Tag: economics

Posted on

When will move-up homebuyers return to the housing market

by Dan Krell
Google+
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.”

More news and articles on “the Blog”
Protected by Copyscape Web Plagiarism Detector
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.

Posted on

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.

More news and articles on “the Blog”
Protected by Copyscape Web Plagiarism Detector
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.

Posted on

Sequestration will affect real estate and housing markets

by Dan Krell
DanKrell.com

Housing and Sequestraion(Dan Krell © 2013) Remember the “Fiscal Cliff?” Well, after a two month hiatus, sequestration concerns are again entering (if not intrusively) the minds of those who may be affected. And, if you remain indifferent on the matter, you might consider the local economic effect from looming government budget cuts that may begin on March 1st.

On February 14th, HUD Secretary Shaun Donovan provided written testimony to the “Hearing before the Senate Committee on Appropriations on The Impacts of Sequestration” (HUD.gov). Secretary Donovan outlined what he described as the “harmful effects of Sequestration” to not only at-risk populations, but families, communities, and the economy at large, as he concluded, “…Sequestration is just such a self-inflicted wound that would have devastating effects on our economy and on people across the nation.”

As a result, HUD counseling would be limited. According to Secretary Donovan, about 75,000 families would not be able to receive the critical counseling services that include pre-purchase counseling, and foreclosure prevention counseling. According to the Secretary: “…This counseling is crucial for middle class and other families who have been harmed by the housing crisis from which we are still recovering, and are trying to prevent foreclosure, refinance their mortgages, avoid housing scams, and find quality, affordable housing. Studies show that housing counseling plays a crucial role in those 3 efforts. Distressed households who receive counseling are more likely to avoid foreclosure, while families who receive counseling before they purchase a home are less likely to become delinquent on their mortgages.”

FHA has been the workhorse to stabilize the housing market as well as providing the means for affordable home purchases. Those directly affected by sequestration would be home buyers and home owners who are applying for FHA mortgages; as well as those seeking assistance through HAMP and HAFA. In written testimony, Secretary Donovan stated that “…furloughs or other personnel actions may well be required to comply with cuts mandated by sequestration.” As a result, “…The public will suffer as the agency is simply less able to provide information and services in a wide range of areas, such as FHA mortgage insurance and sale of FHA-owned properties.”

Another concern is the possibility of a sharp increase in interest rates. Up until now, home buyers (and those refinancing) have had the benefit of historically low mortgage interest rates. Low mortgage interest rates are one of the reasons why home affordability is also at historic levels. A sharp rise in interest rates combined with FHA mortgage delays could shock the housing and real estate market. The result could be housing activity similar to what we experienced immediately after the financial crisis. Granted, the shock would probably not be as prolonged as what occurred in 2008-2009, but nonetheless significant.

In a region that has been relatively unaffected by unemployment and economic issues due to a strong government workforce, sequestration could essentially put a damper on the local housing recovery. Home buyer activity has already been affected, as those who are concerned about sequestration have either put their home purchase plans on hold, or have changed their housing plans altogether. And of course, over time, the changes to consumer behavior would trickle down to various sectors of the economy.

But don’t worry, although sequestration is set to begin March 1st, budget cuts won’t occur all at once. Unless Congress acts on the matter, you might not immediately feel its effects.

More news and articles on “the Blog”
Protected by Copyscape Web Plagiarism Detector
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 © 2012 Dan Krell.

Posted on

This is Chaos – anything can happen

by Dan Krell
DanKrell.com
© 2012

housing developmentThere has been a lot that has been written about chaos theory, and some have even tried to apply it to real estate. More specifically, many have discussed the application of chaos theory to real estate investing. And even more recently there have been attempts to applying chaos theory in figuring out where housing is headed; or to be succinct – when will housing once again begin to realize consistent appreciation?

I’m not one to disappoint, but I can’t predict the future. However, my attempt to explain chaos theory may reveal how its application to the housing market is difficult at best (at least in today’s environment), yet while simultaneously is an exceptional exercise in understanding the underlying dynamics.

Chaos theory is somewhat of a misnomer; a more apt name might have been “pattern to equilibrium theory” as it’s not so much about chaos as it is about predicting natural patterns that seek equilibrium; or put another way – predicting results by looking at dynamic patterns. Equilibrium could be what we typically think it is – a pattern of a self sustaining system; or it could also mean a pattern of inertia to the system’s inevitable demise.

Simplified, chaos theory investigates the relationships and patterns of a system’s trend toward stability. The theory delves into the natural patterns of subsystems so as to predict how patterns develop and unfold to manifest themselves.

housing developmentAlthough mathematicians have been investigating the precursors for chaos theory for many years, one of its first practical applications was in trying to predict the natural patterns of the weather. So it makes sense that you might want to apply the theory to the housing market so you could figure out the best time to buy and sell. The problem in the theory’s application to the housing market is that unlike the weather, housing is not an “organic” system; housing does not follow the natural unfettered patterns of market forces. Rather, decades of intervention and policy have influenced the expressed patterns of the housing market.

But don’t get discouraged, an aspect of chaos theory termed “the butterfly effect” explains that any action, no matter how small and insignificant, can influence a larger system. So, although the housing market is not an organic system, you could theoretically investigate its related influences to work out a market trajectory. So, rather than solely considering supply and demand, you might take into account more wide ranging and complex influences, such as Greek economic policies, German parliamentary elections, EU monetary policy, etc.

By looking at observable influences on the housing market, housing contrarians have been muttering their mantra of “the sky is falling” for years. And when the housing bubble burst, they of course claimed they had it right all along, and many are still waiting for the worst. Was it a coincidence? Of course, in the early 2000’s there were influences on housing and the economy that were inconceivable (such as mortgage CDO schemes).

Chaos theory is as complex as the systems involved. We can also apply it to come up with alternate trajectories and think about what could have been. If for not some small event, someone’s seemingly insignificant decision in the past, there might not have been a housing bubble burst or great recession. But as they say hindsight is 20/20 – but that’s an entirely different theory.

More news and articles on “the Blog”
Protected by Copyscape Web Plagiarism Detector
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 © 2012 Dan Krell.

Posted on

Housing approaches the fiscal cliff

by Dan Krell
DanKrell.com
© 2012

Fiscal cliffMoving forward after the election, there are a number of events and possible legislation that could impact the real estate industry. The most imminent is the “fiscal cliff.”

The “fiscal cliff” is the term that describes the expected economic outcome of the automatic budget cuts (sequestration). Sequestration was part of a budget deal that was passed as the bipartisan Budget Control Act of 2011. Even though it is described as an economy falling off a cliff, some say it is more apt to an economy hitting a brick wall; because the sequestration will make it very difficult for the economy to expand. Others are not as pessimistic about the fiscal cliff; some describe the “cliff” as a gentle slope that may present some impediments to the economy that are not insurmountable.

Regardless of the description, there is a consensus that there will be some economic obstacles. There is an economic truth that the housing market benefits from a thriving economy, as well as suffering when the economy slows.

The Congressional Budget Office has provided warnings that a “fiscal cliff” could cause a recession in 2013 and possibly increase unemployment significantly. As we already know, a recession combined with increases in unemployment will not be good for the housing market. In a Florida Realtors® 2010 study conducted to determine causes of foreclosure in Florida, determined that there is a correlation between unemployment and foreclosure – citing a combination of increased cost of living, unemployment or decreased pay, and other factors.

To address budget deficits and avoid a fiscal cliff, various committees have convened and provided recommendations proposal for improve the budgetary process that included a number of recommendations to lower the budget deficit. One common thread in addressing budget deficits is to either eliminate or further restrict the mortgage interest deduction.

The origination of the mortgage interest deduction is not as extraordinary as you’d expect; however the fact that it has remained through tax reforms during the Reagan administration has been described as rather “remarkable.”

Fiscal cliffThe mortgage interest deduction is often described as a subsidy for the housing industry to encourage participation in market (similar to the first time homebuyer tax credits offered several years ago). Much like social security, it is a political hot potato that elected officials are hesitant to address. Some have argued for many years that the mortgage interest deduction should be eliminated since because they assert the subsidy artificially inflates home prices.

However, a National Association of Realtors® (NAR) December 1, 2010 press release, stated “The tax deductibility of interest paid on mortgages is a powerful incentive for home ownership and has been one of the simplest provisions in the federal tax code for more than 80 years…” The release cited a survey that indicated that the deduction was extremely important or very important to three-fourths of the 3,000 homeowners and renters surveyed (Realtor.org).

Several years ago, the Congressional Budget Office recommended the elimination of the mortgage interest deduction. Additionally, the bipartisan National Commission on Fiscal Responsibility and Reform (more commonly known as the Simpson Bowles Commission) provided recommendations to reducing the mortgage interest deduction benefit from the current $1,000,000 limit to a cap of $500,000.

A resolution to the fiscal cliff may be reached before year’s end; the housing recovery depends on it.

More news and articles on “the Blog”
Protected by Copyscape Web Plagiarism Detector
This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of November 12, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.
Google+

Proudly powered by WordPress