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Opinion, commentary, and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
Servicing

Dealing with one housing bubble at a time

HELOCs and other factors constrain housing “recovery”

April 30, 2015

For those who are skeptical about my belief that there is more bad news headed our way with respect to housing in America, or who criticize me for seeming to be so pessimistic along the same lines, I simply say, I don’t make this stuff up.

I do pay attention to the signs, however, and we could be risking more than one housing bubble.

For example, according to RealtyTrac, as has been reported in various media, millions of Americans will soon see monthly bills increase on home equity lines of credit taken out during the ill-fated housing boom. This is because HELOCs are going to soon begin to make homeowners pay both principle AND interest. It is estimated that 58% of HELOC balances are due to start amortizing between now and 2017.

To RealtyTrac and many industry analysts, that's bad news since many consumers are already underwater. In fact, again, according to RealtyTrac, the share of seriously underwater homeowners increased 0.4 percentage points in Q1 of this year compared to Q4 of 2014, reaching 13.2% of all properties with a mortgage. This was the first quarterly increase in the underwater mortgage rate since the second quarter of 2012.

With home prices rising in many markets across the country over the past many months, it was predicted by many industry observers that HELOCs might not pose as big a problem as it did just before the housing bubble burst in 2008. That’s when so many homeowners, especially in hot markets like California, Arizona, Nevada, and Florida, had used their rapidly increasing home equity as a kind of ATM. But in many other markets today, home prices have stalled or have even declined, bringing worries about many thousands of HELOCs made during the boom years back to the fore.

And now, RealtyTrac predicts that as the average HELOC borrower's ten-year interest-only period ends, that person's or family’s monthly bill will perhaps more than double from $133 to $279. Not a huge sum in and of itself, but with rising prices of other goods and services combining with stagnant wages and continued unemployment and underemployment woes, this could pose a serious problem.

However, in some markets such as California, where home prices have skyrocketed, some monthly payments could rise by more than $1,000.

Other considerations to ponder with regard to housing woes were articulated recently by Pamela Patenaude, president of the J. Ronald Terwilliger Foundation for Housing America’s Families, in an article published by HousingWire, “Do millions of Americans face impending housing peril?”

In her analytical commentary, Ms. Paternaude pointed to recent U.S. Census Bureau news that the national homeownership rate now stands at a paltry 63.7%. According to the author, this marks the sixth consecutive quarter in which this important rate has declined. And this represents a more than five percent drop since 2004 when it peaked at 69.2%.

Even though it is true that the foreclosure rate has dropped significantly over the past several years, it is also true that countless thousands of individuals and families continue to choose renting over home ownership.

In many cases, this is less a choice than the only alternative, since underwriting standards have been raised and student loan debt makes saving for a down payment that much more difficult for young potential buyers.

Multi-family and other rental properties have experienced rapid increases in rents over the past couple of years, partly due to the mass migration of former homeowners to rental units because of the afore-mentioned reasons, but also due to the rise in institutional investors and others wanting to capitalize on the single-family rental asset class.

It is also due to a lack of housing starts for new single-family homes because new home builders have only recently gained confidence in housing making a comeback. With demand comes rising prices.

Ms. Patenaude predicts that many millions of individuals and families are going to find themselves stuck between homeownership for which they will have difficulty qualifying and a rental market that they can probably no longer afford – particularly low income individuals and families.

This could reach crisis proportions.

I share her prediction to a point, encourage her request for solutions and have tremendous empathy for these Americans.

But, I also see that since Fannie Mae, Freddie Mac and the FHFA are looking to make home ownership easier by lowering down payments on mortgages, and looking at alternatives to FICO scores — in addition to the already proliferated share of the mortgage market that riskier FHA loans now represent — there are growing signs that the so-called housing “recovery” has not only been illusory, and also that the “mirage” was short lived.

Considering the impending HELOC resets, is opening up credit to riskier buyers really a good idea at this moment? 

If so, then we must do so with more caution. We don't want to inflate a housing bubble, right as another one is about to burst.

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