Housing market is partying like it’s 2006

After month’s worth of good housing market news, many optimistic home buyers and sellers are preparing for their jump into the market. But some caution that not all the data is positive and the jump into the market should be taken with care.

Have you noticed when there is positive housing news, someone offers data that throws a wrench in the recovery party? Maybe we’ve just become overly analytical about the housing market, looking for reasons to be optimistic. If one month’s home sales exceed expectations, the buzz is about how the market is recovering and anecdotes about multiple offers and fast sales are talked about as if it is the norm. However, when there is a disappointing month, some will try to explain it away giving reasons such as winter weather (even though the data is already seasonally adjusted) or some other one-time incident.

If you haven’t yet figured it out, housing economics is not cut and dried – there is truth in opposing views. The good news is that those who are positive about the housing market are probably correct; the bad news is that those who urge caution are also probably correct. The truth is that since 2010, the housing market has cycled with a two year period oscillating between positive and negative data – one year showing promise, while the next disappoints.

Sure, home prices have increased in recent years, with the sharpest increase occurring from 2012 through 2013. But rebounding home prices are like the sword of Damocles hanging over the housing market: as home prices rebound, affordability has become an issue for many home buyers.

Furthermore, there is a consensus that interest rates will rise sometime in the near future; and some are worried about the effect on the housing market. Spencer Jakab of the Wall Street Journal made this clear in his March 30^th piece (Spring Puts Bounce in Housing Market: Home Prices May Get a Second Wind: wsj.com) by explaining the relationship between mortgage costs and affordability.

Jakab starts off by saying “The demise of the housing recovery has been greatly exaggerated.” And points out how home prices have rebounded, while February home sales were as good as (if not slightly better than) February 2014 (regardless of the two year cycle). He also indicates that although home prices have not reached their pre-crisis levels, they are at the highest levels since the crisis. However, he cautions those who are ready to call it a housing recovery trend. He states: “Once the Federal Reserve starts raising interest rates, likely sometime this year, affordability will begin slipping. Say 30-year mortgage rates are a percentage point higher a year from now, and prices are 5% higher. Then a monthly mortgage payment, assuming a typical down payment, would rise by about 18%.”

Considering that average wages increased 2.1% during 2014, an 18% increase in the cost of home ownership could arrest home price appreciation and possibly cause a déjà-vu market liken to 2008-2009. If you don’t remember: homes were on the market for extended periods; home prices decreased; and home buyers and sellers retreated.

So why should we get all excited about a little good news? Rather than focusing on 2 data points each month (comparing a month’s data to the previous month, and the same month from the previous year), maybe it’s time to focus on the bigger picture.

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.

April 9, 2015July 28, 2019

Home buyer survey predictive of spring housing market

I think it’s safe to say that many of us have been anticipating spring’s warm weather; if not for a change of pace from arctic temperatures, it’s the season that the housing market swings into top gear. However, Fannie Mae’s March 2015 National Housing Survey^™may support anecdotal reports of home buyer attitudes toward home prices and is making some re-think their estimation of the spring market.

The April 7^th Fannie Mae (fanniemae.com) press release titled, “Lackluster Income Growth Weighing on Americans’ Housing Sentiment: Share of Consumers Expecting to Buy a Home on Next Move Reaches Survey Low” might convey that not all home buyers are looking to buy a home this year. However, the news is not all gloom and doom. Although the survey indicated that 60% of respondents said they would buy a home if they were to move, which is an all-time survey low; the percentage of those who responded that it was a good time to buy a home hit an all-time survey high. Additionally, there were fewer respondents in March’s survey who felt their financial situation would improve in the next year.

The survey is described by Fannie Mae as “The most detailed consumer attitudinal survey of its kind.” It polls 1,000 Americans on their attitudes about such things that include (but is not limited to) homeownership, the economy, household finances, and overall consumer confidence. Fannie Mae senior vice president and chief economist Doug Duncan remarked about the March survey: “… results emphasize how critical attitudes about income growth are to consumers’ outlook on housing.” However, consumer sentiment should improve as income growth is realized.

Fannie Mae’s March survey is coming on the heels of news of a possible economic slowdown. The Wall Street Journal’s Kate Davidson reported on March 25^th (GDP Growth Estimates Tumble, Again: wsj.com) that the latest Gross Domestic Product estimates may be a repeat of last year. While several Wall Street economists revised lower their Q1 2015 GDP estimates from 0.9% to 1.5%, the Federal Reserve Bank of Atlanta lowered their Q1 2015 GDP estimate to 0.2%.

If last year’s pattern is being realized, the survey’s consumer sentiment and economic news is just a blip on the radar. Remember that the Q1 2014 GDP was negative as the economy retracted, however rebounding with 5% third quarter growth. Likewise, 2014 home sales rebounded later in the year only finishing the year only 3% behind 2013 (according to the National Association of Realtors®). And as the NAR reported on March 30^th that pending home sales rose during February, it is estimated that existing home sales will increase 6.4% during 2015 compared to 2014 (nar.realtor).

The upshot of this data could be that consumers are saying is that it’s a good time to buy a home, but only if you can afford it. However, it’s not just about the dollar amount; home buyers are increasingly demanding value for their money. Buyers are looking at the bigger picture of the costs of homeownership including maintenance and commute to work. And this attitude can be reflected in home buyers’ push back on home prices.

If you’re a home seller, relatively low housing inventory is good news; but pricing your home correctly may be the definitive factor. And as you might anticipate home buyers competing for your home; consider that some have reported that that low appraisals have impacted their sale.

By Dan Krell
© 2015

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December 11, 2014November 23, 2021

Value vs. affordability – how inflation affects home prices

Home buyers have been tagged as being too picky for not buying homes this year. Surely home buyers have a right to be particular; after all, they’ll be spending a lot of time in the house – and spending a lot of money to get it too! But, maybe there are other reasons that home buyers have become hesitant.

Consider the uncertainty that immediately followed the Great Recession, when home sales volume dropped off. At that time home buyers seemed overly analytic, weighing many factors including short term value. Yet in truth they were fearful about economic uncertainty, and paying for a home that could potentially depreciate after closing.

The specter of another housing bubble in late 2013 may have seemed farfetched by many. But the double digit appreciation in many housing markets around the country reminded many home buyers of the environment that existed in the pre-downturn “go-go” market of 2005-2007. Anecdotal reports of bidding wars and high listing prices in early 2014 may have scared off some home buyers who reported not wanting to participate in such a market.

Reasons for home sales sluggishness during the latter part of this year may have been signs that the fear of a home price bubble was being realized by home buyers. As home buyers sought value, home sellers wanted higher home price appreciation. Was the psychology of fear playing a part in the ongoing home pricing struggle?

In hindsight, the limited housing inventory that existed during 2013 may have caused upward pressure on home prices by forcing increased competition among home buyers. The rapid home price appreciation may have also been the reason for many home owners to go to market. Brimming with listings, housing inventory swelled to levels not seen in years. Yet it may not be home prices per se that is at issue, but rather affordability.

Affordability goes beyond just the purchase price of a home. It comprises the overall costs of home ownership; which includes monthly mortgage payments, property taxes, homeowners’ insurance, regular and emergency maintenance, and utility costs. Putting aside home prices, home buyers are faced with the prospect of sharply inflating ownership costs. Consider the April 25^th LA Times article reporting on utility costs (U.S. electricity prices may be going up for good; latimes.com); Ralph Vartabedian stated, “… the price of electricity has already been rising over the last decade, jumping by double digits in many states, even after accounting for inflation. In California, residential electricity prices shot up 30% between 2006 and 2012, adjusted for inflation, according to Energy Department figures. Experts in the state’s energy markets project the price could jump an additional 47% over the next 15 years.”

Savings also affect the affordability of a home. Marilyn Kennedy Melia, in her May 17^th feature: Savings Habits and the Housing Market: American are saving less, issues with affording a home (nwitimes.com), reported that a lack of savings is preventing some home buyers from purchasing homes by not having enough for a down payment and/or little for homeownership costs. She described a recent Bankrate survey that indicated “…51 percent of Americans have more emergency savings than credit card debt, the lowest percentage since the financial site began tracking this issue in 2011.” Doug Robinson, of NeighborWorks America, was quoted to say, “Two-thirds of the people who faced foreclosure didn’t have any emergency savings…”

October 1, 2014November 23, 2021

Home equity entitlements, home prices, and talk of external price controls

A home buyer who visited a recent open house told me that home sellers need to “let go of their perception of entitled equity.”

I will pause here for a moment, as you are no doubt trying to make sense of the last statement.

Was this visitor verbalizing that a seller’s home equity be measured and controlled? And the follow up question might be: “Since when is a home owner’s equity perceived as an entitlement?” Was the buyer saying that there should be outside intervention to determine the equity a home owner may net on their sale (so as to make housing affordable), much like rental controls that exist in some areas around the country?

Who makes the decision as to how much equity a home owner may realize (net)? Sure, one could argue that home equity is an intangible concept that comes from the perceived value of your home; where the value is relative until it is realized (liquidated). You could also say that equity is realized through liquidation of the home by either selling it (or cashing out with a mortgage or equity line of credit); the value being the price a buyer is willing to pay, (or the amount a lender decides so as to make a loan). So it seems that when it comes to home sales, market forces still (mostly) determines the sale price and the amount of equity (if any) the home seller nets from the sale. Simply put – buyers and sellers negotiate home prices; generally, buyer pushback on listing prices can pressure sale prices to decrease, much like high demand can pressures prices to increase.

Let’s give the open house buyer the benefit of the doubt; maybe having outside intervention was not what he meant by saying home sellers need to let go of their perceived entitled equity. Maybe he was using (or misusing) economic jargon to make a point by expressing his opinion that housing is currently overpriced.

As I wrote in August, if you want to know where the housing market is headed, ask a home buyer. And it seems as if this buyer is not alone in his sentiment, as the attitude that home prices are too high is (again) an increasing view among many home buyers. It could be that the housing market is encountering what was experienced in 2009, when at that time there was a growing disparity between the price home sellers are asking and what home buyers are willing to pay. After all, it was during 2008-2009 when similar attitudes were strongly expressed, a time when rapidly falling home prices did not encourage home sales.

Quentin Fottrell pointed out in his pithy MarketWatch analysis of recent housing data (10 most overvalued (and undervalued) housing markets, marketwatch.com, 10/1/2014) that “Seven of the top 100 metro areas are overvalued by more than 10%, the highest number since the first quarter of 2009.” He also mentions that the last time this occurred was early in the housing bubble; but Fottrell says there should be little concern of current housing bubble because of the current economic environment (jobs and construction).

Conversations with home buyers are extremely valuable to home sellers for many reasons. What you might come away from this conversation is that there is continued push back on listing prices; and unless home sellers are responsive to pricing feedback, they should prepare for a long time on market.

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