Negative Interest Rates Redux

negative interest rates
Average mortgage rates by decade

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.

Home Sale Predictions 2021

home sale predictions
Home equity 2020

Given the performance of the housing market this year, can we make home sale predictions for next year? The housing market had quite a year!  It’s amazing how resilient the market is, which demonstrates the appeal of homeownership.  Even after a significant spring slowdown, home sales rebounded to record levels in the fall.  NAR’s Existing Home Sales and Pending Home Sale Indices for October 2020 increased year-over-year 26.6 and 20 percent respectively (nar.realtor).  Even as we headed toward the holidays, NAR’s November Existing Home Sales increased 25.8 percent year-over-year.  And year-over-year median home prices increased 14.6 percent. 

While some experts expect the recent housing market activity to continue, others question if this intense home buying is sustainable.  Making home sale predictions for the new year has always been predicated on recent trends.  However, 2020 was different.  Unexpected and unusual events occurred throughout the year affecting the housing market.  First taking a pause because of an economic shock, home sales made up ground later in the year. 

Recent trends suggest that home buying will continue at a healthy rate, as long as the economy remains relatively similar.  However, being an election year there is anticipation for change.  Even many economists, who are typically ready to offer their opinion, are ambivalent about the economy.  This may suggest that the economic outlook for the near future is uncertain.

A main factor to watch in 2021, is employment.  It’s a known fact that unemployment directly effects home sales.  In periods of increasing unemployment, home sales decline.  A 2010 Florida Realtors (floridayrealtors.org) survey demonstrated a correlation between unemployment and foreclosures.  There is no coincidence that home sales strongly rebounded along with employment and the economy.  If employment remains stable into 2021, home sales will continue to over-perform. 

Other factors that will drive the housing market in 2021 include mortgage interest rates, home sale inventory, and home buyer demand. 

Mortgage rates have been relatively low since 2008.  At that time, rates hovered in the low 4’s, and were though to be “historically low.”  Also, consider that mortgage rates were in the 18 percent range during the early 1980’s.  Even during the go-go market of 2005-2006, rates hovered in the 6 percent range.  But the most recent mortgage interest rate average of 2.66 percent for a 30-year-fixed rate is described as “another record low” by Freddie Mac’s December 24th 2020 Primary Mortgage Market Survey (freddiemac.com).  If mortgage rates remain low, home buyers will be incentivized to buy homes.

Another after-effect of the Great Recession, which continues today, is low home sale inventory.  The Great Recession changed how consumers thought of housing.  Since 2008, home owners have remained in their homes much longer.  Many growing families make due with smaller spaces, rather than moving-up to a larger home.  Many older home owners are deciding to “age in place,” in lieu of down-sizing.  And telecommuting is outpacing job relocation.  Home sale inventory of non-distressed properties will continue to remain low through 2021.

There is always “home buyer demand.”  Meaning there are always active home buyers.  However, the strength of the demand varies.  Home buyer demand is typically gauged in hindsight through home sales and pending home sales.  When you combine housing stats with other factors, such as employment, economy, and mortgage rates you can estimate the strength of future home buyer demand.  If economic factors remain stable, home buyer demand will continue to be strong in 2021. 

Original published at https://dankrell.com/blog/2020/12/27/home-sale-predictions-2021/

By Dan Krell
Copyright © 2020

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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.

Home Prices 2021

It’s almost inconceivable to think that the housing market will undergo a foreclosure crisis similar to what we went through back in 2008.  How will home prices 2021 be affected by an impending wave of foreclosures?

home prices 2021
Home Buyer traffic 2020

If you remember, the 2007 housing market peaked as home prices skyrocketed.  Homes were a hot commodity as home buyers and speculators seemingly could not get enough.  But by the fall 2007, as if someone flipped a switch, inventory piled up.  There was a reckoning in 2008 as the market was flooded with foreclosures.  Home prices dropped to the lowest levels in a decade and days-on-market averaged in months.  It took five years for home prices to stabilize and maintain solid gains.

Fast forward to the 2020 lockdowns.  The housing market took off like a rocket during the summer and fall, after taking several months off.  Pent-up demand was the catalyst for record home sales leaving inventory depleted and forced upward pressure on home prices.  Housing is again economy’s workhorse.

A November 19th NAR press release (nar.realtor) touting October home sales indicated that existing-home sales increased 26.6 percent year-over-year!   Additionally, the median existing-home sale price increased 16 percent year-over-year.  All this occurred as home sale inventory levels are historically low.  Interestingly, it was noted that about 70% of homes sold during October, which means not all homes sold.

Additionally, October’s pending home sales point to a strong market into 2021.  The NAR’s October Pending Home Sale Index indicated that although new contracts declined a slight 1.1 percent from September to October, the year-over-year new contracts increased about 20 percent!

With stats like this, many industry experts are expecting a strong housing market and increased home prices 2021.  The high expectations for the housing market is demonstrated by a December 3rd HousingWire report (housingwire.com) titled, “Even with low inventory, expect a strong 2021 housing market.

home prices 2021
Home Sale Inventory 2020

And as many celebrate this hot housing market during a global pan-demic, some are raising concerns about the many home owners who are delinquent on their mortgages.  Unfortunately, delinquent mortgages haven’t received as much coverage as it probably should have.  Many home owners are unable to stay current on their mortgages due to lock-down job cutbacks.  As a result, some are expecting a surge in foreclosure notices.

An October 13th CoreLogic press release indicated that the July mortgage delinquency rate (30 days or more late) was 6.6 percent.  Although the rate slightly dropped from June’s 7.1 percent, serious delinquencies (90 days or more past due) jumped to 4.1 percent (compared to 1.3 percent a year earlier).  Serious delinquencies are the highest since April 2014.  Troubling is that mortgages which are 120 days or more late surged to 1.4 percent – which is a 21-year high, eclipsing the 2009 peak!  The metropolitan areas experiencing the highest delinquency rates are those where home price increases made the most gains (such as New York, Miami, Las Vegas, and Houston). 

So, what does this mean?

An August 27th CoreLogic report made a case for declining home prices in 2021.  There’s no denying it, there is a foreclosure wave waiting in the wings.  It’s unclear when the foreclosures will occur because of the current pan-demic moratorium.  However, if foreclosures are as numerous as they were in 2008, home prices 2021 will likely decline when these homes come to market.

By Dan Krell
Copyright © 2020

Original located at https://dankrell.com/blog/2020/12/05/home-prices-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.

Is Upzoning the Solution?

Can zoning be the answer to solving housing shortages and increasing affordability?  Many city planners and politicians think so.  Although many localities are still considering upzoning ordinances, some have already implemented upzoning amendments that allow increased resident density.  The immediate effect is likely to be felt by the addition of housing.  However, it’s unclear how and if the additional units will relieve housing prices.  Opponents voice concern over potential long-term effects of upzoning in single-family neighborhoods. 

What is Upzoning?

upzoning
Local Real Estate (infographic from nar.realtor)

A brief description of zoning is given by the National Association of Realtors (nar.realtor) as “laws that affect land use, lot size, building heights, density, setbacks, and other aspects of property use.”  Zoning ordinances go back to the early twentieth century as a way to efficiently grow a city while protecting residential neighborhoods from industrial and commercial influences. 

Research conducted by G. Donald Jud in 1980 suggests that the absence of zoning (or loose zoning) decreases property value (The Effects of Zoning on Single-Family Residential Property Values: Charlotte, North Carolina; Land Economics; vol.56, no.2, p. 142-154).  His study concludes that residential property owners pay a premium for uniformly in land use.  Jud writes “One of the principal purposes of municipal zoning ordinances is to protect property owners from the deleterious external effects that may arise when incompatible land uses exist within the same neighborhood.”  However, he also states that in the absence of zoning protection, other mechanisms are created, such as neighborhood covenants (e.g. HOA, or civic association).

Herbert S. Swan wrote in 1949 (Economic and Social Aspects of Zoning and City Planning; The American Journal of Economics and Sociology; Vol.9, No.1, p.45-56) that efficient city planning and zoning ordinances can only be measured by their adaption to current conditions.  He stated, “Only as they meet basic requirements of present population, and the emerging needs of prospective population, can they be said to serve a community in full measure.” 

Swan’s words ring true today, as local governments look to zoning to address housing shortages and affordability.  “Upzoning” is the current trend to “meet the emerging needs of the population” to alleviate housing issues.  The city of Minneapolis and state of Oregon have already implemented new zoning that essentially eliminates single-family land use in turn for increased density.  And the trend is spreading throughout the country.  While some localities have gone to the extreme to essential ban single-family development, others are loosening zoning to allow auxiliary dwelling units (ADU).  The Virginia legislature is currently considering statewide upzoning legislation. 

Earlier this year, the Montgomery County Council loosened zoning requirements for ADUs.  Zoning Text Amendment 19-01 becomes effective December 31st 2019.  The passed amendment has additional background information, including a brief description of opposition views from residents.  Some of the concerns of increased density in single-family neighborhoods included overcrowding in schools and decreased availability of parking. Additionally, there is concern that car-choked streets could impede emergency vehicles.  Environmental concerns included uncontrolled water runoff from increased number and size of ADUs.  Opponents to the amendment also voiced concern with “the inability of the County to enforce any regulations.”

Montgomery County’s “loosened” zoning amendment is meant to increased density in single-family zoned neighborhoods.  In light of resident concerns, the Council allowed direct input from the Montgomery County Planning Board to increase the supply of accessory dwelling units in the county, “while also working to minimize any negative impacts on residential neighborhoods.” 

Original article is published at https://dankrell.com/blog/2020/02/03/is-upzoning-the-solution/

By Dan Krell
Copyright© 2020

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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.

More Homes for Buyers?

more homes for buyers
Strength of the housing market

If you’ve been following the housing market, you know that housing experts have been declaring a home sale inventory shortage since 2013.  In NAR’s November 27th Pending Home Sales Index release, NAR chief economist Lawrence Yun partly blamed October’s 1.7 percent decline to “inadequate levels of inventory across the country.”  He stated “There is no shortage of buyers seeking homes, but a lack of available units continues to drag down the nation’s housing market and overall economy.” Essentially, there needs to be more homes for buyers.

However, if reporting holds true, the home sale shortage may be ending soon.  The most recent housing permits report indicates that more new homes will be built, while media attention to a “silver tsunami” suggest more homes for buyers will hit the market.

October’s increased housing permits suggest an increase in new homes to be built next year.  According to a recent report, housing permits reached a post-recession high (Housing Permits Surge to Postrecession High; magazine.realtor; November 20, 2019).  Although permits are just an estimate for future construction, it is nonetheless relevant because, like pending home sales, it gives a hint of the potential for future home sales.  Single family permits reached 1.46 million units during October, which is an increase of about 5 percent.  October was the second-best month for housing starts this year.

Lawrence Yun, NAR chief economist, stated, “At 1.46 million units on an annualized basis, housing permits are nearly to the level needed for the country over the long haul.  Since new-home construction kicks off the chain reaction of people trading up and trading down by buying new and selling their existing homes, more housing inventory will surely show up in the market next year.” 

Robert Dietz, the National Association of Homebuilders chief economist, commented about demand for new homes, “The increase in buyer demand is also being driven by lower mortgage rates, which has been helping to lift the pace of single-family permits since April. Solid wage growth, healthy employment gains, and an increase in household formations are also contributing to the steady rise in home production.”

What about existing homes?  According to Zillow Research, there will be about twenty million additional existing homes that will be for sale through the mid-2030’s (The Silver Tsunami: Which Areas will be Flooded with Homes once Boomers Start Leaving Them; Zillow.com; Nov. 22, 2019).  These home owners are 60 years-old or older, and will eventually sell their home because of health, retirement, relocation, and death.  There will be regional differences depending on the number of senior home owners.  Zillow indicates that the Tampa and Tucson markets are likely to be affected most.

The “silver tsunami” is not a new concept.  It was postulated in a 2012 NAR article The Boomer Effect.  The article surmised that since Baby Boomers began turning 65 on January 1, 2011, there would more homes for buyers and that the inventory would overwhelm the market.  However, we are still waiting for the tsunami. As it turned out, the post-recession economy significantly changed, as did attitudes toward housing.  Multi-generational households increased, and seniors are aging in place.

Will the anticipated increased number of new and existing homes to be sold provide the boost to home sales numbers?  Maybe, if the added inventory is attractive to home buyers.  It has been clear that home buyers will opt for value in a turn-key home.  Home sellers need to keep in mind that home buyers are looking for affordable quality homes.

Original article is published at https://dankrell.com/blog/2019/12/20/more-homes-for-buyers/

By Dan Krell
Copyright© 2019

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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.