Systemic First-Time Home Buyer Problems Persist

By rchrisman@robchrisman.com

(Thank you to Stephen S. for this one.)

A farmer and his recently hired hand were eating an early breakfast of biscuits and gravy, scrambled eggs, bacon and coffee that the farmer's wife had prepared for them. Thinking of all the work they had to get done that day, the farmer told the hired man he might as well go ahead and eat his lunch too.
The hired man didn't say a word, but filled his plate a second time and proceeded to eat. After a while the farmer said, "We've got so much work to do today, you might as well eat your supper now too."
Again, the hired man didn't respond but refilled his plate a third time and continued to eat. Finally, after eating his third plate of food, the hired man pushed back his chair and began to take off his shoes.
"What are you doing"? the farmer asked.
The hired man replied, "I don't work after supper."

A Brad Pitt & Angelina Jolie split? Say it ain't so! It should be a private matter, but think of all the time they, and the press, invested in their relationship! What person in lending hasn't spent numerous hours on a loan, project, or deal, only to have it evaporate, leaving them to wonder, "What now? Who's going to pick up the pieces? Was it worth it?" Well, you're not alone

In some parts of the nation Hispanic home ownership is being watched very carefully, and lenders in those areas are very keen on capturing that business. Along those lines the National Association of Hispanic Real Estate Professionals (NAHREP) released an English-Spanish "Glossary of Real Estate Industry Terms," or, what I prefer to say, "Terminos de la Industria Inmobiliaria." "Unlike other glossaries, the English-Spanish Glossary of Real Estate Industry Terms provides both the technical translation for each term and colloquial terminology which are most often used by customers and practitioners."

 "In a recent NAHREP survey, top producing Latino agents and loan officers indicated that 40 percent of their transactions make use of Spanish at some point in the transaction, and as much as 25 percent of all transactions utilize Spanish exclusively as the means of communication with their clients."

 How about the flip side of this discussion? It is well known that buying real estate in good locations is a worthwhile investment because they aren't making any more land. Long term there's a very good chance your investment will increase. So, how about buying some real estate in Latin American countries? What are the top Latin American cities for real estate investment? Live and Invest Overseas came out with a new survey looking at just that. "A strong dollar coupled with expanding middle classes in some markets and windows of crisis opportunity in others make this is the best time in a decade to diversify into foreign real estate, specifically in Latin America," said Kathleen Peddicord, author and publisher of Live and Invest Overseas.

 The survey found that Cali, Colombia, as the most affordable on a per-square-meter basis. How this survey was conducted was it considered the cost in each market of a two-bedroom apartment of 75 to 100 square meters. Cali offers high-end gated communities in a country setting with a lively downtown. Next on the list in Granada, Nicaragua, followed by (yes) Medellin, Columbia. While many people associate this beautiful place with Pablo Escobar it is actually a pleasant city with parks and gardens. On the opposite side is Punta del Este, Uruguay, the most expensive. "Factors to consider when targeting a market for investment include the strength of the local economy, the rate of foreign investment, the diversity of the pool of buyers for eventual resale, the opportunity for rental yield, recent and planned infrastructure improvements, and, of course, price."

 Returning to the United States of America, historically speaking about a third of all home buyers are first time home buyers. As noted above, in some parts of the country the Hispanic segment is growing dramatically. And low interest rates and an improved job market have created a wave of prospective first-time home buyers - if they can find starter homes. Even IF builders can find land, and IF the fees and permit process is not too onerous, then they are often stymied by a lack of skilled construction labor. Nationwide, the inventory of homes costing $250,000 or less fell more than 12 percent between June 2015 and June 2016, according to the National Association of Realtors.

 The shortage stems from higher labor, land and building permit costs that have caused construction companies to focus on higher-end homes that bring more profit. In addition, institutional investors have sucked up the affordable homes by the thousands in select markets nationwide and converted them to rentals. Starter home inventory in key markets has really declined.

 But that's the supply. What about the demand? Younger workers and new families need a place to live, but do things work out credit-wise? Real average hourly wages of often debt-laden college graduates fell between 2000 and 2014, according to the Economic Policy Institute, while the Case-Shiller U.S. National Home Price Index jumped more than 25 percent, adjusted for inflation, over the same period.

 The fabled bidding wars have quieted down slightly, based on what I am hearing, in many areas. Families with kids are staying put for the school year. But over the past four years, the number of entry-level homes for sale (priced in the lower third of a local market) has fallen by 34 percent, according to a Reuters analysis of data compiled by listings firm Trulia. The market is even tighter in many cities like Salt Lake City (where the average number of starter homes on the market has fallen by 83% since 2012), San Diego (down 71.5%), Cambridge, Mass. and Portland OR (dropping more than 60%).

 Loan officers know that the current rental market in some places is actually their friend due to rent prices. The Census Bureau tells us that between 2006 and 2014 the number of single-family homes occupied by renters jumped by about 34 percent. Of course after the housing crash, institutional investors rushed to buy undervalued and foreclosed homes and convert them to rentals. Corporations or companies now own nearly one fifth of all homes priced under $300,000 that are not occupied by their owners, according to property data firm ATTOM Data Solutions, parent of RealtyTrac, though investor purchases have slowed since peaking in 2013.

 Reuters reports that "at least five publicly traded real estate investment trusts in the U.S. exclusively own single-family rental homes. American Homes 4 Rent (the largest publicly-traded REIT dealing in single-family homes) owns nearly 38,000 properties in more than 20 states. Blackstone has invested $8.7 billion in its 45,000-home portfolio since founding it in 2012."

 "Student debt?" you ask? Outstanding student loan debt totaled $1.2 trillion in the fourth quarter of 2015. Yowza! According to the NY Fed this is trailing only mortgage debt among all consumer debt categories. The average student loan monthly payment has jumped 50 percent in constant dollars, to $351, over the last 10 years. A survey released in June by the NAR found that 71 percent of non-homeowners who carry student debt said it had delayed them from buying a home. But heck, isn't that kind of obvious? How about those carrying any debt at all? Remember the source...

 As student loan debt has mounted and young-adult homeownership rates have fallen over the past decade, considerable attention has focused on the nexus among student loans, education, and homeownership. But most believe that the benefits of attaining a college education outweigh the downsides of student loan debt when it comes to achieving homeownership. (When did "achieving" become attached to buying a house?)

 What about Mom & Dad helping out? The intergenerational channels by which parental resources affect their children's homeownership status have not been fully separated from the roles of their children's education and other endowments. Parental wealth enhances children's chances for homeownership through direct financial assistance around the time of home purchase. But don't forget parents ponying up the money for college in many cases. And then higher education supports higher earnings and thus provides a financial foundation for buying a place of their own.

 Fannie Mae weighed in. "Without knowledge of parental resources, children's educational attainment might assume an exaggerated importance in homeownership achievement. If, however, education has an effect that is independent of parental resources, it would suggest that public policies to promote higher education could have the added benefit of promoting greater homeownership attainment.

 "Perhaps the most striking finding of the study is how little the education effect on homeownership is dampened when parental resources are controlled. Including parental endowments reduces the association between education and homeownership for adult children by less than 2 percentage points. This finding suggests that the educational boost to homeownership is largely independent of the parental resources that may have helped increase education. The implication of finding this independent education effect is that homeownership attainment could be increased via policies that promote higher education and increase human capital."

 Switching to interest rates, it was pretty quiet out there in the ol' bond market Tuesday as the financial press continues to focus on the results of the Federal Reserve's Open Market Committee meeting due out later today. In one corner you have recent financial news showing that the U.S. economy is doing well, but not great, and the world's economies which aren't doing much of anything. And in the other corner you have the presidents of the various Fed districts, basically saying, "Don't be surprised if you see a short term rate increase." And although it seems like the Japanese economy hasn't done much in decades, especially as its population continues to decline, we will also have the Bank of Japan's decision on that country's rates.

 For those numerically inclined, Tuesday the 10-year note price improved nearly .125 closing at 1.69% whereas 5-year T-notes and agency MBS prices were pretty much unchanged.

 The highlights of the week will surely be today's Bank of Japan and FOMC decisions. The BoJ is switching away from its previous bond-buying goals in favor of a 10-year interest rate target near zero percent.

 The FOMC will release its statement at 2PM ET, 11AM PT, followed by Fed Chair Yellen's press conference. The market is expecting the Fed to leave rates unchanged despite mostly hawkish rhetoric from the majority of Fed speakers. We've seen the MBA's number crunching on 75% of last week's retail applications (apps fell over 7% with refis down 8%). Tuesday the 10-year closed at 1.69% and this morning it is sitting around 1.68% with agency MBS prices close to unchanged.