Government data show that home buyers are older than they used to be, but Millennials are on the horizon
New data about 2015 home buyers will be out later this week.
Most of what we know about home buyers comes from the Profile of Home Buyers and Sellers released by the National Association of Realtors® each November. The Profile is based on a comprehensive survey targeted at recent home buyers and sellers. The 2015 Profile of Home Buyers and Sellers will be released this week (Thursday, November 5, 2015), and it will be full of the latest insights on this past year’s home buyers.
The government also surveys people to gather information. In fact, the recently released American Community Survey (ACS) gathered information from roughly 3 million people across the country. While the ACS does not specifically target recent home buyers, we can get a decent approximation of recent “home buyers” by looking at data for those who currently own their own home and moved into the residence within the last year. In the rest of the article, we will use the term “home buyers” to refer to these owners who recently moved.
Digging into the ACS data on recent home buyers by age, we find that older home buyers are a bigger share of the market. The shares in the 50+ age brackets are larger in 2014 than they were in 2005. These shares have grown while the shares of buyers in the under 30 and 35 to under 50 age groups have shrunk since 2005. The promise of the millennial buyer is seen in the recently growing share of those aged 30 to under 35.In spite of the small changes in home buyer shares by age, the government data shows a remarkably steady median age over the years. The typical home buyer was 39 years old from 2005 to 2010 and 41 years old from 2011 to 2014. Data from the Profile of Home Buyers and Sellers shows a similar trend with a slightly older median age than in the government data. One explanation for the relative steadiness in the government data may be the way that the data is collected. The American Community Survey (ACS) is an ongoing survey gathered each month such that recent movers could have moved in any month in a roughly 24 month window which is roughly centered on January of the survey year. By comparison, the Profile of Home Buyers and Sellers targets only those who purchased a home from July to June of the survey year. Still, the data between the two surveys is remarkably consistent as seen in the tables below, and the Profile of Home Buyers and Sellers has is available nearly a full year ahead of the government data.So is the government survey wasteful and duplicative? No. The ACS provides data on a variety of topics in addition to recent movers, and it adds valuable information where there may be none. One additional benefit of the ACS data in relation to recent movers is that the large sample size enables us to see sub-groups that may not be visible in the Profile of Home Buyers and Sellers. For example, we can see a decent amount of variation by looking at the age of the typical recent buyer in each of the 50 states. Comparing 2005 and 2014 we can see that most states mirror the national trend of older buyers, some more significantly than others. A few states, 9 plus the District of Columbia, actually saw a younger typical home buyer in 2014 compared to 2005. North Dakota had the biggest move from 41.3 years to 34.6 years. Other large movers included Alaska, Nebraska, Alabama, the District of Columbia, and Wyoming where the age of the typical home buyer in 2014 was at least 2 years younger than the age of the typical home buyer in 2005. What does the age of the typical mover look like in your state?
 Current home owners could have been gifted the residence that they own, could have married into ownership, or could have previously purchased the property and used it as a second or investment home before moving into the property as a primary residence, so this definition is not an exact match for recent home buyers, but it is a good approximation.
- Existing-home sales increased 4.7 percent in September from one month prior while new home sales decreased 11.5 percent. These headline figures are seasonally adjusted figures and are reported in the news. However, for everyday practitioners, simple raw counts of home sales are often more meaningful than the seasonally adjusted figures. The raw count determines income and helps better assess how busy the market has been.
- Specifically, 471,000 existing-homes were sold in September while new home sales totaled 36,000. These raw counts represent a 7 percent loss for existing-home sales from one month prior while new home sales dropped 16 percent. What was the trend in the recent years? Sales from August to September decreased by 16 percent on average in the prior three years for existing-homes and remained the same for new homes. So this year, existing-homes outperformed compared to their recent norm while new home sales underperformed.
- Why are seasonally adjusted figures reported in the news? To assess the overall trending direction of the economy, nearly all economic data – from GDP and employment to consumer price inflation and industrial production – are seasonally adjusted to account for regular events we can anticipate have an effect on data around the same time each year. For example, if December raw retail sales rise by, say, 20 percent, we should not celebrate this higher figure if it is generally the case that December retail sales rise by 35 percent because of holiday gift buying activity. Similarly, we should not say that the labor market is crashing when the raw count on employment declines in September just as the summer vacation season ends. That is why economic figures are seasonally adjusted with special algorithms to account for the normal seasonal swings in figures and whether there were more business days (Monday to Friday) during the month. When seasonally adjusted data say an increase, then this is implying a truly strengthening condition.
- What to expect about home sales in the upcoming months in terms of raw counts? Independent of headline seasonally adjusted figures, expect better activity in October for existing-home sales. For example, in the past 3 years, October sales increased by 2 to 8 percent from September. In contrast, existing-home sales slipped in November by 4 to 21 percent. For the new home sales market, the raw sales activity in October tends to be better than that occurring in September, and activity slows back down in November. For example, in the past 3 years, October sales rose by 3 to 16 percent from September while November sales dropped by 3 to 18 percent. All in all, REALTORS® get ready to give out a candy to your “trick or treater” buyers.
- Personal income barely rose in September but was comfortably higher from one year ago. Consumer spending is therefore rising. The economy is in a reasonably good shape as it goes into a cycle of rising income leading to more spending which in turn is leading to job creations and a further rise in income.
- Specifically, personal income grew 0.1 percent in September and is up by 4.1 percent from one year ago. Income generated from rents grew better at 7 percent. Farm income is recovering after a big tumble last year. Income from unemployment checks are falling rapidly indicating fewer people on the dole.
- While the total income of everyone combined grew by 4.1 percent, personal consumption grew by a tad less of 3.4 percent. Savings rate is therefore modestly higher, which is helping improve overall balance sheet of families. Based on the latest income and spending patterns and the shift in momentum, GDP in the fourth quarter should be better than the disappointing third quarter performance. No recession over the horizon. Therefore, more jobs will lead to more real estate activity in upcoming quarters.
- Per person basis and after taxes, the disposable income of a typical person in the U.S. is $41,850, which is a gain of 2.8 percent from a year ago.
- As an aside, rising income naturally means more consumption. Interestingly, the language company Rosetta Stone is trying to persuade people to buy not things and stuff but to buy a foreign language as something more lasting and impressive. Despite some concern about an increase use of Spanish language in America, globally the biggest growth is in the English language as this language has in essence become the passport to the world. The real rosetta stone is displayed in the British Museum even though Napoleon and his scientists had discovered it in Egypt. Admiral Nelson simply took it from Napoleon after winning a sea battle.
Home sellers decide to move for many reasons. Using the 2014 Profile of Home Buyers and Sellers, we can discover these reasons as well as some surprising reasons for selling a home.
- While not also the typical reason for selling, 28 percent of REALTOR® respondents have at least once had to sell a house or find a new home for a seller who was convinced that their house was haunted.
- Among all home sellers, 15 percent decided to sell their current home because it was too small.
- Fifteen percent of sellers also sold their homes because of job relocation.
- The desire to move closer to friends and family was the deciding factor for 14 percent of home sellers.
- All at 10 percent, the neighborhood becoming less desirable, a change in family situation, or that the home is too large were all primary reasons for selling.
- First-time sellers sold because their current home was too small, for job relocation, and because the neighborhood became less desirable more than any other group of sellers.
- Repeat sellers sold to move closer to friends and family, because their home is too large, or for retirement at a higher rate than any other seller group.
- There is no consistency to be found with the GDP. After a solid showing in the second quarter, the third quarter performance fizzled. The housing sector is one of the few bright spots and consequently is holding up the economy from slipping into a recession.
- Specifically, Gross Domestic Product (GDP) grew by only 1.5 percent in the first reading of the third quarter performance. It will get revised as more data trickles in. But assuming this figure is reasonably accurate, it is a disappointing underperformance. At times the economy shows a spark of fast growth like in the prior quarter when GDP grew by 3.9 percent. However, the problem has been inconsistency. Across four straight quarters, GDP has been below the historical average growth of 3 percent for 10 straight years.
- The residential real estate’s contribution to the economy grew more solidly, expanding by 6 percent. With much more room to grow for new home construction and home sales, this sector will be the main savior for the economy. Homeowners furthermore have been accumulating equity from rising home values and will therefore have greater confidence to raise consumer spending.
- As for other sectors, commercial real estate was mildly negative, implying not enough new construction for office, retail, warehouse, and other commercial buildings. Vacancy rates will surely fall and rents will rise as a result. Overall, business spending remains soft. Federal non-defense spending rose, while defense expenditure fell. Imports and exports both grew by a tad and had little net impact on economic growth.
- A hypothetical situation versus reality reveals that the economy is short by $1.7 trillion or by $5,000 per person. The hypothetical is what the economy would be had it grown at just the historical normal rate of 3 percent. This missing $5,000 may be one of the contributing factors behind why some people are fed up with Washington politics and turning to extremes. Donald Trump and Bernie Sanders are likely beneficiaries of this unease and are getting huge turnouts at their political events.
Market conditions vary across local markets and states, but REALTORS® generally reported improved housing market conditions in September 2015 compared to a year ago, according to the September 2015 REALTORS® Confidence Index survey report.
Compared to August 2015, REALTORS® reported a seasonal slowdown which is normal at this time of the year. The REALTORS® Confidence Index – Current Conditions chart below shows that single-family homes index was 61, a level consistent with more respondents citing “strong” market conditions. The current reading was better than one year ago in spite of the slip from last month (66 in August 2015; 51 in September 2014). The indices for townhomes and condominiums were both up from a year ago; however, they were both below 50. An index reading below 50 indicates that more respondents viewed their markets as “weak” rather than “strong” or “moderate.”
REALTORS® continued to report on the difficulty of obtaining financing for condominium unit purchases because many condominiums are not FHA or GSE eligible. Sustained job growth and low interest rates, with the 30-year fixed mortgage rate back to less than four percent in September, were reported to be sustaining demand.
 Respondents were asked “How would you describe the past month’s housing market in the neighborhood(s) or area(s) where you make most of your sales?”
 FHA and the GSEs have financing eligibility criteria relating to ownership occupancy requirements, delinquent dues, project approval process, and use for commercial space. See the Statement of the National Association of REALTORS® Submitted for the Record to the Senate Committee on Banking Housing and Urban Affairs on December 9, 2014 at http://www.ksefocus.com/billdatabase/clientfiles/172/1/2180.pdf
Local market conditions vary, but REALTORS® remained by and large “strongly” confident about the outlook over the next six months for single-family homes, according to the September 2015 REALTORS® Confidence Index survey report. The following maps show the REALTORS® Confidence Index – Six-Month Outlook across property types by state.
The outlook for single-family homes was broadly “strong” across most states and was most upbeat in Washington, Oregon, Colorado, and South Dakota. California, Oregon, Washington, Colorado are experiencing strong job growth and population migration, while Texas and North Dakota appear to be resilient amid the fall in oil prices (Map 1).
In the townhomes market, markets were broadly “strong” in the West region and in Florida, Maryland, and the District of Columbia (Map 2).
However, the condominium market remains broadly “weak” in many states, but was strong in California, Oregon, Washington, North Dakota, Colorado, Wyoming, Michigan, Massachusetts, and Florida (Map 3). REALTORS® have reported difficulty in accessing condominium unit purchase financing for both FHA-insured and the GSE-backed loans. Only 20 percent of condominiums are eligible for FHA condominium unit financing because of strict eligibility criteria such as those pertaining to occupancy requirements and delinquency dues.
 Respondents were asked “What are your expectations for the housing market over the next six months compared to the current state of the market in the neighborhood(s) or area(s) where you make most of your sales?”
 The market outlook for each state is based on data for the last three months to increase the observations for each state. Small states such as AK, ND, SD, MT, VT, WY, WV, DE, and D.C., may have less than 30 observations.
Commercial space is heavily concentrated in large buildings, but large buildings are a relatively small number of the overall stock of commercial buildings. In terms of inventory, commercial real estate (CRE) markets are bifurcated, with the majority of buildings (81 percent) being relatively small (SCRE), while the bulk of commercial space (71 percent) is concentrated in larger buildings (LCRE). The bifurcation continues along transaction volumes as well, with deals at the higher end—$2.5 million and above—comprising a large share of investment sales, while transactions at the lower end make up a smaller piece of the pie.
Data are readily available for transactions in excess of $2.5 million from several sources, including Real Capital Analytics (RCA). However, in general, data for smaller transactions—many of which are handled by REALTORS®—are less widely available. NAR’s CRE research offers a window of information for SCRE properties and transactions, mostly valued below $2.5 million.
The latest report from RCA focuses on lending sources in the CRE space. The 2015 landscape is more diversified and balanced than the prior year. CMBS issuers account for 21 percent of the lending market this year, a decline from last year’s 27 percent. Government agencies (Fannie Mae and Freddie Mac) were the second source of funds, by market share, with 18 percent of activity.
Banks have also stepped-up lending for CRE projects, accounting—in aggregate—for 38 percent of market share. While national banks comprised 16 percent of total activity, regional and local banks made up 15 percent of total activity, a significant increase from 2011 when they accounted for only 9 percent of total.
Based on NAR’s 2015 data, the capital picture displays a fundamentally different landscape. Local and regional banks account for 58 percent of REALTORS® CRE market lending. Local and community banks represent over one-in-three lending sources, having gained market share from the prior year, when they made up 30 percent of the market.
Private investors were the third main capital providers, accounting for 11 percent of deals during 2014. National banks came in fourth place, with 7 percent market share. The Small Business Administration and credit unions made up 6 percent and 5 percent, respectively, of transactions. Life insurance companies were much less active in REALTOR® markets, representing 3 percent of deals, while CMBS conduits accounted for only 1 percent of funding, tied with REITs and public companies.
For more information and the full report, access NAR’s Commercial Lending Trends 2015 at http://www.realtor.org/reports/commercial-lending-trends-survey.
Last week, the National Association of REALTORS® reported that homes sold at a 5.55 million unit pace in September and that this was 4.7 percent above the August sales pace and 8.8 percent above the September 2014 sales pace. This figure is seasonally adjusted—to account for fewer sales in winter months like January and greater sales in summer months like June—and at an annual pace—meaning we multiply the resulting number by 12 so that it can easily be compared with the total figure for the year. For example, in 2014, there were 4.94 million homes sold in the calendar year, so we know that this September’s pace is better than 2014
Along with the Seasonally Adjusted Annual Rate data, we also produce an estimate of unadjusted sales. In September 2015, we reported that there were 471,000 home sales across the United States, a figure that was 8.0 percent higher than September 2014 and 6.5 percent lower than August 2015. You’ll notice that the measured increase from September 2014 to September 2015 differs depending on whether we use the adjusted or unadjusted data (8.8 percent versus 8.0 percent). This is mainly because the seasonal adjustment process can result in slightly different seasonal factors from year to year.
So is the 471,000 unadjusted home sales we reported the actual number of homes that sold in September? No; the unadjusted home sales we reported are the best estimate of home sales given our data collection methodology and reporting process. This is a very good estimate of the number of homes sold in the US in September 2015, but like all estimates, it is subject to variation and error.
What are sources of variation in the data? First, there is the issue of rounding. When we report 471,000 home sales, this is a rounded estimate from our data collection process and could mean that the raw number was as low as 470,500 or as high as 471,499. The variation from rounding gives a differential of roughly a quarter percentage point and could sway a growth rate by up to 0.5 percent.
Another source of variation in the home sales data is the sample. While we collect data from hundreds of MLSs and local associations across the country, we only use data from roughly 200 of the most regular data reporters in the panel used to construct the monthly estimates. These reporters account for roughly 40 percent of home sales across the country. If our panel markets have sales trends that mirror the markets in non-panel areas, our estimate will be a solid reflection of the entire market. Alternately, if our panel data varies from non-panel data areas in random ways, our data will be too high some months and too low other months, yet it should be roughly consistent with the entire market over time.
Assuming random sampling error in our sample, the best estimate of a 95 percent confidence interval around the monthly existing home sales estimate is plus or minus 4 percent. When we report 471,000 sales in September, the 95 percent confidence interval for the count of home sales in September is in the range of 452,000 to 490,000 (452,160 to 489,840 before rounding. More generally, in repeated random samples of home sales, the confidence interval would contain the true count of home sales 95 percent of the time). This also means that we can be quite certain that sales in September 2015 were higher than sales in September 2014, and the true rate of increase likely fell between 3.7 percent and 12.4 percent.
If you look, you’ll find confidence intervals around all kinds of data. They don’t often garner much attention, but they provide useful information. One reason why analysts sometime focus more on building permits than on housing starts or completions as an indicator of construction is that the building permits survey has a much narrower confidence interval than either of the other two construction indicators.Monthly Change in Recent Point Estimate Confidence Interval Source New Home Sales -11.5% +/- 11.3%* https://www.census.gov/construction/nrs/pdf/newressales.pdf Total Nonfarm Employment +142,000 +/- 105,000* http://www.bls.gov/news.release/empsit.tn.htm
http://www.bls.gov/news.release/empsit.nr0.htm Building Permits +5.0% +/- 1.4%* http://www.census.gov/construction/nrc/pdf/newresconst.pdf Housing Starts +6.5% +/- 16.4%* http://www.census.gov/construction/nrc/pdf/newresconst.pdf Housing Completions +7.5% +/- 13.6%* http://www.census.gov/construction/nrc/pdf/newresconst.pdf
*Indicates 90 percent confidence interval
Climate change will be one of the key issues in the 2016 presidential elections. Based on prior studies, climate in a given location influences people’s housing decisions, and changes in climate may affect these decisions in ways that alter our understanding of desirable locations. Climate change results in a variety of physical effects including changes in temperature, precipitation, and extreme events such as flooding and hurricanes. Let’s see how temperature and housing prices changed since the last pre – election period in 82 metro areas. Please keep in mind that a four year change in temperature could have been influenced by multiple factors, both man-made and natural.
Temperature rose in most of the metro areas studied. Among these 82 metro areas, 34% had a modest increase (up to 30F) while temperature increased between 40F to 80F in 43% of them. Los Angeles-Long Beach-Santa Ana, CA and San Diego-Carlsbad-San Marcos, CA were two metro areas on the list with the highest increase in temperature between September 2011 and September 2015. In contrast, the temperature in Spokane, WA and Boise City – Nampa, ID fell by 50F in the same period.
The top 5 metro areas with the highest increase of temperature:
- Chicago-Joliet-Naperville, IL-IN-WI
- Des Moines-West Des Moines, IA
- Los Angeles-Long Beach-Santa Ana, CA
- Omaha-Council Bluffs, NE-IA
- San Diego-Carlsbad-San Marcos, CA
Top 5 metro areas with the highest decrease of temperature:
- Boise City-Nampa, ID
- Spokane, WA
- Portland-Vancouver-Hillsboro, OR-WA
- Houston-Sugar Land-Baytown, TX
- Phoenix-Mesa-Glendale, AZ
When it comes to places to live, Americans like it to be warmer. Comparing housing prices in the second quarter of 2011 with 2015, we see that people prefer a hotter place to live over one with colder climate. Cape Coral-Fort Myers, FL, Phoenix-Mesa-Glendale, AZ, Las Vegas-Paradise, NV, Orlando-Kissimmee-Sanford, FL and North Port-Bradenton-Sarasota, FL ranked at the top of places with the highest gains in housing prices.
Does this mean that temperature changes affect housing prices as well? Based on our data, metro areas with the highest gains in housing prices (50% and more) typically had a small increase in temperature (up to 20F) since last pre–election period. For example, in Atlanta-Sandy Springs-Marietta, GA the temperature increased 10F while house prices increased 78%. Also, in Cape Coral-Fort Myers, FL where the temperature dropped 10F, prices increased 91%. Nevertheless, metro areas where temperature rose more than 30F did not experience significant price gains. For instance, in Little Rock-North Little Rock-Conway, AR the temperature rose 60F while prices increased 7%. Thus, there seems to be a negative relationship between temperature change and housing prices.
But, correlation does not imply causation. In other words, the above negative correlation between temperature change and housing price does not necessarily imply that an increase of temperature will cause housing prices to fall. The above model does not take into account other factors which may affect people’s decisions and which may have been changing in different ways over the study period. Factors such as good schools, shorter commute etc. may influence where households choose to live and work. Also, housing recovery may be another factor which affected prices. For example, prices fell sharply in the sand states (FL, AZ, NV, GA) due to the high foreclosure rate, thus their recent sharp price increases seem to be a bounce.
 Gyourko, J and J Tracy (1991). The structure of local public finance and the quality of life.
Journal of Political Economy, 99, 774–806.
Albouy, D, W Graf, R Kellogg and H Wolff (2013). Climate Amenities, Climate Change, and
American Quality of Life. Working Paper 18925, National Bureau of Economic Research,
- New home sales plunged in the past month to the slowest pace of the year. Despite the monthly decline, the year-to-date sales were up by 18 percent. Based on housing permit issuance trends, new home sales are likely to turn upwards in upcoming months.
- In September, new home sales—after accounting for seasonal factors—fell to 468,000 annualized units. New homes sales account for less than 10 percent of the total home sales market at the moment, and so is a much smaller player compared to existing home sales. Yet the pace of new home sales will determine the eagerness of homebuilders to get back into market. From a broad market point of view, more homebuilding is needed in America to tame home price growth.
- There was pullback in every region. The Northeast region took the biggest dive with sales collapsing 62 percent from the prior month.
- Homebuilders are still indicating very little trouble in selling newly constructed property. It took on average only 3.3 months to find a buyer, which is almost a historically fast pace. The reason for fewer home sales is due to not very much new home production. Local authorities need to issue more housing permits. The data suggests they are, so it appears only a matter of time before more new homes will be constructed and sold.
- Homebuilders are catering to the high-end buyers as evidenced by high prices on the homes sold. The median price of newly constructed homes was $296,900. The current premium of new home prices over existing home prices is 33 percent. That is roughly double the average premium gap between new and existing home prices over the past 30 years. This focus on the high-end is also contributing to the constraint of first-time homebuyers in reaching the market.
- NAR released a summary of existing-home sales data showing that the housing market continues to recover as September’s existing-home sales reach the 5.55 million seasonally adjusted annual rate. September marks 12 consecutive months of year over year gains, and sales are up 8.8 percent from a year ago.
- The national median existing-home price for all housing types was $221,900 in September, up 6.1 percent from a year ago, September 2014.
- Regionally, all four regions showed growth in prices from a year ago. The West had the largest gain at 8.0 percent while the Northeast had the smallest gain at 4.0 percent from last September.
- From August, all regions had an increase in sales. The Northeast had the biggest increase at 8.6 percent while the Midwest had a modest increase of 2.3 percent. All regions showed solid gains in sales from a year ago. The Midwest had the biggest increase of 12 percent while the South had the smallest gain of 5.7 percent. The South leads all regions in percentage of national sales at 39.8 percent while the Northeast has the smallest share at 13.7 percent.
- September’s inventory figure decreased 2.6 percent from last month and is also down 3.1 percent from a year ago. It will take 4.8 months to move the current level of inventory at the current sales pace. It takes approximately 49 days for a home to go from listing to a contract in the current housing market compared to 56 days a year ago.
- Single family sales increased 5.3 percent while condos were flat compared to last month. Single family home sales increased 9.6 percent and condo sales are up 3.3 percent from a year ago. Both single family and condos had an increase in price with single family up 6.6 percent and condos up modestly at 1.9 percent from a year ago, September 2014.
At the national level, housing affordability is down from a year ago, but up for the month of August as both home prices and mortgage rates came down while incomes grew slightly above 2 percent.
•Housing affordability is down from a year ago in August as the median price for a single family home in the U.S. is up from a year ago. Regionally, the West had the biggest increase in price at 10.0 percent while the Northeast experienced the slowest price growth at 4.4 percent. The Midwest and the South both contributed solid price gains of 7.2 percent.
•The median single-family home price is $230,200 up 5.1 percent from August 2014. August’s mortgage rate is 4.15, down 9 basis points (one percentage point equals 100 basis points) from last year. Nationally, affordability is down from 160.0 in August 2014 to 157.7 in August 2015.
•Affordability is up from one month ago in all regions, and the South had the largest jump of 3.0 percent while the Northeast rose only 1.2 percent. From one year ago, affordability is down in all regions. The West saw the biggest decline in affordability at 2.9 percent and the Midwest had the smallest decline of 0.7 percent.
•Despite month to month changes, the most affordable region is the Midwest where the index is 198.0. The index is 166.1 in the South, 153.4 in the Northeast, and 117.2 in the West.
•Rents are still rising and are currently at a seven year high. The new rules on lending disclosure known as TRID or “Know Before You Owe” could slow down the process of obtaining a loan and may cause consumers to need more time between contract singing and closing. This could also mean a need for longer rate-lock periods, which could be more expensive. Realtors can help clients by learning about the regulations, managing client expectations, and working with clients to get paperwork turned in earlier. Recent data shows mortgage applications are currently up and monthly figures remain solid. Purchasing a home is still viewed as a standard means of building wealth and long-term gains should remain in the mind of renters.
•What does housing affordability look like in your market? View the data 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.
U.S. housing prices have rebounded strong in the U.S. since the housing collapse in 2006. How does the U.S. recovery compare with other countries? And what is the impact of the collapse of oil prices and slower Chinese economic growth on the ongoing recovery of the U.S. housing market? This was the topic of discussion at a recent REALTOR® University Speaker Series, with Dr. Alessandro Rebucci, Assistant Professor of the John Carey Business School as speaker.
According to Dr. Rebucci, U.S. average house prices have increased fairly relative to national income from their 2010 levels compared to what has been happening in other countries (see Chart 1 below). Using the house price-to-income as indicator, he noted that prices have risen faster than income in countries such as Germany, Switzerland, the United Kingdom, Canada, and Australia. So the increase in U.S. house prices after the housing downturn has actually been more moderate compared to the recovery in other countries.
Regarding the impact of oil prices on housing prices, Dr. Rebucci stated that his analysis of past oil price collapses does not indicate that the current low oil prices will lead to a broad collapse of housing prices as well. Falling oil prices only lead to falling house prices if the oil prices decline is triggered by a recession. Even in states like Texas, there is no evidence of an association between oil price declines and falls in house prices in excess of the national average. He noted also that the oil price decline this time around arose from excess global supply rather than a demand collapse, although the impact might be felt on house prices at the community level where gas shale production is concentrated.
Regarding the Chinese housing market and its economy, Dr. Rebucci cited recent NBER research showing that house price appreciation is out of line with fundamentals only in China’s Tier 1 cities such as Beijing, Shanghai, Guangzhou, and Shenzen. Meanwhile, house prices increased in line with fundamentals in Tier 2 and in especially less liquid markets in Tier 3 cities. If the housing bubble in the Tier 1 cities does burst and house prices fall, Dr. Rebucci expects the U.S. market might benefit because of the possible inflow of capital to the U.S., under progressively more liberal regulation governing international capital flows to and from China.
Dr. Alessandro Rebucci is Assistant Professor at the Johns Hopkins Carey Business School, E. St. John Real Estate Program. He held various research positions at the International Monetary Fund and at the Inter-American Development Bank. He can be reached at email@example.com.
 The REALTOR® University Speaker Series was held on October 19, 2015 at the NAR Washington Office.
 An index lower than 100 means house prices are increasing less than income, while an index greater than 100 means housing prices are rising faster than incomes, making a house purchase more unaffordable. The index is an indicator of changes in prices and incomes compared to a base year. In terms of levels, it is possible that house prices are in fact “ too high” or “unaffordable” relative to the level of income.
 National Bureau of Economic Research
The differences between buying and renting are massive. According to the Federal Reserve, a typical homeowner’s net worth was $195,400, while that of renter’s was $5,400. The data reflects 2013 and the next survey of household finances, which is conducted every three years, will be out in 2016. Based on what has happened since 2013 and projecting a conservative assumption of what could happen next year to home prices if we see only 3% price growth, the wealth gap between homeowners and renters will widen even further. The Fed is likely to show a figure of $225,000 to $230,000 in median net worth for homeowners in 2016 and around $5,000 for renters. That is, a typical homeowner will be ahead of a typical renter by a multiple of 45 on a lifetime financial achievement scale.
Return or boomerang buyers have grown in numbers in recent years. Forecasts indicate that these former homeowners who experienced a foreclosure or short sale will return to the market in greater volume in the years ahead. However, lack of knowledge about special financing programs or lender overlays are hampering this group’s return.
Several factors could hinder a boomerang buyer’s ability to purchase another home including an impared credit score, a weak job situation, or a family matter. Mandatory waiting periods for financing through the FHA, VA, or the GSEs also impact return buyers. As depicted below, the FHA, VA, and GSEs restrict acces to credit following a foreclosure for a minimum of 3, 2 or 7 years (bottom left), respectively, though the GSEs are more lenient for a short sale.
However, if the consumer can prove that they lost their home due to a decline of income, loss of employment or some family situations they may be eligible for the extenuating circumstances criteria. Consumers eligible for this program may be be able to attain financing in as little as a year through the FHA or VA programs (above right).
The chart above depicts the distribution of years in which the foreclosures or short sales took place for return buyers who purchased their subsequent home in 2014. The data is also displayed by the type of financing used. Because each financing program has a standard and extenuating circumstances option, one would expect to find two concentrations of buyers in each distribution: one around the standard time frame and another near the extenuating circumstances opportunity. This two-hump or bicameral pattern is evident in the conventional (green), but not for the VA (red) and FHA (blue). The difference in timing for the VA program is minimal and may result in the single hump. However, there is only one peak in the FHA’s distribution as well and it is higher or more concentrated than the other two distributions. Furthermore this point is four years prior to 2014, suggesting that the bulk of return buyers who use the FHA’s program are waiting three years and not taking advantage of the shorter extenuating circumstances option. Likewise, the VA distribution is most concentrated three years prior to re-purchase, aligning with the two year wait under the VA’s standard foreclosure definition.
There are four potential reasons for borrowers not taking advantage of the shorter waiting period of the extenuating circumstances program at the VA and FHA:
- Consumers are not aware of the program,
- FHA and VA customers do not qualify for the extenuating circumstances,
- Lenders are not aware or do not offer the program, or
- Overlays are having an impact on this group’s ability to credit qualify for the program
Unfortunately, we cannot measure consumers’ awareness of the FHA’s program from this survey nor can we measure these consumers’ credit scores. Survey work by the FHA indicates that the majority of former homeowners who were financed by the FHA and experienced a foreclosure or short sale would have qualified for extenuating circumstances, but this does not necessarily imply that they would choose FHA financing again as pricing was higher for the FHA than conventional in 2014. However, these consumers’ initial choice of FHA suggests that they are either credit, capital or capacity constrained and would likely choose this program again. Finally, a review of several lenders’ product offerings suggests that many lenders do not offer the shorter option for FHA and VA products. Furthermore, because this group’s credit scores are impacted by distress sales which can take years to recover, well documented credit overlays on FHA production could be having a disproportionate impact. While not definitive, the latter two issues may be constraining this group.
From 2006 to 2014 nearly 9.3 million homes were foreclosure on or short sold. Homebuyers who experienced a short sale or foreclosure are returning to the market in growing numbers and will continue to do so over the next decade. While financing channels have expanded to provide opportunities for these potential return buyers, limitations persist.
 Special thanks to Brandi Snowden for preparing these cut of the 2014 Profile of Home Buyers and Sellers
 Ability to recover credit score and build down payment as well as the blend of foreclosures and short sellers may spread re-entry around these points.
 This may be different for owners who used VA or conventional financing on their initial purchase
 See Scotsman Guide’s FHA/VA/Government matrix for September or October of 2015
 For additional details on time to recover credit scores see http://economistsoutlook.blogs.realtor.org/2015/04/17/return-buyers-many-already-here-many-more-to-come/
- Though the headline shows no inflation, rents are now rising at the fastest pace in 7 years. Moreover egg prices are up 37 percent from one year ago. The lower gasoline prices are in essence masking much of inflationary pressures from other items.
- The overall consumer inflation fell 0.2 percent over the month in September and was unchanged from one year ago. As a result, social security checks in 2016 will see no cost-of-living-adjustment.
- The Federal Reserve in deciding on monetary policy is more concerned with the “core inflation” and not the headline inflation. The “core” – after taking out the volatile impact of large swings in energy and food prices – rose by 1.9 percent from one year ago. If it crosses the 2 percent line then the Fed will itch to raise rates. As long as rents rise, and they will given the 30-year low rental vacancy rates, the “core inflation” will trend higher. The Fed rate hike is therefore certain though the first rate hike could be delayed till December or early next year. In addition, the second and third rate hikes will occur later in 2016.
- Renters’ rent rose by 3.7 percent, the highest pace since 2008. Homeowners’ equivalence rent (a hypothetical rent a homeowner would pay if the house was rented) rose by 3.1 percent, the highest pace since 2007. There is a housing shortage and these rent components will continue to rise for the foreseeable future because of falling vacancy rates.
- For seniors on social security who are not homeowners and do not drive that much will get hurt next year from higher rents, higher food prices, higher medical fees, and higher public transportation costs. Prices are lower for clothes and electronic equipment, but seniors do not purchase many of these items.
- Applications for purchase mortgages tumbled 34.1 percent for the week ending October 9th after surging 27.4 percent in the prior week, but the 4-week moving average remains strong. The new TILA RESPA Integrated Documentation (TRID) closing documents and process also known as the Know Before You Owe rule was introduced on October 3rd. Consequently the boom and bust pattern reflects applications that were filed early to avoid complications with the new rule and the subsequent slump.
- This regulation streamlines many of the current closing docs and includes new features intended to make the consumer more aware of their true financial burden.
- While both components fell sharply from a week earlier, the conventional applications portion declined slightly more than government applications (pictured above). However, the full index was down only 1.2% from a year ago, the first year-over-year decline in the seasonally adjusted index since January 2015. If demand had not been pulled forward into the prior week’s reading, this week’s reading likely would have been much stronger than a year earlier. The 4-week moving average, a means of smoothing this weekly volatility, declined just 3.1 percent from the prior week, but is up 23.4 percent from the same time a year ago, roughly the same as it was for the prior month.
- The average rate for a 30-year fixed mortgage was unchanged from a week earlier at 3.99 percent, but was 21 basis points lower than the same time a year earlier.
- This week’s decline is likely to abate in the weeks ahead, but the pattern may remain choppy as originators wrestle with the new regulatory environment.
- In the long term, the rule should help to make the process a more transparent process for consumers. Luckily the change was timed for the fall, a slower period, the Consumer financial Protection Bureau has signaled its intention to hold lenders harmless so long as they perform a “best effort” to comply in the near term.
- Some lenders may be better prepared for the changes than others. Consumers and Realtors should shop a variety of lenders and ask their Realtors for their experiences with various lenders in the TRID environment. The closing process may take longer and as a result could cost slightly more for longer rate locks. A savvy lender could help to smooth the process.
Join us for our next Real Insight Twitter chat this Friday, Oct. 16, at 3 pm EST on technology use in the home buying process. We will be discussing how home buyers use technology to research and identify properties as well as how they connect with and ultimately choose their REALTOR®.
We will be co-hosting this chat with Lauren Mitrick, an award-winning Realtor for Chicago-based Newman Realty. Lauren’s been recognized as a “30 Under 30” Realtor by Forbes, REALTOR® Magazine and the NAR Young Professionals Network. Follow her on Twitter at @laurenmitrick.
Lauren will be joined by an esteemed panel of current and recent homebuyers:
Lexie Kier, Managing Director of LaterPay USA, a micropayment company for digital content, and Founder at Cuurio, an index for tech startups and a partnership platform for brands, is currently going through the process of buying a new home. Follow her on Twitter at @a0k.
A recent Chapel Hill, N.C. transplant with her husband and two daughters, Beth Torrie is VP of Strategic Engagement at Sitecore, an enterprise content management platform. Beth has 20 years of experience leading marketing and communications programs for innovative software companies. Follow her on Twitter at @bethtorrie.
Follow the #RealInsightChat hashtag on Twitter to stay connected to the conversation. We encourage you to ask your own questions and participate in the chat, just don’t forget to use the hashtag!
We hope you can make it!
- Good News: 47 states have created jobs over the past 12 months. Utah is leading the way with a 4 percent job growth rate. The Pacific Ocean states of Oregon and Washington are right behind. Florida and Nevada round out the top-five. Naturally, these states are seeing solid demand for home buying and for commercial real estate leasing activity.
- Bad News: Though jobs are positive, nearly all states lost momentum. The job creation to August were slightly weaker compared to July in 41 states. Only 9 states had a stronger pick-up. For example, Texas had created 278,000 net new jobs in the 12-months to July; but then slipped to a fewer 212,000 to August.
- Ugly News: There are fewer jobs this August compared to one year ago in West Virginia, Alaska, and North Dakota. Lower oil prices are leading to fewer drillings and coal miners are very unhappy about the current state of its industry. Fewer jobs will mean lower demand for real estate.
- At the metro level, some cities continue to fly high. Here are markets with 3.5 percent or better job growth rate:
- Job creations are all fine and welcomed. But inadequate new construction in relation to jobs will lead to real estate prices shooting up too high, too fast, and thereby divide the community between the haves and have-nots. Social tensions are evident in Silicon Valley where fresh job takers in Facebook, Google, and Apple forcing off long-time residents who are renters to move away. It is these types of perceived economic injustice as to why Bernie Sanders can tap into their anger even though successes of high tech companies are good for the country. Broadly speaking, there are too many cities where new home construction is lagging behind in relation to job gains. Though the solution is simple of issuing more housing construction permits by local authorities, this will not occur. Therefore, expect even more angry renters over time.