Housing Conditions: Values and Financing

A Very Cool Labor Market Graphic
June 18, 2016
The Physics of Economics, Part 3
June 20, 2016

Corelogic is a great resource for current, accurate data in the national home markets.   They strive to answer the questions we all ask, questions like:

  • Is it more difficult to get a home loan today?
  • How does my FICO score impact my ability to get financing?
  • Are home values rising?

Let’s take a look.


Why you should care:   Two reasons.  First, if you are a home owner, want to be a home owner, are considering becoming a home owner, etc.   This data can help you make decisions.

Second, let’s face facts:   Without accepting an imbalanced ‘risk/return’ relationship, it is extremely difficult to find acceptable yield in the stock and bond markets today.  In my opinion, quality real estate remains one area of investment where potential returns and observable risks are more balanced…more aligned.   Every investor should give real estate serious consideration.


Taking Action:  Know your FICO score.  Understand how it impacts lending decisions.   Follow property valuation trends.   Is a market ‘overvalued‘?   Undervalued?   How is this determined and what does it mean?

Let’s get some answers.


The BLOG:   What a difference a decade makes.  In 2005/2006, it was absurdly easy to get a home loan.   Today, not so much.

Per Corelogic, in 2005, 7.4 million people were approved and received a purchase SFR (single family residence) loan.  In 2014, only 3.2 million.   Less than 1/2.

Did the quality of borrowers decline?   No, lending standards got tougher.  Take a look:

credit 2

The very constrained lending conditions we find today (about 40% against the 100% benchmark) have the opposite effect from ‘loose and easy‘ lending standards of the go-go decade:  They keep the lid on home values.   It’s a simple supply/demand observation.  In this case, demand is held artificially lower since home loan approval is a critical component of the home buying process.  As a result, home values/price growth are held in check.

The next graphic does a great job of showing how standards became more difficult.   Below is a multidimensional graph – much like the beauty in yesterday’s blog – with six spokes.   Notice the blue hexagon marks the ‘benchmark’ @ 100% for each of the spokes:

credit 1

Current conditions are easier in the ‘LTV’ and ‘non-owner’ categories.   Suggesting it is easier today – than ever before – to obtain an owner-occupied high-LTV or investment property loan.  Interesting.

But ‘low’ and ‘no’ document loans have all but gone away (we all knew this) and FICO scores are far more important than ever.   With a score under 640, chances are only 1 in 5 you’ll get a home loan today.   Which means the higher your credit score, the better.

How about home values here in California?   Take a look (click to enlarge):

corelogic 1

Corelogic is forecasting a 9.9% increase in CA home values over the next year.  Good luck finding that potential ROI in the stock and bond markets.

How about specific areas here in CA?   Again, let’s take a look:

corelogic 2

Three California MSAs are shown.   Corelogic believes the LA/Long Beach/Glendale area is overvalued…interesting.   Yet the San Francisco bay area is ‘normal.’   Hmmm…. OK.

Again, look at the value appreciate forecast for these 3 areas:  Between 8.2% and 10.9% over the next 12 months.

If you’re interested, here’s the complete report:

http://www.corelogic.com/research/hpi/corelogic_hpi_april_2016.pdf

Here are the takeaways:

  1. A high FICO score is hyper-critical today.   Do all you can to improve yours.
  2. Credit standards are, in general, much tougher today than in the past.  This condition prevents many would be buyers from buying.  Keeping a lid on home price appreciation…and preventing market overheating.
  3. This notwithstanding, values are appreciating rapidly.  Generating potential ROIs one cannot find in any other market.

It’s never been a better time to buy real property.

  • Terry Liebman

Comments are closed.