JUNE 2019 VOL 13 ISSUE 6 THINKREALTY.COM/HNR
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Why Mortgage Applications Have to Change
Why Mortgage Applications
Have to Change
MY TAKE The Risk of Too Few Homes 16 DATA IN ACTION Top 10 Metros with the Lowest Property Tax Rate 20
BIG DATA SANDBOX The Red & Blue of Taxes 23
MARKET SPOTLIGHT Is Florida at Risk of Another Real Estate Crisis? 24
To quote Greek philosopher Heraclitus of Ephesus, “The only thing that is constant is change.” This month, we look at some of the unusual trends impacting the mortgage industry. From consumer preferences and employment shifts to the effects of climate change, a whole host of events is pushing lenders to rethink the way they approach mortgage applications. 06 FEATURED ARTICLE: WHY MORTGAGE APPLICATIONS WILL HAVE TO CHANGE The current economic expansion is set to complete its tenth year this fall, making it the longest expansion in U.S. history since the mid-1800s. Despite the expansion, several forward-looking indicators are flashing warning signs, causing some economists to expect a recession by 2021. Freddie Mac Deputy Chief Economist Len Kiefer explains his position on the warning signs, key market trends, and what they might mean for the future. 16 MY TAKE: THE RISK OF TOO FEW HOMES In a recent analysis by ATTOM Data Solutions on 2018 property taxes, there were a total of $304.6 billion property taxes levied on single-family homes in 2018. The report also showed that the average property tax amount on single-family homes in 2018 was $3,498 – an effective tax rate of 1.16 percent. What markets have the highest property tax rates? And the lowest? Housing News Report presents the data answering these questions and more, along with which metro areas posted an increase in property taxes above the national average. 20 DATA IN ACTION: PROPERTY TAXES If you are a single-family homeowner, knowing how property taxes will affect your wallet is a must. In this infographic, ATTOM Data Solutions reveals those top 10 states where the effective tax rate was ranking the highest in the nation in 2018. To arrive at the effective tax rate, ATTOM analyzed property tax data collected from county tax assessor offices for each state, along with estimated market values of single-family homes calculated using an automated valuation model (AVM). 23 BIG DATA SANDBOX: THE RED & BLUE OF TAXES
24 MARKET SPOTLIGHT: IS FLORIDA AT RISK OF ANOTHER REAL ESTATE CRISIS?
More than a decade after a combination of risky loans and overzealous speculation by real estate investors and developers who landed Florida in the eye of a foreclosure storm, the Sunshine State has made an impressive comeback. But, even with improved market fundamentals and falling foreclosure stats, the state continues to lead the nation in total properties with foreclosure filings. Is the market continuing to correct, or heading for another crash? Housing News Report investigates, getting the perspectives of pros with boots on the ground in some of Florida’s major markets.
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U.S. FORECLOSURE FILINGS
0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Business Economics (NABE). So, what are some of the factors and trends currently happening that are likely to impact the way lenders do business moving forward? Let’s take a look. ABILITY TO REPAY Federal rules as well as common sense tell us that lenders must veri- fy the ability of borrowers to repay residential mortgages. While there are exceptions for such things as open-end credit plans, timeshare plans, reverse mortgages, and tem- porary loans (a loan for 12 months or less), the ability-to-repay rule is still the compliance gold standard. Lenders take this stuff seriously, which may explain why the typical loan application vies with “Gone With The Wind” in terms of length and heft. “With the size of an average mortgage loan at more than 500
at a 13-year low in 2018 according to figures from ATTOM Data Solu- tions. ATTOM reports there were foreclosure filings — default notic- es, scheduled auctions, and bank repossessions — on 624,753 U.S. properties last year. And, despite all of the paperwork, many of these distressed properties were never actually foreclosed on. The reason is that home values have been rising in most markets. The National Association of Real- tors (NAR) says median existing home values reached $249,500 in February — the 84th straight month of year-over-year gains. With rising prices, some dis- tressed owners can simply sell in the open market for enough to cover the debt — and many do! In 2018, says ATTOM, only 230,305 properties were actually fore- closed on. Interest rates are also looking very positive for homebuyers right
now, averaging 4.54 percent in 2018 according to Freddie Mac, well below the long-term average of 8.08 percent going back to 1971. By late March 2019, the big GSE said weekly rates for 30-year fixed-rate financing had fallen to 4.06 percent , down almost half a percent from the 2018 average. In effect, it’s very difficult to see the growing stresses in the under- writing process because the system is now so successful. However, success masks the reality that low rates and rising prices are not guaranteed. They can come and go as the economy evolves. And the economy, as we all know, always evolves. “The U.S. economy has reached an inflection point, with the con- sensus forecasting real GDP growth to slow from 2.9% in 2018 to 2.4% in 2019, and to 2.0% in 2020,” said Kevin Swift in March. Swift is presi- dent of the National Association for
Why Mortgage Applications Have to Change
BY PETER G. MILLER
A h, the continued plight of the American mortgage system. While each year millions of home- owners finance and refinance real estate with few problems, the system is increasingly fraught with new complexities and potential pitfalls. Updates are constantly
needed to keep up with a num- ber of outside factors and trends. Without change, the system would increasingly be impacted by risk, fraud, and losses — factors which would result in fewer originations and higher rates. And so, the lend- ing industry needs to be ready for
anything. It may seem difficult to be- lieve that the mortgage system is stressed in any significant way. All of the traditional fundamentals appear to be positive. For instance, foreclosures — the most obvious measure of industry issues — were
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FEATURED ARTICLE: Why Mortgage Applications Have to Change
pages — and hundreds of different document types — the labor-inten- sive and costly processing meth- ods used in the past are no longer possible for banks that want to compete,” says ZIA Consulting. What file size reflects is a serious effort to verify borrower claims. This added bulk, while necessary, is certainly an application problem. But bigger issues lurk beneath the surface. WHAT IS GROSS INCOME, REALLY? All lenders generally treat income the same way. They check how much you earn each month be- fore taxes. They can then see if it’s possible to “gross up” income for qualification purposes. While the expression “gross up” may not sound especially alluring, it can be a huge benefit to mort- gage applicants. It means that such things as child support, tax-exempt interest, and business depreciation can be added to taxable earnings to create a larger qualifying income. For example, if you report $90,000 in yearly income before taxes and receive $1,000 in child support, the lender will review your mort- gage application as if you earned $102,000 a year ($1,000 x 12 = $12,000 plus $90,000). Grossing up can make a big differ- ence for mortgage borrowers. The reason involves the debt-to-income ratio (DTI), a measure used to see if applicants qualify for financing. Lenders don’t want to provide mort- gage financing to borrowers with big debts and excessive monthly payments. For example, lender Smith might be okay with borrowers who devote no more than 43 percent of their gross monthly income for recurring monthly debts such as housing costs, auto payments, stu- dent loans, and credit card bills. Using the 43 percent standard, if
To reduce risk, the Federal Housing Administration (FHA) is going back to a rule abandoned in 2013. For borrowers with credit scores below 620 and DTIs above 43 percent, the government will now require manual underwriting. The likely result will be fewer FHA originations and that will translate into reduced home sales. In the wider market, we may also see an increasing use of dual-ap- proach mortgage underwriting, the use of both automated systems as well as manual underwriting. “One of the primary beneficiaries of non-agency, aka ‘non-QM’ lend- ing, is borrowers whose income is not ‘typical or customary,’” Ray
Brousseau, President at Car- rington Mortgage Services, told the “Housing News Report.” “These borrowers often have good credit and assets, but their income is considered non-traditional. They’re often self-employed, and although their bank statements support positive cash flow and the ability to repay, it’s hard to document using traditional approaches (1040s, W2s, etc.). Hence the advent of ‘bank statement’ non-agency programs that allow these borrowers access to financing through non-agency bank statement programs. These have proven to be extremely pop- ular, and they’re manually under- written.”
you earn $90,000 a year, you there- fore have an average household income of $7,500 a month before taxes. Allowable debt payments amount to $3,225 ($7,500 x 43%). However, if you earn $102,000, the picture changes. Now you have a gross monthly income of $8,500 and 43 percent of that is $3,655. A bigger income allows you to have larger monthly debt payments and still satisfy lenders. This has become an increasingly import- ant issue as consumer debt levels have soared. The Federal Reserve Bank of New York reports that total household debt reached $13.54 trillion in the fourth quarter. “The total,” said the New York Fed, “is now $869 billion higher than the previous peak of $12.68 trillion in the third quarter of 2008 and 21.4 percent above the post-fi- nancial-crisis trough reached in the second quarter of 2013.” One result of growing debt loads is that the HUD recently announced new and tougher FHA standards. Here’s why: • Almost 25 percent of all FHA-in- sured forward mortgage pur- chase transactions in fiscal year (FY) 2018 involved mortgages where the borrower had a DTI ratio above 50 percent, the high- est percentage since 2000. • The average FHA borrower had a 670 credit score for FY 2018, the lowest average since 2008. • There have been a growing number of applications with credit scores of less than 640 combined with DTI ratios greater than 50 percent. • In FY 2018, 60 percent of all refi- nances were cash-out financing, meaning less equity is available to offset losses in a foreclosure situation.
These borrowers often have good credit and assets, but their income is considered non-traditional. They’re often self-employed, and although their bank statements support positive cash flow and the ability to repay, it’s hard to document using traditional approaches (1040s, W2s, etc.). Hence the advent of ‘bank statement’ non-agency programs that allow these borrowers access to financing through non- agency bank statement programs. These have proven to be extremely popular, and they’re manually underwritten.”
IS GROSS INCOME THE RIGHT MEASURE? Gross income has always been the main application standard but that’s likely to change as a result of tax reform. Under tax reform, there were sev- eral major changes to the system. • The standard deduction for those married and filing jointly went from $12,700 in 2017 to $24,000 in 2018. • Mortgage interest remains deductible for as much as $750,000 in new first and second-home real estate debt, down from $1 million. • State and local taxes (SALT) remain deductible, but there is now a $10,000 limit on com- bined property taxes and state and local taxes. How do these changes impact the lending process? Two results stand out: First, most borrowers will elect not to write off mortgage interest and property tax costs. Only four percent
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platform workers) often enjoy the advantages of non-traditional arrangements, while contingent gig workers (on-call, contract, and temp workers) are treated more like employees without the ben- efits, pay, and stability that come with traditional employment.” “Tech-mediated gig work,” according to the National Law Employment Project, “is the latest iteration of a 50-year-old pattern of workplace fissuring – the rise of ‘non-standard’ or ‘contingent’ work that is subcontracted, franchised, temporary, on-demand, or free- lance. Gig companies are simply using newfangled methods of labor mediation to extract rents from workers, and shift risks and costs onto workers, consumers, and the general public.” “By 2023,” says MBO Partners, “over half (52 percent) of the private workforce is forecast to have spent time as independent workers at some point in their work lives.” We have long had independent contractors such as accountants and lawyers who are sole practi- tioners. What’s new and different is that the concept is spreading to fields where workers have tradition- ally been corporate employees. The growing gig economy disrupts the old definition of employment. The problem is that, at this point, we can’t be sure that gig employment means steady and reliable future income. Case in point: a 2018 study by the JPMorgan Chase Institute found that between 2013 and 2017, earnings for freelance drivers fell 53 percent. One can argue that much contin- gent freelance income — and thus the ability of such workers to borrow and repay — will face big challenges in future years. Here’s why: First, there are few barriers to entry. Lots of people can become dog walkers or freelance drivers.
of households will claim itemized deductions, down from 21 percent under old rules according to the Tax Policy Center. Effectively, the cost of homeownership will rise in most cases while the distinctions between owning and renting will narrow. Second, the value of income will change, depending on where you live. This very much impacts the concept of qualifying borrowers on the basis of gross income. Prior to tax reform, such things as mortgage interest, property taxes, and state income taxes were com- monly deductable, but now — with a larger standard deduction — the value of itemizing for most borrow- ers has fallen to zero. Imagine that two married couples each have a gross annual income of $120,000. They're alike in every way except for where they live. Living in Los Angeles, the couple will pay $8,004 in California state income taxes whereas in Florida, Texas, Wy- oming, Washington, South Dakota, Nevada, and Alaska, the tax bill is
income and residual income.
(49 percent). Including multiple job holders, 36 percent have a gig work arrangement in some capacity.” The common understanding of employment — 40 hours a week plus benefits — is giving way to the gig economy. We are increasingly a nation of freelancers, where more and more of us work independently, share jobs, or have multiple occu- pations. Corporations, in turn, love the new economy. With gig workers, businesses do not have to under- write payroll taxes, or offer health insurance, paid vacations, or retire- ment plans to non-employees. Gig work allows companies to tailor work schedules to avoid idle time. This also means many part- time workers are “on call” even if they are not actually working. Without a defined schedule, it’s difficult if not impossible to have a second job even though the hours are available. Gallup says we now have two gig economies and that “independent gig workers (freelancers and online
zero. There is no state income tax in these jurisdictions. The couple in the no-tax states has an additional after-tax, income. Why is that money – which is both real and spendable – not used to gross up the income for borrowers in Florida, Texas, etc? How is it any different from child support or busi- ness depreciation? There is, in fact, a way to capture the blessings of lower tax costs. The Department of Veterans Affairs (VA) requires lenders to look at residual income (the cash left over after ex- penses) when qualifying borrowers. "The VA’s residual income guide- line offers a powerful and realistic way to look at affordability and whether new homeowners have enough income to cover living expenses and stay current on their mortgage," says Chris Birk with Veterans United. "Residual income is a major reason why VA loans have such a low foreclosure rate, despite the fact that about 9 in 10 people purchase without a down payment.”
“In the end,” says Carrington’s Ray Brousseau, “residual income is critical. It’s what’s left that the family is expected to be able to live on. Residual income is an import- ant characteristic when measuring ability to repay.” The VA approach works ex- tremely well. In the fourth quarter, according to the Mortgage Bankers Association (MBA), the non-sea- sonally-adjusted foreclosure starts rate stood at .19 percent for conventional loans with either 20 percent down or backing with private mortgage insurance, .55 percent for FHA-backed financing with as little as 3.5 percent down, and .28 percent for VA loans which are readily available with zero per- cent down. We’re going to see the wider use of residual income. But that does not mean the gross income stan- dard will melt away. Instead, it will increasingly make sense to reduce origination risk and qualify appli- cants on the basis of both gross
WHAT DEFINES EMPLOYMENT? A key measure of borrower
finances is very simply the fact that they have a job. Lenders generally like to see a two-year history of employment at the same job or in the same field. But, how can this standard apply in an era when more and more of us are becoming gig workers? “Broadly defined,” said Gallup in a 2018 study, “the gig economy in- cludes multiple types of alternative work arrangements such as inde- pendent contractors, online plat- form workers, contract firm work- ers, on-call workers and temporary workers. Using this broad definition, Gallup estimates that 29 percent of all workers in the U.S. have an al- ternative work arrangement as their primary job. This includes a quarter of all full-time workers (24 percent) and half of all part-time workers
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FEATURED ARTICLE: Why Mortgage Applications Have to Change
You don’t need a license or a degree for many gig positions. The result is that increasing supply pushes down wages. Freelance drivers, according to the JPMorgan Chase Institute, saw monthly incomes fall from $1,469 to $763 between 2013 and 2017. Second, in the longer term, new jobs will be added as a result of marketplace change while others will largely disappear. While the secretarial pool was killed off with the introduction of personal com- puters and milkmen were done in by supermarkets, a huge number of service jobs have been added to the economy. Lyft, for example, may create more opportunities for programmers over time while reducing the need for drivers. As it explained in its recent IPO, “In the next five years, our goal is to deploy an autonomous vehicle network that is capable of delivering a portion of rides on the Lyft plat- form. Within 10 years, our goal is to have deployed a low-cost, scaled autonomous vehicle network that is capable of delivering a majority of the rides on the Lyft platform. And, within 15 years, we aim to deploy autonomous vehicles that are purpose-built for a broad range of ride-sharing and transportation scenarios, including short- and long- haul travel, shared commute, and other transportation services.” Third, the practical reality is that in a slow down, the first workers to be released will be contingent em- ployees. Full-time workers will be expected to pick up the slack. So, what to do when a contingent gig worker applies for a mortgage? How should such income be count- ed? Should gig income be grossed down in the same way that non-tax- able income can be grossed up? There’s certainly work for lenders to do. Automated systems will need to be refined to incorporate new
work patterns. Manual underwrit- ing will become more common, not less. The need for job experience is likely to grow with gig workers, re- quiring at least a look back at three or four years of past earnings and not just one or two. IS IT REALLYA PRIME RESIDENCE? Across America, the nature of residential real estate is changing. For many homeowners, it’s not so residential anymore. Several million travelers stay with home- owners on any given night. Empty bedrooms as well as unused attics and basements are increasingly seen as income opportunities. The hospitality industry is fight- ing back, demanding that local governments enforce ordinances which limit the competition faced by tax-paying hotels and motels. But the die have been cast: there are simply more homeowners than hotel magnates. Rather than fight short-term rentals, local govern- ments are increasingly coming to terms with the big rental platforms. They’re taxing the revenue received by property owners. More and more, it’s okay to rent a room as long as you pay the local government. According to Airbnb in 2015, “Home sharing is making it possible to take what is typically one of their greatest expenses — their home — to make additional income that helps them pay the bills. Policy- makers are taking notice and acting to support home sharing and the middle class.” While the connection between rental rates and tax collections is direct and obvious, there’s also evi- dence that, at least in some markets, short-term rentals are forcing up real estate prices and rental rates. This is good for owners, though not so good for buyers and tenants.
mortgage applications, along with a proper accounting of the costs required to operate such facilities.
wage earners in 71 percent of US housing markets. Many would-be buyers are being frozen out of the marketplace. But, if you can’t buy a home outright, perhaps it makes sense to buy part of a home. Looking forward, we are likely to see an increase in shared equity arrangements: • A property will have both a res- ident owner and a non-resident investor. • Each owner will be able to potentially deduct their portion of the mortgage interest and property taxes. In addition, the investor will be able to deduct a portion of the depreciation and repairs. In practice, the
For lenders, the growth of home sharing raises two questions: what is being financed and should the borrower’s income be bumped up on the basis of potential short-term rental income? Francois (Frank) K. Gregoire, an appraiser based in St. Petersburg and the four-time chairman of the Florida Real Estate Appraisal Board, told The Mortgage Reports in 2017 that, “a room rental situ- ation, depending on the number of rooms, may shift the use of the property from single or multifamily to a business use, such as a hotel or rooming house.” This new world of short-term rentals raises a number of ques- tions for lenders: • Is the property a prime resi- dence or a riskier investment property? • If the property is used for short- term rentals, has the income been declared for tax purposes? • If the home has not been used for short-term rentals, can an appraiser use short-term rental data from nearby and like prop- erties to create a valuation? A room rental situation, depending on the number of rooms, may shift the use of the property from single or multifamily to a business use, such as a hotel or rooming house.”
• Is the property insured for use as a short-term rental?
• If local ordinances or HOA rules ban short-term rentals, can the owners repay the debt if rent- al income stops because of a complaining neighbor or code violation crack-downs? There are already efforts to create financing options for short- term rental properties. “Hosts in the U.S.,” says Airbnb about its financing initiative, “will be able to work with participating lenders to recognize Airbnb home sharing in- come from their primary residence as part of their mortgage refinanc- ing application. The three mortgage lenders in the initiative are Quicken Loans, Citizens Bank, and Better Mortgage.” No doubt short-term rental income will be increasingly accepted for
THE QUESTION OF SHARED EQUITY No doubt other loan programs for short-term rentals will become available if only because the market for shared-income properties is large and growing. But, while the market is attractive, it will require careful underwriting to ensure that residential financing is not being provided for investment properties or for borrowers who cannot afford to finance without rental income. Or, maybe we need to look at this differently. Affordability is a big issue for many borrowers, especially first-timers. Research by ATTOM Data Solutions found in March that median-priced homes are not affordable for average
resident owner will be unlikely to itemize real estate write-offs while the investor will have business deductions.
HISTORICAL HOME AFFORDABILITY
MEDIAN HOMES PRICES
PCT OF AVERAGE WAGES NEEDED TO BUY MEDIAN-PRICED HOME
35% 35% 34%
29% 30% 30%
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FEATURED ARTICLE: Why Mortgage Applications Have to Change
zones on the condition that bor- rowers maintain proper insurance. For most borrowers, this means participating in the National Flood Insurance Program (NFIP). Unfor- tunately, the program is so broke that in 2017 Congress forgave $16 billion in NFIP debt owed to the Treasury. As this article is written, the program has been re-autho- rized, but only until May 31st. “Congress must now reauthorize the NFIP by no later than 11:59 pm on May 31, 2019,” explains the Federal Emergency Management Agency (FEMA). While it would make sense for the program to be extended until September 30th, the end of the government’s fiscal year, there’s no requirement that Congress “must” do so. The NFIP is riddled with prob- lems. The most basic is that, with changing weather patterns, we’re not so sure which areas flood and which don’t. “Even if you live outside a high- risk flood zone, called a Special Flood Hazard Area, it’s a wise decision to buy flood insurance,” ac- cording to FEMA. “In fact, statistics show that people who live outside high-risk areas file more than 25 percent of flood claims nationwide.” As much as anything, this is an indictment of the federal flood mapping system, a system which
appears to miss a lot of potential flood zones. Mark Gibbas, President and CEO of WeatherSource.com, notes that changing weather patterns are a matter of concern both for mortgage lenders and insurance providers. According to Gibbas, a Task Force on Climate-Related Financial Disclo- sures (TCDF) has been formed. “The TCDF is working to provide a framework for how lenders and borrowers will develop safeguards for doing business in a changing climate,” Gibbas told the “Housing News Report.” “This work is being done mostly at the big banking level, but it will trickle down to mortgages.” We’re now beginning to see loan applications falling through in certain geographic areas because of climate change. “This,” says Gibbas, “has hap- pened a bit, mostly due to the influence from the insurance side. What has happened is insurance companies are, in some cases, refusing to insure a property after multiple claims have occurred. The lack of insurance then stalls the mortgage process. I have not seen any cases where mortgage compa- nies refuse to underwrite the loan on their own.” He adds, “I’m also aware of new technologies coming to market that will provide insurance and/or mort- gage companies the ability to drill down on to a property to get details of past weather events and weather event probabilities. With these new tools, mortgage companies will gain insight into how to prioritize their lending opportunities.” Institutional investors are already considering climate change when evaluating financing and purchase op- tions. No doubt the same is true, less formally, among residential buyers. “Climate change and, more particularly, rising sea levels are especially urgent issues along
• The property will offer short- term rentals.
• The resident owner will essen- tially act as an on-site manager.
• The income from the short-term rentals will offset ownership costs for both the resident and investor owners. • If property values rise, the resident owner will gain equity that’s unavailable to renters. If property values fall, some of the loss will be absorbed by the investor. THE CHANGING CLIMATE Climate change is a big issue today. Is it caused by nature, human activity, or both? Regardless of the answer, the reality is that climate change is here. Melting glaciers, rising seas, stronger hurricanes, “king tides” in Miami, flooded cherry trees along DC’s Tidal Basin, floods in Nebraska, massive hur- ricane damage in Puerto Rico, and huge fires in California are all real. Does climate change impact lend- ing? You bet it does! The most immediate climate-re- lated challenge faced by lenders is on Capitol Hill. Lenders will origi- nate mortgages in high-risk flood
American coastlines,” according to the law firm of Hinshaw & Culbert- son LLP., which in April organized the Third Annual Sea Level Rise & Climate Change Conference. “In the next twenty-five years, absent radical remediation and techni- cal breakthroughs, the sea level along the coasts is anticipated to rise by up to three feet (0.91 me- ters), inundating major portions of the cities of New York, Miami, and coastal areas worldwide. Rising sea levels will result in major chang- es not only to developments and infrastructure (privately-owned structures, roads, utilities, etc.) but also to federal, state, and local laws and regulations which affect developments and infrastructure and their owners and investors. Also affected will be the insurers
that will be dealing with claims and trying to create the next genera- tion of underwriting guidelines and policy coverage. Other relevant and highly probable multi-hazard risks with climate change include greater occurrences of tropical storms and hurricanes, flash flooding, droughts, land subsidence, forest fires, and heat waves.” The bottom line: underwriting guidelines will need to be revised in the face of climate change. The National Oceanic and Atmospheric Administration already has a “Sea Level Rise Viewer” online which shows which properties will be inundated by rising water levels. In 2018, natural disasters pro- duced $91 billion in damages, a sum property insurers cannot ignore. Whether the issue is floods, winds,
or wildfires, in the end, mortgage underwriting standards will have to evolve. The practical effect is that more and more areas will face “managed retreats,” a polite term that increasingly will mean mort- gage financing is unavailable. As we look into the future, chang- es abound. Just as home buying patterns, consumer preferences, employment trends, and even the weather continues to change, so must the mortgage industry’s ap- proach to mortgage applications.
What has happened is insurance companies are, in some cases, refusing to insure a property after multiple claims have occurred. The lack of insurance then stalls the mortgage process. I have not seen any cases where mortgage companies refuse to underwrite the loan on their own.”
Peter G. Miller is a nationally syndicated newspaper columnist, the author of seven books published originally by Harper & Row (one with a co-author), and for many years a Washington-based journalist.
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ities such as the two-year Trea- sury, has flattened substantially in recent months. When this measure of the yield curve slope inverts, a recession almost always follows. The slope, as measured by the difference between the 10-year and two-year Treasury for April 12, was at just 16 basis points. Not invert- ed, but close. If you stick this yield curve metric into a simple proba- bilistic model of recession over the next 12 months, the implied proba- bility of a recession starting over the next year is about one in five. That’s up from an implied probability of about one in six a few months ago. Why might the yield curve invert? One key factor driving the slope of the yield curve is the likelihood of future monetary policy actions. Since late last year when financial markets expected further rate hikes in 2019, expectations have shifted dramatically. Market-based measures of expectations are now pricing in a significant probability that the next Fed rate move could be a cut rather than a hike. business cycle in the United States, and housing market indicators have also been flashing warning signs recently. Home sales, housing starts, and house price growth all declined last year. While single-family house prices increased nationally in 2018, some regional markets experienced declines in house prices with sharp declines in house price growth rates in many markets in the western Unit- ed States. For most of the economic recovery, residential investment was adding to overall GDP growth, but in the last three quarters, residential HOUSING MARKETS TYPICALLY LEAD THE BUSINESS CYCLE Housing has typically led the
The Risk of Too Few Homes
Mortgage rates declining in the early months of 2019 is a reason for optimism about housing market activity, but there is more reason for optimism than just the short-term boost from lower rates. When we look at housing market activity, it helps to think beyond the business cycle. Statistical decomposition of housing market indicators reveals medium-term (8-32 years) and long-term (>32 years) trends are important drivers of housing market activity. These trends reflect demographics that, over the long run, will dominate housing market activity.
BY LEN KIEFER
T he current economic expansion is set to complete its tenth year this fall, surpassing the 120-month expansion of the 1990s for the lon- gest in U.S. history, dating back to the mid-1800s. However, despite a low unemployment rate and robust job growth, several forward-looking indicators have started flashing warning signs causing the outlook from my peers in the economics profession to turn negative. In a survey earlier this year for the National Association for Business
Economics (NABE), two in three economists surveyed expected that the next U.S. recession would begin by 2021 (though not me for reasons discussed below). Despite the potential warning signs and negative sentiment among my peers, the economy looks pretty good. The unemploy- ment rate as of March 2019 sits at 3.8 percent, a very low level by historical standards. However, the unemployment rate is a poor pre- dictor of future economic activity.
The average number of months between the cyclical low of the unemployment rate and the start of the next recession is seven months. WARNING SIGNS Financial market indicators, which move faster than economic data, have pointed to a deteriora- tion in growth prospects. The yield curve slope, or the spread between long-maturity bonds like the 10- year Treasury and shorter matur-
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Real R OI
MY TAKE: The Risk of Too Few Homes
The boost in demand coming from the aging of Millennials and extended lifespan of Seniors is putting pressure on a housing market that is unable to build enough homes. The result is continued pressure on house prices. Despite the recent moderation in house price growth, house prices are still outpacing incomes.
investment subtracted from growth. Fading housing market activity is a typical precursor to U.S. recessions, so many bearish analysts pointed to 2018 housing market indicators. The decline in housing market activity wasn’t too surprising when you consider what happened with mortgage interest rates in 2018. At Freddie Mac, we track mortgage mar- ket trends very closely. My team helps run the weekly Primary Mortgage Market Survey, which tracks the aver- age rate on several popular mortgage products going back to 1971. By far, the most popular product is the 30- year, fixed-rate mortgage. After near- ly hitting a 5 percentage point average rate last fall, rates have fallen to 4.12 percent in our survey for the week of April 11, 2019. The run up in rates last year was a significant factor driving the housing market slowdown in 2018, and this was not unprecedented. My colleagues at Freddie Mac have studied periods of interest rate increases and found that, following a period of sustained mortgage rate increases, home sales fell about 5 percent and housing starts fell about 10 percent. That isn’t too far from what we experienced with exist- ing home sales in the fourth quarter of 2018, which were down 8 percent from the fourth quarter of 2017 and housing starts were down about 6 percent over the same period. Mortgage rates declining in the early months of 2019 is a reason for optimism about housing market activity, but there is more reason for optimism than just the short-term boost from lower rates. When we look at housing market activity, it helps to think beyond the business cycle. Statistical decomposition of housing market indicators reveals medium-term (8-32 years) and THINKING BEYOND THE BUSINESS CYCLE
of Seniors. They found that Seniors born after 1931 are staying in their homes longer, and aging in place, resulting in higher homeownership rates for this group relative to pre- vious cohorts. In total, Seniors are holding 1.6 million housing units off the market by aging in place. The boost in demand coming from the aging of Millennials and extended lifespan of Seniors is putting pressure on a housing mar- ket that is unable to build enough homes. The result is continued pressure on house prices. Despite the recent moderation in house price growth, house prices are still outpacing incomes. Over the next few years, hous- ing demand will provide a boost to housing market activity. However, a significant longer-term risk is that the imbalance between supply and demand will trigger another house price bubble. The experience of the last decade shows that the inevita- ble collapse of a house price bubble is far more painful than the ebb and flow of the typical business cycle.
long-term (>32 years) trends are important drivers of housing market activity. These trends reflect demo- graphics that, over the long run, will dominate housing market activity. To think about this, we need to con- sider the housing market life cycles of both the young and the old. The Millennial generation will drive housing market activity for years to come. They have been slow to start their housing life cycle com- pared to earlier generations, partly because of sociological changes and partly because of economic factors. In a pair of studies (here and here), my colleagues and I examined the factors driving household forma- tion and homeownership for young adults of the Millennial generation as compared to Gen Xers at the same age. We found that sociolog- ical factors, like delayed marriage and lower fertility rates, were signif- icant drivers of delayed household formation and homeownership among Millennials. However, these factors were dwarfed by economic factors such as declining labor force participation and higher housing costs. Our research showed that higher real housing costs explains almost half of the 8 percentage point decline in young adult home- ownership rates for Millennials as compared to Gen Xers. On the other end of the age spec- trum, my colleagues at Freddie Mac looked at the housing choices
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analysis and research, macroeconomic analysis and forecasting. Kiefer is also involved in the analysis of policy issues affecting the housing industry.
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DATA IN ACTION
Top 10 Metros with the Lowest Property Tax Rate
statistical areas analyzed in the report with a population of at least 200,000, those with the highest effective property tax rates were Binghamton, New York (3.19 per- cent); Syracuse, New York (2.89 percent); Rochester, New York (2.88 percent); Rockford, Illinois (2.83 percent); and Atlantic City, New Jersey (2.74 percent).
In fact, Bridgeport, New York boasted the highest average property tax, among all 219 metropolitan areas analyzed in the report. They were averaging $10,754 in property taxes in 2018. Those metro areas to follow in- cluded: New York, New York ($9,700); San Jose, California ($9,391); Trenton, New Jersey ($8,496); and San Fran- cisco, California ($7,973). AND THE LOWEST? As property taxes continue to rise in most parts of the country, which areas are not hit as hard by proper- ty tax hikes? Among the 219 metro areas ana- lyzed for the report, those with the lowest effective property tax rates
were Laredo, Texas (0.35 percent); Honolulu (0.36 percent); Montgomery, Alabama (0.37 percent); Tuscaloosa, Alabama (0.39 percent); and Colorado Springs, Colorado (0.42 percent). NATIONAL AVERAGE ANNUAL COMPARISON Out of the 219 metropolitan sta- tistical areas analyzed in the report, 120 (55 percent) posted an increase in average property taxes above the national average of 3 percent, including Los Angeles (5 percent increase), Dallas-Fort Worth (8 percent increase), Washington D.C. (4 percent increase), Atlanta (7 per- cent increase), and San Francisco (7 percent increase).
BY ATTOM DATA SOLUTIONS
I n a recent analysis by ATTOM Data Solutions on 2018 property taxes, there were a total $304.6 billion property taxes levied on single-fam- ily homes in 2018. The report also showed that the average property tax amount on single-family homes in 2018 was $3,498 – an effective tax rate of 1.16 percent. That number is up three percent from the average property tax of
$3,399 in 2017, and the effective property tax rate of 1.16 percent in 2018 is down from the effective prop- erty tax rate of 1.17 percent in 2017.
assessor offices nationwide at the state, metro and county levels along with estimated market values of single-family homes calculated using an automated valuation mod- el (AVM). The effective tax rate was the average annual property tax expressed as a percentage of the average estimated market value of homes in each geographic area. In looking at 219 metropolitan
WHAT MARKETS PAID THE MOST IN AVERAGE PROPERTY TAXES?
While the effective tax rates in the above markets was above that of the nation, what about those markets whose average property taxes were almost in the double digits?
WHICH MARKETS HAVE THE HIGHEST PROPERTY TAX RATES? The report analyzed property tax data collected from county tax
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BIG DATA SANDBOX
States with the Highest Effective Property Tax Rate &
States with the Highest Effective Property Tax Rate
If you are a single-family homeowner, knowing how property taxes will affect your wallet is a must. Therefore, ATTOM Data Solutions wanted to reveal those top 10 states where the effective tax rate was ranking the highest in the nation in 2018. To arrive at the effective tax rate, ATTOM analyzed property tax data collected from county tax assessor offices for each state, along with estimated market values of single-family homes calculated using an automated valuation model (AVM). The effective tax rate was the average annual property tax expressed as a percentage of the average estimated market value of homes in each geographic area.
Effective Tax Rate Average Tax Amount
METHODOLOGY The report analyzed property tax data collected from county tax assessor offices nationwide at the state, metro and county levels along with estimated market values of single-family homes calculated using an automated valuation model (AVM). The effective tax rate was the average annual property tax expressed as a percentage of the average estimated market value of homes in each geographic area.
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FLORIDA PROPERTIES WITH FORECLOSURE FILINGS
BY JOEL CONE, STAFF WRITER IS FLORIDA AT RISK FOR ANOTHER REAL ESTATE CRISIS?
N ot all that long ago, a combination of risky loans and over-zealous speculation by real estate inves- tors and developers hit Florida harder than many other parts of the nation, turning it into one of the poster children for the housing crisis that followed. During its darkest hour, the number of properties with foreclosure filings in the state went from over 75,000 in 2006 to nearly 517,000 in 2009 (an almost 600 percent increase in just three years), according to data provided by ATTOM Data Solutions. More than a decade later, a lot has changed with the Sunshine State. For one, the annual total number of properties with foreclosure filings has dropped precipi- tously to just over 65,000 in both 2017 and 2018.
But despite those falling numbers, the state has con- tinuously led the nation in total properties with fore- closure filings since 2013. Additionally, Florida ranked the sixth highest foreclosure rate in the nation at one in every 140 households for all of 2018, ATTOM reported. Still, both population and job growth are expected to continue while the risk of a recession sometime in 2019 is considered to be low, according to a forecast earlier this year by the Florida Chamber of Commerce. Unemployment, which rose to as high as 11.2 per- cent in November 2009, is now hovering near historic lows at 3.5 percent projected for February 2019 by the Bureau of Labor Statistics. “All the economic indicators are pointing in the right
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MARKET SPOTLIGHT: Is Florida at risk for another real estate crisis?
2018 TOP 10 STATES BY FORECLOSURE RATE
FLORIDA 2018 DISTRESSED SALES BY TYPE
ASSUMING THE RISK: RECESSION VS. CORRECTION
Foreclosure rate is defined as 1 in every X housing units
In the first quarter of 2012, ATTOM reported that 45.6 percent of all mortgage holders in Florida were seriously underwater. By the end of 2013 only 14.8 of Florida homeowners were equity rich. By contrast only 8.4 percent of mortgage holders in the state were seriously underwater for the fourth quarter of 2018 while 25.2 percent of homeowners were equity rich. “I consider Florida a very safe place,” said author, in- vestor and hard money lender Bruce Norris, president of The Norris Group based in Riverside, Calif. “If we’re there, we don’t think it’s risky. There’s a lot of things going for it. It’s number one in the country for migration of wealth.” As someone who has coached and mentored inves- tors over many years, and now also serves as a hard money lender in Florida, Norris is seeing a number of investors pull their money out of California through 1031 exchanges and move that money into one or more new homes in Florida where they can cash flow those rentals for $1,500 a month. “One of the nicest things about Florida is that its business model bounces off how many seniors show up. That’s why I like Florida as a state. It seems to have the right business model and it’s not connected to any one industry,” Norris said.
REO SHORT SALES
direction. All the major markets are below 4 percent un- employment,” said Jack Winston, principal with Goodkin Real Estate Consulting based in Miami. “Migration from other parts of the country by both primary residents and active adults (retirees) is still going on. Certain major cities are attempting to get a foothold in other industries to give them some diversification. The other thing we are pushing in the southeast is new startups. Venture capital money is coming in at a good rate.” Considering the drive for industrial diversification, the continuous flow of population into the state, and its low unemployment rate, Florida has all the essential economic factors real estate investors look for when selecting a location to purchase properties, no matter their chosen investment strategy. ATTOM reported that for 2018 distressed sales accounted for only 12.8 percent of all home sales in Florida. Of those sales, 5.3 percent were REO sales, 4.6 percent were short sales and 2.5 percent were third party foreclosure auction sales. Flips accounted for 6.4 percent of all home sales in Florida for 2018, down 9.9 percent from the year before, and down 12 percent from 5 years ago, but still
All the economic indicators are pointing in the right direction. All the major markets are below 4 percent unemployment.”
up 63.5 percent over the last 10 years. The statewide median sales price for 2018 was $218,990, up 8.1 per- cent from 2017 but down 4 percent from the peak price of $227,500 in 2006. In all, 41.3 percent of all 2018 home sales in Florida were cash sales while sales to institutional investors accounted for only 2.7 percent. “From an investor’s standpoint, it’s still a good place to invest your money,” Winston said.
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