- It has become easier to breathe with consumer prices falling by the most amounts in six years. Lower gasoline prices are everywhere. But wait, renters are getting squeezed hard with fast rising rents.
- Specifically, the overall Consumer Price Index (CPI) fell 0.3 percent in November from the month prior. This largest monthly decline in a long time has pushed down the annual inflation rate to only 1.3 percent. With the Cost-of-Living-Adjustment on government issued checks, like social payments, set to rise by 1.7 percent in 2015, some people will experience a modestly improved living standard.
- Apartment rents increased at the highest pace since November 2008, rising 3.5 percent from one year before. Homeowner equivalency rents – a hypothetical figure of what the homeowners would pay in rent if they were renting out their home – increased by 2.7 percent.
- Very good that the overall CPI is decelerating. Not only is it good for consumers, but it also implies that the Federal Reserve can be patient and delay raising interest rates. The Fed considers the ideal inflation rate to be at or near 2 percent. Given low inflation, the Fed can keep its short-term fed funds rate at zero at least through the spring of next year.
- Gasoline prices as everyone knows have been tumbling. A typical American family spends $3,000 a year at the pump. It will be $2,000 if gasoline prices stay at this level, a cool $1000 savings. The cause is an oil production boom in North Dakota. This one small U.S. state looks to flip at least one bad acting oil-dependent country – Russia, Venezuela, or Iran.
- With low gasoline prices, there could be record driving miles over this holiday break, including possibly extending vacations to go to new places. Be aware, however, of more domestic arguments. Possibilities of more new activities mean more decisions need to be made. Not all will agree with that decision. That is why there are more domestic arguments during vacations than on normal days where fewer decisions are made.
- New home construction activity declined slightly in the latest month. However, the overall annual figure is likely to show an 8 percent gain for 2014.
- Specifically, housing starts fell 1.6 percent in November from the prior month. Though a decline in housing starts has been above 1 million annualized production rate for the 3rd consecutive month, something that has not happened since 2008.
- The gains in housing starts in recent years have been predominantly on the apartment side. The multi-family housing starts have returned to their historical normal. Homebuilders are responding to increased occupancy rates and rising rents.
- The construction of new single-family homes, however, continues to languish. That is a bit of a puzzle since the builders are having an easy time selling newly constructed homes, with an average of only 3 months to move a property after a completion.
- Rising construction costs, shortage of construction workers, and the difficulty of obtaining construction loans from local banks have been the key reasons as to why homebuilders have been unable to quickly build.
- Overall, the homebuilding activity is too low in relation to job creations and population growth. Do not be shocked if there is shortage of inventory when spring home buying season returns. As a result home prices may rise too fast. Only a sharp ramp-up in new supply from new home construction will keep the lid on home prices. If housing starts can reach 1.25 million in 2015 then home prices will rise by 3 to 5 percent. If not, then much faster home price appreciation should be expected.
- Meanwhile, homebuilders’ assessment of market conditions has been surging and is at a historically high level. But that sentiment appears to be a self-deception as it does not match up with reality. Is this a case of too much idle time on their hands leading to unrealistic wild thoughts, like a lovesick teenager? Or could it be that many homebuilders have gone under during the downturn and the only ones providing the assessment are the big builders with Wall Street money now facing less competition? Something indeed to smile about.
- Factory production in America grew solidly in the past month. This implies that the U.S. economy is brushing aside the weakening European economy and is in no danger of a recession. Job gains will continue. Commercial REALTORS® specializing in industrial spaces will likely experience increased business opportunity.
- Specifically, industrial production in November was 5.2 percent higher from one year ago. That is the best gain since January 2011.
- The construction industry has been one of the lagging sectors in the current economic cycle. Therefore, there has been lower production for construction supplies, like cranes. Meanwhile, the manufacturing sector is reviving very nicely.
- Because of rising industrial production, the capacity utilization rate finally rose above 80 percent for the first time since early 2008. High utilization will require constructing new factories. Commercial real estate practitioners involved in factory site locations need to keep their eyes sharp.
- It is very good news that U.S. companies are producing more. However, it will still be the case that many developing countries will take up a larger share of global manufacturing in the future, particularly related to unskilled repetitive factory assembly work. With wages rising in China, new factory centers could arise in Vietnam, the Philippines, and Mexico. Americans working in menial repetitive tasks that do not require much education will therefore face low-wage competition from these countries. However, Americans in the knowledge-based work like software development, medical instruments, and professional business service will experience rising global demand for their services and will experience higher salaries over time. Income inequality in America will therefore likely become even more unequal in the future between those with and without an education.
- Retail sales are strengthening, likely helped by lower gasoline prices. This implies continued economic expansion and job creations. Commercial REALTORS® should anticipate increased leasing activity and higher retail rents next year.
- Specifically, sales at retail and restaurants rose by 5.1 percent in November, its best showing in over a year. The boost is coming as spending at gasoline stations fell for the 6th straight month. As such, falling oil prices are a net positive for the U.S. economy as it helps consumers spend money in other sectors.
- Retail sales that are generally tied to the housing sector are climbing as well. Spending at furniture and home furnishing shops increased by 2 percent while spending on building materials and garden equipment rose by 8 percent. They are likely to improve further because home sales have become positive on a year-over-year basis in recent months after a brief slump in the earlier part of the year.
- Real estate investors of retail shops have been doing well. Rents are rising and property prices have been zooming. The total investor returns, according NACREIF, provided 7 percent gain in the past year on top of double-digit gains in recent prior years. The average national retail vacancy rate is likely to dip to 9.6 percent next year from 9.8 percent this year. Retail rents are projected to rise by 2.5 percent.
- Warning: if interest rates rise too fast next year then the cap rates (rent income-to-price ratio) will also have to rise. That could mean property price declines in the retail sector unless rents pick up even faster.
- People associate retail sales with buying clothes. City people buy more of them than country folks since more eyeballs will get a glimpse of it. That says we buy clothes not for ourselves but for others. Looking sharp in the city at times appears strange. One famous European painting of “Betrothal” is not of a shotgun marriage but of the fashion of the time of having the right “pregnant look.” Future generations will be laughing at our current fashion.
Back in the 3rd quarter of 2005, the national median home price peaked at $227,633. Nine years later, the national median was $216,367 in the 3rd quarter of 2014, a decline of 4.9%. While the national median sale price remains below the boom-period peak, a majority of local markets have outpaced the national average over this period.
As depicted above, markets in North Dakota, largely due to a boom in oil production surged with the median price in Bismarck up 87.2% over this period. Markets in Texas have done well and six registered in the top 10. Metro areas in the Midwest, the Mid South, and the Northwest gained over this period. In total, 87 of the metro areas tracked saw an increase of the median home price in the nine years since the national market peak.
At the other end of the spectrum were markets concentrated in the boom and bust states like Southern California, Arizona, Nevada, and Florida. Markets in New England have sputtered in their recovery, partially due to the judicial process for handing foreclosures used in these states. The clearing process for foreclosures takes longer and the overhang of distressed properties weighs on the median price, though it may not be representative of submarkets in these areas.
Curious how your market has performed? To find out more about your market or others, see the Local Market Reports for the 3rd quarter.
Mortgage rates eased in the second half of 2014 based on unrest in Eastern Europe and fear of an economic slowdown in Europe. This decline in rates has helped to improve affordability, but rates are expected to rise over the next 12 to 16 months. As rates rise, local income growth will become more important. For more information on local conditions, see NAR’s 3rd quarter Local Market Reports.
Home prices, mortgage rates, and mortgage insurance can all affect affordability. But income growth is also a critical driver of affordability. Mortgage rates eased over the last three decades, ameliorating sluggish income growth over the most recent decade, but that is likely to change over the coming decade putting additional emphasis on the need for solid income growth.
Nationally, the median nominal per capita income grew 1.9% from 2012 to 2013 and at an annualized rate of 1.8% from 2005 to 2013. The average nominal per capita income growth from 2012 to 2013 of the 169 metro areas tracked by NAR Research was 1.1%. Over the longer horizon, the average was 2.7%.
However, real income growth was relatively weak over this period. Inflation, as measured by the personal consumption expenditures (PCE) series, was 1.9% over this period, suggesting that real income growth, nominal income growth adjusted for inflation, did not maintain pace with inflation over this time period. In fact, real per capita income growth fell 0.4% from 2005 to 2013. Adjusting the nominal per capita income growth of the MSAs tracked by the 2.2%  national correction, 126 of these metro areas experienced positive real per capita income growth over this period. The average real per capita income growth was 0.5%, higher than the national average. As depicted above, the strongest annualized real per capita income growth was grouped in North Dakota, Texas, and parts of the Northeast. Bismarck and Fargo were first and third in terms of median income growth, but New Orleans which rebounded from the post-Katrina devastation over this period, was second. Texas and New York each had five markets in the top twenty.
Stagnant real income growth could become an issue. As depicted above, forecasting out the debt-service ratio (annual PITI/annual household income) under a stylized scenario where mortgage rates rise from 4.0% in 2014 to 6.0% by 2018 with different income growth paths depicts the impact on affordability and access to credit. As rates rise without adequate income growth, debt service ratios will rise and in a worst case scenario above even FHA eligibility levels.
Home buyers tend to have higher incomes than non-buyers and borrowers may currently under report their incomes when qualifying, both of which could ameliorate the impact. However, Analysis by Federal Reserve Economists suggests that a 2% increase in mortgage rates would result in a 5% to 7% decline in home purchases, or 250,000 to 350,000 fewer home purchases. Furthermore, these figures do not account for mortgage insurance and loan level pricing adjustments (LLPAs) that are currently impacting affordability. This stylized analysis emphasizes the importance of income growth but it should be noted that proper pricing of mortgage insurance and reasonable capital relief could play a role in boosting affordability as mortgage rates rise.
A restoration of traditional, sound underwriting will allow in many borrowers who may not have had access to lower rates in recent years.
Curious about housing and economic conditions in your area? See the 3rd quarter Local Market Reports for more information on conditions in your areas.
 Per capita adjusted for inflation (CPI-U-RS)
 2.2% was the national adjustment for median family, household and per capita income. A local adjustment would be ideal, but is not available.
Metro areas with a lower cost of living and sunnier weather are poised to see an increased number of Baby Boomers moving in and buying a home as some delay retirement and remain participants on the labor market.
NAR analyzed current population trends, housing affordability, cost of living, housing inventory and job market conditions in the 100 largest metropolitan statistical areas across the U.S. (hyperlink to list of 100) to determine housing markets most likely to see a boost in sales from Baby Boomers. State taxes and the share of expenditures for Public Welfare, Hospitals, Health, Police Protection, Parks and Recreation at the state level for those areas were also considered (tax expenditures hyperlink).
The top markets positioned to see an influx of baby boomer homebuyers are (hyperlink for list of 10):
- Albuquerque, New Mexico
- Boise, Idaho
- Fort Myers, Florida
- Greenville, South Carolina
- Orlando, Florida
- Raleigh, North Carolina
- Sarasota, Florida
- Tucson, Arizona
(View here the Full Release)
Click on the tabs to follow the story below. Hover over the map for a snapshot of each metro area’s share. The following charts show the housing and job market conditions for the 10 most attractive metro areas for Baby Boomers compared to the average for the 100 largest metro areas.
Summary by Jed Smith
Managing Director, Quantitative Research
Most Americans agree that traffic congestion is a major problem in their communities, and congestion seems to be getting worse. In a REALTOR® University presentation Dr. Anthony Downs, an Economist and Senior Fellow at the Brookings Institution, discussed how traffic congestion appears to be a long-term problem. (Watch the highlights video. Dr. Downs has written many books, including An Economic Theory of Democracy, Stuck in Traffic, and Still Stuck in Traffic).
Congested roads waste commuters’ time, cost them money, and degrade the environment. Dr. Downs focused on three major issues—why congestion occurs, where future population growth is likely to develop, and whether walkable communities will dominate future housing choices.
Why traffic congestion arises, and is it possible to get rid of it?
Having everyone present at the same time is the most efficient way for businesses to operate. In addition, businesses are more efficient when located near other businesses, whether competitors, suppliers, or customers. There are substantial externalities associated with the gathering of stakeholders in one location. This means that the participants will all need to travel at the same time, thereby causing congestion.
Building more roads as a solution to congestion doesn’t work. It is too costly to build enough roads. In addition, railroads and other public transportation options tend to be very expensive and don’t pay their way. In addition, mass transit does not provide door-to-door service, as does the automobile, so congestion is probably with us. Congestion is the economic byproduct of efficiency.
Does the future favor population growth in large areas or in small areas?
Urban planners advocate high density, high rise population concentrations in analyses of urban planning. Carried to the ultimate conclusion, everybody ought to live a New York lifestyle. However, analyses of urban areas with population growth in recent years has shown that the majority of the growth has occurred and is likely to continue to occur in the suburbs.
Will walkable communities dominate future growth?
The Millennial generation is reported as adverse to purchasing a car, preferring to walk, bike, or use public transportation. The example most frequently cited is San Francisco, with high tech firms and Millenials clustered in technology jobs, living in the central city. It is appropriate to note that Sa Francisco is an “outlier”—it is the second most densely inhabited city in the country, right behind New York City. There is an acute lack of space in San Francisco. In addition, the Millenials have not yet reached two important facts or stages in life: marriage and children. These two events do not in general appear to be conducive to the walkable communities envisioned by urban planners, even though that is their story and they are sticking to it. Small children need open space, monitored gathering places, playgrounds, and specialized facilities and services—not walkable open-air bars and great shopping experiences.
As noted, while there may be some measurable gains from increasing housing densities, most other land-use strategies have little effect. Indeed, the most powerful solutions, including higher gasoline taxes, increased public funding for transit, and highway tolls, are also the least palatable politically. Large cities exist because of the substantial externalities they create. As a result, congestion is a major by-product, which in general cannot be avoided.
WASHINGTON (December 10, 2014) – Metro areas with a lower cost of living and sunnier weather are poised to see an increased number of baby boomers moving in and buying a home as some delay retirement and remain participants in the labor market, according to new research by the National Association of Realtors®.
NAR analyzed current population trends, housing affordability and local economic conditions in metropolitan statistical areas1 across the U.S. to determine housing markets most likely to see a boost in sales from leading-edge baby boomers2. Boise, Idaho and Raleigh, North Carolina were identified as top standouts for baby boomers for their solid job growth, share of self-employed workers and affordable home prices.
Lawrence Yun, NAR chief economist, says Florida and Arizona cities attract many baby boomers. In addition, the share of men and women working after their 65th birthday has increased3, setting the stage for elevated baby boomer buying activity in metro areas with a dynamic local economy, adequate housing supply and a lower cost of living.
“A broadly improving economy and rebounding home prices are giving baby boomers the opportunity to sell and move to support their retirement lifestyle. Furthermore, our research identified cities movers are gravitating to while still remaining in the workforce as a business owner,” Yun said.
NAR’s research reviewed 100 metro areas that have lower state taxes, solid job market conditions, and strong migration patterns (on a percentage basis) of baby boomers moving to that particular area to determine which housing markets are likely to see a boost from this generation. Cost of living, housing affordability and inventory availability were also considered.
The top markets positioned to see an influx of baby boomer homebuyers are (listed alphabetically):
- Albuquerque, New Mexico
- Boise, Idaho
- Fort Myers, Florida
- Greenville, South Carolina
- Orlando, Florida
- Raleigh, North Carolina
- Sarasota, Florida
- Tucson, Arizona
Other markets with strong potential for attracting baby boomer homebuyers include:
- Chattanooga, Tennessee
- McAllen, Texas
- Riverside, California
- Tampa, Florida
“These metro areas are attractive to baby boomers because of their housing affordability, lower tax rates and welcoming business environment,” says Yun. “With baby boomers working later in life, these factors will likely play as much of a deciding role of where boomers eventually retire as will areas with a warm climate or variety of outdoor activities.”
According to a NAR generational study of homebuyers and sellers released earlier this year, baby boomers represented 30 percent of all buyers, had a median household income of $92,400 and bought a home that cost $210,0004.
NAR also recently analyzed current housing conditions, job creation and population trends to determine the best markets for aspiring, leading edge millennial homebuyers. Visit www.realtor.org/millennials to find out more about millennials and homebuying.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.
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1Areas are generally metropolitan statistical areas as defined by the U.S. Office of Management and Budget. NAR adheres to the OMB definitions, although in some areas an exact match is not possible from the available data. A list of counties included in MSA definitions is available at: http://www.census.gov/population/estimates/metro-city/List4.txt.
Regional median home prices are from a separate sampling that includes rural areas and portions of some smaller metros that are not included in this report; the regional percentage changes do not necessarily parallel changes in the larger metro areas. The only valid comparisons for median prices are with the same period a year earlier due to seasonality in buying patterns. Quarter-to-quarter comparisons do not compensate for seasonal changes, especially for the timing of family buying patterns.
Median price measurement reflects the types of homes that are selling during the quarter and can be skewed at times by changes in the sales mix. For example, changes in the level of distressed sales, which are heavily discounted, can vary notably in given markets and may affect percentage comparisons. Annual price measures generally smooth out any quarterly swings.
NAR began tracking of metropolitan area median single-family home prices in 1979; the metro area condo price series dates back to 1989.
Because there is a concentration of condos in high-cost metro areas, the national median condo price often is higher than the median single-family price. In a given market area, condos typically cost less than single-family homes. As the reporting sample expands in the future, additional areas will be included in the condo price report.
2Baby boomers are generally categorized as those born in the U.S. between 1946 and 1964. NAR’s research analyzed leading-edge baby boomers (ages 60-69).
3 According to the U.S. Department of Labor’s civilian labor force participation rates by age, sex, race, and ethnicity, 1992, 2002, 2012, and projected 2022 (Table 3.3)
4 According to NAR’s Home Buyer and Seller Generational Trends study. The study breaks baby boomers into two generations: Younger (ages 49-58) and Older Boomers (ages 59-67). All information is characteristic of the 12-month period ending in June 2013 with the exception of income data, which are for 2012.
Information about NAR is available at www.realtor.org. This and other news releases are posted in the “News, Blogs and Videos” tab on the website.
- The U.S. economy has added 2.7 million net new jobs or by 2.0 percent over the past 12 months to November. At the state level, North Dakota continues to be the top standout. Texas and Utah are also red hot.
- At the other end, Alaska struggles. Virginia and Maryland, the two states with large exposure to government spending, are near the bottom as they deal with federal budget sequestration.
- As would be expected the real estate market is healthiest in states with better employment conditions. Moreover, job gains should be viewed as a leading indicator of home sales and commercial leasing activity. So REALTORS® in North Dakota, Texas, and Utah should prepare for much better times ahead.
- Among the large metro markets, the fast moving cities are Houston (+4.3%), Grand Rapids (+4.0%), Dallas (+3.6%), Jacksonville (+3.6%), San Jose (+3.6%), Orlando (+3.5%), Austin (+3.4%), Miami (+3.2%), Nashville (+3.2%), Raleigh (+3.2%), and Seattle (+3.2%).
- Among the smaller metro markets, Midland (+7.2%), Elkhart (+4.9%), Lubbock (+4.4%), Odessa (+4.2%), Naples (+3.9%), Sarasota (+3.7%), and St. George (+3.8%) are far ahead of the rest.
- North Dakota’s massive oil production is the reason for the fast job gains. The low gasoline prices are the result, which help U.S. consumers. This small U.S. state may also tip Venezuela, Iran and Russia into revolutions, as these countries rely on oil revenue to fund government social spending.
Credit continued to flow to those with high credit scores, based on information provided by REALTORS® in the October 2014 REALTORS® Confidence Index Survey: http://www.realtor.org/reports/realtors-confidence-index. Almost half of REALTORS® providing transaction credit score information reported FICO credit scores of 740 and above; with normal credit conditions, approximately 40 percent of buyers would have credit scores of 740 and above. About 2 percent of REALTORS reported a purchase by a buyer with credit score of less than 620; in a normal market the credit scores would be closer to 5 percent. As of July 2014, the median borrower FICO score for purchase-only loans was 749, up from about 700—in 2000.
Senior government officials have indicated that mortgage credit should become more available in the foreseeable future. In addition to large financial institutions potential home buyers may find regional and community banks and credit unions as credit sources.
- One of the better indicators about the strength of the job market is the quit rate. How many workers are quitting their jobs? A rational person would only quit if they had a new job lined up or if there is a good prospect of finding a new one. Recent trends show increased quit rates and increased job opening rates.
- Two out of 100 employed people quit their jobs in the latest month, the highest quitting rate since mid-2008. The rising incidences of quits, which reached 2.75 million in October, are congruent with more job creations in the economy.
- People working in lodging and food service have the highest quit rate at 4.2 percent.
- Government workers are least likely to quit. Only 0.8 percent did so in the latest month. Rarely do we hear of a government worker getting excited about the latest work project. The low quit rate is therefore probably related to good pension and easy work load and not about the interesting aspects of their job.
- The quit rate is the highest in the South (2.2 percent) and the lowest in the Northeast (1.5 percent).
- REALTOR® membership experiences about a 15 to 20 percent turnover rate over the course of a year, translating into around 1.5 percent monthly quit rate.
- More dynamism in the labor market generally spills over into the real estate market as well. Some of the quits will necessitate a selling and buying of a house. Dynamism is also good for the economy. It implies mobility. Andrew Carnegie delivered newspapers and Warren Buffet threw peanuts at baseball games before quitting and moving on.
- “Take this job and shove it, I ain’t working here no more.” It’s fine to say that as one leaves. But please consider using a better grammar structure before interviewing with the next employer. Only in few instances is it fine to blurt out incorrect grammar. For example, James Brown’s “I Feel Good” carries a punch far better than the lame “I feel well.”
Every month, NAR conducts the REALTORS® Confidence Index Survey to gather real estate information for the Confidence Index. The RCI-Six-Month Outlook Index tracks/predicts the level of existing home sales three months in advance (i.e.: REALTORS® are excellent forecasters!).
For example, the uptick in Existing Home Sales in September 2013 were “predicted” by the rise in the June 2013 RCI Six Month Outlook Index. The correlation coefficient between the RCI-Six-Month Outlook Index and existing home sales is about 80 percent.
Looking forward, the 6-month outlook index for October 2014 ticked up a bit (seasonally adjusted) so an uptick in sales in the coming months is likely coming.
- A gangbusters figure on job gains in the past month. It is becoming more evident that we will have more home sales and increased commercial leasing activity next year. In November a total of 321,000 net new payroll jobs were added to the economy.
- Are the jobs paying well? First, the wage rate rose 2.2 percent from one year ago – which is a tad better than the consumer price inflation rate. Construction workers’ wages increased at a faster rate of 2.5 percent, now averaging $24.85 per hour. The workers in the leisure and hospitality sector got the biggest boost of 3.7 percent, though their wages are on the low end at $12.27 per hour.
- The unemployment rate was unchanged at 5.8 percent. This figure is determined by separate jobs data (not based on company payroll data, but by asking households if they have a job) and it showed essentially no job gains in the past month. It is normal for the payroll and household data to differ from one month to the next, but the long-term trend tends to move closer together. The household data showed 2.8 million net new job additions in the past year, while the payroll data showed 2.7 million net new job additions.
- A shortage of construction workers is hindering home building. Only 2.4 million workers and general contractors are involved in home construction today, down from 3.5 million several years ago, even though home builders are quickly selling newly constructed homes. The current shortage of construction workers further assures faster wage growth in the sector. At the same time there are too many law school graduates who cannot find a job for which they were trained for and are emerging with massive loads of student debt. Maybe it is time to pick up a shovel rather than law books?
- The net job gains at around 200,000 each month are likely to continue. That’s because the unemployment insurance claims have been rapidly falling. The U.S. economy is bucking the global economic slowdown and moving ahead. Good news indeed.
- Where is the sun? The earth is tilting the other way as we head into winter and workers are commuting through the dark. But let’s consider ourselves fortunate. Not many generations ago in the wealthiest country in the world, Britain in the 19th century, it was common for teenage boys as young as 11 years old to not experience natural light for months on end. They worked in the coal mines 12-to-14 hours a day. They trotted out of their homes early and came home late. They never saw the sun. We, because of their sacrifice and the resulting economic progress, get to enjoy fewer working hours and more hours of daylight.
In the 3rd quarter as in earlier surveys, respondents to NAR’s Survey of Mortgage Originators were asked about impacts of the Qualified Mortgage rule on the mortgage lending market. However, this quarter the survey expanded to measure lender expectations of market conditions and capacity as well as current policy issues including changes at the Rural Housing Service and lending headwinds.
Respondents indicated a production-weighted share of 5.0% for non-QM loans in the 3rd quarter, nearly double the 2.6% share from the 2nd quarter. However, the rebuttable presumption share fell sharply from 12.8% to just 3.5%. Interest rates fell to their lowest levels in nearly 12 months by the end of the 3rd quarter. Interest rate changes have a larger impact on the higher-priced portion of the market which also prefers interest-only (non-QM) products.
Additional Highlights of the Survey
- The non-QM share of originations nearly double in the 3rd quarter to 2.6%. However, the rebuttable presumption share tumbled from 12.8% to 3.5% over this same time frame.
- Respondents’ confidence in their preparations for the QM/ATR rules eroded again in the 3rd quarter, with just 58.3% indicating that they had fully adapted compared to 61.9% in the 2nd quarter.
- The net share of lenders offering rebuttable presumption and non-QM products increased from the 2nd to the 3rd quarter. Willingness to originate non-QM mortgages fell dramatically from the 2nd quarter, but the decline was less dramatic for rebuttable presumption mortgages. Lenders were more willing to originate prime mortgages with the exception of those with lower FICOs.
- 24% of lenders felt the investor takeout for non-QM loans had improved from the 2nd quarter.
- The QM rule continues to dog lenders with 64% indicating having had an issue closing a loan in the 3rd quarter due to some facet of the rule, and an increase in the share of lenders using buffers in advance of the QM requirements.
- Over the next 6 months, respondents expect improvements in demand for all products, but more so for non-QM and rebuttable presumption loans. The majority of respondents expect improved investor demand for all mortgage types, but some expect softening.
- Slightly more respondents indicated fewer pre-approvals in the 3rd quarter compared to a year earlier, but half indicated having more than normal level or preapproved borrowers who could not find a property.
- Respondents indicated a median forecast for mortgage rates to rise to 4.5% over the next six months.
- 66.6% indicated that the increase in fees at the RHS would have an impact on RHS lending in their area
- Overlays were the largest headwind to the market followed by documentation and DTI, suggesting that the QM rule is having an impact
- Finally, 87.5% of respondents indicated that repurchase requests were a concern.
Dr. Nayantara Hensel, Associate Director of Policy and Research at the Federal Housing Finance Agency, gave an update on the status of the housing market in a presentation at the REALTOR® University Brown Bag Lunch Series recently. A graduate of Harvard University and former Chief Economist of the U.S. Navy, Dr. Hensel discussed current trends in the housing market:
- Slides: http://www.realtor.org/presentations/realtor-university-speaker-series-presentation-economic-issues-in-the-housing-market
- Video: http://www.realtor.org/videos/realtor-university-speaker-series-economic-issues-in-the-housing-market
Of particular interest in her talk was the discussion of the major house price indexes. Each index measures housing trends slightly differently, but the indexes tend to vary together.
- The FHFA home price index is based on home prices within mortgage level data obtained from Fannie Mae and Freddie Mac.
- The S &P/Case-Shiller index of home prices is based on county recorder data.
- The CoreLogic Index uses county recorder data and home price data obtained from loan servicer data.
All indexes use the “repeat-transactions” modeling framework, based on the measurement of price changes for homes that have sold at least twice in the past. The Case-Shiller and CoreLogic Indexes are value weighted-- price trends for more expensive homes are given more weight in the index calibration.; the FHFA index is transaction weighted.
Dr. Hensel presented an overview of the 10 metropolitan areas with the highest rates of recent house price appreciation: Modesto, Merced, Vallejo-Fairfield, Yuba City, Stockton-Lodi, Riverside-San Bernardino, and Santa Rosa California; Las Vegas and Reno Nevada; and Bend-Redmond, Oregon.
Conclusions of Interest to REALTORS®: The press is filled with a variety of price index measures as related to housing. However, all of the indexes tend to vary together. Some of the areas of the country that appeared to have some of the worst housing markets during the Great Recession appear to have had good recovery. Put differently, avoiding excess in the housing markets is good; recovery from previous excesses has in many cases already occurred.
- Vehicle sales are rolling fast and are on pace to reach the highest mark since 2006. Considering an automobile purchase is typically the second most expensive expenditure item for most households, what does it imply about the most expensive expenditure of home sales?
- In November, vehicle sales were running at 17.2 million annualized pace. The 11 months of sales this year are at 16.5 million annualized pace. The last time the annual total was this high was way back in 2006.
- An improving economy with around 200,000 net new job additions each month and all-time high household wealth conditions are helping fuel auto sales. Falling gasoline prices surely help with sales as well.
- Note the graph below charting home sales and vehicle sales. Both industries underwent a harsh downturn in around 2007 to 2008. From the low points, both sectors are making a comeback. A closer look shows that the vehicle sales have climbed out more robustly compared to home sales. Does it then mean that home sales are primed for stronger growth in the upcoming year to “catch-up” with past relationship between these two sectors?
- Gasoline prices have fallen by more than 20 percent from the average price of the past 3 years. This trend may be enticing people to drive more and buy a new car. But gasoline prices are volatile, as can be seen in the graph below. No one can know for sure, but the recent slides in gasoline price could easily reverse and quickly climb higher. This point is worth noting because home sales in the outlying exurbs, requiring long commutes, did well in the past when gasoline prices were low but suffered significant declines when gasoline prices sharply increased. So even in broadly improving housing market conditions, the relative performance between the exurbs versus inner neighborhoods will depend on future gasoline prices.
- There are many factors leading to likely higher home sales next year, including continuing job gains, rising rents, increased inventory, and some dialing-down on mortgage underwriting standards. Consumer confidence will also matter for major expenditures like cars and houses. Recent gains in vehicle sales are clearly encouraging signs about the likely direction of home sales.
- As an aside, what did we do before cars? We had to walk, naturally. There is an elementary school on a top of a steep hill in one small town in South Korea. The graduates of this school all have large muscular thighs. Interesting that how small everyday unnoticed habitual activity accumulates over time into something unique. What “unnoticed” activity do you do every day? Something to consider.
The FHFA has announced new loan limits for 2015. A number of counties and metro areas will see an increase in their loan limits in 2015, which is important in this tight credit environment. As prices rise with the improving market, these limits must keep up, or credit worthy borrowers will have no outlet for financing and be unable to purchase a home.
The Federal Housing Finance Agency (FHFA) oversees Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Each year, the FHFA determines the maximum loan size that the agencies can finance. Loans with balances above the limits are referred to as “jumbo” and must be financed by banks or in private label securities (PLS). There is a national “floor” to local limits of $417,000, but some areas with higher median homes prices are granted limits that go above this, but not higher than $625,500.
Financing can be cheaper by the jumbo route, but in the current market access is highly restricted to pristine borrowers with high minimum down payments, high credits scores, low debt-to-income ratios and large amounts of reserve funds, requirements well in excess of those in the conventional space. Despite low current default rates on new production, Banks and PLS investors hurt in the subprime meltdown last decade have been reticent to re-enter the non-pristine portion of the jumbo market without improved practices, protections and a sound legal framework. The FHFA’s director halted plans last fall to lower loan limits in an attempt to “crowd” in private capital as the fundamentals of the PLS market were not yet in place.
As local median home sale prices rise in the recovery, it will become increasing important that the FHFA keep up with conditions, or borrowers pushed into the jumbo portion of the market may not be able to find financing. In 2015, the agency will increase loan limits in 46 counties. Loan limits are determined at the county level, but are the same across metro areas. Thus, the loan limit for all ten counties in the Denver metro areas was raised from $417,000 in 2014 to $424,350 in 2015, an increase of $7,350. Boulder (4.7% increase), Baltimore (9.5%), and Napa (3.9%), will all experience significant increases in their loan limits, but the largest increase was in the Boston (10%) metro area where the limit will rise by $47,150 to $603,750.
The FHFA’s action to raise limits in 2015 will improve access to credit for many borrowers in affected areas. But in the years ahead, the FHFA’s responsiveness to changes in local conditions will grow in importance until health is restored to the jumbo sector.
Counties with higher loan limits in 2015: CLICK HERE
Every month NAR produces existing home sales, median sales prices, and inventory figures. The reporting of this data is based on homes sold the previous month and the data is explained in comparison to the same month one year ago. We also provide a perspective of the market relative to last month, adjusting for seasonal factors, with additional commentary on the potential direction of the housing market.
The data below shows what our current month data looks like in comparison to the last ten October months, and how that might compare to the “ten-year October average”, which is an average of the data from the past ten Octobers.
- The total number of homes sold in the United States for October 2014 is higher than the ten-year October average. Regionally, a similar trend is seen in the Midwest and the South, while the Northeast and the West are the only regions to show current sales below the ten-year October average.
- Because sales were buoyed by the first-time home buyer tax credit in late 2009, the October low point of sales was in 2010. Since the low point of home sales in 2010 there have been four consecutive year-over-year gains for all regions except the West region, which had a slight decline this October.
- The median home price this October is higher than the ten-year October average median price for the U.S. and all regions except the Northeast, which was modestly close.
- The median price year-over-year percentage change shows home prices struggling from 2006 to 2011. Since then home prices began to improve, however, price growth has been decelerating over the last year. For the U.S. and the four regions the best price percentage increase took place in 2005, except for in the West, which had its best gains in 2012. This October the Midwest has the highest year-over-year price percentage change over the U.S. and the other three regions.
- Inventory of homes for sale for the U.S. is currently lower than the ten-year October average. In 2004 the U.S. had the fastest pace of homes sold relative to inventory, while in 2007 the U.S. had the slowest pace with the months’ supply at 10.6. The ten-year October average months’ supply is 7.2 and this October we are at 5.1 months’ supply.
To view the full presentation, click here: October 2014 EHS Vs Ten Year Average
Some aspects of the qualified mortgage rule continue to weigh on the mortgage market. According to NAR’s Survey of Mortgage Originators, despite overtures from the CFPB and modestly fewer issues, lenders tightened some restrictions in the 3rd quarter.
The share of respondents that had issues closing mortgage(s) due to some facet of the qualified mortgage rule (QM) eased from 66.7% in the 2nd quarter to 64.0% in 3rd quarter. Only 20% of the survey respondents indicated not having an issue.
However, the use of buffers increased in the 3rd quarter and was most common on the 3% cap and 43% back-end DTIs requirements with 29.2% and 33.3% of respondents using them, respectively. Some lenders have opted for buffers ahead of the QM parameters to prevent producing a rebuttable presumption or non-QM mortgage.
The CFPB has worked to ease lender concerns and made opportunities for lenders to refund excess fees in certain instances. The increase in concern by lenders could point internal process issues or increased demands from investors.