- Today, Case Shiller released their housing price index data for November which showed that house prices rose 4.2 percent from November one year ago for the 10-city composite, 4.3 percent for the 20-city composite, and 4.7 percent for the national index.
- While FHFA and NAR reported growing, even accelerating prices which we covered here last week, the Case Shiller headline shows a decline from the month of October to November of 0.1 to 0.3 percent (national and 10-city index). A closer look will reveal that this data is not seasonally adjusted and thus is not ideal for month to month comparisons. Using the seasonally adjusted data, we find that prices increase 0.7 to 0.8 percent from October to November. This notable rate of increase is similar to what was reported by the FHFA and marks the 4th month of accelerating prices in the 10- and 20- city indexes and the 6th month of acceleration in the national index. On a year over year basis, however, only the national index shows a very slight acceleration in prices.
- Both FHFA and NAR data showed that the November annual growth rate in prices was higher than that observed in previous months. NAR’s December price data showed growth slightly under November’s pace, but at 6.3 percent, above what might be considered a normal rate of home price growth. As long as tight housing inventory persists, which we expect to see as long as housing starts remain at a subpar level, we expect to see upward pressure on home prices which adds an additional challenge to potential first-time buyers.
- Case Shiller’s city by city data demonstrates this phenomenon. Cities where prices are growing above normal pace, such as San Francisco (8.9%), Miami (8.6%), Dallas (7.7%), Las Vegas (7.7%), and Denver (7.5%), tend to have tighter inventory.
- In other areas where growth rates have been slower, like Cleveland (0.6%), Minneapolis (1.5%), New York (1.5%), Phoenix (1.9%), and Washington DC (1.9%), inventory has tended to be more available.
- The total inventory of homes available for sale fell in December for the first time in 16 months. The decline was very modest of less than 1 percent from the comparable month the year before. Nonetheless, it represents a reversal to the general growth of listings that had been occurring throughout 2014. Months supply is already low at 4.4 months. More inventories are needed, not less. Or else, home prices could re-accelerate.
- Specifically, at the end of December there were 1.85 million properties listed for sale, down 11 percent from November and down 0.5 percent from one year ago. The monthly decline was fairly normal which occurs every year from November to December. But what is of interest is the year-over-year decline in inventory because this hints at possible acceleration in home prices in upcoming months.
- For those technically minded, after applying statistical seasonable adjustment factors, the inventory has declined for two straight months, implying a genuine tightening of supply. Therefore, home prices could re-accelerate.
- Home prices in fact appear already to be re-accelerating. In spring and summer of last year, the median price was rising at 4 to 5 percent. In November and December, the price increased by 6 percent.
- Do not expect any help to inventory from distressed properties. The shadow inventory – those homes already in the foreclosure process or with serious mortgage delinquency – has greatly shrunk. Hence, far fewer newly foreclosed properties will be hitting the market. Those REALTORS® who specialize in distressed property sales should be aware that there will be less business opportunities in this field going forward.
- Because of shorter supply, distressed properties are no longer being sold at deep discounts. Many buyers of these previously thought to be worthless properties have done well in terms of rental return and price appreciation. From this experience, buyers are now eager to bid up.
- As a country, America has been a fine real estate investor. What was thought to be worthless properties were acquired on the cheap. France sold the vast ‘useless discovery’ made by LaSalle – the Louisiana Territory – to America for a mere $15 million. Few years later, the ‘insect infested’ land of Florida was bought for $5 million from Spain. The mocked ‘icebox’ of Alaska was purchased at 2 cents an acre from Russia. (The mocking ended when gold was discovered). But the paradise island of Cuba was not purchased or even given the chance after serious and realistic considerations during President Buchanan’s term.
- Today, FHFA released their housing price index data for November which showed that house prices rose 0.8 percent from October on a seasonally adjusted basis.
- That rate of growth is the highest one-month growth rate reported by FHFA since December 2013; it would translate into an annual price growth of 10 percent.
- While month to month data can be somewhat volatile, looking at the year over year data, we see a similar acceleration though not yet that strong. From one year ago, home prices were up by 5.3 percent, according to the FHFA, very close to the 5.6 percent change reported in NAR’s median price in November.
- Both FHFA and NAR data showed that the November annual growth rate in prices was higher than that observed in previous months. Tomorrow, NAR will release December price and sales data, and we’ll get a first look at whether the acceleration in home price growth will continue. As long as tight housing inventory persists, which we expect to see as long as housing starts remain at a subpar level, we expect to see upward pressure on home prices which adds an additional challenge to potential first-time buyers.
- In addition to national data, FHFA releases data at the Census division level. The most robust gains in FHFA data from a year ago were still in the West though other Census divisions were stronger than the Mountain division. NAR data showed less strength in prices in the West.
- According to FHFA year over year prices rose 7.5 percent in the Pacific division which includes Hawaii, Alaska, Washington, Oregon, and California and 5.6 percent in the Mountain division which includes Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona, and New Mexico. But divisions that make up the South region actually had growth in excess of 6 percent from a year ago.
- NAR and FHFA data both showed the smallest price gains from November a year ago in the Northeast. NAR showed that prices grew by 2.0 percent in the Northeast and FHFA showed that prices rose 1.6 percent in New England (Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut) and 2.1 percent in the Middle Atlantic states (New York, New Jersey, Pennsylvania) from one year ago.
- NAR reports the median price of all homes that have sold while FHFA reports the results of a weighted repeat-sales index. For this reason, the trends in the NAR median price can differ from the trends in the weighted repeat sales index—which computes price change based on repeat sales of the same property, but they typically track very closely and the timeliness of the NAR median price data makes it a good early indicator of price conditions in the housing market.
- 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 while NAR uses data reported from Realtor-assisted transactions in the MLS.
- Using data from NAR’s 2006-2014 Profile of Home Buyers and Sellers, we can examine how the demographics of first-time homebuyers have changed over the last 9 years. What do these numbers show us about the diversity of buyers, and what insight can they provide for the future?
- The demographic characteristics of first-time buyers overall has remained consistent over the last 9 years with slight increases and decreases.
Household Composition of First-Time Buyers:
- Since 2006 the distribution of first-time buyers’ household composition has remained predominantly married couples, making up an average of 52% of first-time buyers.
- On average 22% of first-time buyers were single females and 12% were single males or unmarried couples.
Median Age of First-Time Buyers:
- The median age of first-time buyers has remained within a 3 year age gap between 30-32 years old.
- The average median age of first-time buyers since 2006 was 31 years old.
Racial and Ethnic Distribution of First-Time Buyers:
- The racial and ethnic distribution of first-time buyers has remained predominately White/Caucasian, making up an average of 77% of first-time buyers since 2006.
- The averages of other races and ethnicities are:
- Black/African American: 8%
- Hispanic/Latino: 8%
- Asian/Pacific Islander: 7%
- Other: 3%
Country of Birth of First-Time Buyers:
- Since 2006 the number of first-time buyers who were born outside of the U.S. has increased and then decreased settling back to 86% in 2014, the same as in 2006.
- On average 87% of first-time buyers were born in the U.S. and 13% were born outside of the U.S.
Primary Language Spoken by First-Time Buyers:
- Over the last 9 years, English has remained the primary language of first-time buyers.
- On average 7% of first-time buyers spoke other languages, while 93% spoke primarily English.
The Future of First-Time Buyers:
- While the demographics of first-time buyers over the last 9 years have not necessarily seen great changes, there is still the outlook for the future.
- William Frey, of the Brookings Institution, recently published the book “Diversity Explosion” which looks at the demographic future of America.
- Frey expounds that America is becoming a country with no racial majority, with a dramatic growth of young minority populations expected.
- Frey predicts that sometime after 2040 there will be no racial majority; this would ultimately change the demographics of the first-time homebuyers moving towards greater diversity.
For more information on this research, check out the:
- Single-family housing starts in December reached their highest monthly activity in nearly 7 years. Still, the increase is coming off very depressed levels and another 50 percent jump is needed to help relieve a potential housing shortage.
- Multi-family starts took a dip in December. But this sector has been strong and can be said to be back close to normal. A strong rise in rental demand and the need for apartments have been the main reason.
- Numerically in December, single-family housing starts rose 7 percent to reach 728,000 (annualized rate) while multi-family starts fell 1 percent to hit 361,000 (annualized rate). With the final month’s data collected, for the year as a whole in 2014, the total housing starts reached 1.05 million. That is woefully inadequate and well below historical normal. Over the past 50 years, housing starts have averaged 1.5 million units a year. This great underproduction is principally related to single-family units. Multi-family production is back to normal.
- Homebuilders are not having problems selling what they build. The latest data suggests it only takes around 3 months to find a buyer for a newly built single-family house. That’s fast. Yet, the builders are evidently not in a hurry to build more. Why? Many of the small local builders simply cannot obtain construction loans. In the past, they may have received a loan amount to build 20 homes. But now, they are approved to build only 1 or 2 homes and only after this loan is repaid a new loan is then approved to build another 1 or 2 more. Moreover, there are fewer construction workers around now after many went to Texas and North Dakota to work in oil drilling. Now that the oil price has come down, there could be more construction workers for home building in 2015.
- The forecast is for single-family housing starts to rise by 25 to 30 percent in 2015 as construction loans become more accessible. Multi-family housing starts will rise by additional 15 percent given the very low apartment vacancy rates. That translates into a good recovering year for homebuilders in 2015.
- As an aside, Americans know that a home is a person’s castle. Winds and elements may enter, but Kings and soldiers cannot. Because of its long founding tradition these rights are taken for granted in America. By contrast in China many rural local government officials arbitrarily demolish people’s home with neither homeowner’s approval nor proper compensation. China in a few years will be the largest economy in the world, surpassing the U.S. But China looks to face future social unrest because land ownership is not respected.
Looking at data from NAR’s 2005-2014 Member Profile, we can see how the demographics of our members have changed over the last 10 years.
Gender of REALTORS®:
- Since 2005 the distribution of gender has remained predominantly female.
- On average 42% of members were male and 58% of members were female.
Age of REALTORS®:
- The median age of members has increased overall, with slight increases and decreases throughout the last 10 years.
- The average median age of members since 2005 was 54 years old.
Racial and Ethnic Distribution of REALTORS®:
- The racial and ethnic distribution of members has remained predominately White/Caucasian, making up an average of 86% of our members since 2005.
- The averages of other races and ethnicities are:
- Black/African American: 4%
- Hispanic/Latino: 5%
- Asian/Pacific Islander: 3%
- American Indian/Eskimo/Aleut: 1%
- Other: 1%
Country of Birth of REALTORS®:
- Since 2005 there has been a slight increase in the number of members who are born outside of the U.S., increasing from 9% in 2005 to 11% in 2014.
- On average of 90% of members were born in the U.S., and 11% were born outside of the U.S.
Formal Education of REALTORS®:
- Since 2005 the percentage of members with a Bachelor’s Degree has shown the greatest increase, and has remained at 30% for the last two years.
- The largest average proportions of members have completed some college, with an average of 32%, and an average of 28% hold a Bachelor’s degree.
For more information on this research, check out the: 2014 Member Profile.
Every month NAR produces existing home sales, median sales prices, and inventory figures. The reporting of this data is always based on homes sold the previous month, and the data is explained in comparison to the same month a year ago. We also provide a perspective of the market relative to last month, adjusting for seasonal factors, and comment on the potential direction of the housing market.
The data below shows what our current month data looks like in comparison to the last ten November months, and how that might compare to the “ten year November average” which is an average of the data from the past ten November months.
- The total number of homes sold in the US for November 2014 is lower the ten year November average. In recent months, the 2014 sales figure has been within 5 percent of or even higher than the 10-year average figure. November’s low figure relative to the 10-year average may be partially due to the rush of closings in November 2009, as the first time home buyer’s tax credit was set to expire. Regionally, only the South had higher than average sales while the Northeast, Midwest, and West show current sales below the ten year November average.
- Comparing November of 2004 to November of 2014 fewer homes were sold in 2014 in all regions, with the Northeast undergoing the biggest decline of 40.4%. The South, still leading all regions in home sales had the smallest drop in sales at 19.9% over the ten year period. Population growth may help explain some of the South’s resilience. From 2005 to 2013, data show that the population there grew by 13% whereas the nation as a whole grew by less than 10 percent and the Northeast and Midwest grew by less than 6% each.
- The median home price this November is higher than the ten year November average median price for the US and all regions except the Northeast which was modestly close. The median price of a home in 2014 is up approximately 3% higher in the US, Midwest, and South compared to 2004. Only the Northeast had a drop in price of 2% while the West remained flat.
- The median price year over year percentage change shows that home prices began to fall in 2006, but did not fall considerably in most areas until around 2008. Still, the graph shows the major turn-around in growth rates from nearly double-digit gains in 2005 to a slight loss in 2006. Home prices made their biggest jump from 2011 to 2012 except for the Northeast which saw prices slip slightly in 2012. The West had the largest gain up to 22% price growth in 2012, which is also the largest November year over year gain observed in this 10-year period in any region. This November the Midwest has the highest year over year price percentage change over the US and the other three regions. While prices are still growing, the rate of price growth in the West has slowed considerably since last year.
- There are currently fewer homes available for sale in the US this November than the ten year November average. In 2004 the US had the fastest pace of homes sold relative to the inventory while in 2008 the US had the slowest pace taking 11 months to sell the supply of homes on the market. The ten year November average months supply is 7 and this November we are at 5.1 months supply. The ten year average month supply for November for condos is 7.9 while single family is 6.9. The condo market is currently performing better than single family, having only at 4.6 months supply while single family is hovering around 5.2.
- Consumer prices fell in December, yielding a low one-year 2014 inflation rate of only 0.7 percent. However, renters are getting squeezed. Rents increased at the fastest clip since 2008 with a 3.4 percent jump in 2014. Home prices are not part of the consumer price measurement, but something consumers deeply care about, and they look to have risen by around 5 percent.
- The overall consumer price index (CPI) fell in December by 0.4 percent. It is the second straight month of decline, thanks to a plunge in gasoline prices. Over a 12-month period to December, CPI increased 0.7 percent, which is the lowest one year inflation rate since 2009. A 21 percent decline in gasoline prices will also filter to areas that require fuel. Already airfare has fallen by 5 percent while delivery service fees are no longer rising as it had in the past.
- However, not everything is all right for consumers. In particular, housing costs are rising significantly. Though the rent increase in December moderately slowed to 3.4 percent (compared to 3.5 percent in November), the above 3 percent increases are the strongest rises since 2008. For those fed up with the higher rents and can escape, home prices are rising at an even faster pace of 5 percent. (Home prices are considered an asset, like stock prices, and hence are not counted as part of CPI). Only the historically low mortgage rates are helping in home buying affordability. For homeowners who are on a fixed interest rate, their mortgage payments have increased 0 percent.
- Property management companies should be aware that even though they are extracting higher rents from tenants, the cost of operation appears to be rising. The price of water/sewer/trash collection services are rising at a 4.6 percent clip.
- The cost-of-living-adjustment on many government benefit checks, like social security that went to effect from January was 1.7 percent. In the meantime workers’ wages have been rising at a 2 percent rate. With CPI inflation at 0.7 percent, it would appear that Americans are experiencing a modest rise in their standard of living – at least statistically. That’s not the case for many renters, including the elderly who are not homeowners. Housing costs – both rents and home prices – are outpacing wages. The fast rising housing costs are happening because there has been a great underproduction of new supply over the recent years. Fewer homes in relation to population growth will make the housing costs more expensive and this trend will likely continue throughout 2015.
This blog post was written by Danielle Hale, Director of Housing Statistics, and Hua Zhong, Data Analyst.
You probably know that recent home listings went under contract slightly more often on Mondays, Tuesdays, and Fridays. Here is the data to back up your intuition:
- As we start the New Year, this is a good time to take a look and recap the year behind us to see what insights 2014 holds for 2015. The last sales data for December 2014 is just now being collected, but we can get a good sense of the year by looking at the data we currently have for the past 12 months. In our first posts, (Part 1, Part 2, and Part 3) we looked at closings and listings by day. Here, we’ll take a look at contracts.
- Below, we see the most popular under-contract days of 2014. Similar to the pattern in home listings, we see a strong preponderance of spring dates and lack of weekends.
- The biggest months for new contracts were May, April, and June. These months alone accounted for about 3 in 10 new contracts in this analysis.
- While not devoid of contract activity, the weekends are not common contract signing days. Among weekdays, Mondays, Tuesdays, and Fridays are the most common days for new contracts to be signed, though Wednesdays and Thursdays are almost equally common. In spite of that fact, not a single Wednesday made the list of top 25 days for contracts in 2014.
- While home closings exhibit a strong tendency to get done at the end of the month, contracts are, like listings, much steadier throughout the course of the month. Listings show a slight tendency to be posted earlier rather than later in a month, and contracts have a very slight tendency to be signed more often in the middle of a month rather than at the end.
This is part 4 of a week-long series on EHS. Check back tomorrow at 12 p.m. ET for the final post in the series.
 This analysis includes listings that went under contract at any point in the period under observation, December 1, 2013 to November 30, 2014. If two contracts existed in the observation period on the same listed property because, for example, one contract fell through and another contract was signed in a later month, both contract dates would be counted as “new contracts” in the analysis. Thus, some contracts counted here may have fallen through.
- Seasonally adjusted applications to purchase homes surged 23.6% for the week ending January 9th relative to a week earlier, a significant increase following the prior week’s 4.5% improvement. The purchase applications index is 1.6% higher than the same time in 2014. The week-to-week figures may be volitile, but the unadjusted 4-week moving average has improved steadily since early November and is down just 0.6% from a year.
- Despite the sharp increase, credit overlays and limited supply continue to constrain purchase application volumes. However, sub-4% mortgage rates combined with new products offered by the GSEs and lower MI pricing by the FHA point to strong affordability in the spring market.
- The average rate for a conforming 30-year fixed rate mortgage as reported by the Mortgage Bankers Association fell 12 basis points to 3.89%, the lowest level since the week ending May 17th 2013. The average rate a year ago this week was 4.66%. At the current rate and median price, a borrower would save $46 per month, or an improvement in affordability of 5.2% relative to last year.
- This week’s readings suggest a solid improvement in mortgage applications and dovetails with the robust economic and affordability data as well as foot traffic figures from the last two months. Stronger applications are one more signal pointing to a solid spring market. However, the market would benefit from both income and inventory growth.
This blog post was written by Danielle Hale, Director of Housing Statistics, and Hua Zhong, Data Analyst.
You probably know that home listings go up most often on Thursdays and Fridays. Here is the data to back up your intuition:
- As we start the New Year, this is a good time to take a look and recap the year behind us to see what insights 2014 holds for 2015. The last sales data for December 2014 is just now being collected, but we can get a good sense of the year by looking at the data we currently have for the past 12 months. In our first posts, (Part 1 and Part 2) we looked at closings by day. Here, we’ll take a look at listings.
- Below, we see the most popular listing days of 2014. Note the strong preponderance of spring dates and obvious lack of weekends.
- The biggest months for new listings are May, April, June, and March, and June. These months alone accounted for two-fifths of all new listings in this analysis.
- While not devoid of new listings, the weekends are obviously not popular days to list. Among weekdays, Fridays and Thursdays are the most common days for new listings to go up, with Monday trailing a bit and Tuesdays and Wednesdays are not too far behind. Wednesdays and weekends are the only days of the week absent in the top 25 days for listings.
- While home closings exhibit a strong tendency to get done at the end of the month, listings are much steadier throughout the course of the month with a slight tendency to be posted earlier rather than later.
This is part 3 of a week-long series on EHS. Check back tomorrow at 12 p.m. ET for the next post in the series.
This blog post was written by Danielle Hale, Director of Housing Statistics, and Hua Zhong, Data Analyst.
You probably know that home closings slow down during the holidays and earlier part of the week. Here is the data to back up your intuition:
- As we start the New Year, this is a good time to take a look and recap the year behind us to see what insights 2014 holds for 2015. The last sales data for December 2014 is just now being collected, but we can get a good sense of the year by looking at the data we currently have for the past 12 months. In our first post, http://bit.ly/1y7G1Dp we looked at top closing days of 2014.
- In this list, we see the slowest closing days of 2014. The resulting list depends very much on how you define the eligible days.
- Very few closings happen on weekends and federal holidays. Excluding these days as well as Christmas Eve and the day after Christmas, we find that the slowest closing day was January 2, 2014. Interestingly, there are a few weekend days that performed at least as well as these slow business days. They were Sunday, November 30, 2014 and Sunday, August 31, 2014. Two other weekend days, Saturday, August 30 and Saturday, May 31, outperformed most other weekends and holidays with respect to number of closed home sales. As we saw with the top closing days, the end of the month is a popular time for closing and this can even be observed among weekend days as those at the end of a month tend to outperform other weekend days.
- Because this ranking was compiled with data that was not seasonally adjusted, we see that winter days figure prominently in the list of slowest days for home closings.
- Those who have been in business a few years can probably expect these seasonal fluctuations, but for those who are new to real estate, take note and plan your vacations accordingly.
This is part 2 of a week-long series on EHS. Check back tomorrow at 12 p.m. ET for the next post in the series.
- The U.S. dollar has become mighty once again. It has strengthened against most foreign currencies. That permits Americans to buy foreign products at cheaper prices and to travel abroad with fewer dollars. However in the opposite direction, the strong dollar means foreigners will face higher prices on American-made goods and will buy less of them, including real estate. There will be fewer foreign tourists in the U.S. as well in 2015.
- Not too long ago, $1 could be converted for 100 Japanese Yen or 70 euro cents. Today, $1 gets a lot more: 120 Yens or 83 euro cents. Similar trends against other currencies can be observed. The reason is that the global economy is no longer growing. The only bright spot is the U.S., where GDP and job growth rates have been accelerating of late. This disparity in the growth rates has made the dollar become measurably stronger.
- The table below shows what foreigners paid for U.S. real estate last year and what they are facing today given the stronger dollar. For Canadians, they are seeing 22 percent higher prices for a typical U.S. home after conversion. For Russians, prices are higher by 122 percent. Venezuela’s currency rate is fixed by the government but not available for transaction. On the black market it is estimated that U.S. home prices to have risen by 195 percent.
- REALTORS® experienced 35 percent growth in sales of U.S. real estate to foreigners in the most recently measured period (March 2013 to March 2014 versus comparable one year prior period). Such a growth rate is unlikely given the strength of the U.S. dollar. Russians and Venezuelans in particular are hard pressed. Professional hockey players in Russia are very envious of Washington Capitals star Alex Ovechkin, not because of his talent per se, but because he is getting paid in dollars and not in rubles.
You probably know that home closings predominate on Fridays and the end of the month. Here is the data to back up your intuition:
- As we start the New Year, this is a good time to take a look and recap the year behind us to see what insights 2014 holds for 2015. The last sales data for December 2014 is just now being collected, but we can get a good sense of the year by looking at the data we currently have.
- A list of top closing days of 2014 shows that the last business day of a month and Fridays are the most popular days to complete a home sale transaction. In fact, these days are so popular that the top 25 closing days are expected to account for roughly a quarter of all home sale closings for the year.
- The top 7 closing days were the last business days of June, May, August, April, July, September, and February. The next 18 most popular days were all Fridays except for three dates, all of which were at or near the end of the month: Monday, March 31, Thursday, October 30, and Wednesday, July 30.
- Because this ranking was compiled with data that was not seasonally adjusted, we see that spring and summer days figure prominently in the top of the list, but all seasons are represented.
- This day by day data confirms the unadjusted monthly EHS data which shows that June and July were the top months for home sales in 2014, followed by August and May. In fact, June and July alone are likely to account for more than 20% of sales for 2014.
- It is expected that spring and summer months will be strong from a home sales perspective. This is why NAR Research reports seasonally adjusted home sales data each month, so we can see how sales are performing relative to what we might typically expect given the season.
- By this metric, the second half of 2014 is on track to be stronger than the first half of the year. The peak month of 2014 sales, adjusted for seasonal fluctuations, was October when sales reached the 5.25 million level. We expect the strength in the second half of 2014 to carry through into 2015.
- What was your busiest day in 2014?
This is part 1 of a week-long series on EHS. Check back tomorrow at 12 p.m. ET for the next post in the series.
 This analysis considers data from December 1, 2013 to November 30, 2014.
 December 2014 data is not yet complete, so a projection is made.
 Even a surprisingly low December would be unlikely to pull down the better performance of the second half of 2014.
 Revisions to seasonal adjustment factors that will be made in February 2015 when 2014 data is complete and finalized are likely to shift the precise magnitude of this figure but unlikely to change the fact that October 2014 was the peak month for seasonally adjusted home sales.
- Crude oil prices are now trading at slightly below $50/barrel resulting in steep declines in gasoline prices. As of January 5, 2015, the U.S. Energy Information Administration (EIA) reported that the price of regular gasoline was $2.20 /gallon, the lowest since gas prices peaked to about $ 4/gallon in May 2011. In its December 2014 Short-term Energy Outlook Report, the EIA 2015 forecast for gasoline prices was $2.50 per gallon (which now seems on the high side given the developments in January 2015). The EIA also forecasts savings of $ 550 per household in 2015.
- Lower oil prices mean lower inflation rate which pushes down mortgage rates. Based on Freddie Mac’s weekly mortgage survey as of January 8, 2015, the 30-year fixed rate averaged 3.73 percent and the 15-year fixed rate averaged 3.05 percent.1 At the median home price of $205,300, a 0.75 percentage point drop in mortgage rates will yield savings of about $1,500 annually.
- The economic and housing recovery in the Midwest and South states from North Dakota to Texas has been underpinned by the boom in oil production. The steep price declines may lead to a flattening of revenues. Companies can either make up for the cash requirement by borrowing or issuing shares of stock as they have done since 20112.
- Companies may also resort to layoffs as has been announced by some companies3. The overall impact on employment is not likely to be significant since most of the employment growth is coming from many economic sectors. Of the almost 3 million net jobs created in 2014 , 10,000 came from other nondurable goods that includes oil and gas. However, there will be indirect impact to those localities as restaurants and shops will also likely cut back employment.
- State economies are also well-diversified. Based on 2014Q2 data from the BLS, there are 197,121 employed in oil and gas extraction, representing 0.14 percent of total employment of 138 million (Chart 1). In Texas, the biggest U.S. state oil producer which accounts for about half of the U.S. oil and gas extraction workers, employment in oil and gas extraction accounts for less than 1 percent of Texas’s total employment . However, the direct effect will be larger in some counties in Oklahoma, Texas, West Virginia, Illinois, Kansas, Utah, and Pennsylvania (Chart 2) .
- What this means for REALTORS®: The decline in oil prices is generally positive to households by way of the gas savings and lower mortgage payments. That savings will boost consumer spending in other areas. But there may be some layoffs in oil-producing states.
3 Already, layoffs have been initiated by service companies like Halliburton and Hercules Offshore. And oil producer ConocoPhillips pared its 2015 drilling budget by deferring drilling in America’s shale developments. Both announcements, made in December, likely will be followed by news of other companies cutting back. http://theadvocate.com/news/11127710-123/louisiana-oil-service-companies-expected
At the national level, housing affordability is down from a year ago for the month of November as higher prices make it less affordable to purchase a home despite the lowest mortgage rates in the last 16 months.
• Housing affordability is down from a year ago in November as the median price for a single family home in the US is up from a year ago. Regionally, the Midwest had the biggest increase in price at 7.1% while the Northeast had a slight gain at 2.0%.
• The median single-family home price is $206,200 up 5.6 % from November 2013 as year over year price gains are starting to flatten out. November’s mortgage rate is 4.16, down 22 basis points (one percentage point equals 100 basis points) from last year. Nationally, affordability is down from 173.3 in November 2013 to 170.7 in November 2014.
• Affordability is up slightly from one month ago in all regions, the Northeast having the largest gain at 3.7%. From one year ago, affordability is down in two of the four regions, the Northeast had a 2.6% increase. The Midwest saw the biggest decline in affordability at 2.8 % while the South declined to 1.6% and the West remained flat.
• Positive factors: Low mortgage rates, job creation, and stock market investments are a few of the influences improving consumer confidence. Recently Fanny Mae and Freddie Mac have decided to create new loan programs to help increase credit availability. A boost in incomes would offset home price gains as price growth is coming back to normal levels.
• What does housing affordability look like in your market? View the full data release here.
• The Housing Affordability Index calculation assumes a 20 percent down payment and a 25 percent qualifying ratio (principle and interest payment to income). See further details on the methodology and assumptions behind the calculation here.
- Job gains accelerated in the second half of 2014. The latest monthly data showed 252,000 net new payroll job additions in December. Over the last 12 months, that total net of new jobs comes to a cool 3 million. The pool of potential homebuyers and the need for commercial building spaces are therefore expanding.
- From the low point of 2009, more than 10 million jobs have been created. Recall, however, that 8 million jobs were lost during the painful recession in 2008-09. Therefore, compared with the prior employment peak in 2007, the country has only 2 million workers now. In the meantime over these years, the country’s population increased by nearly 19 million.
- More jobs have pushed down the unemployment rate to 5.6 percent, which would be considered almost normal. Frustratingly though for workers, the wages are barely rising. In December the wage rate rose by 1.65 percent from one year before. The weak wage growth is partly reflecting a considerably large number of people who are working part-time.
- REALTORS® are mostly not on any company’s payroll and are not included in the wage data. Commission income comes in lump sum and only if there is a closing. All the time spent driving and doing research means nothing if the property does not close. REALTOR® income also varies greatly from one year to the next and from one person to the next.
- A typical wage rate by industry is shown below. Note the lower wage rate for retail trade. That is why it is rare to see the same Starbucks crew over a 12-month time span. And each new crew tends to spell your name differently.
The FHA announced important changes to the pricing of its mortgage insurance today. This change will help to shore up the long-term solvency of its mortgage insurance fund, improve affordability and sustainability for most borrowers, and price in a significant number of borrowers locked out of the market in recent years. It will also provide a strong signal, along with solid recent employment growth and lower mortgage rates, to first-time buyers who might be on the fence. Its not the silver bullet, but an important step toward normalization of the housing market.
Changes in Context
The President announced that the FHA will reduce its annual premium by 0.5%, or from 1.35% to 0.85% for a borrower using a 30-year fixed rate mortgage with a 3.5% downpayment. In historical context, that reduces the annual MI charge to its lowest level since since early October of 2010. The fee that FHA charges for its credit enhancement is a combination of an annual fee (MIP) which is paid monthly and an up-front charge (UFMIP) which can be paid as a lump some at closing or more often it is rolled into the balance and financed for the life of the loan. The total fee, estimated as an upfront price now stands at 6.0% , down from 8.5% prior to this change. The total fee is at its lowest level since 2011, but remains higher than other non-recessionary periods over the last 30 years.
Even with the rate reduction, the fee charged by the FHA for its mortgage insurance (6% of originated balance) more than covers the expected losses (5%), allowing excess fees to continue to build up the capital reserve to its required minimum of 2.0%. Furthermore, the added volume generated by the lower fees will help to ameliorate the income lost by reduced premiums. In short, by modestly reducing rates and expanding the pool of borrowers, the FHA is still on trajectory to meet its capital requirement over a modestly longer horizon, while reducing the amount that it charges borrowers beyond the cost of the program.
For a borrower with a $200,000 mortgage, this changes amount to a reduction in the monthly payment of $83, an improvement of 7.1%, or nearly $1,000 over the first year. By year five, this borrower has saved nearly $4,800, but over 30 years the borrower would save roughly $18,000. This later point is important as FHA still charges its annual MI fee for the life of the loan, a change instituted in 2011. Mortgage rates are expected to rise as much as two percentage points in the coming years, which will significantly reduce borrowers ability and incentive to refinance out of the FHA program as they have done in recent years. As a result, this change will have a larger impact for many homeowners over the life of their ownership.
The lower fees will also help to stymie the flow of lower-risk borrowers from the FHA to the conventional market. The FHA pools its expenses for low and higher risk borrowers, thus allowing it to provide lower average pricing than the private market would for moderate risk borrowers. To do so, the FHA must maintain some lower risk borrowers in its portfolio, vets its borrowers, and provides only vanilla products with no risky features. High pricing of its MI caused a flight of quality borrowers in 2013 and 2014 putting the FHA’s ability to fund middle class borrowers and its very mission in jeopardy.
Beyond stabilizing the shift between the conventional and FHA markets, the lower pricing will draw thousands of credit worthy borrowers back into the market. NAR Research estimates that the fee reduction will price in an additional 1.6 million to 2.1 million renters along with many trade-up buyers, resulting in 90,000 to 140,000 additional annual home purchases based on the standard affordability limits at the FHA and conventional market and dynamics in the housing finance market.
Implications for the MI Industry and the Housing Market
The reduction of rates at the FHA will make it tougher for the private mortgage insurers to compete for these homebuyers in the interim. As depicted below in yellow, the pricing advantage shifts from PMI to FHA for a significant portion of the credit box. Later this year, the FHFA is expected to announce new capital requirements for the PMI industry as well as a decision on the future of the GSE’s loan level pricing adjustments (LLPAs). Many have argued that the combined capital requirements of the PMIs and LLPAs provide too much capital protection, leading to inefficiency and high costs to consumers. If the FHFA follows the FHA in providing capital relief, pricing should shift back toward the PMI industry helping it to maintain its footing. This step is important as a healthy PMI industry, like a healthy FHA, is critical for a robust, safe, and liquid housing finance system over the long-term.
The FHA’s proposed changes to its pricing for 2015 are good for consumers and the economy. It puts money back into consumers’ pockets, improves affordability for many borrowers, and unlocks the opportunity to purchase a home for tens of thousands, while preserving the stability of the FHA’s fund and protecting tax payers. Sluggish income growth, low inventories and nagging tight credit remain headwinds for the market, but this shift is an important bell weather of returning health for the market.
 This is a conservative estimate with a multiple of 5. As rates rise and loan life extends due to reduced refinance incentives, the fees could generate higher revenues, further building reserves. Extension to a multiple of 6 would imply a total fee of 6.85%
With rising inventory and the strong price recovery since 2012, REALTORS® responding to the November 2014 REALTORS® Confidence Index Survey expected home prices to increase modestly in the next 12 months, with the median at about 3 percent: http://www.realtor.org/reports/realtors-confidence-index.
The map shows the median expected price change in the next 12 months by the state of REALTOR® respondents in the Sep – Nov 2014 surveys. States with the most upbeat price expectations (orange) include the District of Columbia and several states in the West and South regions. Michigan, Massachusetts, and Rhode Island also have strong price growth expectations. The states with the most upbeat price expectations have strong job growth and appear to be attractive to millennials and retiring baby boomers.
Median Expected Price Change of REALTORS® in Next 12 Months, By State
Based on Sep 2014-Nov 2014 RCI Surveys
 The median expected price change is the value such that 50 percent of respondents expect prices to change above this value and 50 percent of respondents expect prices to change below this value. A median expected price change is computed for each state based on the respondents for that state. The graph shows the range of these state median expected price change. To increase sample size, the data is averaged from the last three survey months.
 In generating the median price expectation at the state level, we use data for the last three surveys to have close to 30 observations. Small states such as AK,ND, SD, MT, VT, WY, WV, DE, and the D.C. may have less than 30 observations.
- Interest rates tend to be very low when there are problems and desperations in the economy. The economy in the meantime has moved into higher gear. GDP is expanding robustly and jobs are coming around nicely. But the overall interest rates continue to remain low. In fact, the mortgage rates have been declining in the past month. Whatever the puzzling reasons, the current low rates are good news for homebuyers.
- At the end of 2014, the average rate on a 30-year fixed rate mortgage was 3.87 percent. That is down from near 4.5 percent 12 months ago. Aside from the 18-month stretch in 2012 to mid-2013, there has never been a time since the Presidency of John F. Kennedy when the average mortgage rate fell below 4 percent.
- Consider, the 30-year rate was above 10 percent throughout 1980s. Because of the high prevailing mortgage rates during this era, adjustable rate mortgages steadily became more popular even though they carried the potential risk to upward adjustment. For those few homebuyers in today’s market who view 30-year rates as being high, the one-year ARM is at the lowest point in modern times: 2.40 percent rate at the end of December.
- A simple punching of the numbers into the mortgage calculators will show what happens to monthly payments at different interest rates. Since nearly all economists anticipate some rise in interest rates at some time this year, though, opinions differ on how much and how fast, it is worth reminding ourselves of the differences as shown in the table below on a $200,000 loan.
- Even if a person misses out on the very low interest rates and catches something higher, they should take comfort in that it is still a good deal from a historical perspective. NAR’s housing affordability calculates that to buy a typical home, a typical home buyer, with a typical income after a 20 percent down payment would be shelling out a reasonable amount on mortgage and not too much. Homebuyers can also take comfort in the fact that the monthly mortgage payment will be fixed and unchanging while in 30 years, if using recent history as a guide, food prices would have more than doubled, gasoline prices tripled, rent payments nearly tripled, medical service quintupled, and college tuition outrageous (rising eight-fold from current cost).