Housing market 2017

housing market 2017
Housing Market 2017(infographic from RE/MAX National Housing Report remax.com)

There’s no doubt that 2016 was an outstanding year for real estate and the housing market.  In fact, National Association of Realtors chief economist Lawrence Yun was reported to say in a January NAR press release (www.nar.realtor) that the 2016 housing market was the best since the Great Recession.  There were 5.45 million total existing home sales in 2016, which exceeded 5.25 million during 2015.  What is necessary for a great housing market 2017, and how will it finish the year?

January’s sales were strong and Dr Yun stated in the press release that there is “resilience” in a “rising interest rate environment:”

“Much of the country saw robust sales activity last month as strong hiring and improved consumer confidence at the end of last year appear to have sparked considerable interest in buying a home…

Market challenges remain, but the housing market is off to a prosperous start as home buyers staved off inventory levels that are far from adequate and deteriorating affordability conditions.”

Home prices also surged during 2016.  A February 28th S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index press release (spindices.com) indicated a 30-month index high, increasing 5.8 percent during December.  The Seattle, Portland and Denver regions were at the top during this period, posting gains of 10.8 percent, 10.0 percent and 8.9 percent respectively (the Washington DC region gained a respectable 4.2 percent).  David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices stated:

“Home prices continue to advance, with the national average rising faster than at any time in the last two-and-a-half years…One factor behind rising home prices is low inventory. While sales of existing single family homes passed five million units at annual rates in January, the highest since 2007, the inventory of homes for sales remains quite low with a 3.6 month supply. New home sales at 555,000 in 2016 are up from recent years but remain below the average pace of 700,000 per year since 1990. Another factor supporting rising home prices is mortgage rates. A 30-year fixed rate mortgage today is 4.2% compared to the 6.4% average since 1990. Another indicator that home price levels are normal can be seen in the charts of Seattle and Portland OR. In the boom-bust of 2005-2009, prices of low, medium, and high-tier homes moved together, while in other periods, including now, the tiers experienced different patterns.”

Of course, the record year was nowhere near the peak market pace of 6.48 million existing home sales during 2006.  However, the economics of the market during that time was different; being influenced by outside forces such as uber-easy money policies and overzealous speculation in the housing market.

The peak market sales records may be a benchmark of a sort.  But in retrospect, those numbers are a reflection of a distorted market where speculators bought and sold homes in record numbers taking advantage of the easy money and a seemingly guaranteed big money payoff (which was a factor in the steep home appreciation spike at that time).  It was a crazy time for housing, when homes were flipped in a matter of days.  Many investors were even making money on homes they never owned by selling their interest in their purchase contracts.  The result was that home buyers found themselves either priced out of the market, or borrowing more than they could realistically afford because of the fierce buyer competition.

After posting impressive housing stats for 2016, the expectations for housing market 2017 are high.  And not surprisingly home sales started the year on the same pace, as the NAR reported January’s existing home sales (homes that settled during January) increased 3.3 percent.  However, the pending home sale index (homes under contract and described by NAR as a forward looking number) showed a different picture with 2.8 percent decrease during January.  Of course in the absence of bad weather, some economists explain that the decrease in pending home sales are due to low inventory and rising interest rates.

Housing Market 2017

Some are concerned about the decreased prospects of future home sales, suggesting that there won’t be a repeat performance of record home sales during 2017.  The recent pending home sale index release is reminiscent of the index reported for January 2014, where the NAR reported that the pending home sale index dropped 9 percent following post-recession record year of home sales during 2013.  At the end of 2014, it was revealed that existing home sales dropped 3 percent from the previous year.  Reasons given for the decrease were low inventory and tight lending.

Many, like myself, remain optimistic for housing market 2017 because interest rates remain historically low, even with recent rate hikes; and mortgage lending has been the easiest since the financial crisis.  The sentiment for housing market 2017 is also shared by consumers; who conveyed increased optimism about the housing market in Fannie Mae’s 2017 Home Purchase Sentiment Index (HPSI).  The February 17th News release (fanniemae.com) indicated that the January’s HPSI increased 2 percent, which is 1.2 percent higher than the same time last year. Doug Duncan, senior vice president and chief economist at Fannie Mae, stated:

“Three months after the presidential election, measures of consumer optimism regarding personal financial prospects and the economy are at or near the highest levels we’ve seen in the nearly seven-year history of the National Housing Survey…However, any significant acceleration in housing activity will depend on whether consumers’ favorable expectations are realized in the form of income gains sufficient to offset constrained housing affordability. If consumers’ anticipation of further increases in home prices and mortgage rates materialize over the next 12 months, then we may see housing affordability tighten even more.”

Copyright © Dan Krell
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Home prices surprise

home prices
National home prices exceed peak prices. Home equity increases! (infographic from keepingcurrentmatters.com)

Back in January, I told you that the housing market of 2016 would be about home prices.

2016 housing market hinges on home prices.

A home selling season has not been anticipated so much by home sellers since 2013. It’s not that 2015 was a bad year for housing, because it wasn’t. It’s that many home owners who have been wanting to sell since 2010 (some because of being underwater) may be in position to make the long awaited move.

And indeed, national home sale prices have appreciated considerably through the year.  But who would have thought that home prices would once again approach the level reached during the peak market of 2006?

The S&P CoreLogic Case-Shiller National Home Price Index (spindices.com) reported in July that the index was within 3 percent of peak, with another month of 5 percent appreciation.  And surprise!  This week’s release of home price data indicated that the September’s S&P CoreLogic Case-Shiller National Home Price Index exceeded the index that was recorded during the peak market that occurred July 2006!  September’s year-over-year gains were due to a 5.5 percent gain to the National Index, while the 20-City composite remained unchanged at a 5.1 percent.

Of course, regional and local differences explain why actual home prices in many areas don’t seem as high as they were during the peak. Consider that Seattle, Portland, and Denver reported the highest annual home price gains with 11 percent, 10.9 percent, and 8.7 percent respectively.  The Washington DC region realized a 2.7 percent increase; which is well below the top gainers, as well as below the national average.  Although the housing markets in Miami, Tampa, Phoenix and Las Vegas experienced the most home price gains during the peak; current home prices in those cities “remain well below their all-time highs.”

Analysis provided in the November 29th press release states:

“The new peak set by the S&P Case-Shiller CoreLogic National Index will be seen as marking a shift from the housing recovery to the hoped-for start of a new advance” says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “While seven of the 20 cities previously reached new post-recession peaks, those that experienced the biggest booms — Miami, Tampa, Phoenix and Las Vegas — remain well below their all-time highs. Other housing indicators are also giving positive signals: sales of existing and new homes are rising and housing starts at an annual rate of 1.3 million units are at a post-recession peak.

The Federal Housing Finance Agency (fhfa.gov) also reported continued home price gains last week.  The FHFA Home Price Index (HPI) increased 6.1 percent year-over-year. The November 23rd press release reported that home prices increased in 49 states during the third quarter of 2016 compared to the same period last year.  However, “Delaware and the District of Columbia were the only areas not to see price increases.”

Indications of a strengthening housing market have been reported for many months.  Last year, the National Association of Realtors® (realtor.org) reported that the national median home sale price recorded for June 2015 ($236,400) surpassed the peak national median home sale price established during July 2006 ($230,400).

And if that weren’t enough, existing home sales have also been expanding.  The NAR reported last week that existing home sales increased during October.  The two-month consecutive increase doesn’t only outpace June’s peak, but is now the “highest annualized pace in nearly a decade.”

Existing-home sales ascended in October for the second straight month and eclipsed June’s cyclical sales peak to become the highest annualized pace in nearly a decade, according to the National Association of Realtors®. All major regions saw monthly and annual sales increases in October.

Termed an “autumn revival,” Lawrence Yun NAR chief economist, stated that “October’s strong sales gain was widespread throughout the country and can be attributed to the release of the unrealized pent-up demand that held back many would-be buyers over the summer because of tight supply…Buyers are having more success lately despite low inventory and prices that continue to swiftly rise above incomes.”

As much as we would like home prices to significantly appreciate indefinitely, market forces and economic factors will intervene.  Increasing interest rates is not only consistent with a growing economy, it will likely moderate home prices.

Fed Chair Janet Yellen stated in her November 17th Congressional testimony  regarding monetary policy:

At our meeting earlier this month, the Committee judged that the case for an increase in the target range had continued to strengthen and that such an increase could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee’s objectives. This judgment recognized that progress in the labor market has continued and that economic activity has picked up from the modest pace seen in the first half of this year. And inflation, while still below the Committee’s 2 percent objective, has increased somewhat since earlier this year. Furthermore, the Committee judged that near-term risks to the outlook were roughly balanced.

Yellen stated that “an increase could well become appropriate relatively soon.”  Yellen referred to economic strengths as rationale, however analysis of new data should comport with the Open Market Committee’s objectives.  Yellen stated that housing market strengths are favorable for an interest rate increase.  Although new home construction has been “subdued,” the fundamentals of the housing market are complimentary to such a move.

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It’s Mr. Trump’s housing market now

Trump's housing market
Dodd-Frank regulation (from uschamber.com)

Change is not always easy.  Sometimes we choose to change and other times we are forced to change.  The Great Recession forced massive change to many aspects of our lives – mostly financial.  Many found themselves out of work because of the recession, and many home owners lost their homes to foreclosure; while the rest of us searched for ways to cope.  It’s Mr. Trump’s housing market now.

As a result, the Dodd–Frank Wall Street Reform and Consumer Protection Act was quickly pieced together and signed into law in 2010.  “Dodd-Frank”, contained over two-thousand pages of regulations and rules, many of which were to be created at a later time by many agencies and unelected bureaucrats.  Dodd-Frank also created the Consumer Financial Protection Bureau, which took over RESPA, lending and consumer finance markets enforcement responsibilities.  The CFPB created the “Qualified Residential Mortgage” and “Know Before You Owe” rules that significantly impacted the mortgage and housing industries.

The purpose of Dodd-Frank and the CFPB was well intentioned as Congress sought a solution to prohibit future crises.  In the uncertain financial atmosphere that ensued, consumers wanted accountability from Wall Street and mortgage lenders.  While some continue to generally blame Wall Street and the mortgage industry for the financial crisis, the reality is that the dynamics that created the financial crises were complex.  And one can surmise from the many hearings, books, dissertations, and working papers that the crux of the financial crisis was widespread fraud that took advantage of a hot real estate market and easy money.

Six years after Dodd-Frank, the rules and regulations keep coming.  Writing for the US Chamber of Commerce’s “Above the Fold,” J.D. Harrison pointed out that Dodd-Frank has created over 27,000 new federal regulations by thirty-two federal agencies impacting many industries (Dodd-Frank’s Regulatory Nightmare in One Rather Mesmerizing Illustration; uschamber.com).  Compared to the previous Wall Street reform in 2002, which had two agencies issuing regulations to only five industries.  Harrison stated that the Sarbanes-Oxley Act “basically sought more corporate transparency and accountability.”

Many have associated Dodd-Frank with the ongoing slow economic recovery, citing increased consumer costs and restricted lending – which effects the housing market, home buyers and sellers.

An example of increasing consumer costs is the CFPB’s TILA-RESPA Integrated Disclosure.  The Mortgage Bankers Association (mba.org) recently reported that compliance with TRID costs on average $210 per mortgage, some of which is recouped from the consumer.  The rule is also responsible for “slower application to closing times.”

A recent appellate case highlighted some of these Dodd-Frank outcomes.  The CFPB sought fines against a mortgage lender for their years of compliance with HUD’s interpretation of a rule; the fines were imposed retroactively for not complying with a new CFPB reinterpretation of the same rule. Additionally, the court focused on the CFPB’s unilateral ability to impose rules and fines without oversight.

It’s Mr. Trump’s housing market now.

Repeal and Replace is a talking point that is not exclusively for the Affordable Care Act.  Shortly after Donald Trump’s election as the forty-fifth President of the United States, many industry insiders and pundits are already anticipating the future of Dodd-Frank and the CFPB.  Mr. Trump’s plan for financial services is posted to the President-Elect’s site (greatagain.gov) stating: “The Dodd-Frank economy does not work for working people.  Bureaucratic red tape and Washington mandates are not the answer.  The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.

Copyright © Dan Krell

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Brexit benefits US housing

Brexit benefits US housing.
International home buyers (infographic from realtor.org)

The immediate response of Great Britain’s referendum to exit from the European Union was one of anxiety and fear.  Some thought the separation would set off a global recession, matching the financial crisis of 2008.  While others believed it would be a blip on the financial radar.  Of course, the housing industry is watching to see how if the aftermath of the Brexit will affect home buyers and sellers.  And it looks as if Brexit benefits US housing.

If you remember, last summer’s US market gyrations were attributed to China’s stock market declines.  As a result, many home buyers who relied on their 401k’s (or other investments) for their down payments had to make other plans. Some were unable to buy.  At that time, the National Association of Realtors® reported a decline in last August’s existing home sales, only to rebound in September (realtor.org).  Will the aftermath of last week’s Brexit have a similar effect? Or maybe Brexit benefits US housing.

Some expect that British home prices will fall as a result of the Brexit, which could affect our housing market.  Foreign home buyer investment in US housing will withdraw as foreign cash will look to the UK for housing bargains.  This will most likely affect the luxury home sector of the market, where many foreign home buyers have parked their money.

In the meantime, initial reactions indicate that the Brexit benefits US housing!  AnnaMaria Andriotis, writing for The Wall Street Journal (Mortgage Rates: How Low Can They Go?; wsj.com; June 28,2016) reported that mortgage interest rates may go lower as a result of the Brexit.  Lower interest rates could make housing more affordable for home buyers, while home owners continue to have opportunities to lower their mortgage payments.

The housing market has already been brisk.  The NAR reported on June 22nd that existing home sales increased to its highest levels in nine years!  Additionally, the S&P/Case-Shiller Home Price Index (spindices.com) reported June 28th revealed an additional 5% year-over-year increase for April 2016.

NAR chief economist Lawrence Yun concluded that low mortgage rates are an incentive for many home buyers.  Although he stated that first time home buyers are finding it difficult to enter the market for various reasons, repeat home buyers make up the majority of home sales.  As home prices increase, many repeat home buyers are finding down payment funds in the form of the proceeds of their home sales.

Yun felt that first time home buyers may find that increasing home prices will be a continuing obstacle.  This is compounded by the enduring low housing inventory.  However, new home construction may add other options for home buyers.

Aside from the interest rate benefit to home buyers, mortgage lenders are finding new programs to help those with little down payment funds!  Of course, the venerable FHA mortgage has been the go-to mortgage for those who qualify, because the down payment can be as low as 3.5%.  The downside to the FHA mortgage is the mortgage insurance premium.  To compete, Fannie Mae and Freddie Mac offer a 3% down payment program to those who qualify.  Like its FHA counterpart, the conventional 3% down payment program has also required private mortgage insurance.

However, HousingWire (hosuingwire.com) has reported that a few lenders offer a 3% down payment mortgage program without the PMI.  And within the last seven days, HousingWire reported that Quicken Loans and Guaranteed Rate Mortgage offer a 1% down payment mortgage program to those who qualify!

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Housing bubble countdown

Housing Bubble
Cycle of housing bubble (infographic from estate123.com)

The March S&P/Case-Shiller U.S. National Home Price Index (spindices.com) was announced May 31st to reveal a 5.2% increase in home prices.  Although down from last March’s 5.3% increase, home prices seem to be appreciating at a regular pace, with the metro areas of Portland, Seattle, and Denver leading the way with double digit gains (year-over-year price increases of 12.3%, 10.8%, 10.0% respectively).  As home prices climb, so too are the claims that we are experiencing a housing bubble.

Those concerned about the next bubble have been ringing the alarm bells since last fall, when the combination of limited inventory, multiple offers, and rising prices created an environment in some regions that was reminiscent of the go-go market just prior to the last market bust.  And like the broken watch that is correct twice a day, those naysayers may eventually be correct – but it may not be for another eight years.

According to Ted Nicolais, the real estate cycle has been steady since 1800 (How to Use Real Estate Trends to Predict the Next Housing Bubble; dce.harvard.edu; February 20, 2014).  Writing for the Harvard University’s Department of Continuing Education’s The Language of Business blog, Nicolais maps out Homer Hoyt’s cycles and found a regular 18-year cycle to the bubble and bust housing market (albeit two exceptions).

The 18-year cycle, as it turns out can be observed by analyzing trends.  An applying Henry George’s four phases of the real estate cycle (as modernized by Glenn R. Mueller), Nicolais can determine how and when the next housing bubble will occur.  (Henry George was a nineteenth century economist who studied the boom-bust cycle of the economy).

The first phase is the “recovery.”  Home prices are at the bottom, and demand increases.  Real estate vacancies decrease as economic activity increases, which fuels the economy.

real estate bubbleThe second phase is the “expansion.”  Housing inventories dwindle, there is little is available to buy, and finding a rental becomes difficult.  Nicolais explains that an issue with real estate is that once demand increases, filling inventory takes a long time.  New development can take two to five years.  Until new inventory is added, price growth accelerates; and rather than valued at market conditions, real estate becomes priced to future gains.  During a real estate boom, people buy into the prospect of “future growth” and believe the escalating prices are reasonable.

Phase three is “hyper supply.”  When the completion of new development begins to satisfy demand, inventories fist stabilizes and then swells.  Price growth begins to slow.  Nicolais stated that the amount of continued development will determine the severity of the impending recession; while demand is satiated, new inventory comes to market and vacancies increase.  He asserted that “wise” developers stop building during this phase.

Phase four is the “recession.”  New development is stopped, while projects coming to completion add to a growing inventory.  Occupancy rates and prices fall; property values and profits dwindle.  Developments in mid-construction may not be completed because they are no longer financially feasible.

Following the four phases and the 18-year cycle; Nicolais stated that the great recession was not caused by external forces, but rather occurred on schedule!  He figures that the current housing market is transitioning from recovery to an expansion phase.  And with the exception of the occasional slow down, he predicts that the next housing bubble will be in 2024.

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