INDIANAPOLIS HOUSING OUTLOOK Company Overview The Truth about Mortgage Underwriting
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Market Trends Indianapolis, IN Grades and Current Statistics
*Arrows indicate change from what was reported last month. Values may have been revised. **Burns Affordability Index: Scale 0.0-10.0, 10 being the least affordable time to buy. Historically low permits are considered an ‘A’ because supply levels are low, which is a positive characteristic for a market. Resale Sales Volume grade is based on a ratio of sales to the number of households.
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Metro Analysis and Forecast Housing Cycle Risk Index
HCRI Legend
Our HCRI is a 1–2 year leading indicator for home price appreciation/depreciation. Improving markets (rising prices and rising construction) make the market riskier and vice versa. *Based on a three-month trend
Forecasts
*Actual results will vary from projections and the variation can be significant. We assume no liability for the use of any of the data or projections in this report. Projections as of: Aug 2014
Based on Aug 2014 Data
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About Us John Burns Real Estate Consulting (JBREC) is a national independent research provider and
consulting firm focused on the U.S. housing industry. Our goal is to provide strategic guidance that drives profitability. Our passionate team of 50+ analysts and consultants help our clients identify areas of opportunity and risk through timely and trusted analysis. We are able to do this because of our:
• Client focus. Our clients have personal access to our
team of market and industry experts. We also connect clients to opportunities for new business. We seek to continually innovate and improve our practices to make our clients’ lives easier.
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• Speed. We are focused exclusively on housing and strive to have the most current data at our fingertips. We are diligent, regularly out in the field, and tapped into industry leaders— resulting in great research and advice.
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provide unique and timely insight. They include: a monthly survey of builder executives, several indices and forecasts, and a demand model by price range and household composition.
• Data quality. We create, collect and buy the best industry data available, enabling our analysts to explain what is going on and how clients can apply that insight to their business planning.
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• Local knowledge. Our team has offices in 10 of the
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seasoned industry veterans who have learned from multiple housing cycles.
• Trusted integrity. We are independent advisors. We do not recommend investments or take contingency fees so it’s clear we have no conflicting agendas.
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Our
Team
Access to Our Nationwide Team of Experts John Burns Real Estate Consulting takes great pride in our highly educated, resourceful and experienced team that includes practitioners with 25+ years of experience in both homebuilding and community development. As a research client, you gain access to our team across the nation to discuss market conditions, our current research and our forecasts.
Client Resources John Burns CEO
Rick Palacios Director of Research
Lisa Marquis Jackson Business Development
Steve Dutra Data Management
Regional Offices Sacramento, CA Dean Wehrli
Chicago, IL Lance Ramella
New England Jody Kahn
Irvine, CA Mollie Carmichael
Washington, DC Dan Fulton
San Diego, CA Pete Reeb
Atlanta, GA David Kalosis
Don Walker
Dallas, TX Ken Perlman
Paige Shipp
Boca Raton, FL Lesley Deutch
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Our
Clients
Diverse Client Base Our diverse client base is one of our greatest assets, allowing us to look at the market from a variety of perspectives. Our clients are among the smartest and brightest in the industry, consistently outperforming their peers. • As of June 2014, our publically-traded home builder clients’ returns were 109% over the past three years. This compares to non-clients at 60% and the S&P 500 at 48%. • All of the home builders that filed IPOs in 2013 and 2014, are research and/or consulting clients of our firm. • Our clients use our research to appropriately time the market. Our two largest clients in 2006 sold their companies at huge book value/stock price premiums. Three of our investment clients in 2007/2008 reported 100%+ returns. • Our clients have made smart land portfolio acquisitions, valuations and due diligence decisions . Eighty-five percent of our consulting assignments come from repeat customers.
JBREC Client Segments
Single-Family Rental Private Equity
Banks Builders
Others Investors Building Products Hedge Funds Developers
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Client Feedback Building Product Manufacturer, President “The John Burns reporting provides the timeliest local market pulse of any national data service allowing my residential divisions to know exactly where to focus. Lisa Jackson has the contacts and insight to provide the most thorough local market analysis enabling us to make the right decisions.” Institutional Investor, Portfolio Manager “The client experience has been great. It makes me wish we had allocated more capital to residential development in this fund.”
Land Developer, VP
Home Builder, President “John Burns Real Estate Company delivers valuable and comprehensive market data, which we feel it is the best in the industry. They also facilitated long standing relationships with industry leaders and now play an instrumental part in our culture by speaking at our annual events and enlightening our company on market trends.”
“Quick accessibility of local market knowledge is critical for us. This is one of the reasons why we switched (to John Burns Real Estate Consulting).”
Home Builder, CEO “My experience with John Burns has enabled me to better assess current market risk level at any point in the homebuilding cycle. Also, I have been able to make new valuable contacts.”
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The Truth about Mortgage Underwriting by Lisa Marquis Jackson, SVP The world is awash in inaccurate sound bites related to mortgage credit. We spoke with numerous industry executives and identified three truths that need to be clarified: 1. Low income buyers actually have it easy. Buyers with poor credit and low income are finding it quite easy to buy a home below the FHA limit. 2. Many affluent buyers find it very difficult. Automated underwriting prevents many highly qualified borrowers, especially affluent retirees, selfemployed, or commissioned salespeople from getting a mortgage because their income situation does not fit squarely in the credit box.
the rich. While the Dodd-Frank rules were written with good intent, let the truth be known, so more first-time buyers can take advantage of current programs to buy homes. Let the bankers use good judgment again, so more affluent buyers can get a mortgage. EASY MONEY THROUGH FHA FHA federally insures 95%+ loan-to-value (LTV) mortgage loans made to people with poor credit and low incomes.
3. Industry executives are unintentionally preventing a recovery. Mortgage industry executives lobbying for the good old days where FHA limits were higher, fees were lower, and documentation was easier need to stop whining because they look very unreasonable to regulators and politicians who are not sympathetic. Our purpose here is to shed some light on what is actually happening—because if there were clarity around this, we would have: 1. More entry-level home buyers. Many qualified people are not even shopping for a home because they presume they cannot get a mortgage. We provide several examples of easy qualification below. 2. More affluent home buyers. More good loans to very qualified buyers would be made if underwriters were allowed to use good business sense rather than fill in automated forms. As we did our research, we heard many stories of buyers reluctantly paying cash or deciding not to move at all and telling their friends who then also elect not to move. These include business owners, retirees, and commissioned salespeople. 3. More relocating home buyers. Many relocating employees are renting simply because they cannot provide historical pay stubs at their new employer. Given their track record of steady employment and desirability to multiple employers, does that make any sense? In the aftermath of the housing crisis, the reality is that we are lending aggressively to the poor and conservatively to 8
Here are three recently approved loans, all through FHA or VA: 1. Recent foreclosure. 96.5% loan on a $170,000 house to a couple with $36,000 in income, a foreclosure three years ago contributing to their 620 FICO score, and debt service equal to 55% of their gross income 2. 57% of income needed to pay debts. 96.5% loan on a $165,000 home to a couple with $38,000 in income, a 642 FICO score, and debt service equal to 57% of their gross income 3. Fixed income and disabled. 100% loan on a $160,000 home to someone permanently disabled with a 601 FICO score and a $34,000 fixed income TIGHT MONEY ABOVE FHA LIMITS Affluent commissioned salespeople, self-employed, newly employed, and retirees who don’t have steady paychecks have tremendous difficulty getting a mortgage because they either:
• report inconsistent income to the IRS, • cannot provide extended income history from a new employer, or • do not have sufficient current income to qualify but are trying to keep some cash in the bank or delay paying taxes on an IRA distribution. Here are six borrowers who were denied a mortgage: 1. 27% LTV. A couple with a 780 FICO score who wanted a $300K loan on a $1.1 million house and would have $300K in reserves after closing, but whose verifiable income was only 30% above the proposed mortgage payment. 2. 801 credit score. Newly retired couple with fantastic 801 credit score, $1 million in retirement accounts, and $400,000 in savings after they were going to put down $350,000 on a $550,000 home purchase, but whose Social Security income was less than double the proposed mortgage payment. 3. Affluent business owner. Owners of a small retail business who were turning the business over to their children to manage, with the intent of collecting dividend income; who had $500K in cash savings and wanted a 50% LTV. 4. Relocating borrower. A US citizen who has been working overseas takes a job in the US, has a 700 FICO, 20% down payment, and plenty of reserves, but cannot produce a W-2 because he does not exist in the country in which he was working and hasn’t started his new job yet. 5. New employee. A prospective borrower qualified in every way except she had only been in her current job for five months and had worked in the family business previously where she did not get a W-2. 6. Loan = 15% of applicant’s assets. A retiree who wanted a 50% LTV and had assets six times the proposed loan amount was turned down and eventually paid cash.
down, you were pretty much looking at an FHA loan. During this period, it’s fair to say that sales were being seriously impacted by 20%+. Slowly at first, and now more rapidly, things are changing. Credit requirements for 95% conventional financing are as low as 620, and MI companies have lowered premiums and relaxed guidelines. Banks have been peeling back overlays. You aren’t likely to get a conventional loan with a ratio above 45% anymore, but nor could you really get that back in the 90s either.” • Disposable income is more important than gross income. “Our industry needs to focus more on disposable income versus debt-to-income ratios, meaning a borrower who makes $2,200 a month with a 40% debt-to-income ratio is more risky than someone who makes $12,000 a month with a 50% debt to income ratio. The first borrower has very little cushion after income taxes, utilities, car insurance, food, etc. for emergencies. But the person making $12,000 a month would have much more left over after all of these other debts.” • Stated income should have its place. “There is a time and a place for Stated Income, not “No Doc” loans, but Stated Income loans. They were a great tool back in the 2000s that rarely went bad if they were used properly because the borrower had a lot of their own capital invested in the home.” • Income is the problem. “The challenge is not credit based, it’s income based. Home valuations have increased at a steeper trajectory than income. Also, the new buyer pool is saddled with student loans and other debt, which has really created the (disposable) income issue. I believe credit is much more accessible than the media/public portrays (in terms of credit scores, LTV’s, etc.) My opinion will remain our immediate challenge is income/debt/ DTI.” SUMMARY
MORTGAGE INDUSTRY VETS TELL IT LIKE IT IS
In conclusion, let’s:
We expect the borrowers and outcomes profiled above will be surprising to many. We also want to share the following sound bites from mortgage industry veterans to offer surprising clarity on other areas of debate:
• Get the word out that loans below the FHA limit are readily accessible, with monthly payments that are a great historical value in comparison to gross incomes.
• Loans today are easier than the 1990s. “For the average borrower, I believe it was more difficult to qualify for a mortgage in the 1990s.” • Huge improvements are being made in conforming loans. “For a while, if you didn’t have a credit score over 720 and you wanted a loan with less than 20%
• Let the bankers use manual underwriting in instances where they can document that the loan has a very low likelihood of losses.
Lisa Marquis Jackson, SVP (214) 389-9003 lmjackson@realestateconsulting.com 9
LANCE RAMELLA Sr. Vice President
(630) 544-7826
lramella@realestateconsulting.com
Lance consults on a broad spectrum of residential and commercial properties, including all for-sale and rental product types, master-planned communities and resorts, infill developments, and active adult and senior housing projects. With over 26 years of industry experience, he has led consulting operations and management for the Central and Eastern US as Director of Consulting at Metrostudy and Senior Managing Director at Hanley Wood Market Intelligence. As a leader in the industry, Lance regularly provides insight to leading publications including The Chicago Tribune, Crain’s Chicago Business, The Daily Herald, Builder Magazine, Big Builder Magazine, Developer Magazine, and The Washington Post. He has been a featured speaker at the Builder 100 Conference, Developer Conference, Presidential Seminar Urban Land Institute and Navigating the Chicago Real Estate Market. In his free time, Lance enjoys golf, reading and riding his bike. Education B.S. from Arizona State University’s W.P. Carey School of Business Affiliations ULI Chicago Chapter ULI – Community Development Council – Blue Flight HBA of Greater Chicago
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LISA MARQUIS JACKSON Sr. Vice President
(214) 389-9003
lmjackson@realestateconsulting.com
As Senior Vice President, Lisa leads the company’s strategic research and business development efforts. With over 23 years of experience in housing research, she is a proven industry strategist with a demonstrated track record for driving growth and successfully creating solutions for complex business challenges and opportunities. Leveraging the strength of her network, experience and industry knowledge, Lisa is a driver of opportunity and has developed a reputation for being a dynamic and strategic business advisor. Prior to joining John Burns Real Estate Consulting, Lisa was an award-winning business journalist providing in-depth news and interpretive coverage of the housing industry for 18 years—most recently with Hanley Wood publications. She also gained industry experience as an account director for a boutique marketing research firm, creating custom research products for business-to-business clients. Lisa has been widely sourced in major media including the Wall Street Journal, NPR, and CNBC. In her free time, Lisa enjoys tending to her budding, urban farm. Education B.S. in Mass Communications from Illinois State University
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