Stock Corrections and Housing

Each time the stock market plunges there’s speculation about a wide spread economic contagion. Talking heads and news headlines predict doom and gloom, as well as speculating about the effects on the housing market. Because Wall Street reacts to all types of news and events, the effect of a stock crash on the housing market can vary. But are stock corrections and housing slumps connected?

If you want to see direct effects of stock corrections and housing slumps, you need only look at the stock market corrections in 2015 and 2018. Both stock market shocks were reactions to events in the US and globally. The extended stock sell-off during 2015 was a reaction to China’s currency devaluation as a result of their low GDP as well as poor economic data that came from the EU. The steep equities decline that happened during August through September of that year was bad timing for the housing market, as it occurred when the fall market was gearing up. Consumer confidence dropped and home buyers were concerned about home values. As a result, home sales slowed during the fall of 2015.

Moving forward, February 2018 is one of the most volatile trading months in recent history. That month saw two of the largest daily losses of the Dow Jones Industrial Average (both over 1,000 points). The market correction was due to Fed rate increases and concerns of inflation. The stock market correction occurred before spring home buyers were out in full force, so the short-lived event had minimal effect on home sales. Although home prices continued to post gains, existing home sales declined the second half of the year after an active spring and summer.

Are stock corrections and housing slumps connected?

This month’s stock market one-day plunge was likely tied to tariffs, trade and currency wars. The large decline occurred after China devalued its currency so as to make its consumer goods cheaper in the face of increasing tariffs.

Regardless of the impact of equities, it’s important to point out that home sales have been inconsistent throughout the year. A July 23^rd NAR press release indicated that existing home sales are 2.2 percent lower than last year. Chief NAR economist Lawrence Yun stated, “Home sales are running at a pace similar to 2015 levels – even with exceptionally low mortgage rates, a record number of jobs and a record high net worth in the country…” Although it may feel like we are repeating the housing cycle of 2015, it’s for different reasons. Like then, home sale inventory is low and home buyers are anxious about increasing home sale prices. However, differences include low mortgage rates, high consumer sentiment, and a stronger economy.

Although the overall effects of current stock volatility on the housing market may be minimal, equities corrections are typically harsher on upper bracket and luxury homes. Demand for starter homes will remain high, while upper tier homes will have to adjust pricing. Yun stated “Imbalance persists for mid-to-lower priced homes with solid demand and insufficient supply, which is consequently pushing up home prices…”

Although stocks rebounded the next day, we really don’t know yet if this is the beginnings of stock correction or a one-day event, so there is no way to gauge an immediate effect on home buyers. However, A July 17^th NAR report indicated that foreign home buyers have been affected by a slowing global economy and low US home sale inventory. The NAR Profile of International Transactions in U.S. Residential Real Estate 2019 indicated a 36 percent decline of foreign investment in U.S. residential real estate from last year. It’s likely that foreign investment may further erode as a currency war develops.

By Dan Krell
Copyright © 2019

Original located at https://dankrell.com/blog/2019/08/27/stock-corrections-and-housing/

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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.

December 23, 2018April 23, 2019

Does a shutdown affect home sales?

There hasn’t been this much anxiety about a government shutdown since October 2013. Back then, the government was “shutdown” for sixteen days. Of course, when the federal government “shuts down,” it’s really a partially interrupted. A majority of government operations continue. But even a partial government shutdown has the potential to affect home sales.

Since only a portion of government employees get furloughed during a shutdown, there is always confusion about which agencies are affected. Back in 2013 many home buyers were jittery about getting their FHA and VA loans processed so they could settle on time (the FHA is a part of HUD, while VA mortgages are guaranteed by the Department of Veteran Affairs). Additionally, many industry insiders were unsure about the impact a government shutdown would have on the recovering housing market.

Today we have some idea how government housing programs, specifically mortgages, will be affected during this time because most federal agencies publicly post their shutdown contingency plans.

FHA’s 2013 shutdown contingency was focused on maintaining consistency in the housing recovery. The contingency plan stated “The Office of Single Family Housing will endorse new loans under current multi-year appropriation authority in order to support the health and stability of the U.S. mortgage market. Approximately 80% of FHA loans are endorsed by lenders with delegated authority. The remaining 20% are endorsed through the FHA Homeownership Centers, leveraging FHA staff with a contractor that works on-site.”

The current FHA contingency is confident that most FHA loans will be unaffected. However, there is a warning that an extended shutdown can impact home sales. HUD’s Frequently Asked Questions in the event of a Government Shutdown, statement on FHA’s operations states:

“Because we are able to endorse most single family loans, we do not expect the impact on the housing market to be significant, as long as the shutdown is brief. With each day the shutdown continues, we can expect an increase in the impacts on potential homeowners. home sellers and the entire housing market. A protracted shutdown could see a decline in home sales, reversing the trend toward a strengthening market that we’ve been experiencing.”

VA loans may be better positioned. It is widely acknowledged that the Veteran Affairs learned from the government shutdowns that occurred in 1995-96. During that time, “Loan Guaranty certificates of eligibility and certificates of reasonable value [appraisals] were delayed.” However, because VA funding includes “advance appropriations,” a majority of the VA’s operations will continue during a federal government shutdown (including mortgages). The VA’s contingency plan indicates that in the event of a government shutdown 95% of VA employees will be fully funded or required to perform “excepted” functions.

Will a short-term federal government shutdown affect the housing market? Probably not. VA loans are expected to continue without much issue. However, certain HUD functions required for FHA mortgages could be limited, but not expected to cause delays in the short-term.

However, an extended shutdown has the potential to affect home sales. Consider that FHA’s mortgage market share increased to approximately 17 percent in 2017 (compared to about 13 percent in 2013). Significant FHA settlement delays could occur in long-term, which would surely have an impact on the housing market. However, considering that home sales have dropped off since the summer, and the market is typically slow during this time of year, the effect on housing will probably be negligible.

Original published at https://dankrell.com/blog/2018/12/23/shutdown-affect-home-sales

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November 1, 2018July 21, 2019

Buyer and seller attitudes about real estate market

Economists are officially pessimistic about the housing market. This is the general sentiment following another month of declining home sales. Experts are pointing to a number of factors for the slowdown, including increased interest rates and housing affordability. But what are home buyer and seller attitudes about real estate? The National Association of Realtors’ most recent Housing Opportunities and Market Experience survey hints at a busy spring!

Economic attitudes about real estate market

An October 19^th NAR news release (nar.realtor) reported that September’s home sales were the weakest in several years. The nationwide trend affected all regions. NAR chief economist Lawrence Yun stated:

“This is the lowest existing home sales level since November 2015…A decade’s high mortgage rates are preventing consumers from making quick decisions on home purchases. All the while, affordable home listings remain low, continuing to spur underperforming sales activity across the country.”

First-time-home-buyers are finding the housing market increasingly challenging. This segment’s participation needs to be strong for a healthy home sales. September’s low thirty-two percent first-time-home-buyer participation is attributed to rising interest rates and home prices.

But low housing inventory is also an issue. September’s housing inventory decreased to 1.88 million existing homes available for sale (from the 1.91 available during the previous month). NAR President Elizabeth Mendenhall stated:

“Despite small month over month increases, the share of first-time buyers in the market continues to underwhelm because there are simply not enough listings in their price range.”

Economists at Fannie Mae believe that the housing market will continue to disappoint. In an October 18^th press release (fanniemae.com) Fannie Mae Chief Economist Doug Duncan stated:

“Our expectations for housing have become more pessimistic. Rising interest rates and declining housing sentiment from both consumers and lenders led us to lower our home sales forecast over the duration of 2018 and through 2019. Meanwhile, affordability, especially for first-time homebuyers, remains atop the list of challenges facing the housing market.”

But what do economists really know about the future? Let’s hear it directly from the consumer!

Home buyer and seller attitudes about real estate

NAR’s Housing Opportunities and Market Experience survey tracks opinions from renters and homeowners about homeownership, economy, and the housing market. The release of their third quarter 2018 survey indicates that sixty-three percent of respondents strongly or moderately believe that it’s a good time to buy a home. Although optimism is somewhat diminished from the second quarter’s survey, there continues to be a positive sentiment about buying a home. The survey’s positive sentiment continues even though a majority of respondents believed that home prices will continue to increase in the immediate six months. Additionally, a majority of respondents believe that qualifying for a mortgage may be an obstacle to a home purchase.

The survey also concurs with other metrics indicating high consumer sentiment for the economy. In light of the recent slide in home sales, NAR’s recent Housing Opportunities and Market Experience survey reveals “a near-record high of sixty percent of households believe that the economy is improving.” Adding to the strong sentiment is the survey’s increased monthly Personal Financial Outlook Index, which indicates that respondents believe that their financial situation will be better in six months.

The survey also indicates a record high of home sellers who believe it is a good time to sell a home. But given the seasonal decline of housing inventory, it is likely this will translate to a surge of home listings in the spring. The added inventory combined with high consumer sentiment will boost the housing market. So sayeth the consumer.

By Dan Krell
Copyright © 2018.

Original located at https://dankrell.com/blog/2018/11/01/attitudes-real-estate-market/

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August 2, 2018July 23, 2019

Home buyer fatigue

Home Buyer Fatigue or Housing Derangement Syndrome?

Although home prices remain strong, the volume of home sales has dropped off during June. This is causing some in the media to exhibit “housing derangement syndrome” by reporting a pending housing collapse. However, there is a more sensible answer and that may be “home buyer fatigue.” Buyer fatigue is not solely used in real estate, rather it’s a term to describe consumers who do not engage in a market sector for a short duration for various reasons. Home buyer fatigue has occurred multiple times since 2013 after a period of sustained home price increases.

Let’s look at the facts.

The National Association Realtors (nar.realtor) reported in a July 23^rd press release that the total existing home sales for June decreased 0.6 percent, and is down 2.2 percent from the same time last year. Home sales in Montgomery County have also been retreating. The Greater Capital Area Association of Realtors (gcaar.com) reported sales declines for single-family and condos during June (-3.4 percent and -13.9 percent respectively). Year-to-date sales are also below last year’s transactions for the same time period.

NAR chief economist Lawrence Yun observed:

“There continues to be a mismatch since the spring between the growing level of homebuyer demand in most of the country in relation to the actual pace of home sales, which are declining.”

However, his explanation for the home sales retreat sounds like home buyer fatigue:

“The root cause is without a doubt the severe housing shortage that is not releasing its grip on the nation’s housing market. What is for sale in most areas is going under contract very fast and in many cases, has multiple offers. This dynamic is keeping home price growth elevated, pricing out would-be buyers and ultimately slowing sales.”

Although national home prices are increasing, the gains remain steady. The latest S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index reported on July 31^st (spice-indices.com) indicated a 6.4 percent annual gain during May, which is the same as the previous month. However, the 20 City Index showed a slight decline to 6.5 percent (from 6.7 percent). Seattle, Las Vegas and San Francisco continue to lead the nation with double digit gains (13.6, 12.6 and 10.9 percent respectively). The Washington DC region, however, showed a modest annual home price growth of 3.06 percent.

As home sales decline, many contribute home buyer fatigue to increasing home prices and mortgage interest rates. A few have already begun to ring the warning bells of bubble popping home price deflation citing Seattle and San Francisco’s housing woes.

However, those exhibiting housing derangement syndrome need to take a deep breath and look at the facts. Most of the country’s home values are increasing at a sustainable rate. Additionally, contrary to reports of inventory surpluses, home sale inventory continues to be low in most of the country (Montgomery County single-family and condo listings are below last year’s level by -9.3 and -12.8 percent respectively).

It’s also important to look deeper into what may be driving those overheated housing markets to experience the sharp price spikes and recent sale declines. For example, Seattle’s housing juggernaut may be tied to Amazon’s nine years of a seemingly hiring frenzy. According to reporting by Matt Day for The Seattle Times (Amazon’s employee count declines for first time since 2009; seattletimes.com; April 26, 2018), Amazon begun corporate layoffs, as well as a possible hiring freeze, earlier this year.

By Dan Krell.
Copyright © 2018.

Original published at https://dankrell.com/blog/2018/08/02/home-buyer-fatigue/

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November 17, 2017September 19, 2018

Marijuana’s high home values

Did you know that the licensing of medical marijuana dispensaries in Maryland has begun? There are only a handful of licensed dispensaries at this time, including one in Montgomery County. Besides dispensaries, Maryland’s budding medical marijuana industry includes growers and processors. Even though the industry is just taking off, there is growing support for legalizing marijuana for recreational use. This is evidenced by recent bills introduced in the Maryland General Assembly that focused on establishing a tax for cannabis sales. Besides increasing tax revenue for states where marijuana is decriminalized, there also seems to be a phenomenon of high home values.

If Maryland does decriminalize marijuana, it could be a potential source of tax. The San Francisco Chronicle (6 lessons from legal pot in Washington and Colorado; sfchronicle.com; September 30, 2016) pointed out that the state of Washington has had a windfall since legalizing pot. It was reported that Washington collected $135 million for the fiscal year 2015 and $186 million for the fiscal year 2016. They were expected a fifty percent for the fiscal year 2017. And that is just on the excise tax on pot products, and doesn’t include the collected sales tax.

About those high home values…

Colorado and Washington state have realized a significant housing boom since decriminalizing marijuana. Washington DC’s housing market has been buzzing along quite nicely as well. While the surrounding suburbs’ housing market has slowed, GCAAR’s October stats (gcarr.com) reveal that Washington DC’s home sales have surged about ten percent year-to-date and average home sale prices grew about four percent! Recent empirical studies have validated the housing-marijuana relationship.

One recent paper that provides such evidence was presented at the 2017 Annual Meeting of the Allied Social Sciences Associations held by the American Economic Association. Cheng, Mayer and Mayer (The Effect of Legalizing Retail Marijuana on Housing Values: Evidence from Colorado; working paper, 2016) measured the “benefits and costs” of legalizing marijuana expressed in home prices. They concede that although marijuana legalization is controversial, there are some benefits. They determined that there is a causal effect such that Colorado’s retail marijuana law implementation was instrumental in its recent housing boom. They concluded that implementing a retail marijuana law will give home prices a bump of about six percent. They also found that high home values and inventory are mutually exclusive, such that the increase in housing demand did not affect housing supply.

Are high home values worth the affects of decriminalizing pot? High home values is not everything.

Regardless of high home values, decriminalizing marijuana is not all peaches and cream. Not to be a buzzkill, marijuana can also negatively impact real estate too. Amy Hoak’s reporting lists a number of issues where legalizing marijuana has adverse effects to housing (5 ways marijuana legalization affects real estate; MarketWatch.com; November 25, 2014).

A major issue Hoak points out concerns federal law. Regardless of any state or local retail marijuana law, the Feds still consider marijuana verboten. Properties (commercial or residential) that are associated with marijuana related activities and can be subjected to civil asset forfeiture. Another issue is financing properties related to the marijuana industry. Federally chartered banks conform to federal law and won’t lend on these properties.

Hoak also points out issues with properties where marijuana is processed, sold or used (commercial or residential). There has been a significant increase in property explosions in states where marijuana has been decriminalized. The explosions are likely due to processing marijuana into hash oil, a process that involves butane. Mold is an issue where marijuana is grown, because of the large amounts of water used in the process. Much like cigarette smoke, marijuana odors can permeate walls and be very difficult to remove. Even if a lease forbids it, residential landlords can have problems when tenants grow, process, and smoke marijuana in the home.

Regardless of the increased home value phenomenon associated with retail marijuana laws, some homes can be difficult to sell. High home values aside, homes that have been “tainted” with odors or mold can languish on the market, even if they are in prime locations. Finally, Hoak pointed out that people are not keen living next to properties involved in the marijuana industry.

Original published at https://dankrell.com/blog/2017/11/17/marijuanas-high-home-values/

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