Millennials redefining American Dream – and it’s not what you think

There is no doubt that the baby boom generation has fueled the housing market for over four decades. That’s right, our vision of the American Dream was shaped by those who are said to have been born between 1946 and 1964. Success was measured against a standard of working at one job or career for a lifetime, buying a suburban house to raise a family, and do it all on a single income.

As time passed and the economy changed, single income families became passé. Many struggled to keep up with the Jones’ and maintain the American Dream. The Dream became twisted into maintaining a lifestyle at all costs, even by financing it with their home’s equity.

In fact this meme was used in a Lending Tree commercial that ran prior to the housing bust. The commercial starts with the character “Stanley Johnson” introducing himself, and then posing with his family proclaiming they are great. The scene pans out to show his home as he continues to describe his four bedroom home being located in a great community. He then shows off his new car. And is proud to point out he is a member of the local club. He rhetorically asks with a smile while grilling in the backyard, “How do I do it?… I’m in debt up to my eyeballs…” And the commercial ends with “Stanley” mowing the lawn as he proclaims, “Somebody help me…”

At the time when the commercial ran, cash-out refinancing was popular. But in retrospect, the dark comedy seems prophetic of what went wrong with the American Dream. And as some have wondered if the American Dream died with the housing bust, it is becoming apparent that the dream is being redefined by Millennials (those born between 1980 to 2000) – and it may not be exactly what you think.

Millennials have been blamed for holding back a strong housing recovery by delaying household formation and not buying homes. But Brena Swanson of HousingWire proclaimed that to be old news in her April 28^th article (Hey Millennials — You know nothing about housing finance; housingwire.com). She reported that many housing economists have declared 2015 as the year of the Millennial. Furthermore, she reported that by the end of 2015, Millennials are expected to be the largest home buying group; which may be derived from recent polls indicating that they believe it’s a good time to buy a home.

But don’t blame Millennials if 2015 doesn’t turn out they way housing economists expect. Why should the problems of a housing market be attributed to a generation who refuses to walk lockstep with older generations? Gen-X blogger, Jeremy Vohwinkle, pegged it in 2007 when he wrote about the problems with the housing market being rooted in an antiquated vision of the American Dream (The Real Estate Generation Gap: The Baby Boomers Are Trying to Sell, but Who’s Buying?; genxfinance.com). He proclaimed that the Baby Boom real estate cycle (starter home, upgrade to large home, downsize to retirement home) is not what younger generations want.

So, it’s not that the American Dream is dead, as some have thought; it is just being reinterpreted, most likely being restored to its original intentions. And rather than keeping up with the Jones’, it appears to be that the American Dream for Millennials is focused on increasing their quality of life – and whatever that brings with it.

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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.

April 23, 2015

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.

March 26, 2015

Home buyer strategy to cope with a low inventory market

As the weather warms, many home buyers are venturing out making themselves known; only to be greeted with low inventories and higher list prices. The National Association of Realtors® March 23^rd press release indicated that nationwide low housing inventory is pushing home prices to grow rapidly; average home prices across the country increased 7.5% during February compared to the same period last year (realtor.org).

Much like the “tire kicker;” a typical home buyer visits selected open houses and lurks online to see what’s out there before talking to a lender and/or a real estate agent. While desiring to be low-key and pretending to be demure may be the strategy of choice; acting this way during a low inventory market could lead you to miss out on the home of your dreams.

If you’re part of this year’s home buyer cohort, prepare for a low inventory market by talking with a mortgage lender and a real estate agent before you begin your search. Working with an experienced agent and lender may increase your chances of not only finding a home, but getting your offer accepted.

Even though home buyers are instructed to get qualified for a mortgage before they begin looking for a home, it is often left until just prior to writing their first offer. A lender approval not only provides you the certainty of knowing what you can afford; it tells the home seller you are capable of buying their home.

Although getting a mortgage qualification letter today is more involved than it was in bygone years, it is for the better. To comply with new rules and regulations, lenders today require a formal application before they will provide you an approval letter that can accompany your offer to purchase. You will need to provide documents indicating your income and assets to determine how much you can afford as well as verify the funds for down payment and closing costs. The application not only helps you through the home buying process, it will make your mortgage process more streamlined too.

Although hiring a buyer agent is not always a consideration during the home search, your choice of agent could affect the outcome of your purchase. Choose carefully – research has indicated that real estate agents are not all alike; veteran agents positively affect your transaction and are more efficient compared to rookies. Experienced agents offer intangible services such as understanding the nuances of the housing market, as well as having an increased ability to engage the parties in the transaction. Additionally, it was found that home buyers who employ full-time agents have better outcomes than those who hire part-time agents.

Rather than waiting to choose your agent until you’re ready to make an offer on a home, meeting and interviewing several agents could help you determine their experience and commitment. Although most buyers think of savvy agents as being expert negotiators; in a low inventory market it also pays to have an agent who thinks outside the box to seek home sale opportunities that are not typically advertised in the MLS.

A low inventory housing market presents the home buyer with a number of issues. Working with an experienced agent and mortgage lender can help you through the ups and downs of the process as well as reframing your expectations to fit the reality of market.

March 4, 2015July 6, 2019

How to price your home in 2015

In case you haven’t been following along closely, the March 3^rd release of CoreLogic’s Home Price Index (corelogic.com) indicated that nationwide home prices increased 5.7% during January compared to the same period last year; and there was a 1.1% increase during January compared to December. And believe it or not, CoreLogic stated that nationwide home prices including distressed sales are only 12.7% below the peak; and only 8.6% below peak if you exclude distressed sales.

Of course, national home price data are an average of regions that vary economically, reflected in their respective housing market. CoreLogic Chief Economist Dr. Frank Nothaft stated, “House price appreciation has generally been stronger in the western half of the nation and weakest in the mid-Atlantic and northeast states…In part, these trends reflect the strength of regional economies. Colorado and Texas have had stronger job creation and have seen 8 to 9 percent price gains over the past 12 months in our combined indexes. In contrast, values were flat or down in Connecticut, Delaware and Maryland in our overall index, including distressed sales.” The only 2 states that realized negative price appreciation year over year (including distressed sales) during January were Maryland and Connecticut, where home prices appreciated (–0.3%) and (-0.6%) respectively.

If you include distressed sales, Maryland’s January home prices appreciated (–0.3%) year over year, (-0.1%) month over month, and is (-25.3%) from the peak. Regional differences, of course, exist: DC home prices including distressed sales appreciated 3.3.% year over year, (-0.4%) month over month, and is only (-1.4%) from the peak; Virginia home prices appreciated 1.4% year over year, (-0.2%) month over month, and is (-15.6%) from the peak.

The CoreLogic HPI Forecast projects nationwide home prices, including distressed sales, to appreciate 0.4% from January to February, with an annual appreciation of 5.3%.

CoreLogic expects consistent home price appreciation through 2015 and into 2016, due in part to a current shortage in housing inventory. Anand Nallathambi, president and CEO of CoreLogic, stated that “Many homeowners have taken advantage of low rates to refinance their homes, and until we see sustained increases in income levels and employment they could be hunkered down so supplies may remain tight. Demand has picked up as low mortgage rates and the cut in the FHA annual insurance premium reduce monthly payments for prospective homebuyers.”

According to the Greater Capital Area Association of Realtors® (gcaar.com) January Montgomery County single family home statistics, home inventory and home buyer activity increased compared to last January. Although total housing inventory increased 26.5% year over year, contracts (pending sales) increased 16.6%, and settlements (sales) increased 4.8%.

If you’re wondering how these statistics might affect your sale, you’re not alone; many home sellers are trying to shape a sensible marketing plan this spring, which includes deciding on a listing price. Consider that although listing inventory is currently relatively low, it is likely to spike within the next two months adding competition to a market competing for discerning home buyers.

Typical home buyers have been increasingly demanding value; besides looking for a “turnkey” (updated and ready to move in) home, they have also been sensitive to home prices. Since cash buyers are not as prevalent as they were two years ago, and many buyers are concerned about their monthly obligations and budgets; pricing your home correctly will be more important this year than it has in the past.

By Dan Krell
© 2015

February 25, 2015July 6, 2019

Stumbling housing market reignites housing policy debate

Surely 2015 is to be the year when the housing market would bounce back from its recent disappointing performance; at least that’s what I wrote back in November. But as January’s news from the National Association of Realtors® (NAR) is not as rosy as we expected; a housing policy debate, that has been subdued since 2010, gets heated.

The NAR revealed in a February 23^rd press release (nar.realtor) that although the pace of home sales increased compared to the same time last year, existing homes sales have declined to the lowest rate in nine months. The typically optimistic Lawrence Yun (NAR Chief Economist) was cited as saying “the housing market got off to a somewhat disappointing start to begin the year with January closings down throughout the country.” Adding that “seasonal influences” can make January data erratic, the combination of low inventory and home price gains over the pace of inflation seems to have slowed home sales – notwithstanding low mortgage interest rates.

Keeping mortgage interest rates low is not the sole solution; however, if it was, the housing market may have bounced back several years ago. Although a myriad of causes have been blamed for a lackluster housing market that has been trying to make a comeback for six years, most are correlational and incidental.

However, Richard X. Bove (Equity Research Analyst at Rafferty Capital Markets) recently made a case for a sole cause in his February 23^rd commentary (There’s a new mortgage crisis brewing; cnbc.com/id/102447414). Bove described how mortgage markets are in trouble; rules and regulations put into place to strengthen the market by increasing borrower standards have dried up a lot of the funding. And not necessarily in the way you might expect; besides shrinking the pool of qualified buyers, Bove suggested that the rules and regulations have made mortgage lending unprofitable and unpalatable for some lenders (leading them to walk away from the business).

As a response, it would seem as if the Federal Housing Finance Agency (FHFA) took steps to make mortgages increasingly available (returning to 3% down payment loans, and increasing the number of loans on Fannie and Freddie’s balance sheets). These actions, along with recorded losses in Q4 2014, Bove described, is making some nervous.

If you don’t remember, the FHFA was created in 2008 as a temporary conservator to Fannie Mae and Freddie Mac; whose original goals included: ensuring a positive net worth for Fannie and Freddie; reducing Fannie and Freddie’s mortgage portfolios; and facilitating a streamlined and profitable model for Fannie and Freddie.

Bove’s catch-22 conclusion, of either hindering the housing market by stopping Fannie and Freddie’s growth or increasing Fannie and Freddie’s debt obligations with continued growth, is not a new dilemma. The debate has been ongoing since 2008.

Having faded somewhat since 2010, the housing policy debate heated up during testimony given by FHFA Director Mel Watt on January 27^th during the congressional hearing, “Sustainable Housing Finance: An Update from the Director of the Federal Housing Finance Agency.” Trey Garrison of HousingWire succinctly portrayed opposing views (January 27, 2014; FHFA hearing: GOP fear housing policy headed for Crash 2.0; housingwire.com): “Democrats said policies in the past year are necessary to expand housing opportunities to lower income and challenged borrowers…” while, “…Republicans…said the administration is adopting dangerous policies that risk another housing crash that will put taxpayers on the hook for billions.”

By Dan Krell
© 2015