Tucson Land Use Law Blog

Tucson Land Use Law Blog

Insight & commentary on local land use and real estate issues

Fueling a New Bubble

Posted in Real Estate

So, Fannie Mae and Freddie Mac, the beleaguered government sponsored agencies, which were seized by the US government during the financial crisis, recently announced programs to back loans to low and moderate income borrowers who would only be required to put down three percent, a two percent reduction in what Fannie and Freddie have required.  Fannie Mae argues that the primary barriers to homeownership for first time home buyers is saving money for down payments and closing costs, and it wants to change that.

Fannie Mae and Freddie Mac certainly had their role in the last housing market run-up and the attendant crash, such that the taxpayers were forced to pump over $187 billion to prop them up (all of which has been paid back and more).  Not surprisingly, they are  targets of much criticism after announcing these new plans to broaden home ownership, which many feel will lead to another housing bubble.

Freddie Mac’s program is called “Home Possible Advantage”, and will be open to anyone who meets certain requirements, but first-time home buyers must participate in a home ownership education and counseling program. All participants will have to pay for private mortgage insurance.  Homeowners with Freddie Mac mortgages could also refinance under the program, but would not be able to take any cash out as part of the process.

Fannie Mae’s program will be available to anyone who has not owned a primary residence for the past three years. Private mortgage insurance will be required, and at least one borrower must complete an acceptable pre-purchase home buyer education and counseling program.  Borrowers with Fannie Mae mortgages will be able to refinance and can take out up to $2,000 to cover closing costs, but will not be allowed to remove equity from their home.  Fannie Mae will also require that at least one of the borrowers is a first-time home buyer.  Fannie Mae will also allow for the down payment to paid by a gift from someone else.

While both programs require mortgage insurance, unlike and FHA loan, the borrower can drop the insurance without having to re-finance, as the mortgage insurance will drop off as soon as the borrower can prove the value of the property has risen below 80% loan to value.  The loans would be allowed only for fixed-rate mortgages on single-family homes that would be the borrower’s primary residence and would require full documentation of the ability to repay the mortgage.

With more substantial safeguards in place for these loans, this may prove a boon to a sluggard housing recovery.  Either way though, Freddie and Fannie will continue to be ceaseless targets of criticism, as they have been for years.  We shall see how these programs play out.

Foreclosure Wave 2.0

Posted in Foreclosure Topics

A recent article by Jann Swanson of the Mortgage News Daily reports on a troubling “tetrad of housing landmines” that could usher in a new wave of foreclosure activity.  Pulling from a from Octavio Nuiry’s Housing Landmines: Are Mortgage Flare Ups Coming Soon?, Swanson reports that while foreclosure activity is waning nationwide, a new wave of foreclosures is forming on the horizon.  The “tetrad” consists of: (1) defaults in loan modifications done under the Home Affordable Modification Program (HAMP); (2) Home Equity Line (HELOC) interest rate resets, and the huge backlog of remaining underwater borrowers and non-performing loans.

The first leg of the tetrad is the likelihood of mass defaults under HAMP.  Sheila Bair, the former Chairwoman of the FDIC has commented that “HAMP was a program designed to look good in a press release, not to fix the housing market. I don’t think helping home owners was ever a priority for them [the Obama Administration].”  Bair believed that the HAMP program was too rigid in its qualification requirements, claiming that the HAMP program was destine to fail because it was voluntary and that the banks would scuttle it.  While the Obama administration promised that HAMP would help 9 million borrowers, by the end of July 2014, only 1.4 million borrowers had received a HAMP loan modification, and for those that did, 350,000 have since defaulted.  Most damning of the inefficacy of HAMP is a comment Neil M. Barofsky, the former special inspector general of Troubled Asset Relief Program, received from former Treasury Secretary Tim Geithner.  Barofsky said that Geithner told him that AMP was not designed to help distressed borrowers, but was implemented to help the banks ride out the foreclosure crisis.  Geithner is reported as saying, “We estimate that they [the banks] can handle ten million foreclosures, over time.  This program will help foam the runway for them.”  HAMP indeed foamed the runway and stretched out the foreclosure process to allow banks time to recover.  TARP originally earmarked $75 billion for HAMP modifications, but by July 2014, only $4 billion had actually been spent.  Since its start, HAMP has rejected 5.5 million homeowners, and those that are actually in the program are about to see a nasty interest rate reset.  Between 2014 and 2021, nearly 90 percent of the HAMP modifications will see a rate reset, including 300,000 in 2015.  Sadly, as a government SIGTARP report states, “he longer a homeowner remains in HAMP, the more likely he or she is to re-default out of the program. Re-defaults of the oldest HAMP modifications are at a 46 percent re-default rate, a rate that continues to increase as the modifications age.”

The second leg of the tetrad is are the home equity lines of credit that are set to adjust soon.  Nuiry, reports that as of December 2013, some 16 million U.S. consumers held $474 billion in HELOC debt that is still outstanding.  Steve Chaouki, head of financial services at TransUnion has said that “Up to $79 billion of those HELOC balances could be at elevated risk of default in the next few years,” as consumers are forced to start paying both principal and interest on these HELOC loans.  TransUnion estimates that 15% of the the $79 billion at risk of default could play out in the next year.  What is more troubling is that over half of the $79 billion in troubled HELOC loans carry balances over $100,000.  The Office of the Comptroller of the Currency estimates that approximately $30 billion in HELOCs will resent in2014. Reset balances will rise to $52 billion in 2015, $62 billion in 2016 and $68 billion in 2017.  Brace yourselves for another default wave.

The third and fourth elements of “tetrad of housing landmines” are the fact that we still have over 1 million underwater borrowers and the continuation of non-performing loans nationwide.  Nuiry’s report is a pretty hard-hitting indictment of HAMP and the banks, something very unexpected coming from RealtyTrac, which is a cheerleader for the mortgage industry.  It remains to be seen just how the banks and our leaders will prepare for a festering new breed of foreclosure activity on the horizon.

Loosening the Belt on Mortgage Underwriting?

Posted in Real Estate

David Dayen of the liberal New Republic recently reported on a speech by Mel Watts, the chairman of the Federal Housing Finance Agency (FHFA), which has served as the conservator for Fannie Mae and Freddie Mac since the financial crisis.  Dayen argues that Watt “signaled to mortgage bankers that they can loosen their underwriting standards, and that Fannie and Freddie will purchase the loans anyway, without much recourse if they turn sour.”  While the reasons for the financial crisis are many, it cannot be argued that loose lending did not play a major role.  Well, on January 10, 2014, the Consumer Financial Protection Bureau’s Ability-To-Repay Rule went into effect, which has caused some tightening in the lending world.

Under the new Ability-to-Repay Rule, mortgage lenders must look at customers’ income, assets, savings, and debt, and weigh those against the monthly payments over the long term not just a teaser or introductory rate period. As long as they check the numbers and the numbers check out, lenders can offer any mortgage they reasonably believe a consumer can afford.  Certain types of mortgages are more likely to become a debt trap for the borrower so the new rule lays out basic guidelines that lenders can follow.  Loans within these guidelines are called “Qualified Mortgages,” and they give lenders greater certainty that they are meeting the Ability-to-Repay requirement. The Ability-to-Repay Rule does not require lenders to offer any specific type of mortgage.  Lenders can offer any mortgage they believe a consumer has the ability to repay, as long as they have documentation to back up their assessment.  So, not all loans will be Qualified Mortgages.  The Consumer Financial Protection Bureau estimates that roughly 92 percent of mortgages in the current marketplace meet the Qualified Mortgage requirements. Dayen argues that the Ability-To-Repay Rule has “created a much safer housing market.”  Click on the graph below to compare delinquency rates on loans originated between 20112 and 2014 and 2005-2008 vintages.  It seems hard to argue with this claim.

Delinquency Rate Graph

Dayen, in much more pointed terms argues that:

the mortgage industry has engaged in an insidious tactic: tightening lending well beyond required standards, and then claiming the GSEs make it impossible for them to do business. For example, Fannie and Freddie require a minimum 680 credit score to purchase most loans, but lenders are setting their targets at 740. They are rejecting eligible borrowers (which, after all, make lenders money) so they can profit much more from a regulation-free zone down the line.

Let’s call this what it is: a shakedown. You can see this clearly from the opening session of the Mortgage Bankers Association conference, where the trade group’s leadership sounded more like mob dons. “If they’re going to regulate us, they must work to better understand the unintended consequences on consumers,” said MBA Chairman Bill Cosgrove. “Enforcement should be the exception to the rule, not the rule itself,” added President David Stevens. Concluded Cosgrove, “Today’s lenders are paying many times over for mistakes that may have been out of their control… It’s time for the penalty phase to end.” Nice mortgage market you’ve got there; shame if something happened to it.

Sadly, Watt, the FHFA chairman, has paid attention to these howls of protest, and has scrambled to “open the credit box,” to use the industry term. In Monday’s speech, he announced additional changes to the representations and warranties language. Generally speaking, the GSEs limit buybacks to the first three years. But they can demand buybacks later in certain prescribed cases of fraud, data inaccuracies or misrepresentation. However, Watt announced that his agency would establish “a minimum number of loans that must be identified with misrepresentations or data inaccuracies” to trigger the buybacks. In other words, lenders can now pass the GSEs a certain number of fraudulent loans, as long as they stay below the threshold.

He concludes with this thought:

Fixing the housing market requires putting people in the financial position to carry a mortgage, not slashing lending standards. It’s as if government’s best and brightest threw up their hands, deciding they had to return to bubble economics as the only way to produce growth. This has the lending industry, which profits handsomely from bubbles on the way up, licking their chops, especially if they can sell off the loans to the taxpayer and let them deal with the consequences.  Given what we know about how lenders shuttled borrowers with weak credit into loans they couldn’t afford, the prospect of a rerun should be frightening enough for any policymaker to reject. But the industry played Mel Watt and other officials like a fiddle, and we’ll all be singing the blues in the aftermath.

I leave it to the reader to decide if they agree with Dayen’s conclusion, but for all the books I was reading during the financial crisis detailing the tactics of the likes of New Century, Ameriquest, Countrywide, and the major banks, it is hard to argue with some tightening in the lending world.  Yes, it will keep some people out of the housing market, but maybe that is exactly how it should have been in the first place.  Maybe we should learn from Ed Clark, a plainspoken, polite and prudent Canadian bank CEO with a few simple rules: “We should never do things for our customers and clients that we don’t actually understand. If you wouldn’t put your mother-in-law in this, don’t put our clients in it.”  Simple advice – just not followed south of the Canadian border.

Student Loan Debt is Crushing the Housing Market

Posted in Uncategorized

Debt Image

Here are some sobering figures from John Burns Real Estate Consulting on how the meteoric rise in student loan debt is having a very appreciable effect on the housing market.

  • Student debt has ballooned from $241 billion to $1.1 trillion in just 11 years.
  • 29 million of the 86 million people aged 20–39 have some student debt.
  • Those 29 million individuals translate to 16.8 million households.
  • Of the 16.8 million households, 5.9 million (or 35%) pay more than $250 per month in student loans, which inhibits at least $44,000 per year in mortgage capability for each of them.
  • About 8% of the 20–39 age cohort usually buys a home each year, which would be 1.35 million transactions per year.

John Burns Real Estate Consulting estimates that student debt will cost the housing industry approximately $83 billion in sales in 2014.  What is particularly troubling is that households that pay $750 or more for college loan debt each month are priced out of the housing market entirely.  This is consistent with what is seen in mortgage application approvals.  Anthony Hsieh, the chief executive of LoanDepot.com has stated: “Between the approved universe and the denied universe, the [borrower’s] credit is the same. The fundamental difference is a few hundred dollars in student loan debt that pushed the debt-to-income above the approved threshold.”

This trend does not seem likely to abate either.  With college debt increasing by about 6% every year, there is every reason to believe this trend will continue, and probably worsen, John Burns Real Estate Consulting reports.  For this year alone, the John Burns Real Estate Consulting report estimates that heavy college debt will reduce real estate sales by 8% for this year.

Increasingly, the chances of younger generations living better than their parents (at least materially speaking) is no longer very promising.

Progressive Housing Policy – Laying the Blame for the Housing Bubble on “Affirmative Credit”

Posted in Uncategorized

A recent article by Michael Booth in the admittedly conservative online magazine American Thinker posits that the much of the blame for the housing crisis can be traced to the Democrat’s “affirmative credit” policies.  Booth argues that the naming of Michael Raines as the CEO of Fannie Mae turned Fannie Mae into a Democratic “campaign machine,” and helped reshape Fannie Mae by lowering credit standards and allowing for no documentation loans and “liar loans.”  There is simply no simple way to explain the housing crisis.  While Booth’s argument attempts to lay the blame on “progressive” housing policies, clearly, there was much more at play.  Securitization, huckster mortgage lending, low interest rates, greed, fear, wanting more than you should have all played a role in this, and trying to pin it on the lenders, bankers, Barney Frank, Countrywide, undeserving homeonwers does not help explain the complexity.

What is clear is that the pendulum swing in lending has been severe.  Home ownership is at the lowest point it has been in forty years.  Rob Couch, a commissioner for the Bipartisan Policy Center’s housing commission argues that “all the laws set up to protect low-income, moderate-income and first-time buyers are protecting them out of a chance to buy a home. And consider the difference it makes on the community to have homeowners, to take chances on people on the margins and have them grow into responsibility.”  So many of the laws that have been implemented since the crash have impacted mortgage lending to the point that many lenders just cannot make any money making loans to these groups.  All of these vacillations in lending standards seems to argue for a more localized lending process through banks where individuals can make decisions based on knowing people, their needs, the strengths and weaknesses.  Securitization certainly created great incentives for lenders and banks and played a huge role in the crash.  A return to local lending decisions based on practical guidelines would help create a stable housing market.

Mortgage Settlements and Tax Liability

Posted in Foreclosure Topics

It is interesting that some attribute the phrase “Monkey on my back” to an older phrase: “Monkey on the roof,” which referred to one’s mortgage.  Well, call it a monkey or a 900-pound gorilla – either way – Bank of America just loosed some kind of opposable-thumb animal from its back.  One troubling aspect of the major post-housing boom bank settlements (among many others for certain) is that much of the settlement payouts will come in the form of “consumer relief,” which includes: loan modification for distressed borrowers, including FHA-insured borrowers, new loans to credit worthy borrowers struggling to get a loan in the nation’s hardest hit areas, borrowers who lost homes to foreclosure or short sales, and moderate income first-time homebuyers, reductions in mortgage principal and monthly payments for consumers struggling to hold onto their homes, funds to take over and tear down derelict housing, and assistance for building or refurbishing affordable rental properties.  For instance, in the recently-announced Bank of America settlement, of the $16.65 billion, Bank of America will shell out $7 billion in “consumer relief.”  While this is certainly welcome news, for many, this kind of relief is no longer even an issue, as so many people lost their homes to foreclosure.

I am convinced that if the major banks could have simply written down principal, reset interest rates, or made it easier to short sale a house, much of the initial pain of the financial crisis might have been averted.  However, the securitization of so many of the loans that Countrywide, Washington Mutual, and other mortgage mills were packaging and sending the secondary markets made it systemically impossible for many of the mortgage servicers to really do anything to help homeowners facing nasty rate resets or unforeseen circumstances.  Securitization has made decision making nearly impossible, as trusts with many, many investors simply cannot make the day-to-day decisions on individual mortgage cases.

Now, I am not all cozy on the side of many housing advocates and others who simply want to take every opportunity to lay the blame on the banks, thought there is much to point at indeed.  The housing bubble, its subsequent burst, and the attendant pain to follow was a complex web of communal bad decision making, greed, and stupidity.  Let’s be honest here.  Fortunately, the settlements seem to be getting more focused and addressing past deficiencies, such as the consequential tax hit that some may face when receiving relief, especially since the expiration of the Mortgage Debt Relief Act of 2007.  Indeed, as part of the Bank of America settlement, it may pay up to $490 million to cover taxes distressed homeowners may owe when some of their mortgage debt is forgiven.  In coming months, Bank of America will be responsible for scouring its mortgage portfolios, identifying eligible homeowners and contacting them for relief or homeowners can contact 877-488-7814 for more information as to whether they may be eligible.

No easy answers in all this, but at least the government has continue to wage battle against the top financial firms, even if they will never exact the amount of flesh necessary to really make these banks think twice about pursuing greed in the same fashion as they did in the last run up.  Sadly, there is little evidence in history to suggest it will not happen again – the only difference being the asset.

The $16.65 billion Bank of America Settlement

Posted in Real Estate, Uncategorized

The Securities and Exchange Commission today announced a massive global settlement between Bank of America and the US Justice Department, other federal agencies (including the Securities and Exchange Commission, the Federal Housing Administration, and Ginnie Mae), and six states, to resolve claims connected to toxic residential mortgage-backed securities, collateralized debt obligations and an origination release on residential mortgage loans.  At issue are $245 billion in soured home loans, only $10 billion of which were from Bank of America. The rest were sold, packaged in bonds, by three firms BofA acquired in 2008 — the giant Calabasas high-risk lender Countrywide Financial Corp., Wall Street fixture Merrill Lynch & Co., and First Franklin Financial Corp., a big San Jose subprime specialist that Merrill had purchased in 2006.

In settling the various claims, Bank of America admitted that it failed to inform investors during the financial crisis about known uncertainties to future income from its exposure to repurchase claims on mortgage loans.  Additionally, Bank of America also is resolving a securities fraud lawsuit that the SEC filed last year related to residential mortgage-backed securities (RMBS) offerings.  The SEC reports that Bank of America has agreed to settle the two cases by paying $245 million as part of a major global settlement in which Bank of America will pay $16.65 billion to resolve various investigations involving violations of laws regulated by other federal agencies ($9.65 billion in cash and approximately $7 billion worth of consumer relief).

According to the SEC’s order, Regulation S-K requires public companies like Bank of America failed to disclose in the Management’s Discussion & Analysis (MD&A) section of its periodic financial reports any known uncertainties that it reasonably expects will have a material impact on income from continuing operations.  Bank of America failed to adhere to these requirements by not disclosing known uncertainties about the future costs of mortgage repurchase claims when filing its financial reports for the second and third quarters of 2009.  These uncertainties included whether Fannie Mae, a mortgage loan purchaser from Bank of America, had changed its repurchase claim practices after being put into conservatorship, the future volume of repurchase claims from Fannie Mae and certain monoline insurance companies that provided credit enhancements on certain mortgage loan sales, and the ultimate resolution of certain claims that Bank of America had reviewed and refused to repurchase but had not been rescinded by the claimants.

Bank of America, as part of the settlement, admitted that “it failed to make accurate and complete disclosure to investors and its illegal conduct kept investors in the dark,” according to Rhea Kemble Dignam, regional director of the SEC’s Atlanta office.  This admission of wrongdoing, it has been stated by the SEC “provides an additional level of accountability for its violation of the federal securities laws.”

In the SEC’s original case against Bank of America filed in August 2013, the agency alleged that Bank of America knew that its wholesale channel loans – described internally as “toxic waste” – presented vastly greater risks of severe delinquencies, early defaults, underwriting defects, and prepayment.  The global settlement has Bank of America paying disgorgement of $109.22 million, prejudgment interest of $6.62 million, and a penalty of $109.22 million while consenting to permanent injunctions against certain violations of the Securities Act.  The settlement is subject to court approval.  To settle the new case, Bank of America agreed to pay a $20 million penalty while admitting to facts set out in the SEC’s order, which requires Bank of America to cease and desist from causing any violations and any future violations of of the Securities Exchange Act.  Although Countrywide Financial no longer exists, co-founder Angelo Mozilo is not in the clear, as prosecutors attempt to still hold him responsible for his company’s role in the U.S. housing bubble.

Bank of America already has settled its liability for Fannie and Freddie claims for more than $5.8 billion. Adding that to its proposed settlement with the Justice Department would bring its settlements to well over $22 billion — the largest settlement by a single entity in American history, according to the Justice Department.  The settlement doesn’t release the bank from criminal charges and the Justice Department reserved the right to file both criminal and civil charges against individuals.  Follow this link to a great graphic showing the various bank settlements since 2008.  http://graphics.wsj.com/documents/legaltab/

Today’s settlement with the U.S. Justice Department will cut Bank of America’s third-quarter pretax profit by about $5.3 billion, or 43 cents a share after tax, Bank of America has reported.  Nonetheless, Bank of America shares rose 3.1 percent to $16 in earlier trading today.  It has been estimated that Bank of America’s net income will surge past $17 billion next year, the most since 2006 and up from $11.4 billion in 2013, according to the average of 15 analysts’ estimates in a Bloomberg survey.

Well, looks like everything is back on track for the banks.  Pretty sure we can say that the fallout from the financial crisis is not “settled” with the public, as the effects continue to materialize.

When Does a Tax Lien Expire in Arizona?

Posted in Tax Lien Foreclosure

When an owner of real property in Arizona fails to pay her real property taxes, the County Treasurer will offer to investors the opportunity to purchase a tax lien against the real property in the form of a Certificate of Purchase.  The successful bidder for the tax lien pays the delinquent taxes, fees, and penalties, and then begins to earn interest on the tax lien at the interest rate bid at the auction or over the counter.  Under Arizona law, at any time beginning three years after the sale of a tax lien, the tax lien holder may bring an action to foreclose the right to redeem.

A recent Arizona Court of Appeals Memorandum Decision (Span v. Maricopa County Treasurer) deals squarely with the issue of when a tax lien expires.  However, this Decision is not binding and did not create legal precedent, as the Court of Appeals did not issue a formal written opinion.  While not creating any legal precedent, the Decision does provide a potential glimpse into how a future court might rule on the issue of when a tax lien expires.

Span, the owner of the subject real property, argued that the tax lien against his property, which was purchased in 1995, had expired because the tax lien holder did not file a tax lien foreclosure action until 2007.  Maricopa County argued that the tax lien had not expired, because the purchase of later delinquent taxes (“subtaxes”) tolled the ten-year expiration period.  Span argued that the tax lien expired because the statute at issue in this case (Arizona Revised Statute Section 42-18208(A)) does not explicitly provide for tolling based on the purchase of subtaxes.

The only question before the Court of Appeals was when does a property tax lien expire under A.R.S. Section 42-18208(A).  The Court of Appeals held that a tax lien expires ten years after its purchase regardless of whether a buyer later purchases the subsequent taxes on the same property, and the expiration date is not tolled accordingly.

Interestingly, prior to 2002, there was no time limit for a tax lien holder to foreclose on his tax lien.  This resulted in a backlog of old tax liens on each of the fifteen Arizona counties’ tax rolls, and also created issues with income tax filings for tax lien holders.  Consequently, the Arizona legislature later amended the law to include a ten-year statutory lifetime for tax liens purchased on or before August 31, 2002.  The Court reasoned that it is clear from the legislative history and another statute that sets a ten-year expiration period (A.R.S. Section 42-18127) that the Legislature intended tax liens to expire after ten years, unless the purchaser begins a tax lien foreclosure action before that date.

The take away is pretty straightforward – if you do not begin a tax lien foreclosure action within ten years from the date the tax lien was purchased – your tax lien will expire.  However, what is not so clear is whether a tax lien that is purchased over-the-counter (at an automatic 16% rate), but was offered for sale years earlier expires ten years from when it was first offered for sale or first purchased.  The Pima County Treasurer, Beth Ford, takes the position that a tax lien expires ten years from when it is actually purchased.  A future legislative amendment is in the works to clarify this very point.  Who in their right mind would purchase a tax lien that was offered fifteen years ago knowing that the second they purchased it, it had expired?

Seniors are Struggling with Student Loan Debt

Posted in Uncategorized

Bloomberg Businessweek recently reported that a growing number of Americans aged 50 and older still have not paid off their student loans.  While people aged 50 and older hold only 17% of all student loan debt in the United States, this group has nearly three times as much debt as it did in 2005, according to recent New York Fed data.  By comparison, student debt for people under age 40 is about one and a half times as high as it was in 2005.  Interestingly though, this data does not distinguish  between older Americans who took out loans to finance their education and those who did so to put their children through college.  Either way, this group is clearly carrying more debt than ever before, and it appears that the government is using every tool it has to get its money back.  Indeed, collectors of federal student loan debt have the power to garnish income, block benefits, and withhold tax rebates.  Student debt also cannot be discharged in bankruptcy, so the debt remains until paid.  For older Americans that are already struggling with carrying debt and having no solid safety net to draw from, having their Social Security payments seized must be devastating.

According to the Federal Reserve, of the roughly $300 billion in U.S. Department of Education “Direct Loans” that are in repayment, one in six, or about 17.2 percent, are at least 31 days delinquent.  By comparison, just 3.3 percent of all loans and leases held by U.S. banks are at least 30 days late.  This latest information, which has been largely undisclosed in the past, comes as Washington policymakers and Wall Street analysts debate whether the nation’s $1.3 trillion in unpaid student debt poses a risk to U.S. economic growth and to the federal government’s budget.  Given the dismal prospects for younger Americans to repay their crushing educational debt and the fact that older Americans are also struggling, one has to wonder whether we are gearing up for another financial crisis that the government will foot the bill for.

Rising Housing Prices + Stagnant Economic Picture = Hard to Buy (or Rent)

Posted in Real Estate

While median home prices are clearly beginning to find some traction, having risen 6.6% from the first quarter of 2013 to the first quarter of 2014 (and just 12% of the national 2006 peak), national wages and income have remained stagnant.  The below graph highlights that real median household income in the United States has slipped significantly since 2006, when it peaked at the height of the housing bubble.


Nationally, asking prices (year-over-year in June 2014) rose faster than wages per worker (year-over-year in 2013) in 95 of the 100 largest metro areas.  Translated – it is getting increasingly more difficult for people to afford to buy a home.  This problem has been most pronounced in those areas most impacted by the housing bubble, namely California and the Southwest.  In Phoenix, Las Vegas, Sacramento, and Orange County, price gains have slowed significantly in recent months after rising nearly 20% year over year in 2013 due to the latest investor speculation wave.

Not only are potential home buyers finding it difficult to purchase a home, renters are increasingly finding the market much more expensive.  According to Mark Takano, a California Representative, “Rental costs are getting further and further out of reach for working families. Wall Street’s purchasing of hundreds of thousands of foreclosed homes for the purpose of converting the properties into rentals and securitizing them into bonds, is troubling.”

While private equity firms are snapping up houses as unprecedented rates, the average worker is finding it harder and harder to rent or own a house.  Indeed, companies like the Blackstone Group, American Homes4Rent, Colony Financial, Silver Bay, Starwood Waypoint, and American Residential have spent approximately $20 billion purchasing nearly 150,000 single family homes nationwide, and converted them into rental properties.  Housing advocates say that the after effect of the housing bubble has been the institutionalization of the single-family rental market, leading Wall Street to take a more direct role at playing landlord, while transforming a rental industry that was once dominated by mom-and-pop owners into one where Wall Street is a major player, once again transforming the housing market in ways never seen.  The below infographic shows how private equity has transformed the rental market since the housing bust.