Saturday Cup of Joe #41. It was a busy week in Detroit. For starters, I spent Thursday in Dallas attending some meetings with other mortgage bankers. In general, February often brings renewed activity in the market, in state legislatures and DC, and in our businesses. This week was no exception. Mortgage companies are projecting out for 2017 and trying to determine what the future holds. We know everyone is watching CFPB closely and trying to determine what the market looks like moving forward. This will be a dynamic year for our industry but for now, we have some great weather in the forecast and I may even play 9 holes of golf later today.
This photo is the view southwest from the riverfront in front of our apartment building with Canada of in the distance and the city of Detroit beneath the sunset.
Of Interest: This week I attended a discussion on the future of housing regulation. There were some of the most successful entrepreneurs in mortgage finance in the room talking about what to expect in national policy around housing this year, what might be the future of the 30 year fixed loan and what housing regulation (i.e. the future of Fannie and Freddie) will look like by the end of the year. It was fascinating and I had a great time. Yet, it is hard to know how creative or how outside-the-box we should think. Some of the most dedicated and hardworking leaders in our industry are not sure how much risk to take in the new Presidential administration. In mortgage finance just like any other industry, the practioners who have dedicated their professional lives to building businesses have a keen understanding that regulators or policymakers do not always understand. Similarly, industry has to be ready to innovate when customers demand improvements. One of the goals of my weekly inquiries on Saturday Cup of Joe has been the future of homeownership. This week is no different.
Early in the week, the Urban Institute published a report citing denial rates as adjusted for “discouraged applications” or more accurately, applications that never happened. According to the report, the “real denial rate” is higher than lenders are reporting but that everyone needs to find “the right balance.” No kidding. What the article did not say was how to balance consumer (i.e. voter) expectations against economic growth against healthy lending. Perhaps it is a never ending cycle where the pendulum swings back and forth. Consumer demand a greater quality of life and access to opportunities like home ownership. Economic policy demands balancing interest rates against demand. Banks try to make as many loans as possible without upending the risk tolerances. I don’t mind the cycles as long as the corrections actually result in rebalancing. Hard to say if that’s happening.
On Tuesday, Bloomberg published an article that highlighted millennials (probably to get the clicks) but basically said that no age groups is that mobile anymore. Granted millennials are less mobile than previous 25–35 years old and less mobile than we expected, but essentially in line with all other age groups these days. Apparently housing mobility is down and job-related mobility is stagnant. I’m not really sure if this is a good thing or a bad thing. Certainly less activity in the housing market is not great for business. But, if millennials are more likely to stay close to home, it may mean the next generation is also more likely to buy a home. That could be a good thing. We know that generations like to react against the previous one. If this group is more willing to purchase a home (eventually) and remain in a community, it is likely to keep home purchase numbers constant and keep home values relatively stable, if not growing. Juries still out on what most of these reports indicate overall, but it is interesting how with each week speculation changes about what the next generation may do.
The Takeaway: There’s a lot of speculation about millennials. I highlighted Simon Sinek’s video recently and here’s another take on it. The upside is that if everyone takes away that millennials are motivated “by building healthy, strong relationships we’ll be happier, healthier and more inspired.” As I’ve written before, the best sales pitch for home ownership is a commitment to people, family and community. Millennials are in. We can easily align our industry with the themes and messages of strong, inspired relationships.
Got Me Thinking: Home ownership is the American Dream. Home ownership represented not only the success but a guaranteed pay off at the end of 10, 15, 30 or 50 years. Today, the 50 year version still pays off. Does 10? Does 15? An article from The Upshot, a blog on The New York Times, questioned whether we should stop telling Americans that home ownership is a good investment. The article, at least in the print version, asked the question “Cars Decline in Value, Why Not Houses?” The answer, apparently, is “Americans, together and all at once, would have to stop thinking about their homes as an investment.”
One interesting aspect to the shift from viewing home ownership as an investment to viewing homes as hardware to be improved upon, made more efficient. Innovators will find a way to rethink housing and make homes better.
The article’s thesis also makes a fascinating claim about the opportunity cost of money. Money invested in other things — stocks, companies, etc. — might be better used than in a home. The piece did not take it a step further, but the thought experiment demands asking — what about time? Time invested in other things like entrepreneurship, writing, hobbies, and creation could also be better spent than on mowing, maintenance and upkeep.
The response that I’ve flushed out over the last 40 weeks is that it’s not about dollars and cents. In some ways, it never was. Having consistently improving home values over the last 50 years helped mask that fact. The point was never making a profit. It was always an investment in family, stability and community. It was an emotional decision that generally paid off. Certainly at least returned what you put in. There’s always a Boston or San Francisco or Washington DC and every now and then a town like Portland or Austin comes along and pays off big time. Otherwise, the American Dream was never about refinancing and buying a boat. It was about fishing with your kids. Or taking the family to Mount Rushmore. Or spending 2 weeks in Rome. Somehow, though, it might be easier to convince the next generation of this than the last.
Have You Heard?: Consumer debt continues to rise. If mortgages and credit cards continue to escalate, or the student debt bubble expands and expands, how will most Americans continue to support their lifestyle? There is a disconnect between expectations and reality. Politicians (and policymakers) do not want to tell the American people that expectations might no longer be reality. Doesn’t mean we cannot achieve in the future or make it happen through innovation and entrepreneurship. But for now, what is the proper expectation of the middle class? Unfortunately we are artificially supporting our lifestyle. At least, for now. Bloomberg Markets cited the type of debt as a significant indicator of economic imbalance.
According to Wilbert van der Klaauw, SVP at the New York Fed, “Debt held by Americans is approaching its previous peak, yet its composition today is vastly different as the growth in balances has been driven by non-housing debt,” Not clear what that means but in the given context, it appears to be of some concern. Consumer debt cannot continue to expand without some expansion of wages and opportunity.
A Look Ahead: You’ve read my thoughts on technology improvements revolutionizing the real estate community, especially how homes are bought and sold. Occasionally I’ll have a conversation with someone about whether virtual reality (VR) home tours will save potential buyers a trip and/or serve as the showing in a hot market where bids must be made quickly. One objection I heard was that part of the showing is to get a sense of the home (pun intended) beyond sight. The sensory experience of smelling a home (think, basement) or listening for traffic, airplanes or neighbors can make or break a purchase. My thought has always been either a) technology will solve for that eventually or b) (some) people may not care. Both were reinforced this week when I saw an article on Ozy titled “How To Get Married In Virtual Reality.” In fact, beyond just weddings, the article noted that “full-sensory” dating will become normal by 2040. Admittedly, buying a home that you have to actually live in daily versus hosting a VR wedding in the Alps for 150 people (all the while marrying someone you’ve known and experienced in reality is not an apples to apples comparison. Yet, it underscores that our industry better be ready for these changes or someone will quickly step in with a VR real estate agent or VR loan officer before we even realized what’s happened. It will change many aspects of our industry from client-facing challenges like negotiating on a home purchase to licensing a VR real estate entity. In the end, technology advances elsewhere in our culture paired with consumer-driven demands will always drive our companies to new and interesting places. For real.
Viewpoint: The Sunday Times columnist Gretchen Morgenson wrote a profile of the CFPB on Sunday and declared the Bureau “too effective.” I disagree with her conclusion only because she missed a glaring data point in her analysis. Mainly that CFPB only hears complaints from disgruntled sources. Yes, some (most?) may be valid. Those of us in the mortgage business recognize that the “bad apples” left the industry during the financial crisis. At the same time, there have been failures related to mortgage servicing practices and foreclosure procedures that lead to actionable complaints. But the CFPB only heard from unhappy consumers. CFPB wrongly assumed all companies were the same as the ones they found during the complaint process. In other words, to say that CFPB was so good at resolving wrongdoing they made “powerful enemies” seems a bit dramatic given the wide range of actors and industries involved (commercial banks down to debt collectors…sorry, debt collectors). In reality, all consumer complaints do not represent the experience of all consumers. By treating all companies like bad actors, CFPB levied inconsistent results. CFPB did a great job when the violations were blatant or intentional but did not do an effective job when the complaint implicated a complex business process or triggered liability on the consumer’s part. An example of this misunderstanding is found in a quote from the article, which assumes lenders are not listening to our customers: “Listening to consumers has been so valuable to our work,” Ms. [Darian] Dorsey [deputy assistant director for the office of consumer response] said. “And it can be very valuable to the marketplace as well.”
Sidenote: Many people from Silicon Valley to Wall Street have noted that the Trump administration is actually a rare opportunity to experiment with reduced regulations. The combination of a President and Congress looking to reduce the perceived role of government in industry and a Presidential agenda that focuses on several key issues while leaving everything else to individual Members of Congress leads many to believe other legislation can move through Congress unnoticed. In addition to legislation, Executive branch priorities and core principles have been published and will continue to be disseminated. I found an interesting piece this week suggesting that in addition to Dodd-Frank reforms, the Trump administration has the rare opportunity to “balance” fair lending enforcement. There’s been an ongoing concern about lenders punished for patterns unrelated to discrimination that can otherwise be attributed to fair lending violations. I have to assume fair lending is pretty low on the President’s radar right now, but as many have said this week in reference to Washington DC politics, anything’s possible now.
Quick Hit: One of my favorite columns in the Sunday New York Times is Adam Bryant’s Corner Office. This week he published a compendium of tips and tricks on “How to Hire” from his interviews with CEOs. I think there’s a lot of value here. Hope you agree.
Today’s Thought: Say it. There is no substitute for clarity. Often, as leaders, we do not articulate enough to our teams. We expect them to know or intuit our best intentions. Unfortunately, most people are (naturally) suspicious. Human nature makes it all the more important to share as much as you can with your team. By simply bringing everyone up to speed, we can avoid confusion and distrust. All it takes is making sure to verbalize the reason for our decisions, actions, and motivations. For instance, an urgent matter arises on email and interrupts a meeting. The simplest solution is to explain, clearly and directly, what’s going on. Often we resort to either no response or short, abrupt cancellations. Sometimes the easiest solution in management is simply to say it.
Bonus Content: I know this is a long piece, but there’s a lot of great stuff in here. And I’m not just saying that about The Chairman. This interview is a thoughtful and interesting dialogue with Dan Gilbert. I haven’t watched the video yet but the interview is worth it.
Quote: “Where ever you are, be all there.” — Steve Potter