Report from Sarasota housing expert urges prompt administrative action
By Chris Wille
Real Estate Editor
Ed Pinto issued a bleak warning to the U.S. House Committee on Financial Services Thursday about the current state of the housing market. He opened his testimony with this:“The last house price boom and subsequent bust was the result of ill-advised and risky government housing policy,” his statement said. “Today we are in the midst of another boom, and, once again, it is the result of ill-advised and risky government housing policy.”Pinto, whose Venice affordable housing project was scratched last year, holds impressive credentials with decades in housing finance, numerous scholarly and commentary articles and testimony before Congress. He is a resident fellow of the American Enterprise Institute, a Washington, D.C. think tank, and the co-director of the AEI’s Center on Housing Markets and Finance. One of his specialties focuses on the availability of affordable housing for working-class families.“Unfortunately, we are now able to document that we are in the midst of another potentially dangerous buildup of policy-induced housing risk,” he said. “This policy is making entry-level homes less, not more, affordable.”
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Pinto based his comments on the results from the risk rating of 60 million individual mortgage loans dating back to 1990. He blames the rise in risk and the unsustainable home price increases on passage of The Federal Housing Enterprises Financial Safety and Soundness Act of 1992.
Barry Grooms takes a different perspective. The 2018 vice president of Florida Realtors and an ethics instructor for the National Association of Realtors says the present-day risk is not as great as the 2006 collapse of the residential real estate market because there are fewer high-risk properties that are mortgaged.After that crash, “lenders were very slow to offer expanded programs; however, due to extended credit recovery, we are now seeing a few ‘creative’ programs being offered,” said Grooms, a Realtor and co-owner of Bradenton-based SaraBay Suncoast Realty Inc. with his wife, Sherry.Greg Owens, president of the Realtor Association of Sarasota and Manatee and a broker-owner with Keller Williams on the Water, puts a regional spin on the issue. “All real estate is local and so far we have not seen a bubble in our area,” he said. “There have been no dramatic price increases, just a slow, steady growth.”Drayton Saunders, president of Michael Saunders & Co., points out the 2006 bubble bust occurred because of rampant investor buying, lax lending standards that overlooked credit worthiness, and buyers allowed to purchase homes without “skin in the game.”“Those are not the conditions of the current housing market,” he said.Warning signs?In his statement, Pinto added historic perspective to describe a significant past and present warning sign.“Home prices started climbing at an unsustainable annual rate in the late-1990s and continued until 2006. During this entire period there was a seller’s market, indicative of tight supply versus demand. Then for five years the market was a buyer’s market (2007–11), and home prices plummeted, severely damaging our economy and inflicting untold harm on millions of Americans.”The National Association of Realtors defines a seller’s market as six months or less remaining inventory at the current monthly sales rate. A buyer’s market is greater than six months inventory.“We don’t have a healthy inventory,” Saunders said.“As of the end of July, there were 3.9-months’ supply of single-family inventory in Florida, marking the third straight month where there was no year-over-year change in this metric,” Florida Realtors chief economist Brad O’Connor said in the organization’s monthly report several weeks ago. “We’re still squarely in seller’s market territory, though, and we’re going to need new single-family construction to ramp up even more.”National home price trends through July 2018 indicate homeowners feel they are in a seller’s market and holding on for higher paydays, and home prices are projected to increase by 5.1 percent by July 2019.Pinto says the country’s been in a continuous seller’s market since mid-2012 — “one even stronger than in the last boom.”He tracks this back to January 2013 when the Bureau for Consumer Financial Protection promulgated a rule under the authority granted in the Dodd Frank Act. The Qualified Mortgage rule set a maximum debt-to-income ratios of 43 percent but exempted such primary home loan agencies as the FHA and VA. “Since 2013, about 85 percent of all primary home purchase financing has been guaranteed by these agencies,” Pinto states, “in many cases doubling or more the percentage of their DTI’s greater than 43 percent.”AEI’s research demonstrated that high-risk home purchase lending is fueling home price appreciation, Pinto’s report states, and 41 percent of agency lending is high risk.“When mortgage risk expands alongside of home prices, there is little ‘friction’ in mortgage markets to slow the growth of a housing boom,” he said. “This serves to make entry-level housing less, not more, affordable.”Grooms cites the abundance of product being built, but at unaffordable price points in undesirable locations.“Our shortage of inventory is at a critical low in the ‘attainable’ price range,” he said. “If we don’t see an increase in attainable product being built soon, we will have a change in the market by way of significant decreasing home prices. The question is whether this is a bust or correction.”Pinto’s testimony featured a number of detailed recommendations, including evidence that a creditor’s ability to keep up with mortgage payments was reasonable and in good faith and re-instituting underwriting standards that have historically resulted in comparatively low rates of delinquency and default during adverse economic conditions.“In conclusion,” he states, “prompt administrative action is advisable now. We are in the midst of a strong home price boom that is unsustainable and fueled by leverage. While we do not know when real house prices will revert to their trend growth path, what is certain is that when such a reversion occurs, low-income and minority home buyers will again be unduly subjected to volatile home prices, loss of equity, and attendant loan defaults. As a nation we can and must do better.”