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Updated: 27 min 30 sec ago

Latest Case Shiller Housing Price Index

Tue, 07/28/2015 - 15:31
  • Today, Case Shiller released their housing price index data for May 2015 which showed that house prices rose 4.7 percent from May 2014 for the 10-city composite after a 4.6 percent gain in April and 4.9 percent for the 20-city composite after a 4.9 percent gain in April. The national index showed a gain of 4.4 percent year over year after a gain of 4.3 percent the month prior.
  • Last week the National Association of Realtors® (NAR) reported rising prices in May and June. Price growth in the year ended June 2015 was 6.5 percent after an 8.0 percent rise in May 2015. The Federal Housing Finance Agency (FHFA) also showed price gains of 5.7 percent for the year ended May after a gain of 5.5 percent for the year ended in April.
  • Today’s release from Case Shiller provides evidence that home prices in some areas are accelerating. In other areas, prices may not be accelerating, but they continue to grow at a strong pace. Strong buyer demand and low inventories coupled with relatively low levels of new construction are helping prices continue to grow and the keep housing market tipped in favor of sellers.
  • NAR showed that national median prices have reached the previous peak, and FHFA reports that prices are within two percent of their previous peak. The Case Shiller National Index is within eight percent, but the 10-city and 20-city indices are still more than ten percent from peak.
  • Of course, potential buyers and sellers should be sure to put the national numbers in the context of what is going on in their local markets. The fastest overall growth rates were seen in Denver (10.0%), San Francisco (9.7%), Dallas (8.4%), and Miami (8.0%) in the year ending May 2015—a repeat of last month’s top markets. By contrast, Washington DC (1.3%), Cleveland (1.6%), and Chicago and Boston (tied at 2.2%) had the slowest year over year growth. Data shows that sellers in these somewhat weaker areas may not have as much power to demand higher prices for their homes given the local market.
  • NAR reports the median price of all homes that have sold while Case Shiller reports the results of a weighted repeat-sales index. Case Shiller uses public records data which has a reporting lag. To deal with the lag, Case Shiller data is based on a 3 month moving average, so reported May prices include information from repeat transactions closed in March, April, and May. For this reason, changes in the NAR median price tend to lead Case Shiller and may suggest that price growth could be slowing in the next few months but is likely to remain strong. The current strong pace needs to slow somewhat to keep housing prices in line with job and wage fundamentals.

Rising Home Prices and Falling Mortgage Debt

Tue, 07/28/2015 - 11:17
  • Today’s homeowners are in the best financial shape in recent memory. Home prices have been rising while overall mortgage debt levels have been falling. As a result the net housing equity has nearly doubled in the past four years. This equity gain, which can be used as a down payment, will provide a greater number of existing homeowners to trade-up.
  • The overall value of all real estate holdings of every household combined in America reached $21.1 trillion in the first quarter of 2015, up from $16 trillion in 2011. Moreover, this equity gain is evidently not being squandered to buy SUVs or flat-screen TVs since the overall mortgage debt has been falling. Houses are no longer being viewed as ATMs and that’s a good thing.
  • The combined effect of rising asset value and falling debt value has pushed up net equity position of homeowners to $12 trillion, which has essentially doubled in the past four years. Homeowners are clearly happier as result. Given that many homeowners use housing equity as source of down payment for the next home purchase we should expect an increasing number of them wanting to list their home in order to trade-up (or even trade-down).
  • There are many reasons for moving into another home: better schools, needing a larger home after having babies, job relocation, enhanced status, retirement, etc. Historically, recent home sellers had stayed in their home for about six to seven years before bolting for a new place. In 2014, however, a typical home seller had stayed put for ten years. That implies a sizable pent-up desire for wanting to relocate. Now, these home sellers have the equity to make that move.
  • Not all is fine, however. The first-time home buyers have still not shown up to the market place. Their share of total home sales, according to REALTOR® survey, is only 30 percent so far this year. It should be closer to 40 percent in more normal circumstances. Rising home values has hurt the affordability for those who are not homeowners, like the first-time buyers. In addition, mortgage credit availability has been excessively tight. As a result the homeownership rate is at a 25-year low, which sadly is contributing to America becoming more unequal in wealth distribution.

Repeal of IRC Section 1031 Would Cause Decrease in Real Estate Values

Mon, 07/27/2015 - 15:26

This blog post was written by George Ratiu, Director of Quantitative & Commercial Research and Erin Fitzpatrick, Research Intern.

Real estate is an integral part of economic activity, with transactions providing avenues for exchange, development, and growth opportunities. Within this framework, like-kind exchanges (LKE) provide an important vehicle to sell and acquire property.

Like-kind exchanges are available to individuals, partnerships, corporations, limited liability companies, as well as trusts. The main requirement of a like-kind exchange is that the sale of one property and acquisition of another property must be part of an integrated transaction, rather than two individual transactions.

The Internal Revenue Code (IRC) Section 1031 codifies that the tax owed on any gain after a sale may be deferred as long as the proceeds are reinvested in a similar property through a like-kind exchange. The Internal Revenue Service (IRS) makes note of the fact that while the gain “is tax-deferred […] it is not tax-free.”[1]

Like-kind exchanges (LKE) feature prominently in NAR members’ real estate transactions, as well as their clients. As most REALTORS are small business owners, and as they represent a wide range of small businesses across the country, LKE transactions are important for Main Street.

The Like-Kind Exchanges: Real Estate Market Perspectives 2015 report details the potential impacts upon REALTORS® transactions due to the absence of the tax deferral provision of IRC Section 1031. Repeal of like-kind exchanges or tax-deferral provisions would have a significant ripple effect through real estate markets. A majority of NAR members—95 percent—indicated that they would expect a decrease in real estate values if IRC Section 1031 was repealed. Additionally, 94 percent expected a decrease in demand for core assets/business/service as a result of a potential repeal.

In addition, repeal of like-kind exchanges would impact debt financing of real estate transactions. According to 86 percent of members, there would be a decrease in new constructions loans. Purchase money loans would experience a decline, as well, based on 63 percent of responses. Moreover, 66 percent of NAR members indicated that real estate would experience large increases in leverage. In terms of refinance activity, the responses were somewhat more balanced, with 58 percent considering there would be an increase in activity and 42 percent projecting a decrease in activity.

To access the Like-Kind Exchanges: Real Estate Market Perspectives 2015 report, visit http://www.realtor.org/reports/like-kind-exchange-survey.

[1] Internal Revenue Service, Like-Kind Exchanges Under IRC Code Section 1031, FS-2008-18, February 2008

Contracts: Closings and Terminations

Mon, 07/27/2015 - 10:43

How many of the Pending Sales announced every month actually go to closure?  According to information from the REALTORS® Confidence Index Survey, the answer is “Almost All, generally over a period of up to 60 days depending on buyers’ and sellers’ needs.”  To be specific:

  • 63 percent of contracts are reported as settling on time.
  • 29 percent of contracts are delayed, but eventually go to settlement.
  • Seven to eight percent of contracts do not close—i.e., they are terminated.  Generally the potential buyer moves on to another purchasing opportunity.

 

The top three contract delay problems are financing, appraisal, and home inspection issues.

What Does This Mean for REALTORS®?

As identified, a lot of the work performed by REALTORS® seems to be educational—providing the “street smarts/applied knowledge” needed to get financing done and properties in acceptable condition (i.e., appraisal, home inspection).  REALTORS® can find a lot of information on the NAR website related to contract problems and solutions.  As professionals, REALTORS® can provide the information to the potential buyer to help to move the closing process along.

The Latest on New Home Sales

Fri, 07/24/2015 - 10:53
  • New home sales fell for the second consecutive month, but the subdued activity is more of a reflection of homebuilders not actively breaking ground for single-family home construction.
  • Specifically, the new home sales pace on an annualized basis was 482,000 in June, a decline of 7 percent from one month ago. From one year ago, sales are up by 18 percent. Still, by historical standards, new home sales can be said to be still crawling near the bottom.
  • The new home market is still soft, largely due to too few new housing starts. If homebuilders do not build then they just don’t have enough to sell. Local government officials need to approve a greater number of housing permits for ownership homes. Recently, most of the gains in housing permits have been for apartments.
  • Currently it takes only four months to find a buyer for a newly constructed home on average, which is still a good fast pace considering it took over a year to find a buyer during the market downturn. In other words, if homebuilders build it then a new home will sell without much problem.
  • The median price of a newly constructed home was $281,800 in June. The price in the past two months has trended lower.  Homebuilders are likely building smaller-sized affordable homes to cater to first-time homebuyers. For comparison, the median price of an existing home was $236,400 in June. The price premium of a new home over an existing home is now around 20 percent, returning closer to the historical normal. That premium ratio had been unusually high at 37 percent in the past four years from 2011 to 2014.
  • There are indications of the younger generation’s willingness to buy (rather than rent) a very small, ‘micro-size’ condominium of 400 square feet or less. Perhaps influenced by watching Seinfeld, Sex in the City, and other TV shows with urban themes, they appear to be seeking residences with walkability. They are fine with no stove as long as there is a microwave. Leave It to Beaver, Father Knows Best, and the Brady Bunch featuring houses with large yards were for the old folks in the olden days. However, there will always be a demand for suburban homes for the simple reason that the young inevitably turn old in time.

REALTORS® Expect a “Strong” Market Over Next Six Months in Many States

Thu, 07/23/2015 - 11:40

In June 2015, REALTORS® were by and large “strongly confident” about the outlook over the next six months compared to a year ago, according to the June 2015 REALTORS® Confidence Index Survey Report.[1]

The maps show the REALTOR® Confidence Index Six-Month Outlook across property types by state.[2] In the case of single-family homes, all states registered an index greater than 50, which means that the number of respondents who had a “strong” outlook outnumbered those with “weak” outlook. Despite the drop in oil prices, the real estate market remained “very strong” in states with significant oil/shale industries such as North Dakota, Texas, Alaska, and Oklahoma where the indices were above 75.

In the case of townhomes and condominiums, the outlook over the next six months was “very strong” in Colorado, Wyoming, and Nebraska. The outlook for home buying activity for condominiums and townhomes was “strong” in California, Oregon, and Washington where technology-related jobs have been growing robustly. REALTORS® continued to have “strong” outlook in Texas despite the slump in oil prices. In Virginia and West Virginia, the levels of confidence were broadly “moderate.” Among all property types, the condominium market is the weakest, with REALTORS® reporting about condominium financing issues for both FHA-insured and the GSE-backed loans.[3]

[1] Respondents were asked “What are your expectations for the housing market over the next six months compared to the current state of the market in the neighborhood(s) or area(s) where you make most of your sales?”

[2] The market outlook for each state is based on data for the last three months to increase the observations for each state. Small states such as AK, ND, SD, MT, VT, WY, WV, DE, and D.C. may have less than 30 observations.

[3] FHA and the GSEs have financing eligibility criteria  relating to ownership occupancy requirements, delinquent dues, project approval process, and use for commercial space. See the Statement of NAR Submitted for the Record to the Senate Committee Housing and Banking Affairs on December 9, 2014 at http://www.ksefocus.com/billdatabase/clientfiles/172/1/2180.pdf

IRC Section 1031 Tax Deferral Is a Critical Feature for Real Estate Transactions

Thu, 07/23/2015 - 11:18

This blog post was written by George Ratiu, Director of Quantitative & Commercial Research and Erin Fitzpatrick, Research Intern.

Like-kind exchanges (LKEs) offer a valuable venue to dispose of and acquire similar properties. The Internal Revenue Code (IRC) Section 1031 codifies that the tax owed on any gain after a sale may be deferred as long as the proceeds are reinvested in a similar property through a like-kind exchange.

According to the IRS, “like kind property is property of the same nature, character or class. […] Most real estate will be like-kind to other real estate.”[1] Generally, a parcel of land with a rental house may be exchanged for vacant land. Similarly, an office building may be exchanged for an industrial warehouse or a retail shopping center. The Internal Revenue Service (IRS) also makes note of the fact that while the gain “is tax-deferred […] it is not tax-free.”[2] At some point, the property owner disposes of the property and gains are recognized, leading to tax payments.

Like-kind exchanges provide several major benefits. The main one is the freer flow of capital. LKE transactions allow property owners to allocate capital more efficiently and be flexible in the face of changing economic and market conditions. Another main benefit is that LKE transactions lead to commerce—as they involve multiple parties—as well as economic growth through job creation.

The Like-Kind Exchanges: Real Estate Market Perspectives 2015 report details the potential impacts upon REALTORS® transactions due to the absence of the tax deferral provision of IRC Section 1031. Based on responses, 40 percent indicated that transactions would not have happened at all during 2011-14 without the availability of like-kind exchanges. Another 24 percent reported that about 75 – 99 percent of their transactions would not have occurred, and 18 percent of members marked that 50 – 74 percent of transactions over a four-year period would not have occurred absent the tax-deferral option.

The effect remained significant when respondents were asked about the likely impact upon those transactions which would have occurred even assuming the absence of IRC Section 1031. NAR members’ answers showed that a significant proportion—56 percent—considered the project would have been smaller than it was. Only 12 percent of answers indicated that the absence of like-kind exchanges would have had no effect on their 2011-14 transactions. The question offered respondents the option of selecting “Other” as a choice, with the availability of an open-ended comment response.  The “Other” option garnered 32 percent of answers, with a majority of comments stating that no transaction would have occurred without a like-kind exchange available.

To access the Like-Kind Exchanges: Real Estate Market Perspectives 2015 report, visit http://www.realtor.org/reports/like-kind-exchange-survey.

[1] Ibid.

[2] Internal Revenue Service, Like-Kind Exchanges Under IRC Code Section 1031, FS-2008-18, February 2008

REALTORS® Confidence Index Survey: June 2015 Survey Highlights

Thu, 07/23/2015 - 11:05

The information provided by REALTORS® based on their client interactions indicates that the real estate market remained broadly “strong” in many local markets in June 2015, according to the June 2015 REALTORS® Confidence Index Survey Report.

The REALTORS® Confidence Index Current Conditions and REALTORS® Confidence Index Six-Month Outlook indices were above 50 for single-family and townhome sales but fell below 50 for condominium sales. An index greater than 50 indicates that the number of respondents who viewed the market as “strong” outnumbered those who viewed the market as “weak.” The REALTORS® Buyer Traffic Index was also above 50, while the REALTORS® Seller Traffic Index remained below 50, an indication of tight supply across many local markets. With strong demand amid tight supply, properties typically sold within 34 days nationally. First-time home buyers accounted for 30 percent of sales. Cash sales slid to 22 percent of sales as purchases for investment purposes dipped to12 percent, and distressed properties dropped to eight percent of sales.

Realtors® noted a number of issues weighing down the market’s momentum:

  • Tight inventory.
  • Affordability issues: fewer affordable homes, so sellers are also hesitant to move.
  • Financing issues: difficulty in qualifying for a mortgage due to higher FICO credit score and down-payment standards, protracted mortgage approval process, and condominium-financing issues.
  • Appraisal issues: conservative estimates, “out-of-town appraisers,” and slow turn-around.
  • TRID regulations that may delay closing/settlement of transactions.
  • Rising interest rates.
  • Declining demand from international buyers due to a strong U.S. dollar.
  • Uncertainty about flood insurance rates and reform.

Like-Kind Exchanges Account for 39 Percent of REALTORS® Sales Volume

Wed, 07/22/2015 - 10:17

This blog post was written by George Ratiu, Director of Quantitative & Commercial Research and Erin Fitzpatrick, Research Intern.

Like-kind exchanges (LKE) provide an important vehicle to sell and acquire property, and are an integral component of small business activity. The Internal Revenue Code (IRC) Section 1031 codifies that the tax owed on any gain after a sale may be deferred as long as the proceeds are reinvested in a similar property through a like-kind exchange.  The provision is of great importance to real estate investors, brokers, agents, and members of the NAR.

The Like-Kind Exchanges: Real Estate Market Perspectives 2015 report—based on a survey of over 100,000 REALTORS®—highlights the importance of LKEs to real estate.  Based on NAR members’ responses, the average total fair market value (FMV) of all real estate sold or transferred in 2014 was $7.0 million per respondent.  Of the estimated $7.0 million of total fair market value that the average REALTOR® disposed or transferred in 2014, nearly 40 percent was disposed or transferred pursuant to IRC Section 1031. The deferred gain component accounted for 36 percent of the total fair market value sold or transferred during the year, with the difference likely made up of realized gains.

 

When asked about the total fair market value of their transactions during 2014, members indicated different volume, consistent with NAR’s other surveys of member activity. Commercial members reported an average annual transaction volume of $7.7 million. Residential members indicated an average sales volume of $5.0 million for 2014.

When asked about the proportion of fair market value which was tied to like-kind exchanges and deferred gain, commercial members pointed to a slightly higher percentage compared with residential members. Based on the $7.7 million in total transactional value, commercial members responded that 41 percent of it was exchanged pursuant to IRC Section 1031, and 37 percent elicited deferred gain for participants. In comparison, residential members had a slightly lower incidence of like-kind exchanges—33 percent, with an equal proportion benefiting from deferred gain.

To access the Like-Kind Exchanges: Real Estate Market Perspectives 2015 report, visit http://www.realtor.org/reports/like-kind-exchange-survey.

Like-Kind Exchanges Are Integral to Small Businesses

Tue, 07/21/2015 - 15:04

This blog post was written by George Ratiu, Director of Quantitative & Commercial Research and Erin Fitzpatrick, Research Intern.

For a significant proportion of real estate market participants, like-kind exchanges (LKE) provide an important vehicle to sell and acquire property. The Internal Revenue Code (IRC) Section 1031 codifies that the tax owed on any gain after a sale may be deferred as long as the proceeds are reinvested in a similar property through a like-kind exchange.

According to the IRS, “like kind property is property of the same nature, character or class. […] Most real estate will be like-kind to other real estate.”[1] Generally, a parcel of land with a rental house may be exchanged for vacant land. Similarly, an office building may be exchanged for an industrial warehouse or a retail shopping center. The IRS makes exception with real properties located outside the United States, noting that domestic U.S. real estate may not be treated as like-kind to international real estate.

Like-kind exchanges are available to individuals, partnerships, corporations, limited liability companies, as well as trusts. While the general assumption may be that mostly large real estate investors benefit from LKEs, the data reveal that like-kind exchange transactions are intensively employed by small businesses, comprising an integral component of their real estate activities.

The Like-Kind Exchanges: Real Estate Market Perspectives 2015 report—based on a survey of over 100,000 REALTORS®—highlights the importance of LKEs to small businesses.  REALTORS® were asked about the composition of business entities which held the properties transferred through a like-kind exchange. The survey results show that 48 percent of the total fair market value of exchanged properties was held in an individual or sole proprietorship. Close to half of LKE transactions in REALTORS’ markets occurred between small investors.  The survey results indicate that 33 percent was held in a S-Corporation, Partnership, LLC, LLP, or MLP. An additional 10 percent of properties were held in C-Corporations (which excluded REITs).

[1] Internal Revenue Service, Like-Kind Exchanges Under IRC Code Section 1031, FS-2008-18, February 2008

Latest Housing Starts

Tue, 07/21/2015 - 11:02
  • The latest data on housing starts suggests the construction of new apartments is now well above historical trends.  On the other side of the coin, the construction of condominiums and single-family homes continues to be well below historical trends.  Such a development could nudge the country towards a renter nation.
  • Here are the numbers for June.  Housing starts were up 10 percent over the month and up 27 percent from one year ago.  Nice gains overall.  However, a bifurcation is developing as multifamily starts soared (up 29 percent) while single-family housing starts actually fell (down 1 percent).  The chart below shows that the multifamily construction of 489,000 annualized production rate is above the long-term average while the single-family construction rate of 685,000 is about half the normal of its long term trend.
  • One may reason that the bifurcation is occurring because of a shift in consumer taste.  More consumers want to be renters and builders are simply satisfying that demand.
  • On the other hand, government policies may (unintentionally?) be pushing people in rental housing.  What happens if there is a plentiful supply?  The price of that product goes down.  With more apartment construction, rent growth will be tamed.  What happens if there is a limited supply? The price of that produce goes up.  With little single-family construction, home price could accelerate.  With rents rising less fast than home prices, from consumers’ point of view, particularly those in their early 30s who are prime potential first-time home buyers, they may choose to rent for longer period.  Rents rose by 3.5 percent in the most recent month while home prices rose by 5 to 7 percent in varying price measurements.
  • What government policies could be leading to a rise in multifamily starts but not in single-family starts?  At the local level, homebuilders need to get housing permits from local authorities.  In cities such as Denver, Seattle, and Portland, the local officials are only granting permits for apartment buildings and less for condos or for single-family homes.  At the national level, many community banks facing new financial regulations are said to shy away from construction loans for local homebuilders.  All the while, the homeownership rate has fallen to a 25-year low already.  Is America being nudged into a renter nation?

Existing Home Sales to International Clients: Continued Growth

Mon, 07/20/2015 - 14:38

Over a five year time frame, 15 to 20 percent of REALTORS® responding to NAR’s 2015 Profile of Home Buying Activity of International Clients have consistently reported an increase in existing home sales to foreign buyers.  The sale of U.S. existing home properties has been a slowly growing niche market, accounting for up to 8 percent of total sales on a dollar volume basis.  Sales tend to be at the upper end of the price ranges, with buyers from across the globe.  Although buyer interest is focused on a few states (Florida, California, Arizona, Texas), most states have a number of foreign buyers—both resident and non-resident foreigners.  The market is subject to the world economic climate (recessions, exchange rates), U.S. market conditions, and preferences of the foreign buyers (e.g., vacation, business, investment, etc.).

Like-Kind Exchanges Lead to Capital Investments

Mon, 07/20/2015 - 10:45

This blog post was written by George Ratiu, Director of Quantitative & Commercial Research and Erin Fitzpatrick, Research Intern.

Like-kind exchanges (LKE) provide an important vehicle to sell and acquire property—both real and personal. A key feature of LKEs consists of allowing a property owner to dispose of a property and acquire another one of like-kind, with any gain after the disposition deferrable as long as the proceeds are reinvested in a similar property.  The Internal Revenue Service (IRS) makes note of the fact that while the gain “is tax-deferred […] it is not tax-free.”[1] At some point, the property owner disposes of the property and gains are recognized, leading to tax payments.

LKEs were recognized in tax law going back to the Revenue Act of 1921. The underpinning principle of the law was the fact that a taxpayer’s economic position did not change as a result of an exchange of property for another of like-kind.  With no change in economic position, there was no need to recognize or impose a tax on the transaction. Any gain from the transaction was deferred.  This principle is important as it recognizes that LKEs are a tax-neutral feature of the law, which does not result in a loss of tax revenue.

An important aspect of this process is the cost basis of the original property. The basis is carried forward to any and all subsequent properties. The property owner does not have the ability to depreciate a newly acquired property at the higher exchange value, but retains the disposed property’s original cost.

Like-kind exchanges provide several major benefits. The main one is the freer flow of capital. LKE transactions allow property owners to allocate capital more efficiently and be flexible in the face of changing economic and market conditions. Another main benefit is that LKE transactions lead to commerce and economic growth. Generally, LKEs involve additional investments in improving properties—especially for real estate—which generate jobs.

The Like-Kind Exchanges: Real Estate Market Perspectives 2015 report illustrates that like-kind exchange transactions facilitated additional capital into the local market. When asked if they or their clients invested additional capital in order to make improvements after acquiring real property, a majority of REALTORS®— 86 percent—answered affirmatively.

Moreover, 56 percent of respondents indicated that they or their clients made property improvements in the 10 – 24 percent range of the acquired property’s fair market value. An additional 16 percent reported that the volume of new capital for improvements accounted for 25 – 49 percent of the property’s fair market value.  REALTORS® pointed to the fact that these additional investments are generally responsible for the creation of new jobs, such as construction and property management.

To access the Like-Kind Exchanges: Real Estate Market Perspectives 2015 report, visit http://www.realtor.org/reports/like-kind-exchange-survey.

[1] Internal Revenue Service, Like-Kind Exchanges Under IRC Code Section 1031, FS-2008-18, February 2008

Jobless Claims Below 300K for 19 Straight Weeks as of July 11

Sun, 07/19/2015 - 12:04

This blog post was written by Erin Fitzpatrick. Erin is a Summer Research Intern and is currently studying at George Washington University pursuing a B.S. in Economics and a B.A. in Political Science.

  • Initial claims for unemployment insurance decreased in the week ending July 11 to 281,000, a decrease of 15,000 from the previous week’s level. This is the 19th straight week that initial claims have fallen below 300,000. The 4-week moving average increased slightly to 282,500, but is still below 300,000. Analysts consider a level below 300,000 to be indicative of a healthy job market, with fewer claims signifying fewer layoffs and greater job stability.
  •  States with the largest decreases occurred in New Jersey (-3,276), Texas (-2,405), Connecticut (-2,180), Maryland (-1,304), and South Carolina (-905). States showing the largest increases include Michigan (+9,961), New York (+6,488), California (+5,714), Ohio (+3,190), and Missouri (+2,661).
  • If job losses continue at this level, NAR expects 2.5 million net new jobs in 2015 and 5.3 million in existing home sales. 

For the FHA, Pricing Springs Eternal

Thu, 07/16/2015 - 15:20

Following several years of premium increases, the FHA implemented a 50 basis point reduction in its annual mortgage insurance fee in 2015.  The sharp reduction was expected to boost affordability for entry-level and disadvantaged home buyers and to stimulate access for new buyers in this part of the market.  Through May, the impact of the reduced fee has been a strong gain in purchase mortgages compared to the same time period in 2014.

On January 26th of 2015, the FHA reduced its annual mortgage insurance fee from 1.35% to 0.85%.  NAR Research estimated the reduced fee would lower the payment on a $200,000 mortgage by nearly $1,000 annually and to draw in 90,000 to 140,000 additional homebuyers per year.  That would suggest an increase of 15% to 24% endorsements for purchase mortgages in calender year 2015 relative to 2014.

From January to May of 2015, the FHA endorsed roughly 251,000 purchase mortgages compared to 214,000 over the same period in 2014, an increase of 17.6%.  However, since the pricing change was implement in late January of 2015, the effect would be isolated to the statistics for February through May.  FHA endorsed 21.6% more purchase mortgages between February and May of 2015 compared to the same 4-month period in 2014.  Non-seasonaly adjusted existing home sales rose just 7.6% over this same time period.  Improved consumer confidence and tailwinds from strong emlpoyment growth in 2013 and 2014 likely played a role in the robust growth at the FHA, but endoresements in January prior to the rate reduction were just 3.8% stronger than the prior year, though stronger than the flat reading in existing sales.  This pattern suggests that while economic factors were important for FHA borrowers relative to the market, the pricing change was key to the strong gains this spring.

If growth relative to 2014 remains at 21.6%, the current pace, for June through December the FHA will endorse more than 120,000 additional purchase loans in 2015.  But if it slips to 13.8% over this period, annual growth for the year would register 15.1%, or an increase of 90,000 endorsements.  Mortgage rates are expected to increase in the second half of 2015, which could weigh on sales favoring the latter estimate.

 As depicted in the map above, the strongest responses at the county level to the change in fees were in the Northwest, Arizona, Florida, northern Wisconsin, Michigan, Illinois, and Maryland.  The Midwest was a mixed bag, with endorsements rising sharply in many counties while other counties experienced sharp declines.  Pockets of declining endorsements were also evident in California, Texas, Oklahoma, New Mexico, Southern Wisconsin, Iowa, western New York, and southern Alabama and Georgia.

At the Metro level the strongest gain was in South Bend (IN) followed by Port St. Lucie (FL) and Duluth (MN-WI), while the weakest gains were in San Francisco and San Rafael.

Stouter employment trends and buyer confidence appear to be driving stronger national sales, but the FHA’s new pricing is driving a disproportionate improvement in its market.

MBA Mortgage Applications (July 15th, 2015)

Wed, 07/15/2015 - 14:45
  • Relative to last week, applications for home purchase mortgages fell 7.5% on a seasonally adjusted basis, more than offsetting the 6.6% gain in the prior week.  Relative to a year ago, the seasonally adjusted purchase figure is up 17.0%.
  • Applications volume has slumped in July and August of the last two years. However, foot traffic this year has outpaced last year and remained strong through June.  The 4-week moving average for purchase applications ticked downward, but remains high.

 

  • The average rate on a 30-year fixed rate mortgage was unchanged at 4.23%, but 10 basis points less than they were this time in 2014.

 

  • While mortgage rates are nearly 40 basis points (BP) above their January low, rates are below last summer and nearly 40 bp lower than the summer peak in 2013 following the Fed’s suggestion that it would reduce the pace of its MBS purchase program.  What’s more is that the 40 bp increase in 2015 was smaller than the 100bp increase during the “taper tantrum” and partially offset by better FHA pricing.
  • Strong job gains in 2014 combined with better FHA pricing and product availability and access have boosted buyer confidence this spring and summer.
  • NAR is forecasting the average rate for a 30-year fixed mortgage to remain under 4.5% through the end of 2015 before averaging 4.8% in 2016.

Like-Kind Exchanges—Integral to Residential and Commercial Real Estate Transactions

Wed, 07/15/2015 - 13:26

This blog post was written by George Ratiu, Director of Quantitative & Commercial Research and Erin Fitzpatrick, Research Intern.

Real estate is an integral part of economic activity, with transactions providing avenues for exchange, development, and growth opportunities. Within this framework, like-kind exchanges (LKE) provide an important vehicle to sell and acquire property. The Internal Revenue Code (IRC) Section 1031 codifies that the tax owed on any gain after a sale may be deferred as long as the proceeds are reinvested in a similar property through a like-kind exchange.  The Internal Revenue Service (IRS) makes note of the fact that while the gain “is tax-deferred […] it is not tax-free.”[1]

Like-kind exchanges are available to individuals, partnerships, corporations, limited liability companies, as well as trusts. The main requirement of a like-kind exchange is that the sale of one property and acquisition of another property must be part of an integrated transaction, rather than two individual transactions.  In addition, while both real and personal property qualify, the properties must be similar, pursuant to specific criteria which delineate eligibility.

According to the IRS, “like kind property is property of the same nature, character or class. […] Most real estate will be like-kind to other real estate.”[2] Generally, a parcel of land with a rental house may be exchanged for vacant land. Similarly, an office building may be exchanged for an industrial warehouse or a retail shopping center.

Like-kind exchanges (LKE) feature prominently in NAR members’ real estate transactions, as well as their clients. As most REALTORS are small business owners, and as they represent through their clients a wide swath of small businesses across the country, LKE transactions reflect both the diversity and character of Main Street.

The Like-Kind Exchanges: Real Estate Market Perspectives 2015 report illustrates the full property spectrum which touches every facet of the American economy.  Based on REALTORS® responses, residential properties comprised the largest proportion of recent deals, accounting for 27 percent of disposed properties and 24 percent of purchased properties, respectively. Apartments accounted for about one-in-five sale transactions, and 22 percent of acquisitions. Apartments ranked third in disposals and second in purchases, trading ranking spots with land.

Land assets accounted for 19 percent of disposals and 17 percent of acquisitions. Retail properties accounted for 13 percent of acquisitions and 8 percent of disposals.  Office buildings comprised 11 percent of properties disposed and 10 percent of properties acquired. Industrial buildings made up 7 percent of both total disposals and acquisitions. Hotel transactions were a minor share of all transactions. Properties disposed and purchased through like-kind exchanges mirrored NAR members’ practice specialty areas. Residential members handled a significantly larger share of residential properties, which comprised 54 percent of dispositions and 48 percent of acquisitions. Residential members also participated in a noticeable share of apartment transactions, accounting for 15 percent of dispositions and 25 percent of acquisitions. Conversely, commercial members were more active across the commercial property types—office, land, retail, apartment and industrial.

To access the Like-Kind Exchanges: Real Estate Market Perspectives 2015 report, visit http://www.realtor.org/reports/like-kind-exchange-survey.

[1] Internal Revenue Service, Like-Kind Exchanges Under IRC Code Section 1031, FS-2008-18, February 2008

[2] Ibid.

Online Communities Taking Over the Neighborhood

Wed, 07/15/2015 - 10:44

This blog post was written by Amanda Riggs, Research Survey Analyst.

Getting involved in your community once only meant volunteering for a civil group, joining a sports club, or running for local governance. People stayed connected through face to face interactions. In a service industry like real estate that thrives on friendly interactions and personal connections, building online communities through websites, social media, and digital communication is now one of the most efficient ways that REALTORS® can build and expand their network to generate new business.

The majority of business for real estate professionals comes from referrals and repeat business, which makes sense since the industry is built upon personal relationships. At first, the idea of expanding online communities to grow the real estate industry seems like a no-brainer. All businesses these days rely on digital connectivity or they get left behind. The National Association of REALTORS® (NAR)’s Research department flipped through its survey data to take a deep look at how its members value online communities for their business. Here is what the surveys said:

The NAR 2015 Member Profile, an in-house survey that gathers demographic data on its 1 million real estate members, reports that:

  • 65 percent of REALTORS® use social media for their business.
  • 64 percent said that open houses brought no business.
  • 40 percent of business for younger agents are from referrals and repeat business and 64 percent for more experienced agents.

Naturally, word of mouth remains the largest source of income for NAR members and only grows by the number of years REALTORS® stay in the game. What is interesting to note is that open houses are almost a dead avenue for REALTORS® – they brought two-thirds of NAR members no business. Websites do not appear to bring in new clients on their own. However, two-third of members said they actively use social media as a means to market their brand and showcase their listings.

The NAR 2014 Profile of Home Buyers and Sellers, NAR’s profile of the buying and selling process, states that:

  • The first step in the home-buying process for 43 percent of home buyers was looking online for properties and 12 percent looked online for information about how to buy a home.
  • Ninety-two percent of buyers use the internet in some way in their home search process and 50 percent of buyers use a mobile website or application in their home search.
  • Real estate agents were viewed as a useful information source by 98 percent of buyers who used an agent while searching for a home.
  • Eighty-eight percent of buyers purchased their home through a real estate agent or broker—a share that has steadily increased from 69 percent in 2001.

As a frame of reference, in 1964, 61 percent of buyers contacted agents, 40 percent read newspaper ads, and seven percent drove around when looking for a home. In 2014, 43 percent looked for properties online. While the initial process may start online, when buyers seek to make a home purchase, they turn to the advice from a real estate agent that they connected with from a trusted friend or family member.

While we do not know exactly how much revenue is generated directly from social media, we do know that social media platforms like Facebook, Twitter, Instagram, Pinterest, and Tumblr do support the building of online communities for REALTORS® to stay connected to current and past clients. They also lend a hand to referrals. Purchasing a home is a lifetime milestone for most and people want to work with someone they trust, usually asking for a referral from a coworker, friend, or family member. People also now have the digital technology to search for a home and then later connect with the agent associated with that property. On social media platforms, agents can showcase homes for potential buyers and thus expand their client base through a digital community.

More importantly, real estate has become a digital landscape where all licensed agents and industry professionals must keep up. Not only can building an online community be beneficial to business, the price may be too high to ignore it. In the NAR 2014 Profile of Real Estate Firms, 41 percent of real estate firms say they expect future competition to come from virtual firms in the next year. Keeping up with technology was also listed as the second biggest challenge in the next two years that NAR member firms reported for their future business outlook. The report also cited that 15 percent of sales and new business inquires come from websites and social media. We expect real estate agents to continue to grow their networks of referrals and repeat customers through the aid of social media.

Which social media platforms are the best for business in real estate? Facebook and Twitter are the most widely used platforms across the world in a general sense. Nevertheless, Instagram and Pinterest are growing and could provide a better site to showcase new property photos without having to pay for advertising. LinkedIn is another professional networking tool that allows agents and brokers to expand their digital community boosting industry achievements. It is not a question of if social media contributes to sales, but how can REALTORS® maximize the digital space to create their online communities so that their business of tomorrow can thrive.

By way of example, we look at NAR’s Research and Statistics social media platforms. NAR Research’s Facebook page has upwards of 37 thousand likes with a weekly average reach of 15,000 people. As REALTORS® are always on the go and mobile with their devices, it is no surprise that they are constantly engaged on Twitter. NAR Research’s Twitter page has nearly 80 thousand followers engaged on a range of topics related to the housing market. Two of the hottest growing platforms include Instagram and Pinterest that can support REALTORS® illustrate their listings and expand their digital networks. Not sure on how to do it? NAR has put together a host of resources that can help direct you on how to use social media as a real estate professional in the Field Guide to Social Networking for REALTORS®.

Sixty Percent of REALTORS® Participated in Like-Kind Exchanges

Tue, 07/14/2015 - 15:21

This blog post was written by George Ratiu, Director of Quantitative & Commercial Research and Erin Fitzpatrick, Research Intern

Real estate constitutes the foundation of economic activity, with real estate transactions providing the connecting pathways between individuals, businesses, and governments. In 2014 the value of real estate in the United States totaled $42.4 trillion[1]. Sales of commercial real estate assets—priced at or above $2.5 million—totaled $438 billion[2] in 2014, while sales of smaller commercial assets—priced below $2.5 million—comprised an additional $60 billion[3]. In addition, sales of residential real estate totaled $1.1 trillion[4] in 2014, with existing properties accounting for 89 percent of total.

For a significant proportion of real estate market participants, like-kind exchanges (LKE) provide an important vehicle to sell and acquire property. The Internal Revenue Code (IRC) Section 1031 codifies that the tax owed on any gain after a sale may be deferred as long as the proceeds are reinvested in a similar property through a like-kind exchange.  The Internal Revenue Service (IRS) makes note of the fact that while the gain “is tax-deferred […] it is not tax-free.”[5]

Like-kind exchanges (LKE) feature prominently in NAR members’ real estate transactions. Based on the Like-Kind Exchanges: Real Estate Market Perspectives 2015 report, slightly over 60 percent of respondents indicated that they participated in at least one like-kind exchange within the 2011-2014 period. Of the total, 40 percent participated in 1—3 transactions, while 14 percent were active in 4—6 exchanges.

REALTORS® were active participants in like-kind exchanges during 2011-2014. The majority of respondents—68 percent—indicated that they acted as a real estate broker/agent in the exchange. An additional 24 percent identified their role as a real estate owner/investor. NAR members acted as professional advisors or qualified intermediaries in six percent and two percent of transactions respectively.REALTORS® were asked about the composition of business entities which held the properties transferred through a like-kind exchange. The survey results show that 48 percent of total FMV of the exchanged properties was held in an individual or sole proprietorship and 33 percent was held in a S-Corporation, Partnership, LLC, LLP, or MLP. An additional 10 percent of properties were held in C-Corporations (which excluded REITs).To access the Like-Kind Exchanges: Real Estate Market Perspectives 2015 report, visit http://www.realtor.org/reports/like-kind-exchange-survey.

 

[1] Federal Reserve Board, Flow of Funds B.101, B103, B104 tables

[2] Real Capital Analytics, US Capital Trends®

[3] Smith and Ratiu (2015), “Small Commercial Real Estate Market,” National Association of REALTORS®

[4] U.S. Census Bureau, New Residential Sales; National Association of REALTORS® Existing Home Sales

[5] Internal Revenue Service, Like-Kind Exchanges Under IRC Code Section 1031, FS-2008-18, February 2008

Existing-Home Sales Data by State

Tue, 07/14/2015 - 14:25

This blog post was written by Summer Research Interns Erin Fitzpatrick and La Shawn Skeete. Erin is currently studying at George Washington University pursuing a B.S. in Economics and a B.A. in Political Science. La Shawn is currently studying at The University of Maryland, College Park pursuing a degree in Economics.

NAR’s existing-home sales series is provided for the four major regions and for the nation.

Most state and local associations of Realtors® provide data for their service areas.  This information is typically raw counts of sales from local multiple listing services (MLSs) though availability and format of the data varies.  The following list of state data providers, which includes association and non-association providers, is given as a courtesy reference.  Contact the state or local Realtor® association in your area for more information (find contact information here).

Alabama http://acre.cba.ua.edu/page.php?id=38 Alaska http://laborstats.alaska.gov/housing/housing.htm Arizona State list of locals: https://www.aaronline.com/about-us/#locassn
Phoenix Area only: http://www.armls.com/statistics/market-reports Arkansas http://www.arkansasrealtors.com/news-events/housing-market-reports California Snapshot: http://www.car.org/marketdata/marketglance/
By region: http://www.car.org/marketdata/data/countysalesactivity/ Colorado http://www.coloradorealtors.com/colorado-regional-statistics/ Connecticut State association: http://www.ctrealtor.com/mt_media_news/pressReleases.shtml

State government: http://www.chfa.org//Press%20Room/CHFA%20Research%20Data/default.aspx Delaware No statistics at this time District of Columbia http://gcaar.com/toolkit_ektid1592.aspx Florida http://media.floridarealtors.org/market-data/ Georgia State association, Requires Login: http://www.garealtor.com/Resources/GeorgiaHousingIndicators/tabid/281/ctl/Login/Default.aspx?returnurl=%2fResources%2fGeorgiaHousingIndicators%2ftabid%2f281%2fDefault.aspx
Local MLS: http://www.gamls.com/statistics/index.cfm?Typ=County&Fn=SF Hawaii http://www.hawaiirealtors.com/MarketInfo/year-end-reports Idaho No statistics at this time. Illinois http://www.illinoisrealtor.org/marketstats Indiana http://www.indianarealtors.com/Research/Indiana-Real-Estate-Markets-Report.aspx Iowa http://www.iowarealtors.com/news/housing-trends Kansas http://kansasrealtor.com/news-media/market-stats/ Kentucky Requires Login: https://kar.com/members/ky-housing-statistics Louisiana http://www.larealtors.org/news/news/market-trends-data/40-market-trends-data/891-real-estate-trends Maine http://www.mainerealtors.com/page/974-849/statistics Maryland http://www.mdrealtor.org/ResearchStats/HousingStatistics.aspx Massachusetts https://www.marealtor.com/members/housing-data Michigan http://www.mirealtors.com/Housing-Statistics Minnesota http://www.mnrealtor.com/member-resources/housing-report Mississippi Points to local statistics, no statewide info: http://msrealtors.org/HousingStats.php Missouri http://www.missourirealtor.org/resources/stats/marketreports Montana http://montanarealtors.org/press-room Nebraska No statewide statistics; http://www.nebraskarealtors.com/i4a/pages/index.cfm?pageID=4104 Nevada http://business.nv.gov/News_Media/Publications/Housing_Market_Report/ New Hampshire http://www.nhar.org/short-term-data/ New Jersey http://njar-public.stats.10kresearch.com/reports New Mexico http://www.nmrealtor.com/housing-trends/ New York http://www.nysar.com/industry-resources/market-data North Carolina http://www.ncrealtors.org/market-statistics-about-ncar-menu.html North Dakota State association: http://ndrealtors.com/resources/
State government: https://www.nd.gov/tax/property/pubs/salesratio/sales-ratio-2014.pdf?20150615090909 Ohio http://ohiorealtors.org/ohio-home-sales-statistics/ Oklahoma http://okrealtors.com/housingdata/ Oregon http://www.pdx.edu/realestate/research_quarterly.html Pennsylvania http://www.parealtor.org/news/ Rhode Island http://www.rirealtors.org/RealtorResources/SalesStats/Default.asp South Carolina Requires Login: https://www.screaltors.org/press/ South Dakota http://www.sdrealtor.org/aboutus/housingstatistics/ Tennessee Requires Login: http://www.tarnet.com/news/ Texas https://www.texasrealestate.com/for-texas-realtors/research-about-texas-real-estate Utah http://utahrealtors.com/news-center/housing-statistics/state-summary/ Vermont http://www.vermontrealtors.com/realtor-benefits/reports/ Virginia https://www.varealtor.com/homesales Washington 1993 to 2013: http://wcrer.be.washington.edu/WSHM/WSHM.html

2008 to present: http://realestate.washington.edu/research/wcrer/reports/ West Virginia Available by phone only: http://www.wvrealtors.com/contact.shtml Wisconsin https://www.wra.org/Resources/Property/Wisconsin_Housing_Statistics/ Wyoming No statistics at this time

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