Housing Inventory Hangover will Continue in 2013
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
For years Americans have seen the drying up of homes for sale. The drought has been harsh. Last year I wrote many articles talking about this trend and how this has had greater effect on a rise in sale prices than has pure demand. Now, this price rise caused by parched inventory is threatening to create another problem down the road which, if allowed to take hold, will only choke us further. What is this trend? I am not worried that home prices will bubble up into frothy foolishness, but I am concerned that this fast rise in prices will result in homeowners reaching their DTI (debt to income) limit and liquid asset limit faster, thereby pricing homeowners out of healthy financial decisions. This becomes a greater threat as mortgage rates slowly trend higher.
For several years now we have had very low rates and affordability has been high, and yet the traditional and first time home buyers have not been participating in great numbers. This is not surprising, as I have been saying for years, because we simply don’t have enough qualified home buyers ( excluding cash buyers) here in the US. This always had more to do with the Debt-to-income ratio of Americans rather than tight lending standards. Mortgage purchase applications have shown this as first time and traditional buyers have been not as strong as some people have hoped, even though rates have gone a lot lower since Mid 2010. DTI is simply too high and liquid assets are too low to generate a mega boom in traditional and first time home buyers . After tax/expense incomes of Americans especially those that would be first time home buyers is not high enough for them to get into the housing. Jobs, incomes, liquid assets, student loans and confidence all play a part for the first timers.
But we have all heard reports that in some areas there are multiple bids on many decent properties coming to market. So, we must know… What is driving this combination of low inventory, and the resultant push up in prices?
Here are the big 3, which are merging together to create this epic problem.
-There remains roughly 5.3 million homes either in delinquency or in the foreclosure process. Now the Shadow Inventory that everyone knows about are stuck in areas that remain the most troubled economically. The banks will extend out that pot of homes for as long as they can and most likely rent out a portion of them, which would leave over 3 million plus loans in delinquency. Now I am not saying every one of them is going to short sale or foreclosure, but a good portion will. So we have a delinquent back log of homes and the timeline to get those homes market in some states can take as long 3 years. There is a big difference between judicial and non-judicial states in regard to time lines.
-Housing Starts are making a comeback but if you look at the history of housing starts, you will see that the previous 4 year period was the worst period of housing starts since those began to be tracked. So, even though we are seeing a rise in starts, we must recognize it is a rise against a very low base. Now, starts will give a boost to the economy but nevertheless we aren’t building enough homes to get to market which means less inventory. So, this aspect has created the inventory shortage. I do believe we can get to 1.4 million in starts soon, but 2013 won’t be the year where new home inventory is going to create some balance.
- Underwater problem continues to plague us. We have over 10 million homes yet either under water or whose equity level LTV (Loan to Value) is 90-99. Having that high of a LTV means that traditional sellers won’t be putting their homes onto market in big numbers. The reason I point out the LTV levels of 90-99 is that when you consider total cost to sell your home you don’t have much left and in some cases you would have to bring money to escrow.
“So what,” you may wonder, “who cares, home prices are going up?” Maybe this market is like a stock with a very small float and the prices fluctuate higher, does it really matter to us all. Yes, it does matter and I will tell you why. My longer term concern with a sharp spike in prices is connected to the fact that we have not yet seen a boom in this economy. We are growing 2-2.4% and still averaging 150,000 -160,00 jobs per month. Neither do we see much income growth here in the US. True, the rise in stock market will help those who own equities and likely give a boost to the higher end homes for sale. For first time buyers, though, the likelihood of owning enough stocks to make a difference in ability to afford a first home is less likely.
As home prices push higher the average American will have to put more money down, borrow more and pay more for the cost of shelter which will lead to less disposable income after expense and less for long-term retirement investments and savings.
So, if home prices continue to rise due to the fact that we have these epic lows in inventory, it won’t only affect the housing market, it will also effect the economy longer term. We need a balance in the rise of prices because mortgage rates can’t be below 4% forever. So for those who says housing is on fire and booming because home price are rising, take note at where the buyers are coming from.
Do you want to know when you will see a real true recovery in housing? Wait until you see a move higher in first time home buyers and traditional buyers and less cash buyers. Then you know the market has solid conviction and a foundation on which to build. But until then, this is a very juiced up housing market backed by 3 trillion plus of the Fed’s balance sheet heading to 4 trillion, cash investors and a low inventory hang over.
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 columnist for Benzinga.com and contributor for Businessinsider.com
It appears that Logan has been silenced by the NAR and by CNBC. CNBC no longer allows comments and it is rumored that the NAR has “persuaded” Logan to no longer speak the truth about the Real Estate market. I notice no recent posts.
Diana did give me this response today. So, it’s coming back
Diana Olick:
Just so you know, there is a technical problem that happened after the website relaunched last month. It has nothing to do with anybody’s comments. I am told it will take some time, but they are relaunching the comments section as soon as the issue is fixed.
They can’t shutdown twitter!
Actually, I believe all their article sites comment sections are down which strikes me as odd because that is a very popular feature for everyone to read and get involved in. Other sites such as Business Insider has as top status on their website to comment away
http://www.businessinsider.com/commenter?id=4d4890f74bd7c84354090000
Hopefully, CNBC reconsiders or maybe they are just doing some internal work on their website.
God post. But “underwater” and “effectively” underwater with respect to selling and rebuying (80% to 100% LTV/CLTV) is ALOT greater than 10mm houses. Of the 54 million mortgages houses we know that about 24% are legitimately underwater — over 100% LTV. Between 80% and 100% are about 15%. So, 39% of the 54mm are zombies. Then factor in those who can’t sell buy or refi due to credit or income restrictions and well over 50% of American homeowners with a mortgage are dead to housing.
That’s why I use the 10 million plus number. 90-99 LTV homeowners would almost have to be desperate to sell because after paying their agent they have nothing left over. 80-89 is a different story, but the two main reasons for selling a home is moving up to a bigger home or a job which both are in question. If prices are inflated again with the low inventory hangover you can get more traditional sellers in 2014. However, then you get into a DTI problem with housing inflation. I did a test run with buyers in 2012. I ran number with 6% rates, DTI capped at 43% as CFBP will do next year, home prices not changing one cent ( which isn’t the case anymore) and 39.6% wouldn’t qualify for the home. There is a capacity limit to housing, unless you get massive job & income growth to offset the housing inflation.
Cash, buy-to-rent institution investors, not first time home buyers, are buying in many hot markets and they are driving price up. This would have no effect on DTI or appraised home values. Many homes in So. Cal would not appraise due to 10 -20% price increase last year but are selling as buyers are all cash.
It’s 30% of the market place ( Cash Buyers) and this is the 3rd year in a row we have had 30% cash buyers when affordability has been so high. 70% still mortgage based but first time home buyers are at a very low 30% ratio where they need to be at a normal level of 40-43%. At some point the cash buyers aren’t going to pay up for these inflated homes and the first time home buyer has to step in. However, with home prices rising each year now, all that is doing is creating housing inflation and we don’t even have the rate factor yet involved. Unless the young get massive income growth to offset housing inflation it’s going to be difficult for them to buy. Not to mention the massive intake of student loan debt since 2007. Those charts look awful. A big reason why the young are renting and living back home
When do you think the Blackstones of the world would stop buying homes indiscriminately in chasing for yield? I heard in some areas cap rate is down to 3%. I’m surprised they’re still buying them to rent out with cap this low. I read somewhere that they are buying them so fast that they have put off renovating them for rent.
Cash to buy to rent thesis has been a good one these past years. The ZIRP policy the Fed has made other assets, cash, CD’s, bonds not so appealing. I honestly believe the FED will change their metric on 6.5% unemployment rate as the cue to start raising rates. So, with that said, as long as the yield makes sense to them and the cost of renovations isn’t too bad they will keep on buying. However, with home prices rising now ( Faster than income growth) at some point the math will not make so much sense to buy but maybe to sell? So, it’s hard to pick a time frame when the cash buyers will leave the market. For me having this high of a % of cash buyers when affordability is so high (supposedly) shows why I will always stick to my main thesis on housing that I have had since day one. We simply don’t have enough qualified home buyers ( excluding cash buyers) here in the US. No matter how low rates get, our DTI is too high and our liquid assets are too soft .
Interesting article and it does make a lot of sense. Present buyers are investors picking up rental property. As long as rates remain low do you believe this is a good long-term investment strategy? I’ve read some authors say another massive real estate bubble crash is coming when inflation hits. But won’t people still need a place to rent?
My long term thesis on housing has been we simply don’t have qualified home buyers in America, no matter how low the rates get. If you look at the % of the buyers in the market places
30% cash
70% mortgage based
30% of that is first time home buyers. Now, that number is 10-13% lower than the historical norm of 40-43% in a normal market.
So looking out you can see is housing inflation is back due to prices are rising. Those prices are rising faster than incomes but rates are low. Once the other hand of housing inflation comes into play, higher mortgage rates then you got a problem unless you get really strong job & Income growth.
The metric I am still waiting to see is when does the first time and traditional home buyer dig into that 30% cash buyer market share. Investors won’t be paying up for homes like they did in the past and some have great returns on their investment. They will be looking to unload those great % returns into a market place that won’t have a 30% cash buying metric
Do you believe this rings true for traditionally more expensive areas such as Santa Barbara, Santa Monica, San Francisco? … that prices will eventually contract if we see no income and/or job growth?
San Franscisco is a very unique market and prices there are rising so strongly because of the supply shortage. I know people make money their and cash buyers are present. However, the laws of math will have to calm the pace at some point.
Here in Orange County today they were talking about how housing inflation in prices is causing the DTI ratio to go higher even with rates under 4%
“In Orange County, the least affordable place in Southern California, homebuyers needed $114,380 or more in annual income in 2013 to qualify for an existing home costing $600,150″.
http://www.ocregister.com/articles/percent-507941-county-home.html
The cash buyer metric has been so strong that it has kept the markets going. That and interest rates below 4%. However, it’s setting up to become a DTI nightmare when rates rise because we don’t have that type of income growth here in the US
For now if cash buyers are 30% plus and rates under 4% the market can move forward. However, those 2 metrics can’t stay with us forever
http://loganmohtashami.com/2013/05/07/housing-mammoth-stuck-in-tar-has-bigger-problems-to-worry-about/
Thanks for the reply Logan. I’ve noticed prices going up very quickly in Santa Barbara, CA as well. The inventory squeeze became worse after 2012 and in turn sellers are asking for more $$$. The supply is SO LOW. Condos under $350,000 receive multiple bigs with buyers going in with cash to rent them out. I had my eyes on a fixer 2 bedroom condo last summer that was the affordable price of $180,000 (for SB) and it had 18 offers after spending only a few days on the market. I’ve been looking for an affordable place since 2009 and these past few months began to wonder if I would ever find my way into a condo in Santa Barbara. I plan to keep on looking and I appreciate your perspective…it gives me a little hope.
A good metric for me is my own home in Irvine CA.
2 bedroom condo 1330 Sq foot. Last year could have gone for $410,000 and now recently broke over $500,000 mark.
I am surprised after the last housing cycle we had that more people aren’t concerned about this trend. We do have a short memory here in US.