The Nation's Housing
Reporting and analysis of tax laws, mortgages and markets make for indispensable real estate coverage. Once a week.
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THE NATION'S HOUSING COLUMN

(Advance for Friday, July 20, 2018, and thereafter. Web release Thursday, July 19, 2018, at 8 p.m. Eastern time.)

(For Harney clients only)

By KENNETH R. HARNEY

WASHINGTON -- Will baby boomers turn into party poopers when they unload their homes in large numbers starting in the next decade? Could they create an indigestible oversupply in the market that lowers home prices and frustrates sales?

That's a sobering scenario outlined by two new, provocative studies. One, from Fannie Mae's Economic and Strategic Research group, warns that the "beginning of a mass exodus looms on the horizon," where "homeownership demand from younger generations is insufficient to fill the void left by multitudes of departing older owners." The net result: gluts in some local markets with potentially negative impacts.

A second study, from the Stephen S. Fuller Institute at George Mason University, focuses on the Washington D.C. market and sees a similar problem ahead. "The significant number of older owners in relatively large homes may portend a 'baby boomer sell-off'" in the D.C. region and elsewhere in the U.S., it reports. Some long-time owners "may have difficulty attaining the price gains they witnessed in their neighborhoods during recent years," according to author Jeannette Chapman, the Fuller Institute's deputy director.

Both studies cite demographic and housing data to make their cases. Boomers -- the giant generation of Americans born between 1946 and 1964 -- own 32 million homes, two of every five in the country. The generations preceding them occupy another 14 million homes. Collectively their properties are valued around $13.5 trillion, according to the Fannie Mae study, co-authored by Patrick Simmons of the strategic research group and Dowell Myers, a professor at the University of Southern California.

All of these homeowners face key choices: Do we stay put, sell, downsize or move to a rental? At some point, the inevitable kicks in: health issues and death will force them to dispose of their properties.

Fannie's study estimates that from 2016 to 2026, between 10.5 million and 11.9 million older owners will end their ownership status. Between 2026 and 2036, another 13.1 million to 14.6 million will do the same.

This massive and unprecedented generational unloading of houses could be "negative for the home sales market," the Fannie study warns, because the upcoming generations of buyers may not have the financial capacity -- or desire -- to absorb the large numbers of homes coming to market. How much of a price hit to boomers' and potentially other owners' properties could occur can't be predicted at this point, co-author Myers told me in an interview.

"It's impossible" to forecast price impacts "10 years ahead," he said. "We do not mean to be alarmists," he added, but hope to spur discussion of the impending challenges and the need for public and private policies that might cushion the impacts. Among the possibilities: Create additional financing programs that encourage Millennials and others to purchase first-time homes, so that they have the equity needed to purchase boomers' homes 10 to 20 years from now.

In the Fuller Institute study, author Chapman notes that there's already a mismatch in many Washington D.C. area neighborhoods, where empty nest seniors own homes with far more space than they need. More than 273,000 homes are owned by individuals 50 years and older that have at least two more bedrooms than the number of people living in the house. "As these owners downsize or move elsewhere ... " Chapman says, "the potential for increased supply is large enough to moderate price gains."

Arthur C. Nelson, a professor of planning and real estate development at the University of Arizona, says some local markets with large oversupplies of boomer homes for sale could encounter significant price declines. In an email, Nelson, who has written about the coming challenges with boomers' homes for several years, suggested that in the worst-hit areas, price declines could be as crushing as "a quarter or a third or more" -- essentially the next housing crash.

Not everybody agrees. Lawrence Yun, chief economist for the National Association of Realtors, says such dark forecasts ignore positive developments well underway -- strong U.S. population growth, the rising importance of foreign born buyers who will help sop up the oversupply of large houses in metropolitan suburbs, and the "glacial" speed at which the oversupply is likely to manifest itself.

Yun is emphatic: There should be "no measurable price declines" attributable to the boomers.

What's this all mean for you? At the very least, be aware of the issue. And think about devising a strategy for dealing with whatever scenario sounds most realistic to you, whether you're an owner or future buyer.

Ken Harney's email address is Harneycolumn@gmail.com.

(c) 2018, Washington Post Writers Group

THE NATION'S HOUSING COLUMN

(Advance for Friday, July 6, 2018, and thereafter. Web release Thursday, July 5, 2018, at 8 p.m. Eastern time.)

(For Harney clients only)

WRITETHRU: In 3rd graf, correcting Rick to Mick and CFBP to CFPB

By KENNETH R. HARNEY

EDITOR'S NOTE: Ken Harney is taking a week-long vacation. His next column will move Monday, July 16, for release Friday, July 20.

WASHINGTON -- In a move with potentially significant implications for consumers, realty agents and lenders, the Trump administration has decided not to take legal action against online realty giant Zillow for alleged violations of federal anti-kickback and deceptive-practices rules.

The decision represents a departure from the direction the Consumer Financial Protection Bureau appeared to be headed under its previous director, Richard Cordray, an Obama appointee who resigned last November to run for governor of Ohio.

Mick Mulvaney, the CFPB's acting director appointed by President Trump, simultaneously serves as director of the White House Office of Management and Budget. Mulvaney has promised to bring a more business-friendly approach to the bureau's enforcement activities in the financial arena. Cordray, by contrast, aggressively sued or obtained settlements from banks, mortgage companies, title companies and other businesses and obtained an estimated $12 billion in fines and consumer restitutions.

Though the consumer bureau made no announcement of its decision and declines to discuss the case, Zillow said in a statement that "we are pleased the CFPB has concluded their inquiry into our co-marketing program." Early last year Zillow was informed by the CFPB that the bureau was considering legal action because of alleged violations of the Real Estate Settlement Procedures Act (RESPA) and federal unfair and deceptive practices rules. Zillow has steadfastly denied that its program violates any federal law.

The focus of the bureau's concerns was Zillow's "co-marketing" plan, under which "premium" realty agents have portions of their advertising bills on Zillow sites paid for by mortgage lenders. Some quick background here: When buyers visit Zillow's website, which includes millions of home listings, they frequently see "premium" agents featured prominently, along with a photo and contact information.

"Premium" agents often are not the listing agent for the property nor are they necessarily among the most active or successful in the neighborhood. Instead they are advertisers, paying Zillow hundreds -- sometimes thousands -- of dollars per month for the placement, hoping that shoppers will contact them. Given these high costs for leads, Zillow instituted a "co-marketing" plan that allows mortgage lenders to be featured on the same page as the agent along with contact information. In exchange for the placement, lenders pay as much as one-half of the realty agent's Zillow bill. As with premium agents, "premium" lenders do not necessarily offer the best financial deal or the lowest interest rates to the shopper; they pay money to reduce the realty agent's monthly expenses and market their own mortgages.

Among the key issues in the CFPB's investigation, according to legal experts familiar with the case, was whether the Zillow plan violates federal prohibitions against paying compensation for referrals of business -- kickbacks. RESPA bans "giving or receiving" anything of value in exchange for referrals of business related to real estate settlements. The rationale is that referral payments are anti-consumer -- they add to overall costs, frequently are unknown to the consumer, and discourage shopping for the best available services or prices. Zillow insists its co-marketing plan does not entail referrals or endorsements, but on its website in an area designated for realty agents it touts the program as a way to "Promote your favorite lenders to customers on Zillow."

In multiple cases, the bureau under Cordray targeted what it considered to be illegal and deceptive marketing arrangements. In one high-profile settlement last year, the bureau fined Prospect Mortgage, LLC, a national lender, $3.5 million for allegedly illegal referral-fee-marketing arrangements with more than 100 realty firms. The schemes were designed to "funnel payments to [realty] brokers and others in exchange" for referrals of loan business involving "thousands" of buyers, according to the CFPB. Among the allegations in the settlement were that Prospect paid portions of realty agents' marketing costs on an unidentified "third-party website" -- widely understood to be Zillow. Prospect neither admitted nor denied wrongdoing as part of the settlement.

Following the Prospect settlement, some lawyers active in the financial regulatory field expected that the CFPB would sue Zillow or seek a settlement. By dropping the case, the bureau under its new leadership appears to be signaling that Cordray's tough approach to policing co-marketing schemes between realty agents, lenders and title companies is dead, said Marx Sterbcow, a nationally known RESPA expert.

"This is going to drive up consumers' costs" in real estate transactions, said Sterbcow, because the extra expense paid by participants in co-marketing schemes -- whether they violate RESPA or not -- inevitably gets passed on to consumers.

Ken Harney's email address is Harneycolumn@gmail.com.

(c) 2018, Washington Post Writers Group

THE NATION'S HOUSING COLUMN

(Advance for Friday, June 29, 2018, and thereafter. Web release Thursday, June 28, 2018, at 8 p.m. Eastern time.)

(For Harney clients only)

By KENNETH R. HARNEY

WASHINGTON -- If you've got it, don't piggybank it -- borrow against it.

That seems to be the prevailing sentiment among tens of thousands of American homeowners who've seen their property values surge and then decided: Hey, we've got a ton of equity sitting here, let's do something with it.

According to the latest estimates from real estate analytics firm ATTOM Data Solutions, 347,875 new home-equity lines of credit (HELOCs) were taken out during the first quarter of this year -- up a surprising 18 percent from the final quarter of 2017 and 14 percent higher than the same time last year.

The increase is eye-opening in part because last year's federal tax law changes were seen as a major negative for home-equity borrowing. The law removed interest deductibility for home-equity loan balances -- new and existing -- that are not used to renovate, build or acquire a home. The loss of deductibility made tapping home equity more expensive on an after-tax basis for many borrowers.

But owners apparently haven't been deterred. Not only have new borrowings for HELOCs risen sharply this year, but another form of equity-tapping -- cash-out refinancings -- has hit its highest level since the housing boom. In a cash-out refi, a homeowner pays off an existing mortgage and replaces it with a new, larger loan. The owner can pocket the difference, tax-free, and spend the money on whatever he or she chooses.

In the first quarter of this year, 68 percent of all refinancings at investor Freddie Mac involved cash-outs. Though total volumes of refinancings are down significantly, cash-outs are at their highest percentage since the fourth quarter of 2007, just before the crash.

Are the sizable jumps in equity-tapping portents that we shouldn't ignore? In the years immediately preceding the financial crisis, many homeowners used HELOCs like credit cards or ATMs -- hocking their inflated property values to finance boats, autos, even daily living expenses -- until the game ended. Home prices sagged and crashed; owners' equity holdings turned to vapor.

Some economists have worries, but most point out that today's market and regulatory conditions are markedly different. Most banks now require borrowers to have relatively high credit scores and a cushion of equity -- generally 20 percent of the estimated home value -- and to document everything. Back in the funny-money heydays of the boom, some lenders essentially required no equity and no documentation -- even negative equity was occasionally OK. Today's credit scores, by contrast, according to Amy Crews Cutts, chief economist for Equifax, are high: A median 770 Vantage score for HELOCs and 713 for home equity loans or second mortgages.

But there are concerns. Frank Nothaft, chief economist for CoreLogic, a real estate valuation and data analytics firm, notes that one-third of the largest metropolitan markets are now "overvalued" -- there's a mismatch between the frothy growth rate in median home prices compared with growth in per capita incomes. During the lead-up years to the crash, two-thirds of all metro markets were overvalued.

Nothaft suggests that although the U.S. is not in a "valuation bubble," there are "many urban areas where prices appear to have become de-linked to the long-term relationship with income" and thus affordability. That "raises the specter of a new bubble forming within the next few years," he warns.

Sam Khater, chief economist for Freddie Mac, argues that fears about the fast growth in cash-out refinancings are misplaced. Though rising cash-out levels coincided with the boom years, he said in an interview, today they're less meaningful because the number of refinancings has fallen dramatically in the past year as interest rates have increased. Most owners who have refinanced this year, he said, have not been seeking lower interest rates but rather equity extraction, raising the cash-out percentage.

Today's owners appear to be making more responsible use of their home-equity borrowings. In a study of equity-loan requests on its network of banks and mortgage companies so far this year, Lending Tree, the online shopping comparison platform, found that 81.2 percent of owners said they plan to use the loan proceeds either for home improvements or debt consolidation. The latter can be a smart move because it allows the owner to pay off credit card bills and other high-cost debts with relatively low-cost home-equity dollars.

But remember this about home equity: It's not money in the bank. It's wealth that depends on market movements, and can melt if the market turns.

Ken Harney's email address is Harneycolumn@gmail.com.

(c) 2018, Washington Post Writers Group

About
Newspaper readers have a trusted friend in Kenneth Harney's award-winning real estate column, "The Nation's Housing." That's because week after week he focuses on the real issues faced by today's record number of homeowners -- complicated tax problems, the settlement fee thicket, credit scores and credit files – and guides readers to smart solutions.
Millions of readers have saved – and will save – money because of Harney's undeviating attention to the American housing consumer's best interests.
Over the years, Harney's columns have contributed to key pieces of housing reform on Capitol Hill and in federal agencies, including cancellation of private mortgage insurance premiums, better disclosures on refinancings, restrictions on private transfer fees, and prohibitions against loan transfer abuses and predatory mortgage servicing practices.
Personal
Harney lives in Chevy Chase, Maryland, with his wife Andrea. The couple has four grown children who live in Shanghai, San Francisco, New York, and Silver Spring, Maryland.
Professional Experience
Member of the Federal Reserve Board's Consumer Advisory Council
Member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination
President and chairman of the board of the National Association of Real Estate Editors
Continues to be a member of NAREE's board of directors