Inventory leads list of positive trends
by Ron D’Vari, CEO, & James Frischling, President, NewOakNewOak is an independent financial services advisory firm built for today’s global markets. Led by a team of experienced market and legal practitioners, NewOak provides a broad range of services across multiple asset classes, complex securities and structured products for banks, insurers, asset managers, law firms and regulators, including financial advisory and dispute resolution, valuation, credit and compliance, risk management, stress testing, model validation and financial technology solutions. We have analyzed or advised on more than $4.5 trillion in assets to date.
For the first time since December 2013, U.S. home prices have declined by 0.09% on a non-seasonally adjusted basis, but they are still up 5.04% year-to-date, according to the latest Case-Shiller’s national index. U.S. home prices are likely to finish the year up about 5%, which is in line with our estimate at the beginning of the year. This brings overall home prices within a 10% range of their peak level in 2006.
Ten-year Treasury yields have fallen to 2.10% in sympathy with the 3.75% fall in the S&P 500 and crude oil’s decline of 12% over the week. Oil prices have declined about 40% in the last five months. By contrast, week-over-week prices of mortgage REIT stocks were only down by 0.7% (non-agency REITs) to 1.3% (agency REITs).
Housing activity overall, including new and existing home sales, has had a positive momentum which we expect to continue. The inventory of new homes for sale has been steadily rising, along with new home starts, which are up 15.5% year-on-year. The positive trend is consistent with other positive economic indicators impacting housing. As an example, industrial production has risen by 1.3% in November and is at 106.7% of its 2007 average, about 5.2% above last year’s level. Capacity utilization for the industrial sector has also moved up by 0.8% in November, reaching to 80.1%, matching its long-run average (1972–2013).
Despite recent stock market volatility caused by oil prices, the underlying U.S. economy will continue to strengthen in 2015. The main drivers will be healing unemployment, cautious Federal Reserve policies, gradually rising interest rates, mild energy prices and low inflation. Residential credit availability will also improve gradually, due to expansion of non-qualified mortgage products by non-bank finance funds, as well as more liberal interpretation of the rules. We remain upbeat on U.S. housing in 2015 and forecast a home price appreciation in the range of 2.5%-5%, with a base case of 3.8%.
Easing housing credit standards: What, me worry?
First-time homebuyers account for just 33% of all home purchases – that’s a nearly 30-year low. In an effort to give housing a boost, government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are willing to lighten up on their credit standards and accept mortgages with as little as a 3% down payment. As memories (as well as evidence) of the credit crisis are still fresh in people’s minds, it’s not surprising many have expressed concern that lowering the down payment threshold will bring too much risk back into the housing market.
Are Fannie and Freddie crazy for bringing these 97% loan-to-value mortgages back? Not at all!
While the consequences of the housing crisis linger, so do the factors that contributed to it. While recognizing the danger and risk of saying, “this time it will be different,” the reality is this time will be different.
The level of due diligence and the required documentation on borrowers to secure a new mortgage is high. Not only will these 3% down loans be required to meet GSEs’ eligibility requirements, the loans will also require private mortgage insurance. The collapse of the housing market, among many things, has resulted in billions of dollars of litigation costs and massive regulatory changes. The financial intermediaries that drive residential mortgages look at the business very differently now, and when it comes to working with the government agencies, conservatism rules the day.
The GSEs goal is to help all qualified borrowers gain access to mortgages. Higher down payments have been blamed for keeping many low- and moderate-income borrowers on the sidelines, so lowering the down payment threshold should attract more first-time home buyers.
For all the naysayers who don’t like this move, lower down payments, to be clear, will not be the issue that trips up the housing market. It will be the failure to conduct proper due diligence, underwriting and documentation that will stick out its foot.