2014 in review – and what’s in store for 2015

What’s expected in 2015? Read on to review the important changes 2014 brought to California’s real estate market, and how they’ll impact your business in the coming year.

Speculators decline in 2014

California’s real estate market in 2014 reflected the downward trend of short-term investors — speculators.

Absentee homebuyers (mostly speculators) purchased 23% of homes sold in Southern California in Q3 2014, down from the 2013 peak of 32%. Likewise, homebuyers using all cash declined from their 37% peak in 2013 to 24% in Q3 2014. Most of these cash buyers were speculators.

As speculators leave the market, the share of owner-occupant buyers naturally rises. However, the quantity of end user homebuyers isn’t yet sufficient to drive the recovery. Thus, while speculator competition over shrinking inventory pushed home prices higher, this also stifled sales volume, a condition which continues as we go into 2015.

Another sign of the times: the Federal Housing Administration’s (FHA’s) anti-flipping waiver expired December 31, 2014. The waiver’s intent was to encourage speculators to prop up the recovering housing market. Now, homeowners will be required to wait at least 90 days from their purchase before they may sell to homebuyers who are purchasing with FHA mortgages.

Home sales volume down

California home sales volume was depressed in 2014. Sales volume ended the year 8% below 2013, just over half of the sales volume experienced in 2005.

The reduced number of home sales is directly related to speculator over-activity in 2012-2013. Speculators provided a boost to sales volume during that time, and an even bigger boost to prices. Leaping home prices and cash-heavy speculators made the competition too steep for many owner-occupant homebuyers. Thus, when speculators began their swift exit in 2014, sales volume deflated.

Sales volume is expected to continue to decrease, bottoming in mid-2015. The next peak in sales volume will occur around 2019-2020, coinciding with the Great Confluence of Baby Boomers retiring and members of Generation Y (Gen Y) buying their first homes.

Home prices peaked in 2014

California home pricing received a huge boost from speculators in 2013-2014. Prices rose swiftly, far exceeding very low consumer inflation, peaking statewide in Q3 2014. This rise leveled off and began to reverse direction in late 2014.

As for home prices, the higher they climb, the further they have to fall. Economic gravity, if you will. The direction of home prices lags behind sales volume activity by 9-12 months. Home sales volume began to decrease at the end of 2013 and is likely to continue to fall through mid-2015. Thus, pricing will continue to fall throughout 2015, likely to bottom by mid-2016. This will be due not only to lackluster home sales volume, but to the rise in mortgage rates expected in late-2015 or the first part of 2016, discussed in more detail, below.

Jobs recover in 2014

A bright spot in our extended economic recovery: California has finally regained all jobs lost in the 2008 Great Recession, as of Q3 2014. For perspective, it took seven years to recover the jobs lost in this past recession. During the 1991 and 2001 recessions it took four to five years to regain those jobs lost.

There were nearly 15.7 million individuals employed in California in October 2014. However, the working-aged population has increased by 1.2 million people since the recession took hold in 2008. This means the real jobs recovery won’t occur until around 2019 at our current respectable pace of job additions.

The quantity (and quality) of jobs held by Californians directly impacts the housing market. As the recent speculator debacle has shown, cash-heavy investors can’t fuel a healthy housing market. It all comes back to those end usersof real estate, and the vast majority of homeowners and homebuyers depend on paychecks, gained through jobs.

The Federal Reserve loosens its grip on the recovery

In October 2014, the Federal Reserve (the Fed) halted its last round of quantitative easing (QE3). It had been purchasing a combination of mortgaged-backed treasury securities, essentially pumping cash into the economy to beef up employment and avoid price deflation, since September 2012. As the economy began to show signs of life in 2014, particularly through a more successful jobs market, the Fed decided it was time to cease the pumping and start “normalizing” the economy.

However, one piece of their plan is still in place going into 2015, and its significance to real estate professionals and their clients cannot be overstated. The Fed has been keeping the short-term interest rate at essentially zero (at or below 0.25%) since 2009. This is what has allowed mortgage rates to remain relatively low during this time. Once the Fed bumps up the short-term rate, mortgage rates will invariably increase, as:

• lenders will increase fixed-rate mortgage (FRM) rates in order to maintain profits; and
• adjustable rate mortgage (ARM) rates will rise, as they are tied to the Fed’s movement of the short-term rate.

When will the Fed increase the short-term rate? There’s no certainty, though the most recent word from the December 2014 Fed statement is that the Fed is going to remain patient in its normalization process for the economy. This suggests interest rates will remain low for several months at least. Once the bond market gets wind of the Fed increasing rates, FRM rates will start to rise. Expect this to begin before the end of 2015.

Mortgage regulation in 2014

The new ability-to-pay rules controlling buyer-occupant home mortgages took effect January 1, 2014. Part of Regulation Z (which implements the Truth-in-Lending Act, or TILA), the new rules require consumer mortgage lenders to make a “reasonable and good faith effort to verify that the [homebuyer] is able to repay the loan.” [12 Code of Federal Regulations §§1026.43 et seq.]

To ensure lenders comply, the new rules include a definition for qualified mortgage (QM). Lenders demonstrate their compliance by either making mortgages:

• under the more flexible, but riskier ability-to-pay rules; or
• under the less risky, but stricter qualified mortgage definition.

A QM adheres to the following standards:

• regular, roughly equal periodic payments;
• no negative amortization, interest-only or final/balloon payment features;
• a term of 30 years or less;
• total points and fees not to exceed 3% of the mortgage amount;
• underwriting which takes into account the monthly payment for any mortgage-related obligations using the maximum interest rate that may apply during the first five years after the first regular periodic payment is due;
• consideration and verification of the consumer’s income and assets; and
• a total back-end debt-to-income (DTI) ratio that does not exceed 43%. [12 Code of Federal Regulations 1026.43(e)(2)]

Separately, the federal agencies charged with implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) published qualified residential mortgage (QRM) rules in October 2014. The QRM requirements are the same as the QM. Lenders that originate residential mortgages which do not follow the QRM rules must retain at least 5% of the non-qualified mortgages they sell on the secondary mortgage market.

A more robust explanation of the ability-to-pay rules and QMs can be found here.

Expanded agency disclosures in 2015

A big change you won’t want to miss for 2015: the agency disclosure law has expanded to include commercial (nonresidential) purchases and leases with terms longer than one year. [Calif. Civil Code §2709.13]

This means commercial brokers and agents now need to provide the same level of transparency required by their residential counterparts. This comes on the heels of mandatory energy and benchmark disclosures for all commercial sales and leasing transactions on single occupant structures larger than 5,000 interior square feet.

Thus, beginning January 1, 2015, commercial brokers and agents will now hand their clients an Agency Law Disclosure form and have it signed and acknowledged by the client as an attachment to:

• a listing agreement employing the broker to locate a buyer or tenant; and
• any writing that initiates negotiations contemplating a sale or lease transaction. [CC §2079.13; see first tuesday Form 305]

Editor’s note — As before, multi-family apartment sales remain uncovered by the agency disclosure law avoiding the required use of forms and confirmation provisions to disclose agency conflicts.

Related articles:

Agency law for commercial brokers – shedding light on conduct New disclosures under the Nonresidential Building Energy Use Disclosure Program

New uniform loan application and estimate for 2015

Beginning August 1, 2015, lenders under the Real Estate Settlement Procedures Act (RESPA) must provide homebuyers with:

• a Loan Estimate of all mortgage terms quoted by the lender within three business days of the lender’s receipt of the buyer’s mortgage application (a consolidated version of the good faith estimate and the Initial Disclosure Form required by TILA); [12 CFR §1026.37]
• a special information booklet published by the Consumer Financial Protection Bureau (CFPB) to help the buyer understand the nature and scope of real estate settlement costs within three business days after the lender’s receipt of the buyer’s application; [12 CFR §1026.19(g)]
• a Closing Disclosure, which summarizes the “final” mortgage terms and details, provided by the lender at least three days before the consumer closes on the mortgage; [12 CFR §1026.19(f)(ii)] and
• a list of homeownership counseling organizations.

Editor’s note — first tuesday will make the new Loan Estimate and Closing Disclosure available at journal.firsttuesday.us/forms-download-2/ once they are made available by the CFPB.

For more on revised residential loan application and post-submission requirements, click here.

2015, here we come

With sales volume down, prices heading south and increasing interest rates on the horizon, it’s easy to be concerned about real estate sales in 2015. But it’s not all bad news. The last time consumer confidence in the economy was this high in California was 2004. Along with an improving job market, signs point to more upbeat sellers and potential homebuyers in 2015. Once prices fall back closer to the historical mean price trendline, homebuyers will be even more likely to jump in (particularly before mortgage rates rise again).

What do you think will be the biggest influence moving the housing market in 2015? Share your thoughts in the comments!