The California Mortgage Relief program is expanding its reach again, hoping to aid more homeowners who fell behind on their payments during the pandemic.
Program officials announced Tuesday that aid would be extended to three new groups: homeowners whose mortgages had a “partial claim” or deferral, those who missed a second mortgage payment after June 2022, and those with a primary residence that includes up to four units. It also offered more aid to homeowners who had previously received help from the state.
One reason for the expansion is that the state has yet to spend most of the $1 billion in homeowner aid the federal government provided through the American Rescue Plan last year. Thus far, about 10,500 households — more than half of them earning only 30% of their county’s median income — have received an average of $28,137 from the program, for a total of just under $300 million.
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“Many California homeowners are still recovering from the financial hardships of the pandemic,” Business, Consumer Services and Housing Agency Secretary Lourdes Castro Ramírez said in a statement. “This program expansion will enable the state to assist even more homeowners who fell behind on their mortgage payments. Our primary goal is to keep families in their homes, prevent foreclosures, and assist homeowners on a stable path to financial recovery.”
Tiena Johnson Hall, executive director of the California Housing Finance Agency, said the agency talked to borrowers and loan servicers to figure out how to evolve the program. “This expansion represents months of careful consideration and creative solutions that make sure the most in need get help,” Johnson Hall said.
Volma Volcy, founder and executive director of the nonprofit advocacy group Ring of Democracy, said the most difficult thing has been getting eligible borrowers to take the state’s offer seriously. “They tend not to believe it because it sounds too good to be true. … This time it’s true,” Volcy said.
“I am imploring you: Come get the help, because it works,” he added.
Under federal law, households earning up to 150% of the median income in their county who suffer a pandemic-related financial hardship are eligible for up to $80,000 for past-due mortgage payments and up to $20,000 for missed property tax payments. According to the federal Department of Housing and Urban Development, 150% of the median income in L.A. County last year was $125,100 for a single individual and $178,650 for a family of four.
A few caveats: If you’ve already paid off your mortgage or tax debt, you can’t recoup that money by applying for state aid. Nor are you eligible for mortgage aid if your mortgage is a “jumbo” loan bigger than the limits set by Fannie Mae and Freddie Mac. Finally, you can’t obtain the state’s help if you have more than enough cash and assets (other than retirement savings) to cover your mortgage or tax debt yourself.
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Here’s a breakdown on the new targets for mortgage assistance.
Partial claim second mortgages and deferrals. Partial claims are a technique to help people at risk of losing their homes after missing several monthly payments on a loan backed by the Federal Housing Administration, the U.S. Department of Agriculture or the Department of Veterans Affairs. Rather than demanding larger payments to cover the past-due amount, the agencies encouraged lenders to split off the past-due portion into a second, interest-free mortgage. That way, a borrower could stay current by paying just their usual monthly payment.
The partial claim second mortgage could be ignored until the house was sold, the mortgage was refinanced or the first mortgage was paid off, at which point the partial claim would have to be paid in full. In the meantime, it’s a real debt that affects the borrower’s ability to obtain credit.
Similarly, some lenders offered deferrals that bundled the missed payments into a sum that was tacked on to the end of the loan. Borrowers wouldn’t face higher monthly payments, but they would have to pay off the deferred amount (a “balloon payment”) when they refinanced, sold their house or reached the end of their loan.
The state mortgage relief program is now offering up to $80,000 to pay all or part of a COVID-related partial claim or deferral.
“Using relief funds to pay down deferred balances for homeowners who experienced COVID hardships restores home equity and puts financially vulnerable families in a stronger position to sustain homeownership,” Lisa Sitkin, senior staff attorney at the National Housing Law Project, said in a statement. “It also alleviates the anxiety of having to figure out how to pay off a large balloon payment in the future.”
More homeowners who fell behind in 2022. Previously, homeowners had to have missed at least two mortgage payments by June 30, 2022, or one property tax payment by May 31, 2022, to be eligible for mortgage or tax relief, respectively. Now, you’ll qualify if you miss at least two mortgage payments or one property tax payment before March 1, 2023.
Homeowners who need a second shot of relief. The mortgage relief program was originally seen as one-time-only assistance. Now, however, California homeowners who’ve already received help can apply for more if they have missed more payments and remain eligible. No household may collect more than $80,000 over the course of the program.
Owners of multiple-unit dwellings. Initially, mortgage relief was available only to people who owned and occupied a single-family home, condominium or non-mobile manufactured home in California. Now, aid will be available to people whose primary residence includes up to four units, such as a duplex, quadplex or a house with an accessory dwelling unit.
The program continues to offer aid to one additional group: homeowners with reverse mortgages who have fallen behind on their property tax or insurance payments.
How do you apply?
Applications are available only online at camortgagerelief.org. For help filling one out, you can call the program’s contact center at (888) 840-2594, where assistance is available in English and Spanish.
If you don’t have access to the internet or a computer, you can ask a housing counselor to assist you. For help finding a counselor certified by the federal Department of Housing and Urban Development, call (800) 569-4287. You may also get help from the company servicing your mortgage.
The online application process starts with questions to determine your eligibility. If you meet the state’s criteria, you can then complete an application for funds. Here’s where you will need some paperwork to establish how much you earn and how much you owe.
According to the program’s website, among the documents you will need to provide are a mortgage statement, bank statements, utility bills and records that show the income earned by every adult in your household, such as pay stubs, tax returns or a statement of unemployment benefits. If you don’t have access to a digital scanner, you can take pictures of your documents with your phone and upload the images.
The site provides links to the application in English, Spanish, Chinese, Korean, Vietnamese and Tagalog.
When will the program end?
The state will continue to offer help to homeowners who became delinquent because of COVID-related issues until it has spent all $1 billion from the federal government. The state estimates that an additional 10,000 to 20,000 homeowners will be helped by the remaining funds.
The money will be awarded on a first-come, first-served basis, with one important exception: 40% of the aid must go to “socially disadvantaged homeowners.” Those are residents of the neighborhoods most at risk of foreclosure, based on the Owner Vulnerability Index developed by UCLA’s Center for Neighborhood Knowledge.
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The first-time homebuyer tax credit played a major role in boosting home sales in the Golden State last month, according to the California Association of Realtors.
Last month, existing, single-family home sales increase 12 percent to a seasonally adjusted annualized rate of 553,910 from July 2008; they were up 8.1 percent from June.
“The federal tax credit for first-time buyers played a critical role in the purchase decision of many buyers,” said C.A.R. President James Liptak, in a release. “Nearly 40 percent of first-time buyers said they would not have purchased a home if the tax credit was not offered.
“Because the tax credit has helped so many first-time buyers become homeowners, it is critical that Congress extends the credit beyond the Dec. 1 deadline, and includes all buyers, not just first-timers.
Meanwhile, the median price of an existing single-family home increased 3.9 percent from June to $285,480, though prices were still off 19.6 percent from a year earlier.
“July marked the fifth consecutive month of month-to-month increases in the median price,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young.
“This was the largest increase on record for the month of July based on statistics dating back to 1979. The yearly decline in July also was the smallest in the past 19 months.”
Interestingly, homes priced below $500,000 now account for 74 percent of total sales, up from 43 percent prior to the beginning of the mortgage crisis.
Unfortunately, prices really haven’t fallen by much in desirable areas, it’s just that low-end and distressed properties are the only things selling; and affordability is only up because of government intervention.
Inventory slipped to 3.9 months in July, down from 6.9 months a year earlier, though it can deceiving with all the foreclosures not on the market, otherwise known as shadow inventory.
Foreclosures have been halted and loans have been modified, even for those underwater, but what about those pesky option arm loans?
The WSJ says government officials are looking for ways to reduce losses, as a flood of option-arm related foreclosures could dent any semblance of a housing recovery.
The so-called “toxic loans,” which allowed borrowers to defer interest up to 125 percent of the loan balance, are so far underwater that they seem destined for foreclosure.
Even with a principal write-down, a mortgage rate reduction, and extended amortization, the prospect of paying off the loans still doesn’t look all that bright. That’s a testament to just how bad these loans are.
Apparently investors believe principal reductions are the key to saving these loans, along with refinancing borrowers into more traditional FHA loans.
Loan servicers, on the other hand, believe the solution is forgiving deferred interest and converting them into interest-only loans.
Unfortunately, many of these loans already have rock-bottom mortgage payments (as low as 1%), so there isn’t much room to negotiate.
Factor in the ridiculous amount of negative equity resulting from plummeting home prices, and you’ve got a loan mod scenario that would likely fail the net present value test required to complete one under the government’s program.
But the loans represent no small minority; they account for nearly 40 percent of loans 60+ days past due in Florida and Nevada, 28 percent in California, and 20 percent of delinquent loans in Arizona.
And another million option arms are expected to reset over the next four years.
They also pose a huge risk to some of the nation’s largest banks, including Wells Fargo, who inherited a $90 billion Pick-A-Pay portfolio from Wachovia.
Of course, they say they’ve been able to modify the loans using the current government program and their own loss mitigation programs, but that seems, at best, optimistic.
Then there’s Chase, which holds nearly $40 billion in option arms, acquired from WaMu, and Bank of America, who took on Countrywide’s $23 billion pay-option arms.
The problem: how do you save something that is beyond redemption? There’s a good chance most of these loans won’t be saved, and the borrowers will face foreclosure, or perhaps a short sale.
The number of mortgage defaults filed during the third quarter fell 10.3 percent compared to a quarter earlier, according to real estate information service DataQuick.
A total of 111,689 default notices were sent between July and September, an 18.5 percent increase from a year earlier when 94,240 hit homeowners’ mailboxes.
“It may well be that lenders have intentionally slowed down the pace of formal foreclosure proceedings, said John Walsh, DataQuick president, in a release. “If so, it’s not out of the goodness of their hearts.”
“It’s because they’ve concluded that flooding the market with cheap foreclosures in this economic environment may not be in their best financial interest. Trying to keep motivated, employed homeowners in their homes might be the most cost-efficient way to stem losses.”
Defaults peaked in the first quarter of this year at 135,431, a number DataQuick believes was inflated due to deferred activity from various foreclosure moratoria.
The median loan origination month of last quarter’s defaulted loans was July 2006; a year ago it was June 2006, so the foreclosure process has moved forward just one month over a year.
“There’s a batch of truly nasty loans that were made in mid 2006. There’s another batch made in late 2006. These are worse than the mortgages before and after, and it’s taking a long time to process them,” Walsh added.
Countrywide originated the most defaulted loans with 7,583, followed by WaMu at 5,146, and Wells Fargo at 4,425.
However, smaller subprime lenders had much higher default rates; ResMAE Mortgage was at 73.9 percent, followed by Ownit Mortgage at 69.5 percent, and BNC Mortgage at 61.4 percent.
Mortgages were most likely to go into default in Merced, San Joaquin, and Riverside counties, and least likely in San Francisco, Marin and Santa Cruz counties.
California homeowners were a median five months behind on payments, or $12,665 on a median $343,200 mortgage, when the mortgage lender filed a default notice.
Trustees Deeds recorded, or the actual loss of a home due to foreclosure, climbed 9.5 percent to 50,013 from the prior quarter, but were down 37.1 percent from the third quarter of 2008, which was the all-time high.
A staggering 22 percent of all mortgages in the state of Florida are non-current, according to a new report from Lender Processing Services.
By non-current, they mean loans that are either delinquent or in some stage of foreclosure; perhaps more troubling is the fact that 10.4 percent of home loans in Florida are in foreclosure.
The LPS October Mortgage Monitor also revealed that the nation’s foreclosure rate was 3.12 percent as of September 30, up 2.6 percent from a month earlier and 88.9 percent year-over-year.
And remember that’s with all the government intervention, foreclosure moratoria, loan modifications, and the like; the national mortgage delinquency rate was 9.37 percent as of September 30.
The report also highlights the large shadow inventory of foreclosed properties that could wreak havoc on home prices and a possible housing recovery.
“The number of loans deteriorating further into delinquent status is now more than twice the number of foreclosure starts, indicating another major wave of troubled loans in an already clogged loan pipeline,” the company said in a release.
“Nearly one-third of foreclosures remain in pre-sale status after 12 months – twice as many as the year prior. The six-month average deterioration ratio has risen the past two months to 300 percent, showing that for every loan that improves in status, three more deteriorate further.”
The only bit of good news in the report was increased loan production, with year-to-date 2009 loan totals of 2,032,973 (28 percent FHA) versus 1,903,723 (16 percent FHA) for the same period in 2008.
As the pandemic shut down office life in Los Angeles’ downtown financial district, Claude Cognian tried to keep his gastropub Public School 213 open. But the evacuation of white-collar workers made way for an influx of homeless people and drug users — and more than a few troublemakers striding in the front door.
“It was hard to keep hostesses at the door, because they got scared,” said Cognian, chief executive of the restaurant’s parent company, Grill Concepts Inc.
Three break-ins cost as much as $12,000 each time just to repair the windows, all while the bottom line was cratering in the absence of the office employees who used to gather for lunch and after-work drinks. With sales down 75% from pre-pandemic days, his company closed the downtown gastropub in August and is not planning to return.
“Our bet was that downtown was going to come back, and it hasn’t,” Cognian said.
For decades the Los Angeles financial district was the beating heart of downtown, the corporate muscle that gave the city of sprawl a soaring glass skyline. But the pandemic and the wave of remote work hollowed out its skyscrapers and helped shut many restaurants and businesses that relied on crowds of workers. Though the neighborhood shows signs of recovery, few expect it to return to being the bustling hive of suits and ties that it was.
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To many insiders — the urban planners, real estate developers and business owners with interests in it — the area will recover only if its identity grows more textured than a zone of white-collar office space.
Desirable office addresses were already spreading beyond the financial district before the pandemic, as downtown experienced a renaissance in housing, art and entertainment on blocks previously shunned by investors and residents.
To the south, billions of dollars were spent improving the blocks around Crypto.com Arena with hotels, housing and entertainment venues. Obsolete century-old commercial and industrial buildings to the east were renovated into desirable housing and fashionably unconventional offices. Billions more were spent north on Bunker Hill where the Music Center including Walt Disney Concert Hall and office skyscrapers have been joined by museums, apartments and a high-rise hotel.
The housing boom drew residents to the financial district as well, and that has kept it from turning into a ghost town.
But for the area to truly come back to life, many say it will need to follow the path of Lower Manhattan. The financial capital of New York faced an exodus after 9/11, but city officials and investors staved it off by making it a place of more diverse uses. It is still an office district but is far more lively than it used to be since it also became a residential neighborhood with more shops, restaurants, parks and hotels than it had before the attacks. A performing arts center will open in September.
“Cities evolve. That’s what they do,” said downtown L.A. business representative Nick Griffin. “From natural disasters, wars and pandemics. They evolve with market changes, customer preferences and cultural shifts. Downtown has evolved pretty dramatically over the last 20 years and the next five or so are going to be very interesting.”
Many companies have returned to their offices, but on a limited basis as their employees work some days from home. “For Lease” signs clutter building fronts, tacked over restaurants and bars that once served lively hordes of office workers. Graffiti marks windows.
At Public School 213, the chairs are stacked neatly on tables as if it just closed for the night. Other former restaurants have been gutted by their landlords. Sidewalks are quiet, sometimes eerily so.
Downtown’s centers of gravity have shifted numerous times since its days as a remote Spanish pueblo.
The plaza by Olvera Street near the Los Angeles River was el centro until the late 19th century. When the railroads arrived in the American era, the business elite shifted the commercial district south from the plaza toward 1st Street in the Anglo section of the racially divided city, said Greg Fischer, an expert on the history of downtown who worked on planning matters for former City Councilwoman Jan Perry. Main, Spring, Broadway and Hill streets became the business hub.
In the early 20th century, elite social clubs such as the Jonathan Club, the California Club and the Los Angeles Athletic Club erected new buildings on the west side of downtown where property was relatively cheap. Soon the rooming houses, small apartment buildings and ramshackle Victorian homes there gave way. Richfield and other oil companies headquartered there, the seeds of today’s financial district.
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In “the Jetsons era,” as Fischer described the 1960s, corporate leaders viewed the Spring Street-centered office district as increasingly obsolete and passé and moved to newer buildings in the financial district. Downtown lost a lot of itslifeblood during that time, he said.
“In the years after World War II, downtown was a shopping, office and entertainment area,” Fischer said. “By the 1960s the office component had shifted west, most entertainment went to suburbs and housing just evaporated.”
Among the big businesses with offices in the west were the Richfield, Union, Signal, National and Superior oil companies. Pacific Mutual Life Insurance Co. was headquartered there and Bank of America had a big presence.
The boundaries of the financial district are not officially outlined, but property brokerage CBRE defines it as the office center south of Bunker Hill and 4th Street, flanked on the west by the 110 Freeway and on the east by Hill Street and extending south to 8th Street.
By the 1980s, much of downtown was moribund; buildings that once thrummed with commerce were dilapidated and vacant or underused. There were pockets of vibrancy, notably the Jewelry District and a Latino-centric shopping zone that emerged among aging buildings along Broadway in the Historic Core. The Civic Center around City Hallremained one of the largest concentrations of public administrative buildings in the country, employing thousands of workers.
But the financial district was the shinythriving part of the city, a high-rise office park for lawyers, bankers and accountants who piled into their cars for a mass exodus at the end of each workday.
To many, the neighborhood felt like a corporate fortress, invisibly walled off from the rest of downtown. Business leaders were painfully aware that downtown L.A. lacked the vibrancy of other big cities because it had so few residents, but was stuck in a chicken-and-egg dilemma: People didn’t want to live there because it lacked restaurants, grocery stores and other typical city-life amenities, but merchants didn’t want to set up shop because few lived there.
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The stalemate began to break around 2000 with an ordinance that made it easier to redevelop obsolete office buildings into housing. The relocation of the Lakers, Clippers and Kings pro sports teams to the new downtown arena then known as Staples Center brought thousands of sports and music fans and led a wave of development south of the financial district.
Decades of efforts to add rail service and thousands of apartments and condominiums helped create a more vibrant downtown that was taking on the flavor of other big cities before the pandemic.
“All of a sudden people were walking dogs and pushing baby carriages,” architect Martha Welborne said. “New restaurants came in, even destination restaurants that weren’t just for the people who worked downtown or lived there.”
Fortunately for downtown’s future prospects, its apartment towers remain nearly fully occupied. More than 35,000 units were built after 1999, when so few people lived there that downtown didn’t even have a big-chain grocery store.
Three new hotels have recently opened and a 42-story apartment tower will start leasing later this year. Bottega Louie, one of the region’s top-grossing restaurants before it shut down during the pandemic, reopened in 2021. A few blocks away, legendary Beverly Hills steakhouse Mastro’s also opened a seafood restaurant last year near Crypto.com Arena.
And last week, Metro opened its new Regional Connector, a 1.9-mile underground downtown track adding three stations and linking different lines to make travel more seamless.
Though some business owners have abandoned the financial district, others see an opportunity to get in at an affordable price during what they hope is a temporary economic dip.
Restaurateur Prince Riley recently leased a spot on Grand Avenue that was last home to the Red Herring restaurant. He grabbed it because he liked the location and it was already built-out for upscale dining.
“You can see all the love and care that went into this space,” he said. “They were a casualty of COVID.”
Riley and his wife plan to open their restaurant, named Joyce, in July, featuring a raw bar and Southern-style seafood such as crudo and ceviche. They moved into the apartment building upstairs to be close to it.
The couple like being near Bottega Louie, a popular Whole Foods grocery store and the recently opened Hotel Per La, which took over a lavishly refurbished 1920s building last occupied by another hotel that closed early in the pandemic.
“I can see business picking up,” Riley said. “This is an opportunity from a terrible tragedy like COVID. We wouldn’t have had this otherwise.”
A key factor keeping downtown teetering between recovery and a further downward slide appears to be discomfort with the streets and the sense that they are not as safe as they were before the pandemic.
The blocks close to Metro’s underground 7th Street/Metro Center station, where multiple light and heavy rail train lines meet, are among those that have changed the most since the pandemic as the Metro system struggles to combat rampant drug use and serious crimes such as robbery, rape and aggravated assault on its lines.
Thegrowing number of homeless people on the streets has been an issue in other cities too, said Cognian of Public School 213. His company also closed restaurants in Seattle and San Francisco because customers at their urban locations trickled away as unhoused people commandeered the sidewalks.
“Hopefully, we as a city, as a state, find a solution for the homeless,” he said. “If the homeless situation doesn’t get solved in some fashion that allows tourists, office workers and businesses to operate, it’s just going to bring down the area.”
Real estate broker Derrick Moore of CBRE, who specializes in matching restaurant and shop operators with landlords, said leasing of retail space downtown has improved in recent months, especially compared to the dark days of the 2020pandemic shutdown when downtown fell silent.
“It seems like ancient history,” Moore said, “but it was very devastating to one’s psyche.” And to downtown businesses.
In the wake of the COVID shutdown, downtown overall lost more than 100 food and beverage establishments with a combined footprint of more than 1 million square feet, Moore said.
“That’s restaurants, bars and lounges, juice bars, boutique coffee operators and even national brands,” Moore said. “A good portion of those remain vacant.”
Replacement tenants like Joyce restaurant are starting to come in, he said, with leasing and property showings picking up in the first quarter at a “resoundingly” busier pace than early 2022. Moore has taken potential tenants to the empty Public School space, where across the street the failed Standard Hotel just reopened under new management as the Delphi.
Faced with a challenging market, retail landlords have cut their asking rents as much as 50% from pre-COVID prices, Moore said, and more than doubled the amount they are willing to spend on tenant upgrades such as installing restaurant kitchens and restrooms, and providing periods of free rent.
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The financial district also faces a struggle of changing tastes, with many firms bypassing the gleaming skyscrapers that were the height of prestige in the late 20th century in favor of campus-style offices anda more laid-back vibe.
Even legal firms, long a stalwart in the financial district, are turning elsewhere in some cases. One firm established in February recently opted out of putting its office there.
“When we started to look at space it became very clear to us that locating in the financial district was a very different proposition than it used to be,” said Matt Umhofer, a partner at Umhofer, Mitchell & King. “Downtown has changed dramatically, and we wanted to rethink what it means to be a law firm in Los Angeles and let go of preconceived notions of needing to be in the financial district in order to be relevant.”
The fledgling firm opted instead for an office in Row DTLA, a campus of shops, restaurants and offices created out of century-old warehouses near the Arts District, east of the financial center, even though office rents in the Arts District are often higher than they are in the glitzy skyscrapers.
“The short version is, being in the financial district isn’t as cool as maybe it was in the past,” Umhofer said.
The spotty attendance of office workers has changed the character of business centers across the country, said Mark Grinis, leader of consulting firm EY‘s real estate, hospitality and construction practice.
An analysis by EY found that offices are being used at only 25% to 50% of the level they were before the pandemic.
“In some locations, three-quarters of the people that normally would have gone in, didn’t,” Grinis said. “People are not on the subway, ordering sandwiches at lunch or having a drink after work.”
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Vacant offices and storefronts can hinder recovery, he said, because people shy away from empty spaces.
“Three blocks of vacant houses in a residential neighborhood ultimately becomes a negative,” he said. “An office center is not that different.”
The physical appearance of vacancy becomes more alarming when graffiti, litter and grime follow and create a bad “multiplier effect,” Grinis said.
Stopping the spiral starts with making the streets safe and getting homeless residents into better housing, but there are also public policy decisions that could help landlords convert office buildings to housing if they are no longer competitive on the office leasing market.
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And the market has been brutal. Owners of some of downtown’s office high-rises have faced defaults, foreclosures and rushed sales in the face of falling demand, real estate data provider CoStar said.
The owner of two of the financial district’s premier office towers, 777 Tower and Gas Company Tower, said in February that it defaulted on loans tied to the buildings. Other high-rise owners are in similar straits.
In the face of rising vacancy rates, “those defaults could signal pain to come for the 69-million-square-foot downtown L.A. office market,” CoStar said.
Owners of buildings facing foreclosure sometimes don’t have enough money to build out new tenants’ offices, as is customary, which hinders strapped landlords from recovering financially.
Commercial landlords are getting hit on multiple fronts, said Jessica Lall, managing director of the downtown office of CBRE.
“What we’re seeing is a perfect storm when it comes to the office distress in downtown L.A.,” she said.
Loans on large-scale properties are maturing at a time when interest rates are high, making refinancing a challenge, Lall said. There is widespread uncertainty among tenants about how much space they will need to rent in the future if employees work remotely at least some of the time.
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Those issues are compounded by “the general perception around downtown being unsafe,” she said. “All urban centers are grappling with that issue right now.”
The downtown office vacancy rate — the share of total space that is unleased — climbed to 24% in the first quarter, up from 21.1% a year ago, according to CBRE. More empty space is coming, the brokerage said, pushing estimated availability to a daunting 30% as some companies shrink their offices or move away from downtown.
Law firm Skadden, for example, a large longtime tenant in downtown’s Bunker Hill district, has decided to move its offices to Century City .
The landlord of the U.S. Bank Tower, downtown’s tallest office tower at 72 stories, remains bullish on the market in spite of its troubles and recently spent $60 million to make the building more attractive to tenants by adding hotel-like amenities.
“People need offices,” said Marty Burger, chief executive of Silverstein Properties, which owns the tower. “Not every company in every industry needs an office, but the majority of them do.”
Among the reasons for offices are collaboration and education, he said. “How do you mentor the young folks who are coming up in your industry if the older people aren’t in the office for younger people to learn from? There is a whole ecosystem where you need people in an office now.”
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Companies may end up using their offices fewer days of the week than they used to as remote work and shortened schedules grow in popularity, he acknowledged: “Fridays may never be Fridays again.”
Burger says his optimism about downtown L.A.’s potential for improvement has a foundation in New York, where Silverstein built One World Trade Center on the site of the Twin Towers.
“After 9/11, everyone said that no one would ever live there or work there again,” Burger said.
In 2001, the neighborhood had about 20,000 residents and saw little activity after office hours. Now rebuilt, the neighborhood has about 75,000 residents and a greater mix of office tenants including businesses in tech and advertising in what was mostly a banking center before, Burger said.
“It’s a vibrant 24/7 community,” he said.
Many see this as the best future for L.A.’s financial district.
The city’s tight housing market combined with the downturn in office rentals opens the possibility to convert some office buildings into housing or hotels.
More residents and visitors would make the neighborhood more dynamic and better able to support restaurants, shops and nightlife, said Griffin, executive director of the privately funded Downtown Center Business Improvement District, a nonprofit coalition of more than 2,000 property owners.
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“If we trade some office for residential, that’s a good thing.”
The pandemic’s blow to the office market “is an opportunity that none of us ever imagined happening,” Welborne said, “transforming office buildings into residential buildings and reimagining our entire downtown.”
Southern California home prices last month were unchanged from a year ago, the first time there hasn’t been a year-over-year decline since September 2007, according to DataQuick.
The median price paid for a home in the Southland last month was $285,000, a 1.8 percent increase from October.
Of course, the median is still 43.6 percent below the peak of $505,000 seen back in early and mid 2007, before the mortgage crisis got in full swing.
A total of 19,181 new and resale homes and condos sold in six Southland counties during the month, down from 22,132 in October, but 14.7 percent higher than the 16,720 sales seen a year ago.
DataQuick said sales have been pushed higher thanks to the first-time homebuyer tax credit, the record low mortgage rates, and “robust investor activity.”
“This market is still really lopsided. Foreclosures and short sales are huge factors,” said John Walsh, MDA DataQuick president, in a release.
“There’s still not a lot of discretionary buying and selling outside the more affordable markets. Anybody who can sit tight is doing just that. The market won’t fully rebalance itself until financing becomes available for the higher price ranges.”
Jumbo mortgages accounted for just 15 percent of all home purchases, compared to roughly 40 percent during the housing boom.
Meanwhile, adjustable-rate mortgages were used to finance only 4.1 percent of last month’s home sales; between 2000 and 2005, nearly half of Southland buyers chose ARMs.
FHA loans were used by 38.1 percent of buyers, the same as in October, and up from 34.5 percent a year ago.
Foreclosure resales made up only 39.1 percent of all Southland resales, the lowest total since May 2008; it was as high as 56.7 percent last February.
We’re all aware of the stories in the mainstream media about the instances of unconscionable behavior exhibited by rogue servicers, lenders, brokers or service providers during the foreclosure process. This was especially pronounced in the early days of the housing meltdown in 2008, but the images and perceptions linger today. The stories were easy to tell — compelling, albeit revolting.
Lawmakers reacted aggressively at all levels — as politicians are wont to do when faced with a seemingly unified public outcry. The demonization of the foreclosure remedy became even more pronounced during the pandemic of 2020, as officials scrambled to delay or prevent the process under almost any circumstances.
Yet, well-intended as the changes were, the expanded web of legal obstacles to a justified foreclosure on a significantly delinquent mortgage has actually served to hurt our communities. Lenders and servicers, hamstrung by well-intentioned but hastily assembled requirements, have been forced to adhere to arduous timelines or hurdle impractical obstacles throughout the foreclosure process.
Most times, this has only further delayed the inevitable, or even dissuaded lenders from foreclosing on properties at all. In so doing, they’ve been forced to roll the extensive costs of compliance, property management and other services they never intended to be involved with into the price paid by those who are able to take on mortgage loans.
The aggressive scrutinizing of our foreclosure process has had another unintended consequence on our neediest communities. Lenders and default managers, unable to reintroduce as many defaulted assets as possible into the housing market, are prevented from helping to address one of the biggest challenges facing the housing industry right now.
We’re facing a shortage of available, affordable housing. First-time homebuyers are struggling to find houses. Increased occurrences of deferred maintenance or “zombie foreclosure” are contributing to the blight of struggling neighborhoods, which in turn are burdened by declining property value across the board. There’s quite a bit of inventory out there that would have otherwise been returned to the market but for unduly harsh political theater. If anything, the vast majority of residents in such neighborhoods would likely support a faster foreclosure process.
Please don’t mistake this for a “blame the victim” type of argument. Foreclosure is not a matter to be taken lightly. It’s obviously not a welcome event for anyone involved. Lenders don’t make mortgage loans to become property owners themselves. Many of those in foreclosure are there because of dramatic life changes or traumatic circumstances. But foreclosure is an effective legal remedy to a real problem. Yes, it should be reserved for appropriate circumstances. Yet, increased and sometimes unnecessary compliance requirements have chilled the exercise of that right, and not always for the better.
Let’s not forget about the defaulted borrower, either. The stress that comes with enduring a seemingly endless process can be unbearable. An efficient process would empower these people to start over and provide them with the resources to start down the path of homeownership once again.
There are other, more effective ways to improve the foreclosure process beyond delaying or downright prohibiting it. Yes, egregious malfeasance should be punished. But the best default and REO professionals — whether real estate brokers, asset managers or other service providers — prefer to find ways to keep homeowners in their homes, or at least help relocate them with compassion. There are many different forms of education and counseling routinely made available to home owners at risk for foreclosure — a much better way to maintaining an owner occupancy rate than prolonged process delays.
“Foreclosure” is not a word most in the real estate industry like to say or hear. It means a solemn contract has been compromised and that someone’s version of the American Dream has failed — this time, at least. But it has morphed, as the result of unintended consequences, into what is now unjustly perceived as some sort of predatory practice. Foreclosure is merely a legal consequence designed to address an egregious and prolonged failure to fulfill the terms of a contract. Borrowers are not entered into default because of a missed payment or two.
Foreclosures have always required independent judicial oversight and an extensive time period to introduce the potential of modifications and work outs. But where counseling and negotiation still fall short or, far more often, when borrowers fail or refuse to accept mitigation options, foreclosure is a necessary part of the home buying cycle.
Let’s have another look at what can be done to ensure foreclosures are undertaken equitably and compassionately without adding yet another layer to compliance requirements. Let’s at least acknowledge the thousands of dedicated professionals working to return dormant or abandoned inventory to the housing market — especially in communities riddled with abandoned properties awaiting resolution. And let’s put more focus on the homeowners in these terrible situations. Let’s provide more resources to help them through their challenges and help restore their dignity with fresh starts as well.
We had a few times in the previous cycle where the 10-year yield was below 1.60% and above 3%. Regarding 4% plus mortgage rates, I can make a case for higher yields, but this would require the world economies functioning all together in a world with no pandemic. For this scenario, Japan and Germany yields need to rise, which would push our 10-year yield toward 2.42% and get mortgage rates over 4%. Current conditions don’t support this.
The backstory
The lifeblood of my economic work depends greatly on the ebbs and flows of the 10-year yield, even more than mortgage rate targeting, which is unusual for a housing analyst.
When I first dipped into 10-year yield and mortgage rate forecasting in 2015, during the previous expansion, I said the 10-year yield will remain in a channel between 1.60%-3%. I’ve stuck to that channel forecast every year since — and for the most part that 10-year yield channel stuck. That range dictated that mortgage rates would roughly stay between 3.5%-4.75%.
When COVID-19 was about to hit our economy, I forecasted that the 10-year yield recessionary yields should be in a range between -0.21%-0.62%. We got to as low as 0.32% on that Monday morning in March when the crisis was hitting the markets the hardest. About a month later, I published my AB (America is Back) recovery model, which said that the 10-year yield should get back toward 1%. We got there in December of 2020 so I was able to retire my America is Back recovery model.
I said that when the economy was beginning the new expansion, the 10-year yield would create a range between 1.33%-1.60%. This couldn’t happen in 2020 but should happen in 2021. Even with the hot economic growth, the hottest inflation data in decades, and the Fed rate hike discussion picking up, this range of 1.33%-1.60% has held up nicely for most of 2021, meaning mortgage rates were going to be low in 2021.
My forecast for the 10-year yield range in 2021 was 0.62%-1.94% which translates to a bottom-end range in mortgage rates of 2.375%-2.5%, and an upper-end of 3.375%-3.625%. Single mortgage rate target forecasts have not fared well over the decades because these forecasters did not respect the downtrend in bond yields since 1981.
The X factor
Can there be a bond market sell out short term, sending yields above 1.94%, like what we saw early in the COVID-19 crisis? Yes, but if the markets do overreact for any reason, typically bond yields would fall back. Why do I not believe bond yields will push higher aggressively? The economic rate of growth peaked in 2021. The economy was on fire this year, and inflation data was super-hot. Even so, the highest the 10-year yield got was 1.75%. The economic disaster relief that boosted the recovery in 2020 and 2021 has been drawn down.
Government spending plans have also been watered down and new legislation might not even pass at all. Economic growth peaked in 2021 and some of the hotter inflation data has the potential to fall next year. The Federal Reserve wants to hike rates to cool the economy. Typically what happens before the first Fed rate hike is that the U.S. dollar has its biggest percent move higher ,which tends to hurt commodity prices and world growth. This is something to watch for next year as it could slow down world growth.
The economy won’t be as hot in 2022 as it was in 2021, but it will remain in expansionary mode. This type of backdrop will make it challenging for rates to rise in a big way and stay higher. The key with all my 10-year yield channel work is how long the 10-year stays in that channel during the calendar year. I have always believed this type of forecast is more useful than targeting a mortgage rate.
Existing-home sales
The forecast
For 2022, I am forecasting the same sales trend range as 2021 of about 5.74 million to 6.16 million. If monthly sales prints are above 6.16 million for existing homes, then I would consider the market more robust than expected. If sales trend toward 5.3 million then we will be back to 2019 levels. This would still be healthy sales considering the post-1996 trend, but it will mean housing demand has gotten softer.
This has happened before when higher rates have impacted demand. This is why since the summer of 2020 I have written about how if the 10-year yield can get above 1.94%, then things should cool down. However, as you can see it’s been hard to bond yields over that level and thus mortgage rates above 3.75%.
The backstory
If the last two reports of the year on existing home sales are above 6.2 million, I will admit that sales have slightly outperformed what I predicted for 2021. Early in 2021, I wrote that home sales would moderate after the peaks caused by the COVID-19 shutdown make-up demand and that readers should not overreact to this slowing. I wrote that sales would range between 5.84 million and 6.2 million, and that we could anticipate a few prints under 5.84 million — but sales would consistently be above the closing level of 2020 of 5.64 million. We got one print below 5.84 million and a few recent prints over 6.2 million, with two more reports. Mortgage demand was solid all year long and has picked up in the last 15 weeks.
One of my longer-term forecasts in the previous expansion was that the MBA Index would not reach 300 until 2020-2024. We got there in the early part of 2020, then the Index got hit by the COVID-19 delays in home buying to only have a V-shaped recovery that led to the make-up demand surge, moderation down and back to 300.
As you can see, it’s been like Mr. Toad’s wild ride here. We will still have some COVID-19 year-over-year comps to deal with up until mid February and then we can get back to normal. However, one thing is for sure: demand has been solid and stable in 2020 and 2021. Also, the market we have today doesn’t look like the credit boom we saw from 2002-2005.
I didn’t believe total home sales could get to 6.2 million in the years 2008-2019, this is new and existing home sales combined. We simply didn’t have the type of demographics in the previous expansion. We are in different times.
New home sales and housing starts
The forecast
My long-term call from the previous expansion has been that we won’t start a year at 1.5 million total housing starts until the years 2020-2024 and we have finally gotten here much like the 300 level in the MBA index. My rule of thumb has always been to follow the monthly supply data for new homes, and as long as monthly supply is below 6.5 months on a three-month average, they will build.
The backstory
Housing starts, permits and builders confidence are ending the year on a good note. Even though new home sales aren’t booming this year, it’s good enough to keep the builders building more homes even with all the drama of labor shortages, material cost and delays in finishing homes.
As you can see below, the uptrend has been intact even with the slowdown in 2018 and the brief pause from COVID-19.
The new home sales sector gets impacted by rates much more than the existing home sales marketplace. The last time this sector saw some stress from mortgage rates was in 2018 when rates were at 5%. Today’s 3% mortgage rates are good enough to keep things going. We should see slow growth in new home sales and housing starts as long as the monthly supply of new homes is below 6.5 months on a 3-month average. This sector has legs to walk forward slowly. I have never believed in the housing construction boom premise as mature economies don’t have construction booms with slowing population growth. More on that here.
The X factor
The one concern I have for this sector in 2022 is if the builders keep pushing the limits of home price growth to make their margins look better. When rates are low, they have the pricing power to do this. This is why the sector has done so well in 2021. If I am wrong about mortgage rates staying low in 2022, and rates go above 3.75% with duration, then demand for new homes should get hit. The longer-term concern for this sector is price growth because if demand slows down, this means a slowdown in construction and the builders really maximized their pricing power in 2020 and 2021.
Home prices
The forecast
I am looking for total home-price growth to be between 5.2% and 6.7% for 2022. This would be a meaningful cool down in price growth but would still be a third year straight of too much price growth for my taste.
The backstory
My biggest fear for the housing market during the years 2020 to 2024 was that real home-price growth can be unhealthy. When you have the best housing demographic patch ever recorded in history occurring at the same time as the lowest mortgage rates ever, with housing tenure doubling as it has in the last 12 years, it’s the perfect storm for unhealthy price growth.
Housing inventory has been falling since 2014 and mortgage purchase applications have been rising since then. As you can see below, 2021 wasn’t looking good for me regarding my fear for home prices rising too much.
The X factor
When I talk about real home-price growth being too hot, I mean that nominal home price growth is above 4.6% each year during the five-year period of 2020 to 2024, for a cumulative 23% growth. This would not be a positive for the housing market. If we end 2021 with 13% home price growth, (and it looks like we will do that or higher), then we have already achieved 23% of the price growth that I am comfortable with in just two years.
While I do believe home-price growth is cooling from the extreme high rate of growth we had earlier in the year, I would very much like to see prices get back in line with my model for a healthy market. In order for this to happen, we would need to have no increase in home prices for the next three years. Because inventory levels are falling again, and we are at risk of starting the 2022 spring season at fresh new all-time lows, this outcome is very unlikely.
Early in 2021, I had raised concerns that prices overheating should be the main concern, not forbearance crashing the market. When demand is stable, it’s extremely rare for inventory to skyrocket and American homeowners have never looked better on paper. In fact, a few months ago I talked about inventory falling again should be the concern going out.
Housing demand
The forecast
Everyone is talking about rates going higher and no one, it seems, is talking about the possibility that mortgage rates could go under 3% in 2022, except me. This is front and center in my mind. I want to see a B&B housing market: boring and balanced. In a B&B market, buyers have choices, sales move at a reasonable pace without bidding wars, and the whole home-buying experience is less stressful and more sane. I would like to see inventory get toward 1.52 – 1.93 million, (which is still historically low). However, this will be a more stable housing market.
The backstory
Millions of people buy homes each year. The only thing that cooled demand for housing in the previous expansion was mortgage rates going over 4% with duration. The increase in rates didn’t crash the market or even facilitated negative year-over-year home price declines; but it did increase the number of days homes stayed on the market.
Currently the biggest demographic patch ever recorded in U.S. history are ages 28-34, the first-time homebuyer median age is 33. When you add move-up, move-down, cash and investor demand together, demand will be stable and hard to break under the post-1996 trend of 4 million plus total sales every year in the years 2020-2024.
The X factor
Frankly, I’m getting tired of calling this market the unhealthiest since 2010. This is not due to a massive credit boom or exotic loan products contaminating the market with excess risk — it’s the lack of choice for buyers. If mortgage rates go under 3%, which I believe they can, it just keeps the low inventory story going on. The Federal Reserves wants to cool down the economy, the government is no longer providing disaster relief anymore and the world economies should get hit if the U.S. dollar gets too strong. So, my concern is about rates falling in year three of my 2020-2024 period. This is also a first-world problem to have and we aren’t dealing with the housing market of 2005-2008 when sales were declining and the U.S. consumer was already filing for bankruptcy and having foreclosures before the great recession started in 2008. This is to give you some perspectives here with my thinking.
The economy
The forecast
I expect the rate of change to slow in 2022 but the economy will still be expansionary. Retail sales have been off the charts, and this data line, which I expected to moderate, still hasn’t. The rate of growth will cool. Replicating the growth we saw in 2021 will be nearly impossible. As the excess savings have been drawn down and the additional checks that people got are no longer coming, this data line will find a more suitable and sustainable trend in 2022. Still I am shocked that moderation hasn’t happened already and I was the year 2020-2024 household formation spending guy, too.
The backstory
The U.S. economy has been on fire this year. Even with the excess savings, good demographics, and low rates, not even I thought we would see economic growth like we did in 2021. However, like all things in life, despite the peaks and valleys, the overall trend will prevail.
The X factor
I recently raised one of my six recession red flags after the most recent jobs report as the unemployment rate got to a key level for myself. These red flags are more of a progress checklist in the economic expansion, and when all six of my flags are raised, I go into recession watch. The economy is in a more mature phase of expansion since the recovery was so fast. Like everything with me, it’s a process to show you the path of this expansion to the next recession.
For housing, a strong labor market means more people are getting off forbearance, which is already under 1 million, much smaller than the nearly 5 million we had early in the crisis. I want to wish a Merry Christmas to all my forbearance crash bros who promised a housing crash in 2020 and 2021. You guys are the best trolling grifters ever!
More jobs and more robust wage growth mean the need for shelter will grow. The housing market is already dealing with too much rent inflation, but as wage growth picks up on the lower end, this means landlords will charge more rent. Again, this the problem you want to have, a tighter labor market means wage growth will pick up and we have 11 million job openings currently.
So, look for the rent inflation story to be part of the 2022 storyline, as well as the rate of growth of home prices cooling down.
There is nothing like a fifth wave of COVID-19 and a new highly transmissible variant to crank up the personal stress meter. While the continuing COVID crisis can cause havoc on some short-term data lines for the economy, we will, as we have done, get through this and move forward. Our reality is that, as a nation, we have learned to consume goods and services with an active virus infecting and killing us every day.
The St. Louis Financial Stress Index, which was a key data line to track for the America Is Back recovery model, has still been in a calm zone for the entire year, currently at -0.8564. When we break over zero — which is considered normal stress — then we have some market drama. However, that wasn’t the storyline in 2021 and we didn’t have a single day where the S&P 500 was in correction mode. It’s not normal to not have a stock correction, so a stock market correction in 2022 is in the works and this can lead more money into bonds and drive rates lower.
For more discussion on this index and the America is Back recovery model, this podcast goes over everything that has happened in 2020-2021.
Conclusion
What a ride it has been for all of us since April 7, 2020 when I wrote the America Is Back economic recovery model for HousingWire. We end 2021 with one of the greatest economic recovery stories ever in the history of the United States of America, and a terrible, dark, two-year period of failure for the extreme housing bears. Now we are well into a recovery and looking forward to a new year with its new challenges.
The job of the analyst is to forecast the positive or negative impacts that a whole slew of variables have on the economy based on carefully formulated economic models. The variables, such as demographics, the unemployment rate, what the Federal Reserve is doing, commodity prices and so many others, are constantly in flux and feed off of and influence one another. Additionally, new economic variables pop up all the time. My job, with every podcast and article, is to show you how the changes in these variables light the path to where the economy and the housing market is heading.
Take a deep breath — in through the nose and out through the mouth. The last two years have been crazy, but I am glad you are here to read this. This is our country, our world and our universe, and everyone is part of team Life on Earth. Merry Christmas, Happy Holidays and have a wonderful Happy New Year. We will get through 2022 one data line at a time.
“We have always held to the hope, the belief, the conviction that there is a better life, a better world, beyond the horizon.” Franklin D. Roosevelt
The “shadow inventory,” which is the pending supply of homes not included in the official numbers, increased to 1.7 million units as of September, according to a report from First American Core Logic.
That’s up from 1.1 million a year ago, thanks to rising numbers of real estate owned (REO) by banks and mortgage lenders, foreclosures, deeds in lieu of foreclosure, and mortgages at least 90 days delinquent.
The visible supply of housing inventory, or homes that are actually listed for sale on the market, decreased to 3.8 million units from 4.7 million a year earlier.
As a result, the total unsold inventory (shadow + visible inventory) decreased to 5.5 million units from 5.7 million units in September 2009.
The total months’ supply, which is the amount of time it would take to clear all the inventory, fell to 11.1 months from 12.7 a year earlier.
“This indicates that while the visible months’ supply has decreased and is beginning to approach more normal levels, adding in the pending supply reveals there is still quite a bit of inventory that will impact the housing market for the next few years, especially in the context of the current increase in home sales, which is in part due to artificially low interest rates and the homebuyer tax credit,” the report said.
In other words, recent home sales data is a bit skewed, so the inventory will probably take even longer to clear than predicted, once the homebuyer tax credit expires and mortgage rates climb higher.
Check out the nifty charts below to see just how much of an impact the shadow inventory (in yellow) can have on the real estate market.