Switching Gears: Builders Turn to Starter Homes to Lure Millennials

Posted on May 22, 2017 by Laura Lam

starter homes

First-time buyers are rushing to buy homes after a decade on the sidelines, promising to kick a housing market already flush with luxury sales into higher gear.  Tracking home sales to a particular age group is hard, but a series of data points form a mosaic of a generation of young people ready to buy: The number of new-owner households was double the number of new-renter households in the first quarter of this year, the share of first-time buyers is creeping back toward the historical average, and mortgages for first-timers are on the rise.

“They’re crawling out of their parents’ basements, they’re forming households and they’re looking to buy,” said Doug Bauer, chief executive of home builder Tri Pointe Group Inc.

In a shift, new households are overwhelmingly choosing to buy rather than rent. Some 854,000 new-owner households were formed during the first 3 months of the year, more than double the 365,000 new-renter households formed during the period, according to Census Bureau data. It was the first time in a decade there were more new buyers than renters, according to an analysis by home-tracker Trulia.

Taking the hint, home builders are beginning to shift their focus away from luxury homes and toward homes at lower price points to cater to this burgeoning millennial clientele. In the first quarter of this year, 31% of the speculative homes built by major builders were smaller than 2,250 square feet, indicating they were in the starter-home range, according to housing-research firm Zelman & Associates. That is up from 27% a year ago and 24% in the first quarter of 2015.

“There’s an increasing confidence level in that part of the market,” said Gregg Nelson, co-founder of California home builder Trumark Cos. “The recovery is finally starting to take hold in a broader way.”

The shift reflects a reversal of a pattern that has driven the 5-year housing-market expansion.  Up until now the luxury market has soared, while the more affordable end of the market has struggled. Tough lending standards, slow wage growth, growing student-debt obligations and a newfound fear of homeownership combined to crimp demand among millennials in particular.  The return of the starter-home market means the housing divide is finally starting to narrow.

Source:  Wall Street Journal/Housing Wire

American Households Spend 53% of Its Income On These Expenses

Posted on May 19, 2017 by Laura Lam

household spendingIf there’s one fairly steady theme over the past couple of decades, it’s that consumers are saving less of their income and their household budgets are being pushed to the limit.  According to the St. Louis Federal Reserve Bank’s February data, the personal saving rating in America was a paltry 5.6%. Comparatively, U.S. workers were socking away more than 12% of their paycheck 50 years ago.  At the same time, a number of household expenses have largely outpaced the inflation rate and wage growth. These include healthcare costs, college expenses, and in recent years housing costs, since home prices have advanced well ahead of the inflation rate.

Surprisingly, education costs and medical expenses aren’t among the average American’s top expenditures, according to 2013 data from the Bureau of Labor Statistics aggregated by ValuePenguin. Of the 15 categories that described the average household’s spending, healthcare spending comes in at number 8 at 6%, while education expenses rank 12th at 2%.   However, the top 4 spending categories wound up eating up more than half (53%) of the average American household’s budget in 2013.

  1. Housing costs (16%) – It should come as no surprise that housing costs, such as a mortgage or rent payment, make up the biggest portion of the average household’s budget. Housing costs have far outpaced the rate of inflation over the past 20 years. Thankfully, current and prospective owners have been blessed with 8 years of well-below-average mortgage rates.  Looking for ways to lower your housing expenses?  If you’re a homeowner, consider refinancing from a 30 year mortgage to a 15-year.  If you’re looking to buy a home, a 15-year mortgage will give you a substantial interest rate discount that could save thousands or tens of thousands of dollars over the lifetime of your loan. Maintaining a good or excellent credit score also ensures that you will receive the best mortgage rates possible.  If you’re a renter, now is a good time to give serious consideration to buying a home. A July 2016 report from GoBankingRates found it to be cheaper to buy a home than rent a home in 42 of the 50 states.
  2.  Transportation expenses (14%) – The average American household spends a good chunk of its income toward transportation expenses – including gas, auto loan payments, public transportation expenses, and vacation travel costs.  The two easiest ways to cut average transportation costs are pretty straightforward: consider public transportation and run the math on whether a new vehicle is right for you.  A recent American Public Transportation Association’s Transit Savings Report showed that a 2-person household who gave up their car and commuted would save an average of $803 per month, or $9,634 annually.  Consumers should also research whether or not it makes sense to pony up extra cash for a new vehicle, or one that’s green (hybrid or electric).  Note that it could take well over a decade for a consumer to be paid back in pump-price savings the extra amount they paid to buy an electric vehicle.
  3. Taxes (12%) – The average American household hands over 12% of its income to pay personal taxes. This does not include property tax, sales tax, or FICA taxes – this is purely personal taxes, of which federal income tax is the biggie.  Want to pay less federal income tax? Consider making a retirement contribution, give to charity, use your home as a tax shelter, and don’t forget about the Earned Income Tax Credit (EITC)
  4. Utilities and other household operating costs (11%) – The 4th highest expense in the average budget is also tied to owning a home. Utilities and household expenses, such as furnishing a home, or paying for services (landscaping, babysitting, or pest control), comprise about 11% of annual income. This means that more than a quarter of the average household’s income goes toward mortgage payments and home maintenance. While utilities are necessary, there are a few ways to reduce expenses long-term.  Energy-efficient upgrades (i.e. appliances, tankless water heaters and Nest thermostat) can cost more in the upfront but the tax credits and savings may be worth it.  Also, maintaining good or excellent credit can also help.
Source:  Motley Fool

Consumer Housing Optimism Rebounds in April

Posted on May 18, 2017 by Laura Lam

home sentiment april 2017Many consumers grew more optimistic about the housing in April, rebounding from March’s dip in confidence, according to the Fannie Mae Home Purchase Sentiment Index.  The index increased 2.2 percentage points in April to 86.7, and 5 of the 6 components saw an increase.  Americans who said now is a good time to sell a home was the only component to decrease, dropping 5 percentage points to 26%, however those who said now is a good time to buy a home increased 5 percentage points to 35%.

Consumers were also more optimistic about the stability of their jobs, with that component increasing by seven percentage points to 77%. Respondents who reported a household income that’s significantly higher than 12 months ago increased by two percentage points to 13%.

Americans who said mortgage rates will go down over the next 12 months rose by 3 percentage points to -57% and the share of those who say home prices will increase jumped one percentage point to 45% in April.

“The Home Purchase Sentiment Index returned to its longer-term trend line after reclaiming ground lost last month.  This is aligned with our market forecast of about 3% sales growth in 2017,” said Doug Duncan, Fannie Mae senior vice president and chief economist.  “Historically strong inflation-adjusted house price gains are tempering consumer sentiment, whereas consumer optimism regarding the ease of getting a mortgage reached a survey high.  On balance, housing continues on a gradual growth track.”

Source:  Housing Wire/MultiFamily Biz
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Majority of Homes Priced Below Pre-Recession Peak

Posted on May 17, 2017 by Laura Lam

Trulia survey home valueWhile many reports show that home prices in many markets surpassed their previous peak, Trulia’s new study shows this is just the average, and more homes than not have yet to recover their full value lost in the recession.  When it comes to individual homes, the U.S. housing market has yet to recover, according to the study. It shows just 34.2% of homes reached values surpassing their pre-recession peak.

While a full 98% of homes in Denver and San Francisco surpassed their pre-recession peaks, this is not the case across other metros in the U.S. In Las Vegas and Tucson, Arizona, for example, less than 3% of homes reached their pre-crisis peaks.

The study studied property-level home value recovery nationally and in the 100 largest metro areas by comparing the nominal value of each home as of March 1st to the nominal peak value of that home prior to the onset of the Great Recession, December 1, 2009. If the current value was greater than the pre-recession peak, the study considered that home to have recovered.

Since the recession, the share of homes that reached their pre-crisis levels has risen about 5 or 6 percentage points each year. At this rate, the study shows the market won’t see 100% of homes reach their pre-crisis levels until about September 2025.

Source:  HousingWire/MarketWatch/Trulia

Millions of Homes Still ‘Seriously Underwater’

Posted on May 16, 2017 by Laura Lam

attom underwater 1Q2017

Since the housing recovery began a few years ago, millions of homeowners have gotten their heads back above water due to rising home prices.  That said, there are still millions who are still underwater.

In its latest report, ATTOM Data Solutions found nearly 5.5 million homes in the “seriously underwater” category at the end of the first quarter. Homes in that grouping have mortgages that are at least 25% more than the homes’ current value.  The report says the number of homes seriously underwater actually rose from the number at the end of the fourth quarter, suggesting a worsening of the situation.

However, the authors point out that most of these seriously underwater homes are in markets that were hit hard by the collapse of the housing market and have yet to recover.   “While negative equity continued to trend steadily downward in the first quarter, it remains stubbornly high in often-overlooked pockets of the housing market,” said Daren Blomquist, senior vice president at ATTOM Data Solutions. “We continue to see 1 n 5 properties seriously underwater in several Rust Belt cities, along with Las Vegas and central Florida.”

Part of the problem, says Blomquist, is that these markets tended to have a higher than average number of distressed sales during the first quarter. That created a drag on the overall market and pulled down home values. And

In some cases, literally being under water contributed to the problem.  “In the case of Baton Rouge – that increase in distressed sales may be in part attributable to the catastrophic flooding there in August 2016,” Blomquist said. “Across the country, the share of seriously underwater homes was higher in high-risk flood zones.”

The report found that the cities with the biggest quarterly increase in seriously underwater homes were Baltimore, Philadelphia, McAllen, Tex., Cleveland, and St. Louis. The increase, however, might be a temporary blip because the number is still down from year-over-year levels.  The report also lists markets where homeowners have the most equity in their homes. As you might expect, they are all in states where the housing market has recovered — New York, California, and Hawaii.

Source:  ATTOM Data Solutions/Consumer Affairs

Bank Card Default Rate Increases, Auto Loan Defaults Down

Posted on May 15, 2017 by Laura Lam

The S&P/Experian Consumer Credit Default Indices, a comprehensive measure of changes in consumer credit defaults, shows the composite rate unchanged from last month at 0.94% in March. The bank card default rate recorded a 3.31% default rate, up 9 basis points from February. Auto loan defaults came in at 1.00%, down 5 basis points from the previous month. The first mortgage default rate came in at 0.75%, up one basis point from February and reaching a one-year high.

The 5 major cities showed mixed results in March with two higher and three lower default rates. New York had the largest increase, reporting 1.09%, up 15 basis points from February. Chicago reported 1.05% for March, rising 6 basis points from the previous month. Miami came in at 1.40%, down 2 basis points from February. Dallas reported a decrease of 4 basis points at 0.79%. Los Angeles saw its first default rate decrease since September 2016, down 5 basis points at 0.75%.

The National bank card default rate of 3.31% in March sets a 45-month high. When comparing the bank card default rate among the 4 census divisions, the bank card default rate in the South is considerably higher than the other 3 census divisions.

“The continuing low consumer credit default rate reflects recent strong job growth and a favorable economy,” says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The economy is also supporting consumers’ positive outlook and strong sentiment about the economy and their financial condition. Data from the Federal Reserve shows that consumer credit continues to expand at more than 6% per year, the highest pace since 2007-2008. Other Federal Reserve data indicate that household net worth in 2015 and 2016 rose 2.3% each year.

“Currently the debt service ratio for consumer credit – the percentage of disposable income required to service consumer credit debt – is 5.58%, up from its recent low of 4.92% in 2012 but lower than the 6.01% peak seen shortly before the financial crisis.  The higher interest rates that most analysts expect over 2017-2018 are likely to combine with continued growth in consumer credit to push the debt service ratio back towards the 6% level.”

Source: S&P Dow Jones Indices/Experian

Millennials’ Financial Habits Differ from Previous Generations

Posted on May 12, 2017 by Laura Lam

millennial investmentsMore so than Gen X and baby boomers, millennials prioritize issues like buying a home, purchasing cars, saving for and planning vacations and weddings and college planning, according to a recent Stash survey.  Yet these are not issues that most financial advisers typically bring up with clients.  “We have a retirement, baby-boomer-centric service model that tends not to interest millennials,” said Alan Moore, co-founder of the XY Planning Network.  “Advisers need to look at where younger investors are in their lives and help them with those issues, such as navigating debt.”

The financial habits of millennials,a giant generation of 92 million people who are entering their prime earnings years, are different from the previous two generations.  Most believe this group is more conservative as investors than previous generations because of the impact that the 2008 economic recession had on them, as it hit during the early years of their career or in some cases as they were seeking to attend college and discovered their parents’ economic trials limited such goals.  “They are not dramatically dissimilar to depression babies,” said Bill Finnegan, chief marketing officer for AMG Funds.

AMG also completed an investing survey that focused on the differences among millennial investors.  The survey revealed some interesting findings.  About 66% of young investors (between 17 – 36) define “long-term” as a period of less than 5 years. They also put great faith in the benefits of using a robo adviser.  About 70% of millennials said they believe they would get higher returns from a robo adviser than a live adviser and 84% expect to receive more objective advice from a digital advice platform, the survey found.

“This makes sense because this group is much more distrusting of human advisers than other generations,” Mr. Finnegan said.  Growing up in a digital age, this generation is armed with information about the markets and investments.  “They don’t need access to information, they need access to knowledge and expertise,” adds Mr. Moore.  Millennials want regular guidance from an adviser, a “personal trainer” type of approach where the financial professional helps keep them on track with their goals.

Source:  Investment News

Fannie Mae Changes Affect Borrowers With Student Loans

Posted on May 11, 2017 by Laura Lam

Fannie Mae has recently outlined changes in the way lenders can qualify potential borrowers who have student loan debt.  The policy change is designed to make it easier for more consumers to qualify for mortgages, in part by excluding some non-mortgage debt for income-to-debt calculations.  These debts can be things like installment loans, student loans, and other monthly debts as defined in the company’s mortgage lending guide.

According to the Fannie Mae web site, “If the lender obtains documentation that a non-mortgage debt has been satisfactorily paid by another party for the past 12 months, then the debt can be excluded from the debt-to-income ratio.  This policy applies regardless of whether the other party is obligated on the debt.”  The move will allow borrowers to purchase a more expensive home, or will allow them to more easily qualify to buy an entry level home if their income is right at the approval threshold.

The policy change also allows lenders to refinance existing loans and apply the home’s equity to paying off student loan debt. That, Fannie Mae says, will allow current homeowners to increase their monthly cash flow. But there are things to consider before doing that.

“Swapping student debt for mortgage debt can free up cash in your family budget, but it can also increase the risk of foreclosure when you run into trouble,” said Rohit Chopra, senior fellow at the Consumer Federation of America (CFA).  Chopra says the policy may help those with solid income and stable employment.  “But for others, they might be signing away their student loan benefits when times get tough,” he said.

CFA says the policy change has the potential to make a difference in the mortgage market, especially in its effect on borrowers with student loan debt. At this point, around 43 million Americans owe approximately $1.4 trillion in student loans.

Before taking advantage of the refinance option, CFA urges homeowners with student loan debt to weigh the pros and cons. It says homeowners who use their home equity to pay off student debt will give up their rights to income-driven repayment options on their federal student loans. Currently, those rights cap federal student loan payments at roughly 10% of income.  That’s important, the consumer group says, if your income suddenly drops, such as during a time of unemployment. CFA says homeowners may also be trading away loan forgiveness options.

Source:  Consumer Federation of America/Consumer Affairs/Inside Higher Ed

Foreclosure Process Can Take 5 Years in Some States

Posted on May 10, 2017 by Laura Lam

USMap-Judicial-ForeclosureA decade ago, a home in Connecticut could be sold to another party about 12 months after a borrower stopped paying a mortgage.  These days, it’s more like 5 years.  The national average for liquidation timelines in 2016 reached 48 months. In many Northeastern states, including Connecticut, that timeline reached or surpassed the 55-month mark last year, according to data from Fitch Ratings.

Sean Nelson, a senior director at Fitch Ratings, said the increase began as a direct result of the mortgage crisis. Loan servicers were not used to dealing with thousands of delinquent borrowers at one time which created a large backlog of foreclosures.  While the national numbers appear to have reached their peak and are beginning to decline, the Northeast is still seeing increases in the time it takes to liquidate a foreclosed home.  One of the major drivers of the timeline, which affects many states, is whether a state is considered judicial or non-judicial. “When a lender wants to foreclose in a non-judicial state, they don’t have to go through the court system,” Nelson said. “In a judicial state, you do.”

Judicial states give the borrower more time to contest a foreclosure proceeding while prolonging the process through paperwork and court hearings.  The following are judicial states:  Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, Vermont, and Wisconsin

The practices and actions of a loan servicer can also have a significant impact on the timeline. Some servicers give borrowers the option of attempting to market their house through a short sale instead of foreclosing on the home. “They accept it’s going to take a loss but it’s likely going to be a smaller loss than a foreclosure,” Nelson said.  Loan servicers could also give borrowers the option of a loan modification by lowering the interest rate on the mortgage, extending the term of the loan or taking another route.

“The longer the timeline, the more it costs,” Nelson said. “You’re not getting payments from the borrower. There could be deterioration to the property and that’s a cost. The longer the foreclosure, the bigger the loss is going to be on the mortgage.”

Source:  National Mortgage News

Millennials’ Debt Load Could Weigh Down Economy

Posted on May 09, 2017 by Laura Lam

millennial debt 2Millennials — 21 to 34-year-olds — hold an estimated $1.1 trillion of the country’s $3.6 trillion in consumer debt, according to UBS, as rising student and auto loans outweigh a drop in mortgages.  All that rising debt is coming with rising default risks. A UBS evidence lab survey found that 52% of people worried about defaulting on any loan over the next 12 months were in the 21 to 34 age group.

That’s not good news considering those same individuals are meant to be the largest source of spending on big-ticket purchase items like houses and cars over the next year.  There is already evidence that millennials are changing their spending habits on smaller items where, according to Lindsay Drucker Mann of Goldman Sachs Research, millennials are willing to search for the lowest price on an item or patiently wait for the right deal to pop up.

“We see areas where millennials are willing to spend, but overall, they’re not levering themselves up to make their dollars go further; they’re being much smarter and much more conservative about their balance sheets,” said Drucker Mann.

Concerns about student loans have come up before. In early April, New York Fed President William Dudley said that “continued increase in college costs and debt burdens could inhibit higher education’s ability to serve as an important engine of upward income mobility.”

But auto-loan debt is another matter. A growing amount of auto loan debt is coming from leasing, with 32% of millennials opting to lease in 2016, up from 21% in 2011, according to a January report from Edmunds. Among households making $50,000 or less, millennials made up 21% of lessees (the largest of any age group).

Should delinquent car payments become an issue because already-squeezed millennials choose to pay student loans first, lower-credit-score applicants could have a hard time financing car purchases. If that happens, automakers could be hurt.  If big-ticket purchases begin to slow down, economic growth expectations may need to adjust.

Source:  Business Insider