Monthly Archives: August 2016

House prices just below record highs

Home prices are continuing to rise; now mere basis points below the all-time highs for prices, set in 2006.

According to the latest data released Tuesday by S&P Dow Jones Indices and CoreLogic, the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, which covers all nine U.S. census divisions, reported a 5.3% annual gain in August, up from 5% in July.

Per the report, the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index is currently at 184.42, which is within 0.1% of its record high of 184.62, set in July 2006.

The increase in August represents the 52nd consecutive month of positive gains.

According to the Case-Shiller report, the 10-City Composite posted a 4.3% annual increase, up from 4.1% in July, while the 20-City Composite posted a 5.1% annual increase, up from 5.0% in July.

The report states that Portland, Seattle and Denver turned in the highest year-over-year gains among the 20 cities for the seventh consecutive month, with year-over-year increases of 11.7%, 11.4% and 8.8%, respectively.

“Supported by continued moderate economic growth, home prices extended recent gains,” said David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices.

“All 20 cities saw prices higher than a year earlier with 10 enjoying larger annual gains than last month,” Blitzer continued. “The seasonally adjusted month-over-month data showed that home prices in 14 cities were higher in August than in July.”

Blitzer also noted that other housing data including sales of existing single-family homes, measures of housing affordability, and permits for new construction also point to a “reasonably healthy housing market.”

Additionally, the Case-Shiller report showed that before seasonal adjustment, the National Index posted a month-over-month gain of 0.5% in August.

The report also showed that both the 10-City Composite and the 20-City Composite posted a 0.4% increase in August.

After seasonal adjustment, the National Index recorded a 0.6% month-over-month increase, and both the 10-City Composite and the 20-City Composite reported 0.2% month-over-month increases.

After seasonal adjustment, 14 cities saw prices rise, two cities were unchanged, and four cities experienced negative monthly prices changes, the report showed.

Ralph McLaughlin, the chief economist at online real estate listing service Trulia, cautions that the increase to a near-record high isn’t quite as drastic as it may seem.

“The numbers suggest housing price trajectory is picking up again, as it was the second month where price growth was larger than the previous month,” McLaughlin notes.

“Earlier this year, price growth slid for five consecutive months and raised questions about where home prices were heading,” McLaughlin continues. “We’re now seeing a reversing of that trend. While the S&P/Case-Shiller National Home Price Index is an important metric to watch, it’s worth noting that the measure is more reflective of price movements in premium homes rather than middle or lower-tier homes.”

Reflecting on the latest Case-Shiller results, the chief economist for online real estate listing service, Zillow, said that the while the market seems relatively healthy right now, it can’t stay on the same track into perpetuity.

 “Throughout 2016, the U.S. housing market has been pretty resilient in the face of a continued shortage of homes for sale, with home prices growing quickly, but fairly predictably,” Zillow economist Svenja Gudell, said.

“Demand is high and enthusiasm for homeownership remains strong, especially among all-important young, minority and would-be first-time buyers. Incomes have been rising strongly in the last couple of years, helping to keep home buying reasonably affordable in most places,” Gudell continued.

“Overall sales volumes are up from a year ago, and up big in the case of newly constructed homes. Still, the market can’t stay on this course forever, and continued inventory shortages are leading to intense competition, escalating prices and mounting buyer frustration, with the average home search over the past year taking more than four months,” Gudell concluded. “Sooner or later we’ll need to begin seeing a big comeback in inventory to help re-balance this market between sellers and buyers.”

Housing is still really affordable

The last full day of the Mortgage Bankers Association annual conference is underway, and the latest revelation is increasing home prices may not be as threatening as many think.

Many studies, including today’s S&P CoreLogic Case-Shiller Home Price Index, show that home prices gains are up more than 5% nationally. While that’s true, the story changes when economists bring in other factors.

In fact, when adjusting for inflation and the amount of purchase power provided by low interest rates, home prices actually dropped in the past 16 years, First American Chief Economist Mark Fleming said in an interview with HousingWire.

“Contrary to popular opinion, housing isn’t getting more expensive,” Fleming said. “In fact, on a purchasing-power adjusted basis, housing is becoming more affordable.”

“Interest rate declines, combined with meaningful gains in incomes, have provided the consumer with greater buying power, which increases housing affordability,” he said. “The growth in consumer house-buying power is actually outpacing the increases in nominal prices driven by remarkably tight inventories.”

The amount of purchasing power is determined by many economic factors including interest rates, inflation and household income.

Since July 2006, real home prices decreased 41% as of August. They did, however, increase 0.8% from July, but decreased 2.6% from August 2015. Real home prices decreased 20.7% from January 2000.

This chart shows that while home prices are near housing boom peaks, affordability is actually much better off:

“At the moment, affordability is actually increasing in more markets than it is decreasing, including San Francisco, San Jose, New York, Washington and Boston,” Fleming said. “The conventional wisdom that these markets are over-valued does not account for the meaningful growth in consumer house-buying power across the majority of major metropolitan markets.”

However, an increase in interest rates could decrease the demand for housing and put the brakes on rising home prices, Fleming told HousingWire. It would decrease the buying power of consumers.

And yet, MBA Chief Economist Mike Fratantoni still predicts double-digit increases in purchase mortgage originations in 2017, despite the possibility of a rate hike.

While a decrease in interest rates could also mean a decrease in purchasing power, according to Fleming it’s “not necessarily a bad thing.”

The economy can’t sustain a prolonged period of low interest rates, he said.

Several members of the Federal Open Market Committee agree with this view, and continue to argue for a rate hike. Many experts expect the Fed to raise interest rates in December.

Mortgage technology is headed

Many lenders have already started the process of going digital. Why? As Roostify CEO Rajesh Bhat put it in a message to HousingWire, “It’s what customers want.”

On Monday, at the Mortgage Bankers Association annual conference in Boston, several panelists spoke on the topic at a session titled Overcoming the Final Hurdles to Digital Mortgage.

“More and more transactions are moving online, and today’s consumers – especially the 35-and-under set – take it as a given that they’ll be able to transact online,” Bhat told HousingWire.

But borrowers aren’t the only ones who benefit from going digital. It can also be helpful for lenders. Digital verification helps lenders make decisions quicker and based on more accurate information.

“Digital saves significant time and effort versus manual, paper-based processing,” Bhat said. Lenders get the documents they need faster, can process them faster, and are less at risk for errors that can delay or derail a loan decision.

As of right now, while many are entering the digital realm, the housing market could still be several years off from going 100% digital.

“We do have a very limited version of it due to the number of investors that accept it, the providers who can participate and the number of counties and notaries involved,” Joseph Tyrell, Ellie Mae executive vice president of corporate strategy, said in an interview with HousingWire.

“So as an industry we’re definitely progressing collectively to truly realize an e-mortgage,” Tyrell said. “But it’s more than tech, it’s about collaboration.”

John Harrell, USAA Bank vice president of mortgage pointed out other benefits to going digital in an interview with HousingWire:

  • Better customer experience through design and automation
  • Convenience
  • Efficiency which leads to lower costs, the savings can be passed on to buyers
  • Better from compliance and quality perspective, it takes out the human error

While Harrell points out some reasons why lenders should look to going digital, there are some factors that prevent that change from happening. Some of the hindrances he pointed out include being stuck in legacy, retail business models and not understanding digital or how to get started. Harrell also said that many banks don’t get prioritized funding in their mortgage lending departments.

More simply put: change is hard, according to Bhat.

Not only is it hard, but the mortgage industry may not receive the same pressure to change as other industries.

“Other tech companies outside the mortgage space are forced to drive for innovation because of their customers’ demand, but think about borrowers — they are only doing a transaction once every four or five years, so lenders haven’t felt the pressure from consumers like other parts of the industry,” Tyrell said at the session.

“But it’s something we need to do to be ready — Millennial borrowers have different expectations of what this experience will be like,” he said.

Despite these obstacles, however, there is hope for the future of digital mortgage. In fact, Harrell expects to see mortgages go 100% digital in at least five years. Within two to three years the majority of the process will be digital, he said in the interview.

The key? The GSEs need to adopt electronic documents and be able to securitize them, Harrell said. After that, all counties across the U.S. will be able to handle digital documents.

But is that the key? Or is it rather, as Bhat predicts, a natural reaction as Millennials take over the market? Or will it require a little of both? Either way, experts agree that the market is moving towards being 100% digital.

“At some point – and not THAT far off – there will be homebuyers who have never made a significant purchase offline,” Bhat said.

At this point, lenders simply need to take a step in the right direction, the panelists agreed. While the system may not be perfect, an step towards going digital will benefit the consumers and lenders alike.