Interest rates are rising and so are home prices. That is putting pressure on borrowers and buyers alike. Mortgage application volume fell 11.2 percent last week from the previous week on a seasonally adjusted basis, according to the Mortgage Bankers Association. Volume is up 42 percent compared from the same week one year ago, when rates were higher. “Despite the 30 year fixed mortgage rate being almost 50 basis points lower than a year ago, refinance activity has been extremely sensitive to rate increases as the pool of borrowers who can benefit from refinancing continues to diminish,” said Mike Fratantoni, chief economist for the MBA.
Mortgage applications to refinance a home loan fell 15 percent for the week, but are still nearly 72 percent higher than one year ago. This is residual demand from the Brexit-induced drop in interest rates last month. Mortgage lenders have been inundated with refinance requests, according to Brandon Ivey, editor of Inside Mortgage Finance.
“Residential lenders were unprepared for the decline in interest rates seen after the ‘Brexit’ vote in late June, constraining origination capacity and prompting increased turn times,” he wrote in a post this week. Ivey cited several lenders who said they were over capacity and were hiring as many as 30 loan officers a month.
Refinance volume slowed for the week due to slightly higher rates. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 3.69 percent from 3.65 percent, with points unchanged at 0.36 (including the origination fee) for 80 percent loan-to-value ratio loans. While that rate is still historically very low, borrowers are watching every tick closely, and most borrowers have already refinanced their loans, some more than once.
About half of securitized agency mortgages, however, have interest rates higher than 4 percent, according to Inside Mortgage Finance. Generally, a 50- basis-point difference is enough to benefit a borrower on the monthly payment. Not all of these loans can be refinanced, however, as some borrowers may not have enough equity in their homes or enough income to qualify.
Mortgage applications to purchase a home decreased 3 percent, seasonally adjusted, for the week to the lowest level since February. They are 12 percent higher compared with the same week one year ago. Homebuyer demand is falling off, as low supplies and high prices continue to plague the market. A housing demand index from real estate brokerage Redfin fell 17 percent in June from a year ago. That was the fifth-consecutive month of year-over-year declines. Home sales overall continue to rise, but they could be increasing at a far faster pace if there were simply more available listings.
This is the biggest increase since February 2008, said Trulia’s economist. Mortgage rates have been at rock-bottom for longer than anyone expected — but are consumers taking advantage of the economic boon to buy a home? Specifically, a new home?
The latest data from the U.S. Census Bureau and Department of Housing and Urban Development (HUD) indicate that sales are quite a bit stronger than last year, at least. Today’s New Residential Sales report, recapping data from June 2016, shows that sales of new single-family homes were at a seasonally adjusted annual rate of 592,000.
That’s 3.5 percent higher than the May 2016 estimate (572,000) and 25.4 percent above the June 2015 estimate of 472,000. Ralph McLaughlin, the chief economist at Trulia, noted that this is the best month of home sales since February 2008 in an emailed statement: “New home sales jumped sharply in June, and marked the best month since February 2008,” he said. “This is a continued sign that demand for homes remains solid and aptly reflects increasing homebuilder confidence.
“The share of all home sales composed of new homes ticked upward to 10.6 percent in June, as new home sales continue to slowly ease the crunch of low existing inventory,” McLaughlin added.
Other data from the Census Bureau and HUD:
The median sales price of new homes sold in June 2016 was $306,700.
The average sales price was $358,200.
The estimate of new homes for sale at the end of June (seasonally adjusted) was 244,000.
This represents about 4.9 months’ supply of inventory at the current rate of sales.
The Census Bureau and HUD use sample surveys to collect data for their home sales, which means this data is subject to sampling variability as well as the typical statistical variance. The survey is based on a sample of houses pulled from building permits. “Sales” are defined as deposits taken or sales agreements signed, not necessarily closings.
Home equity is back, and headed for the bathroom — or the kitchen or the garage or wherever today’s homeowners see the greatest returns. Higher home prices have given people cash back and they are putting that cash to work in more — and bigger — remodeling projects.
Growth in home improvement and repair expenditures will reach 8 percent by the start of 2017, according to a new report from Harvard’s Joint Center for Housing. That is far beyond its 4.9 percent historical average.
“By the middle of next year, the national remodeling market should be very close to a full recovery from its worst downturn on record,” said Abbe Will, research analyst in the remodeling futures program at the Joint Center. “Annual spending is set to reach $321 billion by then, which after adjusting for inflation is just shy of the previous peak set in 2006 before the housing crash.”
Increased home equity is certainly playing a large role, as are near-record low mortgage rates, which are enticing owners to refinance and potentially pull cash out. In the first quarter of this year alone, homeowners gained a collective $260 billion in additional home equity, thanks to higher home values, and with that increase, 38 million borrowers now have at least 20 percent equity in their homes, according to Black Knight Financial Services.
Confidence is also key. When people feel better about their home’s value, they are more apt to invest in it.
“I call it ‘nesting is investing.’ People are saying I want to do something that adds to the value of my house, and I’m just going to fortify the castle,” said Brad Hunter, chief economist with HomeAdvisor, an online home services marketplace.
And what fortifies the castle best? Kitchen and bath remodels are always popular, but Hunter points to less sexy insulation, as yielding the largest returns. He also said service requests on HomeAdvisor for multiroom remodels are up 67 percent from a year ago.
“We could see percentage growth rates in the remodeling and home- improvement sector that exceed those for new home construction in the next few years,” Hunter said.
At least one-quarter of remodeling firms across all sectors report seeing more clients taking on multiple projects at the same time, according to another report from Houzz, also an online remodeling services firm.
Nesting is not the only thing driving home remodeling. As home sales pick up, they fuel fresh finishings as well. “As more homeowners are enticed to list their properties, we can expect increased remodeling and repair in preparation for sales, coupled with spending by the new owners who are looking to customize their homes to fit their needs,” said Chris Herbert, managing director of Harvard’s Joint Center.
No matter the reason, growth in remodeling is a boon to retailers like Home Depot, Lowes, Sherwin Williams and Masco — and of course their stocks. Consumers are not only doing more renovations, they’re spending more on them. With homebuilders still producing far fewer homes than are necessary to meet demand, owners of existing homes are trying to make them new again.
The more deals you analyze the more acclimated you will become to your target market and the quicker you will be in being able to determine a good deal.
The news coming out of the Republican National Convention in Cleveland has so far been dominated by whether Melania Trump intentionally ripped off a chunk of her speech from first lady Michelle Obama (blame the speechwriter), angry protests outside the event, and which celebrities and politicos showed up to support presidential nominee Donald Trump (and those who stayed away). But here’s what the press hasn’t been focused on: what a Republican in the White House, especially a real estate mogul, would mean for the U.S. housing market. Surprised? After all, buying a home is the biggest purchase most Americans will make in their lifetime—and represents the kind of financial stability that many of Trump’s supporters say is impossible for them to achieve in the new economy. Trump has been pretty tight-lipped about what his potential presidency would mean for renters, buyers, and homeowners.
But not anymore.
The Grand Old Party released its 66-page Republican Platform 2016 this week at the convention. And in it, finally, are at least some details of how the Republicans hope to define—and ultimately limit—the federal government’s role in the real estate market.
It’s still a bit vague—but hey, with the election just four short months away, it’s something. “Homeownership expands personal liberty, builds communities, and helps Americans create wealth,” reads the platform. It later goes on, “We must scale back the federal role in the housing market, promote responsibility on the part of borrowers and lenders, and avoid future taxpayer bailouts.” But real estate analysts were quick to point out that these reforms could, in some instances, potentially force buyers to plunk down larger down payments or pay higher interest rates. “The heart of Republican support—blue-collar, middle-aged workers—are the people who will [be affected] the most,” says Bob Edelstein, co-chair of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley. “It may be harder to get mortgages, and those that will be available will be less advantageous.”
Bye-bye, Fannie Mae and Freddie Mac?
The language in the platform is unclear, but it appears the party wants to do away with—or substantially shrink—both Fannie Mae and Freddie Mac. The platform referred to the business models of the pair as “corrupt” and allowing “shareholders and executives [to] reap huge profits while the taxpayers cover all losses.” But calling the current system broken is the easy part, says Christopher Palmer, a real estate professor at the University of California, Berkeley. “The platform doesn’t propose any replacement for the current mortgage-market system that we have, with its reliance on Fannie and Freddie and [the Federal Housing Administration],” he says.
The Republicans would also stop the FHA from providing taxpayer-guaranteed mortgages to wealthy home buyers. The FHA typically insures loans for low-income, first-time, and other buyers who don’t have enough for a 20% down payment.
Currently, the largest FHA-backed loan that borrowers can receive is $625,500—but that’s only in the country’s most expensive areas. The average FHA-backed mortgage so far this year is just over $194,000.
The GOP platform also calls for an end to the government-mandated number of loans that Fannie, Freddie, and federally insured banks are encouraged, if not required, to set aside for “specific groups.” “Discrimination should have no place in the mortgage industry,” reads the platform.
It’s unclear which groups the party is referring to, but Fannie and Freddie currently have goals for at least 24% of their single-family mortgages to go to low-income borrowers.
Less federal oversight of local housing markets
The party also appears to want to end the Affirmatively Furthering Fair Housing rule, although the platform doesn’t explicitly say so. The rule requires communities getting federal housing dollars to take steps to overcome segregation in their areas—or pay fines. “While the federal government has a legitimate role in enforcing non-discrimination laws, this regulation has nothing to do with proven or alleged discrimination and everything to do with hostility to the self-government of citizens,” according to the platform.
But doing away with the rule and leaving these issues in the hands of local leaders is risky, warns urban policy professor Rachel Meltzer of the New School in New York. “There’s a long history of local governments using zoning essentially to discriminate against lower-income residents,” she says.
Hit the road, Dodd-Frank?
The Republicans also seem to want to repeal—or at the very least, limit—the Dodd-Frank Wall Street Reform and Consumer Protection Act. Now this is something that has been talked about—a lot. The act provides more oversight of financial institutions in the wake of the housing bust that plunged the nation into a recession.
“From start-ups forgone to home loans not made, Dodd-Frank’s excessive regulation and burdensome requirements have helped contribute to the slow economy we all endure today,” reads the platform.
The party also wants to get rid of the Consumer Financial Protection Bureau (or subject it to congressional appropriation). The bureau, created through Dodd-Frank, is charged with protecting consumers against predatory financial services companies, including those providing mortgages.
Republicans allege that its “regulatory harassment of local and regional banks, the source of most home mortgages and small business loans, advantages big banks and makes it harder for Americans to buy a home” in the platform.
But Dodd-Frank and agencies such as the CFPB are key to ensuring financial markets are kept in check and act fairly, says Berkeley’s Edelstein. “The financial system needs to be protected,” he says.
When it comes to a long-term investment strategy, more people are sticking with a zero-risk, zero-return mentality. A surprising 54 million Americans said they preferred cash investments for money they did not need for 10 years or more, according to a recent report by Bankrate.com.
Overall, one quarter of Americans said real estate was the most favored investment option for savings they wanted to stash for over a decade, closely followed by cash. Stocks and precious metals were a distant third, tied at 16 percent, while bonds were the least popular at 5 percent. “While cash investments are entirely appropriate for short-term needs, such as an emergency fund, they are completely inappropriate for long-term investment horizons,” Greg McBride, Bankrate.com’s chief financial analyst, said in a statement.
“Returns on cash investments often trail the rate of inflation, with savers losing buying power as a result.” Younger millennials, or those at ages 18 to 25, overwhelmingly chose cash as their preferred investment for they money they would not need for at least 10 years. That was by more than a 2-to-1 margin over the next highest category, real estate. (Millennials are also less likely to own a home because they simply can’t afford one, according to a separate report from the U.K.’s office of National Statistics.)
Older generations were more likely to cite real estate as their top choice for a long-term investment.
“The preference for real estate is well suited for investment horizons of more than a decade, but the apathy many investors feel towards the stock market is detrimental to achieving their long-term financial goals,” McBride said. Even with the recent volatility in the stock market, the S&P 500 has gained 6 percent year-to-date, while most cash investments yield less than 1 percent.
