- Agricultural land prices, after several years of double-digit rates of appreciation, look to fall in the upcoming months because corn prices have been on the decline. Less ‘dividend’ from the land means lower price of that underlying asset.
- The cash price of corn from Central Illinois has essentially been cut in half, from $8 per bushel to now $4. With the forecast of even more supply of bumper crops later in the year, the price of corn could fall even farther.
- Agricultural land prices suffered greatly in the early 1980s when two bad things occurred simultaneously: the price of corn measurably fell and interest rates rose sharply. Many farmers heavily suffered as they could not generate enough revenue to pay off interest on borrowed money.
- This time around, the lower corn prices will have a negative impact. But the borrowing level among farmers has been much more moderate. Moreover, interest rates still remain near historic lows. Therefore, any decline in land prices will be modest and not like the 1980s. Most farmers will be able to absorb some decline in land prices without facing financial problems.
- Because corn is not only used for human consumption but also for live stock feed, some of the strong increases in meat prices that we have witnessed in the past year are likely coming to an end. Beef prices may not fall back down to levels of one year ago, but they will no longer further increase.
- Unlike the days of open-range cooking by the cowboys, beef consumption growth in the U.S. has markedly slowed because of changing tastes and due to increased health-consciousness. But beef consumption is booming in Asia, particularly in China and Korea, in line with their income growth. Even in Japan, where beef and other blood-soaked products of work animals had once been considered as the food for poor people, taste buds have gravitated towards massaged cow from the Kobe region. It is the Asians that will keep the beef prices from falling. (Conversely, it is the Americans that will keep the sushi prices from falling.)
The mortgage market was buffeted by a number of changes in 2013 and 2014 among them higher fees at the FHA and changes to underwriting as required by the Ability- to-Repay and Qualified Mortgage Rules. This survey queries a sample of mortgage lenders about the impact of the QM rule three months after implementation in addition to questions about the impact of changes to the FHA program.
Highlights of the Survey
- Non-QM lending accounted for 1.6% of production by respondents in this sample and 8.3% were rebuttable presumption.
- An encouraging 73.7% of respondents indicated that they had fully adapted to the new rules, well ahead of expectations reported by respondents in the January survey.
- Investor preferences are important. 68.4% of respondents indicated that they did not produce non-QM loans based on investors’ preferences and a surprisingly highly 50% indicated a reluctance by investors to purchase rebuttable presumption QM loans.
- Non-QM lending was restricted to high balance and/or high quality lending.
- Since January 10th, nearly half of respondents indicated they had some issue closing a loan due to the ATR/QM rule.
- For loans that did not meet the 3% cap on points and fees, the most cited method for handling them was to reduce the fees, but second was not to originate the loan. Financing fees was the least frequent response.
- Roughly half of respondents did no use buffers ahead of the 3% cap, 43% DTI, or rebuttable presumption boundary, and 5.3% eliminated them in the three months since inception. Buy-back risk and inability to discover all information about the consumer’s ability to repay the loan were the most often cited reasons for the use of buffers.
- The vast majority, 73.7% of originators have adapted to the rules, but 22.2% of respondents indicated that they would not phase out buffers on QM safe harbor and rebuttable presumption parameters even once they are fully adapted.
- FHA’s premium increases for its mortgage insurance since 2010 and permanent MI policy have undermined an average of 5.7% potential purchases where the consumer could not afford FHA’s fees or conventional financing.
- In most cases, a consumer faced with the higher fees chose to put off the home purchase or were able to qualify for VA or a RHS loan. Conventional financing was cited nearly half as often as an option and originators indicated that it is decidedly more difficult to get financing in the conventional space for a borrower with a higher LTV or lower FICO.
- Finally, roughly 10.5% of originators indicated that the FHA’s 100% mortgage insurance guarantee was not important for lending to high LTV or low FICO borrowers, while 26.3% indicated that they would not lend without it. An additional 57.9% indicated that it was important to different degrees and 5.3% were uncertain.
The Qualified Mortgage Rule and Its Impact
On Friday, January 10th, 2014, the requirements of the ability to repay and qualified mortgage (QM) rule went into effect. The Dodd-Frank act requires that originators make a good faith effort to verify a borrower’s ability to repay their mortgage and imposes stiff penalties if they do not. The QM rule allows for varying degrees of assumed compliance with the ability to repay rule, which is advantageous to lenders as it allows them to minimize and to budget for potential penalties and litigation expenses. All mortgage applications received on or after January 10th are required to comply with the ATR/ QM rule which includes full documentation of income, assets and employment, a maximum of 3% for points and fees, a cap of 43% on the back-end debt-to-income ratio, and limitations on the type of mortgage products that qualify and prepayment penalties among other requirements. 
NAR’s first Survey of Mortgage Originators queried originators about their expectations in the QM/ATR environment and their business plans. This second survey is a follow-up that sheds light on the actual behavior of originators in the QM/ATR environment and the impact to the purchase market.
Respondents indicated an average origination share of 1.6% for non-QM loans and 8.3% for rebuttable presumption mortgages. The vast majority of mortgages were safe harbor QM. The low share of non-QM loans is in part due to the preponderance of mortgage banks and credit unions in this sample who have limited portfolio options to hold non-QM loans.
Respondents indicated having adapted to the regulations faster than anticipated in the January survey. In the April survey, 73.7% of respondents indicated being adapted to the new regulations as opposed to just 16.7% in the January survey with an additional 44.4% having anticipated being compliant by April.
When asked how they treat non-QM, 68.4% indicated that they do not offer non-QM loans based on investor’s requirements, but 52% did not offer them based on firm policy. Only 5.3% treated non-QMs the same as safe harbor QMs, the same share that hold them in portfolio. Originators were much more willing to produce rebuttable presumption loans with just 22.2% having a firm policy against them, but half of respondents indicated no demand from investors for this product. This difference in treatment of rebuttable presumption loans between originators and investors might speak to the difference in credit risk and buy-back risk these loans pose versus salability in the secondary market for pooling. Finally, only 22.2% indicated that they treated rebuttable presumption and safe harbor QM loans the same.
Respondents were asked to rate their willingness to originate mortgages with different characteristics that fit into either the rebuttable presumption or non-QM definitions in 2014 as compared to 2013. The initial three characteristics defined non-QM loans based on product features to which respondents indicated a high degree of reluctance to originate. The next group of four characteristics dealt with mortgages that were slightly over a QM boundary. Respondents indicated an increased willingness to originate mortgages with back-end DTIs between 43.1% and 45%, but no higher and the 3% cap on points and fees is a much firmer boundary. The next group of characteristics dealt with willingness to originate non-QM mortgages with different credit profiles. Not surprisingly, reluctance to lend in this space diminished as the borrower’s credit profile improved with 10.5% of respondents even indicating that they were “more likely” to originate a non-QM mortgage to a borrower with a FICO greater than or equal to 720. Respondents expressed much less reluctance to originated rebuttable presumption loans than non-QM, but only 5.3% indicated they were “more likely” to originate these products. The reluctance toward rebuttable presumption loans, which often reflects the divide between strong and lesser credit quality, may reflect tight current overlays around credit or it might hint at a feature of the QM rule that would inhibit an expansion of credit in the future if investors are reluctant to purchase rebuttable presumption loans.
Nearly half of respondents, 47.4%, indicated that they had had some issue closing a loan since January 10th due to a requirement of the QM rule.
For loans with points and fees greater than 3%, the method cited most frequently by respondents to achieve compliance was to reduce the fee charged at 41.6%, but on average 21.3% of applications with points and fees greater than 3% were not originated and outsourcing of fees was used for an average of 18.9% of origination. Surprisingly, increasing the rate on the loan to finance charges was the least often cited option at 7.6% of the time.
When asked about the impact of outsourcing affiliated services like title insurance, only 12.5% of respondents indicated that these fees were the same as in-house rates. Nearly half of respondents, 43.8%, indicated that the outsourced fees were higher.
Some lenders have opted for buffers ahead of the QM parameters. The use of buffers was most common on the 3% cap with 28.6% of respondents employing one. 20% of respondents had a buffer ahead of the 43% maximum back-end DTI ratio and 18% for the boundary between safe harbor and rebuttable presumption QM.
When asked their rational(s) for using a buffer, 44.4% indicated concern over buy-back risk followed by “concern over ability to discover all aspects of the borrower’s ability to repay” at 38.9%. “No portfolio” was not an issue for this sample and only 16.7% of the sample indicated litigation costs as a driver.
As discussed earlier, nearly a third of respondents had not adapted to the QM rule by April of 2014. Once adapted, 22.2% intend to maintain their buffers, while only 5.6% will eliminate them.
The FHA Lending Environment
The FHA’s role increased dramatically in recent years and the agency now supports a large portion of the purchase market. In this second survey of originators, respondents were asked a series of questions about recent changes to FHA policy and facets of the program that impact the originators’ business decisions.
Since 2010, the FHA has increased the rates it charges for mortgage insurance. On average, respondents indicated 5.7% of originations were lost because of the increase in FHA fees. The distribution clustered between a response of 1.1% to 2.0% and 6.1% to 7.0%.
When asked how consumers impacted by the increase in mortgage insurance rates responded to the higher costs, 68.4% of originators indicated that they had a client(s) who chose not to buy or to put off buying to a later date. Nearly as many originators found that their client(s) were able to find funding through VA and RHS, but only 42.1% cited having success shifting their client(s) to conventional financing with private mortgage insurance. Only 15.8% of originators cited that a client(s) could absorb the costs while 10.5% indicated that they had a client(s) who waited to save for a larger down payment.
Local FHA loan limits were lowered in many markets in in 2014. Further reductions were discussed in policy circles, but have not been acted upon. Survey participants were asked about access to credit for borrowers with profiles similar to FHA borrowers if limits are reduced. All groups would face a reduction in access to credit, but borrowers with down payments less than 5% or FICO scores below 680 would be most impacted. 88.2% of respondents indicated that a borrower with a FICO score from 620 to 679 was either “less likely” or “much less likely” to receive mortgage credit if the FHA loan limits were reduced.
Finally, when asked how important the FHA’s 100% mortgage insurance coverage is for originators to make loans with the low down payment, high DTI, or low FICO traits common to the FHA’s borrower base, only 10.5% indicated that it does not impact their choice. The majority of 36.8% indicated that it “depends on the loan, but some would not be made without” the full coverage, 21.1% indicated that “most would not be made without it” and 26.3% indicated that they “would not originate these loans without it”.
Appendix A: About the Survey
In April of 2014, NAR Research sent out a survey to a panel of 65 different mortgage originating entities. The survey instrument was sent by email on Monday the 8th of April and closed on Thursday, May 1st. Questions in the survey instrument covered the characteristics of the originators, a subset of questions focused on the qualified mortgage rule, and a set of questions focused on the FHA. There were 19 unique responses to the survey for a response rate of 29.2% and a margin of error of 11.1% at a 95% level of confidence.
Much like the first survey, mortgage bankers dominated the sample, but this sample included a modestly higher share of credit unions. Originator profiles were also similar to the first survey in terms of geographic distribution, purchase share, average annual production volume, and the distribution of destinations/purchasers of the originator’s production.
Questions can be directed to:
Director, Housing Finance and Regional Economics
The National Association of REALTORS®
Kenneth R. Trepeta Esq.
Director – Real Estate Services
National Association of REALTORS®
500 New Jersey Ave, NW
Washington, DC 20001
 For a more in-depth discussion of the new rules see http://www.realtor.org/articles/summary-of-new-qualified-mortgage-qm-rule
Within the wider context of regional economics, geographic mobility allows households to move from one area of the country to another for such things as more attractive job opportunities or better housing options. Over a period of time, movement of households limits the regional disparities of income and unemployment that would occur if moving was less frequent.
The following interactive dashboard lets you visualize Migration and Geographic Mobility data at the national and regional level collected from 2006 through 2013 as part of the Current Population Survey (CPS). Specifically, the visualization compares the percentage of Movers and Non-Movers by year, region and income distribution. The visualization reveals that:
At the National level:
- Since 2006, the number of U.S. Households increased by 7.08% (from 114.4 to 122.5 million) while the number of Movers decreased by 7.58% (from about 15.0 to 13.9 million).
- In 2013 the dominant household income was between $50,000 and $99,000 (29.1%). However, those with income less than $25,000 were more likely to move than those with higher income. This fact may be explained by the differences in homeownership patterns, particularly the higher proportion of renters among households with low incomes.
- Since 2006 there has been a steady increase of households with income of $100,000 or more (Movers and Non Movers). Nevertheless, the range “$100,000 or more” still includes the fewest households of any income categories.
At the Regional level:
- The South has the largest number of Householders and Movers. Eight out of 22 Householders (37.5%) and one out of 22 Movers (4.6%) are located in the South.
- Although the Midwest and the West have the same percentage of Householders (22%), the West experienced a higher level of mobility than the Midwest (3.0% versus 2.3%).
- The Midwest shows the highest percentage of Movers with income “less than $25,000” (37.31% of its Movers) while the West has the highest percentage of Movers with income “$100,000 or more” (17.11% of its Movers).
- $92.2 Billion of purchases sold to foreign buyers, 12 months ending March 2014
- Sales split approximately 50/50 between resident and non-resident foreigners.
- Foreign sales approximately 7 percent of $1.2 Trillion EHS market.
- 28 percent of REALTORS® reported having international clients. Market is a niche market—a relatively few REALTORS® handle many of transactions: e.g., 4% of REALTORS® have 11 or more clients.
- Market fluctuates from year to year substantially; long term market trend is up: 20 percent of REALTORS® report market increasing over past 5 years compared to 6 percent reporting declining.
- Foreign buyers are upscale: Mean purchase price above that paid by domestic buyers.
- Five countries (Canada, China, Mexico, India, U.K.) accounted for 54 percent of foreign sales.
- Four states (Florida, California, Texas, Arizona) accounted for 55 percent of sales to foreigners.
- Foreign purchasers are diverse:
- Trophy properties
- Modest vacation homes
- Rental and investment properties
- Personal residences
- Prices paid cover a wide range: 46 percent less than $250,000; 9% greater than $1 million.
- 60 percent of purchasers paid cash
- Predominantly single family homes, although many condos also sold.
- Reasons for buying: Location (i.e., U.S.), investment, and security of property/legal system.
- Reasons for not buying: Cultural differences, lack of understanding of business and real estate practices, difficulties understanding the U.S. lifestyle, customs, and procedures. (Opportunity for REALTORS® to educate/work with clients to increase understanding).
- To supplement the survey, data obtained from realtor.com® concerning U.S. cities most frequently searched by foreigners over 4/2013 through 3/2014 time frame. Cities ranked as follows: Los Angeles, Miami, Las Vegas, Orlando, New York, Detroit, Houston, Ft. Lauderdale, Chicago, San Diego, Washington, D.C., Atlanta, and San Francisco.
- Canadian Searches: Las Vegas, Detroit, Los Angeles, Ft. Lauderdale, Miami, Orlando, Chicago, Naples.
- Chinese Searches: Los Angeles, San Francisco, Irvine, New York, Las Vegas, Detroit, Seattle, Miami, Orlando, Boston Anderson SC, Chicago, Houston, San Diego
- Nearly 80 percent of the 372 metropolitan areas now have more jobs than one year ago according to the latest government statistics. Job growth has been especially strong in Dallas-Ft. Worth region, Austin, Orlando, and San Jose – all registering a blistering 3.5 percent or better employment growth rate. The housing and the commercial real estate markets will therefore continue to expand.
- At the other end, there were some metro markets with job losses. Detroit, Peoria, Scranton, and Atlantic City have modestly fewer jobs now versus one year ago.
- At the state level, North Dakota has been on top for quite some time. Oil and gas drillings have been a major boon for the state. Nevada, Texas, Florida, and Utah round out the top five. These fast job-creating states are known for low tax state and being business friendly. At the bottom sit Alaska, New Mexico, and Vermont. The full ranking of all the states is shown in the below table.
- California baffles. Though widely perceived as a high tax and anti-business state, the Golden State made it to the top ten. Northern California in particular is booming and new job holders have been bidding up both home values and rents to sky high levels. The reason for the good job numbers is that many innovative new firms are starting out there – possibly because of an easier regulatory burden. Even the government is innovative at times. There is no stopping at a toll booth to cross the Golden Gate Bridge, for example, since automatic photographing of every passing license plate is sufficient. In other words, it is not always the local tax structure that matters but rather the ease of regulation. Entrepreneurs do not mind paying taxes so long as the red tape does not strangle them.
- Data from the Bureau of Labor Statistics (BLS) showed that 288,000 jobs were added to the economy in June, marking the fifth consecutive month of net job growth above 200,000. Upward revisions to April and May data added 29,000 jobs and pushed the 12 month average of jobs added over 200,000 in both May and June. Additionally, the unemployment rate dropped notably from 6.3 to 6.1 percent—its lowest level since September 2008.
- In June, job growth occurred in both the government (+26,000) and private sectors (+262,000). The biggest job gains were in service industries such as the professional and business services (+67,000), retail trade (+40,200), leisure and hospitality (+39,000) and education and health services (+38,000). Goods-producing industries such as manufacturing, construction, and mining added a total of 26,000 jobs.
- On net, private industries have increased payrolls by 2.1 percent from one year ago, but some industries have exceeded this average. Construction employment is up 3.2 percent from a year ago with the subsector of residential construction up 8.3 percent. Professional and tech services have increased by 2.7 percent with several subsectors including architectural and engineering, computer systems design, and consulting services exceeding 3.5 percent growth. Leisure and hospitality jobs are up 2.7 percent. Temporary help services continue to show strong but waning growth, up 8.1 percent in the year. Perhaps another sign of a strong labor market, child day care services employment rose by 3.6 percent for the year. By contrast, federal government employment fell 1.9 percent over the year while state and local government employment grew slightly, by 0.6 percent each.
- The earnings picture was also good. As hours held steady, hourly and weekly earnings rose 2 percent in the past year.
- Digging deeper into the household survey shows more good news. The drop in unemployment rate was caused by the number of employed persons increasing by more than the number of unemployed persons, not by discouraged workers leaving the labor force. The number of discouraged workers not in the labor force is down 350,000 from a year ago and at 676,000 is at the lowest level since December 2008 when there were 642,000 such persons.
- While the labor force participation rate is unchanged from its 36-year low, improvement in the number of marginally attached and discouraged workers suggests this trend could result from demographic rather than economic factors.
- If one were searching for a negative data point in this report, one could note that the number of workers with part-time jobs for economic reasons was up by 275,000 for the month, but this subset of data is quite noisy. Just last month, this figure was down nearly 200,000. From one year ago, the number of persons with part-time jobs for economic reasons is down by 650,000, on the whole a good sign.
- What does this mean for markets? The Fed has moved away from a threshold unemployment rate as an indicator for considering rate increases, but the June employment report was strong across the board. Inflation expectations seem to be well anchored and inflation is, for now, under the 2 percent target, but there is some potential for higher inflation if the recent monthly pace of increase is sustained. It’s widely expected that the FOMC will taper the bulk of asset purchases before increasing rates, suggesting that the first rate increase is still 3 to 4 meetings off—roughly at the end of 2014 or early 2015. However, continued strong economic performance could speed up that timeline.
- Additionally, mortgage rates could move suddenly higher in anticipation of rate increases, much as they did last summer when refinance and transaction activity was high. Steady purchase transaction volume and lower refinance volume could mean that mortgages rates may adjust in a more gradual fashion. In either case, as the economy improves—and today’s data clearly suggests it is improving—the overall trend for mortgage rates is up, not down.
REALTORS® generally expect home prices to increase in all states and the District of Columbia over the next 12 months, according to the May 2014 REALTORS® Confidence Index. The median expected price increase is 4.0 percent (same as in Feb-April 2014) .
Expected price movements depend on local conditions relating to housing demand and supply, demographics, and job growth. The difficulty in accessing mortgage financing and modest expectations about overall economic and job prospects are factors underpinning the modest price expectation. The expected price growth was highest (red) in states with low inventory levels, strong cash sales, and strong growth sectors (e.g., technology, oil).
 The median expected price change is the value such that 50 percent of respondents expect prices to change above this value and 50 percent of respondents expect prices to change below this value. A median expected price change is computed for each state based on the respondents for that state. The graph shows the range of these state median expected price change. To increase sample size, the data is averaged from the last three survey months.
- The housing market is beginning to roar back. Existing home sales have risen for two straight months after suffering declines since the summer months of last year. The pending contracts also show robust gains, implying home sales will further rise over the near term. Also there is sizable pent-up housing demand looking to emerge. The timing is uncertain. But the pent-up demand implies home sales have much room to rise over the next few years.
- Existing home sales rose 4.9 percent in May from the prior month after accounting for normal seasonal factors. (Sales increased 12 percent on a raw count, but the bulk of that increase was due to the normal April to May seasonal upswing that occurs every year.) Now that pending home sales have increased by 6 percent in May, the closing activity is assured to rise further over the next two months.
- One key factor that had held back home sales late last year and early this year was simply lack of inventory. If there are too few homes for sale then only too few homes will get sold. Now inventories are rising, not only on a monthly basis, but also from the same time one year ago. This bodes very well for more consumers getting into the market. One has to also remember that the increase in inventory is not only in pure supply, but many families are putting their home on the market in order to buy their next desired home. That is, the increases in inventory are also a reflection of increases in demand for home buying.
- Newly constructed home sales also have been perking up. In May, new home sales surpassed the 500,000 annualized sales pace for the first time in 6 years. With the quickening pace of new home sales, homebuilders will want to create more dust and construct more new homes. That means more new home inventory on the way.
- When home prices were rising at double-digit rates of appreciation, potential homebuyers naturally paused to wonder: is it a new bubble? Or can I afford these prices? But price appreciation has greatly moderated and is rising at only a few percentage points above wage growth. Therefore, potential homebuyers will no longer face the sticker shock and can now make rational decisions about whether or not it makes sense to buy a home.
- There clearly appears to be large pent-up demand. Comparing current supporting factors for potential home sales with actual home sales show a mismatch. Back in the year 2000, a good reference year for comparison since there was neither bubble nor bust at that time, existing home sales reached over 5 million while new home sales nearly touched 1 million. Today, home sales activity is below that. However, there are 6.5 million additional jobs and 36 million additional people living in the country. Mortgage rates are also markedly lower today. Therefore, potential home sales are measurably larger than what we are observing. Home sales have plenty of room for a further rise.
- The outlook, therefore, is for housing starts and new home sales to rise comfortably this year and the next. Existing home sales, due to a sluggish first quarter, will fall a bit short in annual tally this year, but will show growth in 2015. Home prices will rise, though at a manageable single-digit rate of appreciation over the next two years.
- The economy shrank big time in the first quarter. However, there were many transitory temporary factors that passed through, which will begin to reverse in the upcoming quarters. No recession is on the horizon. The economic expansion, however, will not be remarkable. Still, enough of economic juice and lagged impact on jobs assure that 2 to 2.5 million net new jobs will be created this year and the next.
- GDP contracted by 2.9 percent in the first quarter. It is hard to recall when a recovering economy had such a large one-quarter negative shock. But those negative contributing factors will turn positive in the second quarter.
- Consumer spending was modestly positive, rising 1.0 percent, and will pick up faster in the upcoming quarters. Why? Overall personal income after taxes has been rising at a faster clip of 1.5 percent. A record high stock market valuation and recovering home values are also providing wealth build-up to spend more. The net worth of all Americans combined is at a record high, though the gains are largely going to the top 10 percent of the people who have meaningful exposure to the stock market. With consumers representing a two-third of the economy, the likely acceleration in consumer spending will beef up the overall GDP.
- Business spending (formally known as non-residential fixed investment) was slightly negative, falling 1.2 percent. But business spending is poised to turn higher given record high corporate profits and massive corporate cash sitting on the sidelines. Moreover, businesses massively depleted inventory from the warehouses in the first quarter and now they need to hire people to restock those inventory.
- Both residential and commercial real estate construction spending fell in the first quarter due to the harsh cold winter. But housing starts have already been turning for the better and more construction cranes will go up since vacancy rates have been falling across all commercial buildings.
- Government spending at local, state, and federal levels has not kicked higher even with increased tax revenues. Extra tax revenues rarely sit idle for long. The government is known to spend everything it collects and everything it can get away with. Though one can dispute the efficacy of government spending, at least for the short run, increased spending for local hospitals and for highways lead to job creations and a boost to the economy.
- Exports fell sizably in the first quarter and economists are scratching their heads. It looks to be a fluke. Exports will rise as the growing economies of Britain, China, and India buys more of U.S. products.
- The forecast is for GDP to expand close to 3 percent rate for the remainder of this year and next. The net job additions will be around 2.3 million per year. Inflation will rise close to 2.5 percent this year and then accelerate to 3.5 percent in 2015.
- The uniqueness of the latest GDP figure was related to a massive downward revision to health care spending. There was some confusion on health care spending from the faulty implementation of the Affordable Care Act, which led to a temporary reduction in overall health care spending. Because people get sick and need care within reasonable bounds of actuarial probability, it is very hard to foresee people not spending on health care going forward. That will also boost GDP.
- Aging baby boomers will pressure for greater health care spending in the future. People die of untreatable illness such as cancer every day. Most of us will cry over the news of cancer because of our automatic mental reflex to recall only the happy memories with loved ones. Incredibly, many pre-teen cancer patients rarely display sadness. They seem to enjoy every living day because today and tomorrow are always better than yesterday.
Approximately 32 percent of respondents reported cash sales in May (same as in April), according to the May 2014 REALTORS® Confidence Index . A substantial number of move-up buyers, investors, buyers of second homes, and foreign clients are likely to pay cash. REALTORS® reported that high income earners, especially those working in the technology sector, are paying all-cash. Baby boomers who have accumulated equity gains and are trading down were also reported to be paying cash.
Buyers paying all-cash are reported to be winning over first-time buyers who generally obtain mortgage financing. About 12 percent of reported sales to first-time buyers were cash sales compared to about 70 percent of buyers of property for investment purposes and international buyers.
 The RCI Survey asks about the most recent sale for the month.
- Earlier this week, we examined the FHFA and Case-Shiller releases focusing on national data trends. Today, we’ll dig a bit deeper to look at more local data at the regional and city or MSA level.
- Monthly FHFA releases data at the Census division level and quarterly it releases state and metro area data. Case-Shiller offers data on 20-cities monthly. Both of these sources confirm the trend seen in NAR measures.
- At the regional level, the most robust home price gains from a year ago were in the West. NAR reported a price change of 8.2% from a year earlier in both April and in May in the West. According to FHFA, year-over-year prices in April 2014 rose 10.7 percent in the Pacific division (which includes Hawaii, Alaska, Washington, Oregon, and California) and 7.5 percent in the Mountain division (which includes Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona, and New Mexico).
- Likewise, NAR data showed the smallest price change from a year ago in the Northeast (1.0% decline for the year ending in April and 1.9% decline for the year ending in May), and FHFA showed a similar pattern. Prices rose 3.0 percent in New England (Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut) and 1.7 percent in the Middle Atlantic states (New York, New Jersey, Pennsylvania) from April one year ago.
- Among cities, Case-Shiller reported the biggest year-over-year gains in Las Vegas and San Francisco. Each had more than 18% year-over-year gains. San Diego showed the third strongest year-over-year growth followed closely by Detroit. Each of these cities saw prices rise by 15 percent or more from a year ago. The smallest gains in Case-Shiller’s cities were Cleveland at 2.7 percent, Charlotte at 4.4 percent and New York at 5.4 percent.
Confidence about current market conditions was essentially unchanged in May 2014 compared to April, according to the May 2014 REALTORS® Confidence Index. An index above 50 indicates that more REALTORS® view housing conditions as “strong” compared to those who view it as “moderate” or “weak” .
Confidence about the outlook for the next six months dipped across all markets in May compared to April. Continued tightness in supply (although improving), difficult credit conditions, and the lackluster growth in income and savings were reported to be constraining sales. REALTORS® also commented on the difficulty of obtaining mortgage financing for condominiums which are typically the starter homes for first-time buyers due to FHA approval issues.
 An index of 50 delineates “moderate” conditions and indicates a balance of respondents having “weak”(index=0) and “strong” (index=100) expectations or all respondents having moderate (=50) expectations. The index is calculated as a weighted average using the share of respondents for each index as weights. The index is not adjusted for seasonality effects.
- Yesterday NAR released existing home sales and median home price information that showed gains of 5.1 percent in prices in May 2014 compared to May 2013, the same pace of year over year growth as in April and notably slower than double-digit trends in summer/fall 2013.
- Today, both the FHFA and S&P/Case-Shiller released their housing price index data for April. Both data series showed continued gains in home prices with some deceleration suggesting that the pace of home price increase should fall back into a more normal range in the next few months as NAR data has indicated.
- Case-Shiller reported gains of 10.8 percent each for the 10- and 20-city indexes in the year ending April 2014, while FHFA reported home price gains of 5.9 percent for the same period.
- NAR reports the median price of all homes that have sold while FHFA and Case-Shiller report the results of a weighted repeat-sales index. Because home sales among higher priced properties have been growing more than among lower price tiers, the NAR median price had risen by more than the weighted repeat sales index—which computes price change based on repeat sales of the same property.
- The reason Case-Shiller’s reported price growth now exceeds NAR’s is likely a result of the data lag. Case Shiller uses public records data which has a reporting lag. To deal with the lag, Case Shiller data is based on a 3 month moving average, so reported April prices include information from repeat transactions closed in February, March, and April. For this reason, the changes in the NAR median price tend to lead Case Shiller.
- FHFA sources data primarily from Fannie and Freddie mortgages, transactions using prime conventional financing, and misses out on cash transactions as well as jumbo, subprime, and government backed transactions such as those using VA or FHA financing.
- Sales of newly constructed homes soared to the highest level in six years. In May, sales jumped 19 percent to an annualized pace of 504,000 units.
- Rising sales are a reflection of pent-up demand and indicate further increases in new home construction. The current inventory level is tight, at only 4.5 months supply.
- The median price of a newly constructed home is now at $282,000, up 6.9 percent from one year ago. The new home price still carries a large premium over a typical existing home price.
- Whatever is being built is moving swiftly. On average it takes 3.3 months to lead to a sale. A few years ago, it took on average over a year to find a buyer.
- The outlook is for homebuilders to keep moving dirt at an accelerated pace. New home sales will grow by 17 percent this year and another 40 percent in 2015. The dominant existing home sales market, which makes up over 90 percent of all home sales, will see a modest reduction in sales this year, and then rise 5 to 10 percent next year. Job creation and pent-up demand will overpower the impact of modestly higher mortgage rates that is anticipated next year.
- New home sales operate on a first-come, last-in basis in some markets. That is, once a community is developed, the existing residents will fight tooth-and-nail to prevent further developments. One can witness that in places like Boulder, CO and San Francisco. The homeowners there, with limited supply, will enjoy higher home prices. Since not everyone in the community can be homeowners, the renters will feel left out. The wealth gap between the rich and the poor as a result tends to be widest in these hard-to-build new home cities.
The REALTORS® Confidence Index (RCI) Report provides monthly information about market conditions and expectations, buyer/seller traffic, price trends, buyer profiles, and issues affecting real estate based on data collected in a monthly survey of REALTORS®: see the May 2014 report at http://www.realtor.org/reports/realtors-confidence-index.
Broadly, the May 2014 survey indicates that REALTOR® confidence in May concerning current conditions was essentially flat, while registering a slight dip in confidence about the outlook for the next 6 months across all markets. Continued tightness in supply, although improving, difficult credit conditions, and the lackluster growth in income and savings were reported to be constraining sales. Local conditions vary.
NAR Research, in conjunction with REALTOR® University, is pleased to present a free learning resource for REALTORS® and life-long learners alike. The REALTOR® University Speaker Series is a luncheon lecture series that is open to students, members, and the public. Each month, an expert on housing or the economy is invited to speak at the REALTOR® building in Washington, DC. For those that aren’t in DC, the series is also available on video.
The series covers a wide array of topics that agents and those who follow the housing industry alike will find informative. Past topics have included long-term housing vacancies in the US and the implications for the housing market, a review of housing indices and their strengths and weaknesses, commercial real estate topics such as REITS, housing affordability programs, why traffic and commutes matter to homeowners, the power of metropolitan centers of innovation, and many more. Guest speakers come from such distinguished institutions as the Federal Board of Governors, the Brookings Institute, NAREIT, and the National Housing Conference & Center for Housing Policy, among others.
Each lecture lasts between fifteen to thirty-five minutes and is delivered to a live audience one to two times a month. We encourage you to continue your education on topics related to the housing industry by taking advantage of this resource. As an example of one of our more popular topics, here’s Lisa Sturtevant of the National Housing Conference & Center for Housing Policy discussing their Paycheck-to-Paycheck tool >
The next Realtor® University Speaker Series lecture will take place on June 24th and feature Rolf Pendall of the Urban Institute on affordability and community development issues. Click here for more information >
Which U.S. cities are of greatest interest to Brazilians searching for a house? NAR economists have created a City Search Index (CSI) ranking U.S. cities where Brazilians looked for a property in 2013. Topping the list for Brazilians seeking a home in the United States? Miami, Orlando, and Los Angeles.
The index is based on a count of actual house searches by potential buyers throughout the year as measured by traffic on realtor.com, NAR’s official property listing website. Realtor.com helps connect people with the content, tools and expertise they need to find their perfect home, including information on homes for sale; connections with REALTORS®; neighborhood, moving, and mortgage advice; and in terms of buying a home– how to “make it happen”.
Cash sales made up 32 percent of all sales, according to the April REALTORS® Confidence Index. However, for investors, cash clearly continued to provide an advantage, as 70 percent of investor purchases were made with cash.
When looking at the regional trends over the past five years, investor cash purchases have been especially targeted in the South Atlantic region, home to Florida, Georgia, North and South Carolina, Virginia and West Virginia. The five-year average investor cash purchases for the South Atlantic region stood at 77 percent as of April.
Investors were also closing deals with cash in the East North Central region—Illinois, Indiana, Michigan, Ohio and Wisconsin. The region’s share of cash purchases by investors was 74 percent during the 2010-14 period. The other regions where investor cash acquisitions comprised two thirds of transactions were East South Central and Mountain, which were tied at 70 percent, for the 5-year average.
Analyzing just the 2014 data, there are a few noticeable details. New England recorded the highest share of investor cash purchases, at 82 percent. The South Atlantic came in a close second, with 79 percent of investor cash purchases. East North Central was in third place, at 75 percent.
In the Pacific region, which has been a main target of investor acquisitions, cash sales made up only 61 percent of transactions during 2014. The figure represents the lowest share of investor cash deals for the region in the past five years.
Note: The states in each region are detailed below.
New England (CT, ME, MA, NH, RI, VT), Middle Atlantic (DC, DE, MD, NJ, NY, PA), East North Central (IL, IN, MI, OH, WI), West North Central (IA, KS, MN, MO, NE, ND, SD), South Atlantic (FL, GA, NC, SC, VA, WV), East South Central (AL, KY, MS, TN), West South Central (AR, LA, OK, TX), Mountain (AZ, CO, ID, MT, NM, NV, UT, WY), Pacific (AK, CA, HI, OR, WA).
- Consumer prices (CPI) increased 0.4 percent in May, marking the largest 1-month increase since February 2013. On a year-over-year basis, however, prices rose 2.1 percent, just above the Federal Reserve’s 2 percent inflation target.
- While food and energy price changes were somewhat higher, data show that price increases were broadly spread. Core inflation—a measure that excludes energy and food prices—was up by 0.3 percent on the month, its largest increase since August 2011. Year-over-year this measure rose 2.0 percent, right in line with the Fed target.
- While the Fed does not target this specific inflation measure, the factors driving the Fed’s preferred measure are the same, suggesting that the Fed is currently meeting its target. If this trend continues, expect a gradual taper followed by moderate increases in the Federal Funds interest rate. However, if inflation continues to accelerate, the Fed may have to taper more rapidly and begin rate hikes sooner.
- The Federal Open Market Committee (FOMC) meets today and tomorrow; a statement and press conference will follow the conclusion of the meeting. The Fed has steadily reduced the size of its asset purchases, or “tapered”, by $10 billion per meeting since it began the program in December. Analysts expect the taper to continue in tomorrow’s announcement, but a larger than expected taper could be an indication that the FOMC is wary of the potential for inflation.
- One of the big non-energy components of the CPI, the shelter index, rose 0.3 percent for the month and 2.9 percent for the year. This has a large effect on the overall index because shelter is a little more than 30 percent of the index.
- Rent of primary residences—actual market rents paid by individuals who do not own the home they live in (pictured below)—rose 3.1 percent for the year ending in May 2014. When rents are rising, it becomes more attractive to own a home. Because the bulk of home ownership costs for someone with a 30-year fixed rate mortgage are fixed, even if rents are initially cheaper, potential buyers can expect rent costs to catch up to ownership costs.
- A few other sub-components of the shelter index show interesting trends. Housing at School, excluding board (pictured below) shows a gradual decline, but this is just a decline in the rate of increase. In fact, for the year ending May 2014, the price of housing at school was still rising at a 3.2 percent rate—faster than that for rent of primary residences. In contrast, Other Lodging Away from Home Including Hotels/Motels (pictured below) shows a sharp uptick after some previous stability—a 5.2 percent gain for the year ending in May 2014. While the trend for hotel/motel pricing is more variable, it has seen smaller price gains than housing at school over the last 6 years with only a few exceptions—this month being one.
Job creation and household formation are major drivers of the trend in home sales. Job creation has been strong but inconsistent over the last year. However, some areas have shown significant improvements.
Notably, several formerly distressed markets have shown strong gains in employment though their unemployment rates remain high. These include Reno, Las Vegas, Riverside, and Orlando. Supply issues have weighed on job creation in the local construction industries for several of these markets as has a sluggish recovery of mortgage finance sector jobs.
Tech markets like San Jose, Austin, San Diego, and San Francisco have done well as have the oil-boom areas of Fargo and Bismark. Grand Rapids has been a notable bright star in Michigan. Several markets in Florida have also posted steady improvements.
Where does your metro area stand? For more information on recent trends in your state, see the Local Market Reports for the first quarter of 2014.