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 retail sales.
- Consumers are shopping, with retail sales rising by 5.4 percent from one year ago in July. Motor vehicle sales were boosted by 11 percent, while furniture/home furnishing stores notched up 3 percent. Food service and drinking places recorded 4 percent expansion.
- No doubt the recovery in the housing sector is providing the impetus for broader consumer spending. With home sales up 15 percent and home prices up 13 percent, spending on carpets, lawn care, moving trucks, and such naturally rises. Increases in housing wealth provide the confidence to spend more and help the economy.
- Buying stuff gives a boost to happiness for many people, even if temporarily, according to research. To this end, there will be even more happiness in upcoming months since the housing market recovery will continue and consumers will, therefore, shop more. Based on feedback loops of consumer spending, jobs, housing, and such, the economy should expand by better than 2 percent in the second half of this year, leading to 2 million net new jobs in 2013.
- But before getting carried away with shopping, we should be mindful of difference between temporary and lasting happiness. Here’s an example out of history: Empress Sisi is an iconic figure in Germany and Austria. She was considered by many to be the most beautiful person of her time. She lived in grand palaces and could buy anything she wanted. But in great contrast to her youthful and happy energetic days of running around freely as an ‘insignificant’ person, she became increasingly melancholy after being chosen as the wife of an Emperor. Her free spirits evidently died in the royal courtly life leading to a tragic end to her life. This story is a simple reminder for us that the best things in life, such as taking a walk in the park with a special person, cannot be purchased and are free and priceless.
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 federal budget deficit.
- The federal budget deficit continues to shrink. For the month of July, the deficit was $98 billion. Though large, it is down from $117 billion this time last year. The 12-month cumulative deficit is also shrinking.
- The reason for a smaller-sized deficit is that the housing market is recovering nicely and contributing to economic growth. As more people work, more pay taxes and fewer receive government benefits. Sequestration of automatic government spending cuts is also helping reduce the deficit. In addition, the profits from Fannie and Freddie are turned over to the government since these organizations have been effectively nationalized.
- Though it is good news that deficit is falling, it is still a deficit (too much spending in relation to tax revenue) and still very high by historical standards. Only faster economic growth can eventually help turn a deficit into a surplus – as happened during the late 1990s.
- In today’s world economy, Germany is the only notable economy with virtually no deficit. That is due to low unemployment in the country. Munich in particular has only a 2 percent unemployment rate, with Bavarian Motor Works (otherwise known as BMW) cranking out cars for exports. Germany did have high unemployment a decade ago and was known as the sick man of Europe. However, the labor market reform which permitted companies to easily fire workers led entrepreneurs to aggressively hire workers (Companies do not like to hire if they cannot fire). In addition, unemployment benefits were sizably reduced. The consequent job creations are contributing to a healthy German economy.
- The falling U.S. deficit is good news for homebuyers. Lower budget deficit will mean less pressure for the interest rates to rise quickly over time.
The Federal Reserve released its survey of senior loan officers (SLOOS) earlier this week. On its face, the survey suggests a modest loosening of credit for prime and non-traditional lending. However, the picture is a little more mixed for those groups and credit for borrowers with less than pristine credit remains tight.
Respondents to the SLOOS survey indicated an improvement in mortgage lending to prime and non-traditional borrowers. However, lending to subprime borrowers tightened from last quarter.
While respondents indicated a loosening of prime borrowing, this may not represent an expansion of credit to the market as opposed to a shift from FHA backing to conventional backing. As depicted below, the share of mortgages backed by either Fannie Mae or Freddie Mac that had a down payment less than 10% bottomed at 8% in 2010. Rising foreclosures put pressures on private mortgage insurers some of which became illiquid over this period and stopped issuance of new policies as a result. However, this trend reversed course in 2012 before rising sharply in 2013. The excellent performance of loans made in recent years has helped these companies to recapitalize as problematic older loans aged off company books. Furthermore, some companies restructured or received new infusions of capital, while a few new, freshly capitalized companies entered the industry. As a result, private insurers reintroduced support for lower downpayment mortgages and/or reduced pricing for it. Combined with better prospects for the market in 2013, the effect has been an increased willingness of lenders to originate loans for backing by the GSEs since pricing has improved and the counterparty risk from a weak or insolvent mortgage insurer has declined significantly. In short, if a borrower goes into default, the lender can count on the mortgage insurer to cover the cost. This change and improved pricing has shifted originations to the GSEs rather than to the Ginnie Mae which securitizes loans that are insured by the FHA. The shift from the FHA to private MIs helps elligible borrowers as private mortgage insurance rates are significantly lower.
While this shift signals a thaw in originators’ and insurers’ perception of risks, the change does not impact lending down the credit spectrum, so the credit box as a whole remains tight. Recent trends in FICOs and DTIs of purchase mortgages in the conventional market bear out this trend as the average FICO on conventional and FHA purchase originations remain significantly higher than prior to the period of loosened credit standards.
An interesting insight from the SLOOS this quarter is that lenders have become modestly more willing to originate non-traditional mortgages, which includes ALT-A or limited documentation, interest only, ARMs with multiple payment options, longer terms than 30-years or other such features. This is partly a reflection of new specialized entrants into the servicing industry. However, with home prices rising sharply and affordability softening, this might reflect consumers seeking to stretch their dollars. Many of these feastures would fall into the non-QM space, which sadles lenders with significantly more legal liability. It has been argued that few lenders would originate in this space, but it appears that a niche market has developed though its size is not clear. This trend may reflect close relationships between particular originators and specialty services, which would help to mitigate risk through information sharing and high touch with the borrower.
Finally, the SLOOS survey included several special questions this quarter regarding lenders’ willingness to originate in the 2nd quarter of 2013 as compared to the average for the entire period from 2005 to present. In general, lenders are near or slightly more conservative than the midpoint of this period. However, the difference in willingness to lend was notably tighter outside of the large banks, even for originating FHA product which provides a 100% backstop for these originators.
The housing market is on the rebound while the glacial pace of regulatory reform of housing finance is beginning quickening and the mortgage market is beginning to thaw. As a result, private capital is returning in the form of mortgage insurers, but private securitizations remain anemic in number and skewed to pristine borrowers, while lenders remain cautious against oversight and litigation. As rates rise, lenders are likely to push the credit box wider as higher rates and limited refinancing make purchase lending more profitable. However, until then access remains tight.
Proximity to the home country, the presence of relatives, friends and associates, job and education opportunities, and climate and location appear to be important considerations to prospective buyers. This information is based on the National Association of REALTORS® 2013 Profile of International Home Buying Activity, which captures transactions of respondents in the 12 months ended March 2013.
Arizona is one of the major destinations of international clients. About 66 percent of the reported international purchases for property in Arizona were from Canadian buyers.
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.
At the national level, housing affordability is down due to higher home prices even though mortgage rates are still historically low. What is affordability like in your market?
- Housing affordability is down for the month of June in the U.S. as prices reach their highest level since August of 2007. Mortgage rates, as measured by the FHFA monthly survey based on June home sales closing, ticked up a notch this month, bringing down affordability in June.
- Mortgage rates are still lower than a year ago and incomes are higher, but with inventory shrinking that will cause prices to increase which will continue to bring affordability down.
- By region, affordability is down from one month ago in all regions, with the Midwest seeing the biggest drop. From one year ago, affordability is down in all regions. The West had the biggest drop in affordability because it had the biggest price gain at 18.5%.
- Affordability will probably decline again next month as the rise in mortgage rates affects July closings. Affordability could strengthen in the months beyond that, if prices retreat from their seasonal peak enough to offset higher mortgage rates. However, if many buyers are looking to buy now to lock in historically low mortgage rates before they rise further, prices may not retreat as much as is typical. While affordability is down from its recent record highs, this June marks the 3rd most affordable June on record since the index was started in 1971.
- Check out 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.
Approximately 18 percent of respondents who reported a sale in May sold a distressed property, substantially down from levels a few years ago, but unchanged from April. REALTORS® continued to report strong demand for REOs from investors. [Source: June REALTORS® Confidence Index Survey]
What Does this Mean for REALTORS®?
The major market problem now is lack of home inventory: problems with distresseed real estate have declined significantly. The reported”Shadow Inventory” and expected problems have not shown up in the market to any signficant degree—and the market could absorb a significant increase in inventory if it did show up. Right now the major market problem is the lack of home inventories for sale.
- Foot traffic can give a strong indication 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 Shasta Association of REALTORS® rose 2% in July of 2013 compared to a year earlier. July was the second consecutive month of year-over-year gains following four months of consecutive declines in foot traffic.
- Traffic may ease due to higher mortgage rates since May, but that trend has not developed here yet.
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?