With home and commercial real estate sales improving dramatically last year, then a slowdown at the first of this year, there seems to be conflicting opinions and information on the health of the housing market nationally as well as regionally. Is real estate back to stay or was last year an exception? Most positive economic runs, particularly in Texas, historically last no longer than 6 years, so many are on the bandwagon questioning whether the housing and real estate market is back or not.
What are the major concerns? Heightened bank and mortgage regulation will slow buying, but not demand. Many consumers are voicing concerns about the ability to purchase shelter that they can afford. Because of this demand, the other major concern seems to be that housing is suddenly becoming unaffordable and there is risk of another bubble.
First, aren’t these contradictory arguments? If demand is going to be stifled, then how can we have another bubble? After all, any asset bubble is defined by irrational exuberance as exhibited by excess demand. Isn’t the rule, you can’t have your cake and eat it too? Either demand is stifled or there is a bubble, but not both.
Instead, here are some things, which in my mind will keep the market positive this spring.
Availability of credit
Any asset market runs on the availability of credit for purchase and sometimes speculation. The housing market is no different; its heights have been achieved when credit was easy and ultimately unhealthy when the lax underwriting did not perform positively as the markets slowed. This was one of many reasons for the housing bubble and eventual financial crisis of 2008.
Most of us can’t buy a home or investment property without credit. Analysis of the credit profiles of recent purchase transactions tells us that the only real dimension in which credit availability is “tight” right now is with credit scores. Before the crash, many mortgages were underwritten with lower credit; about 10% of purchase originations had FICO credit scores below 620. In addition we saw many ‘subprime’ opportunities in the early 2000’s, with lower lending standards than previously, and with the pendulum swinging to the conservative side today.
At the moment with tighter credit, approximately 0.3% of purchase mortgage originations have credit scores below 620. In talking to local and regional lenders, there are good signs this spring. Some standards are relaxing as lenders are announcing reductions in minimum credit score requirements. Before you begin to gripe about the resurgence of the disastrous subprime loan, remember that lending to borrowers with lower credit scores can and has been done successfully in the past. The caution on lower credit scores is you don’t also layer additional risk on top such as payment shock and high leverage. As an analysis will show, the afore mentioned creates opportunity for speculation with little consistent underwriting. Always a formula for the highs of bubbles and the following credit crashes.
The good news for the remainder of the year is the potential of slow rise of interest rates and many lenders looking at making lower credit score mortgages to fuel their appetites. Rising interest rates should make getting a loan easier. Rising rates historically means lenders’ refinance business dwindles, forcing them to compete for buyers by potentially loosening their lending guidelines. In addition, credit unions and banks may be making it easier for some prospective buyers to qualify for a mortgage. Less stringent requirements and qualifying criteria may help some people finally get that home loan. If you have good credit and some savings available for a down payment, you might just be able to get a loan for your dream home this year.
Will rates stay low? Yes, but not as low as they’ve been. The rates we have seen recently are the second lowest rates have been in 5000+/- years. If the economy continues to heal they should rise. In 2014-15 the new Federal Reserve Chair Janet Yellen is expected to continue Ben Bernanke’s policy of keeping mortgage rates low by buying blocks of mortgage-backed securities, but the Fed’s bond-buying taper could push rates higher.
Pent-up demand and supply
With little to no development and homebuilding in the last 6+ years and the continued formation of households, there is pent up demand. Particularly in Texas, where we have seen all Texas metros improve with shorter times for listings on the market as well as improved appreciation over the last couple of years. Many current and prospective homebuyers are also first or second time home sellers. Even in the best of times, first-time homebuyers account for much less than half of home purchases. The existing homeowner who sells and then buys (called housing turnover as well as 80+% of most markets) is the backbone of the housing market. Yet, nationally, many markets are still under the value of their mortgage, meaning they’re underwater or have less than a 20% equity stake built up.
Negative equity peaked in December 2009 when more than 12 million mortgage homeowners nationally were underwater. Over the past four years, more than 5.5 million homeowners have regained equity, reducing their risk of foreclosure and unlocking pent-up supply in the housing market.
Through 2014-15 fewer homeowners will be underwater with the strength of the demand in the market. Rising values helped 2.5+ million homeowners with underwater mortgages regain positive equity status during the second half of 2013. By Q3, a CoreLogic report found that about 6.4 million (13.3% of all residential properties with a mortgage) homes were still in negative equity at the end of 2013. Watch for that number to shrink this year and next.
CoreLogic’s negative equity analysis showed nearly 6.5 million homes (13.3 % of all residential properties with a mortgage) were still in negative equity at the end of the fourth quarter report. In 2013 limited supply drove stronger price increases, and that could change as more sellers look to capture equity from their homes in 2014. Realtor.com notes that the inventory (homes available for purchase) shortage began to soften in February. New construction and rising prices should bring more homes, both new and old, on to the market in 2014, helping inventory return to traditional levels
The strong gains in home price appreciation in many of the hardest hit markets have created a healthier cycle though, relieving more homeowners’ higher debt than value situations and putting them in the position to become sellers and then buyers again in 2014-15.
Here in Texas, according to real estate research and brokerage firm Redfin (see chart below) our regional metros led the nation and have seen an increase in velocity of home sales over 2013, which in most of our regional markets was one of the best on record.
With the increase in demand nationally but more importantly here in Texas, metro home values will rise between 5% to 10% in all metros in 2014. For comparison’s sake, 2013 saw jumps nationally of 3% to 5%, with increases of more than 20% in some hot spots. These strong gains, while beneficial in many ways, are also unsustainable and well above historic norms for healthy, balanced markets. The markets that saw this aggressive double digit appreciation were also the sand states where values fell double digit annually also, unlike anywhere in the Texas region where last year was the first year of significant single digit appreciation. Towards the end of 2015, 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.”
So are we in a bubble or not? Do most consumers really think that house prices won’t go down? Assuming that prices couldn’t go down was the foundational premise upon which speculators built the last bubble. If you believed in ever-rising prices, then it didn’t really matter whether the borrower was qualified. But most analysts are hard pressed to find anyone now who believes house prices can never fall, and rising rates and increasing supply will slow price appreciation over the coming months.
The days of financially engineered loans of ever-larger amounts, keeping pace with rising prices while holding monthly payments low, are a thing of the past. The lack of access to “unreasonable” credit should, alone, act as a governor of the risk of bubbles.
As we enter the spring buying season, talk of bubbles and affordability crisis is overblown, in my opinion. What really matters is good old-fashioned supply and demand. Expect more supply as the cycle of price appreciation unlocking pent-up supply continues. Expect increasing purchase originations as credit standards relax modestly and help to stimulate more demand. Rationally, most should feel exuberant about the housing market.
For a better explanation of what constitutes an asset bubble please visit our Independence Title blog entry from March 29,2013, “Is there a danger of a housing bubble in Texas?”
With the increase in values and rates, affordability will decline. Nationally, as well as locally income has not kept up with home prices even in a depressed market. A great example is Austin, where over the last 10 years; rents have escalated 58%, home values 38%, and wages less than 10% over the decade.
Despite the slower pace of price increases, home affordability will decline as mortgage rates rise. The real culprit is income levels, which aren’t keeping pace with the increases in housing costs. In 2013, the National Association of Realtors’ Home Affordability Index dropped to a five-year low. Experts predict the trend will continue through 2014-15.
This said, one of the contributing factors to Texas growth is the ability to buy more home and have your pay check go further.
Nationally, because of the above mentioned factors, homeownership rates should fall 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 ten – in a home, if only temporarily. 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% for the first time since the mid-1990s. Watch also for adult children to move out of their parents’ homes, starting their own households, and further decreasing the overall homeownership rate.
Regionally, the ability to buy more house in most Texas metros should continue to be a motivating factor in those consumers who have been waiting to move to better opportunity.
So for the first time in a number of years, the Bureau of Labor Statistics is showing that more Americans will move where they can get more house and lower cost of living. The national trend of rising prices, a reversal of underwater mortgages, and easier credit will free Americans up to move. But next time they’ll choose smaller homes in more affordable locations. Most predictions will send Americans to less expensive hubs like Austin, Dallas, Houston, San Antonio, and less expensive metros.
It’s still cheaper to buy than rent.
If you live in a metropolitan area, it may make more financial sense to buy a home than rent a house, condo, or apartment. According to a 2013 Trulia Trends study, buying a home is 44 percent cheaper than renting in the 100 largest metro areas in the United States. While this data was calculated based on last year’s lower mortgage rates, there is still a significant price difference in total monthly costs with today’s rates. And again income vs. home value is tremendously better in Texas than almost any other state that is creating jobs.
Comparatively, home prices are relatively low.
Housing price trends vary significantly by location and even by neighborhood, but the average housing price trends across the country look promising for prospective homebuyers looking at Texas versus their current state. The S&P/Case-Shiller composite index of 20 metropolitan areas increased only 1 percent this past season, so 2014 could still be a great time to buy.
Because of the lack of dramatic appreciation, there is less competition from home flippers.
Investors looking to buy and flip houses can’t move as quickly as they did in other market in Texas. Housing prices in some markets are increasing, making house flipping attractive. But in Texas it has historically been a lower appreciation value. This gives prospective homebuyers more inventory to choose from and the benefit of having less pressure to close a deal because of another pending offer. This could be the time to enjoy the freedom of shopping around for that perfect home and making an offer.
Avoid the cost of rising rent.
A buyer’s market means it might be time to say goodbye to renting for good, but Texas is a seller’s market. That said, rent increases historically go up quicker than appreciation. So as you look at shrinking housing dollars at your current location or want to move but will experience a spike in rent, consider the benefits of buying a home instead. You may be able to secure a great rate with your credit history and end up paying the equivalent or less in monthly payments as you build equity in a home. Renting can be a more affordable option for the short term, but renters still have to face rising rental costs year after year.
Force yourself to Invest in your future. Buying a home gives you a chance to start building equity, and you are investing in your future. Even if you end up selling your home in five or ten years, you could profit from the sale and invest that money elsewhere. If you’ve been dealing with rising rent or the hassles of costly moves for the past few years, settling in to a home can stabilize your housing expenses – especially if you get a fixed-rate loan at a great rate. You won’t have to worry about your monthly housing expenses changing significantly for a few years, and you will pay for something that has more value than a rental property. Consider the benefits of making this type of contribution to your future month after month.
Of all the regional markets, look what region has had consistent growth over the last 10 years. Not necessarily explosive appreciation, but affordable. Now is the time to buy in Texas!