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37 » VISIT US ONLINE @ DSNEWS.COM TRIGGERING HOMEOWNERSHIP National vacancy rates for homeowners remained essentially flat in the third quarter. So did the national homeownership rate, according to the latest Quarterly Residential Vacancies and Homeownership report by the U.S. Census. In Q 3, the homeowner vacancy rate landed at 1.6 percent, barely 0.1 percent above the Q2 numbers and just as statistically indistinguishable from Q 3 of 2017. Similarly, the third quarter's national homeownership rate of 64.4 percent hardly moved from Q2's 63.9 percent Vacancy rates among renters barely changed from Q2 either. In the third quarter, rental vacancies topped out at 7.1 percent, which is flat compared to Q2 and down only slightly from Q 3 of 2017, when they were 7.5 percent. According to the Census, rental vacancy rates in Q 3 were highest outside Metropolitan Statistical Areas, at 9.2percent. e rates in principal cities (7 percent) and in the suburbs (6.6 percent) "were not statistically different from each other," compared to either Q2 or last year's third quarter. Rates were also highest in the South, at 8.7 percent, followed by the Midwest (7.6 percent), the Northeast (6 percent), and the West (5.1 percent). "e rental vacancy rates in the South and West were lower than the third quarter 2017 rates, while rates in the Northeast and Midwest were not statistically different from the third quarter 2017 rates," the report stated. Meanwhile, homeowner vacancy rates in the South (1.7 percent) were higher than those in the Midwest and Northeast (both 1.5 percent) and the West (1.4 percent), Tian Liu, Chief Economist at Genworth Mortgage Insurance, said the Census report shows something positive–that more people are choosing homeownership over renting. "A large part of that story is the historically large number of first-time homebuyers," Liu said. He said that in the past two years, first- time homebuyers have purchased at least 1.9 million homes each year. "at is more than the pace of household formation over the same period, meaning that the transition from renting to owning is the more powerful driver of housing demand," he said. "at has also been an important and often overlooked reason for the rapid rise in home prices, as more buyers came into the market." Paradoxically, Liu said, the rise of first- time homebuyers—which has pushed home prices up—also is slowing home sales today. "ese events caused the homeownership rate and home sales to diverge this quarter," he said. DÉJÀ VU ALL OVER AGAIN Mortgage risk hit a new high in July 2018, rising 0.5 points from the same period last year, according to the American Enterprise Institute's (AEI's) National Mortgage Risk Index (NMRI). While the FHA index set a new high at 28 percent, higher cash-out refinances during the period also saw the refinance NMRI rising to an all-time high. "Higher NMRI indicates agencies continue to increase leverage to maintain levels of mortgage activity and in furtherance of their 'affordable housing' mission," said Edward Pinto, Co-Director of AEI's Center on Housing Markets and Finance. e NMRI monitors the housing market's stability through real-time tracking of leverage and is a standardized quantitative index for mortgage risks. e index places loans in risk buckets and assesses default risk based on the performance of 2007 vintage loans with similar characteristics, providing a near-complete census of government-guaranteed loans and purchase-mortgage trends. In July, the data from NMRI indicated a huge spread of default rates across risk buckets with the composite index for purchase loans being led by FHA loans that set a new series high. AEI said that unless household income accelerated, "future support for the housing market will likely involve further increases in leverage from an already high level." A massive increase in cash-out risk, which has more than doubled from July 2013, was a key driver for the increase in risks along with a shift towards higher debt-to-income (DTI) after the government-sponsored enterprises (GSEs) increased DTI limit to 50 without compensating factors. "e increase in the cash-out refinance risk index has been nothing but breathtaking," said Tobias Peter, Senior Research Analyst at AEI's Center on Housing Markets and Finance. "With mortgage rates rising over the last two years combined with declining volumes of rate- and-term refinances and flat purchase volume, non-bank lenders continue to ease credit standards for cash-outs, propelled in large measure by steering borrowers to FHA and VA, which have a much wider credit box." e data also indicated that subprime loans could be making a comeback. According to the NMRI, while growth in purchase lending volume did not pause equally across the risk spectrum with the volume of subprime loans seeing "a robust increase while prime and near- prime contracted." Looking at how the general housing trends were impacting mortgage risk, AEI said that the supply-demand imbalance was driving up home prices. "e implications of leverage during a long-lasting seller's market, now in its 73rd month, are higher house prices concentrated at the lower end of the market and in lower income neighborhoods where leverage has been increasing the most," Pinto said. "On the national level, there has been a long period with few metros experiencing negative home price growth, which is allowing market excesses to build. Moving forward, there will be even more risk as borrowers, especially first- time buyers, are forced to take on more leverage to buy."

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