Patrick Carmichael's Real Estate Blog

The percentage of home buyers who could afford to purchase a median-priced, existing single-family home in California rose to 52 percent in the third quarter of 2011, up from 51 percent in second-quarter 2011 and was up from 46 percent in the third quarter of 2010, according to California Association of Realtors, (C.A.R.) ‘s Traditional Housing Affordability Index (HAI).
Home buyers needed to earn a minimum annual income of $61,530 to qualify for the purchase of a $292,120 statewide median-priced, existing single-family home in the third quarter of 2011. The monthly payment, including taxes and insurance, would be $1,540, assuming a 20 percent down payment and an effective composite interest rate of 4.63 percent. The effective composite interest rate in second-quarter 2011 was 4.85 percent and 4.78 percent in the third quarter of 2010.
Regionally, housing affordability rose in most counties in the San Francisco Bay Area but was down in Los Angeles County and Fresno County. At 77 percent, San Bernardino County was the most affordable, while San Mateo County was the least affordable, with only 25 percent of households able to purchase the county’s median-priced home.

Fannie Mae’s third quarter National Housing Survey shows that those who are exposed to default have similar attitudes about buying a home as those who do not know people who have defaulted. However, the survey also finds greater pessimism about the economy and personal finances among consumers who know defaulters.
“Knowing someone who has defaulted on their mortgage appears to be correlated with consumers being slightly more pessimistic about the direction of the economy, their finances, and their ability to obtain a mortgage, but does not materially correlate with their desire to own a home or their view of housing as a safe investment,” said Doug Duncan, vice president and chief economist of Fannie Mae.

Owners and renters who know defaulters are as likely to say owning makes more sense than renting, say buying a home is a safe investment and display roughly the same intention to buy a home as those who do not know a defaulter.
However, the survey also finds higher levels of pessimism on several measures related to the broader economy and personal financial prospects among consumers who know people that have defaulted:

Freddie Mac has released its U.S. Economic and Housing Market Outlook for October, which shows that the multifamily sector is a strong positive signal for the U.S. housing industry.

Highlights of the outlook include:

• Over the year ending mid-2011, the Census Bureau reported a net increase of 1.4 million households that moved into rental housing, a 4 percent rise in the number of tenant households in just one year.
• The U.S. homeownership rate has fallen about 1.5 percent over the past year, with owner rates falling by 4.4 percent for those under 25 years of age and by 7 percent for those aged 25 to 29 years.
• Apartment rents, which had been flat to falling in many projects during the 2008-2009 recession, have begun to rise, albeit slowly.
• New construction starts of apartments in buildings with at least 20 dwellings picked up this year, and in the second quarter, was the highest since the end of 2008.
• Ten-year constant-maturity Treasury yields averaged 1.98 percent in September, the lowest monthly average since the Federal Reserve’s series began in 1953; these yields are a common benchmark for multifamily mortgage rates, and suggest that mortgage rates fell to new lows for multifamily lending in recent weeks.

Strategic default has become an urgent and costly problem for lenders. University of Chicago Booth School of Business studies indicate that roughly 35 percent of mortgage defaults are strategic, and FICO estimates this makes strategic defaults more than a $20 billion problem annually.

FICO Labs researchers announced earlier this year that they had developed a method for predicting which borrowers are at greatest risk of strategic default, focusing especially on the six million U.S. homeowners with current-loan-to-value ratios of 120 or higher, making them twice as likely to consider defaulting on their mortgage. FICO’s strategic default prediction algorithms are now being employed by four of the 10 largest U.S. mortgage servicers. FICO estimates the collective benefit of its solution for these servicers could reach $2 billion in the first year.

Additional information on FICO’s strategic default research can be found in the white paper “Predicting Strategic Default,” available for free at www.fico.com/Insights.

A comparison of nationwide FICO scores from 2005-2011 illustrates that score distribution has remained relatively stable at a national level. However, a close look at the numbers suggests that U.S. lenders have experienced two distinct phases of consumer credit risk in the recession thus far.

Early in the recession, lenders saw a sizeable increase in the number of consumers who scored in the lowest (300-499) and the highest (800-850) segments of the FICO score range, and a corresponding drop in the volume of consumers at the middle range of 600-749.

The movement toward the tails of the FICO score distribution curve is typical during economic downturns. The downward shift likely is a result of quick credit problems experienced by consumers who are highly leveraged, leading to serious delinquencies and bankruptcies that push their risk scores toward the low end of the score range.

At the same time, mainstream consumers may instinctively move to protect their finances by paying down revolving debt, postponing new purchases that would require financing, and similar actions.  Such behavior tends to improve consumers’ credit risk and push their FICO scores higher.

The trend reversed course after 2008, when consumer scores moved away from the tails of the distribution curve, and 2.8 million more consumers scored in the 550-649 range. This shift may reflect the enduring impact to credit risk caused by the appearance of serious delinquencies on consumer credit reports. As FICO reported in March, score recovery from negative events such as mortgage foreclosure typically takes three to seven years for consumers who meet their credit obligations following such events.