Where the Next Huge Real Estate Bubble May Be Building

The 2000s real estate bubble—which burst in 2007 and precipitated a once-in-a-century financial crisis and recession—is not something most folks are excited to see repeated. But five years of declining or stagnating housing prices, the market turned around big time in 2012, making some analysts worry that we’re seeing the beginnings of Housing Bubble 2.0.

Case-Shiller Home Price Index: Composite 20 Chart

Case-Shiller Home Price Index: Composite 20 data by YCharts

As you can see, home prices in most of the country are far from the bubble levels of mid-2000s, but if you drill down deeper to look at individual markets, one sees a different picture. Jed Kolko, housing economist with the real estate site Trulia, has been tracking home prices across the country to see which markets are over and undervalued. In a forthcoming “Bubble Watch” report, he finds that while most of the U.S. real estate market remains significantly undervalued, there are certain markets that are straying into bubble territory.

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According to Kolko’s analysis, which looks at several factors like price-to-income ratio, the price-to-rent ratio, and prices relative to their long-term trend, markets in Orange County California and Los Angeles are more than 10% overvalued. Kolko also pegs the Austin, Texas market at 10% overvalued, while 7 other markets range from 4% to 7% overvalued. Those include:

  • San Antonio, TX;
  • Honolulu, HI;
  • San Francisco, CA;
  • Houston, TX;
  • Riverside-San Bernandino, CA; and
  • Oakland, CA

Unsurprisingly, these markets — concentrated in Texas and California, have also seen double digit home appreciation over the past year, with Orange County real estate appreciating a whopping 23.4% since October of 2012.

So are we in danger of another housing bubble like we experienced last decade? Not quite yet, at least nationally.  According to Kolko, the market remains roughly 4% undervalued overall. And in some markets, like Cleveland, Ohio and Palm Bay-Melborne-Titusville, Florida, home prices are still 20% below their fundamental value. Furthermore, even the most frothy markets are less overvalued than the national market was in 2004, when home prices were 24% overvalued nationally.

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That being said, these numbers are evidence that policies like the Federal Reserve’s quantitative easing program, which have driven mortgage rates to historical lows, are encouraging buyers to snap up homes aggressively in certain markets. And some real estate analysts like housing market veteran Mark Hanson think that analyses like Kolko’s are too optimistic. Writes Hanson:

When comparing house prices and affordability today vs the bubble years people make a critical error.  That’s, they don’t “normalize” the bubble years metrics to account for the fact that the incremental buyer/refinancer used “other than” 30-year fixed mortgages.  In other words, they forgot about the popularity of “exotic loans” and assume everybody always used market-rate 30-year fixed rate financing.

In other words, the world has changed. Young folks can’t afford to leave their parents houses. Even the ones who can aren’t getting mortgages because credit is much tighter than it was in the pre-bubble years, and recent price increases have been fueled by over-enthusiastic investors rather than true economy-wide demand for housing. Every real estate analyst is forced to used assumptions when forecasting the future prices of homes, and given the fact that home price appreciation in California has slowed in recent months, Hanson may be going to far in arguing that markets like California are a full-blown bubble.

But a California-centered bubble is certainly a possibility, and even Kolko’s more nuanced analysis argues for buyers in some of the more frothy markets to approach with caution. One of the enduring lessons of the last real estate bubble is that while there are many reasons to buy a house — like the tax-deductibility of mortgage debt, the forced savings mechanism of paying a mortgage, and the pride of homeownership — expecting significant appreciation in your home’s value shouldn’t be one of them.

December 6th, 2014 12:12p by

Paying the Rent on Time Can Enhance Your Credit Report

The New York Times

If you’re a young person just starting out in the working world, you may not have much of a credit history, especially if you don’t have student loans or have never had a credit card.

That can make it difficult to get a loan when you do eventually want to borrow money to buy a car or a home.

But if you don’t want a credit card because you’re leery of debt, or, you lack enough of a credit history to qualify for one, your record of paying rent on time may offer an alternative way to enhance your credit report.

Experian, one of the three major credit reporting bureaus, includes on-time rent payments as part of its credit reports. It also factors such rental data into VantageScore credit scores, a competitor to the widely used FICO credit score. (Credit scores aim to summarize your credit report with a single three-digit number.)

Experian uses only “positive” rental information in its credit reports and scores, said Brannan Johnston, vice president and managing director of RentBureau, Experian’s apartment data service. Experian doesn’t include late rent payments, he said, because the rules differ from the typical account reported to credit bureaus; rent may be considered late if it is just five days past due, compared with 30 days for credit cards. Experian may eventually include negative rent histories in credit reports, he said, “But it’s not a priority right now.”

A poor rental payment history could affect your credit report otherwise, he noted, if your account was referred to a collection agency.

Because only positive rental history is considered in Experian reports, Mr. Johnston said, it tends to increase your credit score. You’ll benefit the most, though, if you were previously ineligible for a score — for example, if you’re a recent college graduate or an immigrant who hasn’t used the traditional financial system. If you already have a lot of other accounts in your credit file, he said, adding rental data will have less impact.

But your full rental history, including late payments and bounced checks, may be included in separate RentBureau reports provided to property managers for the purpose of evaluating tenants, Mr. Johnston said.

Experian’s rent information comes from data reported to RentBureau by large apartment chains, as well as by start-ups like William Paid, an online rent payment service that works directly with tenants and smaller landlords.

William Paid lets tenants “opt in” to have their rental history reported to Experian’s RentBureau, said Jeff Golding, chief executive of William Paid, so tenants who consistently pay on time can get credit for doing so if they choose. Roughly a third of the service’s tenants have payments reported, he said (but he declined to disclose its total number of users).

Other fledgling companies also offer to report rental history to help you build credit, but they may not necessarily send data to the big credit bureaus used by many lenders. Rental Kharma, for instance, helps consumers report up to two years of rental payment history to MicroBilt, which provides services including alternative credit reporting, said Bill Butler, co-founder of Rental Kharma. Mr. Butler said MicroBilt’s data is used to generate FICO Expansion Scores, which are used for consumers who don’t qualify for a traditional FICO score.

Here are some questions to consider about using your rental history to build credit:

■ Do all three major credit bureaus include rental data in their credit reports?

Experian says it is the only national credit reporting agency that adds positive rental data to its credit reports. (That means you won’t benefit if the lender you choose happens to obtain credit reports from another bureau, noted John Ulzheimer, a consumer credit expert.) A spokesman for Equifax confirmed that it did not incorporate rental information into its credit reports or credit scores. TransUnion didn’t respond to a request for comment.

■ Do traditional FICO scores incorporate rental payment information?

FICO does not include rental information in the formula for its flagship credit score, said Anthony Sprauve, senior consumer credit specialist with FICO. Still, he wrote in an email, “It is something that FICO is looking at.”

■ Are there potential drawbacks to having rental data included in credit reports?

Persis Yu, a staff lawyer at the National Consumer Law Center, said a possible pitfall of broadly including full rental histories in credit reports was that it might discourage tenants from legally withholding rent to obtain services from their landlord — for instance, to force needed repairs at a rental property — out of fear that they will be reported as delinquent.



October 30th, 2014 04:10p by


Potential Bay Area homebuyers who have been sitting on the fence waiting for the market to cool should take note: Rent prices in two of our local cities are increasing at a faster clip than asking prices for homes.studio_for_rent

According to a recent Trulia study, San Francisco and Oakland led in the nation in year-over-year rent price gains last month. Since September 2013, rents in San Francisco have increased 15.4 percent, while Oakland rents have grown by 14.2 percent. Trulia’s data shows that San Francisco rent prices are the most expensive in the U.S., putting the median monthly rent for a two-bedroom unit at a staggering $3,600.

Although homes in both cities have seen solid appreciation over the past year, asking prices aren’t increasing at the velocity that rents are. In San Francisco, condominium asking prices were up 12.7 from last September, while single-family home asking prices increased 9 percent. In Oakland, asking prices rose 11.9 percent from a year earlier.



October 13, 2014 by Pacific Union • Posted in Weekly Real Estate News Roundups

October 27th, 2014 10:10p by

Chinese homebuyers are flocking to these U.S. states

Chinese buyers are now the biggest international players in the U.S. housing market and some states are seeing billions of dollars in real estate deals as a result.
More than half of the $22 billion Chinese buyers spent on U.S. homes during the 12 months ended in March was spent in California, Washington and New York, according to the National Association of Realtors.

Top U.S. states for Chinese homebuyers
Chinese buyers are spending billions of dollars on homes in these states.
State Market share
California 35%
Washington 9%
New York 7%
Pennsylvania 6%
Texas 6%
All other states 36%
Source: National Association of Realtors

The hottest markets: Los Angeles, San Francisco, San Diego, New York and Seattle, according to Juwai.com, a Hong Kong-based website that connects Chinese buyers with U.S. properties.
California is particularly attractive because it’s so close to the homeland, and its major cities have large Chinese-American populations and attractive climates and lifestyles, said Andrew Taylor, Juwai’s co-CEO.
Related: Mansions for under $1 million
“Plus, it has a thriving tech industry that employs many Chinese,” he said.
Leslie Appleton-Young, the chief economist for the California Association of Realtors, said there had always been a small cadre of real estate agents in California who work with international buyers, but the number has exploded over the past two or three years.
“The global real estate market is a reality,” she said.
The influx of Chinese buyers has helped push home prices higher in places like San Francisco. That has forced less wealthy Chinese buyers to turn to nearby cities like Oakland and other less expensive areas, buoying those markets as well, said Appleton-Young.
In Seattle, tech jobs and universities are a big draw. Many Chinese parents are buying condos for their kids who are attending school there.
“They come to Washington State for work, for education or simply to invest,” said Taylor.
Related: Best places for vacation home deals
In New York, Chinese buyers are spending millions on properties in Manhattan that they will never live in, according to Weimin Tan, a real estate agent who caters to Chinese real estate investors.
His clients spend between $1 million and $4 million and many treat the purchases solely as investments. “They use it as a hedge to diversify their holdings,” said Tan.
Chinese buyers are also searching for homes for sale in Florida’s resort areas, according to Juwai’s Taylor.
In Miami, Chinese buyers go for newly built, high-end waterfront buildings, where they can easily find renters at attractive yields.
And growing in popularity among Chinese house hunters is Texas, particularly the cities of Austin and Houston, said Taylor. The state of Texas engages in nearly $10 billion worth of trade a year with China.
Surprisingly, the city of Plano, outside Dallas, has one of the highest percentage of Chinese residents in the nation, at 5.2%.
Related: Want to make money as a landlord? Try Detroit
But perhaps the most unexpected destination for Chinese real estate money to land in is Michigan.
Chinese buyers are keeping an eye on the revival of the auto industry and buying homes in manufacturing cities like Detroit, Saginaw and Flint, said Taylor. They’re also purchasing homes in Ann Arbor and other college towns for their kids.
Most of the buying, however, is pure bottom-fishing with many buyers never even setting foot on their property or in the state, for that matter. In Detroit, news stories of homes being auctioned off at a starting bid of $1 has “set off an avalanche of interest and some purchases,” said Taylor.
Related: Detroit to auction vacant homes online. Starting bid: $1,000
Chinese investors buy the properties cheap, have them refurbished and put back on the market as rentals.
According to NAR, nearly 40% of the Chinese buyers will live in their U.S. homes full-time. But nearly half the purchases made by Chinese nationals are strictly for investment with buyers not intending to live in them at all.
Find homes for sale

By Les Christie @CNNMoney July 23, 2014: 5:11 PM ET

August 16th, 2014 04:08p by

Lenders Emerge to Break QM (Qualified Mortgage) Bounds

Tue Aug 12, 2014 12:45 PDT

Lenders emerge to break the bounds of QM guidelines

Seven months after the Consumer Financial Protection Bureau (CFPB) defined what a qualified mortgage (QM) is, several lenders have rolled out products outside its bounds.

Over the past few weeks, Impac Mortgage Corp. and RPM Mortgage Inc. have debuted products aimed at borrowers who might not fit the QM profile, with both companies citing a need in the market and confidence that their underwriting will be strict enough to keep everyone protected.

RPM’s products target upper-income borrowers who have trouble documenting income, like retirees and the self-employed who may have big investment portfolios or already own property. In some cases, a borrower could get as much as 80 percent on loans between $250,000 and $4 million.

“RPM primarily serves a lot of the high-end market, and many of our clients are locked out of the market from refinancing or purchasing because they do not fall within the QM guidelines,” RPM CEO Rob Hirt told Scotsman Guide News.

Impac has dubbed its line of products “ alt QM.” The offerings include an alternative agency product outside of Desktop Underwriter and Loan Prospector guidelines and a 50 percent debt-to-income (DTI) allowance; a product for self-employed borrowers; a jumbo product with higher DTI and a $3 million limit; and a product for real estate investors with more than 10 properties, outside of government-sponsored enterprise (GSE) limits.

“These loan programs are sorely needed because there’s an underserved market,” Impac President Bill Ashmore told Scotsman Guide News.

The cost of the RPM loan products range from mid-4 percent to mid-5 percent, depending on creditworthiness and assets, Hirt said. Ashmore said that Impac’s products will range from 5 percent to 6 percent.

These products differ from the non-QM jumbo loans that big banks offer to wealthy borrowers — and have offered since the QM standard went into effect — because they may end up serving a more diverse set of borrowers, like those with a sub-720 credit score.

Legal footing

These alternative QM lenders say they are not overly concerned about legal trouble because they will stick to underwriting standards as defined by the ability-to-repay (ATR) rule and will offer good customer service.

A benefit to producing QM loans is legal protection. The presumption is that if a lender followed ATR and QM guidelines, they did everything they could to prepare the borrower and thus bear little or no legal responsibility for a default or foreclosure.

This “safe harbor” is the most legally ironclad QM loan, while the separate “rebuttable presumption” QM type offers slightly less legal protection. According to the CFPB, a borrower could prevail in a rebuttable presumption suit if “the creditor did not consider their living expenses after their mortgage and other debts.”

RPM is building legal costs into the price of loans, Hirt said, but added that any borrower can take any lender to court over any loan, QM or not.

“There’s always something someone can challenge in court if they want to. Non-QM is not any different. How we are rationalizing our underwriting criteria will prevail if we are going so far in court,” Hirt said.

Impac will use ATR guidelines in underwriting all but one of its loan types. The investor product, Ashmore said, is essentially a business loan, which ATR does not cover. Ashmore also pointed out that some alternative programs could produce QM loans if the borrower, for example, has below 43 percent DTI and does not opt for an interest-only loan.

“When you’re going to get sued on a loan is when the borrower is not making payments. We believe the loans we are making are a 680 [FICO score] or above. These loans will perform,” Ashmore said. “I’m not really worried about getting sued.”

Hope in growing market

A recent National Association of Realtors (NAR) survey found that non-QM products are still relatively rare. NAR found that non-QM lending accounted for just 1.6 percent of production among respondents. Even the relatively safer rebuttable presumption loans accounted for just 8.3 percent of production.

Sixty-eight percent of respondents, however, said that their reluctance to originate non-QM was not because of regulators, but because of investors. Industry experts generally agree that without a larger private-label securities market, there will not be a large non-QM market.

Ashmore predicts that investors will inevitably look for a higher-yield product like what Impac is offering, and that the subordination of non-QM loans will settle.

Hirt argued that there is a “well-qualified market starving for liquidity” out there, which non-QM products will serve. Hirt projects that 20 percent of originations will eventually be the result of RPM’s alt-QM products.

“We have 65,000 unique clients in our databases. In reviewing the historical loan types of our past clients, we saw up to 20 percent of them could take advantage of these products,” Hirt said.

“It’s a huge underserved market that eventually will be billions in size,” Ashmore said. “A key indicator of the health of the U.S. economy is a healthy real estate [market]. Right now, it is sputtering out there. There are many borrowers on the sidelines.”

Questions? Contact Neal McNamara at (425) 984-6017 or nealm@scotsmanguide.com.

August 16th, 2014 04:08p by