Commentary: What’s in Store for Housing in 2014, Part 2

For those of you looking for cautionary notes going into 2014, I offer two items: jobs and loans.

Despite recent gains, which some of us believe are more of a mirage than an oasis, the economy still isn’t creating enough good-paying full-time jobs to drive a full recovery in the housing market. This is particularly true among the millennials, who continue to live at home with mom and dad at near record levels.

Unemployment—and under-employment—among the 25- to 35-year-old cohort continue to be stubbornly high, which is having a chilling effect on the number of first-time homebuyers—the group that historically has fueled growth in the housing ecosystem. This has led to slower-than-forecast household formation, and increasingly, when new households are formed, they’re rental households.

Some erstwhile buyers have simply decided not to enter into a long-term financial obligation for the time being. Others either don’t have sufficient funds for a down payment or don’t qualify for today’s relatively strict lending requirements.

Those lending requirements—and a lending environment that I believe is going to get more challenging before it gets easier—are the other major headwinds that could slow down housing. While most forecasts are calling for a slight uptick in purchase loans in 2014, it’s easy to build a scenario that goes terribly wrong.

The Consumer Financial Protection Bureau’s new Qualified Mortgage (QM) and Ability-to-Repay rules will exclude somewhere between 10-20 percent of borrowers who would have qualified for a loan in 2013. Most of the large banks will issue loans that fall squarely within QM guidelines, simply to avoid as much risk as possible. The one exception is likely to be jumbo loans, offered to ultra-qualified, high-net-worth individuals.

Another complication is lower loan limits proposed by Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA). These lower limits will make it more difficult for borrowers in high-priced housing markets to get loans. Those who do qualify for loans will pay more—the Federal Housing Finance Agency (FHFA) recently announced hikes in the GSEs’ guarantee fees and a new, higher payment schedule for borrowers who fall within certain FICO and down payment measures. TheFHA has also increased insurance premiums, particularly on its lowest down payment products.

Some believe that by raising costs and limiting loan amounts, the government will drive private capital back into the market, but that seems unlikely until regulatory and litigation risks have subsided, and until loans can be priced appropriately to risk. At some point in 2014, private capital will probably return, along with a more functional secondary market. Then non-bank lenders can come to market with loans available to less-than-perfectly-qualified borrowers, but at significantly higher interest rates.

Higher interest rates, which are inevitable, will begin to erode affordability levels, even with home prices still well off the peak numbers reached during the housing boom. The primary culprit isn’t high interest rates or rising home prices, but lower median incomes and wage stagnation over the past five years.

So which will it be: Full speed ahead, or trouble around the bend? If nothing else, 2014 promises to be a very interesting year.


Even in Buyer’s Market, Homeownership Expected to Decline

Zillow expects conditions next year to be a bit friendlier to homebuyers—but that doesn’t mean we’ll necessarily see more owner-occupied housing, experts at the real estate marketplace say.

Looking at ongoing trends, Zillow made four major predictions about the course of housing over 2014.

First, home values are forecast to rise by 3 percent at the national level over the year. The prediction projects a retreat from 2012 and 2013 levels, which Zillow says were “unsustainable and well above historic norms for healthy, balanced markets.”

“This year, home value gains will slow down significantly because of higher mortgage rates, more expensive home prices, and more supply created by fewer underwater homeowners and more new construction,” said Dr. Stan Humphries, Zillow’s chief economist. “For buyers, this is welcome news, especially for those in markets where bidding wars were becoming the norm and bubble-like conditions were starting to emerge.”

Second, the company predicts mortgage rates will reach 5 percent by the end of the year—a level not seen since early 2010—as the economy improves and the Federal Reserve adapts its policies. That news may not be as bright for buyers, but Erin Lantz, director of mortgages for Zillow, says it’s important to keep perspective.

“While this will make homes more expensive to finance—the monthly payment on a $200,000 loan will rise by roughly $160—it’s important to remember that mortgage rates in the 5 percent range are still very low,” Lantz said. “Because affordability is still high in most areas relative to historic norms, rising rates won’t derail the housing recovery.”

However, Lantz noted affordability has already turned into an issue for some markets, particularly those in California.

For its third prediction, Zillow again turned to the positive, forecasting a clearer road to mortgage credit.

“The silver lining to rising interest rates is that getting a loan will be easier. Rising rates means lenders’ refinance business will dwindle, forcing them to compete for buyers by potentially loosening their lending standards,” Lantz said.

And finally, the last prediction: Homeownership rates will fall to their lowest level in nearly two decades, dipping below 65 percent for the first time since 1995.

“The housing bubble was fueled by easy lending standards and irrational expectations of home value appreciation, but it put a historically high number of American households—seven out of 10—in a home, if only temporarily,” Humphries said. “That homeownership level proved unsustainable and during the housing recession and recovery the homeownership rate has floated back down to a more normal level, and we expect it to break 65 percent for the first time since the mid-1990s.”

Zillow also combined data on unemployment, population growth, and its own Home Value Forecast to glimpse into what it believes will be the hottest markets in 2014.

The list includes a diverse set of metros spread across all regions of the United States, including: Salt Lake City, Utah; Seattle, Washington; Austin, Texas; San Jose, California; Miami, Florida; Raleigh, North Carolina; Jacksonville, Florida; San Diego, California; Portland, Oregon; and Boston, Massachusetts.


Is Mortgage Market Deconsolidation Temporary or Here to Stay?

In 1998, the top 10 mortgage lenders held around 40 percent of the market. By 2010, their share increased to nearly 80 percent; since then, it’s dropped down to around 60 percent.

Why the decrease? Well, only five of the top 20 single-family mortgage originators in 2006 remain active today. But what’s continuing to drive the big guys out—market cycles or market restructuring? And will the current trend of favoring smaller lenders and servicers last forever?

Fannie Mae’s Gerry Flood and Patrick Fischetti (director and analyst for strategic planning, respectively) explored the topic in a recent commentary.

Factors Favoring Large Lenders:

To start with, Flood and Fischetti assert large lenders are able to spread fixed costs (e.g., technology expenses) across a high volume of mortgage transactions, reducing average costs relative to smaller competitors. Recently released data from the Mortgage Bankers Association shows loan costs from Q2 2012-Q2 2013 were 13 percent higher per loan for servicers of less than 2,500 loans than for servicers of more than 50,000 loans.

Larger banks generally have a lower cost of debt and broader access to funding in the bond markets than small lenders. The researchers cite numbers from Goldman Sachs, which show that since 1999, large banks have an average of 31 basis point costs of debt advantage compared to smaller banks.

In addition, tighter credit standards, plus legislative and regulatory responses to the market crisis have led to a more standardized and commoditized mortgage market.

This reduces product differentiation and operating costs, favoring large lenders.

Large lenders also employ more experts in complex disciplines such as regulatory compliance and financial modeling. This puts access to critical trending information at their fingertips, for a distinct advantage.

Factors Favoring Less Consolidation:

On the other hand, Flood and Fischetti say a sustained shift to retail origination would signal the momentum going to smaller lenders, because larger lenders have greater capacity for wholesale origination. However, the sustainability of the shift to retail is uncertain.

Smaller institutions are more able to react quickly to market changes—but rising mortgage rates and a shift from refinancing to home purchasing could test the nimbleness of many small lenders.

Smaller banks have a clear advantage with their in-depth knowledge of their local market. According to Fannie Mae’s analysts, in regards to single-family credit losses, small banks consistently outperformed larger competitors since 1992—though they admit the factors underlying this outperformance aren’t completely certain.

As far as legacy issues are involved, following the financial crisis, both large and small lenders received loan repurchase requests from the GSEs and other secondary market participants. A significant volume of legacy repurchase issues have been resolved recently through settlements with many lenders, suggesting that these repurchase requests will recede as a business issue for mortgage lenders, the researchers say.

While large and small lenders each enjoy market advantages over each other, Flood and Fischetti say large firms are poised to benefit more from sustainable advantages.

“Consequently, our assessment indicates that the recent decline in large lender share of the primary market is temporary, and principally a result of cyclical factors that caused larger lenders to pull back from the market,” the two concluded. “Absent a meaningful restructuring of the mortgage market … we believe there is a significant probability that in the long-term large lender share of the primary market will increase compared to current levels.”


Industry Data Shows 1,256,000 Loans in Foreclosure

The industry’s foreclosure inventory contracted again in November upon continued improvements on the housing and economic fronts. Although on a monthly basis, the inventory of homes in foreclosure fell slightly by 1.72 percent, year-over-year, it was down 28.81 percent,Lender Processing Services (LPS) reports.

The data and analytics firm released a preview of its November 2013 month-end mortgage performance statistics, showing there are now 1,256,000 mortgage loans in foreclosure, or 2.5 percent of all outstanding mortgages nationwide.

Delinquencies rose month-over-month by 2.63 percent but overall, the national delinquency rate has trended down this year. LPS says November’s delinquency rate of

6.45 percent (loans 30 or more days past due, but not in foreclosure) is 9.41 percent below November 2012 and represents a decline of just over 10 percent year-to-date.

The number of properties with mortgages 30 or more days past due but not in foreclosure tallied 3,241,000 as of November month-end. Of those, 1,283,000 were seriously delinquent, meaning 90 or more days past due but not yet in foreclosure.

Combining the number of delinquent loans and those that are part of the foreclosure inventory shows there are a total of 4,497,000 non-current home mortgages in the United States, according to LPS’ report.

In October, Mississippi overtook Florida to claim the top ranking spot in the nation in terms of non-current loans. Florida’s improvement continued into November, with New Jersey now unseating the Sunshine State for the No. 2 spot in the non-current loan rankings. New York and Louisiana round out the top five.

States with the lowest percentage of non-current loans in November, included Colorado, Montana, Alaska, South Dakota, and North Dakota.

LPS says it will provide a more in-depth review of this data in its monthly Mortgage Monitor report, which is scheduled for release by January 13. Monthly results are derived from LPS’ loan-level database representing approximately 70 percent of the overall market.

The Good, the Bad, and a Sense of Normalcy in the New Year

While maintaining that “local markets vary widely,” released its predictions for the national housing market in the new year. The forecast includes a few bright spots, a couple of looming clouds, and some normalcy expected to precipitate the market in the coming year.

Among the bright spots are the rising tide of positive equity and abating foreclosures.

While 2.5 million homeowners rose from underwater during the second half of this year, 7.1 million homeowners remain below water. Furthermore, 10 million homeowners have less than 20 percent equity in their homes, according to

However, “[t]he good news is that prices are expected to continue rising in 2014, which will lift more homeowners into positive territory,” according to

A second positive trend that will continue into the new year is declining foreclosures.

In the third quarter of this year, foreclosure starts reached their lowest level since the second quarter of 2006.

September also marked the 36th straight month of declining foreclosure activity on an annual basis, according to; and this movement is expected to continue in 2014.

The new year will bring a couple clouds to the market, including rising mortgage rates and declining affordability.

Mortgage rates have already risen 100 basis points this year, and when the Federal Reserve begins tapering its stimulus spending, rates are likely to spike a little higher.

Rising prices may help bring some homeowners out of a negative equity position, but they also pose a threat to affordability. The rate of price appreciation this year outpaced income growth.

Rising mortgage rates also lead to lower affordability.

Another change to the market in the new year will likely be a rise in inventory, bringing it more in line with normal levels.

“The beginning of 2013 could be characterized as the ‘year of low inventory,’” according to As the year ends, inventory matches levels seen a year ago, but median age of inventory is 11 percent lower.

All-Cash Sales Reach New High In November

All-cash purchases accounted for 42 percent of all residential property sales in November, up from 38.8 percent in October and also up from a year ago to the highest level since RealtyTrac began tracking all-cash purchases in January 2011, the company reported.

States with the highest percentage of cash sales last month included Florida (62.7 percent), Georgia (51.3 percent), Nevada (51 percent), South Carolina (50.3 percent), and Michigan (49 percent).

According to RealtyTrac, the national median sales price of all residential properties—including both distressed and non-distressed sales—was $169,000 in November, up 1 percent from October and up 7 percent from November 2012. It was the 19th consecutive month median home prices have increased on an annualized basis.

The median price of a distressed residential property—in foreclosure or bank owned—was $110,500, 39 percent below the median price of $181,500 for purely non-distressed residential properties.

By RealtyTrac’s assessment, institutional investor purchases represented 7.7 percent of all residential property sales last month, up from 7.1 percent in October and 6.3 percent in November 2012. Markets with the highest share of institutional investor purchases included Columbus, Ohio; Phoenix; Atlanta; Jacksonville, Florida; and Cape Coral-Fort Myers, Florida.

Sales to third-party investors at foreclosure auction represented 1.3 percent of all residential property sales in

November, according to RealtyTrac. That share is up from 0.8 percent of sales in both the previous month and a year earlier, and it is the largest percentage of third-party foreclosure auction sales since RealtyTrac began tracking this market element in January 2011. The highest shares of third-party foreclosure auction sales last month were found in Miami (4 percent); Atlanta (3.9 percent); Jacksonville, Florida (3.9 percent); Orlando (3.6 percent); and Las Vegas (3.6 percent).

RealtyTrac reports short sales represented 5.6 percent of all residential property sales in November, up from 5.4 percent the previous month but down from 6.5 percent in November 2012. States with the highest percentage of short sales included Nevada (16.6 percent), Florida (14.2 percent), Illinois (8.8 percent), Maryland (8.6 percent), and New Jersey (7.1 percent).

Sales of bank-owned homes, or REO, accounted for 10 percent of all residential property sales last month, up from 9.1 percent in October and 9.4 percent a year earlier. November marked the third consecutive month in which REO sales increased from the previous month. Metros where REO sales accounted for at least 20 percent of all sales and increased from a year earlier included Stockton, California; Las Vegas; Cleveland; Riverside-San Bernardino, California; and Phoenix.

According to RealtyTrac’s report, U.S. residential properties overall—including single-family homes, condominiums, and townhomes, distressed and non-distressed—sold at an estimated annual pace of 5,146,565 in November. That figure represents an increase of less than 1 percent from October’s revised pace of 5,128,034 but is up 10 percent from November 2012.

Annualized sales volumes declined from a year ago in four states: California (down 14 percent), Arizona (down 12 percent), Nevada (down 9 percent), and Rhode Island (down 4 percent).

RealtyTrac recorded yearly declines in annualized sales volumes in 14 of the nation’s 50 largest metros, including seven California metros, two metros in both Arizona and New York, as well as Las Vegas; New Haven, Connecticut; and Portland, Oregon.

Report: Home Values Recaptured $1.9 Trillion in 2013

Based on early estimates of home values, properties nationwide are expected to gain almost $1.9 trillion in cumulative value in 2013, according to Zillow.

By the end of the year, analysts for the real estate marketplace predict home values will be a cumulative $25.7 trillion, up 7.9 percent from the end of 2012 (which in turn was up 3.9 percent from 2011).

If the figures work out, it would be the second straight annual gain in total home values and the largest increase since 2005, Zillow says.

“In 2013, the housing market continued to build on the positive momentum that began in 2012, after the housing market bottomed. Low mortgage rates and an improving economy helped bring buyers into the market, boosting demand and driving prices up,” said Zillow chief economist Stan Humphries. “We expect these gains to continue into next year, though at a slower pace.”

What’s more, Zillow researchers believe the value of the nation’s housing stock has recovered about $2.8 trillion—about 44 percent—of the value it lost from 2007 through 2011.

Out of the 485 total metro areas analyzed by Zillow, about 90 percent experienced home value gains in 2013. Of the 30 largest metros, those with the biggest increases in overall value included Los Angeles (which gained $323.1 billion), San Francisco ($159.2 billion), New York ($123.1 billion), Miami ($83.3 billion), and San Diego ($71.5 billion).