Three big predictions for 2014
FHFA activism, housing market slowdown and politics, politics, politics
The coming year may bring an intensely activist and somewhat partisan Federal Housing Finance Agency, a general slowing of the housing market’s growth compared to 2013, and a full-court press election-year push on key issues influencing the housing and investments markets.
None of these are exactly surprising in light of the mid-term federal election season, and indeed all three predictions are interrelated and driven by the coming Congressional elections.
For starters, the writing was on the wall early on that incoming FHFA director Mel Watt will bring a more activist agenda after the disciplined approach of his outgoing acting predecessor, Ed DeMarco. Even before he was confirmed back last summer, market watchers and congressional Republicans were concerned about Watt’s lack of regulatory experience and lack of interest in bringing free market reforms to Fannie Mae and Freddie Mac.
In an interview with HousingWire last July, Anthony Sanders, a professor of real estate finance at George Mason University, said investors and taxpayers should be concerned because he predicts that Watt will try to loosen the standards for Fannie and Freddie purchases even though unemployment remains problematic.
Indeed, unemployment now still remains above 7%, and the problems could be exacerbated by a stall out in hiring and business expansion brought on by the burdens of the Affordable Care Act. Sanders told HousingWire that without a real job market comeback and stronger economic recovery, any fuel poured onto the housing market is only going to cover or aggravate ongoing economic malaise.
Watt has not even taken his post and already he’s putting bringing his approach to bear. In mid-December he put the brakes on a modest plan to hike g fees and other rate increases proposed by DeMarco. DeMarco had pushed for a a 10 basis point increase charged to borrowers with mid-range or below credit scores and who don’t meet down payment criteria.
Such an increase would amount to a roughly $4,000 increase in interest on a 30-year, $200,000 mortgage, or about $11.11 per month. Watt would have none of it.
"Upon being sworn in as Director of the Federal Housing Finance Agency, I intend to announce that the FHFA will delay implementation of the g-fee and risk-based pricing plan announced in the FHFA's news release dated December 9, 2013 (and detailed more fully in the Loan-Level Price Adjustment Matrix released earlier this week) until such time as I have had the opportunity to evaluate fully the rationale for the plan and the plan's likely impact on the GSE's risk exposure, the cost and availability of credit and how the plan would interface with the qualified mortgage standards,” Watt said in a written statement on Dec. 19.
The Mortgage Bankers Association, among others, expressed concern that such a hike would have serious negative impact on housing sales.
Second prediction: the housing sector’s recovery will be slowing, regardless of what happens with g fees. It is already slowing, as recently detailed by Federal Reserve members.
With home prices climbing alongside mortgage rates and the new tighter lending standards embodied in the new Qualified Mortgage (QM) rules, a slowdown is inevitable in 2014. On top of that the pending tapering of the QE3, though modest, is already having an effect on interest rates. Add to that sales of new homes will likely outpace existing home sales, which is the vast majority of the market. The National Association of Home Builders, predicts that sales of new single-family homes will hit 607,000 in 2014, compared with an annualized rate of 464,000 in November. If sales of new single-family homes rise above 600,000 next year, the rate would remain below an average of more than 1 million over the five years leading up to a 2005 high point.
There is evidence there is pent-up demand and that purchasers are becoming used to a somewhat pricier sales environment, which will help sales. That’s the good. But all the upward pressure on rates put together and the enigma of whether there will be real job growth in 2014 in a weak recovery and with the Affordable Care Act looming over hiring decisions is what amounts to the bad.
The ugly in this is that it’s all happening in a crucial off-year election cycle. Democrats face an uphill battle as Republicans are seizing on the ObamaCare, and the polls show it will be a good strategy. As the Obama administration has run up a deficit in political capital almost as bad as its spending deficits, the White House needs to keep control of the Senate and needs to take back the House if it expects anything more than its final two years being all lame duck.
In short, Democrats need to do everything they can on the backend to avoid the drubbing that sitting presidents usually take in off-year elections – a drubbing made more likely by the unpopularity of the ACA in general and the current White House in particular.
Republicans, meanwhile, will be using every bit of bad news on unemployment and recovery weakness to trump the Democrats.
What that means is the White House will bring a tremendous amount of pressure on every agency in its reach to keep interest rates down so as to facilitate more home sales and less joblessness. That means pressure on the FHFA to push down fees and to dangerously loosen lending rules, and doing whatever it can – even if the fix is only temporary – to bolster job numbers.
Watt, already a partisan player, will be pushed to make it a buyer’s market and he will likely accede.
Meanwhile, incoming Fed Chair Janet Yellen a Keynesian economist and believer in the Phillips curve (that there is an inverse relationship between interest rates and unemployment), will be pushed to resume full QE3 for its effect on interest rates so as to put artificial downward pressure on unemployment.
Bottom line – what would already be a challenging 2014 is going to be made a lot more challenging and complex for investors, buyers, and employers because of the coming cut-throat political season.