Spring Housing Statistics: Homeownership Declines, Home Prices Rise

By Daniel Duffield

The percentage of Americans who own their residences decreased to 65% during the first quarter of 2013, falling from the 65.4% figure for the first quarter of 2012 and reaching the lowest rate of homeownership since 1995, the Census Bureau indicated today in a report. In terms of vacancy, the vacancy percentage for rented homes decreased from 8.8% a year previous to 8.6% during the first quarter of 2013, while vacancies for owner-occupied properties decreased from 2.2% to 2.1% over the same time period.

Presently, investors are purchasing up single-family homes in order to rent them out and take advantage of the high demand created by families who cannot meet the strict qualifications for mortgage loans. These investment home purchases, a considerable amount of which are funded in cash, have aided in the strengthening of the housing market and been a major cause of the upward pressure applied to home values.

According to statements made by Paul Diggle, a real estate economist for Capital Economics in London, in a phone interview, lending conditions remain severe, and with borrowers being unable to secure mortgage loans, investors have rushed into capitalize on this demand while it lasts.

Diggle further stated that homeownership will persist in its decline during the remainder of 2013. In terms of homeownership highs, U.S. homeownership reached its peak during the housing boom at 69.2% in June 2004, at which time credit requirements were fairly loose, especially by comparison with today’s standards.

Jed Kolko, chief economist for Trulia, Inc., said that homeownership has primarily been affected by restrictive credit standards, a shrinking housing inventory, the increased difficulty for borrowers to save for down payments, and the abundance of single-family rental properties.

In March, the amount of properties put up for sale in the housing market decreased 16.8% from the previous year, according to a statement from the National Association of Realtors (NAR).

During the first quarter of 2013, the amount of occupied homes rose to approximately 114.6 million compared with 114.1 million in the first quarter of 2012. Moreover, the number of rented properties increased to 40.1 million from 39.5 million a year previously. Owner-occupied properties declined from 74.6 million to 74.5 million.

Home Prices Increase Across the U.S.

Amidst the decline in homeownership, U.S. home prices continue to rise, signaling success in the ongoing housing recovery effort. In February, home prices saw the most prominent increase since May 2006 during the real estate boom, further demonstrating housing market strength.

According to the S&P/Case-Shiller index, home values in 20 cities increased a considerable 9.3% from February 2012 levels, exceeding expectations after an 8.1% growth during 2012. Additionally, compared with January 2013, home price increases reached a 7 year peak, seeing the most significant rise since October 2005. While mortgage rates remain just above all-time lows, analysts expect these price gains to fuel more selling activity, which could lessen the scarcity of housing inventory.

Ultimately, however, experts state that year-over-year data tends to be more accurate in assessing trends of home prices. For the second consecutive month, all 20 cities measured by the index saw a year-over-year increase in prices. As such, the housing market recovery seems to be having some success, although some analysts have expressed concerns over the formation of a new housing bubble.

Current Housing Affordability Leans On Low Mortgage Rates

By Daniel Duffield

At present, home purchases have become more affordable than during the past several decades, although experts caution that this trend could be reversed abruptly, due to the volatility of mortgage rates and how they play into the current housing trends.

As the housing market gains strength, home prices increases have exceeded analysts’ expectations; however, these gains have been entirely negated for home buyers as a result of the historically low mortgage rates available today. Presently, American homeowners pay approximately 37% less on monthly mortgage payments at the conclusion of 2012 than during the period prior to the bubble burst, according to a report released by Zillow. Surprisingly, however, home prices have risen 14.5% from historic averages, in relation to homebuyer incomes.

While interest rates today hover between 2-5%, rates have ranged between 6% and 13% from 1985 to 1999. Consequently, homebuyers have been able to afford purchases of larger, more expensive properties while paying less each month.

During the aforementioned period during the eighties and nineties, U.S. homeowners spent approximately 20% of their monthly incomes on mortgage payments, significantly more than today’s 12.5% average, according to Zillow.

Although home prices have risen, average U.S. wages have remained stable, being devalued due to inflation, or have declined. Prior to the burst of the housing bubble, homebuyers spent roughly 2.6 times their median annual incomes when purchasing a standard home; however, currently, borrowers spend 3 times their income, making home purchases 14.5% more expensive in relation to income, according to Zillow. This phenomenon essentially results from the historically low mortgage rates created by government subsidies.

According to Zillow Chief Economist Stan Humphries, housing affordability could very well be a short term trend, since current affordability leans heavily on low interest rates that have been predicted to rise over the next several years.

These predictions hinge on the fact that the Federal Reserve must necessarily discontinue its purchasing of mortgage-backed securities (MBS) sometime in the future, the act of which has been the catalyst driving and maintaining today’s low rates. While not immediate, this increase should take place during the next few years.

Once mortgage rates rise, homebuyer demand will be notably affected unless income growth matches this decrease in affordability. Otherwise, potential borrowers (especially first time home buyers) could find themselves unable to afford large mortgage payments, while homeowners will be unwilling to relinquish their exceptionally low rates by moving, instead opting to remain in their current residences.

In 24 of the 30 biggest metropolitan areas covered by Zillow, homeowners paid more for their mortgages at the end of 2012 in relation to the median income of their locale compared to between 1985 and 1999. This provides a warning indicator that, should rates rise even a slight degree, many potential buyers may find themselves unable to afford homeownership.

7 Things to Take Note of When Getting Pre-Approved

By Daniel Duffield

Before beginning the home purchase process, it is recommended that borrowers get pre-approval for a mortgage. In addition to the peace of mind that comes with knowing that the financing aspect is taken care of, pre-approval letters additionally help to avoid any delays within the mortgage application process and ensure that the transaction proceeds smoothly.

When getting pre-approved for a home loan, borrowers should consider the following items on the pre-approval letter and take these factors into consideration when shopping for a suitable home:

1.       Loan Amount

The most important consideration when looking over a pre-approval letter is the specified loan amount. Often, borrowers seek pre-approval solely to get a decently reliable estimate of how much they can afford on a home mortgage. Pre-approval takes into consideration a range of borrower qualifications, including debt-to-income ratio (DTI), loan-to-value ratio (LTV), and credit history. Taking into account this information, a pre-approval letter includes estimates for the loan amount, down payment required, and monthly mortgage payments.

2.       Status Date and Expiration Date – Pre-approval letters do not extend their guarantee indefinitely; in general, pre-approval letters will remain open for a period of 90 days from when the borrower’s credit was initially pulled.

3.       Mortgage Type – Depending on your circumstances, you may qualify for several different types of loans, including the standard conventional loan, a government-guaranteed FHA loan, or a military-exclusive VA loan. Your pre-approval letter will indicate which type of loan you qualify for.

4.       Loan Term – Mortgage loans can range in terms of their lifespan between 15 years up to even 40 year terms for fixed-rate mortgages (FRM). For adjustable-rate mortgages (ARM), the pre-approval will specify for how long the interest remain fixed, varying between 3, 5, 7, or 10 year fixed periods.

5.       Occupancy Status – This item is fairly straightforward; borrowers applying for a home purchase loan for a primary residence will see occupancy status listed as “owner occupied,” whereas other types of purchases may indicate “secondary residence” or “investment,” depending on the circumstances.

6.       Contact Information – Contact information refers to the avenues through which the borrower can contact the lender, and this often includes the lender’s name and address.

7.       Conditions – Some pre-approval letters include conditions that must be met prior to the lender’s granting of approval, such as the request for additional documentation.

Borrowers should note that, while pre-approval letters are a preliminary sign of mortgage approval, not all pre-approved borrowers will qualify during the home purchase loan application. Ultimate approval may be contingent upon the condition of the home, the appraisal value, title considerations, and other conditions.

HARP Refinancing Remains Strong in January

By Daniel Duffield

2013 HARP Statistics

 In January, roughly 470,000 mortgages owned by either Fannie Mae or Freddie Mac were refinanced to obtain lower mortgage rates and alter mortgage terms. With approximately 97,600 borrowers completing this transaction by taking advantage of the Home Affordable Refinance Program (HARP), HARP refinances remain strong during the start of 2013.

HARP 2013 Statistics

Since the initiation of HARP in 2009, over 2.2 million home mortgage loans have been refinanced through this program, according to the statistics presented by the Federal Housing Finance Agency in its January report on the HARP program. Breaking down these refinances by property types, borrowers have utilized HARP on 1.97 million primary residences, while refinancing 72,396 second homes and 215,580 investment properties.

HARP Volume and LTV

Additionally, in January borrowers with loan-to-value (LTV) ratios that exceeded 105% represented 47% of the volume of HARP refinances, the report indicated.

Furthermore, the amount of finalized HARP refinances for borrowers with exceptionally high LTV ratios remains significant in comparison to the total HARP volume. For example, approximately 20% of HARP refinances loans were obtained by borrowers with HARP LTV ratios exceeding 125%, the FHFA demonstrated.

Regional HARP Statistics

HARP data can also be analyzed and broken down to examine the regional differences in borrower refinance trends. In January, HARP refinances constituted a substantial 66% of total refinances in Nevada, exceeding the 21% national average by more than triple. Similarly, HARP refinances represented 56% of all refinance activity in Florida during January, the report stated.

HARP Data by Loan Product

In January, roughly 18% of HARP refinances were acquired by underwater borrowers for mortgages with 15-year and 20-year mortgage terms, which accumulate equity and amortize more quickly than standard 30-year mortgages, according to the FHFA.

HARP Recap and HARP 3.0

 HARP Introduction

The Home Affordable Refinance Program was initially created in 2009 in response to the bursting of the U.S. housing market bubble. With home prices plummeting, the HARP program offered an opportunity for underwater borrowers, those who owe more than their property’s value, to refinance their mortgages and obtain significantly lower mortgage rates. Due to the strict LTV requirements of most loan products, HARP soon became the sole refinance option for millions of borrowers who lost the majority of their equity due to the housing market collapse.

HARP 2.0 

While those who could qualify for HARP were given significant advantages, the original incarnation of the program placed strict limitations on borrower LTV, despite its goal of helping such underwater borrowers. As a result, HARP was updated to HARP 2.0, and these LTV restrictions were removed, along with several other tweaks to the program. 

HARP 3.0?

Although a significant amount of borrowers can now qualify for this refinance, HARP 2.0 still only applies to borrowers with mortgages owned by either Fannie Mae or Freddie Mac, which still severely limits the amount of eligible borrowers. As such, many have speculated about the release of HARP 3.0, dubbed #myrefi, which is expected to remove this requirement, allowing many more borrowers to take advantage of HARP. However, no official release date has been provided for this program and many have expressed some pessimism that it will ever be released.

Credit Thaws as Housing Recovery Picks Up Steam

By Daniel Duffield

As the real estate market enters into the critical spring season, credit requirements for home purchase loans is beginning to relax, with lenders being more willing to approve mortgages with low down payments and Fannie Mae purchase more of such loans on the secondary market.

Such activity constitutes a large sentiment shift from the past four years, during which a 20% down payment was to be expected for most purchase transactions.

According to John Forlines, chief credit officer for Fannie Mae’s single family business, lenders have generally been more open to working in such conditions than in the past; while requirements have not seen any drastic shift, other mortgage parties are assuming the risk, allowing lenders and mortgage insurance companies to provide more flexible home loans.

Fannie Mae has recently been willing to purchase loans with down payments as small as 3%, however these mortgages require that borrowers pay private mortgage insurance. During the market bottom at the lowest point in the housing crash, such private mortgage insurance was hard to come by.

At the time, the sole loan option for borrowers with minimal funds for a down payment was the FHA loan, insured by the Federal Housing Administration (FHA). As a result, the FHA garnered a large portion of the market, exceeding its original purpose. While this may have temporarily provided support for the market, the FHA assumed substantial losses in the process.

In the face of this $16 billion shortfall, the FHA has now opted to raise mortgage insurance premiums and mandate PMI for the lifetime of the loan for all mortgages secured after April 1, making FHA loans increasingly less affordable.

At the same time, with the housing market making significant improvements this year, private mortgage insurers are beginning to relinquish their expensive overlays on mortgages with higher loan-to-value (LTV) ratios, making conventional loans somewhat cheaper than FHA mortgages.

Craig Strent, CEO of Apex Home Loans in Bethesda, Maryland, noted this trend, stating that FHA loans are indeed growing more expensive while more and more low down payment borrowers enter the mortgage market to seek loans from the private market rather than the government.

In the U.S. Senate, a bipartisan effort is in progress to reduce the market stake of the FHA and reduce the advantages of this product over those offered by private mortgage insurers. However, despite the advantages presented by FHA loans, the FHA’s share of the market has already been diminishing as Fannie Mae gains a greater hold on the market. With mortgage rates rising and less borrowers applying for refinance loans, lenders are allowing borrowers to make smaller down payments to increase their business.