Why the Financial Media and Housing Pundits Got It Wrong

Logan Mohtashami, Benzinga Contributor


There are 5 simple and obvious reasons  why the financial media and housing pundits got it wrong in terms of demand for home purchasing and  year over year growth in existing home sales in 2014.

  1.        Lending standards are not too strict

First, since none of these pundits have any financial lending experience they all naturally assumed that lending standards would ease making demand grow. It was painful to watch Steve Liesman  on CNBC try to make a case  to Diana Olick that if lending standards eased it would  stimulate demand. Sadly, this is a misconception held many in the financial media and Wall Street firms. Mortgage standards are not overly rigorous  in America. In fact, all you need to buy a home in America is a 620 fico score,  3.5% down payment and a debt to income ratio of not greater than 43%. Once this is recognized, the real problem, no wage growth and  the lack of good  paying jobs, will become the focus of how to grow the housing market.

Courtesy of Professor Anthony Sanders



  1.       Housing internals are weak

Second, those housing pundits tend not to consider the “internals” of the  housing market. The internals tell the story for those who care to look.

In a normal cycle we would see the following:
90% mortgage buyers
40% of that first time home buyers
10% cash buyers

In this cycle, however we see the following:

67-70% mortgage buyers
27-30% first time home buyer
30% plus cash buyers for the past several  years

The internals show weakness in demand,  not strength. What if the number of cash buyers returned to a  normal 10% level of the market place?  2014 has a high percentage of cash buyers but the volume of sales are going down. With a lower percentage of cash buyers expected in the future, the number of mortgage buyers will need to increase just to maintain the current level of sales.


  1.       Too many low paying jobs

Also consider that this economic cycle has had a very weak income jobs recovery profile.  In layman’s terms this means  that the majority of the jobs recovered have been low wage  jobs going to people 50 and over. The Debt-to-Income (DTI)  and Liability-To-Income (LTI)  metrics for home buyers are still high even though interest rates are low because wages are low and savings have been exhausted — hence the very soft demand for mortgages. The affordability index used by most of the financial media and Wall Street firms are terribly flawed because they assume  everyone in America can make a 20% down payment. These days only the rich can come up with a 20% down-payment. In my business  I am also seeing signs of economic stress in the  would-be move up buyers.  Many homes may no longer be underwater but the amount of equity is still generally small so there are fewer dollars available for the next purchase.

From Professor Sanders


Home prices are too damn high!

The term “housing recovery” suggests that home prices are now “returning to normal”.  In truth however, prices are rising beyond economic reality of most Americans. While home owners and housing pundits alike were glad to see the return of  home values to nearly pre-recession levels in some areas,  nary a thought was given to how to how this would impact demand.  Prices were up 15%-45% in 2 years  — the biggest 2 year expansion we have seen outside the bubble years.   While we are seeing some price reductions, there  really isn’t any meaningful way to get a price correction in the market until inventories increase or there is another  a job loss recession. One of the best things that could happen to the housing market  would be  a major cooling of prices from the crazy pace we have been seeing in the past 2 years.  Nevertheless, I expect home prices will continue to show growth for 2014.

5. New home sales only account for 10% of the market

For years I have been saying that  housing starts and sales will rise in the new home sale sector because the 80% correction it had in this cycle. And while this is true, new homes are only 1/10th of all home sales and tend to be for the more wealthy buyer. Housing inflation for new homes sales is well over the peak of the 2006 bubble in terms of median income to median prices. Growth in that sector is being carried by the wealthy.  For the less wealthy home buyer, builders are competing  with traditional (resale) homes which often provide a much better value.  Therefore significant growth in the new home sector will be limited.

In short the housing bulls didn’t have the sophistication to know why things were soft; In a “real” housing recovery housing demand would grow by demand from main street America and mortgage buyers not from cash buyers. Even with mortgage rates below 5% since early 2011, zero interest rate policy by the Fed, and cash buyers being 30-35% of the homes bought, we are still going to finish 2014 as a negative year over year in  home sales.


So to all the housing bulls who still believe there is growth coming in 2014, I ask you what kind of Housing Nirvana are you smoking.  This doesn’t mean a housing collapse but also  doesn’t  mean growth in the housing sector for main street America. The only growth left this year are in new home sales and that is being held up by the wealthy buyers, not first time home buyers.  Once main street America gets paid, then you will see a real recovery in housing.



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

13 thoughts

  1. As an appraiser in Orange County since 1979, I have seen hundreds of articles regarding the housing market. This post of yours today is a masterpiece. Well done.

    1. I have done some work over the last 10 years on the 2nd lien re cast. In fact I have been refinancing new clients out of the 1st and 2nd lien combo loans they got back in the days

      The housing inflation side of the equation is going to be hit on the borrowers but I have only seen on paper less than 10% of these lien recast barring a balloon payment as being big enough to cause a default.

      A lot 2nd lien combo loans have been wiped out of the system already for Those who got them in 2004-2006.

      The housing inflation side of the equation is the more impacting matter on this topic, in terms of consumption.

      Also, mind that I am working with So Cal owners some who’s incomes are very high

  2. Point (1) says only a 3-5% down payment is needed, but (3) says lack of a 20% down payment is holding back first-time buyers. Can you please expand/reconcile?

    1. The only Americans that can afford 20% down are the more wealthy Americans in terms of mass

      The reason I used the 20% number is to a point a big flaw in economic model thesis.

      All the financial media, housing pundits, economist and professors all based their affordability models off a 20% down buyer with a DTI of 25%

      Now those of us in the business know that it’s very ridiculous to assume affordability on the metric which they refuse to change or even put an * on.

      This cycle has a common theme. The non wealthy buyers in term mass don’t have 20% down so a lot them are using 3%-15% down loans which means they have to pay more on the 1st lien debt mortgage and then add on mortgage insurance payments, with a UFMIP ( Up Front Mortgage Insurance Premium) charge as well.

      So, when they say housing is so affordable, the index that they use is so flawed and hence why the mortgage buyer has been light this entire cycle.

      Their model isn’t very sophisticated in relationship to this economic cycle. In fact since the financial crisis started I have only done 2 loans where someone had 20% down. The average income of my buyers dual income are well over 100K as well

  3. Have you seen what’s going on in SF and other major cities in the US?

    Prices are sky rocketing. One home at 2514 Gough St went $1.405 million over it’s $2 million asking. Prices are 25%+ above their peak levels in SF and six figure jobs are plentiful.

    What happens when Uber, Pinterest, Dropbox, and Airbnb go public? Scary!

    1. San Francisco is really another planet all together, which is a problem for the lower income level in terms of rents there as I believe is $3,500 median rent now.

      San Francisco and New York are real Ivory Tower bubble cities that don’t have any barring with Main Street America. California, itself I believe has already priced out 82% of it’s population already once you exclude the rich the rich out of the equation

      MI2MP model I have is much different than the CAR model which has 68% of the state priced out of the market

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