NAMED THE NATION’S BEST NEWSLETTER BY NAREE
AUGUST 2018 VOL 12 ISSUE 8
MY TAKE AI AND DEEP LEARNING HELP SOLVE THE BIG DATA PUZZLE FOR REAL ESTATE BY BRAD MCDANIEL • P12
BIG DATA SANDBOX
DATA IN ACTION BEST NEIGHBORHOODS FOR REAL ESTATE BUYING AND INVESTING • P16
SUMMER FORECLOSURE HEATWAVE • P15
Contents
FEATURED ARTICLE
P1 RECESSION FEARS RISING: HOW HOUSING WILL HOLD UP
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Economists polled separately by The Wall Street Journal and Zillow forecast in May that the next recession will arrive in 2020, and they are not alone — many experts within the real estate industry are expecting a recession in the not-too-distant future. A look at how recessions have historically impacted the housing market and what to expect this time around if a recession hits. The massive real estate industry has been overdue for a major shift, writes Brad McDaniel, CEO with Likely.AI. But while the debate rages on about varying commission structures and diverse business models, the real change is coming in the form of big data. Spend any amount of time at a real estate conference these days and you’ll hear about big data. It’s as much of a buzzword as climate change — and just as misunderstood. P12 MY TAKE: AI AND DEEP LEARNING HELP SOLVE THE BIG DATA PUZZLE FOR REAL ESTATE A total of 30,187 U.S. properties started the foreclosure process for the first time in July, up 1 percent from the previous month and up less than 1 percent from a year ago — the first year-over-year increase in foreclosure starts nationwide following 36 consecutive months of year-over-year decreases. The increase in foreclosure starts was much more extreme in some local markets. The ATTOM Data Solutions 2018 Neighborhood Housing Index uses new neighborhood boundary data to rank more than 10,000 neighborhood housing markets nationwide based on six factors impacting the hyperlocal housing market: affordability, home price appreciation, school scores, crime rates, unemployment rates and property taxes. See where your neighborhood ranks with our interactive heat map. P16 DATA IN ACTION: BEST NEIGHBORHOODS FOR REAL ESTATE BUYING AND INVESTING P15 BIG DATA SANDBOX: SUMMER FORECLOSURE HEATWAVE
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SECTION TITLE
LEAD ARTICLE
Recession Fears Rising: How Housing Will Hold Up
BY PETER G. MILLER, STAFF WRITER
For nearly a decade real estate has largely been on the upswing. Armies of people who now sell mortgages and broker real estate, who handle closings, build homes and collect taxes, have never seen a down market. The current economic expansion began in June 2009. As of July it’s the second- longest expansion in U.S. financial
history, and if it continues through June 2019 it will be the longest.
mortgage rates in June 2009 stood at 5.42 percent versus the 2017 average of 3.99 percent. Despite 2018 rate increases, mortgage rates reached only 4.57 percent in June. Higher rates have a real and visible marketplace impact. According to Lawrence Yun, NAR’s chief economist,
It’s said that a rising tide lifts all boats, a notion which in terms of real estate is hard to dispute. Existing home prices in June, according to the National Association of Realtors (NAR), were up year-over-year for the 76th consecutive month. Freddie Mac reports that
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U.S. MEDIAN HOME PRICES & APPRECIATION
ANNUAL HOME PRICE APPRECIATION
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each 0.1 percent rate increase results in 35,000 lost sales.
“The risks of a recession in the next 18 to 24 months are rising.” RAY DALIO CO-CHIEF INVESTMENT OFFICER AND CO-CHAIRMAN BRIDGEWATER ASSOCIATES
Already there are signs of a slow-down. Figures from ATTOM Data Solutions show that “home price appreciation decelerated in the second quarter to the slowest pace in two years, but it was still up on an annual basis for the 25th consecutive quarter.” Median home prices were above pre-recession peaks in 65 percent of 122 metro areas. This also means that 35 percent — 42 metro areas — have still not reached pre-recession highs. Is a recession likely? The rising business cycle we now see began in the financial rubble of June 2009 and as of this writing is still going strong. Residential equity went from $13.43 trillion in 2006 to a heart- stopping $6.01 trillion in 2009 and then to $14.4 trillion at the end of 2017.
May that the next recession will arrive in 2020. Economic panels are not alone.
• JPMorgan Chase & Co. co-president Daniel Pinto says equity markets could fall as much as 40 percent in the next two to three years, according to Bloomberg News. • “What could possibly go wrong?” joked Goldman Sachs CEO Lloyd Blankfein on CNN. “I haven’t felt this good since 2006.” • “Second quarter growth likely to be the high point for the rest of the expansion,” said Fannie Mae in July. It added that “we do not expect the robust growth to be sustainable, and our forecast points to a slowdown in the second half of the year.
• “The risks of a recession in the next 18 to 24 months are rising,” said Ray Dalio, Co-Chief Investment Officer & Co-Chairman of Bridgewater Associates, an investment management firm that handles $160 billion in client funds. “While most market players are focusing on the strong 2018, we are focusing more on 2019 and 2020 (which is the next presidential election year). Frankly, it seems to be inappropriate oversight to not be talking about the chances of a recession and what that recession might look like prior to the next election.”
Economists polled separately by The Wall Street Journal and Zillow forecast in
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RECESSION #1
RECESSION #3
RECESSION #5
• December 2007 – June 2009 (1 year, 6 months) • GDP down 5.1 percent • Home prices decreased down 13.9 percent
• July 1990 – March 1991 (8 months) • GDP up 1.4 percent • Home prices down 0.9 percent
• January 1980 – July 1980 (6 months) • GDP down 2.2 percent • Home prices up 4.5 percent
RECESSION #2
RECESSION #4
• July 1981 – November 1982 (1 year, 4 months) • GDP down 2.7 percent • Home prices up 1.9 percent
• March 2001 – November 2001 (8 months) • GDP down 0.3 percent • Home prices up 4.8 percent
We project that full-year 2018 growth will reach 2.8 percent, one-tenth higher than in our prior forecast, before slowing to 2.2 percent in 2019 as fiscal impacts fade. Real estate and recession The great oddity of recessions is that while they sound fearsome they may not be so bad for real estate. “History shows us that a recession (broadly an economic event) does not necessarily imply declining house prices,” First American Chief Economist Mark Fleming tells Housing News Report . “In fact, in most recessions that has not happened. Price growth may slow down, not necessarily a bad thing, but actual depreciation? Far from a foregone conclusion.” If we look at the last five recessions going back nearly 40 years we often see rising home values and quick recoveries even as the general economy slows.
“What could possibly go wrong? I haven’t felt this good since 2006.”
LLOYD BLANKFEIN CEO, GOLDMAN SACHS, ON CNN
With December 2000 as “100” on the unadjusted Freddie Mac House Price Index, and with the typical existing home selling for $144,500 that month according to the National Association of Realtors, we can calculate the relationship between the last five recessions and home values. The most recent recession was by far the strongest recession in the past four decades, the 2007 downturn was directly related to the widespread sale of so-called “nontraditional” and “affordability” mortgage products, financing defined by such features as negative amortization, predatory prepayment penalties and the use of yield-spread premiums to market loans.
No doc, low doc, and NINJA (no income, no job, no asset) mortgage applications were widely used to qualify borrowers, meaning by definition that such loans were insufficiently underwritten. As mortgage balances rose because of negative amortization, and as home values faltered and then fell, many borrowers with toxic loans could neither afford monthly payments nor sell their homes for enough to cover the debt. The result was the worst foreclosure crisis since the Great Depression. “The profound events of 2007 and 2008,” said a report from the government’s Financial Crisis Inquiry
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Q2 2018 HOME PRICE APPRECIATION HEAT MAP HOME PRICE APPRECIATION ACCELERATING OR DECELERATING? ACCELERATING DECELERATING
“I feel that there will be a recession by late 2019-early 2020 … What makes this impending recession most interesting is the fed fund rate will stand at 3 percent or less when the easing begins. If the Fed lowers rates as aggressively as they normally do, we could end up in negative interest rate territory and have a 30-year loan that starts with 2 percent!”
BRUCE NORRIS PRESIDENT, THE NORRIS GROUP REAL ESTATE INVESTING COMPANY
CLICK HERE TO VIEW INTERACTIVE VISUAL
Commission, “were neither bumps in the road nor an accentuated dip in the financial and business cycles we have come to expect in a free market economic system. This was a fundamental disruption — a financial upheaval, if you will — that wreaked havoc in communities and neighborhoods across this country.” In terms of real estate prices, typical home values on a cash basis reached $223,570 in December 2007 and fell to $192,445 by June 2009. This was the largest price decline of the five most- recent recessions. By January 2012 home values reached $173,949 and did not recover until May 2015 when cash prices hit $223,874. Where is the market today? As of early August, the national market saw rising prices but slowing sales. Are these natural fluctuations or a sign of changing conditions?
summer selling and home buying (season),” RE/MAX CEO Adam Contos told Housing News Report . “But, according to our June RE/MAX National Housing Report, while prices are at record highs and inventory is still at a record low, sales came in 5.5 percent lower than June 2017. ‘We have been expecting to see these numbers, even with low inventory and the Federal Reserve recently raising interest rates, homes are going from ‘for sale’ to sold 28 percent faster than three years ago. “The good news,” said Contos, “is that the rate of sales helps accommodate a shrinking inventory and buyers can still find opportunities. We saw some impressive prices moving up in markets throughout the U.S.” What about the next recession? “I feel that there will be a recession by late 2019-early 2020,” said Bruce Norris, president of The Norris Group and creator of the 2017 course, 2% Interest
Rates, $40 Trillion in Debt and Other Surprise Endings .
“During a recession, interest rates are lowered,” Norris said. “The fed fund rate, in past recessions, has been lowered by 4 to 5 percent. What makes this impending recession most interesting is the fed fund rate will stand at 3 percent or less when the easing begins. If the Fed lowers rates as aggressively as they normally do, we could end up in negative interest rate territory and have a 30-year loan that starts with 2 percent!” “The median family,” said Seeking Alpha in July, “cannot afford the median home in several expensive markets, like the San Francisco Bay Area, Seattle, and Los Angeles. Also, DTI ratios on new mortgages are high and rising, raising the risk that many borrowers will not be able to pay back their loans if the economy slows. New buyers will be unable to buy homes at current prices when interest rates rise, which will
“We will see a natural slowdown as we’re nearing the end of the busy
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Affordability . There’s no doubt that the median-income family cannot afford the median property in any number of high-cost markets. The bigger issue is that people outside major metro areas are also running into affordability problems. According to ATTOM Data Solutions, home value increases outpaced wages in 64 percent of the 432 counties it studied in the second quarter. “Slowing home price appreciation in the second quarter was not enough to counteract an 11 percent increase in mortgage rates compared to a year ago, resulting in the worst home affordability we’ve seen in nearly
create another fall in housing prices. Consider avoiding stocks that suffer from a real estate slowdown, such as home builders, small/mid-size banks, and mortgage companies with heavy exposure to California, Nevada, Oregon, Washington, and Florida.” As we have seen, while recessions are inevitable, bad results are not. It is very possible to have both an economic slowdown as well as rising home prices, good evidence of a solid housing sector. If we look ahead there’s reason to believe that real estate is better prepared for a downturn than at any time since World War II.
10 years,” said Daren Blomquist, senior vice president at ATTOM Data Solutions. “Meanwhile home price appreciation continued to outpace wage growth, speeding up the affordability treadmill for prospective homebuyers even without the rise in mortgage rates.” “The market is always changing,” said RE/MAX CEO Adam Contos. “We are constantly looking at all global economic and social trends and forecasts that factor into that. a change in migration patterns across the U.S,. including a surge in home sales in the suburbs, less- populated markets and even more affordable states. Cities that offer the most effective transportation systems and those that promote high-amenity, ‘walkable,’ contemporary neighborhoods will benefit the most.” “For example, because of low inventory in popular markets, we are seeing
“Because of low inventory in popular markets, we are seeing a change in migration patterns across the U.S,. including a surge in home sales in the suburbs, less-populated markets and even more affordable states.”
ADAM CONTO CEO, RE/MAX
Q2 2018 U.S. HOME AFFORDABILITY HEAT MAP Q2 2018 AFFORDABILITY INDEX* (UNDER 100 IS LESS AFFORDABLE THAN HISTORIC AVERAGE) 47 258
CLICK HERE TO VIEW INTERACTIVE VISUAL
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FIRST-HALF U.S. FORECLOSURE ACTIVITY BY YEAR
“Second quarter growth likely to be the high point for the rest of the expansion. ... we do not expect the robust growth to be sustainable, and our forecast points to a slowdown in the second half of the year. We project that full-year 2018 growth will reach 2.8 percent, one-tenth higher than in our prior forecast, before slowing to 2.2 percent in 2019 as fiscal impacts fade.”
JANUARY-TO-JUNE FORECLOSURE ACTIVITY (PROPERTIES WITH FORECLOSURE FILINGS)
FANNIE MAE IN ITS JULY 2018 ECONOMIC SUMMARY
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Wage gains have ranged from minimal to actual reversals. For example, “from June 2017 to June 2018, real average hourly earnings decreased 0.2 percent, seasonally adjusted,” according to the Bureau of Labor Statistics. This is not what one would expect. With labor in demand, with 4 percent unemployment, why are wage gains not significantly higher? For much of the past decade substantial affordability worries have been offset by mortgage rates at or near historic lows. Now mortgage rates are rising. The Mortgage Bankers Association (MBA) expects rates to top 5 percent in 2019, low by historic standards but enough to flush out marginal borrowers and the potential sales they represent. For its part, the Federal Reserve seems intent on raising the federal fund rate. While the Fed does not directly control or set mortgage rates, its ability to raise or lower bank rates impacts mortgage pricing.
In its semi-annual Monetary Policy Report to Congress, the Fed projects that the federal funds rate will go from 2.4 percent in 2018 with two additional hikes this year to as much as 3.1 percent in 2019 and 3.4 percent in 2020. This forecast suggests two additional rate hikes this year and three or four in 2019. One big question is whether the Fed is adopting policies based on the “right” information, whatever information that might be. The Bureau of Economic Analysis reported on July 27 that “real gross domestic product increased at an annual rate of 4.1 percent in the second quarter of 2018.” On July 20 the Federal Reserve Bank of New York Nowcast estimated that the annual GDP growth was 2.69 percent. The Federal Reserve Bank of Atlanta said that its “GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2018 is 3.8 percent on July 26, down from 4.5 percent on July 18.” (parenthesis theirs)
Do we raise or lower the federal funds rate based on real GDP growth of 2.69 percent, 3.8 percent, 4.1 percent or 4.5 percent — differing estimates of national economic expansion published in the course of less than 10 days? Should we mention that the current expansion is propelled in large measure by massive deficit spending and a one-time tax cut? Former Fed Chairman Ben Bernanke told Bloomberg that by 2020 the economy will “go off the cliff” because of $1.5 trillion in lost revenue as a result of tax reform and $300 billion in increased federal spending. Fed hikes. The current fed funds rate target range is 1.75 percent to 2.00 percent. That’s up a max of 2 percent since 2008. During the same period mortgage rates – which reflect marketplace supply and demand – declined from 6.03 percent in 2008 to 4.54 percent at the end of July. One fortunate reality is that mortgage rates do not move in lock-step with
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AVERAGE U.S. HOMEOWNERSHIP TENURE (YEARS)
ratios above 50 percent was at an all-time high in FY 2017, with over 20 percent of borrowers with FHA-insured purchase mortgages having a DTI ratio at or greater than 50 percent. The percentage of borrowers with DTI ratios greater than 43 percent rose to 49.1 percent in FY 2017 from 43.4 percent in FY 2016.” A job loss or reduced income can start a cascade of unpaid mortgage bills. For those with little financial breathing room and minimum reserves the odds of delinquency are high with big DTI ratios, however higher down payments and tough, often manual, underwriting can offset much of the potential risk. Taking Action Bruce Norris says that in 2006 his firm “saw that recession coming; we knew it would be devastating to real estate prices. We sold our properties and told other California investors it would be wise to do the same.” With a potential recession now on the horizon, California-based Norris says that “no such fear exists. We do not feel real estate prices will take a huge hit for three reasons.” First, says Norris, “for the last eight years, buyers have had to really qualify for any loans obtained. We don’t have any crazy loan programs. The buyers got fixed rate loans about 98 percent of the time.” Second, “prices in California have over doubled since 2008. During a boom time, owners typically use home equity lines to extract equity and either invest or buy toys. They did not do that this
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DTI Ratios . Interest rates are a part of the affordability problem but not all of it. Non-housing debt has increased substantially in recent years, constricting the ability of borrowers to qualify for financing. According to the Federal Reserve Bank of New York, student debt has gone from $260 billion in 2004 to $1.41 trillion in the first quarter of 2018. Auto debt during the same period rose from $720 billion to $1.23 trillion. Mortgage debt, in contrast, has actually declined from $9.99 trillion in 2008 to $9.38 trillion in the second quarter. Not only is mortgage debt down, the cost to service such borrowing has declined substantially. Figures from Freddie Mac show that the overall annual mortgage rate in 2008 was 6.03 percent versus 3.99 percent in 2017. To resolve the debt issue, a number of new loan programs allowing debt-to- income (DTI) ratios above 43 percent have begun to appear. For instance,
Fannie Mae and Freddie Mac now purchase selected mortgages with DTIs of up to 50 percent.
Do higher DTI programs represent more risk?
The absolute answer is “yes” and that will be the headline. Likely unmentioned is that the new loans will be both exotic and rare. According to the Urban Institute (UI), borrowers will need at least 20 percent down to get such financing. UI predicts that only 85,000 high DTI mortgages will be issued of out the 17 million loans Fannie Mae holds in portfolio, about 0.5 percent. There’s no doubt that when higher DTIs are available they will be used. In its 2017 report to Congress, HUD explained that “the average Debt-to- Income (DTI) ratio for borrowers with FHA-insured purchase mortgages continues to rise, with an average DTI ratio of 41.9 percent in FY 2017. The proportion of borrowers with DTI
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predicted by many industry analysts, could bring a more balanced market and ease housing demand.” Long & Foster is among the most- experienced brokerages in the country, having survived seven recessions since its founding. Recession Defenses As with past recessions it’s entirely possible we will see higher prices even if a widespread economic slowdown hits again. In the particular case of the next recession there are several reasons to believe that prices in most markets will be sustained. Unlike the 2007 recession, a slower economy is not likely to produce a wave of foreclosures. Once bought, people are staying in their homes for longer periods. Prior to 2009, the average homeownership tenure was 4.21 years, but following the crash it has steadily increased and was at 8.09 years in Q2 2018 — a new all-time high, according to ATTOM Data Solutions. People have more equity as a result of longer tenure, generally rising home prices and more time for amortization. If things get really bad, many owners can sell, pay off their debts, and keep their credit standing in place. With fewer foreclosures, home values won’t be undermined by bargain-basement prices next door. Also, the impact of toxic “legacy” loans from the 2007 recession is fading away, a significant development. In mid- 2015, as an example, the Mortgage Bankers Association reported that “73 percent of the loans that were seriously
“An economic slowdown, as predicted by many industry analysts, could bring a more balanced market and ease housing demand.”
JEFF DETWILER CEO AND PRESIDENT OF LONG & FOSTER COMPANIES
time around. What’s happened between 2008 to 2018? The owners left most of that equity untouched! Owners of real estate are sitting on the biggest equity cushion ever!“ Third, Norris argues that “lenders have taught borrowers (during the recent downturn) the new methodology of handling delinquencies. Instead of filing foreclosure, the lenders bent over backwards to avoid taking the asset back via foreclosure. Lenders were allowed to ignore delinquencies, modify loans, and work with buyers in ways they never have before. This experience is still fresh in both the lenders’ and borrowers’ mind. When a recession hits, instead of a massive increase in
foreclosure property, we’ll have an increase in delinquencies and a very patient reaction by lenders.” Jeff Detwiler, CEO and President of Long & Foster Companies, a brokerage with more than 10,000 sales associates from New Jersey to North Carolina and now part of HomeServices of America, a Berkshire Hathaway affiliate, says that “from what we see in the regions where we do business, conditions will remain relatively steady for the near-term. While every market is different, that means continued inventory shortages and pent-up buyer demand driving home prices higher – albeit at a slower rate than what has occurred over the past year. An economic slowdown, as
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“Localized foreclosure flare-ups in the first half of 2018 can no longer be blamed on legacy distress left over from the last housing bubble given that nearly half of all active foreclosures are now tied to loans originated in 2009 or later and given that the average time to foreclose plummeted in the first two quarters of the year.”
DAREN BLOMQUIST SVP, ATTOM DATA SOLUTIONS
delinquent, either more than 90 days delinquent or in the foreclosure process were originated before 2008.” Today the impact of legacy loans is declining with every sale and refinance. “Localized foreclosure flare-ups in the first half of 2018 can no longer be blamed on legacy distress left over from the last housing bubble given that nearly half of all active foreclosures are now tied to loans originated in 2009 or later and given that the average time to foreclose plummeted in the first two quarters of the year,” said Blomquist with ATTOM Data Solutions. “Instead these local foreclosure increases are typically the result of more recent distress triggers in those markets.” Inventory & New Construction The real brake on lower prices is simply that demand is outstripping supply by a wide margin. This is true not just in hot metro areas but also in smaller communities. As one example, according to Zillow, July home values
in Pensacola’s 32503 ZIP code were up 18.1 percent year-over-year.
prices are still rising at double the pace of income growth.”
The country has a significant inventory shortage, a lack of homes for sale. This shortage is a bulwark against lower prices. In many markets it’s not enough to be financially qualified, you also need to be swift and pre-approved; otherwise you’ll miss prime buying opportunities. The home building industry would surely like to sell more units but there’s no possibility of a meaningful expansion that will offset the inventory shortage. As of June we produced an additional 50,000 single-family houses when compared with a year earlier, not nearly enough to meet demand in a nation with more than 325 million people. “Unfortunately,” said Freddie Mac Chief Economist Sam Khater in July, “don’t expect much relief from the tight inventory conditions plaguing many markets. As seen again last month, new home construction is not picking up to meet demand, and as a result, home
Going forward, the construction industry faces several major hurdles which limit growth: First, there is a substantial price premium for new homes which detracts from their marketability. According to ATTOM, the median new home sales price reached $312,000 in the second quarter versus $254,900 for existing homes, a huge differential. Second, lumber costs are soaring as a result of our trade war with Canada, adding about $9,000 to the cost of a new home, according to the National Association of Homebuilders (NAHB). Third, labor shortages make major growth impossible. The NAHB estimated in May that 243,000 construction jobs were unfilled. A big part of the construction industry’s labor problems reflect the immigration debate.
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According to the Austin American- Statesman, half the construction workers in Texas were undocumented as recently as 2013. Fourth, some communities have substantially increased new construction costs. Impact fees in Fort Mill, SC were set at $2,500 in 1996 according to The Herald, the local paper. Now, after 22 years, the fee will be raised to $18,158 for a new home. Can the local market absorb higher new home prices or will the result be less construction? If new homes are suddenly more expensive what will happen to existing home prices? Despite demand, new construction is actually slowing. As of June, according to the NAHB, builders are on pace to build 1.17 million new housing units in the next 12 months. “Within this overall number,” said the Association, “single-family starts fell 9.1 percent to 858,000 units. Meanwhile,
the multifamily sector -- which includes apartment buildings and condos — dropped 19.8 percent to 315,000.” Riskier mortgages? Could we have a repeat of the 2007 recession, an event brought on by massive mortgage failures? A look at recent financing trends suggests that the mortgage marketplace has become strongly risk-averse and that toxic loans have largely been washed from the system. of mortgage investors and insurers if loans go bad. Is there anything in the mortgage file which shows lender negligence? Borrowers may complain about picky mortgage applications, but the result is stronger loan applicants, fewer foreclosures and a better ability to withstand an economic downturn. With passage of the ability-to-repay rule, originators are now the first target
loans, and lender interest is plainly increasing. Should we be worried about large-scale subprime failures? The reality is that there just aren’t that many of them. The FHA program will insure borrowers with credit scores down to 500, but getting such mortgages today is simply improbable. Just before the mortgage meltdown, the FHA was a major backer of nonprime financing. In 2007, 21.4 percent of all forward loans insured under the FHA program had credit scores between 579 and 500. In 2017 that market segment accounts for just 0.4 percent of all FHA approvals. Higher-risk nonprime loans are surely out there (see “The Return of Risk: Subprime Sneaking Back” in the July 2018 Housing News Report), but most appear to be in private hands. Freddie Mac, with $95.3 billion in assets, says that at the end of March it had securitized roughly $1 billion
But what about nonprime mortgage financing? There is demand for such
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THE NEW HOME PRICE PREMIUM
NEW HOME PREMIUM EXISTING HOME MEDIAN PRICE
NEW HOME MEDIAN PRICE
else. Perhaps the failure of wages to keep up with prices will stall consumer purchasing. Maybe we will again see errant Fed decisions such as those which contributed to the 1980 recession. There could be a trade war or wars, something much larger than the squabble with Canada over lumber imports. Or, once again, we could see massive hurricanes, earthquakes and fires, events which in 2017 caused damage worth more than $400 billion. Real estate won’t be immune if there’s a recession. There will be an impact on home sales and mortgage rates, but severity will vary from market to market. Unlike the last recession, toxic loans will not be a factor. Fixed-rate mortgages with low interest levels will protect millions of owners from rising costs. The movement of home prices up or down won’t significantly impact owners who simply stay put. The lack of meaningful new construction coupled with longer ownership terms will perpetuate the inventory problem. Ownership will provide a financial haven while renters — faced with few choices and little new development — will bear the brunt of rising rental rates in many markets. “Real estate won’t be immune if there’s a recession. There will be an impact on home sales and mortgage rates, but severity will vary from market to market. Unlike the last recession, toxic loans will not be a factor. Fixed-rate mortgages with low interest levels will protect millions of owners from rising costs.”
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in subprime financing. Fannie Mae at the same time had subprime and Alt-A securities worth $1.3 billion and total assets of $50.2 billion. Even if all GSE nonprime loans go bad, a practical impossibility, the systemic damage would be marginal. The toxic loans marketed in the run- up to the mortgage meltdown would never pass muster today. Residential loans without documentation are gone. Prepayment penalties are allowed
with QM mortgages but only with strict limitations. The bulk of QM mortgages — conforming, VA and FHA financing — do not have prepayment penalties. For non-QM residential loans such as jumbo mortgages, the standard is different: prepayment penalties are simply prohibited. Looking forward, if there’s a recession it won’t be because of the housing sector. Instead, it seems likely that a recession will emerge from something
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MY TAKE
AI and Deep Learning Help Solve the Big Data Puzzle for Real Estate
BY BRAD MCDANIEL CEO, LIKELY.AI
push a button or browse a Web page you leave bread crumbs behind. A trail easy to follow if you know how to put the pieces back together. Big Data Spaghetti Test Therein lies the problem. Most data companies are nothing more than list optimizers. Looking backward to predict behavior. Much of the data is highly siloed, rendering it ineffectual. Still other companies have residually
data. Spend any amount of time at a real estate conference these days and you’ll hear about big data. It’s as much of a buzzword as climate change — and just as misunderstood. As theoretical physicist, Stephen Hawking said, “We are all now connected by the Internet, like neurons in a giant brain.”
Real estate is an industry that is undergoing drastic changes. A big data revolution is on the horizon. This massive industry that boasts an annual revenue of $235 billion with over 200,000 residential brokerage companies and over 1 million loan officers has been overdue for a major shift. But while the debate rages on about varying commission structures and diverse business models, the real change is coming in the form of big
Data is everywhere and much easier to collect. Every time you swipe a card,
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HOUSINGNEWS REPORT
AI AND DEEP LEARNING HELP SOLVE THE BIG DATA PUZZLE FOR REAL ESTATE
of AI, especially supervised learning and machine learning, the amount of processes that can be automated has risen exponentially. New Vantage Partners, a strategic advisory firm that guides many Fortune 1000 companies’ technology initiatives, conducted a survey earlier in 2018. The primary findings of this survey was that 97 percent of C-level executives report that their companies are investing in building and launching big data and AI initiatives. From this survey there was a growing consensus that AI and big data are becoming closely intertwined, if not synonymous. The corporations surveyed report that they have direct access to meaningful volumes and sources of data that can feed AI algorithms to detect patterns and understand behaviors. The integration of AI into big data analysis produces a range of business benefits and results in much more accurate ability to predict consumer behavior.
“One of the most promising solutions lies in the integration of Artificial Intelligence (AI) into data gathering analysis. In the simplest of terms, it can be thought of as automation on steroids. As a result of the recent rise of AI, especially supervised learning and machine learning, the amount of processes that can be automated has risen exponentially.”
gathered data from their core product, and, while realizing it has value, have insufficient knowledge of how to use the information. Neither one of these are sustainable business models. These types of companies continue to change their business approach and modify their practice with the virtual spaghetti test — throwing questionably cooked big data products at the wall in hopes they will stick. As it has been said, time is the great equalizer, and as the arena of big data refines, companies that learn to utilize the information correctly have begun to emerge as leaders. Data points need to be connected, like puzzle pieces
that lead back to the larger picture. Improvement comes in the form of refinement. Using multiple data points and tying them together to target the right buyers is a matter of knowing who they are, when they want to buy and how you can reach them. It sounds simple, but the sheer volume of data requires something more than basic integration and human interaction. The Promise of AI One of the most promising solutions lies in the integration of Artificial Intelligence (AI) into data gathering analysis. In the simplest of terms, it can be thought of as automation on steroids. As a result of the recent rise
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AUG 2018 | ATTOM DATA SOLUTIONS
HOUSINGNEWS REPORT
AI AND DEEP LEARNING HELP SOLVE THE BIG DATA PUZZLE FOR REAL ESTATE
In the past year, companies such as American Express and Morgan Stanley have publicly shared stories of the successful use of their AI-analyzed data. In a recent keynote address, a prominent executive within Mellon Bank stated that the availability of big data technology, combined with the volume of information, is unparalleled to what was available via paper in the past. He further punctuated his speech by saying with the additional mixture of artificial intelligence analysis, businesses are going to see an unprecedented accuracy in predicting customer behavior.
company specifically designed for the real estate and mortgage industries that leverages our patent to utilize AI and big data to build schemas to meld the data for better, proven results. We have assimilated data for 155 million properties with a 225-million- record demographic dataset that includes micro and macro market influencers and a unique mix of individual and household-level demographic data. We have used this wealth of information and automation to create several lead-generating products for the real estate industry, the initial one was consumers with a desire to sell. Using this technology, Likely.AI scores every property in the U.S. based on the likelihood of a sale in the near future. Once the
property reaches a certain confidence threshold in our deep learning models, we provide this valuable lead to real estate professionals. Using this strategy, Likely.AI can provide solutions leveraging its proprietary data base to effectively generate new business for real estate lenders and other professionals. Likely.AI has been developing the most effective ways to generate business with AI and big data for real estate professionals and mortgage originators. Our proprietary data lake allows us to offer solutions others can’t. Some leverage AI and others just utilize big data in very creative ways. At Likely.AI we offer intelligence as a service. So, as you develop out your strategy with big data in the near future, consider those organizations that utilize artificial intelligence and deep learning to produce results. As Peter Sondegaard from Gartner Research said, “Information is the oil of the 21st century, and analytics is the combustion engine.”
Likely.AI’s Big Data Approach Likely.AI is an artificial intelligence
“Likely.AI is an artificial intelligence company specifically designed for the real estate and mortgage industries that leverages our patent to utilize AI and big data to build schemas to meld the data for better, proven results. We have assimilated data for 155 million properties with a 225-million-record demographic dataset that includes micro and macro market influencers and a unique mix of individual and household-level demographic data.”
BRAD MCDANIEL
Brad McDaniel co-founded his first big data analytic company over 12 years ago in the San Francisco bay area. Since then he was issued a patent for the work completed with his first company, and has held senior product positions with Market Leader, Trulia and Vast, before deciding to start Likely.ai. Brad is the pioneer of intelligence as a service for the real estate and financial industries.
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AUG 2018 | ATTOM DATA SOLUTIONS
BIG DATA SANDBOX
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AUG 2018 | ATTOM DATA SOLUTIONS
HOUSINGNEWS REPORT
Best Neighborhoods for Real Estate Buying and Investing SPOTLIGHT
The ATTOM Data Solutions 2018 Neighborhood Housing Index uses new neighborhood boundary data to rank more than 10,000 neighborhood housing markets nationwide based on six factors impacting the hyperlocal housing market: affordability, home price appreciation, school scores, crime rates, unemployment rates and property taxes. The top five U.S. neighborhood housing markets based on the index were the Pine Ridge neighborhood in the Naples, Florida, metro ($632,871
“While home prices are typically higher in higher-ranked neighborhoods with better schools and lower crime, there are still many top-notch neighborhoods with more reasonably priced homes.”
DAREN BLOMQUIST SVP, ATTOM DATA SOLUTIONS
median price); Westlake neighborhood in the Mobile, Alabama, metro ($196,179); Union neighborhood in the San Jose, California, metro ($795,000); Westmoreland
neighborhood in the Charlotte, North Carolina metro ($326,000); and Hunters Hill neighborhood in the Denver, Colorado, metro ($271,000).
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AUG 2018 | ATTOM DATA SOLUTIONS
HOUSINGNEWS REPORT
BOISE HOUSING MARKET BURSTING AT THE SEAMS
2018 NEIGHBORHOOD HOUSING INDEX NEIGHBORHOOD GRADE
CLICK HERE TO VIEW INTERACTIVE VISUAL
“While home prices are typically higher in higher-ranked neighborhoods with better schools and lower crime, there are still many top-notch neighborhoods with more reasonably priced homes,” said Daren Blomquist, senior vice president at ATTOM Data Solutions. “The top five neighborhoods in this ranking represent a diverse set of markets across the country, illustrating that great neighborhoods come in many different forms.” A-rated neighborhoods with home prices of $100,000 or less There were 136 neighborhoods with an A rating and with median home prices of $100,000 or less, led by the Devonshire neighborhood in the Mobile, Alabama, metro ($78,038 median price); the Park Central neighborhood in the Orlando, Florida, metro ($91,750); the East English Village neighborhood in the Detroit, Michigan, metro area ($66,750); the
St. Petersburg, Florida (35.8 percent); and the Portland neighborhood in Louisville, Kentucky (33.6 percent). Best neighborhoods for flipping homes ATTOM also analyzed potential home flipping returns in 3,573 neighborhoods with sufficient home flipping data. There were 209 neighborhoods with an A rating and with an average gross flipping return on investment of 50 percent or more, led by the Cottage Grove Heights neighborhood in the Chicago, Illinois, metro (309.2 percent ROI); the Woodmere and Dolfield neighborhoods in the Baltimore, Maryland, metro (both with 250.0 percent ROI); the West Chesterfield neighborhood in the Chicago metro (247.8 percent ROI); and the Westside neighborhood in the Memphis, Tennessee metro (221.9 percent ROI).
Cypress Shores neighborhood in the Mobile, Alabama, metro ($85,000); and the Hathaway Manor neighborhood in the St. Louis, Missouri, metro ($69,190). Best neighborhoods for buying rental homes ATTOM analyzed potential rental returns for homes purchased as rentals in 10,895 neighborhoods with sufficient rental return data. Among 2,188 neighborhoods with an A rating, there were 494 with a potential annual gross rental yield of at least 10 percent, led by the Westover neighborhood in Fayetteville, North Carolina (41.7 potential gross annual rental yield); the Terminal Park neighborhood in Sarasota, Florida (41.5 percent); the Southwest York neighborhood in York, Pennsylvania (35.8 percent); the Griffin Park neighborhood in Tampa-
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AUG 2018 | ATTOM DATA SOLUTIONS
HOUSINGNEWS REPORT
SECTION TITLE
Know the Risks and Benefits Before You Buy Your Next Home A Home Disclosure Report provides comprehensive property and neighborhood data that will help you make a better decision about the home you want to buy.
Criminal & Sex Offenders Former Local Drug Labs Nearby Hazardous Sites
Local School Ratings Property/Loan Information Neighborhood Demograhics
“I can research homes and neighborhoods like never before. Great data for negotiating with the seller!” G. BUSBY, HOMEOWNER - CHICAGO
Get your FREE Home Disclosure Report at www.homedisclosure.com
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AUG 2018 | ATTOM DATA SOLUTIONS
HOUSINGNEWS REPORT
Housing News Report is a monthly publication dedicated to helping individuals and institutions succeed by providing them with timely and relevant information about the residential real estate market.
EXECUTIVE EDITOR Daren Blomquist
CONTACT US Phone: 800.306.9886 Email: marketing@attomdata.com Mail: Housing News Report 1 Venture suite 300 Irvine, CA 92618
WRITERS Daren Blomquist Peter Miller Joel Cone
ART DIRECTION Eunice Seo
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