6.30.2016 Housing Markets Are Heating Up

Based on analysis recently conducted by the National Association of REALTORS®, it looks like the summer home-buying season got off to an early start this year. During the spring, homes sold as fast as they have at any time since the housing recovery started and asking prices hit record highs in May.

Median Price Hits Record Level

The median list asking price for homes in the U.S. hit $250,000 in May, according to NAR. This was up nine percent from last May and represents the highest level since NAR started aggregating these statistics on its website (www.realtor.com) in 2013.

The number of homes listed for sale nationwide in May rose by four percent over April to 550,000, though this was four percent lower than last May. Homes for sale spent a median of 65 days on the market in May, which was three fewer days than they spent on the market in April. Also, there was a 30 percent increase in the number of home searches conducted on Realtor.com in May compared to a year earlier.

Realtor.com’s chief economist attributes the strong spring to pent-up demand among homebuyers and continuing low mortgage rates. Meanwhile, limited supply in many markets is keeping inventory levels low, which is pushing up prices in the markets.

Hottest Housing Markets

Using data such as the median days on the market and the number of views per listing, NAR identified the 20 hottest housing markets among medium-to-large U.S. metro areas. In these areas, homebuyers are highly motivated and homes are selling almost as fast as they go on the market:

  1. Vallejo, CA
  2. San Francisco, CA
  3. Denver, CO
  4. Santa Rosa, CA
  5. Stockton, CA
  6. Dallas, TX
  7. Sacramento, CA
  8. San Diego, CA
  9. San Jose, CA
  10. Columbus, OH
  11. Ann Arbor, MI
  12. Kennewick, WA
  13. Colorado Springs, CO
  14. Fort Wayne, IN
  15. Santa Cruz, CA
  16. Eureka, CA
  17. Boston, MA
  18. Modesto, CA
  19. Detroit, MI
  20. Raleigh, NC

California dominates the list with four of the top five, seven of the top 10, and 13 of the top 20 hottest housing markets. The Midwest makes a respectable showing with Columbus, Ann Arbor, Fort Wayne and Detroit making the list.

Top Housing Markets for Millennials

NAR also recently compiled a list of the top 10 U.S. metro areas for young homeowners. They analyzed employment gains, population trends, income levels and housing conditions in the largest 100 U.S. metropolitan statistical areas. NAR chose the top 10 based on such factors as above-average share of current Millennial residents and recent movers, favorable employment opportunities, and relatively low qualifying incomes needed to purchase a home:

  1. Austin, TX
  2. Charleston, SC
  3. Denver, CO
  4. Minneapolis, MN
  5. Ogden, UT
  6. Portland, OR
  7. Raleigh, NC
  8. Salt Lake City, UT
  9. Seattle, WA
  10. Washington, D.C.

NAR’s chief economist points out that an overwhelming majority of young renters have said they eventually want to buy a home. “As long as new and existing home supply keeps up to meet demand and holds prices from rising too quickly, these identified areas are poised to lead the way in helping Millennials realize their American Dream of becoming a homeowner,” he stated in an article recently published on Housingwire.com.

We’re interested in hearing from you. What are your observations about hot housing markets and how is the housing market in your area? Send me an email at steven@lendtrade.com.

6.23.2016 What Has Been the Economic Impact of Dodd-Frank?

As we head into the homestretch of the Presidential campaign this fall, we’re sure to hear both the Republican and Democrat candidates talk about what they will do to jumpstart the anemic economic recovery.

And yes, the so-called recovery we’ve experienced since the end of the recession has been anemic. In fact, this is now officially the weakest recovery in U.S. history, with annual GDP growth sputtering along at an average of just 2.2 percent, which is much lower than past recoveries.

New Business Formation Suffers

There are many possible reasons cited by economists and other experts for why economic growth during the current recovery has been so weak. One explanation that hasn’t gotten much attention is the slow rate of new business formation.

An article recently published in The Wall Street Journal pointed out that there has been a steady decline in business formation during this recovery, while the rate of business failures has remained steady. As a result, there are now more business failures than there are new business startups for the first time since these statistics started being compiled.

To what can the slow rate of new business development be attributed? According to the article, a number of studies blame this on the vast expansion of the regulatory state over the past decade.

And when it comes to regulatory zeal, there are perhaps no regulations in U.S. history that can top the Dodd-Frank Wall Street Reform and Consumer Protection Act. According to the article, the text of Dodd-Frank is 23 times longer than the Glass-Steagall Act, which was passed in response to the Great Depression. The Volker Rule, which comprises just one section of Dodd-Frank, contains 1,420 subsections!

Effect on the Banking Industry

On the fifth anniversary of the signing of Dodd-Frank last August, Rep. Jeb Hensarling, who is the chairman of the House Financial Services Committee, met with a panel of regulatory experts to discuss the impact of Dodd-Frank on the U.S. economy. In addition to pointing out how the legislation is stunting new business formation, inhibiting entrepreneurial innovation and restricting capital expenditures, they noted that it is having a damaging effect on the banking industry.

In particular, the Consumer Financial Protection Bureau (CFPB) gives federal regulatory agencies the opportunity to expand their reach well beyond normal banking operations. An article published on TheHill.com last August noted that the CFPB, which operates without any Congressional oversight, has imposed fines at an unprecedented rate since it was established in 2010.

Small banks, in particular, are being hurt by the high costs of administering the new regulations, which were originally intended only for large banks. “Dodd-Frank has become extremely burdensome and is contributing to a growing number of bank mergers and bankruptcies,” the article states.

The article continues: “If the U.S. economy is to recover, then growth must be higher than the current anemic gross domestic product growth rate. We must create a new climate for innovation and investment with a careful and objective analysis of the impact of regulation.”

Replacing Dodd-Frank

In early June, Rep. Hensarling revealed the latest of several as-yet unsuccessful Republican plans to replace Dodd-Frank. The plan has little if any chance of passing the current Congress and overriding a Presidential veto, but it could serve as a blueprint for future plans after the election.

This plan would ease the regulatory burden on big banks that agree to hold larger amounts of capital and also make it easier for community banks to operate. It would eliminate large portions of Dodd-Frank, including regulators’ so-called “orderly liquidation authority” and the ability of regulators to more closely oversee “systemically important financial institutions.”

The plan would also repeal the Volker Rule and allow Congress to set the CFPB’s budget while replacing the CFPB director with a bipartisan commission. In addition, the CFPB would see its power curbed and its name changed to the Consumer Financial Opportunity Commission.

We’re interested in hearing from you. What are your observations about the costs and impact of Dodd-Frank on the U.S. economy? Send me an email at steven@lendtrade.com.

6.14.2016 Why More Homeowners Are Choosing to Renovate Rather Than Move

Renovate or move? That’s the question many homeowners are asking themselves as they look at various statistics and trends.

The first trend is rising property values. According to the S&P/Case-Shiller Home Price Index, home prices are now up 35 percent since 2012. What’s more, the average home price is now within 5 percent of its peak a decade ago.

Another trend is rising interest rates: Though rates on 30-year fixed-rate mortgages have barely budged since the Fed raised short-term rates late last year, they are expected to tick up to an average of 4.7% next year and 5.2% in 2018.

Sell Higher … and Buy Higher, Too

Rising property values can put homeowners in a bit of a pinch: Sure, they can get more for their home, but a new home is also going to be more expensive. And homeowners with sub-4% mortgages may be reluctant to move and take on a new mortgage with a higher interest rate.

These and other factors are contributing to a boom in home remodeling and renovations. At the end of 2015, the National Association of Homebuilders’ Remodeling Market Index remained above the key breakeven mark of 50 for the 10th consecutive quarter. This indicates confidence among remodelers about the market. Also, The Home Depot and Lowe’s both recently offered upbeat forecasts for the next few years.

The Leading Indicator of Remodeling Activity (LIRA) projects that spending on home remodeling projects will increase by 8.6% by the end of this year and by 9.7% by the first quarter of next year. Harvard University’s Joint Center for Housing Studies expects the level of annual spending for remodeling and repairs to reach $325 billion by early 2017, which will be the highest level in a decade.

Home Renovation Stats

With home price appreciation holding steady in the low- to middle-single digit range annually, many homeowners feel more confident investing in their homes. A recent survey by Bankrate.com found that 28 percent of all homeowners (or 36 million of them) plan to renovate their homes within the next year. Here are the statistics broken out by demographic age groups:

  • Millennial homeowners: 37% plan to renovate
  • Gen X homeowners: 28% plan to renovate
  • Baby Boomer homeowners: 30% plan to renovate

The most popular types of planned renovations include the following:

  • Exterior renovations: 52%
  • New flooring: 39%
  • New windows/roof/siding: 34%
  • Kitchen renovations: 30%

“With more homeowners deciding to make upgrades to their homes this year, it’s a sure sign that they’re generally feeling more secure about the economy and in the housing market as well,” stated Bankrate.com’s personal loans and credit analyst in an article recently published by TheStreet.com.

Home Equity Also Rising

As property values rise, so does the amount of equity homeowners have in their houses. The Home Depot’s CFO recently noted that home equity values have increased 94 percent since 2011 due to rising home values and homeowners paying down their mortgages.

Also, there were 12.6 million properties in the U.S. at the end of last year that were “equity-rich,” or had at least 50 percent equity. Strong price appreciation has also reduced negative equity at the bottom of the market, which has created more than $6 trillion worth of equity since early 2009. And about 30 million homeowners now own their homes free and clear — which, of course, means they have 100 percent home equity.

These and other trends are driving a resurgence in home equity lending — much of which is being used by homeowners for home renovations. In 2015, lenders originated home equity lines of credit with limits of $146.1 billion. This was the highest level of HELOC lending since 2008 and double the HELOC volume of 2011.

We’re interested in hearing from you. What are you seeing when it comes to homeowners making renovations or moving into a new home? Send me an email at steven@lendtrade.com.

6.3.2016 How Do Borrowers Use Home Equity Funds?

The popularity of home equity loans and home equity lines of credit is growing as many homeowners choose to stay in their home and remodel instead of moving into a new home. Rising home prices and historically low interest rates are also helping drive more home equity lending.

As we detailed in a previous article, lenders originated HELOCs with limits of $146.1 billion last year, which marked the fourth consecutive year of growth in HELOC lending. This was up 20 percent from 2014 and double the volume of HELOC lending five years ago when it was just $73.2 billion.

The Survey Says…

So why do homeowners tap the equity in their homes, anyway? Morningstar News recently conducted an informal survey among readers to find out. Not surprisingly, the most common reason cited by readers for tapping home equity was to do home renovations. This makes sense because doing so utilizes the value of an asset (i.e., a home) to improve the asset and in turn make it more enjoyable and valuable.

For example, one reader who responded said she tapped her HELOC to do some home remodeling during the economic downturn. “This kept all assets working for the big uptick,” she posted. She said she repaid the borrowed funds quickly and was able to deduct the small amount of interest she paid. And when she put the house on the market a few years later, it sold quickly due to all the updates.

Another reader said he tapped a HELOC in 2008 to perform major renovations on an antique property. The resulting higher efficiency has offset one-third of the total costs of the renovations that were done. “Utilizing the HELOC to prop up these sorts of expenses, we have been able to cut way back on monthly utility expenses and contribute fully to savings, retirement, emergency savings, etc.,” he posted.

Creative Uses of Home Equity

Other reasons commonly cited for tapping home equity were to purchase a vehicle, pay educational expenses, pay off a mortgage and invest in other higher-yielding assets. For example, one reader said the terms on a HELOC were much better than she could obtain on any other type of loan, including a car loan. “Several times I have used my HELOC to buy large-ticket items like cars,” she posted.

Another reader said he put his two kids through college on a home equity loan. “Took awhile to get it paid off but it was sure worth it,” he posted. “One is now a teacher and the other is a lawyer.” Yet another reader said he used a no-closing 2.5% HELOC to pay for school for a career change.

One of the more creative uses for tapping home equity was by a reader who used a HELOC to pay a large tax bill. “The HELOC was the cheaper way to pay that bill and we paid it off rather quickly,” he posted. Another creative use of home equity was to pay off a first mortgage, which one reader did while cutting his interest rate from 5.25% to 3.62%.

One reader even used his HELOC to trade stocks on margin. He has tapped his HELOC to buy higher-yielding assets like high-yield junk bond funds, using the income generated from his investments to pay the HELOC interest. He once used $100,000 in HELOC funds he borrowed at 2.3% to buy a stock paying a 12.5% dividend. “Do the math: I expect total return to exceed HELOC interest paid over time,” he posted.

For Emergencies Only

Some readers preferred to view their home equity loans and HELOCs like a fire extinguisher enclosed in glass that they would only break in case of emergency. In particular, they were leery of the risk of their home declining in value and ending up underwater on their mortgage if they borrow more than the home is worth.

One reader summed up these sentiments this way: “HELOCs are great as an extra ‘cushion’ for an emergency fund, especially when you view the relatively low rates and tax deductibility, but I just prefer to avoid debt.”

We’re interested in hearing from you. What are some creative ways that you have seen borrowers use funds from home equity loans and HELOCs? Send me an email at steven@lendtrade.com.