Kickstarting the Market

Casey Fleming
Home prices are up; sales are down
Home prices are up; sales are down

Home values are up – home sales are down. And the buzz within the industry is all about “Why is this happening, and what can we do about it?”

I read articles every day saying that the best minds keep trying to figure out why folks aren’t buying homes. Recently a number of analysts have asserted that millenials have too much student loan debt. (Without studying the issue I would bet most Millenials agree.) Per Rob Chrisman (one of the best minds in the industry) this morning:

Student loans are weighing down new home buyers
Student loans are weighing down new home buyers

“The Federal Reserve tells us that at the end of March outstanding student loans were $1.11 trillion versus outstanding credit card debt of “only” $857 billion. Student loans have increased $124 billion in the last 12 months while credit card debt has increased just $7 billion over the same period. The smart guys in the room are predicting a new “mobile” economy characterized by low labor participation, high auto sales, high student loan debt and strong multifamily housing production. Residential mortgage borrowing and single family housing production appear to be “so pre-crisis,” meaning Millennials just may not be that interested the way their parents once were in buying a home.”

And from Tim Mullaney via

“After years of retrenchment, U.S. consumers are lightening up — but still not buying homes. And their aversion to housing is the gap between the recovery we have and the recovery we want.”

Why is this happening?

Theories about why millenials aren’t buying homes abound:

  • Loan programs are too restrictive. (This after so much hand-wringing about the sub-prime loans that precipitated the financial meltdown?)
  • The mortgage process is too dysfunctional. (It’s hard to argue with that one.)
  • Prices are too high and folks can’t afford a home. (OK, but what could we possible do about that?)
  • Real wages for the middle class have been stagnant. (True, but in our area most folks aren’t feeling that particular pain. Housing is national, however.)

But does that really matter?

So here’s what I’m trying to figure out: it’s generally accepted that the issue with slow sales (of both new and existing homes) is lack of inventory, not lack of buyers. So, if lack of buyers is not the problem, why are we wringing our hands about how to get more buyers interested and qualified?

It is because we’ve never faced this problem before, and we don’t know how to respond to it. How do you get more people to sell their homes? In April I wrote a blog asking why there aren’t more listings:

In this post I reported that a study by Redfin estimated that 52% of the nation’s homes won’t go on the market anytime soon. I took some exception to the conclusions, but some of the points were valid. There are systemic barriers to listings today.

Would you sell if you didn’t know where to go afterward?

Anecdotally, however, I think there is more to the story. Agents that I work with tell me most prospective home sellers have the same question: “Where do I go if I sell?” Since listings are so scarce, there’s nowhere for sellers to move up to, down to or out to. If they believe that they won’t be able to find a place to move, selling doesn’t do them any good.

Millions are facing a huge jump in their mortgage payment
Millions are facing a huge jump in their mortgage payment

There may be good news – in the form of bad news – on the horizon. We might be looking at a new round of defaults. A popular loan product in the early-to-mid 2000s was an adjustable-rate loan with an interest-only feature. The interest rate on these loans was fixed for the first five, seven or ten years, and the borrower had the option of making an interest-only payment for the first ten years.

To illustrate the appeal of the product, a 30-year fixed-rate $500,000 loan at 5.000% would have a monthly payment of $2,684.11. An interest-only 5/1 ARM at 4.000% would have an initial monthly payment of $1,666.67. The product was often sold to folks who simply could not afford to make the fully-amortized payment, so those folks made only the interest-only payment for years. (For reasons discussed in The Loan Guide: How to Get the Best Possible Mortgage this was exactly how these products should not have been sold. But that is water under the bridge.)

There are still toxic terms that haven’t blown up

Now what happens when the interest-only optional period ends after ten years? If someone has made only the interest-only payment, then they have to pay the loan off over the remainder of the loan term – 20 years. The payment required to do that, assuming the interest rate hasn’t changed, is $3,029.90 – an increase of almost $1,400 per month from the payment they have been making. (More than an 80% jump in payment!)

It turns out that this product was very popular from 2003 through 2007; millions of these loans were sold during that time. This means that millions of loans are now recasting (the interest-only period is ending) over the next three years. No one knows exactly what will happen as these loans recast but we can guess:

  • Some borrowers have been making a fully-amortized payment anyway and won’t be affected.
  • Some will have the ability to make the higher payment and will do so.
  • Some will be able to refinance into a new 30-year loan. Their payment will still rise, but not as dramatically.
  • Some will not be able to make the payment, but they will have equity and put their home on the market. (With very high loan balances and rapidly growing equity, this seems likely for a lot of Bay Area folks)
  • Some will not be able to make the payment and will not have equity. These folks are candidates for a loan modification (possible) or short sale (more likely.)

Lenders have slowly worked their way through their huge foreclosure backlog, and the number of homes currently delinquent and in foreclosure is at a 6-year low today. But this new wrinkle could change that.

So, bringing it back around full-circle: if more listings in the move-up category are needed to get prospective home sellers to make the jump, what kind of event could shake up the marketplace to kick-start the sales?

How about millions of additional existing-home listings coming on the market in a rush? It could happen.

Casey Fleming, Author, The Loan Guide: How to Get the Best Possible Mortgage (on Amazon)

Mortgage Advisor, C2 Financial Corporation

(408) 348-3442 / /

NMLS 344375 / BRE 00889527


Rob Chrisman –

Marketwatch – Tim Mullaney article