home prices Archives - Page 9 of 12 - Real Estate News and Commentary

August 13, 2014November 23, 2021

Making sense of real estate market indicators

It used to be easy to figure out the strength of the real estate market, all you had to do was look at reported housing indices and it all made sense. Statistics were often verified and corresponded to other indices as well. However, since the financial crisis, there seems to be a disconnect between national and local housing indicators; gauging the market has become confusing – understanding what the indices measure and imply is often tricky.

Obviously, the best gauge to the health of the housing market is measuring existing home sales. Existing home sales is reported nationally and locally. The figure is important because it is a direct measure of the number (volume) of home sales during a given time period (usually monthly). National sales figures are often samples of MLS data, while local data are actual (raw) numbers. The statistic is used to chart annual sales trends; as well as a relative comparison to the same period during previous years.

Some have talked about the strength of luxury home sales as an indicator of the housing market. However, during a weak economy is weak, mid and low tier home sales tend to decrease; while upper bracket and luxury sales remain relatively strong. This bifurcation, where two distinct markets are derived from one, has emerged twice since the financial crisis; most recently earlier this year.

The National Association of Realtors® reports the Pending Home Sale Index, which is basically the number of homes that go under contract (pending sale) during a specific period. Pending sales are sometimes called a “forward looking” statistic because it is used to estimate how many homes will have sold for the year. Local pending sales are reported as a raw number of homes under contract. The statistic can be misleading because contracts fall apart for a number of reasons and may be one explanation as to why pending sales and existing sales may not correspond. Although the figure is not always indicative of actual sales, the figure is important because it reveals home buyer activity.

Another statistic relied on by many to determine the strength of the housing market are the home price indices (yes there is more than one). There are a number of national home price indices, and each has their own discrete methodology of measuring home sale prices. Some indices collect MLS data samples, while others use reported mortgage data. Average home sale prices help determine affordability, which can be an indication of buyers’ potential ability to purchase a home.

Some analysts talk about mortgage interest rates for much of the same reason one might follow home sale prices – to project home buyer affordability. The rationale is that the lower the interest the more affordable homes are and increase buyer activity.

Analysts also use new homes statistics to describe the strength of the real estate market. Included in this subset of housing data are new home sales and new home starts. New home starts is typically derived from the number of permits filed to build homes. Besides being a forward looking projection of new homes sales, economists follow new home starts figures closely because it can project construction employment as well.

Housing indices can be inconsistent. And while positive statistics may be reported nationally, it doesn’t necessarily correspond to the local market. Your real estate agent can provide insight to local sales trends and expected projections.

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.

June 18, 2014August 11, 2019

Oil prices and housing, is there really a link?

It seems that anytime there is turmoil in the Middle East, there is concern over disrupting the oil supply and spiking energy prices – notably at the gas pump. Spiking gas prices not only makes everything seem more expensive, it has been thought to compel people to re-think their home buying strategies as well. Is the chaos in the Middle East and increasing oil prices coinciding with a shift in home sale trends?

Gregory White, of Business Insider (businessinsider.com), stated that “The simple reason why a rise in crude prices could tank the housing market is that it has done it before.” This is not a recent story; no, White wrote this in a March 6^th 2011 piece titled: “Barclays On How The Oil Price Spike Could Crash The Housing Market Again.” The article was a brief commentary on Luca Ricci’s (who was at Barclays at the time he was quoted) analysis of the possible consequences of the surge in oil prices to the U.S. housing market.

Ricci was quoted to say, “The main effect is on consumption via gasoline and energy prices. As consumption generally accounts for 60% of GDP, the effect is large. In oil exporters this effect will be offset by windfall revenues from the higher oil prices, so the overall effect is unclear. In our view, the oil price increase in 2008 significantly contributed to the recession and the financial crisis in the US, which then spread globally. By raising CPI inflation, it reduced real disposable incomes and, hence, the purchasing power of the average households, leading to a contraction in real consumer spending and lowering the ability to repay mortgages.”

Indeed, a 2008 sharp increase in gas prices and road congestion was a factor for many to re-think their home location. It was not only those living in suburbia whose idea of an ideal home shifted toward saving fuel costs; home buyers at that time, who did not put their housing search on hold, looked for a home that was closer to their work or easily accessed some form of mass transit. A National Association of Realtors® (realtor.org) study reported that 28% of home owners surveyed indicated that high fuel costs were a decision to sell their home, while 40% of home buyers surveyed indicated that high fuel and commuting costs offset the higher home prices closer to the city center.

How much could you save by moving closer to your office? Based on the Washington Metropolitan Area Transit Authority Savings Calculator (WMATA.com), eliminating 20 miles of daily driving can save over $224 per month or $2,688 per year (estimates at the date of this article). And if gas prices peak like they did in 2008, savings from curbing your driving could be double – or more!

However, while the immediate focus may be on saving on energy costs, urban living could have a trade off in higher property taxes and housing costs. And as much as increasing oil and gas prices may have an indirect effect on the housing market, the urbanite trend may be more about convenience and a healthier living style rather than saving money on gas and commuting costs. Nonetheless, the urban living trend surged in 2010, when sales soared in planned walkable communities with embedded shops and services. Market demands resulted in suburban renewal, where planned urban villages were built (and are being built) in convenient locations; which have also become destinations for the community’s restaurants, shops and offices.

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By Dan Krell
Copyright © 2014

June 11, 2014July 4, 2019

Forget GDP – real estate is still a local phenomenon

Are you one of those who are ignoring the recent negative GDP report? Or are you chalking it up to the weather or other factors? If you are unaware, the May 29^th news release by the U.S. Department of Commerce – Bureau of Economic Analysis (bea.gov) reported that the Gross Domestic Product for the 1^st Quarter 2014 was revised to -1%. Of the number of reasons cited was a negative contribution from residential fixed investment (basically poor home sales).

Although one poor quarter is not a trend, two consecutive quarters of negative GDP could be considered a recession. But this rule of thumb is not always accurate – after all, this is the second time during the current recovery we have had a negative GDP. Many economists are not concerned and expect a rebound, citing the recent employment report; while some are very concerned, citing the low employment participation along with declining personal income and spending.

I hear you saying: “Ok, even though home sales have been lacking, home prices have been increasing,” which is a sign of strength in the housing market. According to an analysis by Ray Valdez (The housing bubble and the GDP: a correlation perspective: Journal of Case Research in Business & Economics; June 2010, Vol. 3, p1), there is a strong relationship between GDP and home prices. Local data for Montgomery County MD during May 2014 not only indicates a year over year decrease in sales volume, but average home sale prices may have decreased bout 1% compared to May 2013. Other indications that the local housing market is cooling this year is the sharp increase of new listings, and a lower absorption rate of listed homes.

The BEA GDP release also cited Gross Domestic Income for the 1^st Q as decreasing 2.3% (compared to the 2.6% increase the previous quarter). Putting income in perspective, Rick Newman of Yahoo’s “The Daily Ticker” (The Middle Class is Even Worse Off Than the Numbers Show); “The “average” American worker earns about $44,000 per year and saves around 4% of his income. And the “average” household has a net worth of approximately $710,000, including the value of homes, investments, bank accounts and so on. But many Americans, needless to say, fall well below those benchmarks, which fail to capture widespread financial distress…” Newman points to the growing wealth of the affluent as skewing income data: “The rich have always skewed wealth and income data to some extent, since they pull up averages and make ordinary people seem a bit better off than they really are. But the outsized gains of the super-rich during the past 25 years have become so disproportionate that some measures of prosperity may be losing their relevance.”

If you’re concerned about mixed economic reports affecting the housing market and possibly your sale or purchase; you can take heart in the notion that the current environment is different than that of the Great Recession. Some economists expect a rebound, citing relatively low mortgage interest rates and some loosening lending standards as incentivizing home buyers.

Nevertheless, real estate is still a local phenomenon; and just like the differences between regional markets, external influences can create differences among geographical areas as well. If you’re planning to be in the market, consult with your real estate agent about recent neighborhood data and trends to assist you with your pricing strategy.

By Dan Krell
Copyright © 2014

January 30, 2014July 3, 2019

Could generational differences trigger deflation of housing

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.

by Dan Krell
© 2014

December 4, 2013June 3, 2020

New real estate economics

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.

by Dan Krell
© 2013