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Updated: 36 min 37 sec ago

REALTORS® Outlook Over The Next Six Months: Positive But More Moderate

Mon, 08/24/2015 - 15:17

As of July REALTORS® were by and large “strongly confident” about the outlook over the next six months although confidence eased somewhat compared to June: July 2015 REALTORS® Confidence Index Survey Report.[1] In the single-family markets, the REALTORS® Confidence Index Six-Month Outlook moderated to 68 after six months at over 70 (72 in June 2015; 60 in July 2014). The index for townhomes slid to 51 after six months at over 50 (53 in June 2015; 45 in July 2014). The index for condominiums dipped to 47 (49 in June 2015; 40 in July 2014). An index greater than 50 indicates that the number of respondents with a “strong” outlook outnumbered those with a “weak” outlook.

REALTOR® respondents expressed concern that the steep pace of price appreciation is eroding affordability. Respondents also expressed concern about the possible adverse effect on market transactions and closing when the new disclosure regulations under TILA-RESPA Integrated Disclosure (TRID) take effect on October 3, 2015.[2]

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

[2] TRID prescribes simplified disclosure forms that the lender needs to deliver to the loan applicant after a loan application is received (Loan Estimate) and before a loan is consummated (Disclosure Form) within prescribed business days and waiting periods. The objective is to help consumers understand the key features, costs, and risks of the mortgage loan for which they are applying. See the Consumer Financial Protection Bureau’s guidelines at http://www.consumerfinance.gov/regulatory-implementation/tila-respa/

Mortgage Application Data (August 20th, 2015)

Fri, 08/21/2015 - 13:51

This blog post was written by La Shawn Skeete. La Shawn is a Summer Research Intern, and is currently studying at The University of Maryland, College Park pursuing a degree in Economics.

  • Seasonally adjusted mortgage application volumes increased 3.6% from the week ending August 7th and are 20.2% higher than this time last year.

  • Seasonally adjusted applications for purchase decreased over the week by 1.1% but purchase application volumes are 19.0% higher than last year.
  • 30-year FRM rates decreased 2 basis points to 4.11% and are less than they were in 2014 by 18 basis points.

  • In the 2nd quarter of this year, 29% of purchase contracts experienced delays due to financing issues, appraisal disagreements, deed problems, homeowner association complications or cold feet among other issues. The implementation of the TRID guidelines on October 3rd is yet another factor that could delay loan closings.
  • The FHA announced its implementation of the “Blueprint for Access” which uses a new “Supplemental Performance Metric” to review a lender’s performance. The resultant insight is expected to “serve eligible underserved borrowers” by expanding credit access from lenders.
  • Vacation home sales have increased 57% since 2013 likely due to increased consumer confidence in the housing market and an expected rise in interest rates from the Federal Reserve.

Mortgage application data serve as an indicator to homes sales and other home related expenditures such as appliances and furniture.

Mortgage Access Continues to Thaw

Fri, 08/21/2015 - 10:51

In the 2nd quarter of 2015, mortgage originators reported measured improvement in access to credit. While more lenders are offering credit outside of the pristine, conventional space, they remain pensive and the trend appears driven by an expansion of interest from mortgage investors.

The share of firms in the most recent Survey of Mortgage Originators that offered non-QM products jumped from 39.3% in the 1st to 53.6% in the 2nd, the highest share to date. All lenders offered prime products and the share offering rebuttable presumption loans surged from 74.5% to 92.3% over this time frame setting a survey high. Rebuttable presumption QM loans are differentiated from other QM loans in that their APR is higher, a sign of some non-pristine characteristics. This pattern suggests that lenders are expanding their offerings to borrowers with lower credit scores and down payments.

While more lenders added non-QM and rebuttable presumption loans to their offerings, lenders’ net willingness to originate non-QM loans eased after showing improvement in the 1st quarter. Willingness to originate prime loans gained steam growing at a strong pace in the 2nd quarter compared to the 1st quarter, but willingness to originate rebuttable presumption QM loans continues to muddle along.

At a more granular level, willingness to originate non-QM mortgages with low balances, those with fees greater than 3%, or low-documentation fell more sharply than non-QMs with higher credit scores, DTIs less than 45%, and interest-only structures. FHA rebuttable presumption loans gained in both the share of originators offering them and willingness to originate given offering.

Few lenders in this survey portfolio loans, so investor takeout is critical. The share of respondents reporting an improvement in investor demand surged for the second consecutive quarter reaching 46.2%. No respondents indicated a weakening of demand or that they were waiting for better investor demand before entering the non-QM space.

A significant share of lenders expressed comfort in rebuttable presumption and non-QM products soon after the introduction of the ATR/QM rule. However, they were slow to take up the new products in part due to limited buyers for these mortgages. Increased investor demand is drawing more lenders into this space, though they remain cautious.

Seasonally Adjusted Inventories

Thu, 08/20/2015 - 15:49

Are inventories even tighter than reported? Is more price pressure on the horizon for existing-homes in the months ahead?

Each month with the National Association of Realtors® Existing-Home Sales data release, we see information on home sales, prices, and inventories. There are two types of inventory measures included in the release:

1)      the raw level of unsold homes on the market, and

2)      the month’s supply—the level of unsold homes on the market relative to the current sales pace. [1]

July’s Existing-Home Sales data release showed that existing-home inventories were at 2.24 million and month’s supply was at 4.8 months. The raw number of unsold homes was down by just 10,000 from June to July, and month’s supply dropped slightly because of declining inventories and the fact that the sales pace quickened from June to July.[2] From July one year ago, the change was even more dramatic. Raw inventory levels declined by 110,000, while the sales pace moved up from 5.07 million to 5.59 million. Month’s supply dropped from 5.6 months to 4.8 months.

The home sales figure is what we call a seasonally-adjusted annual rate. It’s adjusted so that we can easily compare July home sales with December home sales. The correction for the fact that many more homes are sold in the summer months when school is out and many fewer homes are sold during the cold winter holiday season has already been made.[3] The headline inventory data, however, is not seasonally adjusted. In the chart below, the non-seasonally adjusted levels of both sales and inventories are depicted. The vertical grey lines mark each January, the typical slow month for sales and inventories.

[1] The months supply can be understood as the number of months it would take to exhaust the current inventory at the current sales pace. This measure assumes that all of the listings would eventually sell and no new listings would come on to the market.


We produce a less widely covered estimate of seasonally adjusted inventories. Shown in the graph below, you can see that this estimate does not show consistent dips each January. In the most recent data, seasonally adjusted inventory fell to 2.06 million unsold homes which is the lowest level since March 2014. In March 2014, however, homes were selling at a pace of 4.7 million homes per year. In July 2015, homes sold at a 5.59 million per year pace. This means that July 2015 seasonally adjusted months supply—pictured far below—was only 4.4 months compared to 5.3 months the last time inventory was this low. [1] We typically think of roughly 6 months supply as a balanced market.


So what does it mean? The major take-away from this data is that unless new supply comes online or housing demand drops off, more price pressure is ahead in the existing-home market. Realtors® reported in July that some buyers may already be getting fatigued as once-target homes slip out of reach due to rising home prices, mortgage rates creeping up, and stagnant incomes. This means that the adjustment could come on the demand-side, and instead of rising prices we will see fewer home sales ahead.

Whether buyers downsize their purchase plans or give up on their current home search remains to be seen. As hard as it is to compromise for a home purchase, with the price of rent rising at the fastest pace in seven years, staying in a rental may not be all that great of an option.

[1] Seasonally adjusted inventories relative to seasonally adjusted sales

[2] In June 2015 existing-homes were sold at a 5.48 million annual pace while in July 2015 existing-homes sold at a pace consistent with 5.59 million homes sold per year.

[3] For more on seasonal adjustment, see this topic: http://economistsoutlook.blogs.realtor.org/tag/seasonality/

Lenders Cautious on TRID

Thu, 08/20/2015 - 11:01

On October 3rd, the new TILA RESAP Integrated Documentation (TRID) will be implemented. Under TRID, the current closing documentation is streamlined and features are added to help consumers better understand their financial commitment. Lenders were asked their impression of the new rules in the latest Survey of Mortgage Originators.  While most expect a small impact, there are changes that could affect your business.

When asked about their efforts to come to compliance with TRID, none of the respondents were ready as of late July, but 100% expected to be compliant by October 3rd. In preparation for the implementation of TRID, all of the survey respondents had discussed their preparations with their REALTOR® partners.

Similar to today, under TRID originators will have to contend with several timelines for providing consumers with disclosures. REALTORS can help by working with their clients to provide lenders with the required documentation as soon as possible. The three factors that can trigger an issue for lenders just prior to closing are: an increase in the APR of more than 1/8th, the addition of a prepayment penalty or a change in mortgage product (e.g. 15-year fixed rate mortgage vs. a 30-year FRM). As depicted above, the incidence of these changes within three days of closing was low in 2014. Furthermore, respondents indicated they expect the new rules to result in 9.5% of transactions being delayed and 1.0% being cancelled.

Because failure to comply with the new rules could carry penalties for a lender, understanding when the TRID rules apply is critical. The TRID rules apply once an application is made for a mortgage. Some lenders have voiced concern because the definition of an application was streamlined under TRID and made identical to the definition of a pre-approval letter. The CFPB suggests a means of labeling a pre-approval letter to distinguish it from an application. However, more than a third of respondents in the 2nd quarter of 2015 indicated that the new TRID rules would affect their willingness to offer pre-approval letters.

Lenders voiced concern about the new TRID rules in the 2nd quarter Survey of Mortgage Originators.  However, they remain optimistic that the share of originations that will be delayed or canceled will be low.  Of greater concern may be lenders’ reticence to offer pre-approval letters.  To this end, it may behoove REALTORS to seek out multiple sources for pre-approvals until lenders acclimate to the new rules.

Low-income Households Face Higher Rent Inflation

Wed, 08/19/2015 - 15:36

In a presentation at a REALTOR® University Lecture Series, Dr. Richard Peach, Senior Vice President at the Federal Reserve Bank of New York, shared the results of an ongoing study on rent inflation, that lower-income households face higher rent inflation than higher-income households.[1]  The study was based on data from the American Housing Surveys from 1991 through 2014. Households whose total housing cost (rent plus utilities) rank in the bottom 20 percent (lowest 5th quintile) experienced double-digit annualized increase in rents in the range of about 10 to 20 percent. Meanwhile, households whose housing cost was in the top 20 percent (highest 1st quintile) experienced falling rents. Taking 2011-2013 as an example, total housing costs increased 12.9 percent for the lowest 5th quintile compared to a decrease of 1.5 percent for the highest 1st quintile (see Table 1).

Also, households who are in the lowest 5th quintile in terms of housing cost are more burdened than households in the top 1st quintile. Taking 2011-2013 as an example, in households who typically paid rent of $350 and utilities of $66, housing costs accounted for 19 percent of total expenditures. In households who typically paid rent of $1,535 and utilities of $146, housing costs accounted for about 10 percent of total expenditures (see Table 2).

Dr. Peach proffered a possible explanation: new units (rentals and occupied homes) coming into the market are taken up first by higher income households, with a decreased supply left for low-income households.

Why This Matters to REALTORS®: Strong demand for rental units has pushed up rents to an annual pace of close to three percent in the first half of 2015 while overall inflation has stayed near zero and personal incomes have increased at about two percent.[2] Rising rents can have a negative impact on home ownership because renters are able to save less for down payment–even as higher rents make owning a home a better alternative. REALTORS® may want to remind clients of the FHA option, which permits significantly lower down payments than are normally seen for credit worthy buyers.

[1] Dr. Peach is Senior Vice President, Macroeconomic and Monetary Studies Function Federal Reserve Bank of New York The study is co-authored by Jonathan McCarthy and Matthew S. Ploenzke. Dr. Peach made a disclaimer that the views he expressed are his own and do not necessarily reflect those of the FRBNY or the Federal Reserve System.

[2] Based on the Census’ Bureau’s Current Employment Statistics (CES) Establishment Survey, the average hourly earnings in 2014 was $24.46, two percent higher than the average earnings of $23.97 in 2013.

Latest Consumer Price Index (July 2015)

Wed, 08/19/2015 - 11:13
  • There is no inflation to speak of, but rents are now rising at the fastest pace in nearly seven years. The smiles from lower gasoline prices are quickly getting cracked by the hard squeeze on higher housing cost, which is the largest expenditure of most people’s budget.
  • Specifically, the overall consumer price index grew by 0.2 percent. Gasoline prices were 22 percent lower compared to one year ago. But rents grew by 3.6 percent, the fastest rise since November 2008. Given that rents are rising at twice as fast as wage growth, it will make it difficult to save up for down payment by first-time buyers.
  • Homeowners’ equivalence rent is a funny figure of what the homeowner would hypothetically pay to rent out their home. As can be imagined one can question about how this is measured or how accurate it is. At a minimum, though, it should follow the trend in apartment rents and that is what’s happening. Owner equivalency rent rose by 3.0 percent, the highest pace since mid-2007. Given that housing costs comprise the largest weight to the consumer price index, one should anticipate a faster overall inflation once the effects of low gasoline price go away. That occurs around December, the time when gasoline prices initially plunged last year.
  • Regarding inflation on other items, water and trash collection costs rose 4.3 percent. Moving and freight costs rose 6.6 percent. Nursing home costs rose 3.3 percent. These all surpassed the broad inflation rate of zero. What prices are falling aside from gasoline? Internet service costs and airfares declined modestly.
  • It is worth noting of price changes over a long time. From 1982 (when all items were set to equal 100 and hence making for easy comparisons) the price changes have been the following:
    • gasoline prices grew by 135 percent
    • food price by 147 percent
    • rents by 186 percent
    • airfare by 192 percent
    • home price (not part of CPI, but as an asset price) by 223 percent
    • medical service by 375 percent
    • college tuition by 688 percent
    • mortgage payment (with 30-year fixed rate on a home purchased in 1982) by 0 percent

Latest Housing Starts (July 2015)

Tue, 08/18/2015 - 15:33
  • Homebuilders broke ground at the fastest pace in eight years. A fresh supply of new homes will therefore reach the market in upcoming months to help relieve the inventory tightness. There is no need to worry about an oversupply. Even more production would be welcomed.
  • Specifically, housing starts reached 1.21 million in July. Single-family units advanced solidly, up 19 percent from one year ago. Multifamily units fell slightly, by 3 percent from one year ago. Despite these one month trends, it is multifamily construction that is pretty much back to normal while the single-family construction need to rise by another 50 percent to be back to normal.
  • Before housing starts can occur a permit needs to be obtained. In July, permits retreated after having jumped hugely in the prior month. The trend overall, aside from normal month-to-month volatility, is for a meaningful increase to new home construction in the months ahead. Housing starts are expected to surpass 1.1 million for all of 2015 and then further rise to 1.3 million in 2016.
  • People want walkability and the builders are responding to this demand. Multifamily units can be apartments or condominiums. And these high-density buildings are the ones rising faster than single-family homes in the suburbs. This growing walkability preference, aside from enhancing people’s health, also hints that office demand will greater for downtown spaces with walkability than office spaces out in distant suburbs. Employers will pay more in rent in downtown, but will likely have an easier time recruiting and retaining good workers.

Vacancies Decline in REALTORS® Commercial Markets in Q2.2015

Tue, 08/18/2015 - 11:18

Commercial fundamentals in REALTORS® markets continued gaining strength during the second quarter of 2015. Based on NAR’s Commercial Real Estate Market Trends report vacancy rates mirrored regional and product variations, as most properties posted availability declines. With rising new supply, apartments experienced availability increases, as the national average rose from 6.0 percent in the second quarter of 2014 to 6.6 percent in the second quarter of this year.

Office vacancies declined 65 basis points to 15.9 percent compared with a year ago. Industrial availability posted the largest year-over-year decline—246 basis points—to 10.8 percent. Retail vacancies declined 137 basis points on a yearly basis, to 13.2 percent.

Lease concessions declined 8.1 percent. Tenant improvement (TI) allowances averaged $10 per square foot per year nationally. In keeping with higher vacancies, office properties recorded the highest TI rates at $17 per square foot per year. Apartments posted the lowest TI rates—$3 per square foot per year.


To access the latest Commercial Real Estate Market Trends report, visit: http://www.realtor.org/research-and-statistics/commercial-real-estate-market-survey.


Spring’s Mortgage Market Thaw Continues This Summer

Mon, 08/17/2015 - 15:52

Every quarter, NAR surveys a panel of lenders who specialize in mortgages for home purchase. In the second quarter of 2015, lenders continued to expand access for borrowers. Despite a decline in the share of production that was non-QM, an increasing share of lenders offered non-QM and rebuttable presumption loans. This trend points to easing of standards in the jumbo space as well as a thaw in the lower credit score portion of the conventional and FHA markets. A sharp uptick in interest from mortgage investors appears to be creating an outlet for this demand. In addition, respondents shared their opinions on the new TRID rules and FHA taxonomy.

Highlights of the Survey:


  • The non-QM share of originations shrank again to just 0.8% of production in the 2nd quarter, while the rebuttable presumption share expanded to 5.5%.
  • While willingness to originate non-QM and rebuttable presumption loans eased, the share of lenders offering these products increased dramatically.
  • For the second consecutive quarter, the share of respondents indicating an increase in investor demand for non-QM loans surged reaching 46.2%.
  • Over the next six months, respondents expect access to credit for non-QM loans to moderate slightly, while access for rebuttable presumption products remains steady and prime products continue to expand. Respondents indicated that investor demand is likely to mimic these patterns.
  • More than half of lenders are concerned about the potential impact of TRID timelines, but only expect 9.5% of closings to be delayed and 1.0% to be cancelled.
  • However, 38.5% of lenders report that TRID will moderately impact their willingness to issue pre-approval letters.
  • Only 15.4% of respondents felt the FHA’s new defect taxonomy helped to clarify the risk around the FHA’s enforcement policies and an equal share would be more willing to lend to borrowers with credit scores below 640 as a result.
  • Finally, a significant share of originators reported having issues attaining tax transcripts from the IRS, but the issue was more evident with smaller producers.


June Housing Affordability Index

Mon, 08/17/2015 - 11:09

At the national level, housing affordability is down from a year ago and for the month of June as rates inch up and modest income growth still struggles to keep pace with the growth of home prices.

  • Housing affordability is down from a year ago in June as the median price for a single family home in the US is up from a year ago. Regionally, the West had the biggest increase in price at 10.0% while the Northeast experienced the slowest price growth at 4.4%. The Midwest and the South both contributed solid price gains of 7.2%.
  • The median single-family home price is $237,700 up 6.6% from June 2014. June’s mortgage rate is 3.99, down 24 basis points (one percentage point equals 100 basis points) from last year. Nationally, affordability is down from 155.2 in June 2014 to 153.1 in June 2015.
  • Affordability is down from one month ago in all regions, and the Midwest had the largest drop of 4.8% while the West fell only 3.5%. From one year ago, affordability is down in all regions except the Northeast which had an increase of 1.1%. The West saw the biggest decline in affordability at 3.6% and the Midwest had the smallest decline of 0.7%.
  • Despite month to month changes, the most affordable region is the Midwest where the index is 191.1. The index is 161.4 in the South, 150.7 in the Northeast, and 113.9 in the West.
  • With rates on the rise potential home buyers may try to hasten their search and purchase process. Lending options with low down payments are now more widely available. Mortgage applications are currently up but demand may level off if prices and rates continue to increase. New home construction has favored the multifamily inventory stock while single family homes have been lagging in production. An increase in single family construction will help ease the inventory shortage issue and slow down price growth.
  • 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.

Weekly Unemployment Insurance Claims Continue to Trend Below 300,000

Fri, 08/14/2015 - 14:32

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

  • Initial claims for unemployment insurance filed during the week ending August 8 increased from the previous week’s level to 274,000. This increase of 5,000 claims can be attributed as weekly volatility in the data. Initial claims for unemployment insurance continue to trend below 300,000 which analysts consider to be normal. The 4-week moving average, which strips out the weekly volatility, showed a decreased to 266,250 claims, the lowest level since April 15, 2000.
  • The decline in unemployment claims is in line with other positive labor market indicators:
    • 2.4 million more workers employed in  July 2015 compared to a year ago
    • 5.3 percent unemployment rate as of July 2015, compared to 6.2 percent a year ago
  • At the current pace of job growth, NAR expects 5.3 million in existing home sales, up from 4.9 million in 2014.

Demand in REALTORS® Commercial Markets Outpaces Construction in Q2.2015

Fri, 08/14/2015 - 12:36

Commercial space is heavily concentrated in large buildings, but large buildings are a relatively small number of the overall stock of commercial buildings. Based on Energy Information Administration data approximately 72 percent of commercial buildings are less than 10,000 square feet in size.[1] An additional 8 percent of commercial buildings are less than 17,000 square feet in size. In short, the commercial real estate market is bifurcated, with the majority of buildings (81 percent) relatively small (SCRE), but with the bulk of commercial space (71 percent) in the larger buildings (LCRE).

While large buildings in top-tier markets generally receive most of the press coverage, smaller commercial properties tend to be obscured given their relatively smaller size. However, these smaller properties provide the types of commercial space that the average American encounters on a daily basis—e.g., strip shopping centers, warehouses, small offices, supermarkets, etc. These are the types of buildings that are important in local communities, and REALTORS® are active in serving these markets.

NAR’s Commercial Real Estate Market Trends gathers market information for SCRE properties and transactions, and summarizes sales and rental activity based on a quarterly survey of commercial REALTOR® practitioners. Based on the latest report, fundamentals improved during the second quarter of 2015. Leasing volume during the second quarter rose 4.7 percent compared with the first quarter 2015. Leasing rates advanced at a steady pace, rising 2.7 percent in the second quarter, compared with the 2.8 percent advance in the previous quarter.

NAR members’ average gross lease volume for the quarter was $629,000. New construction accelerated, posting a 5.7 percent gain from the first quarter of this year, a pace which more than doubled the 2.7 percent rise recorded in the first quarter 2015.

Tenant demand remained strongest in the 5,000 square feet and below, accounting for 84.0 percent of leased properties. Lease terms remained steady, with 36-month and 60-month leases capturing 60.0 percent of the market.

To access the latest Commercial Real Estate Market Trends report, visit: http://www.realtor.org/research-and-statistics/commercial-real-estate-market-survey.

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

Mortgage Application Data (August 12th, 2015)

Fri, 08/14/2015 - 12:13

This blog post was written by La Shawn Skeete. La Shawn is a Summer Research Intern, and is currently studying at The University of Maryland, College Park pursuing a degree in Economics.

  • Seasonally adjusted mortgage application volumes increased only 0.1% from the week ending July 31st and are 17.7% higher than this time last year.

  • Seasonally adjusted applications for purchase decreased over the week by 3.5% but purchase application volumes are 19.8% higher than last year.
  • 30-year FRM rates remained constant at 4.13% and are less than they were in 2014 by 22 basis points. 
  • This week the National Association of Realtors® released data on metro median home prices as well as affordability trends and found that qualifying incomes for mortgages in the nation’s metropolitan areas are dramatically higher than the national average. For example, to purchase a median-priced home in the Washington market with 20% down requires an annual income of $72,992, which is 80% higher than the national average. The qualifying income in Northern California is twice that amount.
  • In order to maintain affordability in the years to come, income growth will need to accelerate to match rising mortgage rates, while supply must expand to soften price growth to historically stable levels.

Mortgage application data serve as an indicator to homes sales and other home related expenditures such as appliances and furniture.

Yield Premium Favors REALTORS® Commercial Markets in Q2.2015

Tue, 08/11/2015 - 15:16

Commercial real estate transactions span the price spectrum, but tend to be measured and reported based on size. While the majority of buildings (81 percent) are relatively small (SCRE), with the bulk of commercial space (71 percent) concentrated in larger buildings (LCRE)[1], larger buildings account for the majority of sales. CRE deals at the higher end—$2.5 million and above—comprise a large share of investment sales, with transaction data readily available from several sources, including Real Capital Analytics (RCA).

Data for smaller transactions—$2.5 million and below—many of which are handled by REALTORS®, are less widely available. NAR’s Commercial Real Estate Market Trends gathers market information for SCRE properties and transactions.

Based on the latest NAR report on REALTORS® CRE markets, capitalization rates declined to an average of 7.5 percent across all property types, an 85 basis point decline on a yearly basis. Apartments posted the lowest cap rate, at 6.8 percent, followed by hotel properties with average cap rates at 7.4 percent. Office and industrial spaces posted cap rates of 7.7 percent and 7.5 percent respectively. Retail transactions reported the highest comparative cap rates—8.0 percent.

The interest rate on 10-year Treasury Notes—a standard measure of risk-free investments—averaged 2.08 percent during the second quarter of 2015, unchanged from the first quarter. Based on the prevailing rates, the spread between cap rates and 10-year Treasury Notes ranged from 462 basis points in LCRE market to 542 basis points in SCRE markets. The spread denotes that CRE investors are continue to enjoy healthy returns in the rebounding markets.

As the Federal Reserve’s “forward guidance” has been hinting at a hike in the target rate in the latter half of this year, the impact on the CRE sector is likely to be minimal. On one hand, the Fed’s funds rate is essentially a short-term rate, whereas the more relevant Treasury notes carry longer-terms. On the other hand, with communications from the Federal Reserve Board being somewhat more transparent, the initial rate increase has likely been already capitalized in market prices. And on the proverbial economist’s third hand, with spreads exceeding 400 basis points, CRE investors retain a healthy cushion, as cap rates are not likely to change dramatically in the short term.

To access the latest Commercial Real Estate Market Trends report, visit: http://www.realtor.org/research-and-statistics/commercial-real-estate-market-survey.

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

Aging in Place: Likely to Drive Growth in Home Improvement

Tue, 08/11/2015 - 10:28

In a presentation at a REALTOR® University Speaker Series, Dr. Kermit Baker, Senior Fellow of the Joint Center for Housing Studies of Harvard University, shared his research findings on the emerging trends in home remodeling.[1] Dr. Baker presented estimates that home improvement projects are expected to hit an all-time high of $324 billion by the end of 2015, a recovery to the 2007 level. Home remodeling spending on both owned homes and rentals peaked in 2007 at $324 billion as homeowners spent to improve home values that were falling during the housing collapse (Chart 1). Spending dipped to $281 billion in 2011 as homeowners reined in on major homeowner improvement projects amid weak income and job growth. With the economy continuing to improve and with rising home equity that can be used for home improvement financing,  home owners have started to spend more on improvement and maintenance projects. Owner improvement projects are the “big” discretionary spending such as kitchen and bath remodeling and system upgrades which account for about two-thirds of the total home improvement market.

Dr. Baker noted that baby boomers (born 1945-1964) are still the primary drivers of home improvement spending, accounting for about half of total home improvement spending. However, Gen-Xers (born 1965-1984) are gaining share, with their share up from 5 percent in 1995 to 30 percent in 2013 (Chart 2). Recent buyers, who moved into the home within the past three years, spend 25 percent more on the average than non-recent buyers.

With declining mobility among baby boomers, spending for accessibility features that enable senior household members to age in place is expected to be a major driver of home improvement spending. Currently, many households with aging members lack accessibility features (Chart 3). Accessibility features refer to features such as room and full-bath on entry, no steps on entry, extra-wide hallways and doors, and in-home elevators . The 55+ households are heavily concentrated in the Midwest and Northeast.

Why This is of Interest to REALTORS®: People undertake home improvements before or after selling a home. Homes that are in good condition and that cater to a buyer’s needs tend to sell faster and at a better price. Buyers of home with multigenerational family members will likely be looking for home accessibility features for senior members.

[1]               Dr. Baker is Director of the Remodeling Futures Program of the Joint Center for Housing Studies of Harvard University.  He is also Chief Economist, American Institute of Architects.

The Commercial Real Estate Sector: Some Interesting Facts

Mon, 08/10/2015 - 15:30

Size of the Commercial Building Sector

The Energy Information Administration’s Commercial Building Energy Consumption Survey (http://www.eia.gov/consumption/commercial/) has recently provided updated estimates of total U.S. commercial real estate space. The types of commercial building transactions frequently handled by REALTORS®–office buildings, retail space, warehouses, and lodging—accounted for approximately 48 Billion square feet of space in 2015.


Online retailing appears to be driving the growth of warehouse space, accompanied by increased use of flex space for offices. Increased affluence appears to be associated with increased lodging space; vacations and trips are increasing space demands. For the office sector, square feet of space use per person is declining, but the economy is increasingly office and services oriented, accounting for office space growth.

Building Characteristics

The commercial sector is essentially bifurcated between large buildings—generally over $2.5 million in value; and smaller buildings under $2.5 million in value—small strip malls, stand-alone convenience stores, etc. Although the bulk of commercial space is in large buildings, by number the majority of commercial buildings are small.

  • Approximately 70 percent of commercial buildings are smaller buildings–less than 10,000 square feet in size and generally valued well under $2.5 million. These are the buildings typically frequented on a daily basis by people on “Main Street,” –retail, small offices, strip shopping centers–in contrast to larger buildings selling over $2.5 million—multi story office buildings, office parks, large warehouses, etc.
  • Financing for “Main Street buildings” may typically be obtained through local sources, in contrast to national sources (such as major banks, pension funds, insurance companied, etc.) for large buildings.
  • For “Main Street” buildings, local investors may be the owners, rather than larger financial intermediaries.


During the Great Recession the commercial real estate sales declined in price and volume very significantly. Larger buildings were first to start the recovery in terms of price and sales volume. In the past year, the “Main Street” small buildings have started to catch up as noted in NAR’s 2015 second quarter commercial survey for smaller buildings:

  • Sales volume rose 9 percent from a year ago, with the average transaction increasing from $1.7 million in Q1.2015 to $2.0 million in Q2.2015.
  • With inventory shortage topping the list of current challenges, commercial prices accelerated, rising 7 percent year-over-year.
  • Capitalization rates averaged 7.5 percent nationally, across most property types, an 85 basis-point decline from the same period in 2014.
  • Perceived pricing differences between buyers and sellers remained the second most significant concern for NAR members.

In comparison, based on data from Real Capital Analytics (RCA)—for larger buildings (deals of $2.5 million and above):

  • Sales volume in the second quarter of this year rose 23 percent, totaling $118 billion.
  •  Prices for properties rose 3.1 percent on a yearly basis.
  • Cap rates declined 30 basis points from the second quarter 2014, averaging 6.7 percent across RCA’s property types.

As the Small Balance Advocate indicates, strong price gains and rising sales are now being experienced by investors in smaller buildings. While a large performance spread characterized the relationship between small and large markets’ sales and price growth in the first five post-recession years, market indicators have been converging over the past couple of years. Cap rates remain one indicator where smaller buildings and markets continue to carry a premium, given the underlying comparative risk. In short, small buildings are now performing approximately as well as larger buildings.

What Does this Mean for REALTORS®?

The national news continues to have articles questioning whether both residential and commercial real estate markets will continue to expand. Sales, prices, and trends for residential real estate continue to deliver good news. For commercial buildings the data seem to indicate that the market for both small and large commercial buildings is in an upswing, which should continue if job growth and GDP continue their trends as predicted by most economists.

Sales of large buildings totaled $430 billion in 2014, and small building sales appear to have been in the neighborhood of $50 billion in recent years. Although all real estate is local—which means that general conclusions will not necessarily hold for each city, it appears that the small-cap market is now in substantial recovery.

State and Local Down Payment Assitance is Important

Mon, 08/10/2015 - 11:09

One of the Federal Housing Administration’s (FHA) important functions is to provide insurance on low down payment mortgages. The majority of FHA-financed mortgages have a down payment of 3.5%. A homebuyer can get assistance for the down payement from a relative, an employer-sponsored program, or a state or local government sponsored program. Recently, the FHA’s inspector general has called into question the legality of down payment assistance programs threatening an important source of down payment funding for some borrowers.

In 2014, 27.2% of borrowers who financed their mortgage with support from the FHA received help from a relative for their down payment. Another 2.4% received help from a government source, 0.2% got help from an employer program, and the remainder, 70.2%, provided their own down payments. Most state housing finance angencys (HFAs) provide assistance for down payment and closing costs. This assistance can be in the form of a forgivable loan or a loan for the full amount that has a slightly higher rate than market. The FHA inspector general argued in a recent case that the later form of asistance is illegal as the consumer is paying for the assitance through a higher rate. The HFAs argue that the higher rate allows them to recoup the cost of the program and to provide services to other borrowers. Furthermore, the head of the FHA, Principle Deputy Assitant Secretary for Housing Ed Golding, reafirmed the FHA’s support for certain down payment assistance programs like those run by  HFAs.


What impact do these programs have on the market? The share of FHA purchase mortgages with government down payment assistance rose steadily from 1.5% in 2012 to 2.4% in 2014. Government down payment assistance programs accounted for 3.4% of mortgages financed by the FHA in the first four months of 2015.

Certain areas are more dependent on government sponsored down payment assistance programs. In 2014, many of the counties with the highest utilization rates, 15% or more, of government assisted down payments on FHA financed mortgages were concentrated in Nevada and Arizona, but Illinois, Texas, South Dakota, Kansas, and Colorado. More than a quarter of the nearly 1,800 FHA purchase mortgages originated in El Paso county Colorado received government funded down payment assistance, while Shawnee and Osage counties in Kansas had similar shares. New Orleans was also a hot spot. While the utilization rate per county was below 5% across most of California, Florida, Washington, Oregon, and Maryland, all of these states had a high share of counties per state where government down payment assistance was utilized.

Oversight is an important part of the efficiency and effectiveness of government programs. However, it is important to differentiate between programs that benefit consumers while using sustainable financing from others. A reduction or elimination of government assisted down payment programs may have a small effect nationally, but the local impact would be large.

Mortgage Application Data (August 5th, 2015)

Fri, 08/07/2015 - 11:54

This blog post was written by La Shawn Skeete. La Shawn is a Summer Research Intern, and is currently studying at The University of Maryland, College Park pursuing a degree in Economics.

  • Seasonally adjusted mortgage application volumes increased 4.7% from the week ending July 24th and are 14.5% higher than this time last year.
  • Seasonally adjusted applications for purchase increased over the week by 3.3% and application volumes are 22.9% higher than last year.
  • 30-year FRM rates decreased yet again this week, this time by 4 basis points over the week to 4.13% and remain less than they were in 2014 by 22 basis points.

  • The TILA-RESPA Integrated Disclosures (TRID) go into effect on October 3rd, 2015. TRID is designed to make loan transactions more transparent but may dramatically affect the timeline of a home-loan closing. As a result, the lag between closed sales and applications could widen.
  • Sales of single-family homes priced between $750,000 and $1 million are 21% higher than last year outpacing homes costing between $100,000 and $250,000 having only a 12.5% improvement over this period. Lenders are broadening access to meet the rising demand for jumbo loans from credit-worthy borrowers. This week JP Morgan announced a reduction in its minimum down payment from 20% to 15% and credit score from 740 to 680 for jumbo. These modifications follow similar changes by Wells Fargo and Bank of American earlier this year.

Mortgage application data serve as an indicator to homes sales and other home related expenditures such as appliances and furniture.

Latest Employment Report (July 2015)

Fri, 08/07/2015 - 11:08
  • Job gains continued in July, thereby providing a solid foundation for home buying and commercial real estate leasing activity. Not all is alright, however. Part-time employment still remains above normal and wages are barely rising. Job gains in the construction industry remain tepid despite the need to build more homes.
  • Specifically, 215,000 net new jobs were added in July, which brings the total over the 12-months to 2.9 million. From a longer term perspective, 12 million net new jobs have been added from the low point five years ago after having shed 8 million jobs during the downturn.
  • Some sectors are experiencing a faster takeoff than others. Jobs in education and health care sectors have been on a steady increase while jobs in manufacturing are barely coming around.  Also jobs in the professional business sector (which require office spaces) have been robustly rebounding while jobs in the construction industry have tepidly risen. Perhaps, due to rising inequality, the upper-tier people are outsourcing more of domestic works, as evidenced by a fast growing number of jobs in the “personal and laundry service”.
  • The unemployment rate has fallen to a multiyear low to 5.3 percent. But that partly reflects many people who have left the workforce and not looking for jobs. The opposite side of the coin is measuring the employment rate, which shows being stuck 59 percent and well below the pre-recession level of 63 percent. Moreover, part-time employment still remains elevated. Wages are rising by only 1.8 percent while rents are rising double that rate and home prices are rising by more than triple the rate.
  • As an aside, the discrepancy between the good figure on the unemployment rate and the bad figure the employment rate can partly be explained by a surge in disability benefits of recent years. Those who are on it are not counted as unemployed even though they do not have a job.