Bloomberg News

Housing in U.S. Cools as Rate Rise Hits Sales: Mortgages

April 25, 2014

Housing in U.S. Cools

Potential home buyers view a model home at the Shapell Industries Inc. Gale Ranch community in San Ramon, California, U.S., on Friday, Jan. 24, 2014. Photographer: David Paul Morris/Bloomberg

After a roller-coaster decade of boom-bust-boom, the U.S. housing market is going downhill just when many economists thought annual sales would be heading up.

Sales of previously owned properties in March tumbled 7.5 percent from a year earlier to the slowest pace in 20 months, while purchases of new houses sank 14.5 percent from February, according to reports this week. Mortgage applications to buy homes plunged 19 percent from a year earlier, indicating slowing demand during what is typically the busiest season for deals.

The housing market’s underlying fragility is emerging as outside influences that fueled a two-year rebound are receding. Mortgage interest rates are rising from record lows as the central bank withdraws its stimulus, and investors, who had helped drive national prices up more than 20 percent as they went on a buying spree, are now retreating.

“The very low rate environment and the high level of investment activities really masked how weak the housing market was,” Sam Khater, deputy chief economist at Irvine, California-based CoreLogic Inc., said in a telephone interview. “Once it goes back to the normal owner-occupied purchase market, you really realize how weak the market is.”

While last year’s spring buying season was characterized by bidding wars across the country as buyers rushed to take advantage of record-low mortgage rates amid low inventory, the market so far in 2014 has been more affected by issues specific to local geographic areas.

Phoenix, Denver

Sales are slipping in Phoenix and Las Vegas, where traditional buyers aren’t stepping in to fill the void left by investors. In San Francisco, Denver and Dallas, where job growth is robust, listings are scarce and overpriced for many house hunters.

“We’ve had a boom and we’ve had a bust, and those were all national events,” said Mark Palim, vice president for applied economics and housing research at Fannie Mae in Washington. “Now that national drivers are less significant to the market, you’re seeing the re-emergence of local economic factors.”

Buyers, already handicapped by tight credit and weak wage growth, felt the hit to their purchasing power when mortgage rates jumped last year. The average rate for a 30-year fixed mortgage was 4.33 percent this week, according to Freddie Mac, up a full percentage point from near record lows last May as the Federal Reserve scales back bond purchases. That raised the cost of a $200,000 mortgage by 13 percent, with monthly payments climbing to $993 from $881.

Down Payments

Average mortgage down payments remain low compared with levels before the housing boom. In 2013, borrowers put down 10 percent, on average, compared with 16 percent in 2003, according to data from the National Association of Realtors. The average dipped to 8 percent in 2009 and 2010, when tax incentives were put in place to encourage purchases by first-time buyers, who more often use federally-insured loans with lower down payment requirements.

The National Association of Realtors’ Housing Affordability Index, fell 16 percent in the 12 months through February, the most recent month available.

Prices have climbed so fast in the last two years that buyers have sticker shock, said Lawrence Yun, chief economist for the National Association of Realtors. He projects that sales will decline 2 percent this year after predicting, at the start of the year, for a small increase over 2013.

“Housing is a victim of its own success,” Yun said. “It’s just that the fast price growth is not healthy.”

Historically Low

Interest rates on 30-year mortgages are still about half the 8.36 percent average since 1971, according to Freddie Mac’s data. Rates on 30-year loans peaked at 18.6 percent in 1981.

Housing affordability is still 25 percent above the average since back to 1986, based on the trade group’s composite index, which measures housing costs, household income and interest rates.

“When you talk about 3 to 4 percent interest rates, that’s still lower than what most of us are used to and as much as 12 percentage points lower than what we remember at the worst of the market,” Stefan Swanepoel, editor of Swanepoel Trends Report, a real estate industry journal based in San Juan Capistrano, California, said in a telephone interview.

Lenders have begun to loosen credit for home purchases as they seek to hold onto business that plunged as fewer homeowners refinanced. The average FICO score for conventional purchase mortgages was 755 in March, compared with a 763 average in 2012, according to Ellie Mae Inc., a mortgage-software provider.

Bad Weather

It’s too early to say that the market’s recovery is faltering, said Paul Diggle, a housing economist with London-based Capital Economics Ltd. Bad weather accounted for slower sales in parts of the Northeast and Midwest, he said.

“We have taken an optimistic view that as investor demand starts to drop off, we’ll see improvement in organic demand,” Diggle said. “If we don’t see anything by the middle of the year, we’ll be changing our outlook.”

One sign things aren’t all bad: D.R. Horton Inc. (DHI:US), the largest U.S. homebuilder by revenue, yesterday reported earnings and orders that beat analyst estimates. The company is experiencing “solid demand,” Chief Executive Officer Donald Tomnitz said. The shares jumped 8.3 percent.

The broader cooling trend follows a decade of market turmoil. The housing bubble, fueled by lax subprime lending from 2004 to 2006, led to the biggest bust since the Great Depression. Prices fell 35 percent from their July 2006 high and 5 million owners went through foreclosure, many of them still ineligible to qualify for a mortgage. After rebounding from a March 2012 low, the S&P/Case-Shiller index of 20 cities is at 2004 levels.

‘Flat-Lining’

The recent slowdown in sales is making Moody’s Analytics Inc. Chief Economist Mark Zandi “nervous” about his projection that job growth and wider credit availability will push existing-home sales up 5 percent and new-home sales up 40 percent this year.

“I hadn’t expected this type of flat-lining in the housing market for this long,” Zandi, who’s based in West Chester, Pennsylvania, said in a telephone interview. “Investors have driven the market since the turn, back in early 2012, and investor demand is petering out.”

Investors who swooped in to take advantage of low prices -- including companies such as Blackstone Group LP (BX:US) and American Homes 4 Rent (AMH:US) buying homes to turn them into rentals -- have retreated as costs rise and fewer distressed properties come to the market. The share of individual investor purchases declined in March to 17 percent, the smallest for that month in data since to 2008, according to the National Association of Realtors.

Less Distress

Foreclosures and short sales, in which the borrower sells for less than what’s owed, accounted for 14 percent of March transactions, down from 21 percent a year earlier, the group said. The pipeline is shrinking, with mortgage delinquencies and foreclosure starts hitting their lowest points in March since 2007, according to Black Knight Financial Services.

Early figures show purchases in the first quarter by investors with at least 10 rental houses fell 57 percent from a year earlier, according to a presentation by CoreLogic. Blackstone, whose Invitation Homes unit invested more than $8 billion in 43,000 homes, slashed its buying pace by 70 percent from last year’s peak, Jonathan Gray, the New York firm’s global head of real estate, said in March.

South Florida

Fewer investors in South Florida are fishing in the shrinking pond of discounted foreclosures and distressed homes, according to Danny Kattan, principal at Property Investment Advisors Group USA, a Miami-based landlord with 600 rental homes and apartment units. He said he buys 10 to 15 homes a month, about half the pace of last year.

“There’s no lack of money,” he said in a telephone interview. “There’s a lack of opportunities.”

Miami prices have risen 31 percent from an April 2011 low, the S&P/Case-Shiller index shows. The number of delinquent mortgages in Florida fell 34 percent in the year through March, according to Black Knight.

In Arizona, where investors have helped drive a 44 percent increase in home prices in the past two and a half years, “momentum is gone,” said Jim Belfiore, president of Belfiore Real Estate Consulting LLC in Phoenix.

“The market has been deteriorating since June of last year,” Belfiore said. “It started with the significant interest rate increase and it was at the same time new home prices were going up at 1 percent on a monthly basis. It shocked some buyers and sapped some momentum from the housing market.”

Sales Decline

Phoenix-area sales fell 26 percent in February from a year earlier and total spending on homes fell 16 percent, according to a report this month by the W.P. Carey School of Business at Arizona State University. Investors bought 20 percent of homes, half their July 2012 peak share of the market, the report showed.

Other areas are being affected by tight supply more than declines in demand. Sales in the San Francisco Bay area fell 13 percent in March from a year earlier as prices climbed 23 percent, according to research firm DataQuick, a unit of CoreLogic. Bay Area cities Oakland, San Jose and San Francisco had the fastest-moving housing markets, with about 70 percent of listings selling within two months, Trulia Inc. said.

Dallas Boom

A shrinking number of listings slowed sales in the Dallas-Fort Worth area, which has one of the strongest U.S. job markets, according to James Gaines, a research economist at Texas A&M University. Sales fell 4 percent in March and 2 percent in the first quarter from a year earlier, according to data Gaines collected for the North Texas Association of Realtors.

The Texas region’s new home supply is limited because builders can’t hire enough construction workers and haven’t developed enough lots to meet demand, Gaines said. Many first-time buyers can’t qualify for a new home mortgage, he said, leading builders to focus production on move-up buyers.

“There’s very little entry-level housing being built,” Gaines said in a telephone interview from Waco. “They found that their profit margins and their business model works better if they build more expensive houses.”

Denver was the fastest-selling U.S. market in March as homes sold after an average 25 days on the market, down 32 percent from a year earlier, according to Realtor.com, a unit of Move Inc. The number of listings fell 20 percent.

Losing Out

Wendy Nelson spends about 90 minutes a day online looking for a house in the Denver suburb of Highlands Ranch. She’s toured 10 homes since March and made one offer for a house that she lost to a higher bidder.

“It’s so frustrating,” Nelson, 51, a sales representative for pharmaceutical maker Genentech, said in a telephone interview. “There’s not much out there and if there’s something you might consider, it’s gone in an hour.”

Nelson would like to buy a smaller home with a lower mortgage payment than the 4,600-square-foot (427-square-meter) house she bought in 2010, moving before her daughter goes to college in two years. A lot of what she sees in her price range under $450,000 isn’t worth a look beyond the Web. A bank-owned home that she described as “horrific” and “disgusting” had a $439,000 asking price.

“I’m like, ‘are you kidding me?’” Nelson said. “Some people are getting a little crazy saying, ‘It’s a seller’s market. We can get what we want.’”

Builder Offer

The story is quite different in Arizona. In late 2012, Amber and Ben Hodge, working with Realtor Mike Caruso, quit their search to buy a home in Queen Creek, about 38 miles (61 kilometers) southeast of Phoenix, because competition was so heavy that agents for sellers didn’t even bother to call back when they made offers.

This year, homebuilder William Lyon Homes (WLH:US) allowed the Hodges to choose from three nearly-finished houses in the layout they wanted and held one of those off the market for 10 days while the family completed the sale of their previous home. The builder agreed to kick in $5,000 toward closing costs.

The Hodges and their two sons plan to move next month into a 2,300 square foot property at The Villas at Hastings Farm, said Amber Hodge, 34, whose husband retired from the Army after being injured in Iraq.

“It’s nice being a buyer in this market because there are so many options,” she said.

To contact the reporters on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net; Prashant Gopal in Boston at pgopal2@bloomberg.net

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net; Vincent Bielski at vbielski@bloomberg.net Rob Urban


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