- Consumer prices (CPI) fell 0.7 percent in January as declines in gasoline prices more than offset increases in food and shelter prices. Core inflation, a measure that excludes volatile food and energy prices, increased 0.2 percent for the month.
- While the headline rate of inflation shows a decline of 0.1 percent or slight deflation, core inflation at 1.6 percent is just below the Federal Reserve’s 2 percent inflation target. Earlier this week, Chair Yellen testified to Congress and noted that, “The Committee expects inflation to decline further in the near term before rising gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.”
- Today’s data seems to be in line with the Federal Open Market Committee’s (FOMC) expectations as enunciated by Chair Yellen, so the FOMC is likely to stay the course on an eventual tightening, generally expected in the second half of this year. This is the last CPI data that will be publicly available before the next FOMC meeting on March 17-18 when the committee may decide to drop the word “patient” from the FOMC statement, signaling that an increase in the federal funds rate could come in the next few meetings if the economy continues to improve.
- While overall prices are lower and core inflation is under the 2 percent target, prices of certain items are rising faster than that which might make some consumers feel that prices are increasing faster than the official rates suggest.
- For example, rent of primary residences—actual market rents paid by individuals who do not own the home they live in (pictured below)—rose by 3.4 percent from a year ago in January. This was the 10th consecutive month of growth above 3 percent for this rent.
- When rents are rising, it becomes more attractive to own a home. Because the bulk of home ownership costs for someone with a 30-year fixed rate mortgage are fixed, even if rents are initially cheaper, potential buyers can expect rent costs to catch up to ownership costs.
- Owner’s equivalent rent of residences (OER), a measure to approximate price change for owner-occupied housing, rose 2.6 percent in January. This was the 14th consecutive month of growth at or above 2.5 percent for OER. Together, the two rent components contribute more than 30 percent to the overall CPI, but if a renter is putting more than 30 percent of his or her income toward rent, then he or she will feel the squeeze of the increase in rents more than is suggested by the official index.
- Real estate agents may be happy about the energy offset. In spite of increases in rents, energy prices were lower, especially gasoline prices which are down 35.4 percent from a year ago. The 2014 Member Profile shows that the typical REALTOR® spent $1,860 on expenses for the business use of a vehicle in 2013, an amount equivalent to 28 percent of the typical REALTOR® total real estate expenses in the same time period.
- While agents can enjoy this benefit now, it may not be quite as big in the future. Daily oil prices are already up 15 percent from the low price they hit in late February though they remain substantially lower than they were one year ago.
 While the Fed does not target this specific measure, the factors driving the Fed’s preferred measure of inflation are the same.
 Owners do not actually pay the increased costs. OER is intended to estimate the change in the amount of money that an owner could rent their home for if they did not live in the home. This estimate is included as a factor in the CPI so as to lessen the effect of variation in the home ownership rate on the price series.
- NAR released a summary of existing home sales data showing that January’s existing home sales are up from last year but down from last month starting the year off to a sluggish pace. January’s sales show a fourth consecutive month of year over year improvement up 3.2%, even though they represent the lowest sales level since April of last year.
- The national median existing-home price for all housing types was $199,600 in January, up 6.2% percent from January 2014.
- Regionally, all four regions showed growth in prices, the Midwest had the largest gain at 8.2% while the Northeast had the smallest gain at 2.7% from last January. All regions showed a decline in sales from last month, the West had the biggest decline at 7.1%. All regions showed an increase in sales from a year ago, and the South had the biggest gain at 5.6% while the Midwest had the smallest gain at 0.9%.
- January’s inventory figures increased 0.5% from last month but are down 0.5 % from a year ago and it will take 4.7 months to move the current level of inventory. It takes approximately 69 days for a home to go from listing to a contract in the current housing market, slightly longer than last year at 67 days.
- Single family sales decreased 5.1% and condo sales fell 3.5% from last month. Single family homes had an increase of 3.9% from a year ago, while condo sales slipped by 1.8%. Both single family and condos had an increase in price with single family up 6.3% and condo up 5.3% from a year ago, January 2014. Without an increase in inventories the pressure from demand is bound to have an impact on home prices going forward.
With the recent changes to the FHA’s pricing, it’s worth reviewing the FHA’s impact on the market. There are a number of ways to measure the FHA’s market share. No matter which method is chosen, the FHA’s market share has fallen significantly since its peak, ceding way to private capital.
The FHA has two roles: to act as a source of funding for credit-worthy borrowers who face limited access from private sources, like first time, low income or minority buyers; and to provide broader access to credit when the private sector pulls back in general, typically with economic stress. As discussed in a blog post from the spring of 2013, the FHA’s market share can be measured a number of different ways. It can be viewed as a share of:
• Total home purchases
• The mortgage market: purchase money, refinances, or the combined total, or
• The market for mortgage insurance
Furthermore, each of these measures can be calculated using either the total dollar volume of originations or by the unit count of originations. This is an important distinction, as the low average dollar value of homes financed using the FHA would lower its market share using a dollar volume measure, while it would increase a market share measure calculated with units.
Based on total home sales, a unit measure, the FHA’s market share fell by half from 2010 to 2014. Cash purchases increased following the housing bust due to tightened oversight and the specter of new regulations as well as from growth in investor demand. The increase in cash purchases reduced the share of purchases that were financed. In addition, private mortgage insurers (PMIs) expanded into the higher LTV ranges after 2011. The combined effect reduced the FHA’s market share.
By focusing on the mortgage market, the impact of cash purchases can be eliminated. However, the trend persists. The FHA’s share of mortgages for purchase as well as the combined purchase and refinance indexes fell sharply from 2009 to the 3rd quarter of 2014, the most recent data available. This trend holds true whether measured by units or dollar volume. The sharp rise in the “total” measures during 2014 depicted below in green and orange reflect the decline in refinancing following the rise in mortgage rates in the 2nd half of 2013, a portion of the market in which the FHA has historically played a minor role.
Another way to measure the FHA’s share is to focus specifically on its function as a mortgage insurer. The FHA, along with the Veterans Administration and the private mortgage insurance industry, provide insurance to the lender on loans where the borrower typically has less than a 20% down payment at origination. Measuring the mortgage insurance market by dollar volume, the FHA’s market share peaked in 2009 at 70.7% before easing to 34.1% in 2014. By the end of 2014, the FHA was within range of its average share in the late 1990s. The VA’s share of the MI market nearly doubled over this time frame with the expanded military over the last decade.
Finally, the FHA’s share of the market for mortgage insurers can also be measured by unit count. By unit count, the FHA’s market share peaked at nearly 72% of the market in 2008 at the height of its countercyclical role. The FHA’s market share fell steadily thereafter as the private mortgage market thawed allowing more borrowers to take advantage of better pricing in that segment (see post here for more information). Unfortunately, the trade association for private mortgage insurers that once provided this data no longer exists, so this series was not updated. Still, the trend was apparent and one can infer based on the other measures that this measure would decline as well.
The FHA’s market share expanded sharply following the great recession as private mortgage insurers dealt with rising defaults that taxed their capital, reducing their ability to issue new endorsements and to raise new capital. However, since 2011, the PMIs have recapitalized and expanded, repeatedly adding new products and reducing pricing. Today, the FHA’s role has declined significantly to within range of its historical role by several measures. Changes to the PMI’s capital requirements and pricing at the GSEs will likely improve their competitiveness, further shaping the FHA’s market share in the future.
REALTORS® sell homes both to resident and non-resident foreigners. How have sales to non-resident foreigners been, given that major parts of the world have been in economic slowdowns and that the value of the dollar has been appreciating?
The Answer is “Holding Up Reasonably Well.” As part of the REALTORS® Confidence Index survey REALTORS® provide information on existing home sales to non-resident foreigners. The level of sales fluctuates from month to month, so the graph presents the data on a 12 Month Rolling basis.
Sales to non-resident foreigners are currently in the 100,000 per year range, down a bit probably due to the current strength of the dollar and economic slowdowns in some foreign countries. With international economies now recovering, the outlook should be for additional sales and somewhat higher prices.
- Today, Case Shiller released their housing price index data for December 2014 which showed that house prices rose 4.3 percent from December one year ago for the 10-city composite, 4.5 percent for the 20-city composite, and 4.6 percent for the national index.
- On Monday NAR reported growing prices in December and some acceleration in January. Price growth in the year ended January 2015 was 6.3%. FHFA December data is to be released on Thursday.
- Case Shiller’s city by city data highlight some regional variation in price change. Cities where prices are growing above normal pace, such as San Francisco (9.3 %), Miami (8.4%), Denver (8.1%), Dallas (7.5%), and Las Vegas (6.9%), are predominantly in the West.
- Other areas where growth rates have been slower, like Chicago (1.3%), Cleveland (1.5%), Washington DC (1.5%), Minneapolis (1.9%), New York (1.9%), are concentrated in the Midwest and Northeast.
- Case Shiller data, like NAR data is showing more even price growth across regions than we’ve seen in previous months as prices picked up a bit in previously slow growing areas and slowed down a bit in previously double-digit growth areas.
- Also today, Fed Chair Janet Yellen delivered the semi-annual report on monetary policy to Congress. Fed watchers looking for clues on when the Fed will begin to raise interest rates will note that Chair Yellen explained the FOMC’s use of the word “patient.” The Committee intends the word to mean that it is “unlikely that economic conditions will warrant an increase in the… [fed funds rate] for at least the next couple of FOMC meetings.” Since the Committee left “patient” in the January statement, its next opportunity to be removed will come March 18 which suggests that the earliest Fed rate hike would come in June.
- Those in the mortgage market in Spring 2013 will remember that mortgage rates can move strongly based on just the suspicion that the FOMC is going to raise rates. In fact, from its February 5, 2015 low, the Freddie Mac weekly mortgage rate survey shows that 30-year fixed rates are up nearly 20 bps and other market indications are that trend will continue.
The information provided by REALTORS® about local market conditions in January 2015 indicated a broad uptick in confidence and market activity compared to that in December 2014.
REALTORS® reported more buyer activity in their markets on the heels of lower mortgage rates but, inventory was “low” in most areas, especially for “fresh” and “affordable” listings. A lower than normal level of new construction contributed to the lack of inventory. Qualifying for a mortgage was reported as difficult, although becoming easier (e.g., TX, CA, NY). Problems facing potential home buyers included modest income growth, weak credit and income profiles, and in the case of condominium buyers, projects not meeting eligibility guidelines for borrowers to obtain FHA/VA or conventional financing.
Looking ahead at the spring market and the increased buying interest, REALTORS® were broadly more optimistic about the outlook for the next six months. REALTORS® cited the positive effect of mortgage rates now at less than 4 percent and the reduction in FHA monthly mortgage insurance premium rates (by 0.5 percentage points). Optimism also increased in anticipation of the seasonal uptick in the spring season.
REALTORS® in states adversely affected by the harsh winter (e.g., MA, PA, IL) reported market slowdowns. In states with more oil and gas extraction activity (e.g., TX), there was concern about the impact of the steep drop in oil prices in their market. In coastal areas (e.g., FL, NJ), the uncertainty regarding flood insurance rates continued to be reported as affecting sales.
America’s housing stock is increasingly becoming old, with structures typically about 40 years old. This means that homeowners will likely need to do some renovation/remodeling for structural or aesthetic purposes prior to selling their home, or if sold on an as-is basis, homebuyers may need to undertake the renovation/remodeling themselves.
The financial burden of remodeling/renovating a home can be eased significantly by spreading out the renovation/remodeling or doing so on a do-it-yourself (DIY) basis. DIYs can cost less by as much as a half. For example, based on data from the 2013 American Housing Survey, a bath remodeling/renovation typically cost $3,000 (DIY) vs. $8,221 (professional), a kitchen renovation at $15,000 (DIY) vs. $35,821 (professional), and roofing at $1,800 (DIY) vs. $5,00s (professional).
Undertaking the activity might appear daunting to first-time homebuyers, but it is important to note that these added costs are still lower compared to the price differential between a new or existing home. The price differential between existing and new homes has widened from about 10 percent historically to about 37 percent in 2014. The median price of an existing home in December 2014 was $209,500, while the median price of a new home was $ 298,100—a difference of $88,600! Rising construction costs, increasing scarcity of lots, and low level of supply/inventory have pushed up prices of new homes.
What this Means to REALTORS® Many factors come into play in choosing a home, but first-time homebuyers may need to better appreciate the financial benefit of purchasing an existing home as a starting point for homeownership, instead of “saving up for a new home.” In addition to the initial financial benefit of purchasing a cheaper existing home compared to a new one, the homebuyer will start gaining equity which can then be used to “trade-up” to the next home, possibly a newer home.
 “Cost of Constructing a Home”, NAHB, http://www.nahb.org/generic.aspx?sectionID=734&genericContentID=221388&channelID=311.The National Association of Home Builders attributes the increase in the cost of new home construction to rising construction costs and larger house size. Construction costs are increasingly being pushed up by the rising cost of building permit fees, impact fees, and water and sewer inspection. The scarcity of land/lots has also pushed up the cost of lots on a per unit basis (per square foot) , but developers have compensated for this by reducing lot size.
The REALTORS® Confidence Index, based on approximately 3,000 random responses each month, provides insight on home buyer characteristics. An analysis of buyers by age shows the differences between age groups.
- Sixty percent of buyers aged 34 and under previously lived in a rental unit, compared to 34 percent of buyers aged 35 to 55.
- Buyers aged 34 and under have shown to make relatively low downpayments compared to buyers aged 56 and older, who typically put over 20 percent towards their downpayment.
- Buyers aged 34 and under are generally first time buyers. In contrast, buyers aged 35 and older typically buy homes for relocation purposes due to a job change, or for “other” reasons—typically moving from one home to another as personal and family circumstances change.
- New home construction activity in January was notably higher versus one year ago. But the momentum stalled as month-to-month activity fell even after accounting for normal winter seasonal factors. Overall assessment is that new home construction is still woefully inadequate.
- Specifically, housing starts in January reached 1.065 million units (seasonally adjusted annualized rate), a decline from 1.087 million in December, but an increase from 897,000 one year ago.
- The 50-year average on housing starts before the housing market crash was 1.5 million each year. That many new homes are needed to accommodate the rising population and to replace inhabitable homes. For 7 straight years, America has produced less than one million new homes. This great underproduction of homes is the reason for the continuing inventory tightness and should be a major source of concern about future housing shortage.
- The shortage is occurring in the single-family homes. The construction of new apartments (multifamily units) appears to be pretty much back to historical normal. Even so, the rental population has been booming and the apartment vacancy rates have hit historic lows. Therefore, a further boost to multifamily units may be needed as well.
- The months supply of inventory of new and existing single-family homes are at around 5 months. That is too tight and if it persists then home prices will strengthen at an unhealthy pace. Rents are also strengthening too fast. The bottom line is that homebuilders need to get busy. Another 50 percent boost to housing starts is needed to help alleviate inventory shortage.
- As with all economic data, housing starts data are seasonally adjusted. That helps to understand the momentum trends better. But the real world activity is such that in cold regions, like the Midwest, construction is minimal in winter compared to spring and summer. The winter lows tend to be about one-third the activity of summer highs.
- Because construction work is seasonal and not necessarily pleasant, migrant workers are often used in many countries. These workers return home in winter months. That is why there are many babies born in August to November months in countries where migrant construction workers come from.
Purchases for investment purposes appeared to be on the uptrend, according to the December 2014 REALTORS® Confidence Index Survey. Approximately 17 percent of REALTORS® reported that their last sale was for investment purposes (15 percent in November 2014; 21 percent in December 2013). Low interest rates, with the 30-year fixed mortgage rate now at below 4 percent, may have steered investors back into the market. Most investment buyers are in the ages 35-55 year-old bracket.
In the spirit of President’s Day we can use data from the 2014 Profile of Home Buyers and Sellers to see how the typical home differs from the White House.
Typical Home Purchased in the U.S.
- 84% of buyers purchased a previously owned home, with 79% of buyers choosing a detached single-family home.
- Looking at first-time and repeat buyers, both also purchased detached single-family homes more often with 75% of first-time buyers and 81% of repeat buyers.
- 50% of all buyers purchased their home in a suburb/subdivision. The typical detached single-family home purchased was 2,000 square feet.
- Homes purchased also had a median of 3 bedrooms, 2 bathrooms, and was built in 1993.
- Of all buyers, the expected length of tenure in the home purchased was 12 years.
The White House
- The White House was built in 1792, and in comparison is located in an urban or central area.
- The White House contains 6 levels, has 132 rooms, including 35 bathrooms.
- It also includes features such as: a tennis court, jogging track, swimming pool, billiard room, movie theatre, and bowling alley.
- While tenure in the median expected tenure in home lasts around 12 years, in the White House the expected tenure is between 4 and 8 years.
REALTORS’® outlook for the next six months for townhomes and condominiums was generally “weak” across most states, except in the District of Columbia, North Dakota, Colorado, Texas, California, Florida, Hawaii, and Alaska (red), according to the December 2014 REALTORS® Confidence Index Survey. These states have experienced strong job growth due to the oil/gas and information technology sectors. However, REALTORS® in the states that are heavily reliant on oil and gas such as Texas and North Dakota have started to caution about the effect of falling oil prices in their states.
REALTORS® continued to report that obtaining FHA unit financing for condominiums is difficult because many condominiums do not meet FHA eligibility criteria. Condominiums are frequently the entry point to homeownership for first-time homebuyers, more so with the growing interest for “walkable” and “smart” neighborhoods.What Does This Mean For REALTORS®? Helping buyers find starter homes may be an increasing challenge given FHA requirements and increasing demand. REALTORS® will need to work more patiently with homebuyers and present a wider set of feasible alternatives.
 Condominium projects need to pass eligibility criteria to be FHA-approved that will enable borrowers to avail of an FHA mortgage. Among others, criteria relate to the area devoted for non-residential use (no more than 25 percent),ownership (no more than 10 percent ownership by a single entity), delinquency dues ( no more than 15 percent), use of facility (assisted living facility are generally not eligible), and rental pooling arrangements (not eligible). See http://portal.hud.gov/hudportal/documents/huddoc?id=11-22mlguide.pdf
Using data from the 2014 Profile of Home Buyers and Sellers and 2013 Home Features Survey we can break down household composition, and the relationship it has to home purchasing choices.
Married couples had a median age of 43, whereas for married first-time buyers this was 31 and for married repeat buyers 51. Married couples made a median income of $98,300. For married first-time buyers the median household income was $79,400 and for married repeat buyers $107,800. For married couples, the median size of the home purchased was 2,090 square feet. The median price paid for their homes were $240,000.
Single female home buyers had a median age of 52. For first-time buyers the median age was 33, and for repeat buyers 58. For all single female homebuyers, the median household income was $54,800. For first-time buyers the median household income was $47,900 and for repeat buyers $60,600. For single females the median size of the home purchased was 1,500 square feet. Single females paid a median price of $153,600 for their home.
Single male home buyers had a median age of 47. For single males who were also first-time buyers the median age was 31, and for repeat buyers the median age was 56. Single males earned a median household income of $65,800, with first-time buyers earning $60,100 and repeat buyers earning $71,800. Homes purchased by single males had a median size of 1,570 square feet. Single males paid a median price of $173,700 for their home.
Unmarried couples had a median age of 33, with 28 for first-time buyers and 46 for repeat buyers. Unmarried couples earned a median household income of $80,800, with first-time buyers earning a median household income of $68,300 and repeat buyers earning $97,200. Unmarried couples purchased homes that had a median square feet of 1,640. The median price unmarried couples paid for their homes was $186,600.
For more information on how relationship status and household composition affects homeownership choices, check out the Relationships & Homeownership Infographic, the 2014 Profile of Home Buyers and Sellers, and the 2013 Home Features Survey.
REALTORS’® confidence about the outlook for the next six months improved significantly in December, according to the December 2014 REALTORS® Confidence Index Survey. In the single family market, the REALTORS® Confidence Index - Six-month Outlook increased to 67 (60 in November 2014; 66 in December 2013). An improving jobs market, the decline in the 30-year mortgage rate to about 4 percent, and recent measures by the Federal Housing Authority to lower the monthly mortgage insurance premium from 1.35 percent to 0.85 percent and the GSEs (Fannie Mae and Freddie Mac) to buy mortgages with 97% loan-to-value ratio may be underpinning this increased optimism. Optimism also picks up in anticipation of the seasonal uptick in the spring season.
Across many states, the index was greater than 50, which means that the number of respondents who have a “strong” outlook outnumbered those with “weak” outlook. The outlook for single family homes was strongest in North Dakota, Colorado, and Texas (red). However, REALTORS® in states that are heavily reliant on oil and gas such as Texas and North Dakota have started to caution about the effect of falling oil prices.
 The market outlook for each state is based on data for the last 3 months to increase the observations for each state. Small states such as AK,ND, SD, MT, VT, WY, WV, DE, and the D.C. may have less than 30 observations.
REALTORS® reported that local markets broadly picked up for single-family homes in December 2014 compared to November 2014, although market activity was more modest compared to a year ago, according to the December 2014 REALTORS® Confidence Index Survey.
The REALTORS® Confidence Index-Current Conditions for single-family homes was 51 (49 in November 2014; 59 in December 2013). The indexes for townhomes and condominiums remained below 50. REALTORS® continued to report that financing for condominiums is difficult to obtain because of FHA financing eligibility regulations. An index above 50 indicates that the number of respondents who viewed their markets as “strong” outnumbered those who viewed them as “weak.”
Rising employment, although accompanied by weak wage growth, and the decline in the 30-year fixed mortgage rate to slightly less than 4 percent since October 2014 likely accounted for the uptick in market activity.
 An index of 50 delineates “moderate” conditions and indicates a balance of respondents having “weak”(index=0) and “strong” (index=100) expectations or all respondents having moderate (=50) expectations. The index is calculated as a weighted average using the share of respondents for each index as weights. The index is not adjusted for seasonality effects.
- Job gains have been accelerating in the final months of 2014. Nationwide, 2.95 million net new jobs were added to the economy over the 12-months to December.
- North Dakota and Texas were leading the way. But the oil price collapse will slow the job growth pace in the upcoming months. Utah, Delaware, and Nevada round out the top-5 states in terms of job growth rates.
- At the bottom are Ohio, Mississippi, New Jersey, Virginia, and Alaska. Even so, these states are creating jobs, though not as strong as other states. That means that all states are steadily building the source of housing demand.
- Jobs will impact both residential and commercial real estate. Among the mid-to- large metro markets, the winners (those running at 3% or higher) are:
- Seahawks may be crying but they easily beat the Patriots home city of Boston in terms of job creation. Seattle’s job growth rate was among the winners at 3.2 percent versus Boston’s 1.9 percent. The thrilling ending just reminds us about how we wish we can take back one important decision in our life for a re-play. Life hurriedly moves on, however. What is done is done and no need to look back.
In which metro areas has building permit activity returned to the pre-bubble level?
Building permits have trended up during the past several months indicating that U.S. residential construction will likely strengthen in 2015.
Since building permits are an important leading indicator for developments in the economy, it is worthwhile to take a closer look at the number of building permits at the metropolitan level. The visualization below tracks the number of building permits issued in the 100 largest Metropolitan Areas for the following four periods:
2000 – 2003: Pre – Bubble period,
2004 – 2006: Bubble period,
2007 – 2011: Bust period,
2012 – 2014: Recovery period.
The first page of the visualization shows the annual growth of building permits for each of these periods. We see that:
2000 – 2003 (Pre – Bubble period):
Eight out of ten metro areas had positive growth while Portland – South Portland, ME had the highest annual growth (31.3%). In contrast, building permits decreased by 21.1% in Greensboro – High Point, NC.
2004 – 2006 (Bubble period):
The number of metro areas with positive annual growth of building permits dropped to one out four metro areas. Baton Rouge, LA showed the highest growth (32.3%) while Toledo, OH had the largest decline (-30.8%).
2007 – 2011 (Bust period):
None of the 100 largest metro areas exhibited annual growth in this period while Modesto, CA was the metro area with the largest decrease (-45.5%).
2012 – 2014 (Recovery period):
Three out of four metro areas had positive annual growth while Grand Rapids – Wyoming, MI took the lead with annual growth of 48%. However, Scranton – Wilkes – Barre – Hazleton, PA had the largest decrease among the 100 largest metro areas (-39.3%).
The second page of the visualization shows the change in the median number of building permits in each period compared with the pre – bubble period (2000-2003). The data seek to answer the question: In which metro areas has building permit activity returned to the pre-bubble level? Comparing the median number of the building permits during the pre – bubble period and the following periods, we observe that:
Bridgeport – Stamford – Norwalk, CT, El Paso, TX, and Shreveport – Bossier City, LA had permit activity that exceeded the pre-bubble period in each of the following three periods. For example, in El Paso, TX the median number of building permits was higher by 15.8% in the bubble period, 16.2% in the bust period and 14.6% in the recovery period compared with the pre-bubble period. Thus, those areas continued to experience solid levels of building permit activity throughout each phase of the cycle.
Austin – Round Rock – San Marcos, TX and Fayetteville – Springdale – Rogers, AR-MO recovered from the effects of the bust period and the number of building permits exceeded pre-bubble levels during the recovery period.
However, Greensboro – High Point, NC, Denver – Aurora – Broomfield, CO and Grand- Rapids – Wyoming, MI were not able to return to the pre-bubble level of building permit activity. For instance, in Grand Rapids – Wyoming, MI the median number of building permits decreased by 43.7% in the bubble period, by 87% in the bust period and by 78.5% in the recovery period compared with the pre-bubble level of building permit activity.
Please follow the tabs in the visualization below and see how much the number of building permits changed in your metro area over the years.
Bridgeport’s high percentages can be explained. The level of building permits during 2000-2002 was very low because of the financial problems in that area. However, in 2003, the number of building permits surged to 1,964 and it reached 3,119 in 2005 because many multifamily units were constructed. In 2010, in an effort to face the bust period effects, the local Housing Authority announced more plans for development and, thus the level of building permits rose again.
- The U.S. homeownership rate fell again in the fourth quarter of 2014 to its lowest point in over two decades. The latest 63.9 percent ownership rate is down from the bubble peak rate of 69.4 percent. A further drop is likely this year before finally settling down in the upcoming years.
- In the latest, 74.6 million American households owned their homes while 42.0 million households are renting their residence. From 10-years ago, the number of homeowners has decreased by about 1 million while that of renter households has increased by nearly 10 million. That is why we now have the lowest homeownership rate since 1994.
- Clearly the lending conditions had been ridiculously lax during the housing bubble years. But the pendulum on lending swung too much the other way and thereby has greatly limited the number of financially sound renters from converting into successful owners in recent years.
- Back in 2008-09, Warren Buffet, one of the most astute investors of all time, said to buy homes and then buy more homes. Many good renters did not or could not. By contrast, institutional investors who no doubt were already homeowners were able to raise money from Wall Street and did indeed purchase many properties as part of their investment portfolio. Given the rising home prices from 2008 in most places, those who bought are improving financially.
- America has become more unequal in wealth distribution. It’s a simple math. A typical homeowner’s net worth is estimated to have risen to $205,000 in 2014 (from the Federal Reserve estimate of $195,000 in 2013.). By contrast, a typical renter has $5,400 in net worth. But America has fewer homeowners while renter population has exploded. This is one key reason as to why many Americans continue to say tough economic times despite the economy officially being out of recession for over 6 years.
- Over the short-run, the homeownership rate is likely to fall further. The forecast for 2015 is about 500,000 net new renters and 500,000 net new homeowners. But the rise in numbers with a 50-50 split is such that the homeownership rate will continue to fall. Fortunately though, the rise in the number of both the renters and homeowners will mean increased business opportunities this year for real estate business practitioners.
- The U.S. economy grew in the final quarter of 2014, but at a slower pace. A sizable reduction in national defense spending and weakening exports from the rising dollar were key reasons for the slower expansion. Despite hitting the speed bump there is sufficient economic momentum for the economy to move ahead and easily avoid recession in 2015. Job creations will continue.
- Specifically, GDP in the fourth quarter grew at 2.6 percent (annualized rate) after the robust rates near 5 percent in the prior two quarters. The first quarter had been negative. GDP for all of 2014 – over four quarters – grew by 2.4 percent.
- The historical average GDP growth is right around 3 percent. Anything under that mark is considered subpar and anything above robust. The last time GDP grew above 3 percent for the whole year (and not just for one or two quarters) was in 2005. One can say the U.S. economy has been underperforming for nine consecutive years. The average over these nine years was 1.4 percent. Over the recent five years (after the Great Recession) the average was 2.2 percent.
- As to the most recent quarter, consumers opened their wallets with spending rising at 4.3 percent – the best growth in nearly a decade. The job creations and the extra money not spent at the gas pumps are helping. Business spending was soft, rising by only 2.3 percent (after 9.5 percent and 7.7 percent of the prior two quarters.) National defense spending collapsed, falling 13 percent, though after a strong rise in the prior quarter. Imports grew by 9 percent while exports grew by only 3 percent. That’s because other major economies are not growing and are unable to buy U.S. goods. This widening trade deficit hurts overall U.S. GDP growth.
- The 2015 forecast is for GDP to expand at near 3 percent. A big positive to economic growth this year will be the real estate sector. Both residential and commercial real estate construction are primed to rise. Low housing inventory and falling commercial vacancy rates will induce more construction and help the economy get back to normal growth rate.
- For how long can people not move? Historically home sellers lived in their homes for 6 or 7 years before deciding to put it for sale and make the next move. That was not the case in 2014. A typical home seller had lived in the same home for 10 years.
- A somewhat related trend was occurring for vehicles. The historic average age of a car was around 9 years. Then it rose to a record high of 11.4 years in 2013 and car sales remain tepid. But then in 2014 vehicle sales began to soar above historic average – to make up for the lost years, perhaps. The reason for holding on to the car for longer up to 2013 was no doubt due to weaker economic conditions and stagnant wages. However, with the economy strengthening and the job creation accelerating, people are ditching their old cars for new shiny ones. Could a same bursting out phenomenon occur for home sales in 2015?
- The underlying economic conditions for vehicle sales and home sales are the roughly same. Homes, however, have other special factors. Namely, the housing market crash had put a sizable number of homeowners in an underwater status and a good portion of them did not want to bother with the frustrating short-sale process. They have been waiting for home value to turn higher. Well, home values have been turning for the better, up 25 percent over the past 3 years on average. Therefore, there are likely pent-up sellers who had to wait in a better position to make the next move in 2015.
- One other factor for homes that is less relevant for auto sales is the lock-in effect of low interest rates. Mortgage rates have been unimaginably low and homeowners like it. They do not want to give that up to buy the next home. That is understandable. But today’s mortgage rates are also at essentially historic lows. So making the next move still means tapping the very low mortgage rates. Will 2015 therefore be a break out year for home sellers?