TheMReport

July 2016 - Lessons Learned

TheMReport — News and strategies for the evolving mortgage marketplace.

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6 | TH E M R EP O RT TAKE 5 homeownership. There has been some evidence recently from the Census that trade-up buyers—and, in particular, Gen-X'ers—may be creeping back into homeowner- ship. Many of them lost their homes during the recession due to foreclosure. Prices affect the homeownership rate because it's keeping buyers out of the market, especially first-time buyers. M // How do you think regulation affects the homebuying experience? MCLAUGHLIN // On the lend- ing side, I think we're at a very healthy level of regulation, especially with respect to what happened 10 years ago, when lending regulation was lax and people were getting loans without M // What indicators can market watchers follow to help antici- pate changes in home prices? MCLAUGHLIN // If you look at historical data over the last 50 or 60 years, home price changes typically go hand in hand with changes in GDP. So when housing markets start to decline, it's usually a leading indicator that a recession is near or is a lagging indica - tor that a recession has already occurred. The most recent cycle pre-recession lasted 17 to 18 years. So the big question is are we going to go back to a seven- or eight-year cycle or a 17- or 18-year cycle. M // Falling housing affordability has pushed many buyers out of the market and fewer consum- ers are purchasing homes. How do home prices factor into this equation? MCLAUGHLIN // Rising home prices prevent people who might want to get into the housing market from doing so for two reasons. First, it's more expensive, and it takes a higher down pay - ment. Second, it costs more of your monthly income to service the debt. But I think another important question about homeownership and the homeownership rate is will we ever get back to the peak that occurred around 2005 or 2006. The reason why that's an impor - tant question is because at that time, lending was very loose. If you wanted to own a home, it was very easy to do so. So that "peak" may have been an artificial peak. When we settle back into a new normal homeownership rate, my thinking is that it's not going to be of that peak just because we're not lending as loose as we used to and, we probably never will. M // Which demographics are looking to become homeowners? What factors are keeping them from realizing this dream? MCLAUGHLIN // I think what is important to track when it comes to prices is what's go- ing on at price levels for dif- ferent types of homebuyers, in particular first-time homebuyers and trade-up buyers, or middle- tier buyers. That's because those tiers represent the biggest pool of households that are renting but that could possibly tip over into Taking the Market's Home 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. This occurrence has raised questions about price ceilings, housing bubbles, and homeownership. Ralph McLaughlin, Chief Economist at Trulia, dives deeper into rising home prices and addresses some of the unanswered questions about this phenomenon. having to document other things they may want to document. I think that level of regulation has probably swung in the proper direction and that lenders, because of it, are more prudent at lending and probably less likely to set up another demand-induced bubble. On the land-use regulation side, perhaps we are a bit overregulated in some markets, especially the costly coasts. When economic cycles recover from a recession, that's the time when new housing should start to come onto the mar - ket, but because it takes so long to do so, that new supply isn't hitting for a long time—at least anytime it might help alleviate pricing in - creases. In sum, lending regulation is probably where it should be; land-use regulation is overregulated in some places. M // With home prices on such an upswing, can we expect a down- swing is in the near future? MCLAUGHLIN // When we next hit that ceiling or when we go through our next recession, I wouldn't necessarily expect nominal prices to do down or to go down by much, but certainly real prices might start to do down. I think the next recession isn't likely to be caused by the hous - ing market—probably likely by something else. Perhaps global economic conditions. Therefore, its effect on the housing market is likely to be minimal. We're more likely to see a flattening of home price appreciation rather than any nominal decreases. "When economic cycles recover from a recession, that's the time when new housing should start to come onto the market, but because it takes so long to do so, that new supply isn't hitting for a long time—at least anytime it might help alleviate pricing increases." Pulse

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