Is American Real Estate Out Of The Woods?

For some time virtually all markers have pointed to an improving US real estate picture and yet there remains an undercurrent of unease. So are we out of the financial woods?

“The only factors holding us back from a stronger recovery are the ongoing issues of restrictive mortgage credit and constrained inventory,” according to Steve Brown, president of the National Association of Realtors. “With strict new mortgage rules in place, we will be monitoring the lending environment to ensure that financially qualified buyers can access the credit they need to purchase a home.”

The idea that real estate sales are somehow constricted and delayed by evil financial regulations and fussy lenders just doesn’t compute. According to a survey of some two million 2013 real estate closings, EllieMae found:

“The average closed loan FICO score fell to 727 in December 2013, down 21 points from December  2012.” A “closed” loan is not a mortgage application, it’s a loan where the lender said yes to the borrower and provided funds for settlement.

It took 43 days to close a loan in December 2013 versus 48 days a year earlier.

The average debt-to-income ratio (DTI) went from 23/34 in January 2013 to 25/39 in December 2013, meaning that it has become far easier to get a loan because lenders are allowing bigger allowances for housing costs and debts.

The numbers show that access to credit has become objectively easier and not harder. That said, there’s a problem with the financing system but it’s not rules designed to make the financial system less risky.

What’s the problem?

Income.

Home  values can only increase when borrowers can afford larger mortgages. Bigger mortgages are possible when mortgage standards are eased, mortgage rates fall or incomes rise. A look at recent data shows this is a case where two-out-of-three just isn’t good enough.

First, we know that mortgage standards today are more liberal than just a year ago — note the EllieMae finding that credit scores for closed loans dropped 21 percent in 2013.

Second, we also know that mortgage rates are down from the rates generally seen during the past four decades. Standard & Poors says mortgage rates during the last 40 years averaged 8.6 percent while interest levels at this writing are around 4.23 percent for 30-year, fixed-rate mortgages, literally half the rates typically seen by our parents and grandparents. With these rates borrower should be lined up at lender offices.

Third, income has stalled. The problem with the housing market isn’t the housing market; it is instead a profound economic dislocation.

The Brookings Institution reports that “more than one in six men between 25 and 54 years old — the prime working years — aren’t working. That’s 10.4 million men, more than double the population of the city of Los Angeles.”

It is, says Brookings, “one of the most alarming signs that the U.S. economy is still far from healthy.”

Even among those who are working the news is troubling because incomes have tumbled.

The median household income was $51,017 in 2012 according to the Census Bureau. That’s a whole $17 more than in 2011. It’s also 9 percent lower than in 1999, the year median household income peaked ($56,080).

If your income is stuck at $51,000 there’s only so much house you can buy. You can buy more if interest rates fall but interest rates today are closer to the 2012  historic lows than the averages of the past 40 years. You can also buy more if lenders lower their standards, but that’s an idea which leads to no-doc loan applications and toxic mortgages.

There’s evidence that despite pent-up demand and huge demand in some local markets that a slowdown has already begun.

Homeownership  peaked in 2005 at 69.2 percent, a statistic that fell to 65.1 percent in 2013. At the same time rental rates are at historic highs — good news for investors and grounds to suggest that the market remains generally tepid.

In fact, the National Association of Home Builders just reported that “markets in 58 out of the approximately 350 metro areas nationwide returned to or exceeded their last normal levels of economic and housing activity.”

Translation: Markets in 292 out of the approximately 350 metro areas nationwide did not return to or exceed their last normal levels of economic and housing activity.

With incomes limping along why would anyone expect otherwise? We’re not out of the  financial woods yet, an event that won’t happen until household incomes begin  to rise.

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