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.
Welcome. Now that I’m getting settled in my role as Chief Economist at Trulia, I’m kicking off a series of blog posts on Trulia Insights that will sift through the week’s news and explain what really mattered. Different news matters to different people: a trader dealing in real estate investment trusts (REITs) follows every fluctuation in every market indicator, but most of us only care about our local housing market and about the trends that are here to stay. I’ll look back at the week and point to new housing market and economic data that were especially surprising or important, and put it into context. I’ll also highlight insights that are under-the-radar but say something important about housing today and in the future. I’d love your feedback on these posts and any findings you come across that you think are worth discussing.
This week, some thoughts on the latest Case-Shiller home price index and shadow inventory data, as well as new findings that caught my eye about traffic congestion and the mortgage interest deduction:
First up: the S&P Case-Shiller index, an important measure of home price changes, increased for the fourth straight month. Celebrate? Not so fast. Prices usually rise more in these months than at others times of the year. From March to July (this week’s release was the July numbers), the index went up a total of 3.7% – that’s pretty good – but the seasonally adjusted index went up only 0.2%. This means that the 3.7% increase was almost all about the spring/summer bounce that happens most years rather than the beginning of a real long-term trend. One way to take out seasonality is to compare the index to the same time last year, and by that measure home prices fell 4.1%. Not so good.
Next up is the decline in shadow inventory. When there are more homes for sale than there are buyers in a market, prices stay low. But in addition to homes actually on the market, there’s also the “shadow inventory”: homes that aren’t on the market today but probably will be because the homeowner is seriously behind on mortgage payments or the home is in foreclosure or has been taken back by the bank. A large shadow inventory, like a large listed inventory, keeps pressure on prices from rising. CoreLogic reported this week that the shadow inventory is down over 15% in July 2011 versus July 2010. But the current shadow inventory of 1.6 million is still much higher than before the housing crisis, when it was regularly under 500,000. This shadow inventory will have to shrink a lot more before prices really start moving up.
The Texas Transportation Institute published its annual report on traffic congestion. Having a short commute is a key factor in where people want to live. If you’re moving someplace new, you should know how much time you’ll spend in traffic; even if you’re not moving, trends in traffic congestion could affect your home’s value. So what happened to traffic last year? High unemployment means fewer commuters on the road and less congestion: the average commuter lost 34 hours in 2010 from being stuck in traffic, down from 39 hours in 2005. Commuters in Washington DC, Chicago and Los Angeles lost the most time due to traffic jams. Meanwhile, the folks who lost the least amount of time live in places with newer infrastructure, like Phoenix, or slower growth, like Detroit.
|Rank||Metro Area||Hours Stuck in Traffic in 2010|
|3||Los Angeles-Long Beach-Santa Ana, CA||64|
|5||New York-Newark, NY-NJ-CT||54|
|6||San Francisco-Oakland, CA||50|
|8||Dallas-Fort Worth-Arlington, TX||45|
|13||San Diego, CA||38|
But if you can’t stomach listening to the traffic report and brake lights give you road rage, move to a smaller city: commuters in my hometown of Rochester NY spend only 13 hours a year in traffic, and those in McAllen TX, Stockton CA, and Eugene OR spend fewer than 10. And for those of you who can pick and choose your driving times, work from home on Friday and stay off the roads between 5-6 pm.
As the government fights over the federal budget deficit, the mortgage interest deduction – the ability to deduct your mortgage interest payments from your taxable income if you choose to itemize — is a tempting target for politicians: it lowers annual tax revenue by roughly $100 billion, and fewer than 30% of taxpayers even itemize their deductions in the first place. So who takes this benefit? This week, new research shows how much of this tax deduction goes to people in different parts of the country. The differences are huge: in high-income places with high homeownership rates, like the suburbs of Denver, Washington DC and Minneapolis, over 40% of filers claim the deduction, but fewer than 10% in places with low income or low homeownership, like parts of rural Texas and the poorer parts of New York City. Of those who do claim the deduction, the average amount ranges from over $20,000 in coastal California, where homes are expensive, to around $6,000 in rural upstate and western New York. Do these inequities mean that the mortgage interest deduction is doomed, and you itemizers will be paying more tax? No. Because politicians represent geographic areas, the concentration of the mortgage deduction benefits in specific areas means that representatives in those areas will fight hard to preserve the deduction: the mortgage interest deduction would be in greater danger if the same overall benefits were spread evenly across the country. Ironically, the inequity of the mortgage interest deduction boosts its chances for political survival.
– S&P/Case-Shiller index, September 2011 release
– CoreLogic shadow inventory report, September 2011
– Texas Transportation Institute’s 2011 Urban Mobility Report
– “The Geographic (and Political) Distribution of Mortgage Interest Deduction Benefits”, by Ike Brannon, Andrew Hanson, and Zackary Hawley