- Initial claims for unemployment insurance filed in the week ended April 12 increased slightly from last week’s level to 304,000. The increase of 2,000 claims can be considered as weekly volatility in the data. In fact, the 4-week moving average –a less volatile measure – dipped to 312,000 the lowest since 2007. Claims have been trending down and have normalized to levels prior to the Great Recession.
- The largest decreases in claims for the week ending April 5 were in California (-13,892), Iowa (-1,266), Kentucky (-699), Tennessee (-582), and Idaho (-383). The largest increases were in Michigan (+4,285), Pennsylvania (+2,335), New Jersey (+1,630), Florida (+1,624), and Georgia (+1,453). Pennsylvania and New Jersey attributed some of the layoffs to construction.
- Notwithstanding the positive trend related to fewer layoffs, job creation needs to accelerate. Today, only 58% of adult population is working compared to 62% to 64% prior to the recession.
- What this Means for REALTORS®: Fewer claims filed means fewer workers lost their jobs during the week and indicates greater job stability.
 Claims filed under the regular state programs, seasonally adjusted
 Since October 7, 2007 when the 4-week moving average was at 302,000.
The real estate industry has a significant role in the U.S. economy. Historically, real estate and related industries accounted for roughly 18% of GDP. While the economy slumped following the decline of the housing market, record low mortgage rates in 2012 and 2013 touched off a resurgence of home sales growth. As a result, prices have improved, boosting buyer confidence and spending on housing and related goods and services.
At the state level, Hawaii’s economy is by far the most dependent on housing related industries for its state product. In 2012, rental and leasing along with other real estate services and construction contributed 23.1% of Hawaii’s gross state product (data for 2013 has not been released yet). This figure does not include expenditures on furniture and related manufactured goods that often accompany a home purchase. Several of the sand states, including Florida, Arizona, and California, hardest hit by the housing slump and recession were among the top ten most housing-dependent economies. Steady sales and modest price growth held roughly stable the contribution of real estate to these state economies in 2012, but this data does not reflect the strong price growth witnessed in 2013. The 2013 housing recovery in these areas should have a strong impact on local employment as well as state and local finances. Price growth in Maryland, New Jersey and Connecticut has been more muted in 2013 due in part to the local judicial processes which constrained market clearing.
How is housing’s contribution measured? Each home sale results in additional expenditures for remodeling, appliances, services, and furnishings. In addition, as the supply of homes for sales declines, home builders respond by adding new inventory. The employees of building companies and material suppliers in turn spend their incomes thereby expanding the economy, a process referred to as an economic multiplier. Furthermore, rising home values have a strong wealth effect where consumers will spend more of their income if they feel confident that rising home prices are expanding their personal wealth. Strong price growth in the District of Columbia boosted the contribution of real estate to the local economy by nearly $19,000 per sale in 2012.
Housing plays an important role in the economy, which was blunted following the recent housing market decline. Low mortgage rates in 2012 and 2013 boosted buyer confidence and sales which in turn helped to expand the economic impact of housing at the state level. In the years ahead, record low inventories will require new construction to satisfy consumer demand. Access to credit has been limited for some smaller builders, a trend that shows signs of improvement. On the consumer front, access to credit remains tight, but employment and incomes have grown modestly, a pattern that bodes well for home sales and housing related expenditures in the future.
[To view the latest State-by-State Economic Impact of Real Estate Activity report, visit: http://www.realtor.org/reports/state-by-state-economic-impact-of-real-estate-activity]
- Housing starts rose by 3 percent in March. More single-family homes are being constructed while multifamily units contracted modestly.
- The latest pace of 946,000 units on an annualized basis, however, is still well short of what is needed to relieve the housing shortage. Another good 50 to 60 percent increase is needed to measurably bring additional new inventory onto the market.
- Whatever is built is being sold easily, due to inventory shortage. The number of new homes for sale is essentially at a 50-year low.
- Past housing recessions have been followed by a strong snap-back in housing starts. That is not the case in the current recovery despite the housing shortage. The extreme difficulty of obtaining construction loans appears to be hindering a robust recovery especially among locally based homebuilders. New financial regulations are said to be onerous and uncertain, preventing local lenders from making these loans. Meanwhile, those big homebuilders who do not need loans and can tap Wall Street funding – like Lennar, KB Homes, and Toll Brothers – are having an easier time due to lack of competition.
- It is worth recalling that Polish Girl Scouts in the aftermath of the Second World War went from construction site to construction site to help rebuild homes. These teenage girls, not yet in their twenties, did so spontaneously with high enthusiasm for the simple love of their country. (It was only for a couple of years before the mini-KGBs arrived from Moscow to flip Poland into a totalitarian state.) Today, in America, there is an historically low labor participation rate among adult men. The country needs more new homes to be built yet many men are not even in the labor force.
- Inflation ticked higher in March, with the consumer price index increasing by 1.5 percent from one year ago. The current inflation is not troublesome – yet.
- The Fed keeps a closer watch not on the broadest measure of inflation but a narrower one that excludes food and energy prices. This so-called core inflation rose 1.6 percent from one year ago, but the monthly gains were picking up fast with the March annualized rate clocking at 2.5 percent, the highest pace in over a year.
- Apartment rents grew by 2.9 percent. The murkier, but important, figure of homeowner equivalency rent rose by 2.6 percent, the highest gain in nearly 6 years! The continuing fall in apartment vacancy rates combined with the general housing shortage assures even a higher rent and homeowner equivalency rent for the remainder of the year.
- Home prices have also been rising quite fast. The NAR median home price rose 9 percent in February. The Case-Shiller index showed a 13 percent higher home price in January. The home price increases, however, are not counted as part of the consumer price trends because, like the stock market, a house is considered as an investment asset by government statisticians.
- Gasoline prices were lower by 4 percent. But that was offset by a strong 16 percent gain in piped-gas utility price.
- The price of meat is rising quite fast at a 5 percent rate. The price of veggies and fruits are rising at less than 1 percent. In the current economy, that is, vegetarians are faring better than meat eaters. If, however, there is a disruption to planting and harvest in Ukraine – historically the most fertile land in Europe – then the veggie prices will bite consumers next year.
- Watch the housing rent component very carefully. If it begins to accelerate upwards then the Federal Reserve may be forced to raise the short-term interest rates much sooner than the current planned timeline of mid-2015. Higher mortgage rates, sooner, will also be in the offing in such a case.
Tight credit characterizes the current housing environment. Buyers with large down payments are reported to have the bidding edge for houses. However, 60 percent of first–time buyers made a down payment of 6 percent or less as of February 2014, according to the REALTORS® Confidence Index survey.
How much down payment can a typical renter put down? The chart shows the median savings of renters in 2013 ($12,568) versus the down payment for a median-priced home ($197,400) under down payment scenarios of 3.5%, 5%, 10%, and 20% plus an assumed 3 percent closing costs. The typical renter’s savings are substantially less than a hefty down payment plus the closing cost. For renters with less than perfect credit, the path towards home ownership grows steeper as the needed down payment increase in times of tight credit.
What Does this Mean For REALTORS®?
The potential buyer typically looks to the REALTOR® for advice. An education on credit scores and financial priorities may be in order for some clients. Credit scores can increase—if the client focuses on financial basics. Some clients may need to hear this. In addition, knowledge of the lending requirements of a wide number of financial institutions may be helpful in getting a mortgage—particularly for the buyer with a less than perfect FICO score.
At the national level, housing affordability is up for the month of February due to an increase in home prices and minimal movement in wages. What is affordability like in your market?
- Housing affordability is up for the month of February as the median price for a single family home in the US increased slightly by 0.7% from January. The median single-family home price is $189,200, up 9.0 % from a year ago. Affordability is down from 209.8 in February 2013 to 175.7 in February 2014.
- Mortgage rates are up 91 basis points (one percentage point equals 100 basis points) from last year, nationally. Income levels are up 1.9% from last year. A balance of income and job growth will improve affordability options.
- By region, affordability is up slightly from one month ago in the Northeast and the Midwest, but the West and the South had a minor drop in affordability. The Northeast was the only region to have declines in home prices but a slight increase in mortgage rates. From one year ago, affordability is down in all regions. The West saw the biggest decline in affordability as a result of having the largest price gain at 17.0%.
- Improvements in underwriting will increase consumer confidence and bring more first-time home buyers into the market. The spring months have a tendency to see increased foot traffic, helping sales trend up and minimizing delays in transactions.
- What does housing affordability look like in your market? View the full data release here.
- The Housing Affordability Index calculation assumes a 20 percent down payment and a 25 percent qualifying ratio (principle and interest payment to income). See further details on the methodology and assumptions behind the calculation here.
- The cost to build homes has been rising much faster than the broader consumer price index. In February the construction cost to build homes rose 7.8 percent from one year ago. Cumulatively over the past 2 years, the cost has risen by 15 percent.
- New home prices have been carrying a much larger premium over existing home prices in recent years. One reason is due to some distressed properties in the existing home market. But another factor is simply due to the higher cost to build new homes. The median price of a newly constructed home was 38 percent higher than the median existing home price in February. The gap has typically been about 15 to 20 percent in the past.
- Less talked about but a likely possibility for the much higher new home prices may also be due to less competition among homebuilders. The small guys have been effectively shut out of the market because of the extreme difficulty of obtaining construction loans. Local community lenders have indicated the burdensome new financial regulations as to why they cannot easily make those loans. In the meantime the big guys among the Wall Street-funded homebuilders like Lennar, KB Homes, Toll Brothers, and the like are having a field day with less competition. As with anything, less competition means a higher price.
- As to other prices, producer prices are well-behaved with only a 2 percent inflation rate on finished products. But the crude producer prices rose faster at 6 percent in March.
- Copper prices are markedly less expensive now than few years ago. That is why there are fewer reports of thieving and stealing of copper wires from building sites in the past year. Still, copper prices are at near the historical high end. Gold prices, though not for homebuilding, are always worth monitoring as a key benchmark for overall commodity price movement and for a general measurement of “inflationary fears”. Gold prices have come off the very high points, though they are still at a historically high range.
- Gold, because of its unique function as a store of value, has at times caused human misery. Spanish conquistadors came to the New World to take gold from the Aztec Indians. One story has it that when the Spanish approached a river crossing while being chased by the Aztecs, rather than dropping the gold behind and swim across, they tried to swim carrying the heavy load. Nearly all drowned. Separately, a good number of American 49ers who scrambled to San Francisco never struck gold. Rather they died in gunfights among themselves.
- North Dakota has been dethroned, knocked from the top as the best job creating state in the latest state level jobs data. Nevada moved to the top with a 3.8 percent job addition rate over the past 12 months versus North Dakota’s 3.7 percent. Despite this change, North Dakota is still the king in terms of longer-term job growth.
- Colorado, Florida, and Oregon round out the top-five fastest job creating states.
- On the bottom, New Mexico and Kentucky encountered very modest net job losses. New Jersey, Virginia, and Alaska had minimal or no job creation.
- Large cities are doing relatively well. That means traffic jams are getting worse in these markets, simply a byproduct of more people driving to work. San Jose in particular is red hot, with a 4.4 percent job growth rate. That is why both rent and home prices are escalating as more people seek housing in areas where there is minimal new home construction.
- Detroit is reversing some of its recent gains in jobs. In the latest data, Detroit shed 4,200 jobs. But the western part of the state is doing well, with Grand Rapids job growth rising by 3.0 percent.
- Irrespective of short-term job market trends, over the long haul job creation will favor large major cities because job growth will be faster in professional services than in manufacturing or agriculture. Jobs like accounting, software development, legal services, management consultants, and medical services will principally be in cities. Moreover, people are drawn to large cities because of cultural amenities that only a large city can justify, such as concerts, museums, and zoos. Companies, knowing that talented workers are drawn to cities, will want to be based in large cities to have access to a large pool of potential job candidates. Traffic unfortunately will get hellish. That is why developers of condominiums near downtowns in traffic congested cities can anticipate turning a good profit.
- Initial claims for unemployment insurance filed in the week ended April 5 dropped to their lowest level in years to 300,000. The last time the weekly number of claims filed hit around this level was in 2000. The Department of Labor noted in its report that “there were no special factors impacting this week’s initial claims.” One might read that the drop may be due to just the regular volatility in the data. Still, it is hard to dispute that claims have been trending down and have normalized to levels prior to the Great Recession.
- The pace of job cuts is down. Now, let’s hope the pace of job creations accelerates. Today, only 58% of adult population is working compared to 62% to 64% prior to the recession.
- The largest decreases in initial claims for the week ending March 29 were in Pennsylvania (-2,007), Texas (-1,821), Missouri (-889), and New Jersey (-774). However, claims rose in California (+17,626), Oregon (+1,851), Ohio (+1,200), Kentucky (+1,119), and Illinois (+941).
- What this Means for REALTORS®: Fewer claims filed means fewer workers lost their jobs during the week and indicates greater job stability.
 Claims filed under the regular state programs, seasonally adjusted
The FHA has more than doubled its mortgage insurance premiums since 2010 and most recently eliminated the phase out of mortgage insurance on certain products. As a result, the private mortgage insurance industry has been able to recover and to expand in the conventional space. However, buyers that cannot shift to the conventional space bear the brunt of these higher costs at a time when growth in both mortgage rates and home prices have cut into homebuyers’ affordability.
- FHA’s annual mortgage insurance is currently 1.35%, 0.8% higher than in early 2010 and for its most popular products the insurance must now be paid for the life of the loan.
- The higher rates have priced out numerous potential homeowners, shifting many buyers to the private sector
- However, conventional financing cannot serve many of the borrowers FHA is intended to serve, leaving those priced-out, potential homeowners in the cold.
In late 2010, the FHA initiated a series of changes to the pricing of its mortgage insurance program. These changes included both the upfront portion (UFMIP) as well as the annual premium structure (MIP). The initial increase in the annual insurance premium was just 5 basis points between 2008 and 2010, but the changes accumulated to 85 basis points by 2013. Simultaneously, the upfront mortgage insurance premium, which is often financed adding only modestly to monthly payments, increased and fell before being set in 2013 roughly where it had been five years earlier. The net effect though is significantly higher costs for the consumer. As depicted below, holding the mortgage rate and home price constant, the monthly payment of principle, interest, annual MIP and financed UFMIP rose 13% from $834 in 2008 to $942 in 2013 by which time the FHA’s fees accounted for roughly 20% of the monthly payment.
These changes were intended to shore up the agency’s books while promoting growth of the private finance sector. Private mortgage insurers have indeed benefited from the higher rates but also the recapitalization of their industry and new entrants as discussed in an earlier post.1 Their rates are risk based and often cheaper than FHA mortgage insurance, particularly for borrowers with larger down payments and higher credit scores. However, these rates rise significantly as credit scores decline and down payments shrink and at least one of the larger private mortgage insurers does not offers insurance for borrowers with less than a 620 credit score. Herein has historically been the purview of the FHA.
Change in MIP vs 10/3/2010
550,000 to 750,000
1,000,000 to 1,250,000
1,200,000 to 1,400,000
1,250,000 to 1,450,000
1,450,000 to 1,650,000Source: FHA, Census, NAR
The increase in mortgage insurance rates at the FHA has had an impact on affordability for renters or potential first-time homeowners. Based on income data from the American Community Survey and estimating a renter’s front-end debt-to-income level relative to historical standards for sustainable lending (28% to 31%), the number of renters adversely impacted by the increase in the annual mortgage insurance premium has increased in lock-step with the rise in the FHA’s MIP. By 2013, the MIP was 80 bp higher than the rate of 55 bp from 2010. These additional 80 basis points pushed an estimated 1.45 million to 1.65 million renters over a sustainable front-end debt to income ratio for purchase of a median priced home in 2013. Adjusting for FHA market share and taking repeat buyers into account, these changes may have priced out as many as 125,000 to 375,000 home buyers.
An Alternative for Some
Could these potential homeowners migrate to private mortgage insurance? Private mortgage insurance2 for a borrower with a down payment below 5% and a FICO score of 720 or higher is currently 1.1% annually, but that rate rises to 1.31% if the FICO falls between 680 and 719 and increases further to 1.48% if the FICO is below 680. Combined with the higher funding cost of roughly 37.5 basis points for a conventional mortgage (e.g. the difference in base 30-year fixed rates, roughly 4.5% vs 4.125% for a prime borrower) as well as loan level pricing adjustments (LLPAs) and the adverse market delivery fee (AMDC), only borrowers with the highest credit could afford to migrate to GSE financing. For example, the difference in the monthly payment between a conventional loan for a median priced home with a down payment of less than 5% and a FICO score of 670 compared with the same loan financed through the FHA with annual MIP and financed UFMIP is approximately an additional $92 a month. Likewise, for a larger down payment of 5 to 10 percent with a FICO score of 670, the cost of PMI falls to 1.15%, but the payment is still $58 per month more expensive than FHA when all costs are included. The higher pricing of conventional financing for borrowers with lower down payments and low credit scores suggests that many priced out of the FHA program would not have a private alternative.
The FHA has undertaken several important changes in recent years; expanding to support the housing market as the private finance sector pulled back and then adopting best practices to prevent adverse selection and softening books. However, there is a price paid for the higher costs placed on consumers, the impact of which will be amplified in an environment of rising mortgage rates and home prices.
1 http://economistsoutlook.blogs.realtor.org/2013/08/09/lending-shifting-but-still-tight/ 2 http://mortgageinsurance.genworth.com/RatesAndGuidelines/RateFinder.aspx
- Seasonally adjusted applications to purchase homes rose 2.7% for the week ending April 4th, the 4th consecutive increase. The purchase index is 13.9% lower than the same time in 2013. Purchase applications appear to have bottomed relative to last year and are clawing their way back if only modestly.
- The average rate for a 30-year fixed rate mortgage as reported by the Mortgage Bankers Association was unchanged from the prior week at 4.56%. The average rate a year ago this week was 3.68%.
- A strong increase in applications for government financing, up 3.6% relative to last week, led the improvement, though applications for conventional financing rose for the 3rd consecutive week with an increase of 2.3%. The cost of FHA insurance remains high by recent standards, but it is the only option for most borrowers with low down payments and credit scores less than 700. The high cost of FHA mortgage insurance combined with the general rise in rates since last year is crimping affordability on this portion of the market…particularly first-time borrowers and some minority groups.
- This week’s reading suggests a very modest thaw in the weak year-over-year trend for purchase applications. The index improved for the 4th consecutive weak but remains anemic relative to last year’s strength which was driven by sub-3.5% rates. Strong price growth and higher rates since last spring impacted affordability. However, the strong trend last spring also muted the normal seasonal pattern, suggesting that part of the trend this spring is a restoration of the normal seasonal pattern. Sales and applications will continue to pick up as we move towards summer in the typical seasonal pattern, but may remain muted relative to last summer until credit overlays ease and mortgage insurance pricing improves.
Did you know: “Typical” income for a household or family varies based on the type of family you’re interested in describing.
Typical income can be measured in a variety of ways. Analysts often use median household income to indicate what is typical. In 2012, data showed median household income was $51,371 in the US. For families, median income in the US in 2012 was $62,527 .
This may have you wondering, “What’s the difference?” The Census Bureau provides these two data points and has a concise explanation on the FAQ page for one of their surveys : “A family consists of two or more people (one of whom is the householder) related by birth, marriage, or adoption residing in the same housing unit. A household consists of all people who occupy a housing unit regardless of relationship. A household may consist of a person living alone or multiple unrelated individuals or families living together.”
A couple more interesting breakdowns:
Impact of Age:
While the median household income is $51,371 in the US, this varies by age. Households with heads under 25 years old have a median income of $24,476 compared to $55,821 for those with heads aged 25 to 44 years old. Households headed by those aged 45 to 64 have the highest median incomes of $62,049, but those 65 and over have a median income of $36,743.
Impact of HH Size/Family Size:
For both households and families, there is a notable difference in typical income by size. While it is reasonable, to expect some causal relationship between age and income, the trend by size is likely a reflection of other causal patterns that happen to coincide with size.
For households, the impact is most seen between 1 and 2-person households. Median income for a one-person household is $27,237 while typical income for a two-person household is $58,121. Median income rises as household size increases, peaking at 4-person households with a median income of $75,343. For 5 or more person households, median income ranges from $64,747 to $69.691. In families, we see a similar pattern except that, by definition, there are no 1-person families. Median income for a two-person family is $56,646 and rises, peaking at $76,049 for 4-person families. From that point, median income declines to between $64,478 and $70,403 for larger families.
For more even more on this topic, visit our interactive infographic
 American Community Survey 2012 (1-year estimate). All subsequent data in this article is from the same source.
- The market assessment of current conditions and expectations for the future have been falling from the summer of last year. Generally, the two metrics move roughly together, albeit with the outlook views usually getting a tad higher mark.
- The two data interestingly began to diverge with outlook brightening from November while current conditions remained stagnant. Will REALTORS® be sorely disappointed in their outlook or are they seeing subtle intangible trends not picked in the market place? Knowing that sellers who already committed to list their home and buy a new one but will only do so once the snow clears is an example of special info that only the REALTORS® would possess without any hard data in the MLS to show for it.
- The job creation of over 2 million in the past year and nearly 8 million in the past 5 years suggests that there is an underlying logic to the potential demand for home buying. Falling affordability (from higher prices and higher mortgage rates) has been a damper, however.
- REALTORS®’s assessment of the housing market outlook differs sharply with the general public’s view of economic conditions. Consumers have been giving a better score on current job/economic conditions with each passing month. However, views of future economic conditions have remained stuck with no change. A worried consumer, even if the current conditions are improving, is less likely to spend on a major expenditure. It’s worth a careful watch as to how the future develops given the two divergent views about the future.
- NAR’s forecast is for home sales to be lower by 5 percent in the first half of this year versus the same period a year ago. But the sales are projected to be 2 to 3 percent higher in the second half of the year. Home prices, because of the inventory shortage, will keep marching higher to 5 to 6 percent for the year.
- Jobs will be ever more critical to support home sales in a rising interest rate environment. Therefore, the latest addition of 192,000 jobs in March is a big plus. The total gain over the past 12 months is 2.2 million jobs.
- From the worst of the recent recession a few years ago, nearly 8 million jobs have been added. Recall, however, during the recession that 8 million jobs were shed. Not yet a new employment peak, but getting very close to it.
- In the construction sector 19,000 jobs were added in the month. Still, there are 2.5 million fewer construction workers now versus the peak in 2007. Also general contractor jobs now stand at 3.7 million compared to 5 million in 2006.
- Employment in real estate, including sales and rental leasing, is on the rise.
- Good news: each worker is working at bit longer, 34.5 hours per week on average compared to 34.3 hours in the prior month. That extra decimal point in hours worked multiplied by 138 million workers has a meaningful impact on the total work hours in America.
- Bad news: the typical wage rate fell in March to $20.47 per hour from $20.49 for non-supervisory workers in the prior month. Wages are growing essentially at 2 percent a year, below the gains in apartment rents which are rising at 3 percent.
- The unemployment rate did not change and remained at 6.7 percent. But due to ignoring who is in the labor force and who is not, a cleaner picture of job conditions can be measured by how much of the adult population has jobs. This “employment rate” unfortunately is barely improving.
- Over the longer-term perspective, from 2000 to today, 34 million more people are living in America. But job additions have been only 6 million.
- One reason for the mismatch between population and employment gains is due to the decline in the labor force participation rate. It inched a bit in the past month, but still remains well below the historical normal. Too many Americans, it seems, have given up.
- The United States in declaring its independence from Britain spoke of the rights to life, liberty, and the pursuit of happiness. Note it did not say the right to happiness, but the pursuit of it. No one should automatically get happiness, because there is a great deal of satisfaction in overcoming trials and setbacks. In other words, the journey is often more important than the destination. That is why some people wake up smiling each day though not knowing what will happen that day.
- Rents continue to rise but may no longer be accelerating. As measured by the Consumer Price Index component on the renters’ rent, the annual growth rate appears to have stabilized at near 3 percent after rapidly rising from 2010.
- According to REIS, private sector data covering only the large metro markets, rents are rising by 3.2 percent, a bit faster than the government data. With apartment vacancy rates falling to the lowest rate in over a decade, now at 4.0 percent vacancy rate from 4.4 percent a year ago, rents could easily start to accelerate again.
- According to a survey of REALTORS®, nearly half reported rising rents while less than 10 percent reported falling rent. But the sizable rent increases of 6 percent or higher are now less prevalent than several months ago.
- Permits to build new apartments are rising. Perhaps, this new supply will put the lid on rent growth. But the recent increases in supply appear to be only of returning to normal and certainly not an oversupply.
- Rents, therefore, are likely to rise by at least 3 percent this year on a nationwide basis, with 4 percent not out of the realm of possibility. With wage growth barely scratching 2 percent growth, the renters are getting their life squeezed out.
Every month REALTORS® provide a variety of comments on the state of the market when responding to the RCI survey. In general, REALTORS® noted in the February report that uncertainty about economic conditions, rising prices, weather, the limited inventories of available homes, and flood insurance were negatively impacting the home sales markets:
Lack of Inventory: The lack of available homes on the market seemed to be the most pressing problem mentioned by REALTORS®. In some cases potential sellers holding off from listing were mentioned as having unrealistic expectations. The lack of new construction and the inability of potential sellers to find a more suitable home in a time of limited supply were cited as contributing to the problem.
Uncertainties: A number of respondents essentially commented “people are waiting,” in reference to the overall state of the economy, concern about home affordability and rising prices, a lack of consumer confidence, etc. Put differently, a significant number of comments basically indicated that some people are in a stall mode. REALTORS® noted continued strong demand, but potential buyers were reported as being increasingly demanding in terms of expected home condition. The importance of realistic, accurate pricing was noted.
Weather: Continued difficult weather conditions were prominently mentioned by many REALTORS®. There seemed to be general agreement that there had been a significant negative impact on sales in many parts of the country.
Flood Insurance: The availability and cost of flood insurance were cited in a number of cases as having a negative impact on home sales.
Loan Availability: REALTORS® continued to cite problems for potential buyers in getting loans. There was a continued feeling that credit is unrealistically tight.
On Wednesday, NAR released its annual Investment and Vacation Home Buyers Survey, covering existing- and new-home transactions in 2013. The press release can be found here, with highlights and select charts from the report below:
- Vacation home sales rose strongly in 2013, while investment purchases fell below the elevated levels seen in the previous two years.
- Vacation-home sales jumped 29.7 percent to an estimated 717,000 last year from 553,000 in 2012.
- Investment-home sales fell 8.5 percent to an estimated 1.10 million in 2013 from 1.21 million in 2012.
- Owner-occupied purchases rose 13.1 percent to 3.70 million last year from 3.27 million in 2012.
- The sales estimates are based on responses from households and exclude institutional investment activity.
- Vacation-home sales accounted for 13 percent of all transactions last year, their highest market share since 2006, while the portion of investment sales fell to 20 percent in 2013 from 24 percent in 2012.
- The median investment-home price was $130,000 in 2013, up 13.0 percent from $115,000 in 2012, while the median vacation-home price was $168,700, up 12.5 percent from $150,000 in 2012.
- All-cash purchases remained fairly common in the investment- and vacation-home market: 46 percent of investment buyers paid cash in 2013, as did 38 percent of vacation-home buyers.
- Seasonally adjusted applications to purchase homes ticked upward 0.9% for the week ending March 28th, the 3rd consecutive increase. The purchase index is 17.3% lower than the same time in 2013. Purchase applications appear to have hit or are nearing a plateau in terms of decline from last year.
- The average rate for a 30-year fixed rate mortgage as reported by the Mortgage Bankers Association was unchanged from the prior week at 4.56%. The average rate a year ago this week was 3.76%.
- The bulk of the improvement came in the conventional space which rose 1.7% following a 4.0% increase in the prior week. Applications for government financing eased 1.1% following a modest 0.1% increase in the prior week. Recent announcements by some lenders suggest that credit overlays on the FHA program should ease, but that trend has not developed in the data, yet. Furthermore, the cost of FHA insurance remains high relative to private financing, but for those borrowers with high LTVs and credit scores less than 680. The high cost of FHA MI combined with the rise in rates is crimping affordability on this portion of the market…particularly first-time borrowers and some minority groups.
- Purchase applications continue to stabilize, but remain well off of last year’s pace. Affordability has suffered over the last twelve months due to rising rates and prices. Sales and applications will pick up as we move towards summer in the typical seasonal pattern, but may remain muted relative to last summer until credit overlays ease and pricing improves.
The qualified mortgage (QM) rule was implemented in January of 2014. It is the first of two rules that came from the Dodd–Frank Wall Street Reform and Consumer Protection Act that will impact the housing market. This law is intended to protect consumers by strengthening underwriting standards, but some have argued that the rules will raise costs and reduce access for consumers. To gain insight on the impact of the new law, NAR Research surveyed a sample of lenders with questions about the impact of the lending on their business and how the rule could in turn impact consumers.
With respect to the maximum back-end debt-to-income ratio of 43%, 68.4% of respondents indicated that they would not have a buffer in advance of that restriction to protect themselves. However, 15.8% indicated that they would impose a modest buffer at 42.5%, while an additional 10.6% of respondents indicated that they would impose buffers of 41% or 42%.
What does this change mean for REALTORS and consumers? Consumers should expect to have to document their income, employment and resources. If your client has a high debt-to-income ratio, the FHA as well as Fannie Mae and Freddie Mac will be more lenient than private financers, but lenders might impose buffers on both. Your client could work to pay down debts or if your client falls into this or other aspects of the non-QM space or even the rebuttable presumption portion of the QM space (e.g. high fees, subprime, interest only, etc.) your client might require help finding a specialty lender. Consider finding a few lenders who specialize in financing these special cases at affordable rates so that you can meet your client’s needs if the time comes. For the full survey, click here.
- In just a short two years, the nation’s property owners have accumulated nearly $4 trillion in housing wealth. During the harsh downturn, $7 trillion was wiped out. As a result, the housing market is still in recovery mode and not an expansion mode. There are still underwater homeowners, but those who bought from 2009 and onwards are enjoying positive net worth.
- While property values have been rising, the overall mortgage debt outstanding has been falling. At the end of 2013, there was $9.3 trillion in mortgage debt. Several years ago, the total mortgage debt was $10.5 trillion.
- Higher real estate values combined with falling mortgage debt has raised the overall equity portion in real estate to 52 percent of the total real estate value, a substantial increase from the 36 percent of a few years ago.
- Given that the total number of renters has been rising while that of homeowners has not over these periods, one may say that the housing wealth train has already left the station without young first-time homebuyers. Has Washington’s fiddling over new federal mortgage rules, which has confused many small lenders, and major lawsuits against big banks to some degree unwittingly backfired?