economics Archives - Real Estate News and Commentary

January 4, 2021January 4, 2021

Negative Interest Rates Redux

Negative interest rates used to be a controversial topic. However, countries such as Japan and those in the European Union entered into the uncharted waters to stimulate their economies in the years following the Great Recession. Back in 2015 there was speculation that the US was headed into negative interest rates too. But those thoughts quickly vanished as the economy rapidly expanded after 2016. But with the prospect of more economic distress down the road with on-and-off again lockdowns and business restrictions, are negative interest rates on the table again?

What are “negative interest rates?” A very rudimentary explanation is it’s when interest rates go below zero. Meaning that instead of borrowers paying interest on loans, the lender pays the borrower. It may sound backward to what we are used to, but it is a “tool” that central bankers may employ in times of severe financial crisis.

Although many economists contend that negative interest rates are a viable short-term option to respond to a severe financial crisis, it is uncertain the policy works as intended. Negative interest rates expose a vulnerable economy to future financial downturns. Additionally, some are concerned about long-term deflationary effects, while others fear it results in hyperinflation. Some experts point to the potential of a paradoxical effect of freeze community lending. This can occur if investors hold onto their cash, instead of depositing it with banks for zero interest (or even having to pay the bank to hold their money). This lack of investment has the potential will reduce banks’ available capital to lend.

The possibility of negative interest rates in the US is once again a hot topic. A 2020 NAR report discusses this option (Expectations & Market Realities in Real Estate 2020-Forging Ahead; nar.realtor):

“There is nothing stopping the U.S. from moving into negative interest rates, but several issues would arise should the U.S. decide to take that plunge. One of the biggest fears is that the FOMC [Fed Open Market Committee] would not have any tools left to employ when the next downturn occurs. Global investors might lose faith in the safety of U.S. government bonds as negative interest rates and other forms of quantitative easing may be perceived as a sign of weaknesses in the economy. In addition, the portfolios of millions of U.S. investors would likely be hurt. According to the Office of Management and Budget, $16.8 trillion of the government’s $22.7 trillion debt is held by the public of the U.S. A large portion of the holders of U.S. debt are retired or soon-to-be retirees who have their portfolios in risk-free U.S. Treasurys. Many federal programs, including Social Security, Medicare and Medicaid, are also heavily invested in Treasurys, meaning these public programs would most likely lose money on the aggregate due to negative interest rates.”
(Expectations & Market Realities in Real Estate 2020-Forging Ahead; nar.realtor)

Could we see negative interest rates in the US?

In their recent statement of the FOMC (federalreserve.gov), the Federal Reserve believes that although economic activity and employment are recovering, the health emergency has caused a tremendous human and economic hardship in the US (and globally as well). If extraneous events are unchanged, “Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.” However…“The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

Original published at https://dankrell.com/blog/2021/01/04/negative-interest-rates-redux

By Dan Krell
Copyright © 2021

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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 5, 2019November 23, 2021

Housing Market 2020

After the unexpected slowdown of existing home sales last fall, most real estate agents had optimism for the 2019 spring market. However, many were surprised by the early spring reporting of mixed housing data (when all indicators should have been positive). Although national stats for spring seemed to be pushing upward, some regional markets didn’t perform as expected (Mid-Atlantic home sales declined at the beginning of the spring). What’s in store for housing market 2020?

Many experts cited a number of factors were to blame for the decrease in sales. Industry experts agreed that the lack of quality homes for sale was a top concern. In hindsight, last fall’s home sale slowdown into spring may just have been an aberration. But it may also have been an indicator that correctly predicting the housing market is increasingly difficult and subject to local factors. Nonetheless, economists have predictions for housing market 2020 .

At this year’s NAR’s 2019 Realtors Conference & Expo (Housing Experts Discuss 2020 Outlook, Housing Innovation at Realtors’ Expo; nar.realtor; November 9, 2019), we heard opposing views about the economic outlook and the housing market 2020 . First, it’s not unusual to hear NAR’s chief economist Lawrence Yun to speak of the housing market optimistically. Although he doesn’t expect a recession next year, he does caution that global economics could impact the US such that it could hamper growth. Yun stated a common assessment by economists, which is that home sale inventory is low. He stated “The U.S. is in need of more new housing…This is an incentive for builders to start more construction. If they do, I think we will have at least 12 consecutive years of economic expansion.”

Contrasting Yun’s economic assessment, Kenneth T. Rosen, chairman of the Rosen Consulting Group, expressed a risk of a recession due to economic trade and politics. However, Rosen conceded that as long as the job market continues to remain strong, the US economy will likely remain robust.

Speaking of jobs and home sale inventory, a recent market assessment by Ralph McLaughlin of CoreLogic (Homeownership Rate Jumps on the Tail of Low Mortgage Rates; corelogic.com; October 29, 2019) indicated that the recent jump in the homeownership rate is an indicator that there is an “upward” trend in home buyer demand. The 1.4 million new home owners in 2019 is a taken as a positive sign that buyer demand remains high, and is expected to drive the housing market in 2020. However, just like earlier this year, low home sale inventory and “underbuilding” could damper next year’s home sales stats.

So, demand for housing will be strong next year, but what about home prices…

Molly Boesel of CoreLogic reported on home sale price growth and expectations for the housing market 2020 (Home Price Growth Regains Momentum; corelogic.com; November 5, 2019). September’s 3.5 percent CoreLogic’s Home Price Index (HPI) increased slightly from August, which continues the six-month increase of home price growth. The steady increase in national home prices indicate a “regained momentum.” CoreLogic forecasts national home prices to increase 5.6 percent for September 2020.

The S&P Case Shiller Home price Index (spindices.com) corresponds with current national home price growth with a 3.2 percent September index, which is higher than August’s 3.1 percent index. However, future home price growth may depend on regional shifts in home sales and job opportunities. Seattle and Las Vegas dropped out of the top four cities, as it was noted the “hot housing markets” are now in the southeast markets of Charlotte, Tampa, and Atlanta.

Original article is published at https://dankrell.com/blog/2019/12/05/housing-market-2020/

By Dan Krell
Copyright© 2019

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July 21, 2019July 21, 2019

Housing Inventory Shortage Causes

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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July 12, 2019July 12, 2019

Next Market Downturn

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 121^st 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 87^th 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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March 10, 2019November 23, 2021

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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