Student loan debt in the United States has more than doubled over the past decade to about $1.5 trillion, and the Federal Reserve now estimates that it is cutting into millennials’ ability to buy homes.

Homeownership rates for people ages 24 to 32 dropped nearly 9 percentage points between 2005 and 2014 — effectively driving down homeownership rates overall. In January, the Fed estimated 20 percent of that decline is attributable to student loan debt.

Whether that will shift with time as the millennial generation marries and has children is the big economic question.

That’s also a big question for Michael McHale, who says as a child, he pictured a suburban, picket-fenced home he eventually wanted to own. “I can remember wanting that since I was 6, 7 or 8,” he says.

But at age 31, McHale isn’t living that dream. Instead, he and his wife rent in Danbury, Conn., an hour’s drive from the elementary school where he teaches, across the state line in New York.

Not owning a home makes him feel he has made a mistake that has kept him short of a key milestone — and his piece of the American dream. McHale says he feels trapped by his and his wife’s combined $1,200 monthly student loan bills, which prevent them from saving enough for a down payment.

And he says renting means he isn’t free to plan his life, even as their first child — a boy — is on the way. One example: decorating the baby’s nursery. “We can’t really make any actual changes. We can’t really paint too much,” McHale says.

“It seems like there’s like a debt spiral or something. When you get into a little bit of it, it just feeds back in on itself, and for us that started with student loans — that was our first debt,” he says.

It feels especially bad when he compares himself with his father’s generation. Neither his father nor his uncles were burdened by student loans. “They all owned a house and had their full-time jobs by the time they were like 21,” McHale says.

Yet many economists say this younger generation will eventually be able to buy — just later than previous generations.

“It’s not that they’re not going to buy homes. It’s just that they’ll purchase these homes later in life,” says Odeta Kushi, deputy chief economist at real estate research firm First American.

Baby boomers were 25, on average, when they purchased their first homes; millennials, by comparison, are waiting almost a decade longer, Kushi says

Many factors are contributing to this delay: People are staying in school longer, delaying marriage and having children later. This generation is just starting to buy homes, and Kushi expects to see a wave of young buyers in coming years.

“This generation will still yield the wealth benefits from becoming a homeowner, which I think is the key point,” she says.

This might already be starting to happen.

In the past two years, homeownership rates have increasedlargely because of young buyers, who are benefiting from the good economy, says Jonathan Spader, a researcher at Harvard University’s Joint Center for Housing Studies.

“Student loan debt is still a headwind, but they’re at least being buoyed by stronger incomes and employment,” he says.

People with degrees have higher incomes, which offset the debt burden. But it’s also true that people are taking longer to get their degrees, and many don’t finish school.

“Approximately 40 percent of those who start college do not finish within six years. … That’s a huge number,” says Laurie Goodman, co-director of the Housing Finance Policy Center at the Urban Institute.

For those people, it is the worst of all worlds — they have the school debt without the higher wages to show for it.

Christina Ward did finish her schooling, but her chosen profession in social work doesn’t pay enough for her to overcome her student debt.

“I thought that I would be able to at least make enough money to make the payments, which wasn’t true at all,” she says.

Ward racked up nearly $200,000 in loans for college and graduate school. Then she was laid off in December. At 36, she moved back into her parents’ apartment in Newark, N.J.

Ward says she and her girlfriend have had to postpone not just buying a house; her girlfriend is also putting off her graduate education.

“We definitely wanted to get married, and that’s probably going to end up taking priority over the house, because you can’t afford both,” Ward says.

But at the moment, there’s no target date for getting married either.

 

View the full article here at National Public Radio

 

The change could make investors nervous. 

A little-known federal rule change could be making it harder for foreigners to invest in Oregon’s real estate market.

In November the Trump administration took steps toward implementing the Foreign Investment Risk Review Modernization Act, broadening the scope of the committee that investigates business transactions involving foreigners. The recent policy changes make it much easier for investigators to flag foreign real estate dealings of any kind, sending a shockwave through the real estate market.

The mandate of the Committee on Foreign Investment in the United States is to protect national security, and it’s been around since 1988. The idea is to prevent foreign interests from acquiring advanced technology or other information that could be used against the U.S.

The committee has investigated an increasing number of deals every year since 2011, and the legislation makes it likely that trend will continue. Experts predict the number of reviews could jump by 20% or more as the Trump administration intends to apply the law as broadly as possible.

The number of deals that come under scrutiny each year is less than 200, but David J.  Petersen, an attorney at Tonkon Torp, says just the threat of higher regulatory hurdles could slow down the overall real estate market. “It’s a total drag on business transactions,” he says. “Most parties aren’t going to wait around for six to 12 months for an agency to review their deal.”

The lack of data on foreign real estate deals makes it unclear how the new policies will hit Oregon, but the effect could be significant. Portland has a concentrated cluster of companies in the technology and renewables space. The West Coast is a popular target for investors from China or other Asian nations.

Presidents from both parties have used the review power before. In March, President Trump blocked the acquisition of telecommunications company Qualcomm by a Singaporean company with ties to China. In 2012, the Obama administration blocked the acquisition by a Chinese company of an Eastern Oregon wind farm near a naval base. In both cases, the presidents cited national security concerns.

The escalating trade war with China and the Trump administration’s isolationist attitudes might have influenced the policy change. In many of the high-profile real estate deals involving foreign nationals, especially on the West Coast, Chinese investors are involved.

In China, land belongs to the state, and individuals can only lease it from the government for up to seven decades. Many people in China therefore see U.S. property as a more secure investment.

“Combined with the Trump administration’s general isolationist, nationalist tendency, (the act) creates a tool the administration could use to kill real estate deals by foreigners,” Petersen says.

There have been recent signs that Chinese investors are less interested in acquiring U.S. businesses. Chinese foreign direct investment into the U.S. in 2018 fell to just $4.8 billion. That’s a precipitous dive from $29 billion in 2017 and $46 billion in 2016, according to independent researcher the Rhodium Group.

The policy change gives federal investigators latitude to look at a number of new transactions, and hand down greater penalties. The old rule stated that only deals with more than 10% foreign investment could be reviewed, but now there is no threshold.

The act casts additional scrutiny on 27 technology industries, including biotechnology, manufacturing and aviation. Investors could potentially be fined an amount equal to the value of deal. For large commercial real estate transactions, that number could stretch into the millions.

Petersen advises investors to read up on the new rules. The changes have not been widely publicized, despite the serious consequences they might incur. “It’s not a well known thing,” Petersen says, “so a lot of market participants could get caught with their pants down.”

View the full article here at Oregon Business

The United States has enjoyed one of the largest economic expansions in its history since the 2008 housing bust brought the global economy to its knees. But with each passing year, the recovery gets a little longer in the tooth, prompting questions about if or when a cyclical recession might take place.

These questions have gotten louder in recent months as rising interest rates and tariffs have wreaked havoc on the stock market,which had been hitting new all-time highs on a regular basis. One of the most reliable tells of an impending recession—the dreaded Treasury bond yield curve inversion—occurred earlier this month between 2-year and 5-year Treasury bonds, leading some economists to sound their alarms.

If a recession does hit, how would it affect a housing market that’s already starting to cool? With the scars of 2008 still fresh, it’s understandable that some would worry about another housing implosion. But most real estate professionals don’t expect a possible recession to spell doom for the housing market. Some even think it would hardly affect housing at all.

“People’s incomes get squeezed [in a downturn], but they still need a place to live,” said Aaron Terrazas, Zillow’s director of economic research. “Usually what that means is they’re still in the market if they need one, but their price-point is lower.”

Housing in previous recessions

It’s somewhat counter-intuitive, but recessions don’t necessarily mean bad things for the housing market. In fact, they usually don’t.

ATTOM Data Solutions, a leading real estate data provider, looked at home prices during the five recessions since 1980 and found that only twice—in 1990 and 2008—did home prices come down during the recession, and in 1990 it was by less than a percent. During the other three, prices actually went up.

“Housing is such a basic need that it won’t necessarily do well, but [it will] at least truck along,” said ATTOM’s Daren Blomquist. “It may flatten out a bit, but people still need somewhere to live, so that basic need is going to cause how the housing market—and particularly home prices—to continue to go up.”

ATTOM data also show that rents are even less impacted by a recession. During the housing bust in 2008, the average fair market rent for a three-bedroom property, as calculated by the U.S. Department of Housing and Urban Development, rose at a steady clip even as home prices cratered. Rents likely rose as homeowners who had to go into foreclosure during the crisis added new demand for rental housing.

That doesn’t mean that every housing market in America will go unfazed. Real estate professionals like to say there’s no such thing as a national housing market, as each city has it’s own dynamics between supply and demand. Depending on the cause of the recession, it could hit some cities but not others.

For example, the recession in 2001 was caused by the collapse in stock market value of companies trying to take advantage of the newly popularized internet. This caused home prices appreciation in the San Francisco to slow, particularly at the high end of the market. But some other cities were largely unaffected.

Current housing market appears poised to weather a recession

Affordability concerns have plagued the housing market over the last few years, as home prices have long since surpassed their pre-crisis peaks in most markets. High prices have led to a slow down in housing activity, particularly in high-cost markets like San Francisco and New York.

And despite inventory spikes on the West Coast, housing supply for sale remains tight across the country, as home builders have been slow to produce. At the same time, the strong economy coupled with a millennial generation coming of age has added new demand in the housing market. Low supply and high demand means higher prices.

For a recession to impact the housing market, it would need to fundamentally alter this dynamic between supply and demand. A spike in unemployment could negatively impact demand, particularly if an intensifying trade war leads to export tariffs, which could put jobs at risk. But with unemployment already unusually low, it would take a pretty dramatic rise to cause home prices to drop.

It’s even harder to see the supply shortages being alleviated by a recession in a way that impacted prices. If a trade war leads to tariffs on imported construction materials, the cost of new home construction could rise even higher than it already is. Tight immigration policy could make construction labor more scarce as well.

“It really depends on … the magnitude of [foreign] tariffs, and then how aggressive the federal government is at placing tariffs on imports that go into the housing market,” said Ralph McLaughlin, an economist with CoreLogic.

Rising interest rates would prevent a number of potential homebuyers from qualifying for a mortgage and also lower the price point for some wealthier homebuyers. But if a recession hits, the Federal Reserve is almost certain to lower rates in order to jump start the economy, meaning any pain caused by rising rates would likely be temporary. The Fed has also signaled that in the short term it intends to keep rates where they are, and President Trump has made no secret of his opposition to the rate hikes.

The current rate on a 30-year fixed mortgage is at 4.83 percent, according to Bankrate. For perspective, rates reached highs of 18.5 percent in 1981, so even a rise above 5 percent would be historically quite low.

Why this time won’t be another 2008

For a lot of millennials, the only recession they have specific memories of is 2008. That recession not only caused complete chaos in the housing market, but was directly caused by chaos in the housing market. So it’s natural that a lot of people would equate recessions with a housing collapse, but 2008 was a unique case, and today’s housing market in many ways is the complete inverse of the housing market in the run up to 2008.

Primarily, the shoddy mortgage lending practices that flooded the market in 2004 are not present today. In the years before 2008, mortgage lenders made loans to unqualified buyers, or subprime buyers, without verified income or down payments and pushed those buyers into risky loan products that were destined to fail.

Those loans were bundled in to bonds, known as mortgage-backed securities, and dispersed throughout the entire global financial system. When the subprime loans in the subprime bonds started defaulting en mass, the securities failed, too, leading to a financial collapse on a scale never seen before.

But today, mortgage lending is so strict that some in the industry think lenders over-learned the lessons of 2008. The Dodd-Frank legislation passed during the Obama administration enacted strict standards for what types of loans the government-sponsored mortgage facilitators Fannie Mae and Freddie Mac will buy.

The vast majority of mortgage lenders originate a mortgage and then sell it to Fannie or Freddie, so mortgage lenders confirm to the strict standards set by Dodd-Frank. In short, mortgage lending practices today are air-tight, whereas in 2008 they were as sloppy and risky as they’ve ever been. As a result, subprime mortgage bond issuance is a tiny fraction of it was prior to the crisis.

One of the factors in the 2008 collapse that isn’t talked about as much is the oversupply of housing. Going into the 21st century, regional home builders consolidated to form large national companies, and they were churning out houses in volumes that dwarf the pace of building today.

Real estate speculators often purchased this oversupply, and when the crisis hit, they just let those houses go into default because they hadn’t put any money down on it anyway. This led to massive housing supply for sale during the collapse, which pushed prices into free fall. But today, housing supply today is incredibly tight.

“A correction can only go so far because of [the housing supply] dynamic,” said Eric Abramovich, co-founder of home-flipping lender Roc Capital. “I think there’s a floor [today], as opposed to 2008 when there was no floor.”

While the specific mechanics of the 2008 collapse won’t play out if there’s another recession, economists have speculated whether the psychological scars of the crisis would lead to unwarranted panic in the housing market if the economy starts turning sour.

“The psychological component I think is absolutely dark horse in what might happen in the next downturn,” McLaughlin said. “The more that we can provide data out there to help such households make more rational decisions in the housing market the better.”

 

View the full article here at Curbed