International buyers are generally upscale when buying a residential property in the U.S. Based on information in the 2013 Profile of International Home Buying Activity, which covers the 12-month period ending March 2013, the mean price of reported international purchases was $354,193, compared to a nationwide mean price for all home sales of $228,383.
The international non-resident client is likely to be substantially wealthier than the median domestic buyer, may be looking for a trophy property, and is probably looking for a property to be purchased after having met essential living needs. The international residential client may be looking for a property in a specialized niche, for example, a larger property suitable for multi-generational living, or a property that establishes the individual’s presence and standing in the community.
What Does This Mean to REALTORS®?
There is a good chance of having a foreign buyer, whose expectations and needs may differ from those of U.S. buyers. The site http://www.realtor.org/global provides a substantial amount of information that may be of help to REALTORS® not experienced in dealing with international clients.
- Foot traffic can provide great insight into the direction of future home sales. SentriLock, LLC. provides NAR Research with monthly data on the number of showings.
- Foot traffic in the area covered by the Pismo Coast Association of REALTORS® was 14% lower in July of this year than the same time in 2012.
- However, traffic has been consistently lower in 2013 reflecting tight inventories and the inability of new inventories or construction to meet demand.
This summer, NAR Research premiered a series of free webinars that took an in-depth look at several of our most popular surveys and profiles. Manager of Member and Consumer Survey Research Jessica Lautz led the webinars and discussed the highlights of each report. In case you missed any of this summer’s webinars, we have posted direct links below to the playbacks/downloads:
- Overview of the latest Profile of Home Buyers and Sellers
- Overview of the 2013 Profile of Home Buyers and Sellers Generational Trends Report
- Overview of the 2013 Home Features Survey
- Overview of the 2013 Commercial Member Profile, and the 2013 Member Profile
- Overview of the 2013 Investment and Vacation Home Buyers Survey
International home buyers are diverse group with a variety of interests. Resident foreigners, including recent immigrants, typically look for a home for their residence–frequently in a suburb. In contrast, non-resident foreigners more frequently look for vacation homes—typically in a resort. The 2013 International Profile of Home Buying Activity presents information on the intended use by international buyers for the property they purchase.
- Resident-foreigners generally intend to use the property as a home—71 percent focus on a residential use, compared with 25 percent intending to use the property for vacation use. Resident foreigners frequently locate in suburban areas.
- In contrast, non-resident foreigners expect by an 80 percent margin to use the property for vacation purposes, with 16 percent of purchasers focusing on primary use as a home. Typically non-resident foreigners may be looking in a resort area.
The Profile outlines the international buyer as a niche market—although very significant in a number of states. International buyers have special needs and interests when seeking a property. The report and the NAR website www.realtor.org/global contain information and data that may help the REALTOR® in understanding and working with the foreign buyer.
- Foot traffic and future home sales have a strong correlation. SentriLock, LLC. provides NAR Research with monthly data on the number of showings.
- Foot traffic in the area covered by the Marshalltown Board of REALTORS® (IA) rose 2% over the 12-month period ending in July of 2013. This increase in year-over-year traffic was the 4th consecutive, but marked a steady decline from the heady spring levels. The decline was exacerbated by the sharp increase in traffic last July.
- The sharp rise in mortgage rates is not likely to have a significant impact in this market as home prices are relatively low. Employment growth would have a more meaningful impact.
The sharp rise in mortgage rates from May to July of this year presents an opportunity to reflect on the merits of one pillar of the US mortgage finance system; the 30-year fixed rate mortgage. The 30-year FRM has many positive and a few negative qualities, but its role in the U.S. system is central and provides consumers with multiple important benefits. Additional options and alternatives for a stable long-term financing product could only benefit the system, but it is important to maintain one that works.
Rates for the 30-year FRM fell steadily over the last 30 years, but that trend is likely now at an end. Economic growth and the imminent end of the Fed’s MBS and Treasury purchase programs will likely cause long-term borrowing rates to rise over the next decade. This trend will present both lenders and consumers with challenges. Lenders will need to balance the risks of rising interest rates on deposits against fixed returns on portfolios of long-term mortgages. Likewise, mortgage backed securities with low coupons, or the rate paid to investors who own them, will fall in value as mortgage rates rise, creating headwinds for that funding channel. Consumers on the other hand will need to modify expectations for affordability and purchasing power as rising rates and inflation will erode both unless income growth can rise enough to compensate.
One alternative to a 30-year fixed rate mortgage is an adjustable rate mortgage, which can provide low upfront payments. Consumers can refinance these mortgages after a fixed term. This solution helps banks as it limits their exposure to a term miss-match between the short-term deposits that they fund longer term loans with. Consumers benefit from the lower upfront payment, but they face payments that are likely to increase when the rate resets or is refinanced. This change would reduce affordability and make it more difficult for consumers to budget for long-term priorities like saving for a child’s education or retirement. For example, if a consumer were to mortgage a property for $180,000 today with a 30-year FRM and a rate of 3.9%, the monthly principle and interest payment would be $845. The payment for the same home financed with a 5/1 ARM at 2.8% would be $744. However, in five years the payment on the ARM resets to float with the forecasted market rate  of 6.7% but limited by maximum 2% annual increases under the qualified mortgage rule. Thus, the monthly payment would increase by $205 to $949 in the 6th year before rising again by $213 in year seven for a total increase of 52% over the introductory fixed period. The ARM payment would be $285 higher than the fixed rate payment and it could rise further depending on market conditions. Furthermore, a borrower who held the fixed mortgage for eight years would benefit more than if they had held the 5/1 ARM and invested the proceeds of lower initial monthly payments. That benefit would reach $5,180 after a total tenure of nine years. One might refinance an ARM, but there too costs are incurred and access to a refinance might not be available if you are under water, standards are raised, or if finance markets are unstable. A borrower who is confident and correct in anticipating a shorter ownership period might benefit from a five or seven year ARM. Otherwise an ARM presents uncertainty and costs to a risk averse consumer.
Another option would be to finance the purchase with a 15-year fixed rate mortgage. This option helps originators again as the shorter term is easier to manage. However, for a consumer financing the purchase  the principle, interest, taxes and insurance using the 15-year product is $365 or 32% greater than with a 30-year mortgage.  What’s more the higher payment would cause the purchaser’s debt-to-income payment  to jump from 26% to 35%, a figure that might not pass underwriting, or might require a higher mortgage rate to compensate. To achieve the same DTI, the consumer would need to reduce the purchase price by nearly a third, a difficult proposition given relatively inelastic or fixed consumer expectations and market pricing of home size, commute and school districts.
But do consumers value the stability of a 30-year fixed rate mortgage? Based on the realized market share of the 30-year fixed in the conventional market since 1990, one can see that the 30-year FRM has enjoyed a significant if not dominant market share, a reflection of consumers voting with their wallets. This dominance was persistent through periods of both rising and falling mortgage rates.
An ARM might be a good product for a consumer who can accurately forecast mortgage rates, how long they’ll live in a house, who is comfortable with multiple refinances and who has access to credit regardless of market conditions. Other buyers may not be as perceptive, confident, or they might have another reason for preferring the longer duration of a 30-year fixed rate mortgage. Historically the average tenure for a home before resale was 6 years. That figure increased to 9 in recent years due to turmoil in the housing market and the recession. Tenures may ease in the near term with resurgent home values allowing many pent up sellers to come to the market along with a return to historically safe lending standards, but rising mortgage rates, weak income growth, more moderate price gains, and tighter credit standards are likely to extend household tenures for most owners in the long-term.
More important is the fact that tenure varies over the life cycle. Younger buyers may own a home for a few years before trading up, but by mid-life that pattern slows and the share of buyers who hold for longer than 15 years increases significantly, likely a reflection of the need for stability in child rearing. For instance, 21% of home sellers ages 45 to 54 years sold after 15 years, which means that they bought when they were 30 to 39. This pattern increases dramatically in the years after age 55, a period in which budgeting and increased savings is critical for retirement. This trend is likely to grow as the share of homeowners with defined benefit retirement programs decline and as the benefits from social security and Medicare decline.
Recently, the merits of the 30-year fixed rate mortgage have been debated in some mortgage finance circles. However, there appears to be little dispute for consumers; the 30-year FRM is a valuable tool for budgeting and that value will only rise with mortgage rates over the coming decade.
 Estimated as the CBO’s February baseline forecast of the 3-month Treasury plus the average margin from the PMMS survey. The 3-month Treasury is the only long-term forecast available and would be slightly lower than the LIBOR or prime rate. As such, this estimate is conservative and would likely be higher.
 Assuming a 10% down payment or a $200,000 home price, nearly the $208,000 March median national existing home price
 June average 30-year FRM and 15-year FRM rates from FHLMC
 Median household income from BLS forecasted through 2013
The first-time buyer has some characteristics different from the market as a whole. Based on data from the January to June 2013 REALTORS® Confidence Index surveys, 91percent of first-time buyers purchased their home using a mortgage. The median FICO score for first –time buyers was 720. In comparison, the 60 percent of repeat buyers using a mortgage had FICO scores of 750.
When it came to down-payments, 46 percent of first time buyers had down-payments of 3-6 percent, compared to the 46 percent of repeat buyers who put down more than 20 percent. Many investors, second-home buyers, and international buyers also paid cash. In short, the numbers confirm that the first-time buyer is much more dependent on the credit markets than is the case for other buyers—and in recent years has also faced significant issues as regards student loan balances.What Does This Mean to REALTORS®?
The first-time buyer is generally financially less prepared to buy a house than is the case for other types of buyers. In many cases first-time buyers also need assistance in defining the necessary trade-offs in finding a home in a specific price range. Finally, first-time buyers are typically inexperienced with the complex regulatory and legal procedures associated with the purchase decision. There are reasons why first-time buyers are currently lagging in market share—they face a lot of challenges.
In addressing the buying needs of first-time buyers the challenge is helping them understand the financial practicalities associated with the home purchase decision, and the need to be prepared to move quickly in inventory limited markets.
In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the Jobs Report and the Federal Open Market Committee statement.
- The Current Employment Situation, perhaps the biggest leading economic indicator in today’s market environment, showed that hiring in July was somewhat less than expected, but in spite of slower than expected growth in employer payrolls, the unemployment rate edged down 0.2 percentage point to 7.4 percent, the lowest level since the December 2008 reading of 7.3 percent.
- The stock market eased a bit in reaction to this news and bond rates eased slightly as investors try to interpret the data, specifically with regards to its impact on decision making at the Fed. A weaker number suggests the possibility of delayed Federal Reserve tapering (generally perceived as a net positive), but also means a weaker than expected economy (a net negative).
- In Bernanke’s public statements and testimony to Congress, he has generally focused on a threshold of 7 percent unemployment rate before the asset purchase program is scaled back and a 6.5 percent unemployment rate threshold for the beginning of Federal Funds rate increases—both of which are actions that will lead to higher mortgage rates and the anticipation of which is largely to blame for the recent surge in rates.
- In the FOMC statement released Wednesday following the latest meeting, the FOMC specifically observed that “mortgage rates have risen somewhat” in reviewing the potential risks to a strengthening economy. Additionally, one of the FOMC members who voted against the June statement fearing that it was not strong enough on inflation, voted for the July statement, suggesting that the consensus for tapering this year that some believed was beginning to form in June may not be as solid as once believed.
- Looking more closely at the employment report, growth in the number of private jobs was 161,000 compared to 162,000 net jobs added overall. The 1,000 growth in government payrolls was due to an increase in local government workers. States and the federal government both reported shedding employees.
- The bulk of employment gains were in service providing industries where gains were broadly spread across sectors. The top jobs-adding sectors in July were retail trade, professional and business services, and leisure and hospitality. The construction sector shed jobs on net, but there were gains in residential and non-residential building construction and in residential specialty trade contractors. There was also growth of 3,000 net jobs in the real estate sector though it is worth noting that since these jobs are payroll jobs, many of them are not real estate agents, but others working in the industry.
- In addition to slower than expected growth in July, data from May and June were revised down for a combined 26,000 fewer jobs than initially reported (roughly 7 percent), but revisions in this data are not uncommon, and last month’s release showed an additional 70,000 jobs in revisions.
- While average hourly earnings slipped down $0.02 in the month, they are up by 1.9 percent for the year. The average workweek also slipped by 0.1 hour in July.
Inventory/supply conditions were reported to be improving, as reflected in the increase in the Seller Traffic Index to 46 (from 43 in May). The Buyer Traffic Index dipped slightly to 69 in June (from 71 in May), possibly due to the impact of rising prices and higher mortgage interest rates. REALTORS® reported that not enough inventory was coming on the market from both REOs and homeowner listings as current homeowners wait for prices to move up further. About 47 percent of REALTORS® reported having potential sellers waiting for further price appreciation. The information is based on the June REALTORS® Confidence Index (RCI) Survey.
What Does this Mean for REALTORS®?
The major problem holding back the current residential sales market expansion is a lack of inventory. This is a condition that is likely to continue for the foreseeable future, so REALTORS® may want to focus on informing potential buyers as to the limited inventories of available homes and the need to move quickly once a desired home is identified.
What happens to government revenue and the economy if the mortgage interest or property tax deductions are eliminated? A new, independent research study weighs in…
Two new case studies by the Tax Foundation, a non-partisan tax research group based in Washington, D.C., show that if dynamic analysis, which allows for behavioral change, is used to estimate effects eliminating the MID or property tax deductions raises less revenue for the government than expected and reduces GDP growth, leading to job loss and lower wages.
- Every year, the Joint Tax Committee (JCT) estimates the amount of revenue lost as a result of tax expenditures. A “tax expenditure” is basically a reduction in taxation as a result of a particular tax payer activity such as paying mortgage interest or property taxes.
- In its most recent estimate, the JCT finds that the tax expenditure as a result of the Mortgage Interest Deduction (MID) ranges from $69 to $84 billion each year from fiscal year 2012 through 2017, putting it regularly among the top 5 tax expenditures (along with employer-paid health insurance, lower rates on capital gains and dividends, exclusions for employer retirement contributions, to name a few) . The JCT finds that the deduction for property taxes paid results in an expenditure of $25 to $34 billion each year in the same period. Writers sometimes use these figures to suggest that government revenue might increase by an equivalent amount if the MID were to be eliminated, but that’s not the case because people will adjust behavior once a change is made to the law and expenditure estimates do not allow for any behavioral change.
- Two new case studies by the Tax Foundation, a non-partisan tax research group based in Washington, D.C., show that if dynamic analysis, which allows for behavioral change, is used to estimate effects eliminating the MID or property tax deductions raises less revenue for the government than expected and reduces GDP growth, leading to job loss and lower wages.
- What types of behavioral change might be expected as a result of the loss of housing-related deductions? The authors write: “the people affected would respond to the higher marginal tax rates by working and investing less. In addition, the higher cost of home ownership would somewhat reduce the value of the owner occupied housing stock, either through lower home prices or the building of smaller housing units over time.”
- How much less revenue does the model suggest the government will bring in? Eliminating the MID using a dynamic model is estimated to bring in only 40% of the federal revenue implied in a static model. This is consistent with other academic studies suggesting that the revenue to the government after adjustments is somewhere in the 25 to 84 percent range. The study finds that eliminating the property tax deduction raises only about a third of the revenue implied in a static analysis.
- If revenue neutral tax reform is pursued, that is, if the additional revenue from the elimination of these deductions is used to offset other taxes paid, then the studies find that the effects on government revenue and economic growth depend on the type of reforms undertaken. The study results suggest that using the revenue gain to reduce income tax rates only, as was recommended in the Simpson-Bowles reform plan, has a negative overall effect on government revenue and the economy—a loss of $107 billion in GDP per year and a reduction in federal revenues of $26 billion per year for the MID elimination. By contrast, the study results suggest that a combination of tax rate reduction and 100 percent expensing for all non-corporate businesses would have a positive effect on GDP and federal income tax revenue in spite of the elimination of deductions—an increase in GDP of $50 billion and federal revenue of $8 billion in the case of the MID.
- The tax study also places a magnitude on the rate reduction: 8.7 percent for full elimination of the MID, 6.8 percent for full elimination of the property tax deduction, and smaller reductions if income tax rate reductions are secondary to other tax reform priorities. To put these rate reductions in context, a table below lists the reduced tax rates next to the tax rate schedule for single filers in 2013.
In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses mortgage applications and GDP.
- The number of people applying for mortgages to buy a home fell for the second straight week, though it still remains 5% higher than one year ago. Though mortgage rates did not meaningfully change over the past week, the recent higher rates compared to the beginning of the year are giving some would-be homebuyers pause. All-cash sales are not picked up in this data and cash has been making up about a third of all transactions.
- Refinance applications, meanwhile, are tanking. They are down 60% from one year ago. Though depressing for mortgage brokers, one positive piece of news for REALTORS® in this collapsing refinance activity is that resources and staff time are freed up to handle purchasing application with more focus.
- Be warned that mortgage rates will tick higher over time. There may be a few weeks of a reverse trend, but the general direction will be higher mortgage rates. NAR’s forecasting model predicts rates rising to 4.7% on a 30-year mortgage by year end and to 5.3% by the end of 2014.
- In separate economic news, the GDP rose at a sluggish clip of 1.7% in the second quarter. Past data – going all the way back to 1929 – were revised, though modestly. The prior quarter data revision was notable, as it showed a growth of a meager 1.1%. The historical normal growth rate is 3% and should be closer to 4% to 6% after a recession. Unfortunately we do not yet have decent economic expansion.
- Housing is one bright spot and is doing its job. The residential investment portion of the GDP rose by a healthy 13% in the latest quarter. Consumer spending was also helped as housing wealth rose. In short, without the housing market recovery the U.S. economy would more closely resemble Europe, where they face economic recession with job losses.
- Generally, economic growth will be the key to greater income mobility, and naturally greater residential mobility of wanting better houses. In countries with slow expanding or non-existent GDP growth, people on the bottom generally stay at the bottom while people on the top remain at the top. In countries with fast GDP growth, many of the previously poor rise to the middle class ranks or even higher. China, for example, through its growth-oriented policy after the death of Chairman Mao, has lifted 500 million people out of poverty with some becoming millionaires (who then buy houses in the U.S.). Strong economic growth not only creates jobs, but it is the way to really shake things up in terms of income mobility. NAR forecasts that GDP will steadily improve and growth will be 2.6% in 2014.
[A guest blog post from NAR's Manager of the Housing Opportunity Program, Wendy Penn]
NAR recently released the 2013 National Housing Pulse Survey. The findings show that a strong majority (78%) of renters say that homeownership is a priority for them in the future, with 51% calling it one of their highest priorities.
That is an impressive statistic, but it is not surprising. There is a reason homeownership is called the American Dream. Home is where we make memories, build our futures, and feel comfortable and secure. It’s no wonder that most renters want to own a home. So where are these renters and how can REALTORS® help them along the path toward homeownership?
REALTORS® need not look far to find renters. In communities across the country, the people who provide vital services – teachers, firefighters, bank tellers, and retail and restaurant workers – often are renters who cannot afford to buy a home in the areas where they work. This challenge leads to employees having to “drive until they qualify”, which means that workers who cannot afford to live near the workplace must travel outward until they find a neighborhood they can afford. The result is long commutes, traffic congestion, and less time spent with family and friends. One way REALTORS® can address this challenge is to become involved in creating workforce housing solutions.
Workforce housing focuses on expanding housing opportunities for America’s working families. REALTORS® are in a unique position to become partners in workforce housing solutions. They, together with business partners – chambers of commerce, homebuilders, economic development groups, lenders, and individual employers – can work alongside local officials and housing nonprofits to help increase housing opportunities for working families unable to afford to live in the communities where they work.
Social Benefits of Homeownership and Stable Housing, released by NAR in 2010, showed that homeowners move far less frequently than renters and therefore are embedded in the same neighborhood and community for a longer period. Further, the study showed that homeowners have a greater financial stake in their neighborhoods and are more likely to volunteer in their community. It makes sense that people who give their time and talents working in and serving a community would have a vested interest in living there as well. When teachers, police officers, young professionals, and others leave work they take their talents, social connections, and patronage with them. Workforce housing solutions can help keep these vital employees and their social investments in the communities they serve.
People who are able and willing to assume the responsibilities of owning a home should have the opportunity to purse the dream of homeownership, in their desired community, and REALTORS® can help. NAR has a variety of resources including grants, classes, technical assistance, and publications that REALTORS® and REALTOR® associations can use to address workforce housing issues.
Visit www.realtor.org/housingopportunity to learn more about workforce housing and NAR’s resources.
In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s second update discusses the Case-Shiller home price index.
- Case-Shiller May data, which is based on information from closings in March, April, and May, showed that home prices rose at their fastest rate since March 2006. The 10-city index was up by 11.8 percent from a year ago while the 20-city index showed gains of 12.2 percent. These gains are slightly higher than those measured by the FHFA last week and roughly in line with NAR and CoreLogic data for similar time periods. (all pictured in the chart above).
- Looking at the city data, all 20 cities saw home prices increase for the month and the year. Twelve cities had double-digit price growth in the year ending in May, and four of those (Atlanta, Las Vegas, Phoenix, and San Francisco) saw home price gains of more than 20 percent. This data is consistent with other sub-national price breakdowns which have showed the largest home price increases have been in the West, where distressed and non-distressed inventory has been rapidly absorbed.
- San Francisco had the largest year-over-year gain among the 20 cities, with home prices rising 24.5 percent. The smallest 1-year change was in New York, where prices rose only 3.3 percent.
- Nearly all of the recent price releases cover a period of data before interest rates began their swift rise of 100 basis points. The most recent home price data comes from NAR’s June EHS release, which likely had some sales that were affected by the early rise in rates. The June data showed a continuing trend of double-digit price gains from one year ago. From June 2012 to June 2013, prices rose 13.5 percent according to the latest data. Expect Case-Shiller and other house price measures to follow suit in June.
- Because NAR reports data on the median price of homes sold in a period, it is able to release data more quickly than other groups that employ a repeat-sales index process. While the NAR median price picks up fluctuations in house prices as well as the mix of homes sold in any given period, history shows that it is a reliable early indicator of future price changes.
- Yesterday NAR’s June pending home sales index, an early indicator for July and August sales, showed some weakness, but not nearly as much as analysts had expected given the sharp rise in rates. The earliest measurement of July housing market activity will come with NAR’s July Existing Home Sales release scheduled for August 21. Will prices remain resilient in the face of rising mortgage rates? Our indicators suggest that the price level and rate of increase will hold as long as supply pressures remain. What do you see in your market?
- The homeownership rate in America fell to the lowest level in nearly 20 years. The latest figure of 65.2 percent ownership rate in the first quarter of 2013 is down only a decimal point from the prior quarter, but still marks a continuing trend of falling rates since the bubble years when a record high of 69 percent of Americans owned their homes.
- The homeownership rate is likely to fall further before stabilizing. Why? The growth of households over the next two years is likely to be a 50-50 split between new owners and new renters. Though there is sizeable pent-up demand for home buying, excessively tight underwriting will limit the number of first-time homebuyers, thereby preventing conversion of renters to homeowners. Also recent job creations will unbridle young adults to move out of their parent’s home, but they will start out as renters.
- The rise in the renter population with no net increase in the owner population at a time of housing recovery automatically means greater unequal distribution of wealth. Housing wealth is rising because of price increases, but the wealth is going to the fewer and fewer households who happen to be homeowners and those who own more than one homes.
- Clearly, new and stronger regulation to prevent the excesses that led to the housing bubble is needed. The Wall Street titans who are no more, such as Bear Stearns and Lehman Brothers, made colossal mistakes in coming up with and betting on subprime mortgages. Other big Wall Street players received massive government aid at their time of need. But the new regulation out of Dodd-Frank is said to be confusing and burdensome, which greatly restricts credit availability. Construction loans are also hard to get, consequently leading to housing shortage and a rapid run-up in home prices. Many of the financially sound and credit worthy renters who are unable to participate in the housing recovery are therefore weeping.
- But as Dante’s beloved Beatrice is to have told him – “Stop the weeping now. Save the hotter tears for later.” For Americans, that later time is if PATH legislation becomes a law. PATH will significantly raise down payment requirements, make 30-year fixed rate mortgages harder to get, and boost mortgage rates for nearly all homebuyers since the government guarantee would be removed. Because PATH will favor large banks over small ones and would be vulnerable to too-big-to-fail, American taxpayers will face significant risk of bailing out large financial banks. PATH is a law against property and sustainable homeownership. PATH, in short, is a law against hard work and entrepreneurship.
- More info on PATH is here http://speakingofrealestate.blogs.realtor.org/2013/07/29/why-path-approach-to-fannie-freddie-phase-out-is-troubling/
The second quarter marked a noticeable improvement in the recovery trajectory of commercial REALTOR® markets. Based on the results of the July Commercial Real Estate Market Survey, commercial practitioners reported solid leasing activity and a double digit rise in sales volume. Nationally, 60 percent of REALTORS® reported completing a sales transaction during the quarter.
On a year-over-year basis, sales increased 12.2 percent in the second quarter, as prices rose 2.3 percent. Cap rates declined 50 basis points, from an average of 9.2 percent in the first quarter to 8.7 percent in the second. Multifamily properties recorded the lowest average cap rates, at 7.5 percent, followed by industrial spaces, at 8.2 percent. Office and retail spaces posted cap rates of 8.3 percent and 8.5 percent, respectively.
The average transaction price moved from $1.1 million to $1.0 million in the second quarter. Commercial practitioners continued to find financing as the top obstacle in closing deals, followed closely by price disagreements between buyers and sellers. Tight inventory remains a concern for one in five practitioners. In keeping with the upward momentum in the markets, REALTORS® rated the direction of commercial business opportunities 6.0 percent higher compared with the first quarter, in the wake of a 4.0 percent rise from the fourth quarter of last year.
Leasing was also moving steadily upwards, at a pace 5.0 percent higher over the previous quarter, pointing to a steadily rising demand. On the supply side, new construction finally showed signs of life, increasing 4.0 percent over the first quarter. Vacancies declined for all property types, except industrial and hotel properties. Office vacancies declined 7 basis points, to 16.9 percent, while retail availability declined 140 basis points, to 14.6 percent. Multifamily vacancy was 5.7 percent.
With sliding vacancies, landlords find fewer reasons to provide rent concessions. In addition, rental rates rose 2.0 percent during the second quarter. In terms of space requirements, tenant demand remained strongest in the 5,000 square feet and below, accounting for 70.0 percent of leased properties. Lease terms remained steady, with 36-month and 60-month leases capturing the bulk of the market.
For the full report along with respondent comments, please visit http://www.realtor.org/reports/commercial-real-estate-market-survey.
After reaching the highest level in over six years, pending home sales declined in June, with rising mortgage interest rates beginning to impact the market.
The Pending Home Sales Index, a forward-looking indicator based on contract signings, edged down 0.4 percent to 110.9 in June from a downwardly revised 111.3 in May, but is 10.9 percent higher than June 2012 when it was 100.0; the data reflect contracts but not closings.
Based on year-to-date sales activity, and stable contract signings expected for the balance of the year, NAR projects existing-home sales to rise more than 8 percent in 2013. Inventory shortages will lead the median price to rise by nearly 11 percent this year.
In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses unemployment insurance claims.
- Initial claims for unemployment insurance filed in the week ending July 20 slightly rose to 343,000, an increase of 7,000 from the previous week’s upwardly revised level. The increase is not unusual compared to the usual weekly swing in the data. The average level of initial claims is now at the pre-Great Recession level of about 350,000.
- A stable level of initial claims filed indicates that the economy is not losing more jobs. Unfortunately, there is still a large pool of under- and unemployed who needs a job. NAR expects about 2 million net new jobs in 2013. Fewer job losses and more job gains will provide support to increased home sales and rental apartment demand. However, much faster job growth is required to lower the unemployment which as of June was at 7.6 percent.
In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses new home sales and mortgage applications.
- The recent increase in mortgage rates continues to weigh on new home purchases. The Mortgage Bankers Association released its weekly survey of mortgage applications this morning. The purchase component eased 2.1% this week relative to last and has eased by more than 2% in four of the last 6 weeks. This data is seasonally adjusted so the downward trend in applications reflects the strong upward increase in mortgage rates over the same time frame. Rates eased modestly this week in daily trading and are likely to show a moderate decline in tomorrow’s release by Freddie Mac.
- On a more positive note, sales of new homes jumped 8.3% from May to June to a seasonally adjusted annualized rate of 497,000, in part due to a strong increase in June, but also due to a moderate downward revision in May. Sales of new homes have increased for three consecutive months.
- Sales of new homes are hamstrung by low inventories, though. The months supply of new homes eased to 3.9 in June from 4.2 in May, and 4.8 in June of 2012. A figure of 6.5 would be more indicative of a market in balance.
- Low inventories relative to strong demand is pressing up on new home prices, which rose 7.4% over the 12-month period ending in June to $249,700; the 12th consecutive year-over-year increase. The median existing home price was 16.3% lower at $214,700, above the historical average spread of 12.3%, suggesting that existing homes are relatively cheap by historical standards.
- New sales continue to chug along, which is important for new construction and job creation. However, mortgage rates are beginning to have an impact on home purchases. Some of this impact may prove transitory as buyers re-set their expectations and more sellers bring much needed inventories to the market ahead of higher rates. Limitations from Basel III on speculative building and access to capital markets have hampered smaller builders from expanding production to ease supply shortages. Higher rates and prices will erode affordability going forward, though, weighing on sales unless lenders expand originations to take advantage of higher rates and reduced risks in the lending environment.
Canada has remained as the top source of international clients purchasing U.S. property, as reported in the National Association of REALTORS® 2013 Profile of International Home Buying Activity, which summarizes the survey responses of over 3,300 REALTORS® for the 12 months ended March 2013.
Approximately 71 percent of reported purchases by Canadian buyers were for properties in Florida, Arizona, and California. Canadian buyers preferred to locate in a suburban or resort area. Further, according to information from Realtor.com ® based on access to the website, the five markets of greatest interest to Canadians are Las Vegas, Fort Lauderdale, Orlando, Detroit, and Naples.
Other information about Canadian buyers:
- 98 percent purchased a residential property;
- 47 percent purchased in a small town/resort and 41 percent in a suburban area;
- the median price of the reported properties was $183,000;
- about 86 percent purchase on an all-cash basis.
There is a good chance of having a foreign buyer, whose expectations and needs may differ from those of U.S. buyers. The site http://www.realtor.org/global provides a substantial amount of information that may be of help to REALTORS® not experienced in dealing with international clients.
In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the FHFA home price index.
- FHFA data today show that prices were up 7.3 percent from a year ago in May. For the same period, NAR reported that prices rose 12.7 percent and CoreLogic reported a 12.2 rise in home prices. Case Shiller data covering a similar period of time will be available a week from today.
- Looking closely at the May data, we see that the biggest gains from a year ago were in the Pacific (Hawaii, Alaska, Washington, Oregon, and California) and Mountain (Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona, and New Mexico) divisions. NAR data also showed the largest gains in home prices occurred in the West. From one year ago the smallest gains were in the East South Central (Kentucky, Tennessee, Mississippi, and Alabama) and Middle Atlantic divisions (New York, New Jersey, and Pennsylvania).
- From one month ago, the biggest gains were in the South Atlantic (Delaware, Maryland, District of Columbia, Virginia, West Virginia, North Carolina, South Carolina, Georgia, Florida) where prices advanced by 1.8 percent. The East South Central division showed weakness from April to May as prices slipped 1.5 percent.
- In yesterday’s EHS release, NAR data showed a continuing trend of double-digit price gains from one year ago. From June 2012 to June 2013, prices rose 13.5 percent according to the latest data. Because NAR reports data on the median price of homes sold in a period, it is able to release data more quickly than other groups that employ a repeat-sales index process. While the NAR median price picks up fluctuations in house prices as well as the mix of homes sold in any given period, history shows that it is a reliable early indicator of future price changes.
- Based on the FHFA data, the market price peak occurred in April 2007, and the current index is 11.2 percent below that peak, roughly in line with its January 2005 level.