Could generational differences trigger deflation of housing

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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

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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.

New real estate economics

A new economic paradigm for housing markets. The new real estate economics are about recovery trends and bubble fears.

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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

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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. Copyright © 2013 Dan Krell.

Hybrid housing market not for the squeamish

real estate trendsA “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.

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© 2013

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.

When will move-up homebuyers return to the housing market

by Dan Krell
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DanKrell.com
© 2013

Move-up home buyers missing from housing recovery; when will move-up home buyers return to the housing market?

home for saleI recently came across an interesting article about “move-up” home buyers online titled, “Move-up Buyer Provides The Base For A Recovering Housing Market.” The piece, published by the Chicago Tribune, is not unlike the many articles you might find today about the missing move-up buyer in the housing recovery. However, this article is different – it was published August 17, 1985 (article can be found here: articles.chicagotribune.com/1985-08-17/news/8502240441_1_interest-rates-trade-up-market-home-resale-market).

The striking similarities between the current housing recovery and a real estate market that was recovering from one of the deepest modern recessions up to that time (during the early 1980’s), includes home buyer behavior and economic concerns. And of course, the affected move-up buyer sector and the dearth of inventory appear to be familiar.

Home buyer behavior doesn’t have seemed to have changed much as many would-be home buyers are trying to time their purchase with the market bottom. At that time, like today, interest rate pressures are helped home buyers decide to jump into the market; additionally, then like today a significant number of buyers were first time home buyers. Downward pressure on mortgage interest rates, combined with the fear of rising rates affected home buyers to get off of the fence. However, peek mortgage interest rates averaged about 15% in the early 1980’s.

Another similarity between both periods is the missing move-up market. The typical move-up home buyer is sometimes described as a home owner who decides they need more space, which results in the sale of their smaller home and the purchase of a larger home. Then like today, the move- up home buyer was the missing piece to the housing recovery; the move-up home buyer provides much of the housing inventory that first time home buyers seek. However, it seems as if a “psychological barrier” (as described by the Chicago Tribune piece) holds back many move-up buyers today as it did in 1985. During the current housing recovery, many potential move-up buyers have remained in their homes.

Like other housing recoveries, one of the main issues holding back the move-up buyer is housing appreciation. During an early recovery, home owners may have a difficult time rationalizing buying a larger more expensive home when the new home could depreciate the first year of ownership, let alone the thought of a perceived loss of equity in their current home.

As home prices stabilize it would be reasonable to think that there will be an increased presence of the move-up home buyer. A good example of this was in the housing recovery that took place during 2003-2004. At that time, low mortgage interest rates helped first time home buyers back to the marketplace, and the move-up buyer sector took off relatively quickly when rapid home appreciation was realized. Of course rapid home appreciation was a function of “easy money” that generated real estate speculation that produced the “go-go market” of 2005-2006, the housing bubble, and the subsequent financial/housing crises.

The similarities of a post recession housing recovery might indicate there is currently progress. However, the move-up home buyer sector may be one of the final pieces to the recovery puzzle; and until the move-up home buyer presence is felt in the marketplace, we may yet to endure a few more years of “recovery.”

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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 the week of April 1, 2013. Using this article without permission is a violation of copyright laws. Copyright © 2013 Dan Krell.

Is recent housing bubble news cause for alarm

by Dan Krell

DanKrell.com
© 2013

real estate bubbleIf I said that we could experience another housing bubble, you might be concerned for my mental health.  But a couple of years ago I wrote about an impending housing shortage, which could spark another bubble similar to what occurred during 2004-2005.  The market-conditions similarities between 2004 and today are foreboding, if not intriguing. (Dan Krell © 2013)

There hasn’t been talk of a housing shortage since 2004; but looking at Montgomery County MD as an example, you might begin to see similarities between the housing bubble of 2005-2006 and today’s real estate market.

Monthly peek single family inventory in Montgomery County did not exceed 2,000 total active units in 2004; while the absorption rate was reported by the Greater Capital Area Association of Realtors® (GCAAR.com) to be about 80% during the winter of 2004.  During the following year, the winter active inventory greatly increased and the absorption rates dropped to about 40%.  The result was a housing market that reached critical mass, and a one year appreciation rate of about 18% for Montgomery County single family homes; which played a key role in the rampant real estate speculation in 2005-2006.

Active housing inventory has been declining since 2010; the greatest decrease occurring during 2012.  According to the monthly home sale statistics posted on the GCAAR website (GCAAR.com), there were 1813 active single family inventory units for sale in Montgomery County during January 2012.  And although active single family units peaked for the year during the spring of 2012, active inventory dwindled to a low of 1198 active units for sale during January 2013 – a year over year decrease of about 40%. Additionally, the absorption rate of listed homes for sale is rapidly approaching 60%

Add the home price facet – on March 5th, CoreLogic (corelogic.com) reported that national home prices increased 9.7% during January 2013, as compared to January 2012.  This was reported to be the greatest year of year home price increase since 2006.

An additional and telling similarity between the pre-bubble years and present is the number of real estate investors jumping in to cash in on distressed properties.  Of course at the height of the real estate bubble of 2004-2006, real estate investing was transformed from the traditional “rehab and flip” to no rehab and flipping properties as quickly as possible.   A great number of homes sold today are to investors, either to rehab or to rent.

In 2004, like today, we were about three years post recession; albeit the recession of 2001 was not as protracted as the “Great Recession.”  At that time, like today, the Federal Reserve funds rate was historically low.

Although an “easy money” monetary policy is another similarity between the periods, a major difference is the availability of mortgage money.  Getting a mortgage is much more difficult today than it was in 2004-2005.  Buying a home without a down payment as well as qualifying for a mortgage without documenting income could have been a factor of the wide spread real estate speculation of 2005-2006.  Today, as a result of the bursting of the 2005-2006 housing bubble, underwriting qualifications are more demanding as are down payment requirements.

The housing bubble phenomenon is not a new or a recent experience; housing bubbles have occurred in the past and most likely will occur in the future.  When they occur, housing bubbles seem to coincide with a recessionary cycle.  And just like recessions, housing bubbles vary in duration and severity.  Sure, another housing bubble may be looming; but the next bubble may be confined to specific regions of the country, and possibly some local neighborhoods.

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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. Copyright © 2013 Dan Krell.