2014 was not a great year for the housing market. Higher inventories in many areas and low mortgage interest rates lead to lofty promises of booming mortgage purchase applications and “nirvana” for new home sales. Alas, to the dismay of our many mislead pundits, these promises remained unfulfilled like the aspirations of a democratic candidate during the midterm elections. Despite the fact that mortgage rates were low all year-long, existing home inventory was up and rents have been high and rising, we still experienced negative demand year over year, even with the number of cash buyers 20% above historical norms. Starts, permits and all sales were disappointing in 2014: Mortgage purchase applications were down every single week of the year (year over year) and for only a few weeks had less than double-digit negative prints. The number of first-time home buyers who closed a deal hit a 21st century low. Thus, another chapter in the housing saga ends with the hard boot of reality kicking us squarely in the assets.
What went wrong? Forgive me for repeating myself (for the past four years, I’ve been singing this same tired song) but my number one thesis for why the housing market is not living up the tearfully whispered fantasies of real estates agents, economists, housing analysts and other experts is that we simply don’t have enough qualified home buyers to have a true housing recovery in America.
You get my drift: The bar for housing is so low that some housing bulls might try the predictable tactic of bellowing about exponential growth portending a miraculous recovery when all that is occurring is a bump up from a pitifully low base. I take a more measured (or perhaps jaundiced) view of what the future holds.
1. For existing home sales – I predict we will see somewhere in the area of 5.0 million -5.20 total number of homes sold in 2015, with these caveats; cash buyers continue to make up to 30% of the market, and, buyers continue to migrate away from the purchase of new homes in favor of existing homes due to their better value for money and their dispersed geographical distribution. If cash buyers back out of the housing market, and new homes are able to attract the upper income buyers then there is a risk that we will once again experience negative existing home sales, year over year compared to the 5.10 million homes sold in 2013. My prediction, however, is that cash buyers will remain in the market, soaking up the increased inventory and new home sales will remain weak because builders will refuse to lower their prices to meet the current economic realities. This is an increase from the number of existing home sales in 2014 but like last year, we will need the wealthy and the cash buyers to continue to buy a big portion of the homes.
2. For mortgage rates – I predict the 10 year note yield will be in a range of 1.60% – 3.04%, which means mortgage rates will be in the 3.50%-4.5% range. Even with stronger economic data from the U.S., other areas around the world such as Japan, Europe, Russia and even China are now experiencing economic slowdowns. My yield range prediction is based on recent history: In May of 2013, the 10 year note yield was 1.6% before it climbed to 3.04% over the next 18 months. If we see an upside break in the yield to over 3.04% this would be a bullish indicator for the economy, but it would also lead to increased mortgage rates. The bottom line is that I see no significant increase in mortgage rates from the 2014 peak which was roughly 4.5%. The short end of rates rising makes it very interesting for 2015 as the Fed dots are set to raise short terms rates in 2015.
3. For mortgage purchase applications– I predict some growth on purchase applications year over year, because we are at century lows. By the end of March to the first 5 months of the year we will see how much real mortgage demand we will have in 2015. I expect 5%-10% gains for the year. We have been hearing predictions of up to 5.5 million existing home sales. However, for that to be true you would need to see a 30% increase in mortgage purchase applications year over year, with no decline in the number of cash buyers. This is highly unlikely.
4. For the new home sector – I predict a replay of what we saw last year with a conservative estimate of 8% growth to an aggressive estimate of 12% growth. Other “expert soothsays” are predicting an over 25% increase in new homes sales in 2015, because demographics show a buildup in the need for homes. However, the Median Income to Median Home Prices (MI2MP) metric shows that new homes are more expensive than ever and therefore only an option for the wealthy buyer. If builders decided to provide some real incentives and discounts for their products, it is possible they could increase sales dramatically in 2015, capturing more of the “average buyers” – but the discounts and incentives would need to be significant before new homes could compete with the existing home market – and this would mean lower margins – a trade-off I don’t believe the builders are willing to make. Our experts made some epic misses in their prediction for new home sales, starts and permits in 2014. Hopefully their horrible performance provided a much-needed wake up call that debt to income capacity matters in an economic sector that is 90% dependent on mortgages.
For the multi-family new construction market, I predict rental demand will remain strong so starts, sales, permits and multi-family construction will rise but not as fast as many think.
5. For the rental market – I predict the trend to rent instead of buy will continue in 2015. Home prices are too high and even a 3% down payment is more that most Americans can afford at this point in the economic cycle. I’m enjoying the low gas prices as much as the next guy, but the extra $20 to $100 per month that is being saved at the pump is not nearly enough to improve the affordability of a home purchase. Our beloved, yet oh so often wrong housing experts are also predicting “the young” will come back into the housing market in 2015, leading to a significant uptick in first time home buyers. In order for this to happen however, we would need to see a corresponding uptick in the formation of dual income/dual assets households, but this hasn’t happened. The young will continue to make up less than 40% of mortgage buyers in 2015.
The 2.5 million home loans that are in some stage of delinquency are another factor to consider in the 2015 rental market. Some of those owners will lose their homes and have to rent – and those who foreclose are out of the purchase market and in the rental market for at least the several years it takes to repair their credit.
6. For home prices – I predict a modest increase of 1-4%. The low supply of homes on the market gives pricing power to sellers even with the soft demand. I expect inventory of available homes to reach a balance point of 6 months at some point in the year. Year over year price gains are cooling down and this is a good thing as the housing inflation in terms of price gains was simply too much for main street America.
7. The rich will still be a big part of the market place. The wealthy (cash buyers and those who make over 2.5-3 times median income) made up 45% of existing home purchases in the last several years. (For more on this and how hard it is for the middle class to own the debt of housing due to the massive price increases since 2012, see my Bloomberg interview at the BNY Mellon Stock Conference : http://wp.me/p1gHkh-oO ). I predict some decrease in cash purchases in 2015, but the wealthy will still be over-represented in terms of percentage of purchases in the coming year.
In general, I predict the economy will grow at least 2.5 -2.6% in 2015, an improvement over 2014 levels. Look for job creation numbers to be between 210K – 225K with some improvement in the wage growth. We have some positive economic indicators in the later part of 2014, such as increased industrial production, improved confidence in the small business survey, rising employment to population numbers and the best monthly job creation numbers since 1999, which should set the stage for a healthy 2015 in terms of economic growth.
In a “normal housing market” we would expect to see 90% mortgage buyers (thus only 10% cash buyers) and first time home buyers would be 40% of monthly sales. Obviously we haven’t had a “normal” year in housing for nearly a decade and 2015 will not break this run of abnormality. So, although we will see an uptick in some housing indicators such as number of purchase applications and number of new home sales, this is largely due to the very low bar set in 2014.
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
Steve, I get this question a lot being a debt to income ratio guy.
What I have told people in the past and will still stay is this.
We won’t see a waive of foreclosures of any meaning due to the heloc recast. I know this thesis looked good on paper.
However, when I looked at actual 2nd lien recasting loans there wasn’t enough payment inflation to create a foreclosure type of event.
In fact some people where able to refinance out of their 2nd lien combing into one new loan with their first lien
With that said. The Heloc recast is a very valid housing inflation story in terms of added home cost for those who are keeping the home.
Regardless of the size and structure it’s going to be an payment increase since due to the new amortized principal and interest payment.
The impact it could have is this for some troubled homeowners.
1. Those who don’t have equity and are living paycheck to paycheck could either attempt to get their Heloc modified or might be forced to short sale their home. This is a very small group.
2. Those who can’t handle the new payment, paycheck to paycheck people but have equity will probably sell if they can’t get their heloc modified
3. Those who couldn’t refinance or get their heloc modified will just have to eat housing inflation on their monthly cash flow
However, a waive of new foreclosure I don’t see happening. 2014-2016 was the year on the recast but we didn’t even hear of any 2nd lien distress in terms of new loans going delinquent
The worst case I can see in 2015 that a some homes go into default but as a 2nd lien holder unless the same bank owns the first it’s going to be a mess trying to get the home back in a short time frame.
I still believe this going to be a small group but make no mistake this is a housing inflation story and when short term rates rise as well that it just adding the monthly total payment on the home
It shouldn’t take a crystal ball to understand that offshoring and ‘right-sizing’ the careers that paid enough to buy a house would permanently change the housing market. With so many unemployed and underemployed and the young in debt up to their eyeballs with college loans, recovery is highly unlikely. You can’t buy a house on minimum wage or barely above it – especially when many are being forced into part time thanks to companies trying to deal with the health care law changes.
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