Value of U.S. Housing Market Hits Another All-Time High

Posted on October 29th, 2020

In the second quarter of 2020, the U.S. housing market hit an all-time high of $32.8 trillion, per The Federal Reserve’s Flow of Funds Report, as referenced in the latest Monthly Chartbook from the Urban Institute.

That was up from roughly $32.4 trillion in the first quarter of 2020, thanks to an increase in home equity from $21.1 trillion to $21.5 trillion.

Meanwhile, outstanding mortgage debt remained steady at $11.3 trillion, which tells us most borrowers are paying down existing mortgages and/or applying for rate and term refinances to lower monthly payments.

And that’s a good thing because it means most homeowners aren’t overleveraged like they were back in 2006, before the housing crisis ushered in the Great Recession.

Looking at it a different way, American homeowners have a collective loan-to-value ratio (LTV) of about 34%.

The Housing Market Appears to Be Healthy Despite Record Home Prices

value of housing market

  • U.S. property values continue to rise as mortgage debt keeps falling
  • American homeowners have a collective loan-to-value ratio (LTV) of about 34%
  • Mortgage debt is essentially unchanged from 2006 while home values have risen nearly $8 trillion
  • This means today’s homeowners are in good shape overall, but it’s harder for new buyers to enter the market

While one could always express caution when prices hit all-time highs, you’ve got to consider more than just the price.

More important is to look at housing affordability and the debt held by existing homeowners.

Fortunately, U.S. homeowners only carry a collective $11.3 trillion in mortgage debt, which appears to be flat or even lower than total housing debt back in 2006.

There are several reasons why today’s homeowners are carrying a lot less mortgage debt. For one, most haven’t tapped their equity.

Very few homeowners these days have applied for cash out refinances or pulled equity via home equity line of credit or home equity loan.

cash out share

Instead, they’ve been paying down their home loans each month, enjoying tailwinds propelled by record low mortgage rates.

Simply put, homeowners owe less and pay more in principal with each monthly payment, creating a housing market that is less leveraged.

This is a good thing for individual households and for the housing market as a whole because it means borrowers aren’t overextended, and have options if they’re unable to keep up with monthly payments.

A decade ago, mortgage payments often weren’t affordable because of so-called exploding ARMs that reset much higher after the borrower enjoyed an initial teaser rate.

And because they didn’t have any skin in the game, aka home equity, they couldn’t refinance to seek out payment relief.

That led to a flood of short sales and foreclosures, and eventually the creation of widespread loan modification programs such as HAMP and HARP.

Today, even if a homeowner falls behind due to COVID-19 or another setback, they could potentially sell for a tidy profit and move on.

This protects both that individual and their local housing market, which might otherwise suffer from declining property values due to the presence of distressed home sales.

In summary, this is why today’s housing market is very different than the one we experienced more than a decade ago, despite some economists seeing home prices in “bubble territory.”

But What About Housing Affordability Today?

  • Mortgage affordability has actually improved in recent years despite surging home prices
  • Existing homeowners typically spent 17.5% of household income on their monthly housing payments in September, down from 19.6% two years ago
  • Low mortgage rates are improving affordability, but rising down payments are hurting prospective buyers
  • Property values have grown at 2X rate of incomes over the past six years, and typical U.S. home now worth 3.08 times median homeowner household income

It’s great that existing homeowners are enjoying record low mortgage rates and equally affordable housing payments, but what about prospective home buyers?

Well, housing affordability has actually improved since 2018 due to the ultra-low mortgage rates available, per a new analysis from Zillow.

This is despite the fact that home values have grown at about double the rate of incomes over the past six years.

While households typically spent just 17.5% of income on monthly housing payments in September, down from 19.6% two years earlier, the typical U.S. property is now worth 3.08 times median homeowner household income, an all-time high per Zillow.

In other words, monthly payments are cheap for existing homeowners, but their properties are valued well above their incomes.

They remain affordable because many of these homeowners have small mortgage balances and super low mortgage rates.

But if these same folks were to buy their homes today, it might not work out, which brings us to those prospective buyers, or Gen Z home buyers.

Zillow noted that home values have increased a whopping 38.3% since September 2014, while homeowner incomes have gone up just 18.8% over the same period.

If a home buyer puts down 20% on a median-priced property they would have only needed about $36,600 at the start of 2014, or 6.4 months of income for a median homeowner household.

Today, they’d need a $52,000 down payment, which is 7.5 months of income for that 20% down payment to avoid PMI and obtain a more favorable interest rate.

Even worse for those still renting, Zillow expects home prices to rise a further 7% over the next year, which would increase that required down payment another $3,600 to about $55,600.

This is essentially going to steer more new home buyers into low down payment mortgages, such as FHA loans that only require 3.5% down, or Fannie Mae HomeReady and its mere 3% down requirement.

While it at least gives them an option, they’re going to have higher mortgage payments as a result, due to a larger loan amount, higher mortgage rate, and compulsory mortgage insurance.

Additionally, they’ll have very little skin in the game, which could present a problem if home prices take a turn for the worse, as they did a decade ago.

The good news is the bulk of homeowners are sitting pretty on mounds of equity, so assuming cash out refis don’t become the next big thing, the overall housing market should be relatively safe.

Could Existing Homeowners Afford to Buy Their Properties at Today’s Prices?

One last thing. We’ve basically got this weird situation where a lot of existing homeowners probably wouldn’t be able to afford their same properties if they were to purchase them today.

However, they’ve got a ton of home equity that is only growing each month thanks to regular payments of principal and rising home prices, meaning more money is essentially locked in their properties.

At the same time, it makes a move difficult because even a lateral purchase would be pricey from an affordability standpoint when you factor in stagnant incomes and higher property taxes.

Or the fact that some of these owners are retired or not making peak income.

In the end, it further exacerbates an already difficult situation in terms of housing inventory, which has been on the record low end of things for quite a while.

That just points to even higher home prices and lots of equity accrual, which buffers the housing market, but makes it increasingly difficult for new homeowners to get into the game.

Source: thetruthaboutmortgage.com

Foundation Paying Off Mortgages of Fallen FBI Agents To Help Their Families>

The families of the two FBI special agents killed last week in Florida won’t have to worry about making their mortgage payments.

Tunnels to Towers Foundation, created in the wake of the Sept. 11, 2001, attacks to help the families of first responders killed in the line of duty, will pay off the remaining mortgage balances for the families of Laura Schwartzenberger and Daniel Alfin.

The special agents were killed attempting to serve a warrant last Tuesday in a child pornography investigation in Sunrise, FL. The FBI said the suspect, David Lee Huber, shot the agents through the door of his apartment before barricading himself inside and turning the gun on himself. Three other agents were injured.

Both Schwartzenberger and Alfin were married with children.

“These two FBI agents were two of the best of the best who helped stop the worst of the worst. Every day, [the agents] went to work and they kissed their spouses and children goodbye and tried to keep the rest of the children safe,” says Tunnels spokesman Trevor Tamsen. “We thought it was our responsibility to step up and protect the families they left behind.”

The foundation pays off the mortgages of fallen first responders who leave behind spouses and young children. They range from police officers and firefighters to emergency medical technicians and members of the military. The organization also outfits homes for catastrophically injured veterans.

“For most people, their mortgage payment is their greatest monthly burden,” says Tamsen. “Simply by lifting that burden, we hope to give these families time to grieve without having to worry about whether they’ll lose their home.”

During the coronavirus pandemic, Tunnels to Towers has been providing personal protective equipment and meals to front-line health care workers. The group has also been providing mortgage assistance to health care workers who have succumbed to COVID-19.

“These are the people who went to work when most of the country shut down,” says Tamsen. “These are the people who kept us safe.”

Tunnels to Towers was created by the family of Stephen Siller, an off-duty firefighter who died trying to save others in the Twin Towers on Sept. 11, 2001. The organization is funded by individual donations and corporate partnerships.

Source: realtor.com

Understanding the seasonal patterns of mortgage rates

Much like the changing of the calendar, buying and selling homes follows a seasonality that that those in mortgage and real estate have grown accustomed to. But a recent study from tech startup Haus found that mortgage rates can also be seasonal, and borrowers can benefit from understanding that rhythm.

Analyzing over 8.5 million mortgage originations between 2012 and 2018 from Freddie Mac’s Single-Family Loan-Level dataset, Haus found that the sweet spot for rates is typically in January, when mortgage originations also typically slump.

Ralph McLaughlin, chief economist at Haus, explained the correlation. “So, what do lenders have to do to be competitive? They lower their rates. But let’s look at when Treasury rates were dropping like crazy early in 2020. What that usually means is that mortgage rates would also drop like crazy. But at first, mortgage rates didn’t drop. And it’s because there was such a flood of people looking to refinance that lenders couldn’t keep up.

“They couldn’t keep up with demand and so if they couldn’t keep up with demand that allows them to keep their prices relatively high,” McLaughlin said.

2020 was an outlier, with mortgage rates dropping to record lows on 16 different occasions. However, many economists expect as the economy begins its post-pandemic recovery, rates will also begin to stabilize to a more predictable pattern.

“We forecast rates to remain relatively low this year as the Federal Reserve keeps interest rates anchored near zero for a longer period of time, if needed until the economy rebounds,” said Sam Khater, Freddie Mac’s chief economist.

If rates stay low, the Haus study estimates that borrowers buying houses between $400,000 and $500,000 are going to reap the greatest reward – averaging a discount of 23 basis points compared to cheaper loans. That’s because it costs the same to originate a loan that is half a million dollars as it does $200,000, but the latter doesn’t involve as much return.

“You’re not making as much as you would on that more expensive mortgage, obviously, in order to cover some of those fixed costs, so lenders actually increase rates on the lower end of mortgage originations.” McLaughlin said.

An updated market outlook from Zillow expects seasonally adjusted home values to increase by 3.7% from December 2020 to March 2021, and by 10.5% through December 2021.

But even if lenders do inflate prices on a lower mortgage, borrowers can gain an advantage by playing the field. Across the largest lenders in the country (the 100 largest by volume of originations), Haus found on average a 75-basis point spread between the most expensive and least expensive lender. Taking into account size of down payment, existing debt and credit score, the study found that for the same borrower, a potential mortgage rate could, for example, average anywhere from 3.25% to 4%.

So how do lenders retain a potential borrower if they can’t match the price? McLaughlin said they are speculating that the convenience and experience borrowers play may be a leading factor. Those lenders who invest in digital technology and digital documentation are going to have the upper hand.

“It’s like, how much are you willing to pay for a hotel? I don’t think there’s a Ritz Carlton of mortgages or a Motel 6 of mortgages, but nonetheless there is variation and even if a rate is cheaper, a lot borrowers are thinking about quality,” McLaughlin said.

Surprisingly, a borrower who lowers their debt to income ratio doesn’t move the needle much on rates. According to the study, borrowers with a DTI below 36% (considered a “good” DTI), on average have mortgage rates that are just 3-6 basis points lower than borrowers with a DTI above 43% (considered “high”).

That said, recent changes implemented by the Consumer Finance Protection Bureau have removed DTI requirements from qualified mortgages. Haus estimates the ongoing impact that DTI will have on mortgage pricing is also likely to fall.

Source: housingwire.com