage Market Survey shows the 30-year fixed-rate mortgage (FRM) averaging 4.22 percent (0.7 point) for the week ending November 21, a decrease from 4.35 percent last week. A year ago at this time, the 30-year FRM averaged 3.31 percent.

The 15-year FRM averaged 3.27 percent (0.7 point) this week, down from 3.35 percent. The 5-year adjustable-rate mortgage (ARM) average also retreated, averaging 2.95 percent (0.5 point), while the 1-year ARM was unchanged at 2.61 percent (0.4 point).

The declines accompanied a week of lukewarm economic data.

“Fixed mortgage rates fell this week on reports of weaker manufacturing growth and declines in overall inflation rates,” said Frank Nothaft, VP and chief economist for Freddie Mac.

Manufacturing numbers show industrial production falling 0.1 percent in October, while the consumer price index dropped the same amount. Annually, consumer prices are up 1 percent, “the smallest increase since October 2009,” Nothaft said.

Meanwhile, Bankrate’s weekly national survey has the 30-year fixed average dropping to 4.39 percent, with the 15-year fixed falling to 3.42 percent. The 5/1 ARM was also down, falling a few points to 3.28 percent.

While Freddie Mac attributed this week’s movements to economic stats, Bankrate pointed to another cause.

“After two consecutive weeks moving to the upside, mortgage rates reversed course following Federal Reserve Chair nominee Janet Yellen’s comment that ‘there is more the Fed can do,’” Bankrate said in a release.

“Investors took this to mean that the Fed will not be in a hurry to rein in stimulus or boost interest rates,” Bankrate explained, “and that helped bring both bond yields and mortgage rates back down.”

New Head of FHFA Expected

Analysts expect to see a new face at the helm of the agency overseeing Fannie Mae and Freddie Mac now that Democrats in the Senate have changed the rules, eliminating the use of the filibuster to block presidential appointments.

The Senate majority’s instatement of the so-called nuclear option “has cleared the path for Mel Watt’s confirmation” as director of the Federal Housing Finance Agency (FHFA), according to secondary market analysts at Barclays.

Under the chamber’s new rules, the president’s nominees for all positions except Supreme Court judge can be approved with a simple majority vote, rather than the previous requirement of 60 “yay” votes.

Rep. Mel Watt (D-North Carolina) received 56 votes in favor of his confirmation on October 31st, just 4 votes shy of the number needed under the old rules but enough to be confirmed under the new simple-majority requirement.

“[H]e has the required votes and should be confirmed as the new FHFA director. In our view, this raises the level of policy risk,” Barclays said, “as we would generally expect him to be more supportive of the administration’s policies. … [K]ey areas of concern would be principal forgiveness for the GSEs and potential expansion of the HARP [Home Affordable Refinance Program] eligibility date.”

Watt and the administration have previously expressed support for using principal forgiveness as part of the Home

Affordable Modification Program (HAMP) waterfall forGSE loans, Barclays notes. While Acting Director Edward DeMarco has resisted its implementation to date on the argument that the taxpayer benefits would be too small, under Watt’s direction, Barclays expects the FHFA to “take a fresh look at the administration’s proposal and be more amenable to implement it.”

In addition, with Watt’s confirmation, Barclays says the administration may renew its push to expand the HARPcut-off date by a year. An extension of the HARP eligibility date would significantly increase the pool of HARP-eligible loans from the 2009 and 2010 vintages carrying interest rates above the 4.5 to 5 percent range, according to Barclays’ analysts.

“We estimate that these cohorts would likely see as much as a 50 percent increase in borrower eligibility,” they said.

While the immediate attention upon Watt’s confirmation will be on potential changes to HARP or decisions surrounding principal forgiveness and will likely spark some near-term uncertainty, analysts with FBR Capital Markets & Co. believe Watt will be “very beneficial to mortgage credit availability.”

“As director, we expect him to focus on removing barriers for well-qualified homeowners from receiving mortgage credit on loans securitized by Fannie and Freddie, and he is unlikely to lower loan limits, increase g-fees [guarantee fees], or implement new limits on multifamily lending,” according to FBR.

Though his confirmation will probably further complicate housing finance reform, it makes it more likely there will be a continued government backstop, FBR said, adding, “We view this confirmation as positive for mortgage originators, homebuilders, and mortgage insurers and as a negative for private-label securitizers and mREITS [real estate investment trusts].”

“It should be noted there is some chance his confirmation will not take place until after the Thanksgiving recess, but that is not a reflection of his lacking the necessary votes,” Barclays said.

Is Tighter Credit for the Better?

It’s no secret underwriting standards have tightened in recent years, and while many decry the heightened standards for making homeownership less accessible to some Americans, CoreLogic economist Sam Khater pointed out in a report released Wednesday that heightened standards are undoubtedly impacting delinquency rates for the better.

“While there has been much consternation about underwriting being too tight in the context of forthcoming mortgage regulations, one underappreciated outcome has been the very good performance of mortgages during the last few years,” Khater said in an article titled “Tight Credit Results in Flawless Performance,” which was part of CoreLogic’s most recent MarketPulse.

“Tighter credit results in flawless performance,” Khater said.

The serious delinquency rate, which includes mortgages 90 or more days past due, in foreclosure or REO, stands at 5.4 percent as of July, according to CoreLogic.

While still significantly higher than the historical norm of 1 percent, the current rate has come a long way since its peak of 8.5 percent in January 2010, according to CoreLogic data.

Taking an even closer look, Khater examines 2013 vintage loans and compares them to vintages from years past.

Over the first half of this year, the serious delinquency rate for loans originated this year was six basis points, according to Khater.

This is down drastically from the 108 basis points for loans originated in 2007, which is the worst year in the 2000s, Khater noted.

The current rate is also better than the rate recorded for 2003, a year when home prices were rapidly increasing. Serious delinquencies for 2003 vintage loans was 15 basis points, according to Khater.

Serious delinquencies for 2013 loans are also down from 10 basis points among loans originated last year.

“This clearly indicates that the most recent mortgage vintages are pristine relative to even the good performing years of the early 2000s,” Khater said.

Sales of Existing Homes Slip for Second Straight Month

October saw existing-home sales decline for the second straight month as low inventory propped up prices, theNational Association of Realtors (NAR) reported Wednesday.

Total existing-home sales—completed transactions of single-family homes, townhomes, condominiums, and co-ops—fell 3.2 percent from September to October, coming out to a seasonally adjusted annual rate of 5.12 million. Compared to last year, sales were still up 6.0 percent, marking the 28th consecutive month of year-over-year improvement.

“The erosion in buying power is dampening home sales,” said NAR chief economist Lawrence Yun. “Moreover, low inventory is holding back sales while at the same time pushing up home prices in most of the country. More new home construction is needed to help relieve the inventory pressure and moderate price gains.”

The national median existing-home price for all housing types was $199,500, up 12.8 percent annually.

Part of the rise in median price came from a smaller share of discounted distressed sales: Foreclosures and short sales together made up 14 percent of October’s sales (9 percent foreclosures and 5 percent short sales) compared to 25 percent last year.

At the same time, inventory remains a challenge. The total number of existing homes available for sale at the end of October was 2.13 million, down 1.8 percent year-over-year. At the current sales pace, inventory levels come to a 5.0-month supply, NAR reported.

As has been the case for some time, the West felt the greatest strain from low supply, reporting a 7.1 percent monthly drop in existing-home sales to a pace of 1.17 million. Compared to October 2012, sales were down 0.8 percent.

All the other regions saw declines, though not as dramatic: Existing-home sales fell 2.9 percent in the Northeast to an annual rate of 670,000; 1.6 percent in the Midwest to a rate of 1.22 million; and 1.9 percent in the South to an annual level of 2.06 million.

Besides supply problems, another obstacle stands in the way: an “unnecessarily restrictive” credit environment,NAR says.

“Although mortgage interest rates are still historically affordable, some financially qualified buyers are being denied a loan,” said NAR president Steve Brown. “The risk-averse nature of lending also is impacting small builders who are unable to get construction loans, even when they see strong local demand.

“We simply have to reverse the pendulum swing back toward the middle to give more creditworthy borrowers access to safe and sound financing.”