Over half of Americans (52%) have had to make at least one major sacrifice in order to cover their rent or mortgage over the last three years, according to the “How Housing Matters Survey,” which was commissioned by the nonprofit John D. and Catherine T. MacArthur Foundation and carried out by Hart Research Associates. These sacrifices include getting a second job, deferring saving for retirement, cutting back on health care, running up credit card debt, or even moving to a less safe neighborhood or one with worse schools. “Affordability issues are real and a major hurdle,” says Lawrence Yun, chief economist at the National Association of Realtors, an industry group. Home prices have increased 20% over the past two years while wages have barely gone up, he says. “Only by adding more new supply, via housing starts, can home prices be tamed,” Yun adds. In fact, construction of housing units has averaged around 1.5 million a year for the past five decades, he says, but it’s likely to be less than 1 million in 2014. What’s more, at least 15% of American homeowners (or residents of 78 counties across the country) were living in housing markets where the monthly mortgage payment on a median-priced home requires more than 30% of the monthly median household income — long considered the maximum for rent/mortgage repayments. Housing costs above that threshold are “unaffordable by historic standards,” says Daren Blomquist, vice president at real estate data firm RealtyTrac. In New York county/Manhattan, mortgage payments represent 77% of the median income and in San Francisco County represents 70%.
Although mortgage rates are still quite low, down payments, poor credit and tighter lending standards remain three of the biggest hurdles for buying a home, especially among young people, Blomquist says. “The slow jobs recovery for young adults has made it harder for them to save and to get a mortgage.” Some 84% of young people are delaying major life decisions due to the poor economy, according to a 2013 survey by Generation Opportunity, a nonprofit think tank based inArlington,Va. Some people also appear to be cooling on one facet of the American dream. About 43% of respondents in the “How Housing Matters Survey” say owning a home is no longer “an excellent long-term investment and one of the best ways for people to build wealth and assets,” and over half say buying a home has become less appealing. Although 70% of renters aspire to own a home, some 58% believe that “renters can be just as successful as owners at achieving the American dream.” But they’re still suffering the aftershocks of the property bust, experts say. In the years after the recession of 2008, more than 7.5 million homeowners lost their home to foreclosure or short sale and about 9 million more homeowners are still underwater and owe more than their property is worth, Blomquist says. “If one looks at the last seven years as a predictor of housing market behavior in the future, it certainly should give one pause about whether buying a home is a good investment or not,” he adds.
That’s not necessarily a bad thing, says Stuart Gabriel, director of UCLA’s Richard S. Ziman Center for Real Estate. “From a policy perspective, we overshot in prescribing homeownership too often and to those who would have benefited more from other housing solutions,” he says. Homeownership rates hit 64.8% in April, the lowest since 64.7% in the second quarter of 1995, according to the Census Bureau. “It’s wise to approach homeownership with more skepticism and more trepidation,” he says. The good news: Rising prices have lifted millions of homeowners out of negative equity. Since the lowest point in the housing market crash, rising prices have led to an additional $4 trillion in housing equity, going to existing homeowners, smart investors and those who can afford to buy, Yun says. Home prices, including distressed sales, increased 10.5% in April 2014 year-over-year, according to the latest survey from mortgage-data firm CoreLogic, representing the 26th consecutive month of annual increases in home prices.
Knee slapper: Obama says onerous regulation will shrink power prices
In a sweeping initiative to curb CO2, the Obama administration unveiled a plan Monday aimed at cutting carbon dioxide emissions from power plants by nearly a third by 2030. The 645-page plan, expected to be finalized next year, is a centerpiece of Obama’s efforts to deal with climate change and seeks to give theUnited Statesmore leverage to prod other countries to act when negotiations on a new international treaty resume next year. Obama, in a conference call hosted by the American Lung Association, said the plan would both shrink electricity prices and protect the health of vulnerable Americans, but neglected to say how. He scolded critics who he predicted would contend anew that the limits would crush jobs and damage the economy, but neglected to offer reasons why they were wrong. Energy and business experts sounded alarms, warning of economic drag. Senate Minority Leader Mitch McConnell, R-Ky., called the proposal “a dagger in the heart of the American middle class.” “If these rules are allowed to go into effect, the administration for all intents and purposes is creatingAmerica’s next energy crisis,” said Mike Duncan of the American Coalition for Clean Coal Electricity. Coal once supplied about half the nation’s electricity, but has dropped to 40% amid a boom in natural gas and renewable sources such as wind and solar. Although the new emissions cuts will further diminish coal’s role, the EPA predicted that it would remain a leading source of electricity in theUS, providing more than 30% of the projected supply.
Short Sales Lead to Unexpected Tax Hardships
The tax benefit of short sales may have hit a major speed bump. The Mortgage Forgiveness Debt Relief Act of 2007 added a key benefit: The forgiven debt amount would not be considered taxable income. Without that proviso, a seller would have been taxed on a write-off of, say, $200,000 in mortgage debt just as if it had been earned income. And these are typically people who are already in a financial hole. The law first expired onDec. 31, 2012, but was then extended through the end of 2013 by the fiscal cliff bill. The Senate Finance Committee is expected to consider an extender bill this spring, according to a law alert at Continuing Education of the Bar (CEB), an affiliate of the University of California and partner of the California State Bar.
Some states have or are considering local relief. For example, In 2011,Californiaapproved a provision (Section 580e) under its Code of Civil Procedure that generally bans a lender from claiming a deficiency or getting a deficiency judgment against a seller after agreeing to a short sale. In August 2013, state Senator Barbara Boxer asked theIRSifCaliforniahomeowners would be liable for taxes on the forgiven debt in the wake of the federal law’s expiration. That would make it recourse debt. Without that clarification, Boxer warned that “distressed borrowers may face the unfortunate incentive to go to foreclosure rather than seek a short sale in order to avoid a large tax bill,” according to a statement on her website. As reported in the Wall Street Journal, theIRSreplied that the forgiven debt is nonrecourse debt under the state’s law and that a seller would not face federal income tax obligations. (California’s Franchise Tax Board also indicated that forgiven debt would not incur state income tax.)
But the IRS notes that there are exceptions, though it didn’t describe them in the letter: “Section 580e has certain exceptions to its anti-deficiency provisions. Also, federal law may overrideCalifornia’s anti-deficiency provisions in certain circumstances. If any state or federal law would have the effect of nullifying an obligation’s nonrecourse status, we would generally consider the obligation a recourse obligation subject to the application of the cancellation of indebtedness provisions of section 61(a)(12) of the Code.” The agency also noted that its opinion applies only toCalifornia, despite other states’ anti-deficiency laws. In the current political climate, it’s uncertain if an extension of the federal law will happen, says tax attorney Marvin Kirsner at Greenberg Traurig inBoca Raton,Florida. But Congress has always come through in the past with an extension, so there’s reason to hope it will again, he says in an email.
Private sector misses expectations, creates 179,000 jobs in May
US businesses added new workers at a slower-than-expected pace in May, according to a survey of hiring released Wednesday. Private-sector payrolls in the US increased by 179,000 new jobs in May, says the national employment report compiled by payroll processor Automatic Data Processing Inc.ADP-0.44% and forecasting firm Moody’s Analytics. Economists surveyed by The Wall Street Journal expectedADPto report a stronger May advance of 210,000. The AprilADPemployment increase was revised to 215,000 from 220,000 reported a month ago. “Job growth moderated in May. The slowing in growth was concentrated in Professional/Business Services and companies with 50-999 employees,” said Mark Zandi, chief economist at Moody’s Analytics that compiles the data. “The job market has yet to break out from the pace of growth that has prevailed over the last three years.” TheADPreport, while less than expected, probably won’t change the perception of a spring revival in the US economy after an unexpected contraction during the harsh winter months.
The A D Pestimate is issued ahead of the Bureau of Labor Statistics’ employment situation report scheduled for Friday. But Wednesday’s results probably won’t cause many forecasters to rethink their nonfarm payroll estimates. Economists expect nonfarm payrolls will increase 210,000 in May. That’s slower than the surprisingly strong 288,000 added in April but still a solid job gain. The May unemployment rate is expected to edge up to 6.4% after it unexpectedly dropped to 6.3% in April from 6.7% in March. According toADP, firms employing between 1-49 workers hired 82,000 new workers this month. Medium-sized businesses with payrolls of 50-499 workers increased payrolls by 61,000 employees. Large firms, businesses with 500 or more employees, hired 37,000 more workers. Service-sector payrolls increased by 150,000 workers last month. The factory sector added 10,000 positions. Construction payrolls increased by 14,000 slots.
MBA – mortgage applications decrease
Mortgage applications decreased 3.1% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 30, 2014. This week’s results include an adjustment for the Memorial Day holiday. The Market Composite Index, a measure of mortgage loan application volume, decreased 3.1% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 14% compared with the previous week. The Refinance Index decreased 3% from the previous week. The seasonally adjusted Purchase Index decreased 4% from one week earlier. The unadjusted Purchase Index decreased 15% compared with the previous week and was 17% lower than the same week one year ago. The refinance share of mortgage activity increased to 53% of total applications from 52% the previous week. The adjustable-rate mortgage (ARM) share of activity remained unchanged at 8% of total applications. Interest rates for most products fell to their lowest levels in close to a year.
Trade deficit widens to two-year high in April
The US trade deficit widened to its highest level in two years in April as imports hit a record high, suggesting trade could be a drag on second-quarter growth. The Commerce Department said on Wednesday the trade gap increased 6.9% to $47.2 billion. That was the largest since April 2012 and followed March’s revised $44.2 billion gap. Economists polled by Reuters had expected the deficit to widen only to $40.8 billion from a previously reported $40.4 billion shortfall. The government also published its annual benchmark revisions with Wednesday’s data. When adjusted for inflation, the deficit increased to $53.8 billion from $50.9 billion in March. Trade subtracted almost a percentage point from first-quarter gross domestic product. The economy contracted at a 1.0% annual pace in the first three months of the year. Imports increased 1.2% to an all-time high of $240.6 billion in April. Imports of automobiles, capital goods, food and consumer goods all hit record highs in April. The trade deficit with the European Union was the largest on record, as was the gap withGermany. Imports fromSouth Koreaalso touched a record high, while Chinese imports rose 16.3%. That pushed up the politically sensitive trade gap withChinato $27.3 billion from $20.4 billion in March. Exports slipped 0.2% to $193.3 billion.
Olick – lowest rates in a year do nothing for mortgages
Mortgage rates fell last week, and in an unusual convergence, so did applications for refinances and home purchase loans. The average interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.26% from 4.31%, according to the Mortgage Bankers Association. Interest rates on jumbo and federally insured FHA loans also fell, touching their lowest levels in nearly a year. “The historically normal sources of market guidance—like economic data and Fed [Federal Reserve] policy—remain afterthoughts, compared with the current flavor of the month,” wrote Matthew Graham of Mortgage News Daily. “The flavor? Potential rate cuts and easing measures from the European Central Bank.” The low rates, however, were not enough to boost mortgage volumes: applications to refinance a loan fell a seasonally adjusted 3% on the week, and are down nearly 57% on the year, according to the mortgage bankers survey.
Applications to purchase a home—a closely watched indicator of the housing recovery—fell 4% on the week and are 17% below year-ago volumes. This does not bode well for home sales as the market moves from the traditionally robust spring season to the slower summer months. “The lack of movement on mortgage applications even with a significant drop in rates confirms what we have seen for much of the past five years. Namely, that lower rates alone are not enough to generate home purchase activity,” said Guy Cecala of Inside Mortgage Finance. “Home prices, mortgage underwriting, employment, and a basic belief that it is a good time to buy home are major factors that seem to influence home buying more than rates.”
Spring was a disappointment for home sales due in part to bad weather. Some believed pent-up demand would surface later, but signed contracts to buy existing homes in April were essentially flat from March and down about 9% from April 2013. It begs the question, why are more Americans not taking advantage of lower rates to buy homes? The answer may be that many people are struggling with their personal finances. A new survey from the MacArthur Foundation, conducted by Hart Research Associates, found that while the public may believe the housing crisis is improving, many respondents do not feel personal relief with their monthly housing costs: seven in 10 believe the US housing market is still in the middle of the crisis or that the worst is yet to come. Beyond that, attitudes about home ownership, now at a 19-year low, are not improving. “Reinforcing survey findings from 2013, attitudes about homeownership have shifted, with 43% indicating it is no longer the case that owning a home is, ‘an excellent long-term investment and one of the best ways for people to build wealth and assets,’ and more than half believing that buying a home has become less appealing than it once was,” according to the survey. While most Americans still aspire to home ownership, they do not believe it is the wealth-building vehicle it once was. That is perhaps why, when even the potential monthly mortgage payments move lowers, it is just not enough to get more buyers off the fence.
Foreclosures in Colorado Springsarea down
Local foreclosure activity fell in May after having unexpectedly risen during the first few months of 2014, a report from the El Paso County Public Trustee’s Office shows. Foreclosure filings totalled 141 last month inEl PasoCounty, a 14.5% decline from May 2013, according to the Public Trustee’s report. It was the fewest number of filings for any month this year and the smallest number since December. For the first five months of 2014, foreclosure filings totalled 892, five more than during the same period a year ago. It remains to be seen whether May’s slowdown in foreclosure filings will continue, said Public Trustee Tom Mowle. After hitting a record annual total of 5,288 in 2009,El PasoCountyforeclosure filings have been falling each year. They dropped to 1,861 in 2013, the fewest since 2002. Mowle expected that downward trend to continue this year, and he and others were caught off guard when filings ticked upward during the first few months of 2014.
One possible reason for the slowdown in May’s foreclosure filings: National mortgage buyer Fannie Mae stopped doing business with twoDenverlaw firms that had handled large numbers of foreclosure filings inColorado, and instead transferred foreclosure actions to other law firms, Mowle said. Because of that switch, foreclosure filings might have slowed, he said. Mowle said he wants to wait at least another month to see what happens when newly hired law firms take over the filing of foreclosures. “We want to see if this is a sustained drop (in filings) or if what we’re seeing is a transfer period where clients are disengaging from one law firm to another,” he said.
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