Ben Winck of Business Insider opened up the week with an article outlining a few signs that the U.S. may be in a housing bubble.
- Prices are above bubble levels: The Case-Shiller Index has exceeded the heights of the late-2000s boom.
- Homes are selling with bubblelike intensity: Beyond price growth, the ferocity with which homes are selling is possibly the wildest on record.
- Rents are spiking higher: Nationwide, the price-to-rent ratio rose just above 1.5 in 2006, and sat at 1.45 in May.
What is later discussed in this article is that the creditworthiness of mortgage borrowers and lending standards are significantly different than in 2006. Further, the pandemic exacerbated supply chains and created pent-up demand for different housing types. Taking a look at mortgage debt as a percentage of disposable income, we are at all-time lows.
Source: Board of Governors of the Federal Reserve System
New Redfin data also points to a cooling of the housing market, with the share of homes for sale with a price drop increasing for the past three months to 4.9%. Homes are also staying on the market a little longer—a median of 17 days. And, asking prices have eased back to where they were in May, with homes selling for less of a premium above list price.
Redfin Chief Economist Daryl Fairweather notes that:
“Although the market still feels tight and competitive, the number of homes for sale keeps creeping up as more homes are listed. Those home sellers are adjusting their price expectations or seeing their homes sit on the market. There could be even more listings coming on the market as mortgage forbearance ends and homeowners with missed payments decide to sell. And mortgage rates remain near all-time lows with no signs of an increase on the horizon.”
FHFA and rental history
In an interesting move, Housing Wire reported last week that the Federal Housing Finance Agency (FHFA) moved to count positive rental history in Fannie Mae’s mortgage underwriting processes. Most agreed this was the right move to improve affordability, however, critics believe it is irresponsible to loosen credit restrictions given what happened in 2006.
“Starting Sept. 18, Fannie Mae will count 12 months of positive rental payment history in its Desktop Underwriter program. To be eligible, borrowers must be first-time homebuyers, pay a monthly rent of at least $300, purchase the house as a primary residence, and consent to sharing 12 months of their bank statement history.”
Paul Centopani of American Banker (subscription required) reports that Fannie’s Desktop Underwriter will now be able to include consistent rental payments over the most recent 12 months “to give historically underserved populations a more inclusive measure of fiscal health.”
If the applicant has any missed rent payments from the last 12 months, then the rent consistency isn’t included in underwriting. This could give more tools to landlords who communicate with tenants the importance of consistent rent payments, as now it can help in obtaining mortgage financing.
Small landlord update
Most real estate investors are considered small landlords, who also make up the vast majority of single-family home and small multifamily owners. Jonathan O’Connell of The Washington Post penned an article titled, With tenants who won’t pay or leave, small landlords face struggles of their own, discussing how the eviction moratorium has hurt small mom-and-pop investors who only own a handful of units.
“Many corporate apartment chains catering to white-collar workers are raising rents and booking enormous profits; an index of publicly traded apartment chain stocks is up 43 percent through Friday. Meanwhile, some mom-and-pop landlords are giving up and deciding to sell, though at what scale is difficult to determine.”
Katy O’Donnell of Politico wrote a similar article, outlining how at times landlords can be unsympathetic figures in the eyes of tenants, however:
“The distress is acute for so-called mom-and-pop landlords — those who own fewer than 10 properties, which typically have between one and four units. They supply about half the housing stock in the country, and they’re more likely than corporate property managers to have lower-income tenants who’ve fallen behind on their rent as a result of Covid-19. About 30 percent have household incomes below $90,000 a year.”
As of February 2021, almost a quarter of these mom-and-pop landlords had sold a property. In sum, the article notes, “Next to the front-line medical workers and emergency responders, I think the small-business landlords who have kept their tenants housed should be getting a good deal of credit.”
Finally, Jillian Kay Melchior of The Wall Street Journal (subscription required) last week took a similar tone in her article titled, The Vulnerable Pay the Price for Covid Eviction Moratoriums, outlining that “the government set out to help small businesses but left landlords at the mercy of abusive tenants.”