A
recent article in the NAR Economists’ Outlook Blog can give us all some great stats to share with
our clients and Sphere of Influence to remind them of our high level of
knowledge about Real Estate:
o
Existing-home sales in May hit the highest mark since 2009,
when there had been a homebuyer tax credit … remember,
buy a home and get $8,000 from Uncle Sam. This tax credit is no longer
available but the improving economy is providing the necessary incentive and
financial capacity to buy. Meanwhile new home sales hit
a seven-year high and housing permits to build new homes hit an eight-year
high. Pending contracts to buy existing homes hit a nine-year
high.
o
Buyers are coming back in force.
One
factor for the recent surge could have been due to the rising mortgage rates.
As
nearly always happens, the initial phase of rising rates nudges people to make
decision now rather than wait later when the rates could be higher still.
o
The first-time buyers are scooping up properties with 32
percent of all buyers being as such compared to only 27 percent one year ago.
A
lower fee on FHA mortgages is helping.
o
Investors are slowly stepping out.
The
high home prices are making the rate of return numbers less attractive.
o
Buyers are back. What about sellers?
Inventory
remains low by historical standards in most markets.
In
places like Denver and Seattle, where a very strong job growth is the norm, the
inventory condition is unreal – less than one month supply.
o
The principal reason for the inventory shortage is the
cumulative impact of homebuilders not being in the market for well over five
years. Homebuilders typically put up 1.5 million new homes
annually. Here’s what they did from 2009 to 2014:
o
2009: 550,000
o
2010: 590,000
o
2011: 610,000
o
2012: 780,000
o
2013: 930,000
o
2014: 1.0 million
o
Where is 1.5 million? Maybe by 2017.
o
Builders will construct more homes.
By
1.1 million in 2015 and 1.4 million in 2016. New home
sales will follow this trend. This rising trend will steadily
relieve housing shortage.
o
There is no massive shadow inventory that can disrupt the
market. The number of distressed home sales has been steadily
falling – now accounting for only 10 percent of all transactions.
It
will fall further in the upcoming months. There is simply far fewer
mortgages in the serious delinquent stage (of not being current for 3 or more
months). In fact, if one specializes in foreclosure or short sales,
it is time to change the business model.
o
In the meantime, there is still a housing shortage.
The
consequence is a stronger than normal home price growth.
Home
price gains are beating wage-income growths by at least three or four times in
most markets. Few things in the world could be more frustrating and
demoralizing than for renters to start a savings program but only to witness
home prices and down payment requirements blowing by past them.
o
Housing affordability is falling.
Home
prices rising too fast are one reason. The other reason is due to
rising mortgage rates. Cash-buys have been coming
down so rates will count for more in the future.
o
The Federal Reserve will be raising short-term rates soon.
September
is a maybe, but it’s more likely to be in October.
The
Fed will also signal the continual raising of rates over the next two years.
This
sentiment has already pushed up mortgage rates. They are
bound to rise further, particularly if inflation surprises on the upside.
o
Inflation is likely to surprise on the upside.
The
influence of low gasoline prices has been bringing down the overall consumer
price inflation to essentially zero in recent months will be short-lasting.
By
November, the influence of low gasoline prices will no longer be there because
it was in November of last year when the oil prices began their plunge.
That
is, by November, the year-over-year change in gasoline price will be neutral
(and no longer a big negative). Other items will then make
their mark on inflation. Watch the rents.
It’s already
rising at near 8-year high with a 3.5 percent growth rate.
The
overall CPI inflation could cross the red line of above 3 percent by early next
year. The bond market will not like it and the yields on all
long-term borrowing will rise.
o
Mortgage rates at 4.3% to 4.5% by the year-end and easily
surpassing 5% by the year end of 2016.
o
The rising mortgage rates initially rush buyers to decide
but a sustained rise will choke off as to who can qualify for a mortgage.
Fortunately,
there are few compensating factors to rising rates.
o
Credit scores are not properly aligned with expected
default rate. New scoring methodology is being tested and will be
implemented. In short, credit scores will get boosted for many
individuals after the new change.
o
FHA mortgage premium has come down a notch thereby saving
money for consumers. By the end of the year, FHA
program will show healthier finances. That means, there could be
additional reduction to premiums in 2016. Not certain, but plausible.
o
Fannie and Freddie are owned by the taxpayers.
And
they are raking-in huge profits as mortgages have not been defaulting over the
past several years. The very high profit is
partly reflecting too-tight credit with no risk taking.
There
is a possibility to back a greater number of lower down payment mortgages to
credit worthy borrowers without taking on much risk.
In
short, mortgage approvals should modestly improve next year.
o
Portfolio lending and private mortgage-backed securities
are slowly reviving. Why not?
Mortgages
are not defaulting and there is fat cash reserves held by financial
institutions. Less conventional mortgages will therefore be more widely
available.
o
Improving credit available at a time of likely rising
interest rates is highly welcome. Many would-be first-time
buyers who have been more focused about getting a mortgage (even at a higher
rate) than with low rates.
o
All in all, existing and new home sales will be rising.
Combined,
there will be 5.8 million home sales in 2015, up 7 percent from last year.
Note
the sales total will still be 25 percent below the decade ago level during the
bubble year. Home prices will be rising at 7 percent.
So
grab your phone and set up some
coffees/lunches/golf/tennis/wine/cigar/name-your-own sessions and don’t forget to
remind your connections how much you appreciate their referrals!
David
M. Hassler, MFA
VP,
Professional Development
