Jacob Wascalus - Community Development Project Manager
Published July 1, 2012 | July 2012 issue
To better understand what factors are inhibiting home buying in the Twin Cities and Greater Minnesota, Community Dividend posed a trio of questions to a cross-section of housing industry professionals this past April. Their responses, captured below, range from general observations, such as a lack of buyer confidence, to more specific examples, such as low rates of household formation.
Chris Galler, CEO, Minnesota Association of Realtors
Julie Gugin, Executive Director, Minnesota Homeownership Center
Jim Hines, Assistant Vice President, Wells Fargo Home Mortgage
Anita Olson, Single Family Housing Specialist, Minneapolis Field Office, U.S. Department of Housing and Urban Development (HUD)
Community Dividend: From your viewpoint, what key factors are inhibiting home buying?
Chris Galler: There are three major ones at this point. First, there are fewer young consumers, and they have very low rates of household formation; second, it’s difficult for previously qualified consumers to obtain financing; and third, overall consumer confidence in purchasing a home is low.
Julie Gugin: Two issues that remain problems for potential home buyers are down payment accessibility and getting their credit scores in order. There are also not enough viable, easy-to-implement tools that loan officers can use in their work with first-time home buyers.
Jim Hines: There are still millions of homes tied up in the foreclosure process, which has fueled fears that an avalanche of new supply will come on the market. These fears are keeping appraisals conservative and mortgage underwriting standards tight, which could discourage home buying and keep many would-be sellers and buyers on the sidelines.
Anita Olson: In general, potential home buyers currently fall in two groups. One consists of people who have the means and creditworthiness to buy a home, but the turbulence and chaos of the market are keeping them from purchasing one. That’s one factor inhibiting home buying: uncertainty. The other group consists of people who have had “life” happen to them—job loss, foreclosure, short sales, deed-in-lieu and bankruptcy—catastrophic events that have caused them to experience credit problems. Many of the people in this group think that because of their past circumstances, they can’t become homeowners in the future. This isn’t true when it comes to FHA [Federal Housing Administration] financing, and this misunderstanding is another factor inhibiting home buying.
Community Dividend: How do you foresee the housing market shaping up in the next 12 months?
Chris Galler: We foresee a very slow recovery. We have fewer young people—20- to 30-year-olds—entering the market, and those that are have not formed typical, dual-income households. Combined with higher energy costs, high numbers of foreclosures in the 30- to 50-year age demographic, and a very negative election cycle, the back half of 2012, especially third quarter, will be slow.
Julie Gugin: I think we’re going to see improvements. The rental market is starting to turn people off—rents are very expensive, choices for larger families are limited, and we continue to hear from consumers that they want to buy a home.
Jim Hines: According to Wells Fargo’s Economics Group, both sales and new home construction have increased modestly, and prices for non-distressed sales have stabilized in many markets. Credit conditions have also improved modestly, and progress has been made in clearing some of the excess inventory of homes owned by financial institutions or tied up in the foreclosure process. We expect to see sales of new single-family homes rise 12 percent in 2012, and to see housing starts rise 9 percent this year, with single-family construction rising 8 percent and multifamily starts rising 12 percent. Overall, starts should rise an additional 16 percent in 2013.
Anita Olson: In Minnesota, FHA has increased its mortgage financing over the past five years, assisting with stabilizing the housing market. FHA-insured active loans went from 55,000 in 2007 to more than 138,000 in 2012. The next 12 to 24 months will consist of a slow, steady, upward climb.
Community Dividend: What can government, lenders, or potential home buyers do to set the housing market on a stable recovery?
Chris Galler: The government can reduce the regulatory overload. Tighter lending regulations, such as the QRM [Qualified Residential Mortgage] provision,1/ are making it difficult for today’s consumers to purchase a home, and government talk of eliminating mortgage interest deductions adds to consumer concerns about the financial benefits of owning one. Lenders need to quickly modify the short sale process so homes don’t reach the foreclosure stage. A number of transactions are either delayed or never happen because lenders still have no efficient means to dispose of these properties. And home buyers can reduce their expectations. Nobody is giving homes away, but far too many home buyers think they can purchase a home at 30 or 40 percent below the listing price.
Julie Gugin: The home-buying public needs to take advantage of some of the educational opportunities available to determine if buying a home is appropriate for them. If consumers arm themselves with adequate information, they can make the choices that will lead to appropriate and successful housing outcomes. Furthermore, lenders need to be more aware of the home-buying programs that are out there, and government needs to consider simplifying those programs, particularly ones targeted toward first-time home buyers.
In general, the industry needs to realign its thinking on what it’s going to take for people to be first-time home buyers. A lot of people have gotten caught in unemployment and underemployment situations but still have very high potential to be stable homeowners, and the industry needs to continue to get creative about messaging, developing products, and assessing who the new consumer is in our post-foreclosure world.
Jim Hines: That’s a difficult question to answer. That said, Wells Fargo supports national disposition strategies that will do three things: provide rental and affordable housing, clear sales of REO properties, and build partnerships that will address inventories today and in the future. We further recommend segmenting the inventory of government-owned real-estate properties according to optimal sales opportunities and rental opportunities, to make a national REO-to-rental program viable for entities that have significant REO portfolios.
Anita Olson: Potential home buyers can learn about repairing their credit and other ways of taking advantage of homeownership opportunities. They should seek out HUD-Approved Housing Counseling Agencies, which provide education and information on preparing to purchase a home.2/ While there has been a lot of negative press about the housing market, there have been encouraging trends as well. The government—particularly HUD and FHA—and the mortgage industry can help move this dialogue forward and restore confidence by helping consumers learn about the positive homeownership opportunities that are available.
1/The 2010 Dodd-Frank Wall Street Reform Act contains a provision requiring the securitizers of mortgage loans to retain “an economic interest in a portion of the credit risk” of the loans being securitized. Residential mortgage loans that have a low risk of default, called Qualified Residential Mortgages, are exempt from the requirement. As of June 1, 2012, federal banking regulators had not yet issued final regulations regarding the provision.