July 2016 - Lessons Learned

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52 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T ANALYTICS THE LATEST Are Current Home Prices Sustainable? Question marks abound as industry experts bandy about the sustainability (or lack thereof) situation. H ome prices have entered into peak levels not witnessed since 2006, causing a growing concern in the industry about the long-term sustainability of current home prices. Freddie Mac's monthly insight report for May dives deeper into the phenomenon of rising home prices by explaining what risks they pose and how to access the risks. Between 2006 and 2011, home prices declined about 25 percent, and in turn, erased $6.2 trillion in housing wealth, Freddie Mac said. As a result of the drop in prices, almost 23 percent of borrowers found themselves underwater, owing more on their mortgages than their houses were worth, de - linquencies and defaults skyrock- eted, almost 2 million borrowers lost their homes to foreclosure and short sale, and the homeown- ership rate in the U.S. dropped from 69 percent in 2006 to less than 64 percent today. U.S. house prices rose 1.3 percent in the first quarter of 2016 and 5.7 percent year-over-year, according to the Federal Housing Finance Agency (FHFA) House Price Index (HPI). The report noted that this will mark the 19th consecutive quarterly price increase in the purchase-only, seasonally adjusted index and the fourth consecutive year in which prices grew more than 5 percent. "House prices have breached the peak levels of 2006, raising concerns about the long-term sustainability of current price levels," said Sean Becketti, Chief Economist, Freddie Mac. "The difficulty of forecasting house price appreciation and the con - flicting signals of the multitude of house price metrics make it challenging to assess whether— and where—house price risk is indeed increasing." Freddie Mac suggests two meth - ods to gauge home price risk. The first stage compares the prices of recent sales to household incomes to pinpoint areas that merit further scrutiny, and the second stage checks whether additional indica - tors suggest that house prices in the highlighted areas are headed for a fall in the future. "Our first stage identified 10 large metro areas with unusually high house prices relative to the household incomes in those areas. However, the second stage failed to produce compelling evidence of increasing house price risk," Becketti said. "As long as lever - age remains low, homeowners will remain resilient in the face of economic fluctuations. However, if leverage creeps up, homeown - ers' financial cushion will shrink, leaving them more vulnerable to economic shocks. In sum, our analysis suggests that, aside from isolated areas, we don't need to worry about house prices—yet." SFR Securitizations See Benefits of Ownership Drop Increased demand for renting over buying has given single-family rental securitizations a big boost. A drop in first-time homeownership in the U.S., due to the lack of affordable housing, has given single-family rental (SFR) securitizations a credit positive boost. Moody's Investors Service said in a report that housing afford - ability for first-time homebuyers has been decreasing since 2000. This phenomenon has, in turn, provided a higher demand for rentals in the market. Moody's reported that the lack of affordability for first-time homeowners, due to a decrease in personal income and rising home prices, has hit the Generation Y cohort especially hard as those in their 20s and 30s seek to form households and purchase homes. "A dearth of 'for-sale' inven - tory of mid-to-lower-price homes, combined with ongoing tight credit conditions, forces many to remain in rentals," Moody's said. "In addition, many potential first- time homebuyers are burdened with high student loans that further constrain their buying capabilities. As a consequence, demand for rentals is remaining very strong for the limited num - ber of available rental properties." The U.S. Census Bureau re- ported that the rental vacancy is now at 7 percent, down from 11 percent in 2009. Moody's believes that the "drop in vacancy bodes well for the SFRs that we rate, especially regarding anticipated future en - hanced rental revenue as Gen Y renters are a large component of SFR renters. This also portends higher liquidation proceeds on potential sales of SFR properties." The report noted that rental rates will continue to benefit SFR securitizations. Moody's said that the increasingly unattainable goal of homeownership for many and the low national rental vacancy rate will raise rental demand and rents, both of which bode well for SFR cash flows. "Stronger demand for rental properties will benefit SFR secu - ritizations by enhancing borrower and transaction-specific revenue streams and net cash flows, while also potentially increas - ing recoveries on foreclosures of underlying properties, should the need arise," the report said. "The continued financial strength of borrowers and compliance with transaction performance metrics are more likely in this healthy industry environment."

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