The
outlook for residential home ownership is much different from that of investor objectives in acquiring housing for lease or
rent. The varied values in regional markets overshadow the underlying trends that affect the long-term prospects for a healthy
home ownership real estate environment. Replacement costs, often ignored when it comes to the actual transactional prices
paid at title transfer has a long record of suppressing new construction. An equilibrium rebound, is certainly welcomed, but
what effect will the rise in interest rates have in this trend?
The
Washington Post reports in, Wall Street betting billions on
single-family homes in distressed markets, "Big investors are pouring unprecedented amounts of money into real
estate hard hit by the housing crash, bringing those moribund markets back to life but raising the prospect of another Wall
Street-fueled bubble that won’t be sustainable."
Huge amounts of money that institutional investors are putting
into existing single-family homes in some areas hit the hardest in recent years has already occurred. They are rushing to
buy properties, in the hope that acquisitions are at well below true market rate, with the goal of reselling for a tidy profit
as the economy recovers.
Consider the concern in the report,
Are Wall Street Investors Pumping
Up The Next Housing Bubble?
"Areas like Las Vegas, Phoenix, and Miami —
all hit pretty hard by the collapse of the last housing bubble — are now seeing home prices rise at rates above the
national average. But rather than this being an indicator that these areas are finally recovering, some worry that it’s
just a lot of hot air being pumped into another bubble by Wall Street investors."
The long awaited signals that the mortgage rates are on the rise interjects another factor in the article, Did the Federal Reserve Just Kill
the Housing Recovery? "The
reality is that home prices have been moving higher. The average prices in the top-20 housing markets nationwide surged to
10.9% in March, according to the S&P/Case-Shiller Home Price Index . . . driving the demand is clearly a rush of applicants
who want to lock in the low mortgage rates in the housing market, fearing interest rates will inevitably move higher. The
refinance demand is similar. The rise in applicants doesn’t necessarily mean home sales, but simply a move to try to
lock in rates."
Bloomberg adds this assessment
in, Mortgage Rates in U.S. Jump to Highest
Since July 2011. "Mortgage rates for 30-year U.S. loans surged to the highest level in almost
two years, increasing borrowing costs at a time when the housing market is strengthening and prices are jumping.
The average rate for a 30-year fixed mortgage rose to 4.46 percent from 3.93 percent,
the biggest one-week increase since 1987, McLean, Virginia-based Freddie Mac said in a statement. The rate was the highest
since July 2011 and above 4 percent for the first time since March 2012. The average 15-year rate climbed to 3.5 percent from
3.04 percent.
The increase, sparked by expectations that the
Federal Reserve will scale back bond purchases, provides a test for a yearlong housing recovery that’s been fueled by
home-loan costs near record lows. Buyers seeking to take advantage of low rates are competing for a tight inventory of listings,
driving up values. House prices in 20 U.S. cities rose 12 percent in April, the biggest year-over-year gain since March 2006,
according to S&P/Case-Shiller data released this week."
So what are the reasonable conclusions from the residential real estate recovery and the prospects from the rising
mortgage rate? The distinction between investment purchases and owner occupied sales is crucial to understand the direction
in the single-family home market.
Distortions from investor
leveraged asset sales, stripped out of the statistics, gives a clearer projection of the tangible condition of the housing
market. As mortgage rates climb, more perspective homebuyers will have greater difficulty qualifying.
A promising reform recently announced, seeks to deal with the fundamental problem with government financing guarantees.
The LA Times in the column, Senators launch effort to replace
Fannie Mae and Freddie Mac, describes an effort to establish a significant risk requirement that
mortgage loan banks would assume. "Four Democrats and four Republicans want to shut down Fannie and Freddie over five years and replace them with
a new government agency modeled on the Federal Deposit Insurance Corp. — one that would be funded by industry fees and
play a much smaller role in guaranteeing mortgage debt.
The
new Federal Mortgage Insurance Corp. would grow gradually as the government unwinds Fannie and Freddie. Since the 2008 financial
crisis, the two financing giants, along with the Federal Housing Administration, have backed about 90% of all new home mortgages.
The plan unveiled Tuesday would reduce the risk to taxpayers if the housing market
collapses again by forcing private companies — mainly banks — that package mortgages into securities to hold at
least 10 cents in capital for every dollar of the underlying loans to cover the first wave of potential losses.
Had such a provision been in place in 2008, the bill's backers said, there would
have been enough money to back Fannie and Freddie losses without the need for the government to pump $187 billion, to date,
into the companies to cover mortgage guarantees."
The
present Fannie and Freddie financing model is a "no win situation". The conventional mandate of encouraging home
ownership, seriously undermined with the loosey–goosey, no money down, no income qualifications was a disaster
waiting for a meltdown. Requiring the banks to be on the hook for each loan is solid business sense.
In order to restore a substantial and lasting housing recovery, buyers need realistic mortgage financing, based upon
true replacement costs and a reasonable prospect that a seller can find a buyer in a market that serves the interests of both
parties. The biggest threat in creating this balance is the lack of living wage income jobs, in an economy directed by central
control corporatism. A true rebound is still nowhere in sight.
James
Hall – July 3, 2013
