The Housing Bubble

The San Francisco Chronicle reports from California. “We’ve heard it over and over as people lament the high price of housing in the city: that the theory of supply and demand doesn’t apply when it comes to the San Francisco real estate market. Tell them that in South of Market. SoMa, and particularly Mission Bay, have experienced dramatic development, adding thousands of units of new rental housing. And the result? ‘It’s basically a tenants’ market right now,’ says Climb Real Estate agent Elizabeth Kim, who says she has an unprecedented 20 vacant units she’s trying to rent. ‘Usually at this time of year we’re really busy. But now people are not snapping things up. We’re not getting the multiple offers.’”

“As my colleague, Kathleen Pender, wrote in June, there is an unmistakable softening of the rental market in SoMa, South Beach, Potrero Hill and Mission Bay, and large rental developers are bending over backward to attract renters. They have to, says Mark Choey, one of the founders of Climb Real Estate. ‘Demand is probably the same, but supply has shot up dramatically,’ he said. ‘There are hundreds, if not thousands, of empty units.’”

“A potential renter at One Henry Adams said she and her husband decided to move to Mission Bay and gave their Richmond District landlord one-month’s notice. ‘And when our landlady couldn’t get anyone to rent at our rate, she dropped our rent significantly,’ she said.”

“Another trend to watch is that of independent landlords getting out of the business of using their properties as rental income. Choey tells of such a property owner who had been getting $6,000 a month for a luxury two-bedroom SoMa unit — until his tenant moved out. ‘He tried to rent it at $4,000 a month, but couldn’t get it,’ Choey said. ‘So he’s decided to sell while prices are high. It could be that if they can’t get the rent they want, more landlords are going to sell.’”

The Elko Daily Free Press in Nevada. “After weathering apartment crunches in boom times over the years, Elko now has enough apartments to more than meet demand. New construction in the past five years has added hundreds of apartments, and the Ruby Vista Apartments development still has more to be finished in the near future. The abundance of rentals has spurred competition that is stabilizing or bringing down rents, as well as spurring incentives to fill vacancies, but apartment complex managers and real estate experts have differing opinions on whether apartment developers have overbuilt in Elko.”

“‘It’s a renters’ market right now. You see for-rent signs all over town,’ said Sandy Wakefield of Sandy’s Castles, which manages 265 rental properties in Elko, Spring Creek and Carlin. ‘We have more rentals than needed right now.’”

“Cathy Rich, manager of the Parkway Apartments said Elko is ‘overloaded on apartments right now,’ with not that many construction workers coming to town. ‘I can adjust rates to stay full,’ Rich said, explaining that newer apartment complexes can’t lower rent because there are more costs and mortgages to pay. Parkway has 100 units.”

“Kelly Zornes, manager of the newer Copperwood Apartments on North Fifth Street, agreed that Copperwood ‘can’t really lower rents because we have all our bills and mortgage to pay. We’re not even two years old.’ Copperwood’s occupancy stays pretty steady, but the complex has never been fully occupied because ‘the boom left before we finished the building. I feel we are overbuilt, to be honest,’ Zornes said.”

KHOU in Texas. “What’s bad for landlords may be a boon for Houston renters. We have new numbers on how an apartment glut is impacting availability. ‘There’s a greater availability than there is a demand,’ said Realtor Andrew Weiland with ULR Properties. Weiland is in the business of locating living spaces. ‘They had to project it would take a couple of years to complete these projects,’ said Weiland. ‘And within that time frame, things just kind of went downhill,’ he added.”

“A map made using data from apartment search website RentCafe shows the more than 16,000 new units that were expected to open in the city of Houston alone in 2016. But as apartments rose, the Greater Houston Partnership and others report job growth slowed. That was due, in large part, to the oil industry slump. So, it left with a lot of new apartments sitting empty.”

“‘So, a lot of apartment communities are offering specials,’ said Weiland. ‘8 weeks free, I’ve seen up to 12 months free,’ he added.”

A report from Market Watch. “While the days of ‘NINJA loans’ (no income, no job, no assets) are for the most part gone from the American mortgage marketplace, at least one housing think tank says the pendulum has now swung too far in the other direction and made it harder for many Americans to get a mortgage. According to the Washington, D.C.-based Urban Institute, the pool of mortgage loans made between 2011 and 2015 have even lower default rates than the more ‘normal’ lending period of 1999 to 2003, when less than 2% of the loans defaulted after 10 years.”

“Only ‘the best borrowers are getting loans today and these loans are so thoroughly scrubbed and cleaned before they’re made that hardly any of them end up going into default,’ wrote Laurie Goodman, co-director of the Urban Institute’s Housing Finance Policy Center. ‘A near-zero-default environment is clear evidence that we need to open up the credit box and lend to borrowers with less-than-perfect credit,’ she wrote.”

“The Mortgage Bankers Association’s credit availability index, which tracks the relative ease (or difficulty) of obtaining a mortgage by factoring in data such as credit scores, guidelines from institutional loan buyers and appetite for risk, shows that while credit availability has dramatically increased since 2011, it has plateaued since the middle of last year, and is well below the levels of 2004, the last ‘normal’ year of lending and credit scores.”

The New York Times. “Mortgages to borrowers with spotty credit histories have yet to come roaring back from the financial crisis, but they are on the rise at the private equity giant Lone Star Funds. Its wholly owned mortgage business, Caliber Home Loans, is one of the few financial firms to report a significant percentage increase this year in the dollar value of subprime mortgages it is managing and servicing for homeowners.”

“Most of the subprime mortgages at Caliber are ‘legacy’ loans, those issued before the housing bust, which Lone Star acquired from banks and federal agencies. But Caliber is also one of the few lenders beginning to issue mortgages to borrowers with less than perfect credit records and to issue bonds backed by those loans.”

“Caliber, a firm that Lone Star began cobbling together nearly four years ago, is now one of the fastest-growing mortgage finance firms in the country. Its portfolio of subprime mortgages increased about 14 percent, to $17 billion, in the last year, according to Fitch Ratings. Mortgages to borrowers with shaky credit histories account for 18 percent of the $93 billion in mortgages that Caliber manages and collects payments on from homeowners.”

“In June, Fitch reviewed and rated the first securitization of nonprime mortgages Lone Star brought to market, a $161 million bond offering backed by nearly 400 mortgages, which is one of the largest securitization of nonprime mortgages since the financial crisis. In its review, Fitch noted that the ‘credit quality of the borrowers is weaker than prime.’”

“Now, Lone Star plans an even larger bond offering backed mainly by nonprime mortgages written by Caliber. In a Sept. 6 pre-sale ratings report, Fitch said the newest $217 million securitization will be backed by 501 mortgages.”

The Australian. “The biggest market in the US, real estate, makes a mockery of the country’s reputation as a bastion of free enterprise. The level of government interference in the $US26 trillion ($34 trillion) US housing market, worth 40 per cent more than it was five years ago, continues to rise automatically and with little scrutiny.”

“The toxic subprime loans that spread around the world stoking the 2008 financial crisis have evaporated. But in their place a new socialisation of mortgage risk has emerged, underpinning surging house prices and increased borrowing. Prices in Denver, Seattle and Portland are rising at Sydney-style double-digit annual pace, while US house prices overall have been rising about 5 per cent a year since 2012. Texas house prices are already 20 per cent above their 2006 peak.”

“‘Our nationalised home lending system is an economics-free zone,’ says Edward Pinto, a scholar at the American Enterprise Institute with 42 years in the industry. ‘It’s a frog in a pan on slow boil: we have the unseemly situation of low-capital government entities competing with each other to underwrite risky loans. This will continue until it can’t, which could be 12 or 15 years away.’”

“Chastened by billions in fines and tougher regulations, the US banks have almost vacated the field and now originate fewer than one-fifth of new home loans. Quicken Loans, a Detroit finance company, for instance, is about to overtake banking giant Wells Fargo as the biggest US home lender. Already more than 60 per cent of the $US10 trillion in US mortgages outstanding are directly or indirectly insured by the US government, or a smattering of New Deal and 1960s-era agencies with varying degrees of government ownership and control.”

“These loans are packaged up and sold to investors, such as large pension and mutual funds, all around the world. And this share is growing, with about 90 per cent of new loans guaranteed by these agencies — up from about 80 per cent a decade ago. ‘The vast majority of mortgage risk is now directly borne by US taxpayers with basically no capital standing behind it,’ says Mark Calabria, a financial regulation expert at the Cato Institute.”

“Even the US Federal Reserve is helping prop up demand. It holds $US1.7 trillion in mortgage-backed securities. While the quantitative easing programs that instigated the build-up have finished for now, the Fed still buys about one-quarter of new mort­gages issued to maintain its existing stock.”

“Investors wouldn’t be so keen if credit quality mattered to them. But it doesn’t. These loans are insured or guaranteed by one of Fannie Mae, Freddie Mac or Ginnie Mae. As long as they conform to increasingly generous limits laid down by regulation, these agencies will guarantee — for a fee of less than 0.7 percentage points, which ultimately is passed on to the borrower — interest payments and principal.”

“‘Most of the benefit doesn’t go to bring in more borrowers, a large portion of it goes to higher prices for the sellers,’ says Pinto. The system doesn’t appear to have helped home ownership much, though. The US home ownership rate has steadily fallen from 69 per cent in 2004 to 63 per cent, the lowest level since the 60s.”

“Nevertheless, borrowers believe they are getting an excellent deal. US households can borrow for 30 years fixed at 3.5 per cent, which is less than many sovereign governments have to pay. More than 80 per cent of mortgages outstanding are of this type, a feature extending back to the 30s when congress first stipulated the duration of loans that Fannie Mae would insure.”

“Intended to be temporary, the agencies’ loan limits were relaxed significantly in the wake of the financial crisis, but they remain high and are about $US625,000 in many parts of the US. ‘A more cynical interpretation is that people like (congress members) Barney Frank and Nancy Pelosi wanted to see more of the housing markets in their own districts (California and Boston) covered,’ says Calabria.”

“Not surprisingly, the average loan to valuation ratio has crept up from 80 per cent to 86 per cent since the financial crisis. While US banks have roughly doubled their capital levels (albeit from not very much) to more than $US1.1 trillion since the financial crisis, Fannie and Freddie and the Federal Housing Authority — which insures the loans that Ginnie Mae packages up and sells — have little meaningful capital. If swathes of loans default, taxpayers will be picking up the tab.”