It's beginning to look like unemployment may be the next big threat to the housing market. Today's numbers were, once again, not good. 524,000 people lost their jobs in December for a total of 2.6 million in 2008. People without jobs can't buy houses, and people who fear losing their jobs don't buy much either.
The headlines say this is the worst since World War II, but that's a bit of an over-dramatization. It is true that this is the largest annual job loss since 1945 when 2.75 million people lost their jobs. However, in a growing country you can't just compare numbers like that without adjusting for the size of the workforce. The US population was less than half what it is now, so 2.75 million was a lot more back then.
The scary detail in these numbers is that 1.9 million of the 2.6 million total were lost in the last four months of the year. The job losses will likely get worse before they get better, and it could be a while if we're only four months into it.
Unemployment is really more of an indirect threat to our local real estate market. We don't have any good jobs to lose in Grants Pass. The people moving here, however, have to sell their old homes to someone, and that someone usually needs a job to afford that house. Great rates and low prices are all very nice, but they won't be enough to fix the market without jobs.
Friday, January 9, 2009
Monday, January 5, 2009
New Appraisal Rules
On December 23rd the final Home Valuation Code of Conduct was released. The HVCC is a new set of rules designed to prevent undue influence on appraisers by lenders, mortgage brokers and realtors. While inflated appraisals may or may not be a significant problem (see my earlier post), these rules are definitely not the solution.
The most significant change is that virtually all appraisals will have to be ordered through Appraisal Management Companies, or AMCs. These AMCs are essentially middlemen who take orders from lenders and assign them out to appraisers. This firewall is seen as a way to prevent appraisers from feeling pressure to hit a specific value.
Of course this assumes that lenders are bad and the AMCs are above reproach. The irony of the situation is best expressed in an article by Dave Biggers, "This massive push toward AMCs is all the more surprising given that the original lawsuit by the Attorney General was filed against eAppraiseIT, an AMC, accusing it of inflating appraisals to satisfy Washington Mutual's demands."
Even if we assume that appraisers were inflating values in response to pressure from their clients, this solution takes us in the complete wrong direction. If an appraiser is pressured by a loan officer, the worst that can happen is that they'll lose that person's business. Is one client really worth risking your license over?
Once all the appraisals are ordered by a small handful of national AMCs that becomes a whole different question. Can any appraiser afford to piss off Landsafe, LSI, or eAppraiseIT when they become the Wal-Marts of appraisal ordering? The potential for abuse is much higher in a world where there are only a few large clients ordering all the appraisals.
The most significant change is that virtually all appraisals will have to be ordered through Appraisal Management Companies, or AMCs. These AMCs are essentially middlemen who take orders from lenders and assign them out to appraisers. This firewall is seen as a way to prevent appraisers from feeling pressure to hit a specific value.
Of course this assumes that lenders are bad and the AMCs are above reproach. The irony of the situation is best expressed in an article by Dave Biggers, "This massive push toward AMCs is all the more surprising given that the original lawsuit by the Attorney General was filed against eAppraiseIT, an AMC, accusing it of inflating appraisals to satisfy Washington Mutual's demands."
Even if we assume that appraisers were inflating values in response to pressure from their clients, this solution takes us in the complete wrong direction. If an appraiser is pressured by a loan officer, the worst that can happen is that they'll lose that person's business. Is one client really worth risking your license over?
Once all the appraisals are ordered by a small handful of national AMCs that becomes a whole different question. Can any appraiser afford to piss off Landsafe, LSI, or eAppraiseIT when they become the Wal-Marts of appraisal ordering? The potential for abuse is much higher in a world where there are only a few large clients ordering all the appraisals.
Scapegoating the Appraisers
We've been looking for someone to blame for the crash of the real estate market since the beginning. Maybe it was the homeowners borrowing more than they could afford. Maybe it was the subprime lenders selling those adjustable rate loans. Maybe it was the big investment bankers with their insatiable appetite for exotic mortgages. Or maybe it was the appraisers for inflating the values and allowing people to borrow more than their houses are worth.
I've heard this argument, that appraisers are to blame for people owing more than their house is worth, even from "respectable" news sources like Bloomberg. This is just ridiculous. Certainly there are bad actors in any profession and those individuals should be rooted out, but that's not why people owe more than their homes are worth.
The real estate market is like any other market, like the stock market for example. My stocks are worth a lot less now than they were six months ago. Does that mean that they weren't really worth that much when I bought them? I don't think so. Values go up and down, the difference here is that people are highly leveraged in their homes. If you took out a 100% loan on your home a year ago you now owe more than the house is worth, period. It doesn't matter what it was worth back then, it's going to be lower now because values are down.
If we all borrowed money to buy stocks we'd be in the same situation because of the stock market collapse. As it is we lament the money we've lost in our retirement accounts, but nobody looks to blame someone else for having paid too much. We accept that this is the way markets work and hope it recovers soon. We all need to take a deep breath and realize that the same is true of the housing market. Or should we go after our stock brokers for allowing us to pay too much for shares we bought a year ago?
If you got the house you want and a payment you can afford, who cares what the value is now? Most people aren't in default because of the value. They're in default because they can't afford their payments. Of course if values were still going up many of those people could have bailed themselves out by selling, but that still wouldn't have made it a good idea to take that loan in the first place.
For the most part those "inflated appraisals" were simply a reflection of the inflated home prices at the peak of the market. In addition, inflated appraisals aren't even the big issue when it comes to mortgage fraud. According to Fannie Mae's Fraud Update on loans done in 2006 and 2007, inflated values account for a whopping 5% of all mortgage fraud. Compare that to 30% for misrepresented income and 26% for doctored up liabilities and you see that appraisers are not the root of the problem after all.
Obviously there are appraisers committing fraud for their own gain, and those individuals should be punished. Appraiser's are licensed, and the licenses of bad appraisers should be revoked. The unethical will always find a way around whatever new rules we throw at them. The best solution here is to spend some time finding and removing the bad ones instead of coming down on the whole industry.
I've heard this argument, that appraisers are to blame for people owing more than their house is worth, even from "respectable" news sources like Bloomberg. This is just ridiculous. Certainly there are bad actors in any profession and those individuals should be rooted out, but that's not why people owe more than their homes are worth.
The real estate market is like any other market, like the stock market for example. My stocks are worth a lot less now than they were six months ago. Does that mean that they weren't really worth that much when I bought them? I don't think so. Values go up and down, the difference here is that people are highly leveraged in their homes. If you took out a 100% loan on your home a year ago you now owe more than the house is worth, period. It doesn't matter what it was worth back then, it's going to be lower now because values are down.
If we all borrowed money to buy stocks we'd be in the same situation because of the stock market collapse. As it is we lament the money we've lost in our retirement accounts, but nobody looks to blame someone else for having paid too much. We accept that this is the way markets work and hope it recovers soon. We all need to take a deep breath and realize that the same is true of the housing market. Or should we go after our stock brokers for allowing us to pay too much for shares we bought a year ago?
If you got the house you want and a payment you can afford, who cares what the value is now? Most people aren't in default because of the value. They're in default because they can't afford their payments. Of course if values were still going up many of those people could have bailed themselves out by selling, but that still wouldn't have made it a good idea to take that loan in the first place.
For the most part those "inflated appraisals" were simply a reflection of the inflated home prices at the peak of the market. In addition, inflated appraisals aren't even the big issue when it comes to mortgage fraud. According to Fannie Mae's Fraud Update on loans done in 2006 and 2007, inflated values account for a whopping 5% of all mortgage fraud. Compare that to 30% for misrepresented income and 26% for doctored up liabilities and you see that appraisers are not the root of the problem after all.
Obviously there are appraisers committing fraud for their own gain, and those individuals should be punished. Appraiser's are licensed, and the licenses of bad appraisers should be revoked. The unethical will always find a way around whatever new rules we throw at them. The best solution here is to spend some time finding and removing the bad ones instead of coming down on the whole industry.
Tuesday, December 23, 2008
Home Sales in the West Still Strong
Once again the nationwide Existing Home Sales numbers are grim, and once again the West is moving in the opposite direction. The headlines say that last month saw the sharpest decline in home sales on record and that the prices are also down by 13.2%, the largest percentage since they began keeping track.
A closer look at the data shows two very different trends blending together to give these numbers. The West was the only region to show an increase in existing home sales once again. In fact, the single family numbers in the west are up 19.8% over last year, which is actually pretty impressive.
Of course a lot of this is the result of dramatically lower prices as bank owned properties begin to move. Single Family Home prices were off by 25.5%, which is by far the most for any region.
Once again this looks like a "first in, first out" scenario. The super heated California markets that crashed first seem to be about a year ahead of the rest of the country and, hopefully, are already moving toward a recovery.
Once those markets burn through some of their inventory and find some stable footing, our own little market should bounce back as well since most of the new buyers in Southern Oregon are the sellers from California.
A closer look at the data shows two very different trends blending together to give these numbers. The West was the only region to show an increase in existing home sales once again. In fact, the single family numbers in the west are up 19.8% over last year, which is actually pretty impressive.
Of course a lot of this is the result of dramatically lower prices as bank owned properties begin to move. Single Family Home prices were off by 25.5%, which is by far the most for any region.
Once again this looks like a "first in, first out" scenario. The super heated California markets that crashed first seem to be about a year ahead of the rest of the country and, hopefully, are already moving toward a recovery.
Once those markets burn through some of their inventory and find some stable footing, our own little market should bounce back as well since most of the new buyers in Southern Oregon are the sellers from California.
Friday, December 19, 2008
Rates Hit 37 Year Low
If you've been paying attention this week you know that mortgage rates fell to some pretty impressive levels. For a few hours on Wednesday you could lock in a rate lower than 4.5%, which is certainly something I've never seen. Apparently I'm not the only one. This weeks average is the lowest since Freddie Mac began tracking it in 1971, so it's definitely a big deal.
The interesting thing is that the amazing rates seem to be confined to the 30 year fixed. I don't know why lenders even show the hybrid ARM rates anymore. Why get a loan fixed for three to five years if the 30 year fixed rate is more than a point better?
Even the 15 year fixed rate is no better than a 30 year in this market. 15 year rates are usually at least 1/2% better than the 30 year, but this week there have been days where the 15 was actually worse.
This may reflect the secondary market's aversion to anything that isn't a traditional 30 year fixed rate loan. The interest only, adjustable, negative amortization type loans that have been making all the headlines have soured investors appetite for anything out of the ordinary. When some of the more exotic loans started going bad investors fled to the more conventional.
Fortunately for us, the 30 year fixed really is the best loan for most people in most circumstances. This week the phones are ringing with people wanting to refinance into a lower rate. Hopefully this will also bring some new buyers into the market, but even if all it does is to save homeowners a lot of money it might end up being a much needed stimulus for the economy.
The interesting thing is that the amazing rates seem to be confined to the 30 year fixed. I don't know why lenders even show the hybrid ARM rates anymore. Why get a loan fixed for three to five years if the 30 year fixed rate is more than a point better?
Even the 15 year fixed rate is no better than a 30 year in this market. 15 year rates are usually at least 1/2% better than the 30 year, but this week there have been days where the 15 was actually worse.
This may reflect the secondary market's aversion to anything that isn't a traditional 30 year fixed rate loan. The interest only, adjustable, negative amortization type loans that have been making all the headlines have soured investors appetite for anything out of the ordinary. When some of the more exotic loans started going bad investors fled to the more conventional.
Fortunately for us, the 30 year fixed really is the best loan for most people in most circumstances. This week the phones are ringing with people wanting to refinance into a lower rate. Hopefully this will also bring some new buyers into the market, but even if all it does is to save homeowners a lot of money it might end up being a much needed stimulus for the economy.
Tuesday, December 16, 2008
Doom + Gloom = Time to Buy?
Once again all the economic headlines today are glum. The Consumer Price Index was down 1.7% and flat when you exclude food and energy. This is the largest decline since they started seasonally adjusting the number in 1947. Housing starts also set a record today by dropping 18.9% to the lowest level since they started keeping track in 1959.
Of course this is all bad news for the larger economy. However, there are some glimmers here for housing. First, the CPI numbers hint at deflation and certainly show no signs of inflation, which is the best possible news for mortgage rates. Rates have been falling lately and this news makes it likely that they will continue or at least hold steady at these low levels.
Housing starts indicate that builders are not very confident, and less construction will mean painful job losses. In the long term it also means fewer new houses going into an already glutted market. Inventories of unsold homes are a big part of the problem with the housing market, so fewer new homes means at least we're not adding to the problem.
All this gloom does create an opportunity for buyers. Prices are low, there's plenty of selection, and mortgage rates are great. If these factors are enough to bring first time buyers into the market it could go a long way to fixing the housing market. Locally we are starting to see some of the first time buyers who had been priced out of the market during the peak.
Years from now I imagine people will be looking back thinking "if I'd only bought back then..." Aside from the investment angle, housing is actually affordable again for people living here in Southern Oregon, which was really not the case when prices were high. Sure, people who owned a home could sell it and buy another, but the new buyers were almost all from out of state. Now, between the prices and the rates, may be time again for renters to become buyers.
Of course this is all bad news for the larger economy. However, there are some glimmers here for housing. First, the CPI numbers hint at deflation and certainly show no signs of inflation, which is the best possible news for mortgage rates. Rates have been falling lately and this news makes it likely that they will continue or at least hold steady at these low levels.
Housing starts indicate that builders are not very confident, and less construction will mean painful job losses. In the long term it also means fewer new houses going into an already glutted market. Inventories of unsold homes are a big part of the problem with the housing market, so fewer new homes means at least we're not adding to the problem.
All this gloom does create an opportunity for buyers. Prices are low, there's plenty of selection, and mortgage rates are great. If these factors are enough to bring first time buyers into the market it could go a long way to fixing the housing market. Locally we are starting to see some of the first time buyers who had been priced out of the market during the peak.
Years from now I imagine people will be looking back thinking "if I'd only bought back then..." Aside from the investment angle, housing is actually affordable again for people living here in Southern Oregon, which was really not the case when prices were high. Sure, people who owned a home could sell it and buy another, but the new buyers were almost all from out of state. Now, between the prices and the rates, may be time again for renters to become buyers.
Monday, December 8, 2008
4.5% Mortgage Rates?
By now everyone has heard that the Treasury Department is considering plans to push mortgage rates to 4.5% in an effort to stimulate the housing market. While this sounds like a good idea, there are some real problems with it.
The biggest problem is that the government doesn't control mortgage rates. Mortgage rates are set by the market based on what investors will buy and sell mortgage backed securities for. It's kind of like the government saying they plan to move the Dow Jones back over 10,000. Maybe they could do it by buying enough stock, or in the case of interest rates buying enough mortgage backed securities, to move the overall market. Maybe that would work, but maybe it wouldn't. It's not like the Fed Funds rate that can be arbitrarily set.
Beyond that you have to wonder how much it would even help. Mortgage rates are already hovering around 5%. Would an extra 1/2% (about $60 a month on a $200,000 loan) really be enough to bring out the buyers? If you can't afford a $1,200 PITI payment, would $1,140 make a difference?
This plan was floated as a way to help struggling homeowners, but apparently the 4.5% is only for new purchases. People who need to refinance to be able to stay in their homes won't benefit, unless of course some new buyer comes along to save the day.
Of course, as a mortgage broker I am all in favor of lower rates. I just don't think lower rates will fix the housing market. Rates have actually been pretty good through this whole crisis. I'm sure a 4.5% rate wouldn't hurt, but I don't think it's worth the cost in taxpayer dollars.
Borrowing and spending money the government doesn't have is not only expensive, it leads to inflation down the road, which is a real long term threat to interest rates. I also have some concerns about what happens when the crisis is over and the Treasury Department decides to dump all these securities. It seems like there's the potential to do a lot of long term damage for a potentially insignificant short term gain.
The biggest problem is that the government doesn't control mortgage rates. Mortgage rates are set by the market based on what investors will buy and sell mortgage backed securities for. It's kind of like the government saying they plan to move the Dow Jones back over 10,000. Maybe they could do it by buying enough stock, or in the case of interest rates buying enough mortgage backed securities, to move the overall market. Maybe that would work, but maybe it wouldn't. It's not like the Fed Funds rate that can be arbitrarily set.
Beyond that you have to wonder how much it would even help. Mortgage rates are already hovering around 5%. Would an extra 1/2% (about $60 a month on a $200,000 loan) really be enough to bring out the buyers? If you can't afford a $1,200 PITI payment, would $1,140 make a difference?
This plan was floated as a way to help struggling homeowners, but apparently the 4.5% is only for new purchases. People who need to refinance to be able to stay in their homes won't benefit, unless of course some new buyer comes along to save the day.
Of course, as a mortgage broker I am all in favor of lower rates. I just don't think lower rates will fix the housing market. Rates have actually been pretty good through this whole crisis. I'm sure a 4.5% rate wouldn't hurt, but I don't think it's worth the cost in taxpayer dollars.
Borrowing and spending money the government doesn't have is not only expensive, it leads to inflation down the road, which is a real long term threat to interest rates. I also have some concerns about what happens when the crisis is over and the Treasury Department decides to dump all these securities. It seems like there's the potential to do a lot of long term damage for a potentially insignificant short term gain.
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