Risky Business

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The latest s e c on da r y m a r k e t a na ly t ic s Se r v ic i ng Or ig i nat ion SERVICING Analysts Wonder Why Some Markets Are More Responsive Than Others Data shows there are clear reasons why some areas are bouncing back at a faster clip. W hile the trend of low mortgage rates seen in the last year has stirred up housing activity and helped the market, Pro Teck Valuation Services posits a major question in its latest 48 | The M Report Home Value Forecast (HVF): Why have home prices in some markets been less responsive to low rates? In Pro Teck's "Lessons from the Data" entry for March, experts examine the effect of the Federal Reserve's commitment to keep interest rates low on home prices, which have historically increased during such programs. The piece's authors note that the inverse relationship between median home prices (conventionally financed by Freddie Mac) and 30-year fixed rates started to break down in 2008, exaggerating the recovery gap between markets. The writers believe there are three dominant reasons why low interest rates and loose monetary policy are not boosting home prices as much as they have in the past. First, they note that credit scores for many households took a hit during and after the crisis as a result of loan modifications, foreclosures, and job losses, "and the breadth of the impact has been sufficient to affect millions of households who now must become or are already renters." Though recent studies have found buying to be cheaper than renting, those households that suffered must remain on the sidelines for the time being until they can repair their credit situations. Second, tight underwriting has drawn out the time required to secure a loan and created more challenges for potential borrowers with less secure income streams. Those who are paid based on self-reported productivity are being affected most severely, the authors say, because lenders now require more conservative assumptions on future earnings. In addition, appraisals are being kicked back if they're not conservative in the selection of appraisal comps, "so the risk tolerance pendulum has swung towards extreme conservatism," the authors wrote. Finally, it's possible the investment appeal of housing and presumption that prices will only go up "has lost its shine," the writers said. "Affordability is definitely improved when interest rates are lower," said Norman Miller, professor at the Burnham-Moores Center for Real Estate at the University of San Diego and contributing editor to the HVF. "But it is very likely that the top tiers of the owner-occupied housing market are the ones benefitting the most from lower mortgage rates as this group has been less affected by credit score downgrades or more restrictive underwriting."

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