Miss Housing Nirvana Cries Uncle

Logan Mohtashami, Benzinga Contributor

NickTimiraos from the Wall Street Journal

https://twitter.com/NickTimiraos

Nick Timiraos ‏@NickTimiraos
Zelman existing home sales forecasts: 2014 at 4.8M (vs earlier 5.4M); 2015 at at 4.9M (vs 5.7M); 2016 at 5.0M (vs 5.9M). 2013 was 5.09M.

Nick Timiraos ‏@NickTimiraos
Ivy Zelman slashes existing home sales forecast: now -5% for 2014, vs earlier +6% forecast. New home sales forecasts unchanged.

Today “Miss Housing is in Nirvana 2013”  and “Housing Nirvana is around the corner 2014” finally threw in the towel with existing home sales, revising them not only for this year but out to 2016.  Recently, I wrote an article stating that if mortgage purchase applications don’t make an epic rise in the month of March,  then revisions lower will have to be made for total sales). http://loganmohtashami.com/2014/02/20/mortgage-purchase-applications-running-out-of-time/

Money doesn’t grow on trees and home buyers don’t have 100% stated income financing anymore. The charts below from Professor Anthony Sanders shows that we simply don’t have the year over year demand to have growth for existing home sales from mortgage buyers. Cash buyer total volume isn’t strong either. This with rates at 4.5% and inventory rising

http://confoundedinterest.wordpress.com/2014/04/09/zombieland-us-mortgage-purchase-applications-down-14-year-over-year-refi-applications-down-5-from-previous-week/

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Does this mean housing in a collapse?  No, it just means that until we get wage growth and better jobs into the economy the housing market for existing home sales will be soft.  For new home sales it’s a different market place because it doesn’t really represent main street America. So that market will have growth in sales in 2014. However, that is more a by-product of coming off an 80% correction from the peak  in  new homes sales which  are only 1/10th of sales now.   Traditionally this  would be 1/6th  of the market.

Existing home sales are more representative of main street America, not including the 35%  of the market who were cash buyers last month.  Until we see growth in American wages and overall employment, the market will remain soft. Another aspect is that the first time home buyer and move up buyer has to deal with all this housing inflation we have seen since April of 2012. When prices and rates rise together it creates a dynamic duo of pain for buyers.

As Professor Sanders shows here in this chart which goes to my very first economic thesis about housing back in 2010, “We simply don’t have enough qualified home buyers, excluding cash buyers to have a strong primary resident housing market” If the cash buyers weren’t around in this cycle the weakness would be more evident but for now they’re 1/3rd of the market place

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Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com and contributor for Businessinsider.com

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Existing Home Sales Look Soft

Logan Mohtashami, Benzinga Contributor

Today the NAR came out with the Existing home sale numbers and the year over year action looks soft:

http://www.realtor.org/news-releases/2014/03/february-existing-home-sales-remain-subdued

5 points on the numbers that came out today

- It’s looking more like zero growth in total sales for 2014. While new home sales still have room to edge higher, existing home sales, which are more indicative of what is happening on main street America, continue to be soft

- Inventory is higher, but housing inflation has dampened demand. As I warned back in May of 2013, housing inflation on both fronts (prices and rates) should have been the NAR major concern, not a lack of inventory

http://loganmohtashami.com/2013/05/07/housing-mammoth-stuck-in-tar-has-bigger-problems-to-worry-about/

- 35% of the market is cash buyers. This is a pathetically high when one considers that we are in year 6 post-crash and enjoying rates of 4.5% and under. Mortgage purchase applications are down 18% year over year on the 4 week moving average.

- Americans need 28-33% equity in their property in order to purchase a larger or more expensive home, if the desire is to not pay out any additional cash. This is not yet possible for millions of Americans-so the “trade up” market is also expected to be soft

- We have never had a post World War II recovery in housing where median incomes didn’t recovery.. until now.

Great chart from Professor Anthony Sander who has a great blog

http://confoundedinterest.wordpress.com/2014/03/20/existing-home-sales-fall-back-to-2012-levels-and-late-2007-levels-when-the-wheels-came-off-the-economy/

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First time home buyers are 28% of the marketplace, down from 30% a year ago. The NAR would say that 40% is a normal level

First time home buyers are going to be light for many reasons including

- lack of jobs

- lack of income

- Student Loan debt

- Housing Inflation on both fronts prices and rates

Recently I wrote an article saying mortgage purchase applications were running out of time. The thesis was that if by the end of March we didn’t see a strong upward move in applications, we would be looking at weak sales. While last year showed strong year over year gains in this index, this year the index has been constantly down year over year .

Another great chart from Professor Sander

http://confoundedinterest.wordpress.com/2014/03/19/mortgage-muggins-mortgage-applications-drop-yet-again-1-15-purchase-applications-5-lower-than-last-year/

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New home sales will have growth this year because they are coming off such a low base from the bottom of the cycle. Existing home sales are looking like we will negative growth if there isn’t a pick up in activity in the next 5 weeks. If we do get a surge in purchase applications in April we may still salvage a flat year but if we get April fooled and see no strong action in purchase applications then it’s all downhill as seasonality starts to kick in. Not quite Housing Nirvana yet… Ivy Zelman

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com and contributor for Businessinsider.com

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First Time Home Buyer, What’s That?

Logan Mohtashami, Benzinga Contributor

In a recent article Bloomberg financial asked me to comment on the scarcity of first time home buyers in the housing market.

http://www.bloomberg.com/news/2014-03-05/americans-shut-out-of-home-market-threaten-recovery-mortgages.html

The lack of first time home buyers is not a new phenomenon. This group of mortgage buyers has been underrepresented in the market for years, and you don’t have to read tea leaves to figure out why:

- Median income growth has been very weak
- Majority of the jobs recovered in this cycle have been low wage paying jobs going to people 50 and over
- Lack of liquid assets for a down payment and closing cost even for a 3.5% down payment loan is an issue
- Parabolic rise in student loan debt since 2007
- Living at home is financially more beneficial in this economy for some
- Renting as an option has an appeal for those who aren’t settled economically or not married with kids.
- Base salaries for college grads in some sectors isn’t high enough to obtain mortgage debt

The bottom line is that unless we see income growth, more younger Americans working and more of those younger Americans with better base salaries, first time home buyers will continue to be shut out of the market and this will affect the overall housing recovery.

From Anthony Sanders:

http://confoundedinterest.wordpress.com/2014/03/05/mortgage-origination-volume-falls-to-lowest-since-2008-mortgage-applications-still-at-1995-levels/

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Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com and contributor for Businessinsider.com

 

 

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Mortgage Purchase Applications Running Out Of Time

Logan Mohtashami, Benzinga Contributor

For 2013, one of the main stories in housing was the cool down in existing home sales numbers over the second half of the year, in spite of the relative strength in GDP

What was the main reason for this? Follow the data and the answer appears.  When interest rates spiked we did not see the mythical sideline home buyer rush to the market place. Rather what we saw was a collapse of the mortgage purchase application index.
Thus far for this year, mortgage purchase applications numbers continue to be weak. A host of reason from the polar vortex to the lack of supply have been used to excuse the lack of demand interest. Some even say that the mortgage purchase application number is not the best tool to forecast future buyer demand.

The chart below from Professor Anthony  Sanders show why I haven’t

been a ranging bull on housing. Buying a home is buying debt . When median incomes don’t rise logic says that once housing inflation rises on prices and rates,then the number of qualified home buyers gets impacted

On the chart below the green line shows median incomes and the other metric is the mortgage purchase applications index. I believe it speaks clearly for itself . Hope springs eternal. To be sure , there is yet time for the mortgage purchase applications to make their seasonal rise for the spring selling season. However, the clock is ticking . If we don’t see a pick up with in the next 5 weeks, then the 2014 existing home sales numbers will need to be revised a little lower.

I do believe we will see some better numbers in the upcoming weeks. However,the year over year numbers will be mostly negative for the first half of 2014. We simply aren’t seeing the same demand as we saw last year when the 10 year note was below 2% . One of the most disheartening items I am hearing is when I get calls from loan officers and escrow officers saying how quiet things are and express their concerns of the overall business.

So what must be in place for housing to attract more mortgage buying interest with these higher level rates.

Simple We Need:
- Wage growth
One of the economic metrics I follow just showed a first level red flag. It’s the national saving rate falling and consumer debt being leveraged up again. For me, that is a bad sign in a low wage growth economic cycle

- Better Paying Jobs

The housing market can’t have a strong recovery on the backs of service sector jobs going to people 50 and over.

Notice no mention made here about easing lending standards or QM. As always, the tight lending standards theory is an economic myth. All a potential buyer needs to buy a home is a 620 Fico, 3.5% down payment and a debt to income ration of 43%. Some lenders recently have even lowered their Fico score limits to 580-600 in a desperate act to create demand.

So what’s the problem?

It’s the economy stupid
http://confoundedinterest.wordpress.com/ Anthony B. Sander -George Mason University

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Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com and contributor for Businessinsider.com

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My Interview With David Lykken On American Economics

Logan Mohtashami, Benzinga Contributor

My portion starts around the 40 minute mark

http://www.blogtalkradio.com/lykkenonlending/2014/02/03/2-3-14-special-guest-logan-mohtashami-with-straight-talk-about-the-markets

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com and contributor for Businessinsider.com

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Mark Zandi: It’s The Economy Stupid

Mark Zandi: It’s The Economy Stupid

Logan Mohtashami, Benzinga Contributor

January 27, 2014 2:25 PM

 

 

 

 

Are tight lending standards the go-to fall guy in this economic cycle?  It would seem so.

 

Wall Street Journal’s Nick Timiraos sparked a recent Twitter discussion on this topic when he shared an article Mark Zandi,  Moody Analytics Chief Economist,  wrote.   Mr. Zandi believes lending standards will  hamstring a struggling housing market, and should be loosened.  A number of Nick’s followers jumped in to agree.

 

A lively  discussion followed.  David Stevens, CEO of the Mortgage Bankers Association and  Christopher Whalen of Carrington do not agree with my stance on this topic, a stance which from which I will  not waver.

 

While true that by historical standards we currently  have a low rate of mortgage buyers, I do not believe lending standards are the reason, nor that the standards are too tight .

 

I believe the reasons are  weak incomes, lack of liquid assets, too much debt (especially student loan debt),  the labor force falling down, and a host of others having nothing to do with lending standards.

 

However, lets forget about my economic ramblings and  consider Mark Zandi’s points, one at a time.

 

http://www.washingtonpost.com/realestate/zandi-credit-constraints-threaten-housing-recovery/2014/01/23/fd5559ac-74c0-11e3-8b3f-b1666705ca3b_story.html

 

“ For the housing recovery to maintain its momentum, first-time and trade-up home buyers must pick up the slack. Yet these buyers face a significant barrier: Today only those with the cleanest of credit records are able to obtain mortgage loans. The average credit score on loans to buy homes last year was above 750 (on a scale of 300 to 850), some 50 points higher than the average for all consumers, and 50 points higher than the average among those who received mortgages a decade ago, before the housing bubble.”  – Zandi

 

This is false.    Loans buyers with low fico score loans and low down-payments have been available to first time home buyers and move up buyers this entire cycle.   The fact that Mark Zandi claims these loans are not available makes clear his lack of experience in the lending business.

 

In fact,you could have gotten a mortgage with a 620 Fico, 3.5% down-payment and debt to income ratios to 43%-50% for the last few years.   Even today you can get an 80% loan with a fico of 620.

 

Further, his use of  the average score of those who bought homes as proof that lending standards are too tight is flawed analysis.    The score reveals more about the buyers’ credit quality on average, but not that lending standards are tight.   We must remember that there is no subprime lending in the mortgage business anymore, and that this is a good thing.

 

Some may point to the auto loan business, which offers sub prime lending and which is experiencing a boom, as proof than housing should follow suit.   However, the debt structure of car loans is much different from housing, and cant fuel the fires of trouble that sub prime loans in housing can (and once did).

 

“Several mutually reinforcing factors are keeping credit tight.

First, lenders are less willing to take on risk, in part because they were burned in the housing collapse. Moreover, there are other costs associated with riskier lending, including legal and reputation problems related to loan defaults and the additional infrastructure and manpower needed to service distressed borrowers.” -  Zandi

 

Lenders are giving loans to people with 620 Fico Scores and 3.5% down. How much more risk do you want them to take?   Notice Mark Zandi doesn’t come out and say we should go back to 100% loans or even give a Fico limit. Lending guidelines are back to normal and since we haven’t seen normal in a long time we mistake this as being tight.

 

“Lenders are also adjusting to changes related to the Dodd-Frank financial overhaul. One of the most significant is the qualified mortgage rule, which provides a safe harbor from borrower suits under the Truth in Lending Act. Many lenders will not make loans that fall outside of that safe harbor, and those who do are likely to restrict them to wealthy borrowers or those with very high credit scores.”   – Zandi

 

Barring debt to income ratio being moved down from 45% to 43% a lot of the new QM ( qualified mortgage) guidelines have already  been accepted by the market place. Also, lenders will do non -QM loans and even interest only loans but they will do them for the upper income  home buyers in America.  What I am trying to stress here is that the guidelines that we have seen in the last few years,  and in place today, are not overly stringent.

 

“Lastly, lenders are turning away many borrowers who meet the requirements for government-backed mortgages because of uncertainty about the government’s rules for loans that are deemed faulty because of underwriting mistakes. When a lender makes a loan insured by Fannie Mae, Freddie Mac or the Federal Housing Administration, it is with the understanding that the lender will not bear the cost of a default. But the government can force a lender to absorb the cost if the lender did not follow correct underwriting rules. In recent years, Fannie, Freddie and the FHA have been much more aggressive about returning defaulting loans to lenders.”  – Zandi

 

He is correct that the fear of loans being deemed faulty due to underwriting mistakes have made banks very cautious.   However, to then leap to the assumption that  fear of put back wars prevents banks from lending to qualified home buyers is flawed thinking.

 

I have yet to see  a transaction go bad when  the buyer has the financial ability  to own the house.   In fact the only reasons I have seen a loan get declined is that the appraisal value comes in low or a condo project doesn’t get approved.

 

To be clear, this does not mean that a complex tax return or a deposit hasn’t bested an underwriter and prevented a qualified home buyer from obtaining a home loan.   No doubt this occurs from time to time.  However, in all honesty this is a very small drop in the pool of transactions.

 

The reason why my neck hairs rise when I hear lending standards blamed for the low mortgage numbers, is that by pointing to a red herring, the real problems are overlooked.

 

So what are the reasons more mortgages are not being written during a time or relative low-interest rates?

 

Here are the reasons I believe fewer folks qualify for mortgages.

 

1. Incomes are weak.   Years of soft income growth has caught up to an economy that is based on debt consumption.

 

2. Debt to Income ratios are too high.   The current household debt to income ratio when purchasing a home is too high even after  all the de leveraging that has gone on.

 

3.  Liability to Income ratio is too high.   These are the real line by line item costs monthly expense costs Americans pay for recurring needs that  don’t properly show up on Debt to Income ratios.     Many  Americans add these monthly expenses, such as cable bill, insurance bill and  others,  to credit cards because cash flow isn’t that great.

 

4. American jobs do not, on average, pay enough to sustain an increase in mortgage applications and approvals.  Since the majority of the jobs recovered have been in the low wage service sector and going to people 50 and over,  the improving employment picture has not done much to help housing.   Many Americans are making less than what they made during the housing bubble economic cycle so the debt to income and liability to income ratios aren’t as strong as pundits think. The after tax expense incomes for Americans is not rosy.

 

5. Student loan debt  is affecting the young’s ability to purchase their first home.   This debt stands at  1 trillion dollars and growing.   Unlike the other household debt that  can be written off in a Bankruptcy filing, or through foreclosure or a short sale, f, student loan debt just grows and grows and grows. This is the one household debt that has been rising through out this cycle.

 

 

6. Americans are just a bit more reasonable on taking on debt.   I coined the phrase LTI ( Liability to Income) to capture and present the idea that for most Americans, what matters is how much they must spend, line by line, to pay their regular monthly bills.    It is clear that even when a person has little debt, if their monthly expenses plus a new house payment will exceed their ability to pay, the mortgage will fall into trouble.

 

Progress I have seen in this cycle is that Americans aren’t as willing or likely to borrow maximum amount of money they might have in the past.  They have budgets and know how much their total mortgage payment which include principal, interest, taxes and insurances is. This is a plus for America because this means they have more money in their pockets at the end of the month.

 

7. Renting is a great idea for many, including the young. Mobility is a key asset in the job hunting game and with many young Americans delaying marriage and starting a family,  adding on the biggest debt they will likely  ever have isn’t their biggest priority.

 

8.  The old adage promoted by many real estate agents that one’s home is one’s best investment is questioned.    Individuals should look at housing as the cost of shelter, and take on  only the debt they can afford to pay, for that shelter.    This is and should be a different perspective that of  Wall Street firms or foreign cash buyers who are looking for yield investments or  wanting a place to park cash.  The theory that buying a home will allow the homeowner to both live in it, and watch the investment grow is no longer accepted by many Americans.   Now, they are more likely to believe it is the payment they are buying.  If you don’t believe me,  ask the millions of  Americans who are still underwater.

 

9. Economics cycles seek equilibrium.   Since 1968 we have been in  a very long economic cycle driven by Globalization, Technology, Debt and Demographics.   In this  phase capital gets better treatment that labor.   So, if incomes don’t grow in an economy based on debt,  and that economy has no financial bubble to create fake demand to create fake well-paying jobs, then you get this type of cycle we are seeing right now.   But, as I’ve pointed out before,  the financial heads in New York, Washington D.C. and San Francisco just don’t get the struggles of Main Street America.

 

So if I haven’t convinced you that it’s not lending standards that are too tight but it’s the economy,  then I did a poor job, because math, data and facts should win out in the end.

 

However, as always I challenge the Wall Street Journal, CNBC, Bloomberg, BusinessInsider, Trulia, Zillow and the NAR to an open forum debate on this issue.   Prove me wrong with facts not assumption or academic reports because I know all too well they aren’t telling you the real story.

 

On a final note,  I will tell you when I believe the housing story is getting better.   It will be when we see Main Street Americans buy homes, when first time home buyers buy homes in a bigger percentage fashion than what we have seen these last few years.   The problem we have with this housing cycle is that housing inflation is running  higher on both fronts now,  and we are so  asking Main Street America to buy and pay more for a home that went up in value not because of economic strength but because the housing bubble hangover left an inventory crisis for this country.  So when people say lending standards are too tight, I say it’s the economy stupid.

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com and contributor for Businessinsider.com

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My Interview With Bloomberg Financial On My 2014 Housing Predictions



Logan Mohtashami
, Benzinga Contributor

Podcast of Interview with Bloomberg Financial

http://media.bloomberg.com/bb/avfile/Economics/On_Economy/v9PUOKbnFMeE.mp3

2014 Housing Predictions

http://loganmohtashami.com/2013/12/30/2014-housing-predictions/

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com and contributor for Businessinsider.com

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