Selma Hepp has been the Chief Economist with Trulia since June 2015, where she leads the company's housing economics research team and provides key insights about the economy, housing trends, and public policy to house hunters. She collaborates with the USC's Lusk Center and the REALTOR University Center for Real Estate Studies. Selma previously served as a senior economist with the California Association of Realtors and as an economist and manager of public policy and homeownership with the National Association of Realtors. She has also worked for the U.S. Department of Housing and Urban Development and the National Center for Smart Growth Research and Education as a research associate.
How much will the recent weak job reports affect housing for the rest of the year and into 2016?
The recent job numbers were rather disappointing and unexpected; however I don’t think the weak trend will continue. With the number of job openings rising to a series high of 5.8 million in July, we are looking at employment picking up again in the next few months, especially with professional and business services sector experiencing the largest increase in openings.
The housing market may remain weaker for the remainder of this year given both the lower end of the homebuying season and trepidation resulting from financial markets turmoil. Going in 2016, the housing market will pick up again as employment picks up and we see more demand coming from millennials who are getting married and having children.
What effect will TRID have on the housing industry? We have already seen a big spike in mortgage applications.
The spike in applications last week is likely the result of the anticipation about the new rules; however, I think that’s a one-off spike. Originators and real estate agents were most likely concerned about the implementation and hurried their clients to close sooner. However, yesterday’s passing of the grace period will give more time to everyone in the industry to adjust to the expectations and we probably won’t see another spike like that.
The industry has been anticipating the change for a long time and a lot of training has been put in place to make sure everyone is informed about the changes. The lack of consumer education may be a problem and cause some frustration, but I believe the industry professionals will build the longer closing period into consumer expectations. The changes are ultimately good for consumers and will provide more transparency. The impact will be transitory and won’t affect the housing activity longer term.
What have been the major drivers in the consistent decline in foreclosures and defaults over the last five years?
The decline in new defaults and foreclosures is driven by many changes that proceeded the mortgage market bust. Tightening of lending standards and implementation of Dodd-Frank changes as well as fears of put-back risk leave the lending pool to only well-healed, lowest-risk borrowers.
For example, the median FICO scores on new originations have jumped almost 50 points since the crash. The 10th percentile of FICO scores, which represents the lower bound of creditworthiness needed to qualify for a mortgage, increased from low 600s to 668.
More recently, the tight job market and competition for scarce inventory of homes available for sale allowed lenders to demand high down payments. The loan-to-value in relatively more expensive markets, i.e. California, which was one of the epicenters of the last crisis, have fallen to about 75 today which means a borrower typically needs to come to the table with about $100,000. And the piggy-back products which previously allowed borrowers to purchase homes with less than 20 percent down payment are largely non-existent today. In general, the exotic products that fueled the crisis are essentially gone.