Price increases recently spread across all 42 reported markets in DataQuick’s monthly Property Intelligence Report.
During the past year, home price appreciation across the country has ranged from a minimum of 4.43% in Suffolk County, N.Y., to a maximum of 31.4% in Sacramento, Calif., with averages across markets at 16%. However, all reported markets are experiencing home price growth in excess of long term averages that normally range from 3% to 4%.
This means growth rates are increasing at a historically unsustainable pace not supported by underlying economic fundamentals essential to lasting growth.
Though positive impacts from rapid price growth are expected in many markets early in the coming year, considerable uncertainty exists about future economic prospects. Servicers need to understand the implications of home price appreciation across the industry and be ready to adjust strategy accordingly as prices will undoubtedly level off moving forward.
The rapid home price growth seen over the past 12 to 18 months will continue to have a wide-ranging impact on many areas of the servicing industry. Here is a snap shot of some of the immediate implications of home price increases:
Increased Equity
As homeowners with negative equity experience home price growth and are swept toward a position of positive equity, homes listed for sale and overall sales will increase across the country. Borrowers who are no longer underwater will be less hesitant to sell because they will not need to bring much (if any) cash to the closing table.
As borrowers look to take advantage of positive equity, demand for second loans and home equity lines of credit will increase. This means that total borrower indebtedness and combined LTVs will rise above the amount typically reported to the servicer of the first mortgage.
On the other hand, prepayments to refinance will not be dampened as much by a lack of equity. This will especially affect jumbo and nonagency borrowers who are not eligible for HARP refinancing.
Foreclosures and Delinquencies Decrease
The effects of home price growth and increased equity will impact future foreclosure rates. Loans that are currently delinquent will be less likely to make it to foreclosure as homeowners will have the equity to sell before reaching default.
Overall delinquencies will also drop as borrowers see the light at the end of the negative equity tunnel and find more value in remaining in their current residence.
Rental Demand
Demand for apartment and single-family rentals will remain strong in the coming months due to the decreased affordability of homes on the market. Large pools of both available properties and potential renters will also keep driving a positive market for investors. Purchases by investors will continue to be a large share of all single-family purchases for the foreseeable future.
Along with a lack of affordability, rigid credit standards will continue to drive rental and investor demand in the face of housing price increases. As the recent appreciation is not driven by strong underlying economic fundamentals, risk of home price corrections exists and mortgage credit standards will remain stringent.
Though the current rate of price growth will certainly not be sustained long term, it is impossible to determine when exactly prices will taper off. To prepare for the day price appreciation does return to historical averages and current market conditions change, there is an increased need for servicers to more highly scrutinize each property valuation.
With rapid price movements, data from a few weeks or months ago is not adequate for current valuations, and the latest property data is needed to know whether a price accurately reflects the current value. As servicers ride the wave of rapid price growth early in 2014, they must also be vigilant in evaluating the most up-to-date and granular-level property data in preparation for the approaching price let down on the horizon.
Gordon Crawford is vice president of analytics for San Diego based DataQuick.
