Housing Inventory Shortage Causes

housing inventory shortage
Mover rates (infographic from census.gov)

A common complaint from home buyers is that there is lack of quality homes for sale.  A fact that most overlook is that home sale inventory has been relatively low since 2011.  The shortage has been attributed to many things including, home prices, economy, mortgage interest rates, jobs, etc.  However, a Freddie Mac report issued earlier this year pinpoints a major cause of the ongoing inventory shortage.  And according to the report, the housing shortage may get worse before it gets better.

A post-recession housing inventory shortage was actually predicted in 2010 by Brian Wesbury, chief economist for First Trust Advisers (Housing Shortage Coming In 2011; Forbes.com; February 15, 2010).  Wesbury’s industry startling prediction was based on statistics that require an average of 1.5 million homes to be added to the housing inventory each year just to be on par with population growth.  At that time, housing starts and completions were only a fraction of the 1.5 million target. 

Since then, housing market inventory has been low relative to the housing market prior to the great recession.  A lack of inventory has been attributed for inconsistent home sale stats this year, as well as previous years.  And although there have been a few years of post-recession record home sales, home sales have struggled for ten years to surpass pre-recession numbers. 

A study by Freddie Mac discusses one of the major causes of the recent housing shortage that has been impeding the real estate market, which is the growing trend of “aging in place.”  The study, published by Freddie Mac Insights earlier this year (While Seniors Age in Place, Millennials Wait Longer and May Pay More for their First Homes; freddiemac.com; February 6, 2019), is fueling an ongoing debate of the current housing inventory shortage. 

Aging in place is term given to aging home owners who stay on their homes as long as possible.  Rather than moving to retirement communities or other stereotypical older adult housing, seniors are staying put.  This trend is confirmed by a survey conducted by AARP that indicated “3 out of 4 adults age 50 and older want to stay in their homes and communities as they age” (2018 Home and Community Preferences: A National Survey of Adults Age 18-Plus; aarp.org; August 2018).

To highlight the impact of the current trend of aging in place, the Freddie Mac report pointed out that the home ownership rate for seniors aged 67 to 85 only dropped 3.6 percent, while the previous generation experienced a 11.6 percent drop in homeownership for the same age span.  A major revelation was that the current homeownership rate for seniors aged 81 to 85 is almost 15 times greater than the previous generation (for the same age span).

The Freddie Mac study looked at subdued millennial home buying trends and looked at who lived in the homes that millennials could have purchased.  The results indicated that seniors born after 1931 stayed in their homes longer, which resulted in higher homeownership rates compared to previous generations.  According to the study, “We estimate that this trend accounts for about 1.6 million houses held back from the market through 2018, representing about one year’s typical supply of new construction, or more than half of the current shortfall of 2.5 million housing units…This additional demand for homeownership from seniors will increase the relative price of owning versus renting, making renting more attractive to younger generations…

By Dan Krell
Copyright © 2019

Original located at https://dankrell.com/blog/2019/07/21/housing-inventory-shortage-causes/

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Next Market Downturn

The next market downturn (infographic from keepingcurrentmatters.com)

The current US economy just hit a milestone by becoming the longest stretch of economic growth in our Nation’s modern history.  The expansion is now in the 121st month.  The previous expansion record was 120 months, and occurred between March 1991 and March 2001. Most attribute the dot-com bubble as the precipitating event that ended that period of expansion.  Many have been anticipating the end of the current expansion for several years.  And they will eventually be correct when this period of economic growth inevitably ends in a downturn, recession, or correction. To prepare, experts suggest to start saving for the next market downturn.

Earlier this year, I wrote about housing market mini-cycles are different from a full-blown recession.  Then (and now), housing indicators are mostly positive.  Although the next next market downturn is unlikely to be caused by another housing crisis, it doesn’t mean that the housing market won’t be affected by other economic factors. 

Whatever triggers the next recession will undoubtedly become an economic contagion that will spread across many industries, including housing.  The chain of events are generally characterized as: consumer sentiment drops which causes people to spend less money which causes businesses to slow which results in unemployment.  Home owners who lose their jobs may have difficulty in repaying their mortgages, and are at risk of default or losing their homes. 

Lessons for the next market downturn

Economic and financial lessons are learned with each recession.  The dot-com bubble recession in 2001 made many rethink the policy of raising interest rates when markets are signaling trouble.  Many are still studying the Great Recession, but one of the take-aways is that job creation is key in economic growth and prosperity. 

How will the next market downturn affect housing? The housing market typically responds to a recession through home price reductions.  A NAR Economist’s Outlook from October 23, 2018 (How Do Housing Market Conditions Compare in 2004 and 2018?; nar.realtor) suggests that home prices will likely fall but not as sharply as we experienced in 2008.  This is mostly due to home sale inventory and home prices.  The housing market is much different than it was prior to the last recession.  According to the latest NAR press release on existing home sales (nar.realtor), the median existing home sale price during May increased 4.8 percent.  This is the 87th consecutive month of year-over-year gains.  Additionally, home sale inventory remains at historic lows.

Start saving

A recent press release from the JPMorgan Chase Institute indicates that the conventional wisdom about mortgage default may be incorrect (jpmorganchase.com).  The institute’s study was published in report “Trading Equity for Liquidity: Bank Data on the Relationship between Liquidity and Mortgage Default.”  A major conclusion is that having three months of housing costs in reserve can save your home in the event of recession and job loss.  This is counter to the conventional wisdom of the post-recession era policies of home buyers having “skin in the game” by making larger down payments.  Having home equity is also not a guarantee of making mortgage payments.  Home equity is relative to the housing market and home prices.  The study concluded that “liquidity is a more useful predictor of mortgage default than home equity, income level, and payment burden—especially for borrowers with limited liquidity at closing.” 

Even though the Great Recession officially ended ten years ago, the memories are still fresh.  There will be eventually a recession or market correction. And the main concern for most home owners is how to prepare.  Unfortunately, we can’t predict the exact timing and severity of a recession.  However, most experts suggest saving and having several months of reserves in case of job loss.

By Dan Krell
Copyright © 2019

Original located at https://dankrell.com/blog/2019/07/12/next-market-downturn

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Mixed housing stats

mixed housing stats
Mixed housing market stats (infographic from keepingcurrentmatters.com)

This week’s National Association of Realtors press release (nar.realtor) sends mixed signals about the housing market.  Reports of sluggish home sales and slowing home price appreciation is not what you would expect when the spring market should be humming along.  But then again, mixed housing stats may be a vital sign of a healthy market in motion.

First, let’s talk about home sale prices.  The NAR’s report on metro home prices and affordability indicate that the average home sale price for the first quarter of the year was $254,800.  This is a 3.9 percent increase compared to the same time last year.  Average home sale prices in the Baltimore metro area were slightly higher than the rest of nation at $275,300.  Not surprisingly, Washington metro prices were significantly higher at $420,000 (a 6.5 increase from the same time last year).

The latest S&P CoreLogic Case-Shiller U.S. National Home Price Index (spindices.com) is almost spot on with the NAR, indicating a 4 percent increase in home sale prices nationwide.

Affordability is always a concern when mixed housing stats confound the market. So, how much income do you need to qualify for a home?  The National Association of Realtors Qualifying Income report indicates the average qualifying income for a 5 percent down conventional mortgage is $60,143 nationwide.  The average qualifying income in the Baltimore metro area is slightly higher at $64,982.  However, because of significantly higher home sale prices, the average qualifying income in the Washington metro area is $99,137. 

The neighboring Baltimore and Washington metro areas highlight home pricing extremes in competing markets.  Many home buyers who work in the Washington metro area are opting for longer commutes to make homeownership affordable.  Others are opting for alternative work to not only lower their housing cost, but eliminate the commute as well.  Commenting on affordability, NAR’s chief economist Lawrence Yun stated, “There are vast home price differences among metro markets. The condition of extremely high home prices may not be sustainable in light of many alternative metro markets that are much more affordable. Therefore, a shift in job search and residential relocations into more affordable regions of the country is likely in the future.”

Although home sale prices continue to climb, the national home sale picture is another story.  The 1.2 percent increase in spring home sales compared to winter sales should be expected.  However, the 5.4 percent decrease from last spring is a disappointment.  According to MarketStats by ShowingTime (getsmartcharts.com), the number of homes sold in the Mid-Atlantic region decreased 4.77 percent year-to-date.  There was a larger decline in Montgomery County, where there was a 7.25 percent decrease in home sales year-to-date! 

Days-on-market is another fundamental indicator of the housing market.  And, like home prices and units sold, days-on-market can vary depending on the local market.  Homes in the Mid-Atlantic region are taking a bit longer to sell, as days-on-market increased 7.04 percent to 76 days.  However, houses in Montgomery County are selling quicker, where days-on-market decreased about 13 percent to 65 days. 

Mixed housing stats can confound home buyers, sellers, and their agents. But consider the analysis of David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. He stated that that home sale prices gains have been slowing down until recently.  And although mortgage rates are lower, home sales have “drifted down” from their peak during February 2018.  Even new home sales and residential investment have shown weakness since last year.

Original published at https://dankrell.com/blog/2019/05/20/mixed-housing-stats/

By Dan Krell
Copyright © 2019

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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.

Housing market mini-cycles

housing market mini-cycles
Housing market mini-cycles

In a statement last year, NAR chief economist Lawrence Yun discussed the housing market’s recovery since the Great Recession (Realtors Chief Economist Reflects on Past Recession, What’s Ahead for Housing; nar.realtor; August 28, 2018).  Citing increasing homeownership rates and addressing the recent home sale slowdown, Dr. Yun believes that concerns about a significant housing slump are unsubstantiated.  Instead, we may be going through housing market mini-cycles.

Dr. Yun is not the only one pointing to affordability (home prices and mortgage rates) and lack of home sale inventory as causes of market disruptions.  But his statement is almost trite: “…even as mortgage rates begin to increase and home sales decline in some markets, the most significant challenges facing the housing market stem from insufficient inventory and accompanying unsustainable home price increases…”

Housing market mini-cycles and the economy

The housing market, like the overall economy, goes through cycles of boom and bust.  It’s been about eleven years since the last recession, and many are saying we’re overdue for another one.  But if the economic cycles, as described in 1876 by economist Henry George and modernized by Glenn R. Mueller, accurately include recovery, expansion, hypersupply, and recession, there is no clear phase to describe recent housing activity.  Instead, what we are experiencing is housing market mini-cycles.

Most understand the concept of the broad economic boom and bust cycle. But most are unaware of the mini-cycle that manifests as repeat periods of short-term growth and slowdown.  Recessions typically have broad effects on the economy, where as mini-cycles are are fast cycling and specific to economic sector. So, a complete housing market mini-cycle can last several months or longer and may not spill over to other sectors.

Since 2013, the housing market has undergone at least three mini-cycles of growth.  These cycles peaked with record sales volumes, only to be set back by months of sluggish home sales.  The causes of the housing market mini-cycles are debatable and, like a recession, clear in hindsight.  Of course, Dr. Yun and other industry experts are likely to be correct saying that home prices (affordability) and inventory are to blame.  However, there may be other reasons worth exploring as well.

Micro-economic factors are playing a large role in the housing market mini-cycle.  Take for example the increase in employee telecommuting.  There is an abundant research pointing to how telecommuting has affected the commercial real estate market.  These studies point to increased office space vacancies due telecommuting.  Companies are downsizing offices because of the reduced need for space as employees are working from home.  This trend is recognizable in real estate brokerages.  Real estate office spaces are shrinking as the industry becomes increasingly “virtual.”

Telecommuting is also impacting home sales. According to Global Workplace Analytics (globalworkplaceanalytics.com) “Regular work-at-home, among the non-self-employed population, has grown by 140% since 2005, nearly 10x faster than the rest of the workforce or the self-employed.”  Currently, there are about 4.3 million employees that work from home at least half the time.  As businesses are increasingly hiring a telecommuting workforce, workers opt to stay in their current residence rather than relocate near their new employer. 

Does housing market mini-cycles lead to recession?  Maybe the the mini-cycle is a brief market correction that helps avoid the broader effects of recession. Take for instance the three housing market mini-cycles that recently boomed in 2013, 2016, and 2017-2018. During these mini-cycles, home prices soared and home sales broke recent records (since Great Recession).

Current economic indicators (at the time of this writing in March 2019) point to a positive home sale season.  The Bureau of Labor Statistics (BLS.gov) most recent unemployment statement was 4.0 percent (which included government shutdown stats).  The Consumer Price Index remains stable (the CPI-U was last reported unchanged). Real average hourly earnings was reported to increase 0.2 percent from December to January.  And after a three-month decline, the Conference Board (conference-board.org) reported a rebound in the Consumer Confidence Index.  Given the winter housing slump, real estate may be on everyone’s mind again in this spring.

Original published at https://dankrell.com/blog/2019/03/10/housing-market-mini-cycles/

By Dan Krell
Copyright © 2019.

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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.

Embrace millennials for prosperity

embrace millennials
Generational shifts (infpgraphic from nar.realtor)

Montgomery County Executive Marc Elrich’s recent remarks about millennials and housing doesn’t just speak volumes about politics and elected officials, but possibly reveals the future of housing and business in Montgomery County MD.  His “slip of the tongue” opposing building housing for millennials was not taken lightly and received plenty of pushback.  To be fair, Elrich has clarified his statement and is making amends by meeting with millennial activists who reside in the county.  Elrich should consider it a defining moment of his tenure and take the opportunity embrace millennials and the businesses that employ them to address the county’s housing and economic issues.

Millennials shouldn’t be pigeonholed just because their generation is misunderstood.  According to the National Association of Realtors, millennials are the largest segment of home buyers.  They account for more than one third of nationwide home buyers (Millennials Want the ‘Anti-Suburb Suburb’; magazine.realtor; February 26, 2016).  Jessica Lautz, NAR’s managing director of survey research stated, “Their buying power is huge…They are definitely a force in the market. They are overtaking the baby boomers.”

Affordable housing is an issue for every generation, including millennials.  According to the NAR, eighty-six percent of millennials “believe that buying a home is a good financial investment.”  However, like all home buyers, millennials are facing low home sale inventory, increasing home prices, and rising rents.  Additionally, many millennials have the heavy burden of student loan debt, which stifles their ability to rent, as well as save for a down payment to buy a home.  To put this into perspective, consider Zack Friedman’s report for Forbes indicating student loan debt approaches $1.5 trillion (Student Loan Debt Statistics In 2018: A $1.5 Trillion Crisis; forbes.com; June 13, 2018).  This makes student loan debt the “second highest consumer debt category” (mortgage debt is first). 

Embrace millennials to address housing issues

Millennials don’t expect cities to tear down older affordable housing to build new homes for them.  It’s quite the opposite.  As was reported by NAR research cited above (Millennials Want the ‘Anti-Suburb Suburb), many millennials are moving out of the city and opting to live in more affordable suburban neighborhoods. Instead of tearing down homes and disrupting communities, millennials are revitalizing older homes and invigorating forgotten neighborhoods. 

It has been established that millennials are currently driving the economy of housing, and they should not be dismissed.  According to the National Association of Realtors 2018 Home Buyer and Seller Generational Trends study (nar.realtor), millennials have been the most active generation buying homes for the past five years.  Millennials represented more than one-third of all home purchases in 2018.  It was pointed out that the number of millennials buying homes in urban areas is declining.  After peaking at 21 percent in 2015, only 15 percent of millennials purchased in an urban area during 2018 (only 2 percent buying a condo).

Embrace millennials to address economy

The millennial shift toward the suburbs is affecting business too.  Jim Fagan recently wrote about businesses chasing millennial talent (Millennials are re-migrating to the suburbs and their employers are following; westfaironlline.com; September 14, 2018).  He observed that as millennials are moving out of urban areas, their employers are following them.  Just as millennial migration is affecting residential real estate, it is also affecting commercial real estate and the urban landscape .

Demographics are not static and affect housing and the economy.  Millennials are a driving force in today’s housing and labor markets.  If Elrich is to address the county’s economy and housing issues, he should embrace millennials and the businesses that employ them.

Original published at https://dankrell.com/blog/embrace-millennials-economic-prosperity

By Dan Krell. Copyright © 2019.

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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.