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“Wipeout”: Maneuvering Through the U.S. Housing & Mortgage Markets. PresenterS : Maureen Campbell – President, Pearce Plus Relocation & Senior Services Ryan Huskey – VP, Corporate Lending Group Melissa Graber – Director, Client Services, MSI (Moderator). Recap of 2010.
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“Wipeout”: Maneuvering Through the U.S. Housing & Mortgage Markets
PresenterS:Maureen Campbell – President, Pearce Plus Relocation & Senior ServicesRyan Huskey – VP, Corporate Lending GroupMelissa Graber – Director, Client Services, MSI (Moderator)
In 2010 and the first half of 2011, the economy, unemployment, and real estate markets continued to create some of the biggest challenges since the Great Depression. HR/Mobility professionals have been challenged more than ever to adjust relocation programs in an effort to continue to move employees in a business environment focused on reducing costs wherever possible.
Recap of Housing 2010 • An uptick in salespeaked in the first half of the year giving false hope of a robust recovery. • Expiration of home buyers tax credit caused a housing slump in the second half of the year. In July, closed sales dropped 25% year over year. • Accelerated foreclosure actions weakened prices. • S&P/Case-Shiller home-price index fell 1% in December, its fifth straight decline. • Interest rates were near historical lows and affordability improved, but fewer potential buyers qualified for new loans due to the heightened credit standards. • High unemployment, weak consumer confidence, and uncertainty about the future of home prices still prevented some potential buyers from entering the market.
Current Market Statistics Where Are We Now?
Unemployment Rate • The July 2011 Jobs Report indicated that the unemployment rate still hovers around 9.1%.
2011 Mortgage Rates Despite the lowest mortgage rates in 50 years, strict qualifying procedures continue to stall the housing recovery.
House Prices - June 2006 to march 2011 have varied from -59% to +11%
Four-Quarter Price Change by StateQ1 2010 – Q1 2011 • The Biggest Declines: • Idaho at -15.7% • Arizona at -12.2% • Oregon at -10.3% • Only 3 States Saw Price Appreciation • North Dakota at 1.1% • Alaska at 2.7% • West Virginia at 2.2%
Lawrence Yun, Chief Economist for the National Association of Realtors “The dip in contracts may be due to temporary factors. The pullback in contract signings is disappointing and implies a slower than expected market recovery in upcoming months. The economy hit a soft patch in April from sharply rising oil prices, widespread severe weather with the heaviest precipitation in 20 years, and a sudden rise in unemployment claims.” 05.27.2011 PENDING HOME SALES 2011
Future Home Sales Will Rise Fannie Mae, Freddie Mac, Moody’s and NAR 5/2011
There is Optimism AMONG “Pundits”… “If you don’t own a home buy one. If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home.” John Paulson Multibillionaire hedge fund operator, September 2010 "Pricing is down so much in some markets that when you analyze renting versus owning, it makes much more sense to own“ Michael Larson Real-Estate Analyst, Weiss Research, February 2011
Fortune Magazine Real estate: It's time to buy again “Forget stocks. Don't bet on gold. After four years of plunging home prices, the most attractive asset class in America is housing.”
Home Price Expectation Survey Macro Market Home Price Expectations Survey 03/2011
Economic Signs the Bottom is Close • Housing is the most affordable it has been in decades • Nationally, the cost of a house is the equivalent of about 19 months of total pay for an average family, the lowest level in 35 years. • The average price has fallen to just over 2 years' income now - well below its pre-bubble average of 2.6 years. • Ultimately, affordabilitywill drive people to buy homes. • Attractive mortgage rates • Greatly reduced housing prices Moody’s Analytics & Wall Street Journal, February 27, 2011
Consumer Confidence Point of maximum risk in investment Euphoria Denial Excitement Optimism Fear Panic Optimism Hope Depression Despondency Point of maximum opportunity Source: Westcourt Funds
Freddie Mac “We expect the pace of our REO acquisitions to increase in the remainder of 2011, in part due to the resumption of foreclosure activity by servicers, as well as the transition of many seriously delinquent loans to REO.”
Fannie Mae “Our foreclosure rates remain high. However, foreclosure levels were lower than what they otherwise would have been in the first quarter of 2011 due to the delays caused by servicer foreclosure process deficiencies and the resulting foreclosure pause.” Fannie Mae 5/6/2011
“Shadow” Inventory • The number of months between the date of the borrower's last payment and the date of liquidation is now at more than 18 months on average. The highest figure on record. • Discoveries of defects in the residential mortgage foreclosure process further extended liquidation timelines - slowing the resolution of shadow inventory and preventing home prices from finding a floor. • Prior to the foreclosure moratoriums -The total number of troubled loans peaked in early 2010 and began to show improvement. Source: Fitch Ratings, NYC
Clearing of “Shadow” Inventory • Florida has the largest shadow inventory: • Stemming from inflated foreclosure inventory which takes a very long time to clear • New York & Florida: • Highest number of days loans are delinquent (644 & 638) • Taking longer for properties to come on the market • Arizona & Nevada are faring better with shadow inventory: • Moving faster through the pipeline and comprising a larger share of existing sales • Arizona – 55% of existing sales are foreclosure • Nevada – 70% of existing sales are foreclosure • The months’supply depends on saturation of distressed sales: • New Jersey reported about 20% of existing sales to be distressed sales, therefore it will take longer to clear • Nevada’s 70 % share will clear more quickly Selma Hepp, Research Economist, March 21, 2011
Mortgage Default Warnings Surged in August • The number of U.S. homes that received an initial default notice jumped 33% in August from July • Biggest monthly gain in 4 years • Banks are now taking swifter action nearly a year after processing issues led to a sharp slowdown • This means a potentially faster turnaround time for the housing market • A revival is unlikely as long as a glut of potential foreclosures hovers over the market • There are 3.7 million more homes in some stage of foreclosure now than there would be in a normal housing market
Foreclosures in Process OCC and OTS Mortgage Metrics Report 3/2011
Share Of Distressed Sales Shows the % of sales that are distressed in each state.
Months Supply of “Shadow” Inventory *Months’ supply is estimated by dividing the shadow inventory and the monthly number of distressed sales. NAR May 2011
National housing survey Americans believe that homeownership has more potential as an investment than any other traditional investment vehicle including stocks, bonds and mutual funds. Fannie Mae 4/2011
Pew Research Center Percentage who agree that buying a home is the best long-term investment a person can make. Agree 81% Disagree 19% Pew Research Center 4/12/2011
Homeownership Rates • Until 1995, home ownership rates historically hovered around 64% • Between 1995 and 2004homeownership rates increased when Congress urged Fannie Mae and Freddie Mac to invest in mortgages targeted to lower-income buyers, encouraging subprime lending and a deregulated mortgage industry • In 2004 over 69 %of households owned homes • In 2010, that number has decreased to 66.9 %. America's rate of home ownership may be permanently declining from its 2004 peak • The last time a lower percentage of Americans owned their own homes was in 1999, when the rate was66.7percent • In today’s current housing market, the number of renters is on the rise Source: Associated Press, "Homeownership Stays At Lowest Level In A Decade," November 2, 2010 and WSJ, February 2011
Desire for Homeownership Remains Strong Though! • Affordability has increased due to lower home prices and interest rates • Homeownership rates increase with age, and the U.S. population is experiencing an aging trend fueled by the Baby Boomers. • There are 6 million more “Millennials”in the prime future homeowners group than there were Baby Boomers in 1977. • The biggest first time homeowner opportunity in the history of the country is ahead of us! • People buy homes as their family and lifestyle situations change Source: Associated Press, "Homeownership Stays At Lowest Level In A Decade," November 2, 2010 and WSJ, February 27, 2011
Housing Affordability & Demographics Source: US Census Bureau
Market Conditions Are Local • Post-Bubble price declines have been dramatic in some markets • AZ dropped 42% • CA dropped 36% • FL dropped 42% Source: Federal Housing Financing Agency One unit, non-condominium properties 2000 2006 2010 2000 2006 2010 2000 2006 2010 ARIZONA CALIFORNIA FLORIDA
Market Conditions are Local • In other markets, post-bubble price declines have been more moderate • DC dropped 6% • ND increased 15% • NY dropped 13% Source: Federal Housing Financing Agency One unit, non-condominium properties IDAHO 2000 2006 2010 2000 2006 2010 2000 2006 2010 WASHINGTON, DC NORTH DAKOTA NEW YORK
To Evaluate Real Estate Market Conditions • It’s essential to understand that markets and economies vary from state to state, town to town, and neighborhood to neighborhood. • Broad-based data is important for understanding overall economic conditions, but to get a true reading, statistics must be gathered on a local level with the assistance of a local expert. • That’s why the ERC Broker Market Analyses addresses both the macro and micro markets. • Every property needs to be examined individually. • Local data is critical to accurate pricing and marketing success!
Regional & Local Market Data • To get the most accurate information on real estate markets and trends, it’s important to look at regional and local data. • RDC Members post quarterly market stats on: • Median/Average Sales Prices • Days on Market • Absorption Rate • # of Active Listings • # of Closed Sales (past 6 months) • Increase/decrease in value • List Price to Sales Price Ratio www.relocationdirectorscouncil.org
How does this Real Estate Data impactHR & Mobility Professionals?
Relocation Challenges • Smaller Buyer Pool • Unknown Impact of “Shadow” Inventory on Market Competition • Property Management Needs • Loss-on-Sale • Negative Equity • Extended Days on Market • Extended Duplicate Housing Costs
The Need For Creative Approaches to Recruiting & Relocation • Pre-decision BMAs/Appraisals • Extensive counseling on pricing strategies • Customization • As consumers, people want customization and flexibility. • This is true of employers and employees as well • Even homeowners have become renters – How does this impact their benefits package? • Extended temporary housing/duplicate housing costs • Property Management • Loss-on-sale assistance – Negative Equity - Short sale assistance • Mortgage Interest Differential Adjustment (MIDA)
Positioning Properties for a Quick Sale • Pricing! Pricing! Pricing! • Staging: • In this market, it’s important • Lack of staging goes to condition • Home repairs & improvements • No matter what you do, if a property is not priced accurately to begin with, it will not only sit on the market, but, in a declining market, will sell for a lot less. • Homes will sell in any market if all of the critical factors are in place. A recent study showed that sellers who priced correctly from the start got 12% more for their properties in half the time.
Industry Players • To understand today’s lending environment, you need to understand who the industry players are • We have all heard the names Fannie Mae, Freddie Mac, GNMA, FHA, and VA. But who are they and what do they do?
Fannie Mae (FNMA) • FNMA was established in 1938 after the Great Depression as part of FDR’s New Deal • Their purpose was to create a liquid secondary market by buying FHA insured mortgages from banks • In 1958, Congress passed legislation giving private investor’s access to common stock while the federal government held preferred stock • In 1968, FNMA converted to a publicly held corporation so that the federal government could remove it from the budget
Fannie Mae (FNMA) • When Fannie Mae went public, they split into two entities • Fannie Mae retained responsibility for purchasing non-government guaranteed loans • Ginnie Mae was created and assumed Fannie’s original charter of purchasing government guaranteed loans
GSEs and Ginnie Mae • In 1970, Freddie Mac (FHLMC) was created to expand the secondary mortgage market for mortgages in the U.S. • FNMA and FHLMC are Government Sponsored Enterprises (GSE) • GNMA is a Government Owned Enterprise (GOE) • What is the difference? • The GSEs are publicly owned but have an ‘implicit guarantee’ that the US Government will back their securities • Ginnie Mae is owned by the government and has an ‘explicit guarantee’ that their securities are backed by the full faith and credit of the US Government
The Meltdown of the GSEs • In 2008, FNMA and FHLMC were placed into conservatorship under the Federal Housing Finance Agency • In 2010, FNMA and FHLMC were delisted from the NYSE • Although not official, the GSEs appear to have the same guarantee as GNMA • What does this mean? Essentially, the US Government is controlling all of the shots in today’s lending environment
GSEs and Ginnie Mae • So what do the agencies do? • They do not originate or service loans • They purchase or guarantee mortgage backed securities that are traded on the secondary market • The GSEs set the lending guidelines for conforming loans that they purchase or guarantee • Ginnie Mae guarantees loans from the following government agencies: • Department of Housing and Urban Development (HUD)- FHA loans • Department of Veteran Affairs- VA loans • Department of Agriculture (USDA)- Rural Development Loans
GSE and Ginnie Market Share • Between 2004 and 2007, the total market share of the agencies was 51.5% • Between 2008 and the present, the total market share of the agencies is 97% • What does this mean? • The federal agencies have a monopoly on the mortgage market • Until private money comes back, the agencies set the lending rules