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Updated: 19 min 48 sec ago

Latest Consumer Price Inflation (May 2015)

Thu, 06/18/2015 - 09:51
  • There is no inflation in the latest data.  However, prepare for higher inflation and likely higher mortgage rates later in the year because the impact of non-inflationary pressure from low gasoline prices will have mostly dissipated by November.
  •  Specifically, consumer price inflation was unchanged in May over the past 12 months.  The rising prices of food, medical services, apartment rents and many other items were all negated by a deep price dive in gasoline prices, which were 25 percent below last year.
  • Keep in mind that gasoline prices started to decline from November of 2014.  Therefore, by November of this year gasoline prices will no longer show a large plunge.  Consumer prices of all items will then show positive growth – probably in the 3 percent range.  Knowing that long-term interest rates generally follow inflationary trends, one should expect some upward pressures on mortgage rates.
  • One of the key components pointing towards higher inflation is related to rents.  Rents paid by renters continue to remain elevated, rising at 3.5 percent which would be essentially at a 7-year high; while the hypothetical rent a homeowner would pay if they were renting out their home rose by 2.8 percent, which is technically a 7-year high.  In short, housing costs are rising and this will put upward pressure on the overall consumer price inflation in the near future.
  • Home prices are rising at 8 percent in the latest NAR data.  But this is not part of the consumer price inflation since home is considered as an asset.  Stock prices similarly are also not included as part of consumer inflation.  For homeowners with mortgages nearly all have a 30-year fixed rate mortgages so their monthly payments are fixed and not rising.  For one-third of homeowners who have paid off their mortgages, they have zero monthly payments – a goal we should strive towards for our advanced years.
  • As an aside there is “inflation” or “deflation” unrelated to prices.  Given human nature and the forces of market to better satisfy those human desires, countable figures have changed over time.  Today’s students are said to receive “grade inflation” where we now have many high GPA students, but not necessarily more Einsteins.  When Babe Ruth hit an unheard of 29 homeruns in 1919, thereby feverishly exciting the fans, the ball was made lighter for the next season.  The Bambino then knocked 54 balls out of the park in 1920.

Will Setting Clear Rules Help Expand Credit?

Wed, 06/17/2015 - 10:57

When lenders originate a loan, they often sell these loans to investors rather than holding the loans in their portfolios.  These investors set requirements for the loans they will buy and if those requirements are not met, they may force the lender to buy back the loan.  In a similar way, the FHA sets rules for the loans that it insures.  If a lender originates a loan to be insured by the Federal Housing Administration (FHA), but the loan is later found not to comply with the rules, the FHA may ask the lender to indemnify the FHA.  In short, the FHA will not insure the loan and any losses must be covered by the lender.

Since the housing market bottomed, the FHA has increased indemnification requests, while the Department of Justice (DOJ) has sued some lenders for problem loans.  Originators have asserted that fear of indemnifications and DOJ actions have hampered lending to borrowers with lower credit scores and other non-prime factors.

 

More than half of respondents to the 1st quarter Survey of Mortgage Originators indicated that they have been asked to indemnify the FHA for improperly originated loans since 2009 and 40% indicated that this occurred multiple times.  A significant 46.7% of respondents indicated that they were never the subject of an indemnification request.

 

Despite only half of originators having had an indemnification request, two thirds indicated that they had restricted lending to borrowers with FICO scores less than 640 due to the FHA’s policy.

 

Relative to the risk of Fannie Mae or Freddie Mac requesting them to repurchase a loan, 60% of respondents indicated that FHA indemnification was of equal concern while, 20% indicated that it was of greater concern.  However, 6.7% of respondents reported that indemnifications were significantly less of a concern than repurchase risk.

Lenders have been faced with several new regulations in recent years combined with changes and perceived changes in oversight.  Fannie Mae and Freddie Mac made important changes to their representation and warranties framework at the beginning of the year to clarify and to ease the rules of the road for lenders.  The FHA proposed new indemnification rules just a few weeks ago that will hopefully help to clarify indemnification risk for originators.  Clarification will help, but lenders may still wait to see how the DOJ behaves in the future.

How Did Housing Wealth Change at Your Zip Code?

Tue, 06/16/2015 - 10:46

Based on our recent study “Widening Wealth Inequality”, we found that although there are gains in housing wealth in recent years from rising home prices, fewer people benefit because of the decline in the homeownership rate. Hence, wealth inequality increases in the United States.

But how did housing wealth change at a local level between 2011 and 2013? Based on the American Community Survey (5-year estimates of median home value), the visualization below presents estimated housing wealth gains/losses by zip code, metro area and state. The change in wealth includes the change in median home values (2011 – 2013) and an estimate of principal accumulated[1].

Much has changed since 2013.  Nationally, housing prices have risen by about 15 percent since then and much of the increase in home prices has been seen in zip codes that showed large losses as of 2013, as seen below.  Still, this study is useful in showing the geographic distribution of gains, which were generally widespread even after the housing bust, and losses, which like the largest gains were mostly concentrated.  Note, two zip codes form the San Jose metro market made it to the top-10.  At the same time, one zip code from San Jose was in the bottom-10.  Even within a metro market, there appears to be a sizable variation on which zip codes thrive or not.

From a sample of 12,763 zip codes[2], here is a summary of the zip codes with:

a)      Higher gains in housing wealth (2011 – 2013): b)      Higher losses in housing wealth (2011 – 2013):

Check below to see whether your zip code experienced gains or losses in housing wealth for the period 2011-2013:

[1] Principal is estimated using 30 – year mortgage and assuming that the homebuyer finances 80% of a median – priced home.

[2] Zip codes with median home value greater than $1,000,000 and margin of error greater than 10% of the median home value are excluded from the sample.

The Impact of Rising Interest Rates on Home Prices

Tue, 06/16/2015 - 08:01
  • Mortgage rates have been rising and are expected to increase further over the next two years.  Home sales and home prices are generally impacted negatively if mortgage rates were the only things changing.  Fortunately, there are other economic variables along with the fact that consumers are not tapped out to the maximum in borrowing capacity to suggest home prices will not fall.  Prices in fact could grow too fast in one of the scenarios.
  • A simple mortgage calculation shows a loss of about 12 percent in purchasing power from a one-percentage point rise in mortgage rates.  For example, a person taking out a $200,000 using a 30-year fixed rate mortgage at 3.75% rate would have faced $926 monthly payment (just on principal and interest).   At 4.75%, and to keep the same monthly payment, the loan amount has to be cut to $177,500.  The purchasing power has been reduced due to higher rates.
  • If everyone wanted to maintain the same mortgage payment as previously planned then one might see a general decline in home values from rising rates in order to accommodate the lower purchasing power.  It is unlikely to be an instantaneous price change given the stickiness of home prices but can occur over time as sellers find fewer and fewer buyers without a reduction in prices.
  • The real world, however, is such that home buyers generally do not quickly scale down the price points knowing that could mean a different neighborhood than what they had envisioned.  Rather, people find ways to put additional down payment.  Or people stretch their budget and will pay a higher mortgage payment as long as it is manageable.  In the current environment, there appears some room to stretch without getting anywhere near the danger zone.
  • The first graph below shows what a buyer would pay in monthly payment for a median priced home at the prevailing mortgage rates of that time, with a 20 percent down payment.  In the most recent data, it was $840 per month.  This figure essentially matches the average monthly payment since the turn of the century.  With rates rising now that figure is headed up to $920 and possibly $1000 by next year.  But it would still be under the danger condition of $1200 during the period of bubble home prices.
  • There is much talk of stagnant income of the recent times.  But the description reflects after accounting for inflation.  The raw income figures (or as economists would call it the nominal income) has been rising 1.9 percent a year from 2000.  A typical family income was $50,700 in the year 2000.  By 2014, the income has grown to $65,300.  That means, a family is much more easily able to absorb higher monthly mortgage payment today versus in the year 2000.
  • A more relevant metric is not monthly payment but monthly payment in relation to income.  And the bottom chart shows even a greater possibility to absorb higher mortgage rates.  Most recently a typical home buyer was dedicating 15 percent of her income for mortgage principal and interest.  To get us to 20 percent, as had been in the year 2000 when there was no concern about home prices being a bubble, mortgage rates would have to rise to about 5.5%.  The most weekly mortgage data show rates currently at 4.1%.  So there is still a room for rates to rise without damaging housing affordability as compared to historical norms.
  • Aside from the above number crunching exercise there are many other factors that can influence home values in addition to mortgage rates and people’s income.  For example, the London home prices is said to be in housing bubble.  But this talk has been ongoing for what seems to be the past few decades.  Yet, home prices in London continue to rise.  San Francisco home prices are another example.  The commonality of these high priced markets is the lack of new home construction.  Currently in the U.S., there is an inadequate supply of new home construction.  As long as these conditions persist then there is little prospect of home prices tumbling even in a rising interest rate environment.  It’s simple supply and demand.
  • Briefly other factors to suggest home prices would not be impacted from rising mortgage rates are
    • Higher than normal level of all-cash transactions
    • Job creating environment and hence low mortgage default rates and consequently few fresh distressed properties.
    • Large pent-up household formation of many young adults living with parents but just looking ahead to form their own separate households.
    • Very high stock market valuations, where some people can cash-out portions in order to diversify out of the stock market and put funds into real estate.
  • The most important variable for home price growth will be new home construction, provided mortgage rates do not rise too fast too quickly.  With mortgage rates anticipated to rise to 5.5% by the year-end 2016, home prices will likely change as follows:

Mortgage Application Data

Fri, 06/12/2015 - 13:34

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 applications increased 8.4% from the week ending May 29th and 3.5% from this time in 2014. Applications for purchases increased 9.7% over the last week and 14.3% over the last year, reflecting a positive trend in purchases. Changes from last week also reflect buyers returning from Memorial Day vacation.
  • The year-over-year trend in purchase applications tracks NAR’s measure of buyer traffic which increased 9.5% over the past month.
  • Seasonally adjusted refinance applications are up 7.0% from last week but down 4.8% from this time last year. However, government applications for refinance are up 28.4% from last year versus an 11.5% fall in conventional refinance applications from last year to this year. The strength in government applications likely reflects the sharp 50 basis point reduction in fees charged by the FHA.  Refinance applications tend to rise immediately after an increase in mortgage rate before tapering off.
  • The average rate for a 30-year fixed rate mortgage was at 4.17% this week, 15 basis points higher than last week, but it is not expected to deter buyers as purchase applications still show healthy growth.

 

 

  • Job growth and economic confidence are significant drivers of increased housing demand.
  • Low inventory and builders suffering locally to find financing to meet increasing demand are factors in rising home prices. The median home price rose 0.5% in May.

Mortgage application data serve as a leading indicator for homes sales and other home related expenditures such as appliances and furniture.

 

Latest Weekly Unemployment Insurance Claims Indicate Improving Job Market

Fri, 06/12/2015 - 12:08

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 June 6 increased slightly from the previous week’s level to 279,000. This increase of 2,000 claims can be attributed as weekly volatility in the data. The 4-week moving average also increased to 278,750 claims. Most analysts consider a level of 300,000 as an indicator of normal economic activity. Initial claims for unemployment insurance are filed by workers starting a period of unemployment. Fewer initial claims mean fewer layoffs and greater job stability.

  • Initial claims data by state lag a week compared to the national level data. For the week ending May 30, the largest decreases occurred in California (-7,891), Texas (-2,580), Kansas (-2,075), New Jersey (-1,531), and Florida (-1,232). The largest increases occurred in Tennessee (+1,006), Puerto Rico (+686), Ohio (+540), New Mexico (+416), and Alabama (+359).

  • With job losses trending downward and jobs increasing at a monthly pace of about 220 thousand, NAR forecasts 5.2 million of existing home sales in 2015.

Housing Affordability Index

Fri, 06/12/2015 - 11:41

At the national level, housing affordability is down from a year ago and for the month of April as higher prices continue to outpace incomes and as home sales continue to ramp up for the spring-summer selling season.

  • Housing affordability is down from a year ago in April 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 11.6% while the Northeast experienced slower price growth at 4.9%.
  • The median single-family home price is $221,000 up 10% from April 2014. April’s mortgage rate is 3.95, down 44 basis points (one percentage point equals 100 basis points) from last year. Nationally, affordability is down from 168.6 in April 2014 to 164.9 in April 2015.
  • Affordability is down from one month ago in all regions, and the Midwest had the largest drop of 5.8% while the South fell only 2.2%. From one year ago, affordability is down in all regions except the Northeast which increased 2.6% as price growth slows down. In other regions, the decline from a year ago was relatively small as mortgage rates lower than a year ago helped but could not completely offset increases in home prices. The Midwest saw the biggest decline in affordability at 2.4 %. The South had the smallest decline of 1.1% followed by the West at 1.7%. Both the South and West have recently experienced healthy job growth.
  • Positive factors: Low mortgage rates, job creation, less investors, and less competition.
  • Mortgage applications are currently up and rates are expected to rise. This may be a good time for return and first time home buyers to surge back into the housing market before rates climb higher, further reducing affordability.
  • 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.

Banking Regulations Impact Capital Availability in REALTORS® Commercial Markets

Fri, 06/12/2015 - 10:19

Based on the Expectations & Market Realities in Real Estate 2015: Scaling New Heights report—released by Situs, RERC, Deloitte and the National Association of REALTORS®—commercial real estate (CRE) has been riding a wave of improved macroeconomic conditions and bullish capital markets.  CRE sales volume continued positively, with $438 billion in closed transactions during 2014, based on data from Real Capital Analytics (RCA).  The first quarter 2015 continued the trend, with sales volume reaching $129 billion, a 45 percent year-over-year increase.  Most of the transactions reported by RCA are based on data aggregated at the top end of the market—above $2.5 million.

In contrast to the large commercial transactions reported by RCA, commercial REALTORS® managed transactions averaging $1.6 million per deal , frequently located in secondary and tertiary markets (small CRE markets, or SCRE markets), and focused on small businesses and entrepreneurs.  The Commercial Real Estate Lending Trends 2015 shines the spotlight on this significant segment of the economy—a segment which tends to be somewhat obscured by reports on large Class A commercial properties.

The data underscore an important point about the recovery and growth in SCRE markets.  Based on comparisons of vacancies, rents, as well as sales, prices and cap rates, the rebound in smaller markets was delayed by three years and the rate of price growth has been shallower.  Capital liquidity also recovered at a slower pace, as debt financing represents a much-larger portion of capital in SCRE markets, whereas LCRE deals benefit from significant equity contributions.  Based on the 2015 report, the bulk of capital in SCRE markets flowed through regional and local/community banks, which accounted for 58 percent of transactions in 2014.

The raft of financial regulations which has hit the industry over the past six years has left a deeper impression on available capital for CRE deals. With higher costs of compliance and higher capital reserve requirements for CRE loans, regional and community banks have shouldered a proportionally larger share of the costs, leading to more cautious lending activity.  In 2014, 22 percent of REALTORS® reported tightening lending conditions, compared with 28 percent in 2013.

 

While the figure points to an improving capital market the pace and volume remains slower than for LCRE markets. When asked if bank capital allocated to CRE projects remains an obstacle to sales, 58 percent of REALTORS® responded affirmatively.  The top reasons cited for these difficulties were legislative and regulatory initiatives, uncertainty over regulatory actions.

For more information and the full report, access NAR’s Commercial Lending Trends 2015.

Did You Know: Household Net Worth

Thu, 06/11/2015 - 14:50

  • The net worth of households and non-profits is now at $84.9 trillion in the first quarter of 2015 according to data from the Federal Reserve Flow of Funds.  This is a new record and shows that in the aggregate, household balance sheets have never looked better.  Net worth is now more than $17 trillion or 26 percent above its pre-recession peak.
  • After slowing a bit in 2014, total net worth showed a stronger bounce of nearly 2 percent in 2015 Q1 which brought the level up 5.7 percent from one year ago. This is the 22nd consecutive quarter of positive year over year growth.
  • Net worth is the value of household and non-profit assets (financial and non-financial) less any liabilities (debts).
  • While a reduction of debt contributed to the increase in net worth earlier in the recovery, the last 3 years have seen liabilities begin to grow again. Growing at a year over year pace of 2.7 percent, liabilities have yet to return to the pre-crisis minimum growth rate of 3 to 4 percent which we saw in recessions of the 1970s and 1980s.  This suggests that while the deleveraging may largely be over, credit markets may not yet be back to normal.
  • In spite of increasing liabilities, net worth moved higher which means that assets are increasing faster.  The driver of increases in net worth is the continued growth of home and stock prices.  Household real estate accounts for $21.1 of the $99 trillion in household assets and owner’s equity in household real estate is $11.7 trillion of the $85 trillion in net worth.
  • In the most recent quarter, gains were split roughly two to one between financial assets and real estate, with gains of roughly $1 trillion and $0.5 trillion, respectively.
  • Households and non-profits are grouped together because current data collection by the Fed is not at a level of detail that would make separation of the two groups possible.

Latest Retail Sales (May 2015)

Thu, 06/11/2015 - 11:21
  • Consumers spent more, though not very robustly. That is still enough to propel the economy ahead and create jobs.  Because of the stronger sales gain via ecommerce, the demand for warehouse spaces will rise at a faster rate than for retail spaces.
  • Specifically, retail sales increased 1.2 percent in May over the month and are now higher by 2.7 percent from one year ago.  One key reason for soft figures is due to a good reason of spending less at gas stations, which fell by 18 percent over the year thanks to lower oil prices.  Spending at vehicle shops meanwhile were strong, rising 8 percent.
  • In other sectors, a steady pick-up in home sales should lead to better sales at shops selling furniture, gardening equipment, and paint coating.  Sales at building material and gardening stores indeed rose solidly by 6.2 percent in May.
  • Spending via electronic shopping data will come out later, but the data trend to April and prior months suggests much stronger growth.  Generally speaking, the growth in electronic shopping has been about twice as fast as at retail shops.  Not surprisingly, job growth at warehousing has been rising faster than at retail stores.
  • What does the latest data mean for commercial REALTORS®?  There appears a better business opportunity in brokering and leasing warehouses compared to retail shops.  What does the latest data mean for the economy?  GDP will rise around 2 percent for the remainder of the year and thereby add around 2.5 to 3 million net new jobs.  Housing and rental apartment demand will rise as a result.
  • As an aside to relieve our daily boredom of being glued to the web all day, think of a vastly different shopping experience of the old days.  That is at the marketplace and fairs where everyone comes to one central location.  Think Amsterdam during the time of Rembrandt: the hawking noises of vendors, loud counter offers on the price, shouts of unlettered people returning every unkind word, the musical sounds by amateur street performers.  Just the abounding sounds themselves would have delighted our senses.

New Closing Docs – A Problem this Summer?

Wed, 06/10/2015 - 15:46

REALTORS ® are familiar with the many documents that consumers see at closing.  In an effort to streamline the documentation and to provide important consumer protections, the Consumer Financial Protection Bureau will require lenders to implement new closing documents on August 1st.  These new forms are known as the TILA RESPA Integrated Documentation or TRID.

According to responses from lenders to the 1st quarter Survey of Mortgage Originators, the vast majority of originators were consuming time and money to comply with the new TRID documentation.  However, 60% indicate that they still have unanswered questions about the new forms and how they impact closings.

 

With regard to the timing of the TRID implementation, two thirds of respondents indicate that they expect the rules to delay some closings, while an additional 26.7% expect both some delays and for some loans not to close at all.  Only 6.7% expect no impact from the changes.

 

According to the most recent REALTOR® Confidence Index survey, between February and April of 2015 15% of all transactions experienced financing issues and 26% were delayed.  Thus, delayed closings are a facet of the current market.  Additional closing delays in August due to TRID could impede homebuyers, but a change in affordability would exacerbate the problem.  Mortgage rates climbed in May on European inflation, signs of health in the US economy, and anxiety around the FOMC meeting and impending decision to raise short-term rates.  These same factors are likely to reemerge in the 3rd quarter as the FOMC will meet again in mid-September and many forecasters expect the economy to improve in the 3rd quarter.  A sharp rise in rates when closings are delayed could impact home sales.

The CFPB has made efforts to reach lenders and to clarify questions about TRID.  Most recently the CFPB has indicated that it will be “sensitive” to lenders who make a “good faith effort” to comply with the rule for a short period, suggesting a limited grace period for infractions.  While changes to closing documents are unlikely to change an aspiring homeowner’s intentions, a volatile mortgage rate environment could.

Cash Accounts for 28 Percent of Commercial Transactions in REALTOR® Markets

Tue, 06/09/2015 - 15:34

Commercial real estate investment trends were positive in 2014, following on last year’s tail winds.  Sales of large CRE transactions (LCRE)—over $2.5M—advanced 21 percent year-over-year in, totaling $438 billion, based on Real Capital Analytics (RCA) data.  The investment trends continued apace in the first quarter 2015, totaling $129 billion, a 45 percent increase from the same period in 2014.

Investor demand for properties continued on an upward path, as economic fundamentals, broadening lending sources and capital followed returns.  With global economies moderating in 2014, the U.S. property market became an even stronger contender for cross-border investors, as well.  Secondary and tertiary markets remained on the list of investor destination due to higher yields. However, top markets returned to the forefront as capital sources consolidated in pursuit of top-tier properties.

In comparison to the high-end deals, 86 percent of commercial REALTORS® posted transactions below the $2.5 million threshold in 2014.  Although many REALTORS® participate in transactions above $2.5 million per deal, they serve a segment of the commercial real estate market for which data are generally not as widely reported, which we term the small CRE transactions (SCRE).

Based on National Association of REALTORS® (NAR) data for the SCRE market, sales volume increased 35 percent on a yearly basis in 2014.  The strong increase mirrored the renewed investor interest in stable market and properties offering higher yields.

Prices for REALTORS® commercial transactions advanced 8 percent year-over-year in 2014, a much slower pace than in LCRE transactions.  Cap rates averaged 8.1 percent over the year, a 40 basis point decline from 2013. Yields in SCRE markets continued to offer a premium compared with the 6.8 percent average recorded in LCRE transactions during 2014.

While lending conditions eased in 42 percent of REALTORS markets, financing remained a major concern.  For 59 percent of members, the average transaction’s loan-to-value (LTV) was 70 percent or higher, with 31 percent of total deals posting LTVs of 80 percent or above.  Just as importantly, cash deals comprised 28 percent of all transactions. While the figure represents a decline from 2014, it has hovered around the 30 percent mark for the past four years.

 

In LCRE markets, national banks provided the bulk of debt financing, actively competing with government sponsored enterprises, CMBS conduits and life insurance companies.  However, in SCRE markets, where many commercial REALTORS® are active, regional and community banks were the largest lending group, making up 58 percent of transactions.

The lending survey highlights the marked differences in the LCRE markets versus the SCRE markets.  Debt financing represents a much-larger portion of capital in SCRE markets, whereas LCRE deals benefit from significant equity contributions.

For commercial REALTORS®, 42 percent of transactions failed due to lack of financing, mostly on account of stringent loan underwriting standards.  With higher costs of compliance and higher capital reserve requirements for CRE loans, regional and community banks have shouldered a proportionally larger share of the costs, leading to more cautious lending activity.  In 2014, 22 percent of REALTORS® reported tightening lending conditions, compared with 28 percent in 2013.  While the figure points to an improving capital market, the pace and volume remains slower than for LCRE markets.

For more information and the full report, access NAR’s Commercial Lending Trends 2015.

Latest Job Openings (April 2015)

Tue, 06/09/2015 - 10:27
  • Job openings are becoming ever more plentiful.  In fact, they shot up significantly in recent months.  Also, for the first time in many years, there were more job openings than job placements, implying companies are beginning to struggle in finding workers with right skill sets.  In the meantime, those with rights skills can expect meaningful wage gains from intensifying competition for workers.
  • There are more workers quitting current employers to go elsewhere.  This is a good trend as it implies more dynamism in the economy.  Greater job changes also entail more residential moves, and hence, home sales opportunities will rise.
  • Workers are quitting because they have increased confidence that they can more easily find a better job.  Workers do not quit their jobs during a recession.  In April, the number of workers quitting was 2.7 million, while the number of hires was 5 million.
  • Not all industries are equal.  Though the service industry gets a bad label as being low paying work at a hotel or fast-food restaurants, there are higher paying service sector jobs such as in accounting, medicine, college teaching, and software development.  Specifically, placements have been solid in the Professional Business Service sector and in the Educational-Health Service sector.  Not so in the Manufacturing industry.  This divergent trend could have societal implications particularly among blue collar factor workers, who are predominantly male.  For those interested, a detailed special report on the “weaker sex” was covered by The Economist recently.

 

  • A first major seismic shift in women’s role in the workforce occurred after the First World War.  With men out in the gruesome battlefield, an increasing number of women were involved in factory work and war production.  After witnessing this event that many countries started to grant the right of women to participate in democracy.  One of the first important countries to do so was Britain.  The voting age for men at 21; for women at 30.

64 Percent of Contracts are Settled on Time

Mon, 06/08/2015 - 15:45

In a monthly REALTORS® Confidence Index Survey, NAR asks REALTORS®: In the past 3 months, think of your most recent sales contract that either went into settlement or terminated. Please explain how the deal concluded.”.

Among contracts during the three month time period February to April 2015, 64 percent of contracts were settled on time, 26 percent had delayed settlement, and 10 percent were terminated.  This is based on the responses of 1,539 randomly selected REALTORS® who answered this question in the April 2015 survey. The share of contracts that settled on time has stayed at about this level since NAR asked the question in January 2015. NAR will monitor this data in light of the RESPA-TILA changes slated August 1.

About 60 percent of REALTORS® reporting on their last contract indicated that the contract had some type of issue:  12 percent had financing issues, 8 percent had home inspection issues, and 7 percent faced appraisal issues. It is surprising that in a “tight” and “difficult” credit environment, only 12 percent of contracts that were reported to have settled or terminated had financing issues. One explanation may be that potential homebuyers are deciding to sit on the sidelines for now, so these buyers were not captured in the data.

 

Financing Continues to Impact REALTORS® Commercial Sales Transactions

Mon, 06/08/2015 - 11:00

Commercial real estate investment trends were positive in 2014, following on last year’s tail winds.  Sales of large CRE transactions (LCRE)—over $2.5M—advanced 21 percent year-over-year in, totaling $438 billion, based on Real Capital Analytics (RCA) data.  Investor demand for properties continued on an upward path, as economic fundamentals, broadening lending sources and capital followed returns.

In the first quarter 2015 sales volume rose 45 percent on a yearly basis, totaling $129 billion, according to Real Capital Analytics. Office investments comprised $33.5 billion in sales, while apartments made up an additional $33.0 billion. The largest yearly gain was recorded by the industrial sector, where volume shot up 95 percent compared to the first quarter 2014.

While secondary and tertiary markets remained on the list of investor destination during 2014—due to higher yields—top markets returned to the forefront as capital sources consolidated in pursuit of top-tier properties.  In comparison to the high-end deals, 86 percent of commercial REALTORS® posted transactions below the $2.5 million threshold in 2014.  Although many REALTORS® participate in transactions above $2.5 million per deal, they serve a segment of the commercial real estate market for which data are generally not as widely reported, which we term the small CRE transactions (SCRE).

Based on National Association of REALTORS® (NAR) data for the SCRE market, sales volume increased 35 percent on a yearly basis in 2014.  The strong increase mirrored the renewed investor interest in stabile market and properties offering higher yields. Prices for REALTORS® commercial transactions advanced 8 percent year-over-year in 2014, a much slower pace than in LCRE transactions.  The data underscore an important point about the recovery and growth in SCRE markets.  The rebound in smaller markets was delayed by three years and the rate of price growth has been shallower.

With rising asset valuations and prices, the incidence of failed transactions due to financing have been declining. According to the REALTORS® Commercial Lending Trends 2015 report, the proportion of failed sales deals falling through due to lack of financing was 42 percent. The figure compares positively with the past five years, when failure rates exceeded 50 percent, reaching a high of 67 percent in 2012. However, in light of the broadening recovery in commercial markets, the numbers paint a picture of a market in which investors continue to be negatively impacted by lack of capital or overly stringent underwriting standards.

The lending survey highlights the marked differences in the LCRE markets versus the SCRE markets.  Debt financing represents a much-larger portion of capital in SCRE markets, whereas LCRE deals benefit from significant equity contributions.

 

In the case of failed transactions on account of lack of financing, 54 percent of REALTORS® cited loan underwriting standards as the main culprit, pointing to an increased scrutiny from banks following regulatory requirements. The other major reasons cited were appraisal/valuation and financing availability, each accounting for 17 percent and 16 percent of responses, respectively.

For more information and the full report, access NAR’s Commercial Lending Trends 2015.

Re-financing $300 Billion in Maturing CRE Debt: Perspective from REALTORS® Markets

Fri, 06/05/2015 - 14:24

Commercial debt played a major part in the commercial real estate boom of the mid-2000s. Commercial mortgage backed securities (CMBS) issuance rose dramatically from $94 billion in 2004 to $168 billion in 2005 and hit a peak of $230 billion in 2007. Many of the loans issued during that period, and repackaged, were 10-year loans, which have been coming up for refinancing in 2014 – 2017. According to Trepp, about $330 billion in commercial loans are scheduled to mature over the four-year period, totaling about 28,000 loans.

The majority of the loans are for office and retail assets, which have recorded slower comparative recoveries in fundamentals post-recession. Office vacancies still hover around the 16.0 percent mark, while retail availabilities have just nudged below 10.0 percent.

 

In terms of volume, $79 billion of CMBS is expected to mature in 2015, with an additional $111 billion in 2016 and a similar $111 billion volume coming due in 2017. Commercial investors have expressed concern over the large wave of refinancing coming due, in light of the potential for rising interest rates. According to Trepp—accounting for current interest rates—about 6.4 percent of maturing loans would not meet the minimum refinancing requirement of a 1.2x debt-service coverage ratio (DSCR). Moreover, assuming that rates climb 150 basis points, the percentage of outstanding loans who would not meet the minimum DSCR rises to 15.7 percent.

How do commercial REALTORS® find this challenge impacting their markets?

Based on the Commercial Lending Trends 2015 report, CMBS loans made up a scant 1 percent of capital in REALTORS® markets during 2015, a figure which is consistent over the past few years. In turn, as market conditions have improved over the past few years, asset valuations have risen in tandem with net operating income (NOI). Commercial REALTORS® reported that NOI for properties they sold or leased increased in 48 percent of markets over the past five years.

As lending conditions eased, the share of transactions failing due to refinancing has been on a downward trend. Refinancing difficulties caused deal failures in 50 percent of transactions during 2012. The share dropped to 42 percent in 2013 and 21 percent in 2014. Based on REALTORS® latest data, refinancing failures dropped to a low of 16 percent in 2015.

 

Based on commercial members’ feedback, the average DSCR provided a silver lining in 2015, with an average of 1.3x. The DSC ratio was reported at 1.3x percent in 2012, and 1.4x percent in both 2013 and 2014. With the ratio slightly higher than the 1.2x minimum and the Federal Reserve being cautious about a rate hike, maturing debt in commercial REALTORS® markets has a certain degree of buffer over the next couple of years.

For more information and the full report, access NAR’s Commercial Lending Trends 2015.

Latest Employment Data (May 2015)

Fri, 06/05/2015 - 13:01
  • Very solid job numbers in May.  Jobs are coming at the right time knowing that interest rates are set to rise later this year.  The positive influence to real estate from job creation can easily overpower the negative influence of rising mortgage rates.
  • Specifically, 280,000 net new payroll jobs were added to the economy.  Moreover, it is not a one-month fluke as the jobs momentum has been fairly consistent with the 12-month tally showing over 3 million net new jobs.
  • Another encouraging sign is that wages are beginning to tick up.  The wage growth rose 2.3 percent over the past 12 months, the fastest gain since 2009.
  • Thankfully, construction jobs are also coming around after a long delay.  A total of 6.4 million are working in the construction industry (including general contractors).  That is up about 1 million from a low point five years ago.  But another 1 million construction jobs will be needed to assure the home building industry has enough workers to build an adequate supply of new homes.  The one industry that is cutting jobs is in the oil & gas extraction.  The falling oil prices have greatly scaled back plans for new drillings.  It is then possible that some of the workers getting laid off here could move into the construction industry.
  • The labor force participation rate rose to 62.9 percent, possibly signaling the end to the dreadful trend of people not working and not even searching for work.  There is still a long way to go before we get back to normal in this figure, but the turning point may have occurred.
  • It is hard to imagine why an able-body person would choose to leave the labor force.  Nothing good can come of it.  To do great things, one has to try and constantly learn.  Possibly the greatest of the Russian Czars was Peter the Great.  He had an inquisitive mind and always said that he is a student first and czar second.  He traveled across Europe, always asking how this or that is made.  From the acquired knowledge he turned an all-nothing swamp into one of the most majestic cities in Europe – a city named after him – St. Petersburg.   That is, be inquisitive and be alive.

Local Price Trends for First Quarter 2015

Fri, 06/05/2015 - 12:53

Across the country, home prices rose in the first quarter 2015 compared to the same period in 2014. Stronger demand amidst lagging inventory levels caused home prices to accelerate in most of the metropolitan areas. From a sample of 174 metropolitan areas, 85% of them experienced an increase of home prices while 14% had a decrease.

Here is the list of the metropolitan areas which were at the top:
Visualization 1

https://public.tableau.com/profile/national.association.of.realtors#!/vizhome/LMR-Q12015/Dashboard1

When home prices increase in most of the metropolitan areas, people ponder whether the value of their house increased more or less than in other locations. Comparing with the prices of the first quarter 2012 and 2008, we see that the metropolitan areas below had the highest gains[1] in prices during the last three and seven years, accordingly:
Visualization 2

https://public.tableau.com/views/LMR-Q12015/Dashboard2?:embed=y&:showTabs=y&:display_count=yes

Based on the chart above, we see that the list of the top ten metro areas with the highest price appreciation changes when we select three years period and then seven years period. This means that the “right” time to buy or sell your house differs from metro area to metro area. Of course it is impossible to know the exact “right” time to buy or sell a home.  This likely explains why data from the 2014 Profile of Home Buyers and Sellers shows that affordability of homes ranks 6th on the list of primary reasons why people purchase a home and 3rd on the list of primary reasons for the timing of a home.  The buyer’s desire or readiness to own a home was the number one reason for the purchase and for the timing.

Where does your metro area stand?  For more information on recent trends in your metro area, see the Local Market Reports for the first quarter of 2015.

 

 

[1] Note: Equity gain reflects price appreciation only.

Financing Continues to Impact REALTORS® Commercial Sales Transactions

Thu, 06/04/2015 - 15:35

Commercial real estate investment trends were positive in 2014, following on last year’s tail winds.  Sales of large CRE transactions (LCRE)—over $2.5M—advanced 21 percent year-over-year in, totaling $438 billion, based on Real Capital Analytics (RCA) data.  Investor demand for properties continued on an upward path, as economic fundamentals, broadening lending sources and capital followed returns.

In the first quarter 2015 sales volume rose 45 percent on a yearly basis, totaling $129 billion, according to Real Capital Analytics. Office investments comprised $33.5 billion in sales, while apartments made up an additional $33.0 billion. The largest yearly gain was recorded by the industrial sector, where volume shot up 95 percent compared to the first quarter 2014.

While secondary and tertiary markets remained on the list of investor destination during 2014—due to higher yields—top markets returned to the forefront as capital sources consolidated in pursuit of top-tier properties.  In comparison to the high-end deals, 86 percent of commercial REALTORS® posted transactions below the $2.5 million threshold in 2014.  Although many REALTORS® participate in transactions above $2.5 million per deal, they serve a segment of the commercial real estate market for which data are generally not as widely reported, which we term the small CRE transactions (SCRE).

Based on National Association of REALTORS® (NAR) data for the SCRE market, sales volume increased 35 percent on a yearly basis in 2014.  The strong increase mirrored the renewed investor interest in stabile market and properties offering higher yields. Prices for REALTORS® commercial transactions advanced 8 percent year-over-year in 2014, a much slower pace than in LCRE transactions.  The data underscore an important point about the recovery and growth in SCRE markets.  The rebound in smaller markets was delayed by three years and the rate of price growth has been shallower.

With rising asset valuations and prices, the incidence of failed transactions due to financing has been declining. According to the REALTORS® Commercial Lending Trends 2015 report, the proportion of failed sales deals falling through due to lack of financing was 42 percent. The figure compares positively with the past five years, when failure rates exceeded 50 percent, reaching a high of 67 percent in 2012. However, in light of the broadening recovery in commercial markets, the numbers paint a picture of a market in which investors continue to be negatively impacted by lack of capital or overly stringent underwriting standards.

The lending survey highlights the marked differences in the LCRE markets versus the SCRE markets.  Debt financing represents a much-larger portion of capital in SCRE markets, whereas LCRE deals benefit from significant equity contributions.

 

In the case of failed transactions on account of lack of financing, 54 percent of REALTORS® cited loan underwriting standards as the main culprit, pointing to an increased scrutiny from banks following regulatory requirements. The other major reasons cited were appraisal/valuation and financing availability, each accounting for 17 percent and 16 percent of responses, respectively.

 

For more information and the full report, access NAR’s Commercial Lending Trends 2015.

Latest Employment Situation by State (April 2015)

Thu, 06/04/2015 - 09:01
  • The best state for job creation is Utah, which sped at 4.0 percent.  The West region is doing well with Washington, Nevada, Oregon, California, and Idaho making the top-ten list.  The South was also doing well with Florida, Georgia, South Carolina, and North Carolina in the top-ten.
  • Even though 49 of the 50 states are creating jobs (West Virginia was the sole exception with fewer jobs over the past 12 months), more states are weakening in job creation compared to the month before: 29 states showed slower pace of job creation while 20 states had stronger pace.
  • Not surprisingly, the real estate market is most vibrant in the states with fast job creations.  More people working means more income and more potential homeowners.  More jobs also entail more office leasing and increased rental housing demand.  Nothing like jobs to support real estate.
  • At the metro level, the jobs were plentiful in the following cities:

 

 

 

 

 

 

 

  • The current U.S. residential mobility rate is one of the lowest in history.  There are many reasons for it.  However, low residential mobility is presumably implying less economic mobility as well since in a dynamic economy like the U.S. there would always be job destructions there and job creations here.  With on-going complaints of sluggish job market, why are Americans less willing to move to where the jobs are?  In the worst economic period of the U.S. during the Great Depression, as depicted in the Grapes of Wrath, people moved West in search of work … and dignity.  Americans did not drop out of the labor force back then.  There is today solid job growth in America in the West and South, yet the labor force participation rate is very low.

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