2017 Housing & Pending Home Sales Trends; Subservicer White Paper

I hate to break the news, but racial diversity exists in the United States. In fact, many will tell you that it is one of the U.S.’s strongest attributes, and that we benefit from it. Astrophysicist Tomasz Stepinksi used NASA data to make an insanely detailed map of U.S. racial diversity, using techniques used to map Mars' craters algorithmically. (And yes, diversity is entirely different than profiling or stereotyping.)

Housing in 2017

We have all noticed that the housing market has been quite strong for a while now. Sure, there are regional and local laggards, but no one can disagree that housing trends are different than five years ago. Now, it seems some are even talking about it reaching its peak while others think the economy points to continued growth. Going back to earlier this year, S&P research found strong home price increases in the February data, along with growth in new home sales. Although existing home sales were down from the previous month, they hit their swiftest stride over 10 years in January and increased YOY in February by 5.4%. New single-family homes increased briskly, with 6.1% increased sales from January and a robust 12.8% YOY in February according to the Census Bureau and HUD.

Lenders know that it is a two-edged sword. As home prices have risen dramatically, people who usually would be able to afford a house are now unable to do so. In fact, the US homeownership rate has been decreasing steadily since its high in 2005 of 68.9%. In 2016, it landed at 63.4%. A few key factors are primarily responsible for this decline. The crisis caused a sudden drop that many areas felt. Sand states were especially hard hit, such as Arizona, Nevada and Florida and they are still trying to regain their footing.

Remember when people feared the tidal wave of foreclosures hitting the market? It never materialized due to the impact of larger investors in the housing market. When the crisis hit and prices tanked, institutional investors took advantage of the opportunities. These investors often turned foreclosures into rental properties which took them out of the pipeline for other buyers. Supply was diminishing while demand slowly swelled. This is especially true for high growth areas such as San Jose, Seattle, Austin and Denver. This combination has pushed up the price-to-income ratio more quickly than natural market factors would normally allow and made it more difficult for first-time home buyers to get involved.

And let's not forget the changing demographics of the country affecting all areas relative to homeownership. This is most pronounced in slower growth regions such as the Midwest, Northeast and South. Millennials are entering decent house-buying years, people who were foreclosed upon 5-10 years ago are re-entering the market, and we still have immigration.

Although rates are higher than much of 2016, and lower mortgage interest rates have helped this situation some, lack of inventory is an issue in many areas. But some economists point to new home development. Predicted to grow at a 6.5% pace this year, new units could help supply limitations ease, which will further balance out housing prices. Median home prices are expected to slow somewhat from 2016 and new home prices and existing home prices appear to be moving closer together.

"Pending" Home Sales, "Existing" Home Sales, and "New" Home Sales - take your pick. They all show something slightly different, and economists have their favorites. Housing and jobs play critical roles in the United States economy, thus the abundance of various statistics for each one. Let's look at Pending Home Sales trends for the last several months. Remember that this is an index created by the National Association of Realtors (NAR) that tracks homes sales in which a contract is signed but the sale has not yet closed. And they don't assure an actual sale: the appraisal may not come in at value, the borrower doesn't qualify, the inspection turns up a cracked foundation, whatever.

Pending Home Sales fell 0.8% in March as tight inventory reduced transactions. On a YOY basis, they are up 0.8%, as February was an unusually strong number. NAR chief economist, says sparse inventory levels caused a pullback in pending sales in March, but activity was still strong enough to be the third best in the past year. "Home shoppers are coming out in droves this spring and competing with each other for the meager number of listings in the affordable price range," he said. "In most areas, the lower the price of a home for sale, the more competition there is for it. That's the reason why first-time buyers have yet to make up a larger share of the market this year, despite there being more sales overall."

February pending home sales surprised, rising 5.5% M-o-M, and are at their highest reading since 5/06, while house prices rose a strong 5.7% during the three months ending 1/17. Moreover, February new home sales were 592,000 seasonally adjusted, their second-best level since 2/08, and February housing starts hit 1.288 million seasonally adjusted, their second highest level since 8/07. While excellent, unusually warm February weather surely contributed to these strong numbers. February's number is 2.6% higher than a year ago, and the second-highest reading since the bubble years (the first was last April). A slight uptick in listings drove the increase. Demand is there, supply is not.

Pending Home Sales fell 2.8% in January as tight inventory reduced sales. Lawrence Yun, NAR chief economist, said home shoppers in January faced numerous obstacles in their quest to buy a home. "The significant shortage of listings last month along with deteriorating affordability as the result of higher home prices and mortgage rates kept many would-be buyers at bay," he said. "Buyer traffic is easily outpacing seller traffic in several metro areas and is why homes are selling at a much faster rate than a year ago 1. Most notably in the West, it's not uncommon to see a home come off the market within a month."

Pending Home Sales increased in December, according to NAR. The challenge for 2017 will be increasing inventory enough to offset higher borrowing costs. NAR is forecasting housing starts to increase 8% this year to 1.26 million. Normalcy is closer to 1.5 million. 

Pending home sales fell 2.5% in November on rising mortgage rates and tight supply, according to the National Association of Realtors. They forecast existing home sales to hit just over 5.5 million in 2017, which works out to be a 10-year high. NAR anticipates that increasing wages will offset some of the problems with affordability. They missed expectations for faster growth after a 0.1% rise in October. The decline was not a huge surprise because mortgage rates moved up sharply since the November 8 U.S. election

Capital markets

Yesterday's bond market, and last week's as well, seemed like the summer doldrums were already here. It was darned quiet, although rates moved higher with the 10-year closing at 2.39%. Fortunately Agency MBS continued their march tighter to Treasury securities although some traders think it'll be hard to find any more reasons for much improvement in the spreads.

Unlike yesterday, today we actually have some economic news. The NFIB Small Business Optimism Index slipped slightly for the third month in a row. At 7AM PT we have the March JOLTS (job openings) and March wholesale trade. We also have the weekly Redbook Same-Store Sales Index at 5:55 AM PT, and a $24 billion 3-year Treasury auction. For numbers, rates (including MBS prices) are nearly unchanged from Monday's close. The 10-year is at 2.39%.

Employment & products

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Not understanding complex mortgage servicing practices does not absolve you of your responsibility to monitor and oversee your subservicer's performance. With no "checklist" for third-party or subservicer oversight offered by the CFPB, OCC bulletins or various agency servicing guides, Richey May & Co. has released its latest whitepaper, "Mortgage Subservicer Oversight: Understanding Your Selection and Oversight Responsibilities." It includes guidance on selecting a subservicer, as well as recommended schedules for conducting oversight. As a CPA firm highly specialized in the mortgage industry, Richey May has completed its onsite review on Dovenmuehle and is headed to Cenlar on May 11 and 12. To learn more about Richey May's subservicer oversight review program, or how to participate in the Dovenmuehle or Cenlar reviews, please contact Kurt Blohm.

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And there is this note about superior customer support at Unify CRM. "It's refreshing dealing with your company. I am new to Residential Home Funding and learning Unify. Working in Northern VA, away from NJ, my resources are only as good as email and phone for support. Being in this business 30 years I understand the importance of a good CRM and marketing platform, especially today. Unify was one of the main reasons for me bringing my team to RHF. It's so nice to experience top-notch customer service today, in a world where we throw that term around way too much and many who do underperform. The customer service department certainly exceeded my expectations these last two weeks.  All too often as managers we all get complaining emails, I just had to write a positive one in recognition of your team. I'm looking forward to working with you all," wrote Paul Johnson, Regional Manager. To learn more, Schedule a DEMO today or contact Scott Benson (651-288-7110).