Mortgage Fraud Returns to Pre-Pandemic Levels

One indicator that the real estate market is showing signs of recovery is the levels of mortgage fraud. Unfortunately, that’s not a good thing, because mortgage fraud dropped dramatically during the Great Recession. Fewer mortgages does mean fewer opportunities for fraud, but the numbers are expressed as percentages, so it’s not a directly proportional relationship. Fraud indications increased by 37% between Q2 2020 and Q2 2021. Even with such a large jump, it’s actually not much higher than the average across the past decade.

Mortgage fraud can originate from either the lender or the borrower. Borrower fraud is relatively simple to look out for, but it’s something the lender would need to do. Lenders can look at recent job changes, especially to a higher-paying job, claims that the property is a primary residence, inconsistences in data about the property, failure to disclose debt or past foreclosures, or possible attempts to disguise parts of the transaction. These indicators aren’t a surefire guarantee of fraud, but they’re important areas to begin the search. A borrower who has had a Suspicious Activity Report (SAR) filed against them may be blocked from future mortgage loans or be required to pay off their mortgage immediately or go into foreclosure. Fraud by lenders could result in fines, loss of license, or possibly jail time.

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Market Competition Favoring Older Buyers

While Millennials make up the largest contingent of potential homebuyers, they’re not without competition. Baby boomers have been buying at an accelerating rate as well, perhaps looking for retirement homes, or potentially buying for their children, who are probably Millennials. Average age of home buyers has been trending upward for years, but the Great Recession intensified the trend greatly.

This is because heavy competition favors the older generations. Millennials are generally first-time homebuyers without any equity, many are saddled with college debt from ever-increasing tuitions, and wage growth hasn’t even begun to keep up with inflation. What low supply existed was easily snatched up by those who could afford to pay above asking price, in all likelihood, those who had already owned a home for decades.

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Relocation Boom Losing Steam

The pandemic and work-from-home sparked a trend of moving out of dense urban areas into rural, cheaper areas. Leaving congested cities meant social distancing would be easier, and people were still able to work while paying less for housing. But it turns out that the trend didn’t really change anyone’s opinion of rural living — it’s starting to decline as pandemic fear is lessening and more people are moving back into the city, as well as back into offices.

Searches outside the prospective buyer’s current metro area are still above the pre-pandemic levels, at 30.1% compared to 25%. But they’ve dropped off consistently since the peak in Q1 of 2021, which was 31.5%. The pattern is likely to return to normal levels in 2022 or 2023. While more people are moving back to the big cities, they’re still paying attention to their wallets in where they look. Cheaper metro areas, such as Sacramento, are becoming far more popular destinations than expensive coastal metros like San Francisco.

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Homeownership Costs in the First Year

Homeownership costs are not a simple matter of paying the purchase price. For one thing, most people don’t pay full cash. Even a 20% down payment is going to be the bulk of your first year’s costs, but it’s not all of it. Closing costs are an additional up-front cost, and you’re also going to pay the first installments of recurring costs, which include mortgage payments, homeowner’s insurance, and property taxes. Because of these costs, there’s a slight difference between ranking median home prices and ranking average total first-year costs, though they’re not too far off.

Among 20 of the largest US cities, Indianapolis has the lowest first-year costs, while San Francisco has the highest. These also happen to have the lowest and highest median home prices, respectively, of the cities on the list. But take a look at New York City. Property taxes are fairly low in NYC, but that’s eclipsed by the incredibly high closing costs and homeowner’s insurance cost. This makes the first year in NYC a bit more expensive than San Diego, despite lower median home prices. Similarly, Philadelphia having the lowest property taxes on the list makes it the fourth cheapest city in the first year, despite relatively high closing costs and a slightly higher median price than the next cheapest, Houston, which also has more expensive homeowner’s insurance.

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Demand for Pet-Friendly Homes Increasing

Plenty of people own pets, and no one thinks buying a pet is odd, even if they aren’t pet owners themselves. So the recent increase in pet purchases may have flown under the radar, but it’s there and it’s significant. The percent of households with at least one pet jumped from 64% in 2020 to 73% in 2021. The increase is being attributed to pandemic lockdowns — it’s likely that many people unable to meet with their friends wanted a pet to keep them company.

This means that homes that can accommodate pets are in higher demand. Pet-friendly HOAs or landlords are a plus for condo or rental seekers. For SFRs, a few factors are important for pet owners. They want fenced-in outdoor space so their pets can be outside without fear of them going missing. Having a doghouse is also a bonus. They usually want an extra bedroom for indoor pets, or at least more living space. This is also a general trend among recent homebuyers, but the decision to move seems to coincide with pet purchases.

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Decline in Commercial Vacancies Sparks Optimism

The commercial sector, especially with regard to office buildings, is still recovering from the 2020 recession. Fortunately, the stats are showing a positive trend. The industrial market bounced back most readily, since warehouse space was still necessary even without storefront purchasing. Vacancy rates in the retail sector are still above pre-2020 levels, but it’s slowly dropping. Work-from-home has hampered recovery in the office sector, but the numbers are stabilizing.

The most significant changes over the year occurred in net absorption. Net absorption is the total amount of space that is occupied — regardless of how many separate properties that includes. For the industrial sector, net absorption is now in the millions of square feet across SoCal. It was already 3.9 million in the Inland Empire last year, but now it’s up to 6.9 million. Other areas were previously below 1 million. The largest increase, both in raw numbers and by percentage, was in Los Angeles county, which increased nearly ninefold from 417,900 to 3.7 million.

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Aging in Place Contributes to Low Inventory

The concept of aging in place, whereby older homeowners simply live in their home instead of moving to a retirement home, has been trending upward in recent years. The COVID-19 lockdowns only amplified that trend — seniors don’t want to be stuck in a home with several other residents. Unfortunately, this is causing a problem for inventory, since Baby Boomers and the Silent Generation own a combined 58% of properties. If over half of the homeowners are aging in place, they aren’t selling.

It’s not entirely their fault, though. After all, they aren’t intentionally lowering inventory out of malice. The trend is merely compounding a different issue, which is that population is increasing, but construction rates aren’t, and it’s especially low for multifamily housing. Recent legislation has made it easier to develop multifamily housing. But if that doesn’t happen, seniors moving from SFRs into retirement homes isn’t going to suddenly open up enough affordable space for everyone.

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Landscaping Key Factor in Home Values

It’s common knowledge that first impressions are important, and that maintaining strong curb appeal can boost interest. But curb appeal is important for your bottom line even if you aren’t struggling to get interested parties. A well maintained lawn or garden, just one tree, or even patio decorations can vastly improve your home’s value, perhaps by 30% or more in some areas.

Those buyers weren’t surveyed directly, according to observations by real estate agents, the types of landscaping buyers are most interested in are grass, trees, and flowers. 64% of agents thought grass was most important, 59% say trees, and 52% flowers. Hardscaping — outdoor design that doesn’t involve living things — is also important. 58% of agents stress the importance of well-maintained decks. 54% focus on the driveway, and 47% say an outdoor kitchen is valuable.

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More Deals Falling Through After Appraisal

Though the appraisal process can be waived, and it’s not all that infrequent — about 25% of transactions, as of August — when the appraiser disagrees with the buyer and seller on a home’s value, things can get awkward. For all-cash offers, the appraiser’s opinion doesn’t have any direct effects, though it can still influence the buyer or seller’s decision to stick with the deal or not. But for contracts involving a loan, the lender frequently will only lend up to an amount based on the home’s appraised value, even if the buyer offers more than that. And quickly rising prices make appraisal values frequently lower than the asking price, while many buyers are actually offering over the asking price.

Appraisers’ inability to keep up with a fast-paced market is slowing down many transactions. Buyers want to buy quickly, but appraisals take time. More disastrously, deals are forced into renegotiation when buyers find the appraisal is too low for them to qualify for a loan for the amount they expected. This results in 23% of deals being delayed after the appraisal process. About half of these delayed deals end up completely falling through.

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Many Joint Owners Don’t Share a Last Name

In recent years, co-buying has skyrocketed. This refers to a situation in which a home is purchased jointly by multiple owners. And nowadays, more and more of them don’t share a last name, with this value jumping by 771% since 2014. Of course, there could be multiple reasons for not sharing a name, and they could even be married, but chances are they’re not.

Buying your first home is not easy in the current economic climate. Millennials, who make up the largest chunk of prospective homeowners, have inherited astronomical home prices, crippling student debt, a weak job market, and negligible wage growth. Most can’t afford a home on their own — so they ask their friends or roommates to co-buy a house with them. The percent of co-buyers identifying as neither a married nor unmarried couple is only 3%, but that’s still up from two years ago when it was only 2%. The percent of unmarried couples co-buying also went up from 9% to 11%, as Millennials as a generation are also tending to marry later or not at all, whether for financial or personal reasons.

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2022 Market Projections

Next year is expected to be a bit calmer than this year was. An estimated 439,800 sales are projected for this year by the end of the year, but the model predicts only 416,800 for 2022, a 5.2% decrease. It had increased 6.8% in 2021 from 2020. House prices will still be going up, albeit at a much slower rate. The median home price will have increased over 20% this year. It’s only expected to increase about 5% next year. This will also mean a 3% decrease in housing affordability, from 26% to 23%. The forecast assumes that the pandemic situation can be kept under control, primarily focusing on low supply during a recovering market. 2022’s market is likely to be better for prospective homebuyers who were pushed out due to heavy competition. Those who already couldn’t afford to buy still won’t have much luck, but the slowing rate of price growth is hopeful for them.

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Home Equity Gains Are a Buffer Against Foreclosure

The foreclosure moratorium is over now, putting many homeowners at risk. However, unlike the previous recession, homeowners actually have options this time around. Home prices are high, rather than low, meaning home equity has also increased. This will allow many homeowners to sell their homes instead of being foreclosed on.

The average annual gain in equity this year was $51,500, the highest point in the past 11 years. It’s also five times the value last year. Another important statistic is negative equity, which CoreLogic started tracking in 2009. Fewer homes than ever since the statistic has been tracked have negative equity, at only 2.3%. At the state level, Louisiana is somewhat struggling at 7.8% negative equity share. Among metros, Chicago has the highest negative equity share at 5.2%, but also the second lowest amount of negative equity — meaning more people have lost money than average, but those who have haven’t lost very much. Conversely, San Francisco has the lowest negative equity share at 0.6%, but the highest amount of negative equity.

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Renters Overtake Homeowners in Suburbs

Homeownership has been a mainstay in suburban areas, where the typical house is a single-family residence or possibly a duplex. Residents in these areas have tended to be middle- or high-income earners. All of this is starting to change as the demographic is switching to Millennials and Gen Z homeowners. The majority of residents in suburbs are now renters, unable to afford to purchase a home.

Millennials and older Gen Z people inherited the effects of the Great Recession, which delayed their careers and consequently their ability to own a home. This also compounded with student debt, since Millennials are a highly educated generation. All the while, prices are increasing but wage growth is stagnant. While some of these people recovered somewhat since the Great Recession, others were still trying to get back on their feet or were just entering the job market when the 2020 recession hit. Most of Gen Z is still not old enough to own a home, so it’s unclear whether this would extend to them as well.

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Competition Starting to Soften

The 2021 housing market has experienced heavy competition from buyers, with most sellers receiving multiple high-priced offers. The peak was back in April, with nearly three-quarters — 74.3% — of listings generating at least two offers. While the numbers have been dropping off, with July’s percentage at 62.1%, it wasn’t until August that it fell just slightly below the prior year’s percentage for the month, at 58.8%.

The percentage is still over half, but that’s generally pretty normal. The current numbers are to be expected as far as seasonal variation. What’s even more indicative of a return to normality is the drop in number of offers and speed of sale. Agents are noticing decreases from 25-30 offers to 5-7 offers. In addition, a bit fewer offers are above asking price.

That’s just national averages, though. There are still some highly competitive markets, and the most competitive ones are actually becoming more so. 8 of the 10 most competitive markets actually had an increase in bidding wars between July and August.

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August HPSI Flat, But Not Unchanged

Fannie Mae keeps track of the Home Purchase Sentiment Index, or HPSI, each month. From July to August, the change in total value was negligible, from 75.8 to to 75.7, though it’s down 1.8 year-over-year. But the HPSI is a composite of six different categories, and none of them were without change. Three categories increased and three decreased.

Notable changes were an increase in those who believe it’s a good time to buy and a decrease in those who expect home prices to increase over the next 12 months. While the number who think it’s a good time to buy is still not a majority, it’s approaching a third at 32%. In July, only a bit less than half — 46% of respondents — expected home prices to increase. In August, this dropped to 40%. Only 24% of respondents believe home prices will decrease.

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Larger Homes Now More Important Than Nearby Amenities

In July, the Pew Research Center conducted a survey that asked the following question: Would you prefer a community where homes are larger, farther apart, and farther from amenities, or smaller, closer together, and closer to amenities. The answer was 60% for the former and 39% for the latter. When they conducted a similar survey in 2019, before the pandemic, the numbers were significantly closer: 53% to 47%.

Because each of the two responses involves three separate categories, it may be difficult to tease apart which one respondents were most focused on, or if they were considering all of them equally. The survey didn’t ask that question, and it’s unclear why the three separate factors were lumped into one question. Still, we may be able to guess what changed since the pandemic. It’s already established that the advent of work-from-home has caused an increase in desirability of larger homes, with room for a home office, larger kitchen space, and additional personal entertainment space. For a time, lockdowns and increased reliance on delivery services also meant that people weren’t really going to stores or restaurants anyway, so they didn’t care how far they were. It’s possible that social distancing has conditioned people to want their homes farther apart as well, but this seems either unlikely or a negligible factor.

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Average Length of Homeownership Going Up

For a few decades, the average period of time that a family stays in their home before selling has hovered around six years. However, in recent years, this number has climbed up to around nine years. Why the increase, and what does this mean for the housing market?

There could be multiple factors contributing to the increase, but a couple are fairly easily understood. The market crash in the late 2000s led to a price decrease, which encouraged sellers to wait longer for home values to go back up. Even once prices starting increasing again, not everyone was confident in the stability of the market or their own personal economic stability. Another reason is that the largest market group is currently Millennials, who have a relatively low homeownership rate, in no small part due to various economic factors largely outside their control. Not being homeowners, they aren’t able to sell, so they have no impact on the average length of homeownership.

Average length of homeownership is an interesting statistic to follow, but since it hasn’t changed in so long, it’s not entirely clear what the impact could be. One could guess that it would have a negative impact on available inventory. This could be a problem for anyone looking to buy, but also could further contribute to increasing average length of homeownership for people who don’t actually want to stay in their current homes, but have no option.

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August 2021 Real Estate – A Good Market by Any Measure

Sales Volume Down

Back in 2019 the first eight months of the year saw 5,706 homes sold. During the same period in 2020, in the early response to Covid-19, sales dropped off by 12% to 5,003. As the market came out of the Covid doldrums in 2021, sales took a dramatic 57% jump. It’s most easily seen looking at the sales volume for the Harbor area in March on the chart below.

Part of that jump was the approximately 700 sales which didn’t happen in 2020. We don’t know how many of those “deferred” transactions have jumped back into the market. As of August the South Bay sales were at 6845, a 20% increase over the 2019 sales for this point in the year.

Seeing that a huge part of the March increase came in Harbor home sales tells part of the tale. The biggest piece of that market in recent months has been entry level or first time home buyers. Closely following are investors in small income properties.

Stories from the street imply that the growth in ADU additions and conversions has had an out size impact on that market as well. Both homeowners and landlords benefit from having additional living spaces.

For right now, the pandemic appears to be fading, which would tend to boost sales. Similarly, the low mortgage interest rates continue to support the market. At the same time we’re moving into fall and winter, when sales typically slow. August showed just a hint of a seasonal downward movement. September should be a directional indicator.

Sales Prices Up

That jump in sales volume was accompanied by a bigger jump in the median price of the homes selling. Pent up demand and low interest rates combined to create bidding wars and drive median prices up. As of the end of August, the median price of a home at the Beach was $1.7M. That number was $1.5M in 2019 and $1.4M in 2020.

Median prices on Palos Verdes trended about the same at roughly $100K more per unit.The Inland cities and the Harbor area both showed mosest increases in the $50K neighborhood.

Area Sales Dollars Slowing

The monthly sales value of homes sold across the Los Angeles South Bay for August declined in all areas except the Palos Verdes Peninsula.

Compared to July, the number of sales on the Hill increased 8% in August, with a 2% increase in median price. That translated into a $150M increase in monthly sales since the first of the year.

Activity in the Inland cities has been stable for three months already, having risen about $50K per month since the first of January.

Monthly sales at the Beach and in the Harbor area pulled back for a second month in succession. Looking at the blue line for the Beach, we see a sharp drop in July which softened considerably in August. The Harbor area shows a steady decline over the same period.

As of August monthly sales totaled ~$150M higher than the beginning of the year at the Beach. During the same period monthly sales totals were up ~100M. As we move into the fall and winter season these numbers should slow somewhat.

Statistics – by Month, by Year

Interestingly, the number of homes sold in the Beach cities was unchanged from July, while the median price increased 6% at the same time.

There were 175 homes sold in both months. So how did Beach homes grow from a median price of $1.6M to a median price of $1.7M in one month? In July, 27 of those properties sold below $1M. In August, only 20 sales closed escrow for under $1M. The entire market simply moved up, pushing the median price up $100K in one month.

On a month to month basis, prices are holding or increasing across the board. At the same time we’re seeing slowing or flat sales everwhere but Palos Verdes. Continued slowing for the season is to be expected.

There’s still a lot of buyer traffic at open houses, but sales volume is slowing and buyers are showing price resistance. There’s also some chatter out there about what’s beginning to look like inflation in the real estate market. My crystal ball is showing a slow steady ride through the next month. It’s all cloudy after that.

Owning a Starter Home Still Better than Renting

Many renters feel like they will always be stuck renting. For some of them, that may unfortunately be true. But for those who are able to afford to buy but are afraid of mortgage debt, you may actually be better off buying a home. It’s true that sale prices are still increasing, but so are rent prices, which hit new highs in July in 40 of the 50 largest metro areas. The median rental price in the US is $1607 as of last month. The median mortgage payment for a starter home is about 15.5% less than that.

Of course, there are many factors that can adjust these numbers. Rent prices and home prices both vary depending where you live. It may not be easy to find a starter home in some neighborhoods. In areas with rent control, your rent may be relatively low if you’ve been in the same place for a while. Mortgage payments depend on your down payment as well as the home’s price. If you’re a renter, it’s not a guarantee that you should go out and look for a home right now, but you certainly shouldn’t dismiss the idea.

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Uneven Recovery Exemplified by Second-Home Demand

Our recovery from the 2020 recession has been described as a K-shaped recovery. Generally speaking, this means that the recovery occurred at starkly different paces for different segments of the population. More specifically for 2020-2021, while wealth decreased for many groups, it actually increased for those who were largely unaffected by the circumstances of the recession — in this case, primarily job losses and lockdowns. Many of those who were able to keep their jobs and continue to work from home during lockdowns enjoyed their reduced daily spending and lower mortgage rates.

This led to a increase in demand across the board, but notably in one sector of the market: vacation homes. Those who were affluent enough to possibly purchase an additional home were encouraged to do so by low mortgage rates and increased savings, and higher-income jobs are actually more likely to be able to be done from home. In California, the trend was first made obvious in October 2020, which saw a 120% increase in second-home demand from the prior year. The trend continued, though, demand for second homes increased 178% between April 2020 and April 2021. Rising prices dampened the effect, but it only slowed when lenders tightened restrictions on mortgages for second homes and lockdowns ceased being much of a factor.

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