REALTORS®’ assessments of market conditions indicated flat market activity in October 2014 compared to September and a year ago. The REALTOR® Confidence Index-Current Conditions for single family homes and the Buyer Traffic Index registered near 50, a level that indicates an equal number of respondents with “strong” and “weak” outlook: (http://www.realtor.org/reports/realtors-confidence-index).
REALTORS® reported on market conditions. Properties stayed longer on the market, typically at two months. First-time home buyers continued to account for less than a third of the market. The percent of home purchases for investment purposes was steady compared to September but weaker than a year ago. The percent of sales of distressed properties continued to be on the downtrend.
REALTORS® were more confident about the outlook for the next six months, with the REALTOR® Confidence Index-Six-month Outlook for single family homes above 50. Respondents expect prices to increase in the coming 12 months at a modest pace, with the median expected price growth at 3 percent.
This long-form article was written by Jessica Lautz, Director of Member and Consumer Survey Research, for the Richard J Rosenthal Center for Real Estate Studies at REALTOR® University and is used here with their kind permission. It first appeared in the Journal of the Center of Real Estate Studies, Vol 2 No. 2.Introduction
Multi-generational housing is not a new concept, but a concept long forgotten while households made the shift towards nuclear families living in separate homes. Recently, data released by the U.S. Census Bureau, Pew Research, Generations United, and the National Association of REALTORS® suggests a trend of moving back to multi-generational households is now underway. While there are no doubt societal implications of this trend, this article will focus on the housing implications and will attempt to make sense of the data.Analysis
Understanding the definition of a multi-generational home is important to understanding the depth and breadth of the topic. Data collected by the U.S. Census Bureau defines multi-generational households as “a family household consisting of three or more generations. These include families with either a householder with both a parent and a child, a householder with both a child and grandchild, a householder with a grandchild and parent or a four-generation household…”. The National Association of REALTORS® (NAR) recently started collecting data on recent home buyers who purchased a multi-generational home and defined it as “a home that will house more than you and children under the age of 18 (such as adult siblings, adult children, and/or grandparents, etc.)”. Data collected from AARP defines a multi-generational household as “Householder, child, and grandchild; Householder with parent; Householder with parent and child; Householder with grandchild; Householder with parent; child, and grandchild; Householder with parent and grandchild. It does not include households comprised of parents and children, regardless of the age of the child.”
In 2010, the AARP Public Policy Institute issued a fact sheet titled Multigenerational Households Are Increasing, in which they conducted an analysis of the Current Population Survey. “In 2008, 6.2 million intergenerational households resided in the United States (5.3% of all households.) That number jumped to 7.1 million households by 2010 (6.1% of all households.) The increase in these two years represents a faster rate of growth than the previous eight years combined.” In September 2011, Generations United released the report Family Matters: Multigenerational Families in a Volatile Economy based on a survey conducted by Harris Interactive. The survey was based on 2,226 U.S. residents over the age of 18 and found that 136 of these individuals responded that they lived in a multi-generational household.  Among online survey panelists who lived in a multi-generational household, 66 percent reported that “the current economic climate was a factor in their family becoming a multi-generational household…”. Because the Generations United data is based on a survey panel, they cite figures from Pew Research that 51.4 million—nearly one in six—Americans of all ages live in a multi-generational home.
Data from Pew Research has been updated and is based on an analysis of U.S. Census Bureau data. It is weighted based on the American Community Surveys. In the Pew Research report, released in July 2014, a staggering “57 million Americans or 18.1% of the population of the United States, lived in a multi-generational family household in 2012, double the number who lived in such households in 1980.” The report, In Post-Recession Era, Young Adults Drive Continuing Rise in Multi-Generational Living, details the fast pace in which young adults ages 25 to 34 living in multi-generational homes have grown to be the largest segment living in these household types—even outpacing those who are 85 and older. Data released from the U.S. Census Bureau in 2013 reports that 4.6 percent of family households live in a multi-generational home.
Regardless of the report cited or definition used, this is a household type that is increasing in presence and is increasingly being discussed by real estate agents and brokers, home builders, and economists. The topic stirs discussion surrounding student loan debt, the perception of housing, immigration, even the American Dream of homeownership. Understanding the needs and potential growth of these types of homes is essential for real estate professionals.
In 2013, the National Association of REALTORS® first started collecting data on the share of home buyers who purchased a home for a multi-generational household in the annual Profile of Home Buyers and Sellers survey. Overall, 14 percent of recent buyers purchased a multi-generational home. Twenty-four percent of multi-generational buyers bought this type of home, because children over the age of 18 were moving back into the home; 24 percent purchased for cost savings; 20 percent purchased for health/caretaking of aging parents; and, 11 percent purchased to spend more time with aging parents. 
Source: National Association of REALTORS®, 2014 Home Buyer and Seller Generational Trends, March 2014.
The largest population of home buyers who purchased a multi-generational home was among Younger Boomers. Twenty-two percent of buyers who were born between 1955 and 1964 purchased a multi-generational home. The most commonly cited reason for this household type was due to children over the age of 18 moving back into the home, at 38 percent.
NAR data shows the typical home buyer who purchased a multi-generational household was 50 years old, and had a median household income of $85,800 in 2012. Buyers of multi-generational households are more ethnically diverse than buyers who do not buy multi-generational homes—75 percent of buyers of multi-generational homes were white/Caucasian compared to 88 percent of buyers who did not purchase a multi-generational home. The share of home buyers who purchased a multi-generational home varies significantly by sub-region. The buyers were typically buying a home that was 2,150 square feet and most (82 percent) were buying a single family home. Aside from the desire to own their own home, they were buying for a larger home, to accommodate family changes, and to be closer to friends and family.
Source: National Association of REALTORS®, 2013 Profile of Home Buyers and Sellers, November 2013.
The Pew Research data and the National Association of REALTOR® data suggest the boomerang population of Gen Y may be the key to multi-generational housing growth. Data indicate that these young adults want to be homeowners, but there may be other factors holding them back. According to data from Fannie Mae, 59 percent of young renters (defined as 18 to 39) believe owning a home makes more sense, but 73 percent of young renters also believe it would be difficult to get a mortgage today.  Additionally, 90 percent of young renters are likely to buy at some point, but the majority have “…insufficient assets to cover a 5% down payment plus closing costs on a typical starter home…”. It is promising that younger renters in Gen Y and Gen X do still want to own a home. It is not necessarily the “sharing generation” many the media outlets have led us to believe.
Given this research, one of the surprising results from the 2014 Home Buyer and Seller Generational Trends report is that the share of Gen Y buyers (born between 1980 and 1995) is just slightly higher than the other generations, at 31 percent.  The expectation is that Baby Boomers would still outweigh Gen Y as buyers given the average age from 1981 to 2013 for the typical first-time buyer is 31. If there were no economic constraints, Gen Y would soon overtake Baby Boomers as the largest home buying segment.
However, there are economic conditions at play. Restricted access to credit, slow wage growth, and lack of employment opportunities are holding many potential first-time buyers back, and living with other family members has become a comfortable alternative. For good reason. Those aged 65 and older have historically been at retirement age. According to the Census Bureau the percent of workers aged 65 and older who were employed increased to 16.2 percent in 2010 from 14.5 percent in 2005, while the share of 20 to 24 year olds who were employed decreased to 60.3 percent from 68 percent during the same time period. The annualized income growth from 2008 to 2012 has remained flat for those 25 to 34 and has increased just 0.3 percent for ages 35 to 44. During the same time period income growth for those aged 45 to 54 has risen 0.8 percent, 0.6 percent for those aged 55 to 64, and 3.2 percent for those 65 to 74.
While ages and employment grow for those outside of Gen Y and Gen X, the younger generations are disproportionate holders of the $1.12 trillion in student loan debt. Thirty-nine percent of the borrowers are less than 30, and 28 percent of the borrowers are aged 30 to 39. Eleven percent of student loans were 90 days delinquent in the second quarter of 2014, up from 6.3 percent in 2003. In comparison, the delinquency rate for all debt is 6.2 percent.
Those who are successful buyers have experienced stricter lending conditions and access to credit in recent years. As such, incomes of successful first-time buyers increased from $54,800 in 2002 to $67,400 in 2012. Higher income home buyers are also less likely to be delinquent on loans such as student loans and have the ability to pay them back faster than their lower-income peers.
Among recent successful home buyers, 12 percent cited saving for a home as the most difficult part of the home buying process, but this increases to 20 percent among Gen Y buyers and 15 percent among Gen X buyers. Of the 12 percent that cited difficulty saving, 43 percent attributed student loans as the expense that delayed saving for a downpayment. Among the 20 percent of Gen Y who cited saving for a home as the most difficult step, 56 percent cited student loan debt as the factor that made it more difficult to save. Among the 15 percent of Gen X who cited saving for a home was the most difficult step, 35 percent cited student loan debt as the factor that made it more difficult to save.
Even younger repeat buyers who already owned a home face some headwinds in purchasing another property. Gen Y and Gen X sellers who bought another property are more likely to state that they wanted to sell their home but could not sell when they wanted to and waited or were stalled because the home was worth less than the mortgage—17 percent among Gen Y and 19 percent among Gen X. This further adds to their financial problems. However, it is promising that sellers ultimately went on to buy a home instead of moving and renting.
Gen Y and Gen X buyers are often making the most financial sacrifices to buy a home of their own, but they are also the most optimistic that, when they are a successful home buyer, that their home is a good financial investment. More than half made financial sacrifices, such as cutting spending on luxury items or non-essential items, on entertainment, on clothes, cancelling vacation plans, and earning extra income through a second job.  When asked if the buyer thought the home was a good financial investment, 87 percent of Gen Y and 82 percent of Gen X buyers did feel their home was a good financial investment compared to 74 percent of the Silent Generation.Conclusion and Implications
Renters and those moving in with relatives ultimately want to buy a home. They recognize the long term financial value of owning, and the American Dream of homeownership is still very much alive. However, stagnant wage growth, coupled with a difficult job market, tightened lending standards, and student loan debt potential buyers took on to invest in their human capital, has made it difficult to purchase a home. For now, multi-generational housing is the retro trend that is more achievable for some American families.
For housing, this trend means there are implications for builders. The value of mother-in-law suites or rather “Gen Y college educated son/daughter suites” have increased among recent home buyers. In 2004 only two percent of recent home buyers found buying a home with an in-law suite very important. That doubled in 2013 to four percent of buyers valuing in-law suites as very important. While the share of buyers who find an in-law suite very important has stayed the same since 2007, at four percent, the dollar value has increased. Among buyers who bought a home without an in-law suite in 2007, they were willing to pay $1,900 more for a home with an in-law suite; in 2013 that rose 54 percent to $2,920.
According to a Pulte Group survey conducted in 2012, adult homeowners who are over the age of 35 and who have children ages 16 to 30 living with them or who have living parents, 14 percent have an adult son or daughter living with them; and, 15 percent have an aging parent living with them. Both sets of respondents expect the share with adult children residing at home and the share of aging parents living with them to double.
When respondents were asked how they will house a larger family, change seems more necessary among those with aging parents living with them or anticipating living with them—72 percent plan to renovate or move. That compares to 49 percent of homeowners who have an adult child living with them who are anticipating a move. “Respondents noted that the most important features to comfortably support an extended family include separate living spaces, such as a mother-in-law suite, additional bathrooms and larger great rooms.“ It is possible that homeowners see adult children living with them as a temporary situation, while those adult children save money or look for job opportunities. Aging parents may seem to be a longer term situation that requires a larger space and, in some instances, a more comfortable environment for aging relatives.
The topic of multi-generational housing is not as simple as having three generations who want to live under the same roof; nor is this is a new and unique aspiration. To some, this is not even a comprehensive definition. This is a housing situation that often transforms due to economic constraints and out of compassion for family. Aging parents may move into a home with their childrens’ families to be cared for and to spend time with them. Young adults may move back home — or perhaps never leave — due to high debt loads and low incomes. While young adults recognize the benefits of homeownership, some may have trouble reaching that goal quickly.
For home builders there is increased value placed on separate living spaces and dual master suites or in-law suites. For REALTORS® working with clients, helping buyers to see how a space can be transformed to accommodate growing families in one location can be helpful. For researchers and economists, it is important to look not only at the economic influences that lead households to forming multi-generational homes, but also to the future impact of Baby Boomers who may be financially pressured with both aging parents and young adult children. It will be important in coming years to see if Boomers are able to retire and move to retirement destinations or if they will stay put under one roof in non-traditional retirement settings to keep family in place. Multi-generational housing is a multi-faceted issue, and will continue to be an important one as long as these economic conditions persist.
 National Association of REALTORS®, 2013 Profile of Home Buyers and Sellers, November 2013.
 Harrell, Rodney, Enid Kassner, and Carlos Figueriredo, Multigenerational Households Are Increasing, AARP Public Policy Institute, April 2011. http://assets.aarp.org/rgcenter/ppi/econ-sec/fs221-housing.pdf
 Generations United, Family Matters: Multigenerational Families in a Volatile Economy, 2011. http://www.gu.org/LinkClick.aspx?fileticket=QWOTaluHxPk%3d&tabid=157&mid=606
 Fry, Richard, and Jeffery S. Passel, In Post Recession Era, Young Adults Drive Continuing Rise in Multi-Generational Living, Pew Research, July 2014. http://www.pewsocialtrends.org/2014/07/17/in-post-recession-era-young-adults-drive-continuing-rise-in-multi-generational-living/
National Association of REALTORS®, 2013 Profile of Home Buyers and Sellers, November 2013.
 National Association of REALTORS®, Home Buyer and Seller Generational Trends, March 2014. http://www.realtor.org/sites/default/files/reports/2014/2014-home-buyer-and-seller-generational-trends-report-full.pdf
 National Association of REALTORS®, 2013 Profile of Home Buyers and Sellers, November 2013.
 Fannie Mae, National Housing Survey, What Younger Renters Want and the Financial Constraints They See, May 2014. http://fanniemae.com/resources/file/research/housingsurvey/pdf/nhsmay2014presentation.pdf
 Thompson,Derek, and Jordon Weissmann, The Cheapest Generation, Why Millennials Aren’t Buying Cars or Houses, and What it Means for the Economy, The Atlantic, August 22, 2012. http://www.theatlantic.com/magazine/archive/2012/09/the-cheapest-generation/309060/
 National Association of REALTORS®, Home Buyer and Seller Generational Trends, March 2014. http://www.realtor.org/sites/default/files/reports/2014/2014-home-buyer-and-seller-generational-trends-report-full.pdf
 National Association of REALTORS®, Profile of Home Buyers and Sellers, Historical data 1981-2013.
 U.S. Bureau of Census, From Living Arrangements to Labor Force Participation, New Analysis Looks at State of the Nation’s 65-and-Older Population, June 2014. http://www.census.gov/newsroom/releases/archives/aging_population/cb14-124.html
 U.S. Bureau of Census, Table P10-Median Income. https://www.census.gov/hhes/www/income/data/historical/people/
 Federal Reserve Bank of New York, Household Debt and Credit Report, Second Quarter 2014. http://www.ny.frb.org/householdcredit/2014-q2/data/pdf/HHDC_2014Q2.pdf
 National Association of REALTORS®, 2013 Profile of Home Buyers and Sellers, November 2013. National Association of REALTORS®, 2003 Profile of Home Buyers and Sellers, 2003.
 National Association of REALTORS®, Home Buyer and Seller Generational Trends, March 2014. http://www.realtor.org/sites/default/files/reports/2014/2014-home-buyer-and-seller-generational-trends-report-full.pdf
 Ibid .
 National Association of REALTORS®, 2004 Profile of Buyers’ Home Feature Preferences, 2004.
 National Association of REALTORS®, 2013 Profile of Buyers’ Home Feature Preferences, 2013.
 National Association of REALTORS®, 2013 Profile of Buyers’ Home Feature Preferences, 2013. National Association of REALTORS®, 2007 Profile of Buyers’ Home Feature Preferences, 2007.
 PulteGroup, Multi-generational households to double in the future; families making plans for new space, PulteGroup Survey: Mom and Dad Anticipate Future Roommates, October 2012. http://www.pultegroupinc.com/files/doc_news/2012/Releaseaafa0f19-9717-4e5e-b688-fe90d91c27f2_1746385.pdf
- It has become easier to sell high-end expensive homes. The strongest growth in home sales in the latest data occurred at the very top of the price category.
- In October, home sales increased 16.2 percent from one year ago for those properties at $1 million and above. Overall home sales had increased by only 4.7 percent.
- The inventory change was also most noticeable on the upper end. The months’ supply of inventory fell by the largest magnitude for the expensive homes as it declined to 10.6 months’ supply from 12.1 a year earlier. By contrast, the months’ supply increased for all homes to 5.1 months from 4.9 a year earlier.
- The improving trends in the upper-end market do not mean REALTORS® should only chase this market. First, the million dollar home market makes up only 2.2 percent of total sales. Second, even though this specific market may be improving, it is still not easy. The months’ supply, as mentioned, is 10.6 for $1 million homes. But it is less than 6 months for homes priced under $500,000 and 7 months for homes priced between $500,000 and $1 million.
- The million dollar homes are moving better likely due to the huge gains in wealth in America from the stock market boom over the past 5 years. The ultra-loose monetary policy of bringing down interest rates has moved investor money into the stock market since there is virtually no yield in bank deposits or in bonds. But only about 10 percent of Americans are said to have a significant investment in the stock market. (Slightly more than half of Americans have some amount in the stock market through 401K and pension funds, but not a significant amount).
- Because many vacation home sales go to the people on the top, one may see improving conditions in the vacation home market as long as the stock market wealth holds up.
- It’s hard to take our eyes off The Lifestyle of the Rich and Famous even as we secretly may be wishing for their downfall, particularly the arrogant and stuck-up kind. But wealth should be viewed not solely in financial terms. Think of how much cultural wealth a person could accumulate by visiting museums or reading a fine book or of relationship wealth that comes from chatting with dear friends. These are activities, however, that take a long time to develop. That is, one can instantly buy a fancy watch from sudden wealth, but one cannot buy an improved vocabulary skills or true friendship no matter how much money is flashed around.
A lot has been written about the Millennial generation as related to housing. A look at the facts finds data in variance with the conclusion that the emerging generation will not be buying houses. However, they do appear to be at the lower bound of their historical purchasing history—possibly due to unnecessarily tight credit requirements coupled with difficult job markets.
Millennials have household formation rates significantly under that of the rest of the population, and home ownership rates well below that of other groups. They are now entering an age at which household formation and homeownership should be picking up. In terms of the housing market place, millenials currently have a purchase rate roughly comparable to their proportion of the population, but they are at the lower historical bound of purchasing experience for that age cohort. At this point a loosing of unnecessarily tight credit standards would help them enter the housing market.
Over an extended period of time the home buying patterns of people in the Millennial age group appear to have fluctuated—but not radically. The tendency of the media to write off the Millennial generation as home buyers seems premature: younger people have never bought houses to the degree that older people have. As noted by Krainer and McCarthy, credit standards have been too tight. Various surveys indicate a preference for home ownership by Millennials. Clearly there are issues associated with college loans, the economy, job availability, and tight credit standards. However, the data do not support the idea that in the long run Millennials will be permanent apartment renters.
 John Krainer and Erin McCarthy have also noted that tight mortgage credit standards have been an obstacle to a pickup in housing demand: “Housing Market Headwinds,” FRBSF Economic Letter, November 3, 2014.
According to the latest REALTORS® Confidence Index, current conditions across property types essentially moved sideways in October–a slight decline for the single family market, and a slight increase for townhouses and condos. Data were from the October REALTORS® Confidence Index Survey: http://www.realtor.org/reports/realtors-confidence-index. 
REALTORS® continued to report difficulties in obtaining a mortgage under tight underwriting standards and the decreased supply of “affordable” homes. Respondents also reported that the effective increase in mortgage insurance premium payments have made a home purchase less affordable and closing costs harder to cover. Financing for condominiums remained difficult to obtain due to FHA financing eligibility regulations for condominiums relating to occupancy guidelines.
 An index of 50 delineates “moderate” conditions and indicates a balance of respondents having “weak”(index=0) and “strong” (index=100) expectations or all respondents having moderate (=50) expectations. The index is calculated as a weighted average using the share of respondents for each index as weights. The index is not adjusted for seasonality effects.
- Lower gasoline prices are contributing to low overall consumer price inflation. Low inflation in turn means interest rates can continue to remain at rock bottom rates. However, one weighty component in consumer prices shows an accelerating trend: namely, rents are rising at the highest pace in 7 years.
- Gasoline prices have fallen by over 10 percent since summer and there could be an even further drop based on the trends in the price of crude oil. It could just as easily reverse course and suddenly rise since energy prices are always subject to unexpected global events.
- Partly because of lower energy prices, the overall consumer price inflation is minimal and ideal, rising by only 1.7 percent over the past 12 months to October. This should be to the liking of the Federal Reserve, which likes to see inflation rate at slightly under 2 percent.
- Apartment rents are higher by 3.3 percent, the fastest pace in nearly 6 years. Given the low and still-falling apartment vacancy rates, rents could rise even further. This trend is automatically pushing up homeowner equivalency rent as well, which is now up 2.7 percent, the fastest pace in nearly 7 years. With home building activity still well below normal, the housing market could feel shortage pressures, which means an even further rise in rents. Since the housing component is the biggest weight to the consumer price inflation, the inflation in 2015 and beyond could be a bit higher than what the policymakers are currently assuming. That means interest rates may be forced up by the Fed little sooner than planned.
- Moreover, as every grocer would know, food prices are trending higher at 3 percent (with the price of meats up 13 percent).
- Expect inflation to reach 3 percent sometime in 2015 and thereby force mortgage rates up to around 5 percent from current 4 percent.
- Where there is high inflation banks will have to charge higher interest rates to compensate for the loss in the purchasing power of money. That is why the high 1970s-style inflation led to high mortgage rates. Later, due to government price control, lenders could not raise interest rates and many banks scrambled to come up with innovative ideas of enticing new customer deposits. The offers of free toasters and free Tupperware were the result. Many lenders still went bankrupt when the interest on money lent out was below the interest rate on deposits. Stagflation and bad economic times were the visible results of that time.
- The median age of members has been rising since data collection started in 1978.
- In 1978 the median age of NAR members was 42, today the median has risen to 56 years of age.
- In 1978 the share of members who were under 30 was 15 percent and remained in the double digits until 1987. In 2014, only three percent of members were under 30 years of age.
- For more information on the Member Profile, go to: http://www.realtor.org/reports/member-profile
- Seasonally adjusted applications to purchase homes jumped 11.7% for the week ending November 14th, a solid improvement in a series of gains following a weak trend in late October. The purchase applications index is 6.1% lower than the same time in 2013. Credit overlays and high cash shares continue to dog purchase application volumes, but regulatory clarity in the form of a final QM and QRM rules as well as overatures by the FHA and FHFA to improve clarity on lender risks should help to ameliorate some of the constriction.
- The average rate for a conforming 30-year fixed rate mortgage as reported by the Mortgage Bankers Association eased to 4.18%, down slightly from last week. The average rate a year ago this week was 4.46%.
- The share of both FHA and VA loans increased in this week’s survey.
- Equally strong were single family housing starts and permits for construction which reached their highest levels since last October. Starts gained 4.2% on a monthly basis for the second consecutive month and were up 15.4% compared to a year earlier while permits rose 2.4% on a year-over-year basis.
- Low inventories and an inventory miss-match, particularly at the entry level portion of the market, have hampered sales, particularly in non-judicial states.
- Improved construction spending will help to alleviate inventory constraints as well as fuel job creation and buyer confidence as options improve.
- This week’s readings suggest a solid improvement in mortgage applications and dovetails with the solid foot traffic and pending home sales figures from the last two months and point to a solid fall and winter market. Additional construction will help to ameliorate tight inventories and fuel home sales, but without dampening price growth; construction remains low on a historical basis. Consumers will benefit from employment growth and better options in the market.
- Home builders are expressing optimism for better days ahead. They are partly right. But their recent roaring confidence could be a bit misleading.
- The home builder confidence index reached its second highest monthly reading in nine years. The latest index of 58 in October was an improvement from 54 in the prior month. Such a high reading should be implying all is going well in the home building industry. That is not the case.
- Nearly all home builders work on single-family homes and not apartments. And the actual construction of single-family homes is still pretty much down and out. The recent months’ construction pace of around 650,000 is only about half the normal rate. Multifamily construction, by contrast, is essentially back to normal. This trend reflects the strong rise of a 4 million net new rental population and one million fewer homeowners in the population since 2010.
- It is unclear, but one possible explanation for the divergence between home builder confidence and low housing starts could be due to the fact that many small mom-and-pop builders have gone out of business and therefore are not expressing their view in the surveys. Extreme difficulties of obtaining construction loans have hinder smaller-sized local builders. The larger regional and national home builders (like D.R. Horton, Pulte, and Toll Brothers for example) do not need construction loans and tap capital via Wall Street. Therefore the large builders have been gaining market share and they are the ones who would be feeling much more confident about the industry.
- Directionally at least, housing starts are likely to increase in the upcoming months because of improvements in the home builder confidence. The total housing starts in 2015 are likely to be 1.25 million, up from 1.0 million this year. Single-family starts are likely to get bumped to 840,000 in 2015 from 640,000 or so this year. The increase in new home construction will help relieve housing inventory shortages in many markets ahead of the spring buying season.
- The U.S. trade deficit will widen in the upcoming months and thereby trigger a slowdown in the U.S. economy. Why? Japan has officially fallen into a recession with two straight quarters of economic contraction. Eurozone economies are barely hovering at zero growth. China has markedly slowed down, no longer roaring at a 10 percent clip. The Russian economy is falling apart because of economic sanctions and from falling oil prices. Brazil is fighting hard not to contract. All of this adds up such that foreign economies will have less capacity to buy American products. U.S. exports will no longer rise while American consumers will continue to buy imported goods.
- The U.S. economy did show some sparks with the GDP expanding 4.6 percent and 3.5 percent in the past two quarters on an annualized basis. Above 3 percent is desirable and good and below 3 percent is subpar. However, based on softening exports, GDP in the final quarter of the year may only be 2 percent. Such a slowdown means job gains will also slow.
- U.S. exports to foreign countries already started to contract in September, falling 1.5 percent. Meanwhile U.S. imports were about the same. Therefore, the trade deficit increased. This type of trend will further continue for the foreseeable future because foreigners will have less capacity to spend. Moreover, the U.S. dollar has strengthened, which makes U.S. products more expensive and foreign products cheaper. In a pronounced case of Russia, its currency has tumbled by more than 30 percent against the dollar. Therefore, there will be less Russian buyers of Miami properties in the upcoming year.
- Forecast? The U.S GDP growth in the fourth quarter will be sluggish at around 2 percent. If subpar growth continues into early next year than the pace of job gains will surely slow. Job growth is currently projected at 2.5 million for 2015. But if exports struggle to expand and the economy grows slowly at 2 percent throughout next year then the job gains may slow to only 1.5 million.
- Russia’s economy is potentially facing shambles because of sanctions. This weakening will have some reverberations across the global economy. Finland for one, an innocent bystander, will suffer a deep recession as Russian tourists stop coming. But the sanctions on Russia will not be lifted as long as it misbehaves, like invading a foreign country. Back during the U.S. Civil War, European countries wanted to continue the cotton trade with the Southern states despite the sanctions placed by the North. To reaffirm the sanctions and prevent violations for good, Abraham Lincoln came out with Emancipation Proclamation, something he had pondered for several years. Lincoln knew with his announcement there was no way Britain and France, who both had abolished slavery several years earlier, could now violate the sanctions. The Southern economy subsequently collapsed. Moral reasons will always triumph over economic reasons.
- Consumers are becoming ever more confident in the economy. Continuing job gains, lower gasoline prices, and rising home values are likely contributing to the sentiment. Interesting though, that REALTORS® were feeling less optimistic in the past month.
- The latest consumer confidence index reached a 7-year high mark. In October, the index was 94.5. The long term average is near 100. The overall improvement in the economy is no doubt contributing to better consumer feelings. This consumer confidence index is about the whole economy and not specifically related to home buying. But consumers need to be confident of the general economy in order even consider making a major expenditure such as buying a home. Therefore the rising consumer confidence portends better for the housing market outlook.
- REALTORS® in September expressed an opposite feeling with the index falling to its lowest mark in 2 ½ years. And the assessment of the condominium market has been consistently lower than that of the single family properties.
- Pending contracts to buy a home have been rising in recent months (though still down from one year ago). So unless REALTORS® are expressing their sentiment based on intangible factors, like changes in the number of client appointments or lower foot traffic at open houses, the weakening confidence by REALTORS® seems uncalled for.
- The confidence data cannot decipher if high-producing REALTORS® are just as pessimistic as the general REALTOR® population. We know that 20 percent of REALTORS® earn more than a six figure income while 30 percent of REALTORS® earn less than $15,000 a year (with the rest earning in-between). It is presumed that confidence and earning are correlated.
- The U.S. Capitol dome is currently undergoing a major reconstruction. This dome is indeed a truly remarkable engineering feat and a thing of beauty. But one of the best known domes in the world covers a church in Florence, Italy designed by an architect Brunelleschi over 500 years ago. He and his crew, many of them orphans and labeled as “men without names,” built the dome without construction cranes or other modern equipment. He built it to honor God and, possibly and more importantly, to raise hope of what people are capable of achieving. There is nothing like confidence to get things done.
Recently the FHFA announced that it would begin to allow the GSEs to finance loans with as little as 3% down payments. This news was received with mixed reviews. Some view it as an improvement in access for entry-level buyers while others see it as a step down the path of loose lending that brought down the market in the mid-2000s. In fact, this step is only a modest change that will likely be done under common sense restrictions to augment successful lending with a small impact on market. However, it should provide a positive signal to lenders.
In response to rising defaults and losses, the GSEs both eliminated their 3% down payment products in recent years in lieu of higher 5% minimums. However, roughly two weeks ago, the new Director Mel Watt announced the restitution of this program. Critics are concerned that this change would harken a renewal of the loose lending that brought down the housing finance system in the mid-2000s.
In a speech Friday at the Residential and Economic Trends Forum at the 2014 REALTORS® Conference & Expo, the Director clarified that, “…the guidelines will require that borrowers have compensating factors — such as housing counseling, stronger credit histories, or lower debt-to-income ratios — in order to make the mortgage eligible for purchase by Fannie Mae or Freddie Mac.” As depicted below, examination by FHFA economists suggests that FICOs scores are very important in mitigating risk and that a borrower with a 740 FICO score and only 3% down payment has on average a lower foreclosure rate than a borrower with a 660 and more than 20% down payment. What’s more, the agency’s work has shown that foreclosure rates vary by debt-to-income ratio. The Department of Housing and Urban Development cited research for its HAWK program that found a decline in delinquency of 19% to 50% for borrowers who went through pre-purchase financial counseling. Finally, all loans financed by the GSEs must conform to the qualified mortgage rule. Researchers at the UNC Center for Community Capital found that loans originated between 2001 and 2008 that met the QM standard save for the 43% back-end debt-to-income requirement experienced a 5.2% 90-day delinquency rate through 2011. This was well below the 5.8% for all QM loans and roughly 17.6% rate for all non-QM mortgages. In short, the underwriting the GSE’s employ will act as a foil against defaults.
But the FHFA will be in crowded company as it ventures into the lower down payment portion of the market. The FHA offered its 3.5% down payment product throughout the recovery while the VA dramatically expanded its mortgage program that requires no down payment. Likewise, the USDA’s rural housing program and state housing finance agency programs have been important sources of low down payment funding.
FHA financing has been expensive in recent years, though, as the annual mortgage insurance premium has increased nearly 80 basis points since 2008. The GSEs’ entrance into this portion of the market will provide a more affordable option to the FHA, but it will be priced relative to risk by both the agencies and their private mortgage insurer (PMI) counterparties. The GSEs do not currently price for the 3% down payment product, but they do increase loan level pricing adjustments based on DTI, FICO and LTV. Furthermore, private mortgage insurers like MGIC do price this risk charging 1.1% in annual PMI for a borrower with a 740 FICO and 3% down payment mortgage compared to just 0.71% for the same borrower putting down 5%. The fee jumps to 1.48% for a 660 borrower with 3% down payment versus the FHA’s permanent MIP of 1.35% and UFMIP of 1.25%. In short, as depicted below it will make financial sense for borrowers with credit scores below 720 to remain at the FHA or make larger down payments. These borrowers could save $25 to $40 per month with this change.
This segment of the FHA’s business is significant, though. Based on the FHA’s Quarterly Report to Congress, FHA’s production with FICO greater than 720 and down payment less than 5% was roughly 13.7% of its purchase production in the first half of 2014, down from 18.5% in all of 2013. It would comprise roughly 4% or less of the GSE’s purchase production. Given the low default risk and high premiums that this portion of the market generates, it could impact the agency’s bottom line. However, the high and permanent PMI structure at the FHA and low rate environment has led to an increase in run off as FHA borrowers gain equity and seek to refinance into better, non-permanent PMI rates. Because of this existing run off, the impact of competition in the 3% space would be limited, but more permanent.
The fact that PMIs are currently pricing this segment is important as well; it demonstrates that private capital is willing to take this risk. Thus, this shift by the FHFA has important implications for lenders as it signals the willingness of the agency to back off its extreme risk aversion, a change that should reinforce the agency’s recent overtures on repurchase agreements giving more comfort to lenders and a potential expansion of credit down the road.
While the FHFA’s recent announcement of the return of its 3% down payment program will improve affordability for a limited number of borrowers, it will be done with compensating factors that will limit risk and the size of the program. More important may be the signal that it sends to lenders: the GSEs are following the example of private mortgage insurers and reaching out to borrowers.
- Mortgages backed by the Veterans Affairs have generally performed better than other mortgage products, even though VA loans require no down payment.
- In the most recent quarter, the percentage of mortgages going into foreclosure for VA loans was 0.3 percent compared 0.4 percent for all mortgages. The differences were even more pronounced during the housing collapse with VA foreclosure starts running at around 0.7 percent during 2009-2010, half the rate of other mortgages.
- Among the mortgages that are past due by over 3 months but not yet in foreclosure, a similar performance difference is observed. The serious late payment rate on VA loans was 1.85 percent while it was 2.31 percent for all mortgages.
- Worth reiterating is that VA loans are zero-down payment products. The better performance could be due to American veterans’ sense of duty of fulfilling their contractual obligation and demonstrating responsibility. The better outcome is also likely caused by the fact that veterans are required to stay well within their budget, and not take on super-large mortgages. Washington policy makers need to be mindful of these results and not impose artificially high down payment requirements on people stretching their budget that could tip them over.
- USAA – an insurance company that underwrites various policies for people who had served in the Armed Forces – is said to do well financially year-in year-out. That is because there are lower cases of accidents and insurance frauds among this group of people compared to the rest of the population. Knowing this trend as well as that of mortgage performance, employers, lenders, and other business leaders may want to give extra consideration for people who have served.
With rising home values and fewer foreclosures, the share of distressed sales to existing home sales continued to decline, according to data from the September 2014 REALTORS® Confidence Index Survey: http://www.realtor.org/reports/realtors-confidence-index
In September 2014, distressed sales accounted for 10 percent of sales: 7 percent of reported sales were foreclosed properties, and about 3 percent were short sales. The decline of distressed properties on the market explains to some degree why investment sales and all-cash sales have been on the decline.
Distressed property sold at a 14 percent average discount for the past 12 months. Properties in “above average” condition were discounted by an average of 10-12 percent, while properties in “below average” condition were discounted at an average of 14-20 percent.
 The survey asks respondents to report on the characteristics of the most recent sale for the month.
- The broadest measurement of the U.S. economy (GDP) expanded solidly in the third quarter at a 3.55 percent annualized rate. This marks two straight quarters of robust growth. Growth at this rate can accelerate future job creations. Still, we are missing consistency. The first quarter was negative. For the year as a whole in 2014, GDP looks to notch up only around 2 percent growth. That would mark nine straight years of sub-par economic growth of less than the historical average of 3 percent.
- Real estate components slowed down in the latest quarter. Residential investment spending (from new home construction to real estate brokerage service) grew by only 1.9 percent, much slower than 9 percent gain in the prior quarter. Commercial real estate investment (known formally as nonresidential investment) expanded by 5.5 percent in the latest quarter, slower than the 10 percent gain in the prior quarter. Difficulties in obtaining construction loans have resulted in slower than normal expansion in the real estate sector.
- A big contributor the latest GDP growth came from increased business spending on things like computers and equipment and strong export growth. Given the faster U.S. economic expansion currently versus most other countries, export growth will likely slow in the upcoming quarter while import consumption will pick up.
- Without going into too much detail, the upcoming fourth quarter GDP is likely to grow at 2 to 2.5 percent, which is simultaneously good news and bad news. Good that the economy is in no danger of a fresh recession. Bad that economic growth is again slipping back down below 3 percent.
- Long periods of slow economic growth have consequences. Roughly speaking, $4,700 is missing from average American’s pocketbook. That is the gap between the potential GDP had the economy grown at the 3 percent historical growth rate versus what actually happened in nine straight years of sub-3 percent growth.
- Who to blame for the missing $4,700? That’s easy. Most people decided very early on as to whom to blame, with the reasons to be found and made up later. Democrats will blame the unfettered wheeling and dealing of Wall Street that nearly crashed the whole global financial system in 2008 and the subsequent widening inequality. Republicans will blame too many new regulations, higher taxes, and Obamacare. Many will make their feelings known on November 4th. Though there are some concerns about who votes and how often, it will be nothing like that of the master crook. The Soviet leader Stalin once said what really matters in elections is not about how often one votes, but who counts the votes.
During 2013, commercial real estate witnessed a noticeable reversal in capital availability. Following exceedingly stringent capital standards and overly tight liquidity in the wake of the 2008 recession, funding sources broadened. The trends accelerated during 2014, as most major capital providers returned to the markets and actively competed, leading some investors to express concern about an overabundance of capital chasing too few deals in some markets.
For commercial REALTORS®, the main sources of funding in 2014 mirrored the trends of the past couple of years. Local and community banks were the largest source of lending, accounting for 30 percent of deals. Regional banks were the second largest provider of CRE loans, with 23 percent of transactions. Over the 2013-14 period, regional banks increased their share of the market. Private investors provided 10 percent of funding for REALTOR® deals, followed closely by the Small Business Administration, at 9 percent.
National banks were a much smaller source of CRE lending in REALTOR® markets, accounting for 8 percent of total. Credit unions and insurance companies comprised close to one-in-ten loans. Lending sources also included international banks, REITs and CMBS, but only in a small fraction of transactions.
Underscoring the importance of the banking sector as a source of funding, 64 percent of REALTORS® indicated that bank capital for commercial real estate remains an obstacle to sales. When asked about the main causes for the lack of bank capital, 27 percent indicated that legislative and regulatory initiatives proved the main stumbling block. Another 22 percent pointed to the U.S. economic uncertainty as an underlying factor.
For more details on lending conditions in REALTORS® markets, visit: http://www.realtor.org/sites/default/files/reports/2014/commercial-real-estate-lending-survey-2014-10-08.pdf.
For the first time since January 2012, the Buyer Traffic Index, which captures on the aggregate how REALTORS® viewed traffic conditions in their markets, dropped to 44 in September (55 in August), according to data from the September 2014 REALTORS® Confidence Index Survey: http://www.realtor.org/reports/realtors-confidence-index. An index below 50 indicates that more REALTOR® respondents viewed their local traffic conditions as “weak” compared to those who viewed conditions as “strong” or “moderate.” The higher the index, the more respondents there are with “moderate” or “strong” outlook.
By state, buyer traffic strongest in North Dakota and in D.C. as well as states in the West, South, and in the Great Lakes. Buyer traffic was generally “weak” in many states in the North East and Mid-Atlantic.
 The buyer and traffic index by state is based on data gathered from the last three surveys to accumulate enough observations for each state.
- Today, S&P/Case-Shiller showed that home prices grew 5.6 percent year over year in August for the 20-city index while the 10-city index showed a gain of 5.5 percent. The newer Case Shiller monthly national index showed a gain of 5.1 percent year over year in the August.
- Headlines seem to be focusing on the slow-down in prices as if it is a bad thing, almost as if we are beginning another housing correction. Here is another perspective: for now, prices are still growing but at a healthier, slower pace. There is a big difference between slow growth in prices and price declines. In the latter situation, home owners are losing equity and the monthly mortgage payments may not help them build up equity faster than it is being lost to home price declines. In the former situation, home owners are gaining equity from price growth AND from paying their mortgage each month, though they may not be accumulating equity quite as quickly as they did when home prices were gaining at a double digit pace.
- The slow-down in price growth is only just now bringing appreciation back into a more normal, sustainable level of growth. Because the housing market overshot on the downside (prices corrected to levels that were unsustainably low), it was not alarming to see double-digit price growth in housing last year, but that trend cannot continue indefinitely unless incomes grow commensurately (and in case you missed those headlines, income growth has not grown at anywhere near that pace.)
- The good news is that no matter the measure used to evaluate home prices, we are seeing the same trend: a return to a more normal level of price growth. This slower pace of growth is good for buyers without harming current home owners. Market fundamentals of income growth and construction should keep supply and demand balanced enough to foster continued, normal growth of prices going forward.
- Last week NAR released median home price information that showed gains of 5.9 percent in September 2014 home prices compared to September 2013. These gains followed NAR’s estimate of 4.5 percent gains for the year ending in August 2014. September was the 6th consecutive month of housing price gains in the 4 to 6 percent range, what is typically considered normal, and notably slower than double-digit price growth in summer/fall 2013.
- Also last week, the FHFA released their housing price index data for August. FHFA’s data, like NAR’s, showed continued but decelerating home price gains. FHFA estimated growth of 4.8 percent for the year ending August 2014.
- NAR reports the median price of all homes that have sold while FHFA and Case-Shiller report the results of a weighted repeat-sales index.
- The reason Case-Shiller’s reported price growth is higher than NAR’s is likely a result of the data lag. 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 August prices include information from repeat transactions closed in June, July, and August. For this reason, changes in the NAR median price tend to lead Case Shiller changes.
- FHFA sources data primarily from Fannie and Freddie mortgages, transactions using prime conventional financing, and misses out on cash transactions as well as jumbo, subprime, and government backed transactions such as those using VA or FHA financing. Sometimes, these non-Fannie and Freddie financed purchases have more volatile price trends.
- Given recent trends in NAR data, we expect Case Shiller- and FHFA-measured price growth to continue to moderate in the next few months.
- For those interested in the local perspective, stay tuned for NAR’s metro home price release out later next week or contact a local expert who can give you the most current local MLS information and put these national headlines in context.
REALTORS’® confidence about the outlook for the next six months for single-family homes is still generally “moderate” in many states, according to the September REALTORS® Confidence Index Survey: http://www.realtor.org/reports/realtors-confidence-index .
The graphs below show a measure of REALTORS’® confidence for the single family residential market on a state-by-state basis. An index above 50 indicates that there are more respondents who viewed their markets as “strong” or “moderate” compared to those who view them as “weak.” The higher the index, the more respondents there are with “moderate” or “strong” outlook.
Many states had an index greater than 50, the highest in North Dakota and the District of Columbia, states with strong economic and job growth.
REALTORS® Confidence Index: Outlook in Next Six Months for Single-Family Homes Based on July 2014-September 2014 RCI Surveys
 The market outlook for each state is based on data for the last 3 months to generate enough observations for each state.
- There is no consumer price inflation to speak of – as of yet. Even the expectation of future inflation rates remains low. This is the key reason as to why mortgage rates remain at historically low rates and why the cost-of-living-adjustment (COLA) for social security checks will barely rise next year.
- The latest consumer price inflation in September was up only 1.7 percent. This particular month is the basis for the COLA for many checks issued by the government for the year 2015.
- Because of the falling gasoline prices in the past month, there could be further deceleration in inflation in the upcoming months. But energy prices are always subject to volatile swings. If energy prices measurably turn up due to unanticipated geopolitical events, then the overall inflation rate could be pushed above the Federal Reserve’s desired 2 percent ideal inflation target.
- Another factor that could move higher and hence push up the overall inflation rate is from the housing sector. Rents rose 3.3 percent over the 12 months to September, the highest pace in nearly 6 years. Homeowner equivalency rents, a hypothetical number of what homeowners would receive if they were to rent out their home, are also hitting near 6-year high. Given insufficient new home construction in relation to population and job growths, both rent components are further poised to rise. Given that the housing is the biggest weight to the CPI calculation, the overall CPI could easily kick into high gear.
- Though there has been massive printing of money by the U.S. Federal Reserve in the past few years (to buy government bonds and mortgage backed securities – something known as Quantitative Easing), inflation so far has been very tame. Should inflation at some point pop out, however, then all the borrowing costs including mortgage rates will rise to compensate for the future loss in purchasing power. The likelihood of inflation popping out to 10 percent or higher as happened during the large money printing period of the 1970s is highly unlikely. But a higher inflation of 3 to 4 percent within a year is a distinct possibility. In such a case mortgage rates will commensurately get pushed up.
- The Federal Reserve has many contingency plans in place to assure that recent printing of the money does not lead to high inflation. Just for an interesting historical anecdote and not as a possibility, even a remote one, it is worth recalling the years after the discovery of America by Christopher Columbus. Spain experienced a long period of high inflation. The monetary system at that time was based on precious metals of gold and silver. The large shipments of gold and silver from the New World to the Old World resulted in too much metal-based money chasing after too few goods (since many Spaniards stopped working to live the easy life). The result was too much inflation and Spain defaulted on sovereign debt several times. As one historian puts it: “The new world conquered by Spain, has now conquered Spain in return.” Common sense says that the greatness of a country is determined by how hard people work and not by how easy it is to obtain currency.