Is housing market in trouble?

home sales stats
Home sales stats from realtor.org

Two seemingly mundane and unrelated news items were reported over the last couple of days without much attention, but could be a warning that housing activity is slowing.  First are reports of disappointing home sales during February, while the other is about mortgage principal write downs.

The National Association of Realtors® (realtor.org) reported in a March 21st statement that February home sales plunged 7.1% from January’s sales; however, February sales were still 2.2% higher than the same time last year.  The disappointing sales were recorded in all four national regions; and were likely due to a combination of extremely low inventory and increasing home prices.

NAR chief economist Lawrence Yun stated in the release that although the northeast blizzard may have had some impact, vapid sales were more likely due to the lack of supply and affordability.  He stated, “…Finding the right property at an affordable price is burdening many potential buyers.”  Yun pointed out that although there are gains in job growth, NAR’s latest quarterly Home Survey indicated that fewer respondents believed the economy was improving, while a lower number of renters stated it’s a good time to buy a home.  Remaining optimistic, Yun qualified February’s data saying home buyer demand is still high, however, “…home prices and rents outpacing wages and anxiety about the health of the economy are holding back a segment of would-be buyers.”

NAR also reported that February’s median existing home price for all housing types was up 4.4% year-over-year; while exiting inventory is 1.1% lower compared to the same time last year, which leaves unsold inventory at a 4.4 month supply.

However, a housing slowdown may not be noticeable in my area.  Statistics reported by the Greater Capital Area Association of Realtors® (gcaar.com) indicated that settlements during February for Montgomery County single family homes are actually up 19.3% and homes under contract increased 12.4% compared to the same time last year.  However, February’s new inventory for Montgomery County single family homes decreased 3.4% year-over-year.

Although continued increases in home prices is good news for homeowners; it is easy to see that affordability is an impediment to home ownership for many would be home buyers.  Additionally, possibly keeping home sales inventory down are the number of homeowners who continue to feel that they cannot sell because they still owe more than the value of the home.  Consider that Realtytrac (realtytrac.com) reported that there were 6.4 million properties that were seriously underwater at the end of 2015; which represents about 11.5% of all homes with a mortgage.

In an effort to offer relief to underwater homeowners, the Federal Housing Finance Agency (conservator of Fannie Mae and Freddie Mac) approved a plan to reduce mortgage balances on a “large scale.”  Joe Light reported for the Wall Street Journal (Fannie, Freddie to Cut Mortgage Balances for Thousands of Homeowners; wsj.com; March 21, 2016) that as many as 50,000 underwater homeowners could see their mortgage principal reduced by Fannie and Freddie.

Although the number of assisted homeowners seems small in comparison to the number of underwater properties reported by Realtytrac, and is not expected to impact the housing market; it is a milestone nonetheless.  Mortgage principal reductions has been controversial, and has been bandied about by industry experts and regulators since the foreclosure crisis began in 2007.  Light reported that the previous FHFA director, Edward DeMarco, was reluctant to support such a program because of the cost to taxpayers.  However, current FHFA director, Melvin Watt, has taken a “measured approach” to the plan.

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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.

Will home prices depreciate second half of 2014?

house for saleIt’s no secret that the pace of home sales has slowed during 2014. So what’s ahead for real estate and the housing market? If you really want to know, Irwin Kellner, Chief Economist for MarketWatch, has some advice. In his August 19th MarketWatch.com piece (Opinion: Don’t count on U.S. consumer to save economy) he eloquently and succinctly stated, “If you are trying to discern where the economy is heading, look at the consumer.” And this applies directly to real estate too.

July housing figures from the National Association of Realtors® are due to be released this week (July housing press release August 21st); and although good news may be suggested, the numbers may be revealing of where the market is heading – and it may not be good. The NAR July 22nd (realtor.org) press release indicated that June’s existing home sales increased (compared to May 2014), however it stated that existing home sales were down 2.3% compared to the same time last year. In the area where I list and sell homes, Montgomery County single family home closings (sales), reported by the Greater Capital Area Association of Realtor® (gcaar.com) also dropped off in June (decreased 1.5%); and particularly telling is July’s decrease of 16.2% compared to the same time last year, as well as the 7.4% decrease year to date (compared to last year)!

The silver lining is that NAR reported that median home prices have increased in 71% of the “measured markets.” However, 27% of the measured markets showed a decline in median home prices from last year. Montgomery County median home sale prices are moderating (according to GCAAR stats): increases were about 3% during June and about 2% during July compared to the same periods last year.

Taking Irwin Kellner’s suggestion of “looking to the consumer,” let’s look at home buyer behavior trends; which may be understood through home absorption rate (the number of homes sold compared to the number of available listings during a given time period). It should be no surprise that the home absorption rate decreases compared to recent years due to the steady growth of home inventories and the reduced number of closings. Surprising is the rate of decrease in the absorption rate (calculated from MLS data) during June and July compared to the same periods last year (a decrease of 15% and 39% respectively).

Like the average consumer, it seems that home buyers may have become a bit skittish. Kellner points out that contrary to economist’s expectations, the August report of the Thomson Reuters/University of Michigan survey of consumer sentiment has dropped to a 10 month low. Additionally, he reported that although there has been some good news about employment, he argues that wages are not keeping up with inflation due to the nature of many newly created jobs, which are temp or part-time. Furthermore, he states that consumer savings are either low or “depleted.” Rounded out by the usual concern about job security, geopolitics, and the general economy: Kellner gives us a glimpse of today’s consumer.

As for real estate, the statistics suggest that the housing market may be at another crossroads. Homes sales have already dropped off during the busiest time of year, and it may be reasonable to expect that sales for the remaining year may also be subdued. The mediating factor will be home prices; which may eventually decline as home sellers try to be competitive with other listings, as well as entice home buyers to buy their homes.

© Dan Krell
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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.

Making sense of real estate market indicators

home sales statsIt 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.

© Dan Krell
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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.

Looking beyond inventory and sales: A deeper understanding of current housing market conditions

by Dan Krell © 2012

Housing StatisticsAccording to the National Association of Realtors® news release of February 9th, home affordability has increased in the last quarter of 2011 in many metro areas- including the metropolitan Washington DC region. The increase of home affordability is attributed to “softer existing-home prices and record-low mortgage interest rates in the fourth quarter.” The Washington DC region home affordability increased in the last quarter about 5.8% while the region’s home prices for existing homes fell about 5.4% (realtor.org).

Details of the NAR’s fourth quarter market analysis include a continued interest in home ownership among first time home buyers, as 33% of home purchases in the fourth quarter of 2011 were by first time home buyers. Additionally, 29% of the homes purchased in fourth quarter were “all-cash purchases,” which has been relatively unchanged; however, the percentage of “all-cash” real investor purchases was 19% (down from 20% realized in the third quarter).

Greater housing affordability may sound promising, however having more meaningful information may help understand what’s happening in the housing market.

To get a clearer understanding of the housing market, you might consider the February 10th speech given by Federal Reserve Chairman, Ben Bernanke, to the National Association of Home Builders entitled, “Housing Markets In Transistion” (federalreserve.gov). The overview of the housing market was explained as an imbalance in the supply and demand. Supply in the housing market, as Dr. Bernanke described it, greatly exceeded demand in the last few years. Demand for housing, as measured by home vacancy, has considerably decreased; home vacancy is “dramatically” elevated from the number of vacant homes in the first half of the 2000’s. Additionally, a high foreclosure rate is likely to continue; which would not only increase the number of vacant homes, but negatively affect families and communities as well.

Adding to the imbalance is the strengthening of the rental market, which evidently has increased demand.

Housing StatisticsDr. Bernanke also described the problems in the housing market as a secondary issue that stems from more pressing economic concerns, such as employment and household formation. Economic uncertainty has impacted the willingness to commit to home ownership. “…housing may no longer be viewed as the secure investment it once was thought to be…”

A stifled housing market has also held back an overall economic recovery. Dr. Bernanke stated that home equity has been reduced about 50% from the housing peak; more than $7 Trillion of equity has been lost which resulted in a decrease of household spending of “$3 to $5 per year for every $100 of housing lost” (which is estimated to be about $200 Billion to $375 Billion per year). Besides the reduced consumer spending, low/negative equity creates other problems for home owners too; such as: restricting the ability to refinance to lower interest rates; reducing or eliminating the ability to cash out home equity for emergency expenses; and possibly preventing a move due to an underwater mortgage.

Dr. Bernanke was clear when stating that housing problems have far-reaching effects on home owners, communities, the financial system, and “the vitality of the economy as a whole.” He continued to state, “…This observation underscores the importance of efforts to improve the condition of the housing market.” He is not the first to say that there is no single solution; however, he is one of the few who has been able to articulate the interconnected factors that need to be addressed.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of February 13, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.