housing market Archives - Page 15 of 25 - Real Estate News and Commentary

April 11, 2014July 3, 2019

Housing recovery is cliché

The word “recovery” has been used a lot over the last five years. So much so, it seems as if the term is automatically associated with anything written about real estate and housing. But, maybe it’s time for a shift in our perception and expectations.

If you look up the definition of recovery, you might find: “re·cov·ery – noun \ri-ˈkə-və-rē,\ : the act or process of returning to a normal state (after a period of difficulty).” It might make sense to refer to the housing market as still recovering, and in the process of returning to normal; but then again, who’s to say that the home price and market activity peaks realized during 2005 – 2006 was normal?

A number of research papers (such as Reinhart & Rogoff’s The Aftermath of Financial Crises) were produced to discuss how the recovery from the Great Recession would take shape. Although there is not a clear consensus, many concluded that a recovery after a financial crisis is much longer in duration than recoveries from non-crisis recessions. However, some claim that may not be the case because the comparisons to other financial crises around the globe are not analogous the U.S. financial system.

Regardless, maybe the use of the term “recovery” is, after five years, cliché. Niraj Chokshi seemed to allude to this in his November 2013 article on Washingtonpost.com, “What housing recovery? Home values and ownership are down post-recession.” Chokshi pointed out that home ownership and home values have not even recovered to the levels of the three years during the recession (2007-2009).

But then again, it could be that there is a journalistic license to use “recovery” when referring to housing; because there is an expectation for the real estate market to return to the peaks it experienced in the last decade. An April 7^th National Association of Home Builders (nahb.org) press release of the NAHB/First American Leading Markets Index was titled, “Latest NAHB Index Reading Shows Recovery Continues to Spread;” highlighted that there are 59 of 350 metro areas that “returned to or exceeded” their normal market levels. However, “market levels” are based on a metro area’s employment, home prices, and single family home permits (it is unclear if the labor participation rate, which is the labor force as a percent of the civilian noninstitutional population, is included in the employment data).

Talking about a recovery is no longer acceptable for home buyers and sellers planning their futures; rather it is more appropriate to again talk about relative market conditions. Considering that references to a recovery that is extending into a fifth year seems distant and confusing; the dramatic changes that the industry underwent after the recession makes it almost inconceivable for the marketplace to return to the exact state that existed prior to 2007. Relative market conditions are more meaningful to home buyers and sellers, specifically when they are deciding listing and offer prices.

Although the National Association of Reltors® Existing Home-Sales stats are due out April 22nd, and Pending Home Sales Index due April 28th; Wells Fargo Housing Chartbook: March 2014 (April 9, 2014) states, “Although we still see conditions improving in 2014 and 2015, the road back to normal will, in all likelihood, remain a long one…” and outlines a “Brave New Housing World.”

With that in mind, a look at local market conditions; March 2014 year-over-year Montgomery County MD home sale statistics for single family homes as reported by the Greater Capital Association of Realtors® (gcaar.com) indicated: total active listings increased 27.5%; contracts (e.g., pending sales) decreased 7.4%; and settlements (e.g., sales) decreased 12.6%. Additionally, the March 2014 county average single family home sale price of $562,157 is less than the county average SFH price of $573,281 reported for March 2013.

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.

March 26, 2014July 3, 2019

Real estate, climate change, and data-porn

The National Association of Realtors® (realtor.org) March 20^th news release reported that February home sales remained subdued because of rising home prices and severe winter weather. The decline in existing home sales was just 0.4% from January, but was 7.1% lower than last February’s figures. NAR chief economist Lawrence Yun stated that home sales declines were due to “weather disruptions, limited inventory, increasingly restrictive mortgage underwriting, and decreasing housing affordability.” And although it may sound bad, Yun actually has a rosy outlook saying, “…Some transactions are simply being delayed, so there should be some improvement in the months ahead. With an expected pickup in job creation, home sales should trend up modestly over the course of the year.”

So, if a snow filled and cold February is to blame for poor home sales, was Snowmagedden and Snowzilla the reason for increased home sales during February 2010? Of course not. And although home sales increased 5.1% year-over-year here in Montgomery County MD during February 2010, it was mostly due to increased home buyer demand that some speculate was due in part to the availability of first time home buyer tax credits. Additionally, RealtorMag reported that Southern California December home sales dropped about 21% month-over-month, and were down about 9% in compared to the same period in 2012.

As home sales are trending lower, it’s reasonable to look for reasons why demand is soft; but can weather be the main reason to keep potential home buyers at home? Probably not. Consumer demand is a robust force that is multifaceted, and can even prevail over seemingly difficult circumstances. Consumer demand can even trump weather, as was the case during the winter of 2010.

Consumer demand can even be resilient in the face of the speculative effects of global warming. A November 2013 RealtyToday article (The Looming Global Warming Catastrophe and its Effect on Real Estate; realtytoday.com) discusses how home buyer demand for coastal property has remained strong even as increased claims that climate change will make these areas uninhabitable.

Housing data cause and effect is only conjecture unless it is directly observed. To make sense of the “data-porn” that is excessively presented in the media, often without proper or erroneous explanation; economic writer Ben Casselman offers three rules to figure out what the media is saying (Three Rules to Make Sure Economic Data Aren’t Bunk; fivethirtyeight.com): Question the data; Know what is measured; and Look outside the data. Casselman states, “The first two rules have to do with questioning the numbers — what they’re measuring, how they’re measuring it, and how reliable those measurements are. But when a claim passes both those tests, it’s worth looking beyond the data for confirmation.”

Keeping these rules in mind, could the winter slowdown be the result of cold weather, or is it something else? Sure, cold weather may have marginal effects on home buyer behavior and demand; however, weather does not typically affect extended periods of consumer behavior unless weather events are catastrophic. The current data may be indicative of a housing market that is returning to the distinct seasonal activity that we have been used to for many years prior to the “go-go” market and subsequent recovery years.

However, other factors referenced by Dr. Yun, such as increased home prices and tougher mortgage standards, are more likely to be the reasons for subdued home sales. And as the year progresses, these factors may emerge to be significant issues for home buyers.

by Dan Krell
© 2014

March 7, 2014November 23, 2021

How many more years for housing recovery?

The “long slog” housing recovery prediction appears to be relevant as a recent study published by the Demand Institute (DI) now estimates that the recovery may take several more years. DI, a non-profit that studies consumer demand, suggests that home values may not rebound until 2018.

The DI study was reported by Realtor Magazine (Uneven Recovery to Continue for 5 Years; March 03, 2014) to be comprehensive and include 2,200 cities across the country and 10,000 interviews. Overall, the report concludes that the recent sharp increase in home prices was mostly due to real estate investors who purchased distressed properties. Now that distressed home sales are declining, values are not expected to increase as precipitously; the continued housing recovery is expected to be driven by new household formation.

The study reported the appreciation rate of the 50 largest metro areas in the country through 2018; home prices are estimated to appreciate about 2.1% annually. However, the top five appreciating cities will average an overall increase of 32% through the recovery; while the bottom five will only average about 11% (Washington DC is listed among the bottom five). Cities that experienced the highest appreciation and subsequently sharpest depreciation in home prices will likely have the longest and protracted recovery, and yet may only recover a fraction of the peak home values by 2018.

Not highlighted, and not yet expected to be an impact on the housing recovery, is the move-up home buyer. The typical move-up home buyer is sometimes characterized 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. Similar to previous recessionary periods and real estate down markets, the move- up home buyer was the missing piece to a housing recovery; the move-up home buyer provides much of the housing inventory that first time home buyers seek. However, it seems as if psychological barriers hold back many move-up buyers today as it did in past recoveries. During the current housing recovery, many potential move-up buyers have remained in their homes. And until the move-up home buyer presence is felt in the marketplace, we may yet to endure a few more years of “recovery.”

Much like the DI study, there has been a lot of discussion and debate about the effects (on housing) of the lack of housing formation during the recession and in the subsequent recovery. Andrew Paciorek, an economist at the Federal Reserve Board of Governors, described household formation during a presentation given at the Atlanta Fed’s Perspectives on Real Estate speaker series (June 2013); “Think of the unemployed or underemployed college graduates living in their parents’ basements instead of renting or buying their own place. When a person establishes a residence, whether that’s an apartment or a house or another dwelling, that person is forming a household. Mainly because of a weak labor market that held down incomes, the rate of household formation cratered during the recession and subsequent recovery…”

To give perspective to the issue, the rate of decrease of household formation during the great recession was significant (an 800,000 per year decrease compared to the previous seven years). Additionally, household formation between 2007 and 2011 was at the lowest level since World War II, and was 59% below the 2000 to 2006 average. Most significantly: during 2012, 45% of 18 to 30 year olds lived with older family members; compared to 39% during 1990, and 35% during 1980. He described the household formation crash as an indirect contributor to declining home prices, which diminished household wealth linked to home values.

Although household formation continues to be a concern as the labor participation rate has decreased, Paciorek points to improvements in the job market as the spark to increasing household formation. He forecasts that household formation should increase to 1.6 million over the next several years, and could possibly exceed the pre-recession average due to pent up demand of those who waited to form a household during the recession. However, a disclaimer was provided saying his forecast is “based on assumptions that could prove overly optimistic;” and has “lots of caveats and lots of uncertainty” – much like the housing recovery.

by Dan Krell
Copyright © 2014

December 25, 2013July 1, 2019

Will new mortgage rules set stage for subprime resurgance

After much speculation, new mortgage and appraisal rules have recently been revealed and will go into effect in January. Combined with the recent news of FHA’s reduction of loan limits (authorized increased limits sunset the end of 2013), there’s been a lot of buzz about how the housing market and home buyers could be affected.

On December 18^th, the Consumer Financial Protection Bureau (CFPB) launched a campaign to educate consumers about new mortgage rules that go into effect January 10^th; specific information and fact sheets can be found at consumerfinance.gov. Among the new rules, several include: the creation of the Qualified Mortgage (QM); new mortgage servicing rules; and additional protections financially challenged borrowers.

The QM is classified by the CFPB as a loan which qualified borrowers are presumed to be able to repay; and is described as a “safer” loan compared to some of loans originated prior to the mortgage crisis. One of the main features of a QM, as of January 10^th, is that mortgage lenders will have to assess the borrower’s ability to repay. Additionally, the borrower cannot exceed a total monthly debt-to-income ratio (all monthly obligations including mortgage payments) of 43%. Although lenders must make an effort to determine a consumer’s ability to repay based on typical factors including: income, assets, and debts; the new rules do not eliminate all subprime mortgages.

Two additional features of a QM include safer terms and limiting points and fees. A QM cannot have loan terms that have been attributed to “risky” loans, such as negative amortization or interest only payments. Furthermore, if you are directly paying a mortgage broker to originate your loan, they can no longer receive additional payment by another party for the same transaction; a QM is limited to 3% of the loan amount for points and fees.

To assist borrowers, the CFPB has set new mortgage servicing rules that include: providing clear mortgage statements that show how payments are credited; addressing mistakes promptly; crediting payments when received; and providing early notice for adjustable interest rate increase.

To assist borrowers facing financial challenges, the CFPB institutes rules that include: foreclosure cannot be initiated prior to 120 days delinquent; a foreclosure cannot be initiated if a complete application for mortgage assistance has been submitted; servicer call centers must be able to answer borrower questions relating to critical documents; as well as providing accurate and timely foreclosure status to borrowers who ask.

Financially challenged borrowers seeking assistance through their mortgage servicer have additional protections. Borrowers who make application for loss mitigation early on must have all their options evaluated with one application; an explanation must be provided to borrowers rejected for loss mitigation; and borrowers could appeal a loan modification rejection based on the servicer’s mistakes.

New appraisal rules instituted by the CFPB become effective January 18^th. Although these rules do not apply to all mortgages, typically a borrower should expect: a licensed appraiser; an interior of the property, and a copy of the appraisal prior to closing. Additionally, a second appraisal is required for a home that is considered a “flip;” a home sale that has sold in the previous six months is classified as a flip.

Although some have speculated the new rules, along with reduced FHA loan limits, will limit the availability of mortgages for some home buyers; others see the resurgence of the subprime mortgage to fill the gap.

New mortgage rules, lowered FHA loan limits, and other new changes are increasing investor backing of non-conforming mortgages.

by Dan Krell
© 2013

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