Tuesday, October 22, 2013

Rationale for a Housing Recovery

The U.S. Housing market will continue to recover.

Here are two reasons why:
1.      The credit cycle is strengthening, and
2.      Inventory levels are favorable 

Nominal Mortgage rates are what we see in the newspaper. Real mortgage rates adjust the nominal by subtracting annual inflation from the median house price. That takes into consideration that debt to buy a home costs less (in real terms) as the asset being purchased increases in value.

The recent period of negative real mortgage rates signifies that people who have bought property, measured on a nationally aggregate basis, have made great purchases of property. This is one metric that actually objectively says, “…now is truly a good time to buy a home.” Despite the recent slowdown in price appreciation, the cost of financing side is still in our favor.

And for the inventory part: 

The recent housing rally doesn’t need to become as lofty as the previous to manage respectable appreciation from this point either. Fundamentally, there are reasons behind demand - income levels, ability to qualify, etc. - but technically speaking, the lack of supply issuance (above chart) suggests that there hasn’t been housing starts (construction metric) for quite some time. Due to this lag, don’t be surprised to see appreciation in housing on the fact that there is a delay to new supply (click on charts to enlarge). 

Tuesday, October 15, 2013

A Common Misconception about the CPI & OER

There is a tendency, well, everywhere, to throw numbers in the face of friend and foe alike, generally in an attempt to produce that silent, “man, you-are-totally-right-and-I-will-never-doubt-you-again” response. Not that it actually happens anyhow. What I’m saying is that numbers tend to demand respect without being qualified. And any chance I can aid in adding clarity to a figure or concept is always a fair excuse to elaborate:

The Consumer Price Index, or CPI, is one of the most loaded figures invented by man. The paradox here is that peoples’ past consumption decisions determine the metric’s current output (demand pull or cost push), and based on that output, people have a tendency to change their future decisions because of it. Or we can just call it what it is: past behavior is a predictor of future behavior.

Visually illustrated:

Distinction is the reason one studies philosophy:

There are two separate housing-components within the CPI index—the common conception of what it is, and the ‘Owners Equivalent Rent’ (OER).

The dirty secret here is that the CPI does not track home prices per se, because the OER concept is really just a proxy.

This portion that makes up nearly one-fourth of the index value is an answer to the question: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?You should be asking your agent this question so you have a better idea at arriving at the appropriate negotiation value for your home (future blog to elaborate).

I want to make one more argument. See the following chart:

Major premise: The Home Price Index (HPI) is the nominally appraised market value of a property. This is what willing buyers and sellers agree upon. Nationally speaking, this is what drives the perception of the “housing market.”

Minor premise: The Owners’ Equivalent Rent, which we acknowledge has limitations, represents the rent-demand pricing power built within an existing home. The increase in home qualification standards, supply constraints, and the change in existing home owner behavior has justifiably increased the fundamental case to establish a floor price on home values.

Argument: the OER specific to one’s region is the qualification number to the CPI. This is the equivalent of the earnings power rising for a company over time. As long as the OER shows strength over time, and it has, then the nominal price of a home will eventually reflect that intrinsic value.

Monday, October 7, 2013


Whether it’s your first or fifth property, everyone really should get pre-qualified. The primary reason to get pre-qualified is because one wants to know how much of a home they can buy. Though the reason(s) one buys a home can be multiplicative or singular in nature, the process in route is pretty standard. Talk to me if you need help in going through the steps. Below I want to elaborate on a few insights around this process:
1.      Getting pre-approved & pre-qualified are not the same thing! Getting pre-qualified determines that one is likely to qualify for credit, while the pre-approval implies that a credit decision has been rendered.
2.      The appeal of a bid made on property in many cases does go up when the letter from a lender is ready to go. However, in many cases it will not offer an advantage because it is required.
3.      Debt-to-income ratios are what it’s all about: financial institutions want to know where you were so they can understand where you will be. The bank is actually building your balance sheet for you! You are allowed to ask for your personalized report.
4.      The pre-approval is not ironclad. It does not guarantee that you will get a loan. {A banker joke: keep them on hold until you get income projections, and when you get the projections just ignore them.}
5.      Historically speaking: the mortgage-lending business arose in the 90’s on the value proposition that “real estate agents should spend more time with clients and less with the banks…” Call it right or wrong, but the fact is that there is another layer in the process. An agent’s responsibility is to aid in the financing process however possible.
6.      It is ultimately a loan officer, and not a mortgage underwriter that approves your loan. Depending on the institution one can feasibly influence approval through qualitative arguments.
7.      Student-loans are a very important consideration. Recall the importance of debt-to-income before and after the home purchase.

If you are only interested in the how questions, please come and speak with me so that I can walk you through the process. Here I have given a few of the why explanations surrounding the process.

Until next time.