Category: Ken’s Columns

PBJ Guest Column: Housing, No Longer Lead Dog?

PBJ Guest Column: Housing No Longer Lead Dog

Ask anyone what the number one indicator of the economy is, and most will say the housing market.

This isn’t new, of course, and dates all the way back to the Industrial Revolution and to post World War II rebuilding. Fast-forward to the explosive growth in the late 1980’s through 2006, and it’s clear the housing market has been the lead dog driving the sled.

While home ownership continues to be a driving indicator of our collective economic health, business owners and investors should be aware of other factors that are worth watching. Here are three new dogs that I believe are now driving the sled and changing the business paradigm.

  • The rental market. Rents are increasing dramatically, as more and more people simplify, reject home ownership, and recover from a battering six years. Inventory of existing homes is at historically low levels. In the U.S., existing home sales are up 2.4 percent for September 2014 (source: National Association of Realtors), while Portland metro sales dropped 1.4 percent in August 2014. Compare that to a healthy real estate market, which should grow at a greater pace than inflation of 2.9 percent. (source: Regional Multiple Listing Service) Consumers are nervous about the future — their jobs, health care, debt, or fear of being trapped in a long-term commitment. They don’t want to be over extended with either cost or risk. Renting serves up more options with short-term commitments and no loss exposure as in buying in a volatile real estate market. Right now, renting is simply more affordable and flexible.
  • Access to credit. The largest pool of credit-challenged borrowers in my lifetime, are now starting to get back on their feet. But it is a lot tougher to get a loan. Short sales, bankruptcy and foreclosures are commonplace, creating a barrier in qualifying for a mortgage loan. But good news is coming! The Obama Administration has been pushing for an upgrade in some FICO scores, and the positive results are starting to emerge. For instance, some credit FICO scores are now being adjusted up by as much as 25 points for borrowers that have had medical-only credit challenges. Additionally, credit score requirements have been lowered below 600 for most FHA loans, and now non-QM loans are available for borrowers who had to opt for a short sale. Only in some cases do people have to wait two years before they can purchase a home. Going forward, the market needs to adjust to friendly terms, and programs that convince the already skittish consumer to start buying goods and services again. (You’re seeing that with inducements like “no interest” offers and air miles.) The credit vault will need to continue broadening to see the economy really take off.
  • Historic shift in demographics. What effect is the aging of the Baby Boomer generation having on the economy? Baby Boomers are between 50 and 66 years old today and triggering several real estate trends. The era of the large family home is fading, as more borrowers in this age group down-size and simplify. Accessory Dwelling Units and add-ons are growing. Millennials are looking for less space, lower cost and less risk, after witnessing the fallout of 2008. Many are moving back home with good ol’ Mom and Dad.The aging Baby Boomer generation is here, growing and wants services to fit their needs.

Smart businesses are poised to take advantage of these changes, by remembering that the American Dream, rather than being forgotten, is simply changing. The vast majority of Americans are replacing a white picket fence, two cars in the driveway and two children for low-risk, simplicity and flexibility with their housing, goods and services. Meeting those demands will drive a healthier economy.

Are student loans killing the housing recovery?

From BizJournals.com by Ken Maes

There’s a new four-letter word for today’s young adults and it’s spelled D-E-B-T.

ken-maes-groundhog-post

Ken Maes, Skyline Home Loans NW

After spending four years or more finishing their degrees, new graduates are suddenly realizing they’re in a financial mess—far worse than those penny pinching college days eating noodles seven days a week. (Many parents are also smarting over that realization.)

Student loans have now exceeded both car loan and credit card debt, and have moved in behind home mortgages as the second largest category of debt, according to a study by the Federal Reserve Bank of New York.

Car loan debt totals $789 billion, credit card debt has exceeded $679 billion and federal student loan debt has jumped 50 percent since 2007 to reach $1.2 billion.

As a father of five children, one still in college, here are some statistics that got my attention:

1. A report from the Institute for College Access & Success reveals that 71 percent of 2013 graduates nationally have an average of $29,000 dollars in student loan debt.

2. In Oregon, the numbers are a little better. The average graduate is $26,639 in debt with 60 percent of the graduates in debt, according to an article in Real Time Economics.

3. From 2008-2012, debt increased per student at an average rate of six percent a year, according to Chris Herbert, research director at Harvard University’s Joint Center for Housing Studies.

4. Federal Reserve figures suggest that the share of borrowers who owe more than $50,000 dollars in student loans has increased from five to 10 percent since 2004.

Is the housing recovery being slowed by this student debt explosion? Absolutely.

“A crucial factor slowing down the recovery has been limited demand for homeownership resulting in part from a slowdown in family formations,” Larry Summers, director of the White House United States National economic council, was quoted as saying in the Real Time Economics article. “That is driven by the overarching life shaping imperative of managing student debts for too many young people.”

So with all that depressing news, is there a way to purchase a home, even if you or someone you know has incurred debt from student loans? You bet.

Many lenders will not count the student loan debt until six months, after graduation. Also, the payments on these loans are much lower than credit card and auto loan payments. Your credit score will improve as well, assuming you pay them on time, which will give you better mortgage rates and lower fees. This will all help make the qualification process for a home purchase much easier.

What are some tips to move forward?

Try to stay debt free on everything else like cars and credit cards. It will be tempting but don’t give in.

Work as hard as possible to limit what you borrow. Debt is a devil to pay off.

Don’t stretch too far on that first home purchase. Smaller is better.

Practice. Before you buy that home, get pre-approved, determine your potential new payment, and set it aside each month with your student loan payments, to see how it “feels” from a cash flow standpoint.

I believe with all my heart that owning your own home is still a big part of the “American Dream As the father of those five wonderful children, and seven awesome grandchildren, I’ve seen first hand what achieving the goal of home ownership has done to enhance their lifestyle and pride. So, scrimp, struggle, and save; it will pay off in the future when you can say two four letter words: Debt free.

Opinion: ​Easing credit scores to fuel lending

By: Ken Maes and originally posted on BizJournals.com

Have you seen the movie “Groundhog Day” with Bill Murray?

ken-maes-groundhog-postIf so, you know where I’m going with this. In this column, we’re going to talk about the government insanity unfolding right before our eyes. Albert Einstein described insanity as “doing something over and over again, and expecting a different result.” To see how this applies to us, let’s journey back to the late 1990’s.

President Clinton presided over an economic boom, driven largely by falling interest rates. In January 1993, the average 30-year mortgage rate was 8.02 percent, according to the Federal Home Loan Mortgage Corporation By 1999, rates had fallen to 6.79 percent due to the rapid rise of home prices, the average homeowner could claim up to 45 percent equity.

In 2000, during President Bush’s election, one of his major themes was to create an “ownership” society, where he said we could “put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.”

Congress stepped in, applying pressure on FNMA, FHMLC and FHA to lower credit standards to help the ownership dream become reality.

I think you know the rest of the story. What followed was a nightmare housing bubble and the “Great Recession,” as easy money allowed a rush of buyers with bad credit to apply for and get homes. Six years later, we’re still struggling to recover.

A snapshot of Portland’s housing market

Let’s take a quick status check of the Portland area housing market:

  • The Portland area grew at an annual rate of more than 11 percent in 2013.
  • Home equity loans are going up due to rising home values.
  • The inventory is low, with Portland ranking eighth lowest in the nation.
  • Rents are at the highest levels ever, triggering a bigger demand for homes.

The Obama administration says it has a great solution to those low inventories, and high home prices: It wants to lower credit standards.

What? That’s the “solution” that imploded the housing industry in 2008.

It’s important we all understand the real reasons behind the growing housing market: artificially low interest rates and low inventories of homes. There are fewer buyers because of the 2008 housing crash, and its devastating fallout.

Why we’re not in a true recovery

To clarify, this is not a true housing recovery because stable, full-time employment is not being created to drive a real housing recovery. I like to refer back to the era of big hair-big interest rates: the 1980’s. Back then, the U.S economy created 19 million jobs despite the fact the average interest rate over that 10 year period was 11.67 percent. In contrast, in the lost decade of the 2000s, there was net zero job creation, and the average interest rate was 6.29 percent.

For the past three years, the Obama administration has been pressuring the credit industry to loosen up standards to “help” borrowers with accounts that have turned into collections for unpaid medical debt. The result: borrowers will see their credit scores improve by up to 25 points, allowing them to qualify for mortgages, car loans and credit card debt—all of which they can’t afford.

The pressure appears to be working. The model that’s used as the standard bearer in the industry is the FICO score. FICO (Fair Isaac Corporation) is actually a private firm based in San Jose, California. It developed the model that gives people credit scores ranging from a low of 300, to a high of 850. The government has convinced this private firm to “improve” its tool, so that many borrowers with delinquent accounts will see their score increase up to an additional 25 points.

What, me worry?

How does this affect you, or to quote the vintage Mad Magazine phrase, “What, me worry?” Yes. Worry. All the factors are falling into place for yet another housing correction that can start a domino effect of bad news in our economy. We can all avoid that by remembering to:

  • Buy a home today for your lifestyle, not a short term investment.
  • Be patient; prices will fall.
  • Look into remodeling, a fairly inexpensive way to get a bigger home.

My family has built a business on helping people realize the dream of home ownership — but only if they can afford the payments. When people buy goods and services they can’t afford, it not only further destabilizes their finances—but also our country’s. Lowering lending standards to include borrowers who have credit issues is nothing but insanity — again.