Leading up to the 2012 elections, here are 4 hot topics that matter most to the state of housing in America.
President Obama will deliver his annual State of the Union address to the nation tonight. It will tell us where Obama thinks he’s succeeded and fallen short. It will also set the tone for how he will fight in the election. I’ll be watching to see what he does (and doesn’t!) say about housing.
Specifically, here’s what I’m looking for:
1) Will Obama be upbeat or downbeat about the market? On the plus side, sales and construction are rising and inventory is falling. On the minus side, prices keep slipping and a foreclosure wave is coming. Which story will Obama tell?
2) Which policies – planned, coming or surprises — will Obama talk about? Will we hear about:
–The robo-signing settlement
–Expanded refinancing through HARP
–Sale or rental of government-owned homes (REO-to-rental)
–Changes to the mortgage interest deduction
–Changes to conforming loan limits for Fannie/Freddie/FHA
–The future of Fannie and Freddie
–Or something else?
3) How will Obama sell his housing ideas to the public? Will he tackle the tough questions about:
–Who pays for housing policies – Taxpayers? Banks? Investors?
–The “heads I win, tails you lose” problem: how will he sell policies that reward bad choices that some homeowners, banks and agencies made?
4) Will Obama make housing a partisan issue? Housing is a bipartisan issue. Trulia’s survey of consumers shows that most Democrats AND most Republicans want the government to support homeownership and want to see more action on housing (full survey results here). But the Republican presidential candidates have shied away from housing policy. Will Obama use housing to attack the Republican candidates?
Stayed tuned – I’ll be giving my take on his speech tomorrow.
Before we welcome in the New Year, Trulia’s Chief Economist looks back at 5 events that really mattered for housing in 2011 – and beyond.
Government, the mortgage industry and forces of nature all shook the housing market in 2011. They had both an immediate impact and slow-burning effects, setting the stage for a bumpy 2012 with more foreclosures, political battles and local market risks.
1) Robo-Signing Reverberations
The “robo-signing” scandal – where banks were accused of approving foreclosures with incomplete or incorrect documentation – exploded in October 2010, but where are we now? Banks want a settlement in order to avoid costly, drawn-out lawsuits. One is shaping up that could reduce loan balances or interest rates for current homeowners, give payments to people who lost their homes and establish new mortgage servicing standards for the future.
Even if you think there’s money coming to you because you lost your home, don’t start spending against your settlement windfall just yet. One estimate from the Wall Street Journal is for a settlement of $25 billion if all states participate. Another report from TIME says that will translate into $1,500-$2,000 for households who were mistreated in the foreclosure process. A couple thousand dollars will give people some breathing room, but it won’t change anyone’s financial lives. And, be patient: it could be months before a deal is reached, an administrator is in place and the details are finalized.
Until that’s all figured out, here’s the immediate drama: who’s in and who’s out? Some states might hold out for a better deal or decide to sue these mortgage servicers directly, as Massachusetts has. California was the first and most vocal state to back out, and New York, Delaware, and Nevada have spoken out, too.
What Really Mattered: The threat of robo-signing lawsuits made banks gun-shy about pursuing foreclosures in 2011, which left many homes stuck in the foreclosure process. But once a settlement is reached, we’ll see a rush of foreclosures in 2012.
2) The Debt Ceiling and the Budget Deficit
The federal government is running a deficit — it is spending more than it collects in taxes and other revenue – so it borrows to cover the gap by issuing debt. When there’s a deficit, we add to the pile of debt. To shrink this pile, the government needs to collect more than it spends (or, if you prefer, spend less than it collects) and use the surplus to reduce the debt.
In August, the government played a game of chicken over whether to raise the debt ceiling – which is really just a formality acknowledging that the deficit requires issuing debt to keep the government going. However, the right way to deal with the debt is to reduce the deficit – not by fighting over the debt ceiling.
Long before the debt ceiling debate and Standard & Poor’s federal credit-rating downgrade, we all knew that the federal budget was in bad shape. The debt ceiling debate rattled the markets and consumer confidence temporarily but interest rates stayed low. The important effect was that Congress created a bipartisan supercommittee to tackle the deficit – but it couldn’t reach agreement by its November deadline.
What Really Mattered: The deficit-reduction supercommittee teased us with some policy proposals that will surely rear their heads again. One idea that both Republicans and Democrats didn’t totally disagree about was reducing the mortgage interest and other tax deductions. If and when that happens, high-income homeowners with mortgages would pay a lot more in taxes.
3) The Expansion of HARP
In October, the Federal Housing Finance Agency (FHFA) said seriously underwater homeowners will be able to refinance through the Home Affordable Refinance Program (HARP). Originally, refinancing under HARP required a loan-to-value of less than 125% — that is, you couldn’t be more than 25% underwater – but that rule goes away for fixed-rate mortgages. But there’s a catch! Loans must be guaranteed by Fannie Mae or Freddie Mac, and – more importantly – borrowers must be current on their payments and must not have missed a payment in the last 6 months.
What Really Mattered: Some seriously underwater borrowers who fell behind on their payments in hopes of negotiating a loan modification are now kicking themselves because those missed payments make them ineligible to refinance. But those who can and do refinance will have lower monthly payments and extra money to spend — which will help stimulate the economy.
4) Natural Disasters Cause Insurance Disaster?
In 2011, several tornados, floodings and a hurricane temporarily halted what little construction there was to begin with, but this was just a short-term slowdown. The bigger long-term effect was the near-collapse of the federal government’s National Flood Insurance Program (NFIP). Still struggling financially under debt amassed after Hurricane Katrina, the NFIP’s insurance premiums don’t fully cover insurance claims when disaster strikes. August’s Hurricane Irene and its flood damage returned this problem to center-stage.
What Really Mattered: In flood-prone areas, you can’t get a mortgage if you don’t have flood insurance. Without NFIP, housing markets in these areas would skid to a stop. Could the program actually expire? It could, but as part of last week’s payroll tax agreement, the program got a last-minute extension until May 2012. No doubt, the political fight over this program’s long-term future will continue in into next year.
5) Lowering the Conforming Loan Limit
Starting in October, the government lowered the upper limit for loans backed by Fannie Mae or Freddie Mac or insured by the Federal Housing Administration (FHA) from $729,750 to $625,500. Why? Government agencies now back or insure most loans, but it’s time to make the housing market less dependent on the feds. Lowering loan limits is one step in that direction; however, the real estate industry has urged the government to push the loan limits back up. And you know what? They scored a half-win in November, raising the loan limit back up for FHA loans but not for Fannie and Freddie.
What Really Mattered: Mortgage lenders are willing to charge lower rates for loans that are backed by Fannie or Freddie; with a lower conforming loan limit, a small number of loans that used to qualify for federal backing no longer do. As a result, homes that are now on the wrong side of the conforming loan limit will see fewer potential buyers and lower sales prices. This will matter more in California, New York, and other high-cost areas.
5 years later and the housing market’s still stuck in the mud. Obama’s definitely got an uphill battle come election year (oh snap, that starts in two weeks!)
2012 is going to be a big year for Washington DC. Not only are we going to get more political skits from Saturday Night Live (remember this gem from 2008?), but we’re also going to hear a ton of campaign promises on how candidates plan to make things better for the economy, the government purse and housing.
But before we go down that rabbit hole, let’s take a step back and ask the American people what they want rather than listening to politicians tell us what we need. To do this, we asked people across the country (through an online survey conducted by Harris Interactive), what they thought needs to be done to fix the economy. We also asked them what would actually make them believe that things are getting better and if they still believe Obama can turnaround the housing market.
So what did our Winter 2011 survey tell us? To give you the inside scoop, we put together an infographic to help us walk though all the key findings. Let’s get started…
Get Your Priorities Straight – Jobs Before Homes!
The bigwigs at the capital might still be battling it out over how to fix the economy, but if you were to ask everyday Americans what they think the government needs to do, they’ll give it to you straight. Helping people find jobs needs to come before helping people buy homes. To flip this would be putting the cart before the horse, and it’s a sentiment that’s shared by both team elephant (Republicans) and team donkey (Democrats). Just check out the bar chart below to see just how aligned everyone is.
It’s About Keeping What Ya Got
While housing ranked lower on almost everyone’s to-do list, 72% of Americans said government policies and programs should be pimping out homeownership. But wait! Before you get all up and arms about how “irresponsible” that is, let’s point out a notable caveat first. By encouraging people to be homeowners, what Americans are really saying is that they want Uncle Sam to help current homeowners keep their homes, rather than helping renters buy their own pads. The chart below spells this out much better, illustrating the housing policies and proposals that voters care most about.
Housing Recovery? Seeing Is Believing
While the housing market isn’t crashing and burning like it did five years ago, things aren’t exactly coming up roses right now. But really, what’s the light at the end of the tunnel when it comes to a recovery?
To find out, we asked people to tell us what will make them feel better about buying and selling homes (by picking 3 things out of 10 options). Interestingly, the top three beacons of hope were things that you can see with your own two eyes. This includes fewer foreclosures, fewer lingering for-sale signs and fewer empty houses. Check out the flow chart below to see where prices and lower mortgage rates ranked.
A Change of Confidence We Can Believe In
Back in 2008, Obama asked the American people to “vote for change” – there was a bit of marketing magic in how he united the nation around his vision that “yes we can” make things better. Now fast forward to today and it’s almost safe to say that the more noticeable change we’ve seen is a change in consumer confidence.
How do we know this? Well, we had asked people back in 2009 about their confidence in the incoming president’s ability to turnaround the housing market. We then asked this same questions again in 2011 and then graphed the results in a side-by-side comparison. Clearly, America’s faith in Obama’s ability to stabilize the housing market has waned.
So long story short, if the president hopes to have a second term, then he best be ready to fight for it. With about 65% of Americans saying that housing hurt Obama’s re-election, Obama’s got an uphill battle waiting for him. Only time will tell if the President can bring back Candidate Obama from 2008.
To see the full results from our latest consumer survey, click through the slideshare below:
To view a video of our Chief Economist Jed Kolko discussing the findings, see below.
To download the infographics pasted above, check out our Flickr account:
Renting out REO properties would be a drop in the bucket – it wouldn’t clear much of the housing inventory and wouldn’t ease rising urban rents, but it would help shore up neighborhoods where housing prices took the biggest slide, and that makes it worthwhile.
The Federal Housing Finance Agency (FHFA), the regulator for Fannie Mae and Freddie Mac, is considering proposals for selling government-owned homes to investors, who would then turnaround and sell or rent them out. (The official request for policy ideas is here.) It’s hoped that this move would help government agencies earn some much-needed revenue, boost neighborhood home values by getting buyers or renters into vacant homes and ease tight rental markets by expanding the supply of rental housing.
Even though Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) are national agencies, housing markets are local, which means that the vacant, foreclosed properties they own are concentrated in regions that were hit hardest by the housing crisis. Among larger metro areas, these agencies own the most foreclosed property – known as REO (real estate owned) – in Las Vegas and Atlanta, after adjusting for metro area size. Several metros in Arizona, Michigan and California are also among the top 20 metros where the government owns a lot of homes.
|Metro area||Government-owned REO for sale per 10,000 housing units|
|Las Vegas-Paradise, NV||28.9|
|Atlanta-Sandy Springs-Marietta, GA||22.6|
|Lake Havasu City-Kingman, AZ||20.9|
|Riverside-San Bernardino-Ontario, CA||16.3|
|Warren-Troy-Farmington Hills, MI||15.4|
|Lansing-East Lansing, MI||14.9|
|Boise City-Nampa, ID||14.5|
|Cape Coral-Fort Myers, FL||13.4|
NOTE: Top larger metros (100,000 housing units or more), ranked by government REO per ten-thousand housing units. Includes all homes owned by Fannie Mae, Freddie Mac and FHA that have been through the foreclosure process and are being marketed for sale, as reported by the U.S. Department of Housing and Urban Development (HUD).
Generally, places that suffered most during the housing bust from severely falling home prices and high mortgage delinquency rates now have the highest concentration of these vacant, foreclosed government-owned homes. The big exception is Florida. While the Sunshine State experienced big price declines and lots of defaults, surprisingly few of the homes lost there have made it through the foreclosure process and can be put back on the market. Why is that? It’s because the foreclosure process in Florida takes a lot longer than in most other states. As a result, many of the Florida homes that the government and banks plan to put on the market someday are trapped in a slow limbo today.
Would selling these government homes to investors help neighborhoods? Yes. Vacant, foreclosed homes drag down the value of neighboring properties, so getting those homes occupied would help stabilize neighborhoods. A push to rent or sell these homes can and would help neighborhood home prices in areas where the government owns a lot of the homes – but such a policy wouldn’t do as much good for hard-hit Florida where the government has less REO to sell. The map shows where the government owns the most REO ready to sell (relative to total housing units) – and where getting those homes occupied could help local markets the most. The Southwest, inland California, northern Georgia and southeastern Michigan stand to gain the most from selling or renting out government REO.
But if you don’t live in a neighborhood with lots of homes that the government can sell or rent, then REO policies wouldn’t do you much good. Renting out these government-owned homes wouldn’t ease pressure on tightening urban rental markets. Renters typically live in bigger, denser cities, which are not where most of the government-owned homes are. In fact the typical location of a government-owned home is in a neighborhood with fewer renters, higher rental vacancies and where homes are more spread out. (FYI, this description is based on the housing characteristics of zip codes where these government REOs are located.) In short: you’d benefit if you live near government-owned vacant homes that get occupied, or if you’re looking to rent in neighborhoods where lots of overbuilding led to lots of foreclosures, but most people facing tight rental markets live far from these clusters of REO properties. Renting out government-owned homes wouldn’t give renters more options in most neighborhoods, which means that those same government-owned homes might have a tough time finding tenants.
And even if the government sold all its REO to investors and those investors were able to find buyers or renters immediately, it would make only a small dent in the overhang of empty homes from the housing boom. Of all the REO homes currently owned by Fannie Mae, Freddie Mac and FHA, fewer than 100,000 units are currently listed for sale. (In total, including those not yet being marketed for sale, these agencies own over 200,000 homes.) There are over 3 million total homes on the market, plus millions more of “shadow inventory” – homes in default or foreclosure that aren’t on the market but are likely to be in the future. Getting people in 100,000 government-owned homes still leaves a lot of housing supply that will take years for the market to absorb.
So is this policy a misstep? No. It would help some of the most struggling neighborhoods in the country by getting vacant homes occupied. It leaves lots of big problems unsolved, but no one housing policy will fix what ails every local housing market. And, remember, housing is local, so the housing market is not just the federal government’s problem: state and local governments need to act, too. Florida loses out on the benefits of REO sales because its foreclosure process takes so long. Cities with tight rental markets need to boost supply by undoing regulations that make construction expensive or impossible. Just because one policy wouldn’t fix everything is no reason not to do it, but we can’t stop there.0 comments
The good, the bad and the ugly on the federal government’s ReFi Plan, and where are home prices heading as of now?
This week’s big news was the plan to expand refinancing eligibility. I’m devoting this week’s post to explaining which problems this plan will and won’t solve, and which other policies being kicked around might solve the problems that easier refinancing won’t. But first, a quick look at the latest home price numbers.
Home Prices Up and Down Depending on Where You Live
Two different home price indexes reported this week that prices have fallen nationally about 4% this year up to August 2011. But prices were relatively stable over the last three months after slipping earlier this year, with Case-Shiller reporting a -0.3% drop and the Federal Housing Finance Agency (FHFA) reporting a +0.6% bump. Nationally, this is a sign that prices might finally be leveling out, which could be the cue that everyone’s been waiting for – the cue for builders to start planning to build single family homes and for banks and home sellers that it’s time to start putting more of their vacant or distressed properties on the market. As always, location matters: this past summer, prices went up the most in Detroit, followed by Chicago, Washington DC, Minneapolis and Boston. So what’s going on here? Well, Detroit’s price rise is a bounceback from the big price decline during the recession – the largest drop among big metros outside the Sunbelt. The other cities’ price increases were helped by a combinationrelatively low vacancy rates and stable job growth. In Atlanta, where jobs are disappearing, home prices fell most, followed by Phoenix, where there are still a ton of vacant homes. Sellers in those cities hoping to unload will have to wait.
The Federal Government’s Re-Fi Plan: The Good, The Bad and The Ugly
Now on to politics and policy. The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, announced an expansion in refinancing eligibility through the Home Affordable Refinance Program (HARP). The official notice is here.
So here’s what’s new: some people who are seriously underwater are now eligible to refinance their First: what does it mean for you? You might be able to refinance if your loan-to-value is more than 125% — which used to be the ceiling for eligibility – and you might be able to pay lower fees to refinance. Also, under these new rules, your lender might be more willing to refinance because it makes refinancing less risky for them. BUT, your loan must be owned or guaranteed by mortgages.
First:what does it mean for you? You might be able to refinance if your loan-to-value is more than 125% — which used to be the ceiling for eligibility – and you might be able to pay lower fees to refinance. Also, under these new rules, your lender might be more willing to refinance because it makes refinancing less risky for them. BUT: your loan must be owned or guaranteed by Fannie Mae or Freddie Mac and you need to be current on your mortgage payments, have no late payments in the last six months, and no more than one late payment in the last twelve months. That’s a big “but” and will disqualify many people who want to refinance, but those who do qualify might save a lot. A rough rule-of-thumb is that lowering your mortgage rate by a point will lower your monthly payment by around 10%, but the effect on your payment depends on the details of your loan.
Next:what does it mean for the economy and the housing market? Since borrowers have to be current on their payments to qualify, lots of people on the verge of losing their homeswon’t be helped. And, a lower mortgage rate doesn’t mean a lower loan principal balance right away (even though some borrowers might use the lower rates to shorten their loan and start paying down) – so really underwater borrowers will stay really underwater and still at risk of default and foreclosure. And of course easing refinancing doesn’t help people buy homes because you need to own a home already in order to refinance. So what will this plan do? Stimulate the economy – somewhat. Qualifying borrowers will have lower monthly mortgage payments and therefore more money in their pockets to spend on other things. Who pays for this? Investors in mortgages or mortgage-backed securities – which includes government agencies – who will receive reduced mortgage payments from borrowers. On balance, it’s stimulus because the borrowers will increase their spending more than the investors will decrease theirs. In short, the refinancing expansion is an economic stimulus that avoids the messy politics of trying to get Congress to approve more stimulus plans.
Since the ReFi plan leaves many problems unsolved, debate is brewing on other housing policies. No formal proposals in these areas have come out yet, so treat this as a viewer’s guide to what might be coming next from Washington on housing policy. Grab your beer and chips, and here we go:
1) Principal reductions: The most direct way to prevent future defaults and foreclosures is to reduce mortgage principal balances – in order to get underwater borrowers closer to air. These proposals typically call for the government or whoever the mortgage-holder is to absorb the cost of the reduction. But there’s no free lunch for the borrower.Economist Marty Feldstein proposed that borrowers could have principal reductions in exchange for the lender having “recourse” – which means that a borrower who defaults after a principal reduction could lose not only their house but other assets. Earlier principal reduction proposals called for borrowers who benefited to share any future increases in home value with the government or whoever absorbed the cost of the loan reduction.
2) Renting vacant, foreclosed properties: Bank and government agencies own vacant properties, which aren’t earning them any money – and vacant properties pull down neighboring home values, too. At the same time, as fewer people want to own their own homes, the demand for rentals is rising, leading to lower rental vacancies and sky-high rents. This “plan” aims to kill all birds with one stone, and give owners of vacant properties – or investors who would buy them – incentives to rent them out? Sounds great in theory. Could work in practice if the investors can spruce up these homes and manage them as rentals. The hitch is that lots of the vacant, foreclosed homes are in the outer suburbs (or what you could call, the middle of nowhere), where so much construction during the housing boom took place, but the tight rental markets tend to be in big, dense cities. If we could only figure out how to take a vacant, foreclosed single-family home in Modesto and rent it out as a one-bedroom apartment in San Francisco ….
3) The mortgage interest deduction – just about every economist wants to tackle this, but just about no politician does (can we say, election suicide?). The two hotly debated questions are (1) if the government is going to spend $100 billion annually to support homeownership, is the mortgage interest deduction, as it’s currently designed, the right way to do it? and (2) should the government spend $100 billion annually to help people buy homes in the first place? This is a big, messy question that affects tens of millions of homeowners and all taxpayers. I’ll take this on in a future week.
3) Do we need Fannie Mae and Freddie Mac? – do these institutions help keep mortgage rates low and expand homeownership, or do they deserve blame for the housing mess we’re in? Politicians will ramp up this debate as the housing market moves out of intensive care and can begin to walk on its own with less government support. This, too, I’ll take up in a future week.