Housing Affordability May Plummet in 2018

Posted on November 21, 2017 by Laura Lam

affordability chart 1During the recent CoreLogic and the Urban Institute’s Housing Finance, Affordability and Supply in the Digital Age conference, CoreLogic Chief Economist Frank Nothaft predicted rising interest rates will cause home prices to rise.  Mortgage interest rates are expected to continue rising over the next couple years as experts predict the Federal Reserve will raise the Federal Funds rate in once more this year in December and up to 4 more times in 2018. As the chart shows, CoreLogic forecasted it will rise to 4.7% by December 2018.

Nothaft explained as mortgage interest rates increase throughout 2018, less current homeowners will be motivated to sell their home, wanting to keep their low interest rate. This will then lead to less homes coming onto the market, and will squeeze the already tight housing inventory.  First American Financial Chief Economist Mark Fleming agreed it could hurt housing supply, saying, “There is no reason the current homeowner today will want to sell.”

Nothaft predicted home prices will rise yet another 5% in 2018, benefitting current homeowners as their home equity increases. CoreLogic data shows the average homeowner gained $13,000 in home equity in just the past year. In Washington, where Seattle saw a surge in home prices, homeowners gained a full $40,000 in equity since last year.

affordability chart 2The chart shows the amount of equity the average homeowner gained in each state from the second quarter of 2016 to the second quarter of 2017.

However, the rise in prices will not bode as well for the mortgage market, which will continue to see decreases in refinance originations. But refis will not fall off completely as Nothaft explained many FHA borrowers will seek to refinance their mortgage into a conventional loan in order to cancel their mortgage insurance.

In fact, FHA to conventional refinances reached a new all-time high since CoreLogic began tracking in 2000 at just over 10%.  Nothaft predicted while originations will continue to rise, it will be much more moderate, and see less volatility from year to year.  The decrease in refi originations and the slowdown of purchase origination will be partially offset by a rise in home equity lines of credit, which has been rising steadily over the past several years.  But will interest rates increase in 2018? Fleming cautioned economist have been forecasting an increase to 4.5% in mortgage rate for the past three years.

Source:  Housing Wire

Americans Waiting for a Bigger Raise

Posted on November 17, 2017 by Laura Lam

wage growthThe government said that average hourly earnings rose 2.4% over the past 12 months.  That’s a slip from the 2.9% increase reported in September. It remains below the 3% to 3.5% range that many agree is normal in a truly healthy economy.  The last time wages were up more than 3% year-over-year was in April 2009, just as the economy was emerging from the depths of the global banking crisis that fueled the Great Recession.

Why have wages remained stagnant even though many other indicators of the job market and broader economy look healthy? Unemployment continues to drop. The housing market is vibrant and stocks continue to soar.

John Bellows, a portfolio manager at Western Asset, argues that the impact of globalization, more automation and an increased number of people working part-time are keeping wages in check.  Bellows and others think lawmakers and President Trump need to take action to improve American wages.  “I’m not sure how much the Fed can do to increase wages,” Bellows said. “But we shouldn’t be defeatist about it. It’s now just mostly up to Congress.”

Erik Weisman, chief economist at MFS, says that if tax reform passes and leads to lower corporate tax rates, big multinational U.S. companies may bring back to the U.S. cash that’s sitting overseas, and use it to boost salaries and hire more workers.  “Lower taxes could incentivize companies to keep profits onshore and invest more domestically,” Weisman said.

Matt Schreiber, president and chief investment strategist of WBI Investments, thinks there’s another problem. Now that companies are hiring again, people who had been unemployed or underemployed may be returning to the workforce for lower salaries.  “More people are getting jobs that underpay and are not making what they used to,” he said.  He added that businesses are still waiting to see if recent signs of U.S. economic improvement — two consecutive quarters of annualized growth of at least 3% — is sustainable.  Schreiber said that he is also hoping “corporate tax cuts could turbocharge the economy and wage growth.”

There are some hopeful signs.  Matt Toms, CIO for Voya Investment Management, said it is good to see that more states and cities are raising their minimum wages, as are giant American employers like Walmart (WMT) and McDonald’s (MCD).  But the average hourly workweek has remained relatively flat over the past few months, stuck around 34.4 hours. Toms suggests that some employers could be limiting worker hours in light of wage increases in order to keep labor costs in check.  “We’d be more encouraged if there was even more wage growth. It’s needed at this part of the economic cycle,” Toms said.

Source:  CNN Money

Sales to First-Time Home Buyers Fell 34% in 2017

Posted on November 16, 2017 by Laura Lam

first time homeowners 1981First time homebuyers continue to struggle to enter the housing market amidst limited housing inventory, falling to the fourth lowest level since 1981, according to the National Association of Realtors’ 2017 Profile of Home Buyers and Sellers report.  The share of first time homebuyers in the housing market decreased from 35% in 2016 to 34% in 2017. In the 36-year history of NAR’s report, the long-term average of first-time homebuyers rests at 39%.

“The dreams of many aspiring first-time buyers were unfortunately dimmed over the past year by persistent inventory shortages, which undercut their ability to become homeowners,” stated NAR Chief Economist Lawrence Yun.  “With the lower end of the market seeing the worst of the supply crunch, house hunters faced mounting odds in finding their first home.”

While “solid economic conditions and millennials in their prime buying years” should translate to many first-time home sales, Yun said the unfortunate reality is that the homeownership rate will remain suppressed until “entry-level supply conditions increase enough to improve overall affordability.”

In addition to low inventory, student debt is also working against young potential homeowners.  While student debt has affected multiple generations, college tuition costs have become so high, that getting a job and working your way through is simply no longer possible.  In 1993, 47% of college students graduated with student debt of about $9,450 per grad, according to the Federal Reserve Board of New York. As of 2012, that number surged to 71% of college graduates, and in 2016 the average loan amount totaled a shocking $37,172 per graduate.

NAR’s study showed 41% of first time homebuyers held student debt of $29,000 in 2017, up from 40% of buyers with $26,000 in debt in 2016. While only 41% had student debt while buying their home, 55% of first-time buyers said student debt delayed saving for their home purchase.

Why the surge? As of 2014, undergraduate education cost 12 times more than it did 35 years before, far outpacing inflation. The price of college tuition and fees surged 1,122% since 1978 while the cost of medical care increased 600%, and housing and food increased 300%.  Incomes are also rising but not at a rate to counter the inflation surge.  With student loans outpacing other forms of debt, it should come as no surprise that first-time homebuyers continue to decrease lower than historical norms.

Source:  Housing Wire/NAR

Are Home Equity Loans Staged for a Comeback?

Posted on November 15, 2017 by Laura Lam

HELOCS not usedThere has been a hint of optimism for home equity lending among bankers this earnings season, but attitudes remain mixed a decade after the housing market crash began.  While home equity lines of credit provided a lift to some bank consumer portfolios, a number of other banks said their home equity businesses had fallen and added little about their future.

Industry observers say bankers should take the long view. Home equity lines of credit especially are poised to grow now that home values have been rising for a number of years during the economic recovery.  “If you think about the consumer credit portfolio, it’s for so many years been sitting idle,” said Christine Pratt, a senior analyst with Aite Group. “You have a consumer sentiment that is very positive about spending and borrowing right now, and you have housing prices rising.”

Last week the credit bureau TransUnion said it anticipates 11.4 million Americans will take out home equity lines of credit between 2017 and 2022, more than double the 5.4 million Americans who took out home equity lines between 2011 and 2016.  TransUnion currently projects 1.4 million for 2017, representing a well of untapped opportunity.

“Since 2009, there’s really been a supply shortage. A lot of lenders got out of the HELOC business or curtailed that activity there,” said TransUnion’s Joe Mellman.  “We’re already starting to see more and more lenders are coming back into the market or scaling up their operations.”

While an overall HELOC bump is likely still a few years away, lenders will need to speed up the origination process to compete in this space. Mellman predicted that traditional lenders would look to innovations in the fintech space to expedite HELOC originations.

However, Pratt issued a note of caution to lenders working to speed up the HELOC origination process. As the speed to closing increases, so does the risk of fraud – particularly fraud perpetrated by family members who have the same name as the homeowner.

Source:  National Mortgage News

Housing Affordability Still Strong Despite Price Increases

Posted on November 14, 2017 by Laura Lam

Black Knight Chart 2Home prices continue to increase, yet affordability actually improved since July, according to the latest Mortgage Monitor report from Black Knight.  As of September, the average homeowner needed 21.4% of their median income to purchase a home. This is actually down from July’s post-recession peak of 21.7% and low by historical standards.  For comparison, an average 24.2% of the median income was required to purchase a home from 1995 to 1999. That increased to 26.2% in the years before the housing boom from 2000 to 2003.

Interest rates declined about 40 basis points over the past 6 months, offering the opportunity for potential savings, but these would-be savings continue to be offset by the growing rates of home price appreciation across most of the nation.  However, according to Ben Graboske, Black Knight executive vice president of data and analytics, “when viewing the market through a longer-term lens, affordability across most of the country still remains favorable to long-term benchmarks.”

Home prices increased 6.24% from last year in August, however home price growth may have tapered off.  Currently, 47 out of the 50 states hold payment-to-income ratios below their 1995 to 2003 averages. The exceptions are Hawaii, California, Oregon and Washington D.C.

While optimistic scenarios showed most states will remain below their long-term benchmarks even as home prices continue to rise, more pessimistic scenarios show that if the 30-year mortgage rates rise significantly, several states could surpass their historical norms by this time next year.

“In looking at the affordability landscape across the country, we certainly see varying levels of affordability in each market compared to their own long-term benchmarks,” Graboske said. “But, by and large, the overall theme is that affordability in most areas, while tightening, remains favorable to long-term norms.”

Other experts agree housing is affordable by historical standards. First American Financial Corp.’s latest Real House Price Index found real home prices decreased 0.4% from the previous month, and are now 38.4% below their housing boom peak in July 2006.  The Urban Institute recently released a report that showed overall, housing in the U.S. remains very much in the affordable range, however certain markets could be close to a housing bubble.  The National Association of Realtors forecast that existing home sales will increase 3.7% in 2018 suggests housing will remain affordable into next year.

Source:  Housing Wire/National Mortgage News

Will Regulation Solve Cybersecurity Problems?

Posted on November 13, 2017 by Laura Lam

cybersecurity 3Cybersecurity was a main topic at a recent New York banking conference.  According to Arthur Lindo, senior associate director of the Fed’s division of supervision and regulation, more rules may not be the best answer to protecting the financial system.  “I don’t think the solution to the cybersecurity problem rests in regulation,” said Lindo.  “We’re going to try a more flexible approach.”

The Fed and other regulators issued a notice of proposed rulemaking on cyber risk management standards last year, which is typically followed by a prospective rule. After the industry and others involved in computer security discouraged regulators from creating a standard, they decided not to proceed, Lindo said.

Lindo’s comments come weeks after Equifax Inc. announced a massive consumer data breach that led to the theft of personal information of more than 145 million people. Lawmakers including Idaho Republican Mike Crapo, head of the Senate Banking Committee, have asked the Fed and other regulators whether they need more authority to help ensure credit bureaus adequately protect consumers’ information in the wake of the attack.

There are already lots of rules and regulations that banks and other financial institutions have to follow when it comes to cybersecurity. Several lenders and trade groups collected all U.S. and global guidance documents, regulatory requirements and recent proposals on cybersecurity into a “financial sector profile,” said JPMorgan Chase & Co.’s Kevin Gronberg.  It ended up being a 2,000-line spreadsheet showing a lot of overlap between rules and demands from different regulators, Gronberg said.

“We tried to put it all into a common language, so we can reply with the same answer when we get the same questions from different regulators,” said Gronberg, vice president of global cyber partnerships.

Source:  Bloomberg

Millennials are saving more for retirement

Posted on November 10, 2017 by Laura Lam

millennials retirementIn the race to save for retirement, one group is doing surprisingly well: millennial parents.  That’s according to a new NerdWallet survey, which found that 38% of millennial parents (ages 18-34) save more than 15% of their income for retirement. All told, millennial parents reported a median retirement savings rate of 10% of income, compared with 8% for Generation X parents (ages 35-54) and just 5% for baby boomer parents (ages 55+).

Given the picture typically painted of this age group, you might be shouting “fake news” right now. There’s one caveat: The results include only those currently saving for retirement; some in all age groups aren’t. But according to the survey, that cohort is surprisingly small among younger adults: Only 7% of millennial parents — and 15% of millennials overall — say they’re not saving for retirement at all.  How are the savers pulling it off, especially given the high cost of raising children?

They’re making sacrifices

  • Putting money aside often means giving things up.  According to the NerdWallet data, 76% of millennial parents have sacrificed something in order to do so.
  • 43% say they’ve cut back on dining out in order to save for retirement.
  • Of those saving for retirement, millennial parents and millennials overall are skipping trips in roughly equal numbers: 42% and 37%, respectively.

They’re saving more when they can

  • Millennial parents report that they’ve increased their savings rates after major life changes.
  • More than 50% say they’ve done so after landing a higher-paying job, 39% after getting married and 24% after their children entered school.
  • Other common opportunities to save more money might come after you’ve gotten a bonus or windfall, paid off a debt or cut monthly expenses such as your cable bill or insurance premium.

They’re making retirement a priority

  • Saving for retirement in your early 30s is no easy task when retirement is at least three decades away.
  • While the media tells us that this generation doesn’t save for retirement because they can’t deal with delayed gratification, 61% of millennial parents said that retirement is one of their top long-term savings priorities.
Source:  NerdWallet  

FHA Loan Delinquency Rate Flattens

Posted on November 09, 2017 by Laura Lam

FHA Loan delinquenciesClosed-end loans continue to return to normal levels as overall consumer delinquencies remained steady and serious delinquency rates remained near the 10-year low.  However Federal Housing Administration loans delinquency rates seem to be slowing down.  FHA loans, popular among first-time home buyers with affordability constraints, have made steady improvements this year but may be reaching a plateau.

Loans 90-days delinquent, in foreclosure or involved in bankruptcies remained stable at 4.31% in August. The seasonally adjusted estimate was 5.2% a year ago.  Even though delinquencies have been improving, FHA loans continue to make up a large percentage of the distressed loans in the larger market, according to Altisource Portfolio Solutions.

FHA product makes up about 17% of new originations but one-third of the distressed loans in the market, Altisource’s analysis of FHA and Black Knight data shows.

While the FHA share of distressed loans is up, compared to the crisis the amount of distressed FHA product remains low, noted James Harp, director of real estate auction services at the company.  “I think the volumes have come down significantly,” he said. “It no longer makes sense for servicers to maintain large staffs.”  As a result, “a single vendor is becoming really appealing to servicers who previously wanted to diversify their vendor base,” Harp said.

More than 70% of mortgage servicing professionals surveyed predict that the volume of loans that the FHA and the Department of Veterans Affairs insure at their organizations will increase in the next 12 to 24 months, according to the Altisource study.

Source:  National Mortgage News

Storm Damage: Auto Lenders Brace for Losses

Posted on November 08, 2017 by Laura Lam

used car prices stormU.S. auto lenders are starting to tally the financial damage from late-summer hurricanes that destroyed an estimated 500,000 to one million vehicles.  So far, the impact on lenders has been relatively small, since many of them are offering forbearance to car owners who are struggling to rebuild their lives. Moreover, the biggest U.S. auto lenders have less than 10% market share, so hurricane-related losses will be spread widely across the sector, hitting credit unions and the financing arms of automakers in addition to banks.

Still, the industry’s eventual losses seem likely to run into the hundreds of millions of dollars across Texas, Florida and Puerto Rico. During the quarter, major auto lenders such as Ally Financial and Wells Fargo significantly boosted their loan-loss reserves in anticipation of higher default rates.

The costs to specific banks hinge largely on their geographic footprint. Wells Fargo has significant exposure in Puerto Rico, where damage estimates are emerging more slowly than they did in Texas and Florida. A Wells Fargo subsidiary, Reliable Auto, is the largest vehicle financing companies on the storm-ravaged island.  Wells said during its third-quarter earnings call that it built its reserves by $450 million to plan for hurricane-related losses.

Ally, which is one of the nation’s largest auto lenders, set aside $48 million during the third quarter because of the hurricanes.  “We would expect higher chargeoffs over the coming few quarters due to the localized impact of the hurricanes,” said Ally CEO Jeffrey Brown.  Ally also insures the vehicle inventories held by auto dealers. The company said that it absorbed an additional $19 million in losses in that business, but that some dealers did not file claims because they were able to move vehicles from potential flood areas to higher ground.

Because auto lending is so fragmented, the impact of credit losses on any single institution “should be relatively manageable,” stated Michael Taiano, an analyst at Fitch Ratings.  Analysts at Standard & Poor’s said they expect the hurricanes to have a bigger impact on subprime auto lenders than on firms that focus on more creditworthy borrowers. Borrowers with better credit scores tend to have more equity in their cars.

For the entire auto lending sector, there is a silver lining to the hurricanes. Used-car prices, which determine the value of lenders’ collateral, are expected to rise as hundreds of thousands of Americans who lost their cars shop for replacements.

Source:  American Banker

Are Some Cities Close to a Housing Bubble?

Posted on November 07, 2017 by Laura Lam

Urban Institute housing bubble 2According to a recent report released by the Urban Institute, with home prices on the rise, some cities are inching closer to a housing bubble.  The Urban Institute explained that in order to determine if the U.S. is in a housing bubble, knowing the reason for the price growth is critical.

In order to determine the reason for the price growth, Urban Institute utilized its housing affordability index.  Overall, housing in the U.S. remains very much in the affordable range. The median household can afford a house that is $70,000 more expensive than the median home price today. In 2006, the median household could only afford a mortgage that was $22,000 more expensive than the median home price.  First American Financial Corp.’s latest Real House Price Index found that real home prices are now 38.4% below their housing boom peak in July 2006.

First American Chief Economist Mark Fleming explains that as mortgage rates rise, affordability will continue to decline for those seeking to achieve the goal of homeownership.  “While affordability is lower than a year ago, it remains high by historic standards,” he said.  “Only three states and the District of Columbia are less affordable today than they were in January 2000.”

Urban Institutehousing bubbleThe areas that could possible cause concern include Hawaii, which is up 8.1% from January 2000, California which increased 5.7%, and Alaska, where home prices are up 4.6%. The District of Columbia is up 3.6% from that same time period.

The Urban Institute saw similar results when it measured the top 37 largest metropolitan statistical areas to find which, if any, could be areas of concern for a real estate bubble using data from CoreLogic, the U.S. Census Bureau, the U.S. Bureau of Labor Statistics and Freddie Mac. Urban Institute’s researchers looked at the area’s real increase in home prices since their lowest point and the institute’s affordability measure.

The company added the rankings together and re-ranked the MSAs most likely to be in a bubble, calling it the “bubble watch” rank. The top 10 MSAs are ranked high on both home price growth and lack of affordability measures. But further down the list, the rank could be driven by one measure or the other.

Six metros stood out above the rest: the San Francisco area and the San Jose area tied for the top ranking in the institute’s bubble watch. The Miami area and Oakland, California areas tied for third place, and the Portland and Seattle areas tied for fifth place.

Source:  Urban Institute/Housing Wire