As the population ages, could generational differences trigger a housing deflation?
Many understand that there are numerous factors that affect the real estate market. Those who are interested may track the daily ups and downs of the stock, bond, or commodities markets; some look forward to reading the minutes of the Federal Reserve’s Open Market Committee meetings, and others may peruse the Fed’s “Beige Book.” But some economists are suggesting that many are overlooking the most obvious factor that could impact the real estate market for years – the aging population.
As the Baby Boomers make way for Generation X, the generational population size difference will be noticed in a number of ways. There is increasing discussion about the affect of the aging population on assets, specifically real estate and housing. As the population ages, some experts expect a deflationary market due to the shifting generational demographics. And a few imply that the deflationary effects of the great recession might pale in comparison to those of the generational shift.
In an October 2012 Realtor Magazine article, the Counselors of Real Estate® (an affiliate of the National Association of Realtors®) listed the “aging population” as the number one matter affecting real estate. Although an aging population impacts a number of real estate sectors (such as retail and medical); the demand for housing will certainly be affected. They define the shift geographically, where some regions gain over others.
Mary Ludgin, of Heitman LLC, describes the geographic shifts that may be associated with an aging population. In her article “Shifting Demographics: Real Estate Investment Implications,” Ludgin forecasts increasing demand for apartments and offices mostly in downtown areas. However, a population migration is expected to favor the “mountain west,” southwest, and southeast. She expects high amenity cities to do well.
A working paper published by the Bank for International Security (Aging and Asset Prices, August 2010; bis.org), presents the theory and data linking age demographics and asset prices. The paper asserts that because the Baby Boom generation is substantially larger than the preceding Swing generation (the WWII generation) and the subsequent Generation X, asset prices rose substantially during Boomers’ “active years;” and are expected to decrease during the declining years. The data suggests that Baby Boomers home buying activity pressured home prices to increase by as much as 40% during active years; and as the population ages, home prices are expected to decrease by as much as 30% in the next forty years. Yet, some economists and prognosticators are hyping such deflation to occur in the next ten years.
Although the result of an aging population on housing sounds daunting, aging demographics is not the only force active upon home prices. Although Japan is often cited as the poster child of negative influences of generational effects on home value; there are some economies, such as the UK, where home prices have transcended generational effects and made positive gains.
Even though attention focused on an aging Baby Boom generation has been about retirement and/or relocating, some have begun to talk about the generational shift’s effect on real estate and resulting home buying trends by Generation Xer’s and Yer’s, and Millennials. Besides geographical shifts, localized effects that are often experienced include the trend of transformation and/or tear down of older homes that once met the needs of previous generations, to build modern and efficient dwellings to meet the needs of those who are actively purchasing homes.
Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.
A new economic paradigm for housing markets. The new real estate economics are about recovery trends and bubble fears.
Lawrence Yun, chief economist of the National Association of Realtors®, stated in a November 8th news release, “…existing-home sales have shown a 20 percent cumulative increase over the past two years, while prices have gained 18 percent, but incomes have risen only 2 to 4 percent in the same timeframe.” Additionally, it is expected that existing home sales to maintain 2013 gains through 2014; and home prices to continue and upward trend (realtor.org).
The 2014 prediction for U.S. housing sounds great. But does this mean we are expecting increased multiple offer situations with further plummeting of average days on market? In a post housing bubble world, some wonder if this year’s real estate activity is sustainable – maybe it was no coincidence that some descriptions of hot housing markets sounded like the go-go market that occurred during the housing bubble years. And yet with hindsight, should we be concerned about “priming the pumps” for another housing bubble?
Sentiment about over-valued markets around the world was expressed by none other than Robert Shiller. Shiller, of the S&P/Case-Shiller Home Price Index, won the Nobel Prize in Economic Sciences this year for the “empirical analysis of asset prices.” And if Robert Shiller is talking about over-valued markets, maybe we should listen.
Shiller’s book, “Irrational Exuberance” is said to have made the argument for the dot-come (2000 edition) and housing (2005 edition) bubbles, as well as predicting the subsequent market crashes. (Interestingly, the book title is said to be taken from an Allan Greenspan speech described the rapid cycling stock market activity of the mid 1990’s.)
Two weeks after Janet Yellen’s confirmation hearings to become Chairperson of the Fed, Robert Shiller was interviewed by the German magazine Der Spiegel. Yellen’s responses to Senators during the hearing suggested that there were no bubbles in equities and housing, although she conceded that bubbles are hard to predict; while Shiller expressed concern about over-valued equities in many markets throughout the world, as well as a sharp rise in home prices in some global real estate markets (including some U.S. real estate markets such as Las Vegas). Shiller made specific mention of the U.S. Stock market saying that data is suggesting an equities bubble. However, as he cautioned that it might be too early to sound the alarm, there is an expectation that the market will go even higher.
Is this the new real estate economics?
Are bubbles such a bad thing? Economist Matthew Klein (Is the Only Choice Bubbles or Recession?; Bloomberg; Nov 19, 2013) speculates that bubbles may actually be an important part of a modern economic cycle that allows for growth in various sectors. He states “…bubbles can transform wealth that would otherwise be stashed in government bonds and other safe assets into income for those who work in the expanding parts of the economy.” However, many economists assert that eroding wealth and savings to artificially grow an economy is dangerous and unsustainable.
How will real estate economics play out? Getting back to the NAR press release, Yun credited the current sales and price trends to a lack of housing inventory and buyer demand. Unfortunately, housing inventory is at about a thirteen year low; and unless inventory increases we can expect an interesting year ahead.
There are no courthouse default notices, and it is unlikely for real estate investors to go knocking on the white house doors to try to purchase it as a short sale. Although a government default is not quite the same as a default on your mortgage, a government default will nonetheless have consequences in the housing market.
A U.S. default would be uncharted economic waters; there is no way to know exactly what will happen – but it will most certainly not be good. When speculating about the consequences of a government default, some talk about 1930’s Germany and 1990’s Russia; these defaults occurred for different reasons and had different outcomes.
Experts discuss a possible consequence of a government default to be an almost immediate economic recession, which could rapidly evolve into a depression. The resulting shock from a possible economic contraction would filter through the economy and would no doubt result in mass layoffs. And just like the most recent recession, mass unemployment had deleterious effects in the housing market and real estate industry resulting in waves of foreclosures and property devaluation.
Other possible outcomes of a default could be runaway inflation, sky high interest rates, and/or general economic calamity. In these scenarios, forget about a housing recovery; home buyers could find it exponentially difficult to obtain a mortgage to buy a home. Homeowners who have fixed rate mortgages should be safe from payment increases; however those with adjustable rate mortgages could possibly see interest rate increases hitting adjustment caps.
In an October 9th article, Morgan Housel wrote (“What Happens If the U.S. Defaults on Its Debt?”; fool.com); “…Those holding bad mortgage debt fared the worst in 2008, but financial pain spread throughout the entire financial system, and to areas that had nothing to do with real estate. The reason was fear. If the global financial system is built on credit, it is supported by trust. When you remove trust, people hide now and ask questions later. The system freezes. I don’t want to lend to you because you might hold something bad, or be lending to someone who is holding something bad, or be lending to someone who is lending to someone who is holding something bad. So people just wait. Credit stops flowing, and as we learned in 2008, that simply devastates the economy… But a credit crisis doesn’t need to last long to bring the house down. Lehman Brothers was well capitalized two days before it was bankrupt…”
Fear is a very powerful emotion that can be used to influence popular beliefs and behavior. As congressional budget talks have been at a standstill, talk of a government default seems to be on everyone’s mind as we approach the debt ceiling. And although we fear a government default, the distinction must be made between default and debt ceiling.
Put in a very simple way: raising the debt ceiling is akin to asking for an increase in your credit card limit. However, you don’t default just because your credit limit is not raised; you default when you fail to make payments on your debt. Even if there is no debt ceiling increase, many experts agree that a chance of a U.S. default is slim; it has been estimated that treasury revenue is much more than the amount needed for debt servicing. Regardless, the fear of a government default is enough to chill the housing market.
Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.
After much speculation, mortgage interest rates appear to be on the move. Even with rising interest rates, rates are still relatively low. Some economists expect that when the Fed’s Quantitative Easing program begins tapering, mortgage interest rates may jump due to financial market volatility.
Many fear that rising interest rates could derail the recovering housing market. In an August 19th news release (realtor.org), Chief NAR economist Lawrence Yun stated that although the pace of home sales are at its highest since February 2007, the market could be experiencing a “temporary peak” due to home buyers’ seeking to close deals before interest rates rise significantly. Looking ahead, Dr. Yun expects that rising interest rates and limited inventory could create an imbalanced market due to inconsistent home sales.
Home sale prices also have been rising, prompting bidding wars, as the median home sale price was reported by NAR to have maintained nine consecutive months of double digit year over year increases. However, Dr. Yun stated, “Limited inventory in some areas means multiple bidding remains a factor; 17 percent of all homes sold above the asking price in August, although 63 percent sold below list price.”
This week’s release of July’s S&P/Case-Shiller Home Price Index (spindices.com) also revealed that home sale prices were still holding onto the double digit annual rate of gain over 2012 levels, as the 10 city and 20 city composites posted about a 12% year over year increase for July. However, it is pointed out that home price are still “far below their peak levels.”
The sharp increases in home sale prices sparked fears of another housing bubble. But price gains only increased about 2% from June to July. Monthly price gains have lessened, and the gradual slowdown of home price gains may indicate that home prices may be peaking. Chairman of the Index Committee at S&P Dow Jones Indices, David M. Blitzer, stated, “Following the increase in mortgage rates beginning last May, applications for mortgages have dropped, suggesting that rising interest rates are affecting housing. The Fed’s announcement last week that QE3 bond buying will continue for the time being may have only a limited, though favorable, impact on housing.”
The rapid increase in home prices has affected potential appreciation for many home owners who waited to sell their homes. And the increased inventory provided additional housing stock for eager home buyers. Given the recent increases in home sale prices, the expectation of an uncertain real estate market may not be welcome news by home buyers and sellers.
But home price increases have not only helped the housing market, but the economy as a whole. CoreLogic (corelogic.com) reported that the housing sector contributed about 17% to GDP growth during the first quarter of 2013. However, CoreLogic predicts that increasing mortgage rates will directly affect the housing market, and indirectly affect the overall economy: Single family housing starts (new homes) are thought to be declining because of increasing mortgage rates; and CoreLogic estimates that long term GDP growth to be about 1.75%.
It remains to be seen if modest increases in mortgage interest rates have been beneficial to stave off another housing bubble. However, given that the indicators and experts point to a housing recovery peak; increasing mortgage interest rates could suggest caution for the housing market.
Original located at https://dankrell.com/blog/2013/09/26/rising-interest-rates-a-help-and-hindrance-to-recovering-housing-market-2/
Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.
A “hybrid” housing market is has a little bit of everything. There are the multiple offers and escalation clauses, as well as the homes that sit idle for days (both could be on the very same block!); buyers willing to pay more than list and those offering less. The result is frustration among buyers and sellers who are disappointed by not having their expectations met; and even a few real estate agents are losing their cool. What is becoming increasingly apparent is that the current housing market is not for the squeamish!
Although few home owners are venturing to list their homes, those who do may be seeking a premium price; most likely due to the optimism permeating the air. Furthermore some are expecting the prize of getting multiple offers with escalation clauses. Owners of homes that do not sell within the first week of listing are anxiously wondering, “Why hasn’t my house sold yet?”
The flip side is that although home buyers are plentiful (compared to the current home inventory), there still seems to be many home buyers who seek to buy a home at a 5%+ discount. Unlike the “bargain hunter,” many of these home buyers are more concerned with future home resale (which may be indicative of a lack of confidence in the future housing market).
Pressure on home buyers and sellers is likely originating from reports of bubble activity pockets that seems to be popping up, and recent home price indices that indicate increasing national average home prices. Regardless, there appears to be a lack of symmetry among home sales as well as a lack of consistency among home buyers and sellers.
So if you’re planning a home sale or purchase, what are you to make of this? You should understand that national home price indices are comprised of multiple regions, and much of the national home price increase is due to regions that had the highest home price declines over the last six years, as well as a few pockets of very hot activity (unlike the home price climb during 2004-2006, which was mostly due to high confidence in the housing market, easy credit, and a much different economy). Likewise, the Metro DC region is microcosm of the national picture, such that it is comprised of a number of counties that realized double digit home price decreases, as well as a few pockets of hot activity.
To add some perspective to local market trends, the average days-on-market of a home in Montgomery County is roughly 60 days (depending on the source). Additionally, Montgomery County single family home data compiled by the Greater Capital Area Association of Realtors® (gcaar.com) indicated that median and average single family home price decreased year over year for the last three consecutive months. And while the number of homes listed continues to decline, the number of pending home sales (homes under contract) has also declined in March year over year, as well as year to date.
Getting into the market requires solid data, a strategy, and an open mind. If you’re selling: consult with your agent about recent neighborhood prices; and stay informed of all activity, as it could be your cue to decisions made on the sale. If you’re buying: in addition to discussing comp data, you should consult with your agent about a strategy to deal with competition from other home buyers.
This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.
