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Brokers, Here’s Everything You Need to Know About Rocket Pro TPO

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Home appraisal’s ugly history and uncertain future

This is Part I of a deep dive into the home appraisal industry. Today we explore the origins of the appraisal industry and its current lack of diversity.

Loan quality lessons learned from 2020

HousingWire recently spoke with Trevor Gauthier, CEO of ACES Quality Management, about the effects of 2020 on loan quality and what lenders should expect regarding loan quality and risk management this year.


Who does the Fed think they’re fooling?

Dallas Fed says housing market is fine

The Federal Reserve Bank of Dallas says the housing market recovery has gained traction, and Americans have reason for cautious optimism about the housing market over the next few years.

Richard Fisher, president and CEO of the Dallas Fed, says that the housing recovery, combined with other positive economic data seen in 2013, is a good sign for this coming year.

"With a durable housing recovery at hand and the broader U.S. economy poised to further improve, we are confident that 2014 will bring new opportunities for the country," Fisher said.

The report, "The Long Awaited Housing Recovery" written by Dallas Fed vice president and associate director of research John Duca, highlights a number of indicators that the he says point to a stable, durable upturn in the housing market on a national basis, as well as what factors he says could shape the path of recovery in the coming years.

"While the U.S. housing recovery will probably continue for some time, its pace and composition will be affected by the nature of the labor market recovery, the movement of mortgage interest rates and the difficult-to-predict evolution of credit availability to prospective homebuyers and to homebuilders and developers," Duca said.

While there are some conclusions in the report drawn from incontestable data such as the growth in new starts and inventory levels, other elements of the report seem to be at odds with outside studies and information.

Homebuilding, Duca reports, is indeed weak and that’s backed by information from the National Association of Homebuilders, which admits homebuilding has been lagging previous averages but is slowly recovering.

"Nationally, home prices hit bottom in 2011. New construction tends to strengthen when existing-home prices rise relative to the cost of building new units. Not surprisingly, single-family permits — needed before building can begin — also started to turn around after prices bottomed out," Duca said in his report. "Nevertheless, with single-family permits still well below 1 million units a year, the homebuilding recovery has been tepid."

But where Duca concludes that home prices are in line with rental rates, there is definite divergence from other analysts. And he says that home prices, which are rising, are in line with incomes, which are definitely not rising.

Comparing the cost of owning a home to the cost of renting provides an indication of the short-term sustainability of the housing recovery. An unusually high price-to-rent ratio implies that house prices are expensive relative to renting.

When the housing market is in equilibrium and mortgage credit standards are steady, the ratio of house prices to rents should move inversely to real mortgage interest rates, Duca writes.

(Click here for the full Dallas Fed report.)

In his report, he says, home prices are aligned positively with rental rates, as this chart shows: 

"Comparing the cost of owning a home to the cost of renting provides an indication of the short-term sustainability of the housing recovery. An unusually high price-to-rent ratio implies that house prices are expensive relative to renting. The house price-to-rent ratio tends to be high when the inflation-adjusted perceived cost of owning is low," he notes.

But other analysts aren’t seeing that – in fact they see an alarming divergence between the two.

Ed Pinto, Resident Fellow and Codirector of the International Center on Housing Risk at the American Enterprise Institute, says home prices and rental rates are now diverging to the tune of 11%.

To put that deviation in perspective, Pinto said that 11% gap opened up in just six quarters. A pre-crash gap of the same size in 2002-2008 took twice as long to open, as the chart below shows:


"Housing prices versus rents is a reliable indicator," Pinto said. "We have taken the index back to 1983 and we find that for a period of 15-16 years the two indices were in synch. They started deviating in 1998 and the peak was 2008 when home prices crashed."

"When you start seeing a deviation like that, what that means is housing prices are growing unsustainable," he told HousingWire.

By late 2012, Pinto said, the indexes were back in synch. But, he says, as a result of QE and loose lending practices with very low down payment requirements, current policies are promoting a rebound in house prices that is beyond borrower income and growth in rents.

"That 11% deviation we have now occurred in six quarters – that same deviation happened in 13 quarters in early 2000s. We went from 3% to 12% and if that continues for another six quarters the deviation will grow to as much as 18% or 19%. Even unwinding slowly from 11% we know from history can be painful. Once you get to 18%, it takes a big drop to get back to the mean,” Pinto said.

The Fed’s Duca says that the Fed’s policies have appropriately pushed prices up.

"A necessary condition for the home construction recovery to continue is a sustainable home-price turnaround. This condition appears to have been met, considering evidence from several key measures: whether house price changes are consistent with the supply of existing units for sale; whether the house prices are sustainable in light of rents and real mortgage interest rates; and whether mortgage payments are affordable based on median income," he writes.

Pinto doesn’t disagree the policies have driven up prices – he just thinks they are artificially high, also driven by the affordable housing mandates that require smaller down payments.

"We are very likely creating another bubble," he said. "QE has driven up the prices of home and it done so needlessly," Pinto said.

Ironically, some observers note, this bubble pressure that raises home prices will likely also inflate rental rates.

As Charles Hugh Smith writes, "What few seem to realize (or discuss) is how rising home prices push rents higher. This is an entirely pernicious effect, as renters aren't getting any more 'home' for the higher rent–they're paying more money for the same shelter."

Smith said, "The standard-issue financial pundit (SIFP) has little interest in rents other than their role as income streams that support higher valuations for real estate investment trusts (REITs) and other tradable real estate securities. Rising rents reduce the discretionary income of renter households; since incomes have been declining in real terms for 90% of U.S. households, paying more rent leaves less income for everything else."

Peter Wallison, a senior fellow at AEI, was also a member of the Financial Crisis Inquiry Commission, said current lending standards will contribute to this. 

The Federal Housing Administration is requiring down payments of just 3.5%. Fannie and Freddie are requiring just 5%.

AEI’s National Mortgage Risk Index data shows that as of Oct. 2013, about half of those getting mortgages to buy homes but 5% or less down.

"When anyone suggests that down payments should be raised to the once traditional 10% or 20%, the outcry in Congress and from brokers and homebuilders is deafening," Wallison said. "They claim that people will not be able to buy homes. What they really mean is that people won’t be able to buy expensive homes."

He notes when down payments were 10% to 20% before 1992, homeownership stood steady around 64% but was less volatile because people bought homes they could afford.

(The AEI SlideShow can be viewed here.)

The Dallas Fed report says there's no bubble brewing.

Of course, outgoing Fed Chairman Ben Bernanke told Maria Bartiromo back in July 2005 that there was no national housing bubble back in July 2005, and the same to the Washington Post back in late October 2007.

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