It’s not about the housing market. The real culprit is the Consumer Financial Protection Bureau’s new Know Before You Owe TILA-RESPA Integrated Disclosures Rule (TRID).
PALM COAST, FL – December 4, 2015 – Reported November home sales are still trickling in. It will be another week before final home sales numbers are known, but preliminary results show a precipitous drop in year-over-year home sales. Media headlines will no doubt conclude that the market has begun a free fall. Not so. The real culprit is the Consumer Financial Protection Bureau’s new TILA-RESPA Integrated Disclosures Rule.
How bad does it look? As of December 4, only 123 single-family residential Flagler County homes have been reported sold in November through the Flagler Multiple Listing Service (MLS). That is down 30.9% from 178 reported sold in November 2014, representing the largest year-over-year monthly percentage drop since July 2010. (The years 2009 and 2010 represented the bottom of the Flagler home sales market.)
The new rule took effect October 3rd. it changes the home sale closing process in two major ways. The first change affects the loan origination. A new form, the Loan Estimate (LE), which must be delivered or placed in the mail to the applicant no later than the third business day after receiving the consumer’s loan application. The LE must provide a good faith estimate of credit costs and transaction terms on the LE.
The second change affects the closing. The creditor must provide a Closing Disclosure (CD) to the consumer at least three business days prior to the closing. The CD replaces the HUD-1 closing statement. The amounts shown on the CD must align with those on the LE. Discrepancies will delay the closing by up to ten days. The potential for delay puts a premium on getting it right the first time on the CD.
What all this means is an increase in the time between the contract signing and the closing. Estimates of the increased timeline vary from one week to 15 days. Whatever the delay, it will slow down reported closings. At least some of the delay will be permanent. Think of the hour you lose in the spring when you set your clock ahead. You get it back in the fall. But we will never get the total TILA-RESPA created delay back.
But what if the transition to the new procedure does not go smoothly? The vagueness of the new regulations, especially with regards to liability, has caused some participants to hold back on participating. Increased compliance requirements are said to be overwhelming smaller lenders.. Even if the closing timeline settles down to be less than the projected one week to 15 days, initial implementation hiccups are bound to cause greater delays in the near to mid-term.
At a recent National Association of Realtors’ conference, Lindsay Dolamore, local Watson Realty broker learned that banking and regulatory experts believe it will take about one year for everything to settle down. At that point, the experts hope to have fine-tuned the new regulations so that the closing cycle for sales involving a mortgage is extended by less than a week when compared to pre-October 3rd conditions.
Sales are unquestionably down in Flagler County but the median selling price for those transactions that did close in November was $180,000, up 12.5% from $160,000 in November 2014. Interestingly, local real estate professionals give mixed reports on volume. Some reported a softening market yet Dolamore reports increased prices and total year-over-year revenue growth. The Palm Coast Watson Realty office’s November revenue rose over 21%. It’s likely that during this time of turmoil among title companies and lenders, Watson is benefitting from having its own in-house title and mortgage arms.
So that’s why November’s home sales numbers will be down. Don’t look for much of a rebound in December either. What comes next is more difficult to predict. The media reporting will have an effect on some consumer’s behavior. It’s not too difficult to imagine the following lead story titles:
Housing Market Goes Off the Cliff in November
Drop in Home Sales Matches Great Recession Results
Some potential buyers could become warier of the market and decide to sit on the sidelines. If that happens, the Consumer Financial Protection Bureau and the media will have created a self-fulfilling prophecy.