Several days ago, I hung hundreds of Christmas lights on our home, our trees, and our bushes to get ready for the holidays. I always enjoy decorating, and my wife indulges me — as long as I promise not to make the house look like Clark Griswold’s fictional manse!
The whole process got me thinking about how far the housing market has — and hasn’t come — over the past few years. And it got me thinking about some of the housing trends I’ve been following, and how they bear watching by investors in anything related to the industry.
So what are the most important ones to follow as we head into 2015?
* The real estate industry is going hat in hand to Washington … and it’s being listened to again! A National Association of Realtors official just told the U.S. Senate that “tight credit, high fees and low inventory have combined to make it prohibitively expensive for millions of responsible, creditworthy prospective buyers to own a home.”
Those kinds of exhortations for help didn’t gain much traction in the wake of the housing bubble. Government officials were too focused on reducing credit losses on Federal Housing Administration (FHA) mortgages. Heck, they even discussed shuttering or replacing the mortgage guarantors Fannie Mae and Freddie Mac.
|House prices are still going up, but the rate of appreciation is slowing as investors back out!|
But as time goes on, institutional memories fade, and sob stories about tight credit standards get more press, I’m finding that Washington is listening to the real estate lobby again. So I expect to see home loans become easier to get — gradually — in 2015 and beyond. Which leads me to my next observation …
* The 97 percent loan-to-value mortgage is making a comeback! Specifically, Fannie Mae and Freddie Mac are going to start backing 3 percent down payment loans again, something that will encourage more banks to offer them. Those kinds of ultra-low down home loans largely went the way of the dodo during the housing bust, so the move is yet another sign that lending standards are gradually loosening up again.
What does that mean for mortgage losses down the road? They’ll be higher, as low down payment borrowers have less to lose by walking away from their homes. But that’s a problem for a few years down the road — beyond the time horizon that most politicians and bank regulators care about! In the meantime …
* Delinquencies have faded dramatically because standards got so tight! Lenders all but stopped making higher-risk loans after the housing bust. The only people who were getting mortgages for a period of a couple years were people who really didn’t need them!
That was bad for housing demand, of course. But it had a positive side effect: It dramatically shrank the mortgage delinquency pipeline! As a matter of fact, the credit analysis firm TransUnion just forecast a 2015 delinquency rate of 2.51 percent. That would be down from 3.21 percent this year … far lower than the post-bust peak of 6.93 percent in 2010 … and the lowest level in eight years.
As standards loosen up, the delinquency improvement will slow and eventually reverse. But again, I don’t anticipate mortgage credit losses being a major story for the banking sector until a few years down the road.
* House prices are still going up, but the rate of appreciation is slowing as investors back out! The latest report from S&P/Case-Shiller showed prices up 4.9 percent year-over-year in September. Sounds good … until you look more closely and see the trend has been decelerating all year. As a matter of fact, we haven’t seen annual price gains this small since October 2012.
I believe the fading of the rental property investment boom is responsible for some of the cool down. Lackluster income growth in Middle America is another factor. So while home prices won’t crash or anything in 2015, low single-digit increases – or relatively flat prices – are probably the best you can hope for as a homeowner.
Throw it all together and you can see why I’m still not thrilled about housing-related stocks. There are a few niche plays here and there, particularly those that may benefit from easing credit standards or strong rental property performance.
But by and large, I don’t expect housing and mortgage stocks to outperform the market. So you’re probably better off sifting through the rubble in the energy sector for bargains, or focusing on highly rated companies in sectors like health care, aerospace, consumer goods, and more. Those are the ones that are helping bolster results in my Safe Money Report, and I expect even stronger performance from them in 2015!
Until next time,