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February 13, 2013

CCL Analysis: Breaking down President Obama’s State of the Union comments on the housing market

by Central Coast Lending
White House

In his February 13 post, Rob Chrisman’s comments on the state of the economy made us chuckle a bit when he wrote, “so here we sit watching housing and jobs, jobs and housing.” We agree. The news cycle about the U.S. economic recovery does tend to cycle around those two topics. And so we find ourselves sitting here writing about housing and jobs, jobs and housing.

During his speech, President Obama focused a great deal of time on his administration’s economic policies, including discussion about new initiatives for job creation and a federal minimum wage of $9.00.

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In between all the jobs talk, President Obama squeezed in a few paragraphs about housing. First, he lauded the advances that the housing market has made since the collapse.

The good news is, our housing market is finally healing from the collapse of 2007. Home prices are rising at the fastest pace in six years. Home purchases are up nearly 50 percent. And construction is expanding again.

However, President Obama continues, strict lending standards are restricting the full range of the recovery, leaving deserving borrowers out in the cold.

But even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected. Too many families who have never missed a payment and want to refinance are being told no. That’s holding our entire economy back. We need to fix it.

To solve this problem, President Obama references action taken to further expand refinance eligibility to every “responsible” homeowner.

Right now, there’s a bill in this Congress that would give every responsible homeowner in America the chance to save $3,000 a year by refinancing at today’s rates. Democrats and Republicans have supported it before. So what are we waiting for? Take a vote and send me that bill.

President Obama concluded his remarks on housing with a very general statement about making credit accessible to more borrowers.

Right now, overlapping regulations keep responsible young families from buying their first home. What’s holding us back? Let’s streamline the process and help our economy grow.

As Alan Zibel and Nick Timiraos over at the Wall Street Journal Developments blog interpreted these comments to suggest that the White House “will make a bigger issue out of reducing barriers to credit for new buyers.” Zibel and Timiraos go on to suggest a few modest solutions for how the White House could begin to get this done. Read the full post HERE.

CNBC real estate guru Diana Olick had a bit a different take in response to first-time buyer struggles. During the speech, Olick tweeted “‘overlapping regulations keep responsible families from buying their first home.’ That and investors are outbidding them.”

True enough. Investors have been an important reason why the housing market recovery progressed, as they bought up discounted properties by the bundle. With shrinking supply, first-time buyers find themselves in competition with investors.

Olick followed up with her column today, noting that higher mortgage rates (of late), tight credit standards, and falling inventories will make life difficult for first-time buyers in 2013. As a result, according to Olick, “the housing market is therefore still largely in the hands of all-cash investors.”

The recovering real estate market in California, for example, saw 32.4 percent of properties bought entirely with cash in 2012, a record, according to real estate and data provider DataQuick.

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To Central Coast Lending owner Daniel Podesto, one statement from President Obama’s that stood out was: “too many families with solid credit who want to buy a home are being rejected.”

Is he suggesting a loosening of credit standards? If these families have ‘solid credit’, then he can only be referring to Debt to Income [DTI] and/or down payment requirements. Since there are still many low and no-down payment loan programs available (0% down USDA, 0% down VA, 3% down HomePath, 3.5% down FHA, and 5% down conventional), I believe he must be referencing DTI requirements. Is he suggesting increasing DTI maximums from 45/50% on conventional or 57% on FHA? Is he suggesting reintroducing stated income qualification? Or does he not know what he is suggesting?

Lending standards have tightened relative to the “wild and free” bubble years, but the hype surrounding this pullback is contributing to general fear that few borrowers are qualified for a loan. We have said this before and we will say it again: banks are lending money to qualified borrowers, they are just being extremely meticulous about documentation. The narrative that the banks simply aren’t lending money is not going to help the market.

Podesto clarified areas that tight lending might make obtaining a loan difficult, but not impossible.

One item that I do think is over the top is regarding asset verification and the anti-money laundering regulations.  We have to go above and beyond documenting source of funds in all asset accounts… we need to know the source of every cash deposit complete with letters of explanation and paper trails… it can be quite an ordeal, but certainly possible for borrowers to document with some extra effort.

From Podesto’s perspective, the housing market could be further aided by expanding on the existing framework put into place by HARP (Home Affordable Refinance Program).

HARP could be expanded to include non-agency loans (non-Fannie/Freddie loans). This would help a great deal of underwater homeowners who have been unable to qualify under the program’s current iteration. HARP could also be expanded by removing the 5/31/2009 date requirement.  Home values continued to decline until last year in many parts of the state and country, and interest rates have also moved lower over the past 3 ½ years creating the possibility for more homeowners to benefit.

The discussion is certainly worth having. Housing is a major contributor to GDP (Gross Domestic Product), the measure of the value of all goods and services produced in an economy within a given time period. According to National Association of Home Builders (NAHB) data, residential investment has historically accounted for 5 percent of GDP, while housing services average about 12 percent of GDP (in 2012, that total was lower, with 2.7 percent and 12.4 percent, respectively).

In 2012, housing finally began to contribute positively to GDP growth. Initial numbers place 2012 U.S. GDP growth at 2.2 percent, and residential fixed investment contributed 0.3 percent to this growth.

We are on the right track, but the housing market still has a long way to go. For now, be prepared for plenty more talk on jobs and housing, housing and jobs.



Central Coast Lending is a California mortgage brokerage based in San Luis Obispo County. With offices in San Luis Obispo, Morro Bay, Paso Robles, and Arroyo Grande, Central Coast Lending is the top source for Central Coast mortgage, real estate, and home loan needs. To see why using a broker offers lower rates and superior service, click HERE. For a free, hassle-free online pre-qualification click HERE or call 805.543.LOAN to talk to one of our expert loan officers.

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