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CoreLogic and the Housing Policy Council of the Financial Services Roundtable host a breakfast event in Washington D.C., April 14, 2015 discussing the state of housing and housing reform.

Faith Schwartz    |    Housing Policy, Housing Trends

I had the pleasure of moderating the first panel at our co-hosted event in Washington, D.C. on Tuesday, April, 14th.  Refreshing and insightful information was offered by three respected chief economists, including Dr. Frank Nothaft of CoreLogic, Dr. David Crowe of the National Association of Homebuilders and Dr. Nela Richardson of Redfin. Each offered a unique take and perspective on the housing market, a few of which I’ve highlighted:

Dr. Frank Nothaft, CoreLogic:

Nothaft offered insights on the spring real estate market outlook by discussing the dimensions of supply and demand.

He noted that it is clear that macro indicators are slowly improving and that information from the most recent Federal Open Market Committee minutes suggest that the federal funds rate is expected to rise. Nothaft further indicated expectations for rising home prices through 2016 based on the CoreLogic Home Price Index (HPI) for the U.S. While these factors indicate progress, the U.S. housing market also faces some fundamental weaknesses. For example, housing inventory as a percent of households is currently at a 30 year low based on data from the National Association of Realtors and the U.S. Census Bureau. Housing supply shortfalls have been exacerbated by the persistent negative equity estimated at 10.8 percent of homes financed with a mortgage across the U.S. at the end of 2014. In some markets, the proportion of homes in negative equity remains stubbornly high, such as the state of Nevada which is hovering near 24 percent and Florida at 23 percent.

Nothaft also shared an analysis of current underwriting standards as estimated by the CoreLogic Housing Credit Index for purchase loans. &The index measures six dimensions of underwriting and clearly identifies the availability of credit from 2000 to present day. Based on this information, we have found that underwriting standards are more conservative and access to credit is much tighter than at any other point in the last 15 years, regardless whether the loan is jumbo, conventional conforming, or FHA-insured. .

Underwriting Remains Cautious

Underwriting Remains Cautious

Dr. David Crowe, National Association of Home builders (NAHB)

Crowe offered his expertise around demand and supply for new housing stock. Beginning with the demand side, he first pointed out the significant shift to the construction of higher priced homes. For example, in early 2000, the shift of homes priced at less than $200,000 has declined from 43 percent of the market to approximately 20.8 percent of the market in 2014; with much of this being driven by regional sales of new homes. Condos have come down from a market high of 53 percent of multifamily starts in the third quarter of 2005 to less than 12 percent in the fourth quarter of 2014.

One particular question of importance addressed by Crowe was simply put-- where have all the first time homebuyers gone? That is a consistent question being asked by the Administration, economists, mortgage industry, and think tanks across the board. Crowe noted that in early 2015 the number of first-time homebuyers as a percentage of existing sales was approximately 29 percent; in the new-home market, first-timers were even a smaller share, representing just 16 percent of new-home buyers in 2014, the lowest in at least 15 years.

First-time Home Buyer Share of Existing Home Sales

First-time Home Buyer Share of Existing Home Sales

With regard to supply side observations, Crowe noted that we are nationally seeing indications of low lot supply which is translating to a lack of inventory of both land and units, while demand has been increasing. He continued that even in cases where there may be ample lot supply one particular issue affecting construction is a lack of skilled labor, particularly carpenters and framers, noting that if you can’t frame a house you also don’t need an electrician or plumber. This lack of skilled construction workers has been a problem across the U.S., and may be a cause of slower economic growth in certain local jurisdictions. An unfortunate additional result is a considerable lack of accessible, affordable housing.

Dr. Nela Richardson, Redfin

Richardson shared a refreshing update on the real-estate market from the perspective of Redfin, a real-estate brokerage house. While the firm is mostly dominant in urban areas versus suburban or rural, it was interesting to hear from the realtor segments at the grass roots level. Some early observations were about the existing home sales market. Richardson assessed that we are far from the peak of home sales based on the last 25 years and have room to grow. She reiterated Nothaft’s observation by affirming that Redfin is also seeing steady, moderate price growth in 2015.

Other than the pre-crisis years, we seem to be back to more normalized prices and seeing fewer homes selling above the list price. Richardson also observed that sellers are dropping their prices sooner in the sales cycle and that some of the early observations in 2015 are encouraging. She noted that 44.6 percent of REDFIN customers request house tours, and 36.4 percent have signed offers. And perhaps most encouraging, in many major markets, sales are up and inventories are down. Cash is no longer king, dropping from the highs of 41 percent in 2013 to a more consistent 35 percent in 2015. And in one of her most important points on the current improvement in the housing market, Richardson pointed out that while first time homebuyers are slowly re-emerging, credit obstacles still remain (credit, down payment, and student debt).

Fewer home are selling above list price

Fewer home are selling above list price

Richardson shared an anecdote from a REDFIN transaction noting that in overheated markets, a 20 percent down payment is often not enough to get the contract from the seller. Cash or a 30 percent-plus down payment is more the norm, with the borrower then quickly refinancing once title has been transferred. This was a discouraging observation as the average homeowner and certainly, first time homebuyers are more limited consumers in this kind of market.

What are the key concerns that we heard from the audience and economists regarding access to credit in housing?

Summary Observations from Faith Schwartz, CoreLogic:

Down payment and the wealth effect: At the end of our session, I asked the audience to raise their hands if they put down LESS than 20% for their first mortgage. I raised my hand as did the vast majority of audience participants. The result was telling. We as an industry need to address this issue to ensure we are maintaining strong access to credit where otherwise credit worthy borrowers would not be able to access mortgage financing.

Many mortgages being made today are for the more wealthy borrowers, based on average down payments. The information shared by economists still show a constricted credit box from well before the crisis. Nothaft highlighted concerns around the growing student loan debt which will undoubtedly add to the back end DTI. While there are programs in place such as the GSE 97% loans and lower MI fees on higher LTV FHA mortgages, the vast majority of loans are being made to borrowers with stronger credit scores, higher down payments and fewer blemishes on their credit reports. The data are quite clear about this.

As the housing market continues to strengthen and shift to a more purchase money marketplace, the Administration, GSEs, and private investors will need to sort out how to best serve first-time homebuyers. We need to ask ourselves what may evolve from the GSEs, adjustments with integrated disclosures, QM, and more private capital coming back to the system. We will continue to see innovation around finding ways to serve the first-time homebuyer with more limited down payments and thin credit files while ensuring we are meeting the demand responsibly.

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