It is Finally Happening
For years the slow recovery was hampered by the
existence of tighter credit. A vicious cycle was created when the recession
caused consumer credit to worsen and at the same time banks tightened up on
lending standards. For some time we have been predicting that lending standards
in the real estate sector would not loosen up until two factors emerged. Factor
one was the stability or recovery of real estate values. It makes sense that lenders
would be shy about lending in a real estate sector in which the underlying
asset was unstable.Yet, the real estate markets recovered over the past few years without a significant improvement in lending standards. Why? Some blamed it on new legislation aimed at making lenders more responsible with regard to their lending. But most aspects of the legislation were not implemented until recently. In reality, there was a second aspect we cited over the past few years which has now come to fruition. For the past three years lenders were inundated with refinances because of record low rates. Now with rates still really low but a bit higher than they were, the refinance craze has abated.
It makes sense that lenders would not lower standards while they were overwhelmed with demand. Today, lending standards are loosening because lenders are hungrier. Many national sources for real estate loans have lowered their minimum credit score requirements. And we think that this will flow into other areas of lending such as cars and business loans. This is all part of building a virtuous cycle. Keep in mind that we are not looking for a return to the subprime era or anything close to that. The new legislation we cited makes sure lenders will be more careful. Underwriters are still scouring loans with a fine-tooth comb. But it is interesting that while lenders are implementing the new legislative standards, their requirements are getting somewhat less restrictive.
The Senate Finance Committee has
passed a two-year retroactive extension of tax relief for households who’ve had
home finance debt forgiven by a lender as part of a short sale or loan
modification. “We applaud the Senate Finance Committee for approving a bipartisan
compromise bill,” NAR President Steve Brown says. The legislation still needs
to be passed by the full Senate and also by the House. The issue has been one
of NAR’s top legislative priorities since 2007, when the association worked
with lawmakers to enact the relief into law and also later to encourage them to
extend the relief in 2008 and 2012. The relief expired at the end of last year,
and unless the full Senate and House approve the extension, households will
face the prospect that when they file their returns next year, they’ll pay tax
on so-called phantom income, which is the amount of debt forgiven. Absent the
provision, the tax law provides that such forgiven debt is income. “This is, at
its core, an issue that’s all about fairness,” Brown says. “It is unfair to ask
homeowners who are underwater on their home loan and who make the prudent
decision to do a short sale instead of allowing their home to go into
foreclosure to pay tax on the forgiven amount of the loan.” Brown says the tax
hit encourages owners to walk away rather than sell their house, which hurts
neighborhoods and the communities they’re in. The tax relief provided in the
past has been one of Congress’ bipartisan success stories, and there’s a good
chance an extension will pass Congress this year, too, analysts say. Some
350,000 households could be affected by the tax if relief isn’t extended,
because that’s the number of households who sold their house last year as a
short sale. “And we expect a large number of short sales this year,” says
Brown. Source: Realtor.com
Vacation home
sales rose strongly in 2013, while investment purchases fell below the elevated
levels seen in the previous two years, according to the National Association of
Realtors®. NAR’s 2014 Investment and Vacation Home Buyers Survey, covering
existing- and new-home transactions in 2013, shows vacation-home sales jumped
29.7 percent to an estimated 717,000 last year from 553,000 in 2012.
Investment-home sales fell 8.5 percent to an estimated 1.1 million in 2013 from
1.21 million in 2012. Owner-occupied purchases rose 13.1 percent to 3.7 million
last year from 3.27 million in 2012. The sales estimates are based on responses
from households and exclude institutional investment activity. NAR Chief
Economist Lawrence Yun expected an improvement in the vacation home market.
“Growth in the equity markets has greatly benefited high-net-worth households,
thereby providing the wherewithal and confidence to purchase recreational
property,” he said. “However, vacation-home sales are still about one-third
below the peak activity seen in 2006.” Vacation-home sales accounted for 13
percent of all transactions last year, their highest market share since 2006,
while the portion of investment sales fell to 20 percent in 2013 from 24
percent in 2012. Yun said the pullback in investment activity is
understandable. “Investment buyers slowed their purchasing in 2013 because
prices were rising quickly along with a declining availability of discounted
foreclosures over the course of the year,” he said. "With a return to more
normal market conditions, investors now have to evaluate their purchases more
carefully and do their homework,” Yun added. The median investment-home price
was $130,000 in 2013, up 13 percent from $115,000 in 2012, while the median
vacation-home price was $168,700, up 12.5 percent from $150,000 in 2012.
All-cash purchases remained fairly common in the investment- and vacation-home
market: 46 percent of investment buyers paid cash in 2013, as did 38 percent of
vacation-home buyers. Source: NAR
As the housing
market and hiring continue to recover, consumers are making their home loan
payments a priority again. A growing number of borrowers are paying off their
home loans before their credit card debts, reversing a trend first seen in
September 2008, according to a TransUnion study that examined the delinquency
rates of borrowers with mortgages, auto loans and credit card debt. The
delinquency rate for home loans fell to 1.71% in December, down from 3.32% in
September 2008. Meanwhile, the rate of credit card delinquencies was 1.83% in
December, down from 3.29% in 2008. After the housing bubble burst, many
borrowers owed more on their homes than they were worth and stopped making
home loan payments a priority. "As unemployment rose and home prices
cratered, many borrowers chose to value their credit card relationships above
their home loans," said Ezra Becker, vice president of research and
consulting for TransUnion. "When people lose jobs they need credit cards
as a source of liquidity." Yet, last September the delinquency rates began
to shift to pre-recession norms -- home loan delinquencies fell to 1.79%, while
credit card delinquencies came in at 1.86%, TransUnion found. One debt
borrowers continue to prioritize over everything else is auto loans, mainly
because they rely on their cars to get to work. In December, the delinquency
rate on auto loans was 0.87%, compared with 1.65% in September 2008. Source:
CNN/Money
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