The Federal Housing Administration’s (FHA) anti-flipping waiver sunsets on December 31, 2014, another headwind facing speculators in the market.
The waiver was instituted to encourage speculators to enter the housing market and provide cash for turnover of properties during the foreclosure epidemic. The waiver allows speculators to sell properties to homebuyers who are purchasing with FHA-insured mortgages, a method of financing that has lost much of its appeal in the past two years.
Beginning January 1, 2015, speculators will be required to wait at least 90 days from their purchase before they may sell to homebuyers who are purchasing with FHA-insured mortgages.
Revival of the 90-day restriction has sparked debate about its impact on first-time homebuyers. Proponents of the waiver point out that many first-time homebuyers opt for FHA-insured mortgages, and typically lack the funds to complete the renovations on low- to moderately-priced homes in their price range.
Thus, the end of the waiver means alienating a significant pool of first-time homebuyers.
But what does the end of the waiver really mean for the market? Despite what naysayers claim, discontinuing the waiver is good news.
The FHA’s continued reliance on speculators to mend the market is negligent at this point in the recovery. While speculators welcome needy homebuyers with one hand, they pick inventory clean and artificially inflate prices with the other. The evidence flows from the market landscape left behind by speculation since mid-2012 — and which will be with us for most of 2015.
We’ve seen speculators reign free over the 2012-2014 market, inflating prices and decreasing home sales volume, then fleeing when the resulting damage has left the market unviable for them.
Related article: Speculators… the harder they fall
Take a look at the latest trends: home sales volume was propelled upward during the recent flipper acquisition frenzy going into 2013. It has since dropped back down to its 2010 level as speculators began exiting the market. But where speculators play, long-term effects remain. And home prices — particularly those in the low tier where speculators are most active — have climbed, due solely to the speculator surge. Inventory — supply — is not the problem; it is user demand which has failed to develop.
In August 2013, as the market became a speculator playing field, low-tier home prices soared to levels 31% higher than the prior year. Sales volume remained the same, peaking in May 2013. Though prices continued this upward trend in 2014, they will likely peak in Q4 2014, or sooner (home sales volume data is delayed several months). Prices in all tiers stagnated from July to August, the preamble to a price decline and further sales volume drop.
Nonetheless, home prices are still plump from speculator inflation as they begin their likely rapid descent after decelerating for over 12 months. While presently stagnant from month to month, in August 2014, low-tier prices were 12% higher than a year earlier, compared to a 7% increase in mid-tier and a 6% increase in high-tier prices.
Much like the events going into 2006, speculator over-activity has driven prices up, creating the façade of a robust market recovery for the ill-informed public (but not real estate agents). Cash-poor homebuyers are being forced out of the market – the same homebuyers speculators say benefited from speculator activity.
Now that the number of speculators is dwindling — currently down to 23% of homebuyers in Southern California from 32% in 2013 — an end to the FHA’s waiver seems obvious, not prescient. Discouraging speculators by relaunching anti-flipping restrictions is in the best interest of the housing market and the improving health of FHA homebuyers.
Additionally, first-time homebuyers will benefit from the Federal Housing Finance Agency (FHFA)’s recent plan to accept 3% down payments for Freddie Mac and Fannie Mae mortgages. The FHFA will purchase loans with less than 20% down payments as lender safe-harbor qualified mortgages (QMs) and insure against losses on default through private mortgage insurance (PMI). These loosened guidelines mean any homebuyers who lack the funds for a 20% down payment are provided more financing options beyond FHA-insured mortgages exclusively for low-tier housing.
It seems, then, first-time homebuyers are not doomed to end up on the sidelines. As speculators exit and mortgages become more accessible, owner-occupant homebuyers will no longer be elbowed out of the competition by speculators. But that will take 18 months or more, well into 2016, for buyers to reach the consensus that homeownership is once again worth it.