- Home prices appreciated 4.4 percent on average across the country. This increase reflects a genuine price growth for a typical home as it reflects a constant quality repeat-price measurement. Such a gain would translate into about $900 billion in wealth gain for property owners in the past 12 months.
- Specifically, in the 12 months prior to the July figures, the FHFA home price index rose 4.4 percent. Though an increase, this latest gain is softer. The increases had been 7 to 8 percent in recent prior months. But moderating price growth should be viewed as a welcoming trend for longer-term sustainable health since wages and incomes have not gained much.
- This repeat price index provides a better measure of true home price appreciation then the median price. That’s because if only larger expensive homes get sold then the median price will get a boost, though not necessarily due to price appreciation of homes. But the repeat price index computes appreciation by examining the same property after it gets transacted twice and examining the price change over that time. And FHFA, a government agency, does that by reviewing Fannie- and Freddie-backed mortgages along with their corresponding home values.
- From the low point in 2010, the repeat price index has recovered 18 percent. It is now off by only 6 percent from the past peak.
- All regions of the country are experiencing price gains. But the New England states are recovering at the slowest pace. Home prices in the West South Central region (Arkansas, Louisiana, Oklahoma, and Texas) are doing the best and have been setting new highs with each passing month.
- An influx of new people to a city can greatly boost home values. Austin, TX has consistently seen more people come to the city over the past 25 years, though not sure if they are all of the “weird” type the city prides itself in welcoming. Due to the influx, Austin did not even experience a price drop during the Great Recession and prices have steadily marched upwards.
- Home prices in Geneva spiked during the times of European religious wars as the followers of John Calvin flocked to the city. A sudden housing shortage led to multiple bidding. Though no data are present, it is likely that home prices in Baghdad spiked during years when the city’s House of Wisdom was the top learning center of the world and drew many scholars. Algebra, astronomy, and the very erotic stories of 1001 Arabian Nights were the outcomes of that age. The ancient Greek plays were preserved in Baghdad when books were getting burned in Europe. How times have changed.
- Initial claims for unemployment insurance filed in the week ended September 20 increased slightly to 293,000. The increase of 12,000 can be considered as normal volatility and does not fully wipe out the gains of the previous week, when claims fell by 35,000. Overall, claims have been on the downtrend in September, averaging 298,500 for the last four weeks, which is below the benchmark of 300,000 that most analysts consider as an indicator of normal economic activity. Fewer claims for unemployment insurance means greater job stability for workers. A solid job history is an important criteria lenders look at when evaluating a loan application.
- With generally fewer claims filed every week, the number of insured unemployed has also been on the decline. As of the week of September 13, there were 2.4 million claiming unemployment insurance, down from about 6.6 million at the height of the housing crisis in 2009.
- Overall, the insurance claims data indicates an improving job market in September and portends a continuing decline in the unemployment rate. About 2 to 2.5 million net new jobs are likely to be added over the next 12 months. NAR expects that the sustained improvement in the job market can support 5 million existing home sales in 2014.
The assessment of REALTORS® about their local real estate markets was broadly unchanged in August 2014 compared to July 2014, according to data from the August REALTORS® Confidence Index Survey.
In the single family market, the REALTORS® Confidence Index – Current Conditions for single family homes stayed at 60, which indicates that there were more respondents who viewed their markets as “strong” compared to those who viewed them as “weak.”  There were reports that in some areas market activity fell in August, which respondents attributed to seasonal factors such as school openings. Inventory was reported to be improving although still generally tight, especially for “affordable” homes. Obtaining credit was the main concern reported by REALTORS®.
The indexes for townhouses/duplexes and condominiums continued to be generally weak with the indexes below 50. REALTORS® have reported that the condominium market has not recovered as strongly as single family homes because of FHA financing and occupancy regulations.
 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.
- Seasonally adjusted applications to purchase homes fell 0.3% for the week ending September 19th, a sideways move from the prior week, but steady relative to a soft August. The purchase index is 15.6% lower than the same time period in 2013. Purchase application volumes have been weighed down this year by credit overlays, regulatory constriction and the high cash share of purchases.
- The average rate for a 30-year fixed rate mortgage as reported by the Mortgage Bankers Association rose to 4.39%, the highest level since the week ending May 9th. The average rate a year ago this week was 4.62%.
- Conventional applications led this week’s decline, while applications through government programs rose. Both programs fell sharply in mid-July and muddled through August.
- However, contracts for new home sales surged 18.0% in August relative to July. The strongest gains were in the West and Northeast, which jumped 50% and 29.2%, respectively, while the South rose 7.8% and the Midwest was flat. The summer moderation in rates combined with sustained interest in owning appears to be driving this trend.
- New sales only account for roughly 11% of total sales, so the August contracts figure for new sales trend would have a muted impact on mortgage applications. However, the share of cash existing purchases fell from 29% to 23% from July to August, which would imply some lift to applications in July that may have reversed in August.
- The median price for a new home under contract rose 8.0% over the 12-month period ending in August at $275,600. The median existing home price was 20.0% lower at $220,600, roughly double the historical average spread of 10.8%, suggesting that existing homes remain a bargain by historical standards.
- This week’s reading suggests a solid improvement in new sales which will reduce inventories relative to demand heading into the fall. It also runs counter to stories of a disinterested or burdened consumer. Tight inventories of new homes will sustain price growth there and on the existing side, helping underwater owners, and boosting both buyer and seller confidence.
REALTORS’® assessments of real estate market conditions in August 2014 and the outlook for the next six months were essentially unchanged from the July 2014 survey, according to data from the August 2014 REALTORS® Confidence Index Survey.
There were reports that in some areas, market activity fell in August due to the school opening season. Supply constraints were reported to be easing in more states than reported previously (in AZ, CA, DE, FL, GA, IN, ID, MD, ME, MI, MN, NC, NV, NY, TX, VA, WI), although inventory was still generally tight especially for “affordable” homes.
Under tight credit conditions, purchases by first-time buyers accounted for about the same share of the market as previously. Given the robust price recovery and fewer distressed properties for sale, the share of purchases for investment purposes decreased significantly. As always, local conditions vary from market to market.
The median age of First-Time Home Buyers was 31 years old in 2013, but it differs slightly each year. The maps below show the median age of home buyers at the state-level for the past decade (2003-2013). There is an obvious increase in the median age since 2003, specifically for 2006 and beyond. In 2011, the median age of home buyers reached its highest value. In addition, First-Time Home Buyers exhibit greater stability in median age than Repeat Home Buyers.
At the state-level, here are some highlights for the median age of each type of home buyer:
All Home Buyers:
- Pennsylvania (2003) and Michigan (2008) had the lowest median age, 29 years old. On the contrary, Oklahoma (2008), Arizona (2013) and Florida (2013) had the highest median age, which was 55 years and over.
- Maine, Illinois, Minnesota and Virginia show stability in the median age of all home buyers across the years. Idaho, Arizona, Indiana and New Mexico experienced the greatest variations in the median age. For instance, Arizona’s median age for all home buyers in 2005 was 34 years old while last year it increased to 56 years old.
First-Time Home Buyers:
- Oklahoma and North Dakota had the lowest median age for First-Time Home Buyers, 25 years old in 2007 and 2010, respectively. In contrast, Mississippi’s median age was 46 years old in 2012.
- Indiana, Illinois and Wisconsin exhibit stability in median age over the years while Nevada and Texas have a fluctuating trend in the median age for First-Time Home Buyers.
Repeat Home Buyers:
- Arkansas and Utah had the lowest median age, 30 years old in 2004. Conversely, Nevada’s median age reached the highest value in 2013 and 2011 (62 and 63 years old, respectively).
-Hawaii shows stability in the median age of repeat home buyers while Idaho, Utah and Nevada exhibited the greatest variations. For instance, Idaho’s median age was 31 years old in 2004 while last year it was 59 years old.
The 2014 NAR Profile of Home Buyers and Sellers will be released in early November, at which time we will look for any fresh trends in the data.
Data used was from the Profile of Home Buyers and Sellers (for the period 2003-2013). The sample includes home purchases for primary residence use only. In order to be considered, a state needed to have sufficient response data for each one of the types of home purchase (first-time and repeat). The states with no available data are colored in gray.Learn About Tableau
Financial Reform and Monetary Policy in the Wake of the Global Financial Crisis [REALTOR® University Speaker Series]
Presentation by Dr. Anthony Elson at the REALTOR® University Lecture Series
Summary by Jed Smith, Managing Director, Quantitative Research
The REALTOR® University Brown Bag monthly lecture series features presentations by leading economists, analysts, and social scientists on evolving national and regional issues of interest to REALTORS®. The objective is to highlight a diversity of viewpoints in terms of thought-leadership, recognizing that there will be a variety of possibly conflicting ideas and objectives presented. The talks are for informational purposes and may be at variance with some NAR positions.
Dr. Anthony Elson has held senior positions with the International Monetary Fund, has worked with the World Bank in the evaluation of the Bank’s analytical and advisory service to member countries, and has been a professorial lecturer at the Johns Hopkins School of Advanced International Studies and a visiting lecturer in the program in International Development Policy at the Duke University Center for International Development.
Dr. Elson discussed the financial factors that preceded the global financial crisis: bank finance intimately connected with housing bubbles, “originate to hold” converted to “originate to distribute” with Mortgage Backed Securitization, and a shadow banking system outside the scope of regulation.
He indicated that the subprime crisis in the U.S. became global, through the interconnectedness of financial institutions, reliance on leverage, and lax regulation.
According to Dr. Elson, necessary reforms of the financial system include increased capital requirements, stress tests and intrusive supervision, and Orderly Liquidation Authority.
Dr. Elson’s talk is of significance to REALTORS®, for home sales are highly dependent on financial markets. Both the talk and slides are available at realtor.org.
- Both imports and exports are rising much faster than the broader economy. That means more companies are seeing faster sales growth to foreign buyers than to U.S. domestic buyers. A greater interaction with foreign economies, in turn, will mean increased demand for U.S. real estate by foreigners.
- Imports have been rising at 9 percent a year and exports at 10 percent in recent years. Though growth rates did slow to around a 4 percent annualized pace in recent months, they still easily outpace the broader GDP economic growth. Most companies still do the bulk of their business with domestic clients, but the growth opportunities are clearly occurring on the international side. There will be more Canadian and German workers, for example, here in the U.S. to help facilitate business and, conversely, there will be more American workers living abroad. Automatically these people in new locations will need local housing.
- Some service items are part of international trade. A foreign student studying here and paying tuition is counted as U.S. exports. A Brit getting a medical surgery in the U.S. is also counted. That partly explains why there are Chinese condo purchasers in college towns and Brits living in Florida.
- NAR estimated home sales to international clients rose 35 percent in the 12-month period ending in March 2014 from the prior year. For comparison, the overall existing home sales over the same period rose by only 6 percent. The domestic market is still much larger, but the growth is coming from foreign buyers.
- Given that Canada and China have been the two major countries with whom the U.S. trades, the home buying by foreigners were the strongest from Canada and China – even though a good portion of real estate purchases may have been for non-business reasons, such as for vacation and investment purposes.
- Many countries consolidated in the past to help move goods freely without tariffs, or for strengthening defensive forces against outsiders. But there appears to be a growing desire for separation and secession in many parts of the world since free trade agreements can be made without a formal union of governmental unions. It’s worth noting that Admiral Horatio Nelson stands on a tall column overlooking the city of London to remind people of the importance of the common benefit of being united as Great Britain (including Scotland) in preventing Napoleon from invading the island. For a different reason, on this side of the Atlantic, John Calhoun stands on a tall column overlooking the city of Charleston, SC, to remind the locals of the importance of state rights (to nullify federal laws). That is why SC politicians tend to be more of a rambunctious sort and always appear to be thinking of secession.
Homeowner Equity as a Share of the Value of Real Estate could normalize by late 2015 – early 2018.
- After 2 years of gains exceeding 5% per quarter, growth in household owners’ equity rose by a much more modest $177 billion (1.7 percent) from last quarter to a level of $10.8 trillion. This is up $4.7 trillion from the trough during the housing crisis or roughly $53,000 per property. Home owner equity is on the rebound as a result of construction, rising prices, and a continued decline in mortgages outstanding according to second quarter data from the Federal Reserve’s Flow of Funds.
- Mortgage debt outstanding fell by less than $10 billion while the market value of household real estate rose $170 billion. The total value of household real estate reached $20.2 trillion in the second quarter.
- One way of judging whether we are back to a more “normal” market would be to look at the equity that is accumulated in real estate relative to the value of the real estate. In total, home owners now have equity equal to slightly more than half of the total value of household real estate compared to as little as 37 percent in the first and second quarters of 2009.
- The chart below shows that the share of equity was roughly stable at just less than 60 percent from 1995 to 2005. Holding the level of mortgage debt outstanding constant, the value of household real estate would need to grow to about $23 trillion to reach that share of equity, or roughly a further 13 percent gain from its current level.
- At the growth rate seen in 2014Q2, it would take until early 2018 to fully recover the share of equity in real estate, but if the growth rate is more rapid as was seen earlier in the year, the share of equity would be fully recovered by late next year (2015).
 The Fed indicates that this includes owner-occupied housing, second homes that are not rented, vacant land, and vacant homes for sale. Using the Census Housing Vacancy Survey, housing units meeting this description have totaled roughly 88 million for the past 8 years.
Six months after the implementation of the QM/ATR rule, the market appears to be shifting modestly. In the 3rd Survey of Mortgage Originators, which covers lending in the 2nd quarter of 2014, participants were asked about their willingness to delve into the non-QM market as well as other current issues including the FHA’s HAWK program, GSE loan level pricing adjustments, and FICO’s new scoring model. Another change in this survey is an expansion of the respondent panel to include members of Community Mortgage Lenders of America.
Highlights of the Survey
- The non-QM share of originations more than tripled in the 2nd quarter to an originations-weighted 2.6% from 0.8% in the 1st quarter. Rebuttable presumption expanded as well to 12.8% from 9.8% over this same time frame.
- Respondents were less sanguine about their comfort with the QM/ATR rules in the 2nd quarter, with just 61.9% indicating that they had fully adapted compared to 73.7% in the 1st quarter.
- The share of lenders offering rebuttable presumption and non-QM products in the 2nd quarter improved, but willingness to originate non-QM and rebuttable presumption mortgages fell from the 1st quarter to the 2nd quarter. Lenders were more willing to originate prime mortgages, though.
- Over the next 6 months, nearly half of respondents expected improved access to credit for prime borrowers with FICO scores between 620 and 720. However, the vast majority expected no change for rebuttable presumption and non-QM borrowers. Respondents expect improved investor demand for all mortgage types
- Half of respondents indicated that the premium reductions under the FHA’s HAWK program were insufficient or the education fees were too high, while 55% indicated that the program would not expand credit.
- Only 15% of respondents felt that FHA’s program of early reviews would help to alleviate overlays.
- However, 85% of respondents indicated that a reduction of LLPAs directed at high LTV and low FICO borrowers would stimulate access to credit.
- Finally, 60% of respondents indicated that the Fair Isaac Company’s new FICO 9 scoring model would help to stimulate access to credit. Only 35% expected no change as they either defer to their investors’ or the GSEs’ scoring models.
In this new regulatory environment, it is important for REALTORS to have a broad lender-referral network that includes originators who specialize in non-QM, rebuttable presumption, and subprime borrowers. A deep network of lenders will help to source funding for those clients with special requirements.
- Disappointingly, housing starts fell measurably in August. Homebuilder confidence had risen to a 9-year high but that is not being matched by what is actually happening on the ground. The current pace of new home construction is woefully low – only about 60 percent of the norm. If new home construction activity does not pick up sizably in the upcoming months then the housing market will again encounter an inventory shortage when the spring buying season returns next year.
- Housing starts in August were 956,000, down 14 percent from July. It is nowhere close to the 50-year average of 1.5 million a year. A large dip in multifamily starts was the reason for the overall decline. Single-family housing starts were steady but well below normal.
- Though inventory of homes for sale and the related months’ supply have been rising recently, the situation could revert back to tight inventory conditions by early next year if housing starts do not pick up. Ideally, housing starts should rise by 50 percent soon.
- The overall inventory needs to rise further to smooth out the market. That’s because consumers like to view 10 to 15 homes before deciding. Too few inventory leads to unenthusiastic home buyers and fewer home sales.
- Two big reasons for the persistent slow recovery in new home construction are the difficulty of obtaining construction loans and the construction labor shortage. Construction jobs pay good salaries yet builders are having difficulty finding skilled workers. For comparison, the average construction worker’s weekly earning was $1,044 while that of retail trade workers was $534.
- As mentioned above the long-term average for housing starts is 1.5 million per year. There is an economic logic behind the number. Generally there are about 1.2 million new households formed each year in the U.S. In addition, about 300,000 uninhabitable homes are demolished every year. Therefore, 1.5 million new housing units are needed to accommodate new households and to replace demolished units.
- Rarely does a well functioning home get demolished. Once in Finland, however, many good homes were strategically burned to the ground when the Soviet Army invaded the country in deep winter. What was surprising to the Finnish soldiers who arrived with matches was that many homeowners had left their homes in sparklingly clean conditions. When asked why, the homeowners said they wanted to honor the last visitors to their homes: the Finnish soldiers. Economic logic would say the cleaning of the homes was wasted energy, but human emotional logic says otherwise. The homeowners wanted the very last image of their homes to be a positive and lasting one. That is, the last impression is just as important as the first impression.
- Consumer prices (CPI) fell 0.2 percent in August as declines in gasoline prices offset increases in food and shelter prices. Core inflation, a measure that excludes volatile food and energy prices, was flat for the month. On a year-over-year basis, prices rose 1.7 percent for all items and core items.
- This rate of inflation is just below the Federal Reserve’s 2 percent inflation target  and the information comes as the FOMC meeting wraps up today. A statement on any adjustments to monetary policy as well as economic projections and a press conference with Chair Yellen is scheduled for this afternoon. Expect a continuation of the current taper schedule (a further $10 billion reduction in asset purchases) and perhaps some changes in the policy statement to indicate that the Fed may begin rate increases in the first half of 2015 if the economy continues to improve as expected.
- While lower overall prices may lessen pressure on the FOMC to begin tightening, prices of certain items are rising faster than the 2 percent target.
- For example, rent of primary residences—actual market rents paid by individuals who do not own the home they live in (pictured below)—rose by 3.2 percent from a year ago in August. This was the 5th month of growth above 3 percent for this rent.
- 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.
- Owner’s equivalent rent of residences (OER), a measure to approximate price change for owner-occupied housing, rose 2.7 percent in August  . This was the 9th consecutive month of growth at or above 2.5 percent for OER. Together, the two rent components contribute more than 30 percent to the overall CPI.
- Real estate agents may be happy about the energy offset. In spite of increases in rents, energy prices were lower, especially Gasoline prices which are down 2.8 percent from a year ago. The 2014 Member Profile shows that the typical REALTOR® spent $1,860 on expenses for the business use of a vehicle in 2013, an amount equivalent to 28 percent of the typical REALTOR® total real estate expenses in the same time period.
 While the Fed does not target this specific measure, the factors driving the Fed’s preferred measure of inflation are the same.
 Owners do not actually pay the increased costs. OER is intended to estimate the change in the amount of money that an owner could rent their home for if they did not live in the home. This estimate is included as a factor in the CPI so as to lessen the effect of variation in the home ownership rate on the price series.
Presentation by Dr. Calvin Schnure, National Association of Real Estate Investment Trusts, at the REALTOR® University Lecture Series
Summary by Jed Smith, Managing Director, Quantitative Research
The REALTOR® University Brown Bag monthly lecture series features presentations by leading economists, analysts, and social scientists on evolving national and regional issues of interest to REALTORS®. The presentation by Dr. Calvin Schnure focused on the economic outlook and its implications for real estate:
Dr. Schnure first discussed the mixed economic recovery: problems with GDP growth and the job market on the negative side; consumer deleveraging, housing market recovery, and reduced drag in government spending on the positive side. Overall, he concluded that the impact of the economy on commercial real estate appeared positive:
- Commercial vacancy rates high, but trending down.
- Rent growth rising.
- Commercial property prices recovering.
- Commercial sales activity raising concerns about the supply of space overblown.
As a Vice President of NAREIT he provided extensive information on the Real Estate Investment Trust (REIT) industry, including types of REITS, operating attributes of listed REITS, Investment Attributes, investment performance, and diversification correlations between REITS and other financial investments.
Both the talk and slides are available at realtor.org.
Based on a report released by The Demand Institute, Millennials and Their Homes: Still Seeking the American Dream:
- In the next five years, 8.3 million new millennial (Gen Y) households will form. It is predicted that millennials will spend $1.6 trillion on home purchases and $600 billion on rent.
- The generation is optimistic: 79% expect their financial situation to improve and 74% expect to move within the next five years.
- Gen Y wants to own. Similar to other survey findings, 75% believe home ownership is an important long-term goal and 73% believe ownership is an excellent investment. 24% already own their home and an additional 60% plan to buy a home in the future.
- Looking forward: when they move, they will want more space and they will move to the suburbs to start families.
- 88% own a car, and they are open to moving locations where grocery stores, restaurants, and retail is within a short drive vs walking distance.
- 44% do think it would be difficult to qualify for a mortgage, and 69% would consider lease-to-own approaches to home buying.
- The data is based on a survey of more than 1,000 millennial households (ages 18 to 29).
- Check out http://demandinstitute.org/sites/default/files/blog-uploads/millennials-and-their-homes-final.pdf to view the entire report.
Corporations/partnerships accounted for approximately 17 percent of land purchases in the past 12 months ending June 2014, according to information gathered from a NAR-REALTORS® Land Institute Survey, conducted in July 2014.
- About two-thirds of land purchases by corporations/partnerships were development (30 percent), commercial (26 percent), and timber (17 percent) lands.
- Slightly more than half of the purchases were for land in RLI Region 3 (KY, TN, NC, SC, GA, AL, MS, FL) and RLI Region 4 (KS, MO, AR, LA, OK, TX).
For the full report, visit: https://rli.memberclicks.net/index.php?option=com_mc&view=mc&mcid=form_175226
Incoming fresh economic data point to continued GDP expansion at a near 3 percent growth rate and about 2.5 million net new jobs over the next 12 months. Inflation remains tame – so far. But upward pressure will build with rent growth pushing up the overall CPI. The Fed will have no choice but to raise the fed funds rates by the spring of next year. Mortgage rates will move up even before the official Fed policy change since the longer-date bonds will rise in anticipation. Homes will become less affordable for those taking out a mortgage. However, when all is said and done, home sales will have notched up 5 to 10 percent in 2015. Real estate brokerage revenue will rise by even more (10 to 15 percent) because of the added boost from rising home values.
Let’s review each of the economic data separately:
- GDP = C + I + G + NX. The equation is always a good starting point to see where economic growth will come from. Consumer spending (C) has been growing roughly at 2 percent for the past three years. A better figure of 2.5 percent was recorded in the most recent quarter. This component will continue to expand for the simple reason that consumers have more income. Americans simply do not chuck away a large portion for savings and the total personal income has been growing at 2.5 percent after inflation on a year-over-year basis. Not only that but the composition of personal income has turned for the better. Non-farm entrepreneurial income is up 5 percent on nominal terms from a year ago while income from unemployment benefits is down 43 percent. Rental income is up 7 percent. Bulk wages and salaries are up 5 percent, the result of job creation. On top of this, the stock market continues to make gains. The market capitalization of S&P 500 companies rose by more than $3 trillion. Such euphoria always leads to greater consumer spending, not less.
- Investment spending (I) can be divided into two parts: business and housing. Business spending on factories, equipment, software and the like rose solidly by 8 percent in the second quarter, though after no gain in the prior quarter. This component tends to be volatile because some of the purchases are bulky and big growth in one quarter can be followed by soft growth in the next. Over the past 3 years, the growth rate averaged a decent 6 percent. Given massive corporate profits, there are plenty of financial resources to be spent by businesses. Aside from corporations, the optimism expressed by small business owners reached the highest since 2007, according to the National Federation of Independent Business. On the housing side, the recovery has been subdued, but the potential for a future ramp-up is strong. Existing home sales are modestly lower from one year ago and housing starts are trying to breakout cleanly above the one million mark. In July, housing starts hit 1.1 million. Given that the normal figure should be closer to 1.5 million, there is ample room for further growth. In other words, investment spending will be solidly positive going forward.
- Government spending (G) will have hardly grown and will likely remain at the zero growth line for awhile. State and local governments have started to boost spending as tax revenues have come in nicely, but the federal government, particularly in regards to national defense, will still have to deal with further cuts. In the most recent quarter federal spending was down 1 percent while state and local government spending was up 3 percent. This component will neither add nor subtract to economic growth in any measurable sense.
- Net exports (NX), like government spending, will be neutral. Whatever growth in exports will be negated by the growth in imports. In the second quarter exports grew by 10 percent while imports grew by 11 percent. Given the generally weaker conditions in European economies, export growth may get shaved somewhat compared to the recent path. The mighty German economy is also slowing to a no growth zone. Meanwhile, the Ukraine has no money to buy. Russia is sanctioned and cannot buy. The overall net export was $463 billion in the red in the second quarter (with imports exceeding exports by that amount). Figures in the upcoming quarters will be roughly the same. That means, the net export picture is neither improving nor deteriorating in any measurable way.
Adding up each of the components implies GDP growing at around 3 percent. That is enough to generate 2.5 million net new jobs. More jobs mean more income. More income means more consumer spending. Businesses then will ramp up their spending to produce more. That, in turn, means more GDP and jobs. The economy appears to be entering a steady-state virtuous cycle in the immediate future.
One external shock to the system is a sudden and fast rise in interest rates. Consumers and businesses could pull back as a result and put GDP growth at risk. But the expected rise in interest rates will be very manageable. The fed funds rate will go from currently zero to 1 percent by the end of 2015. That is still low given that the 20-year average fed funds rate is 2.9 percent, which includes the past 6 years of a zero interest rate policy.
The one variable that deserves careful monitoring is CPI inflation. As long as inflation is contained or not busting out then interest rate increases can be modest. Through the middle of 2014, inflation was showing at 2 percent. But one component of inflation that is not yet contained is rent growth. Rents have been rising and rising and are higher by 3.3 percent in July, the highest in 6 years. Falling apartment vacancy rates imply continued rent gains. Because rent and homeowner equivalency rent (which follows the apartment rent trend) comprise the largest weight to the overall CPI, the growth in rents will inevitably force up CPI. There has been a nice recovery in multifamily housing starts, averaging 360,000 year-to-date and 437,000 in July on an annualized rate – the rise in rental population has quickly soaked up any new supply. Moreover, there appears to be a greater number of single-family homes that are now rentals. So the increased supply may tame rent growth. On the other hand, the overall supply of new homes has been well below the historic norm of 1.5 million for eight straight years, signaling housing shortage conditions that will persist for a while. Rents could then approach a 4 percent growth rate. CPI inflation could get out of hand. The Fed may then be forced to sharply raise interest rates. An unlikely scenario, but it is a scenario worth a close watch.
The 2014 NAR Leadership Summit, an annual event that brings together Presidents-Elect and Chief Staff Executives of the local and state associations, was held in late August in Chicago. As part of the program schedule, NAR Chief Economist Lawrence Yun gave a housing and economic update to attendees. Video of the presentation can be found here: http://www.realtor.org/videos/nar-leadership-summit-2014-lawrence-yun
VIEW THE FULL PRESENTATION HERE: Economic Forecast
At the national level, housing affordability is down for the month of July and from a year ago, due to home prices that continue to rise faster than incomes. Despite those factors, slower-paced price growth and the second lowest mortgage rates of the year are good for a change in affordability.
- Housing affordability is down for the month of July, as the median price for a single family home in the US may have met its seasonal peak.
- The median single-family home price is $223,900, up 5.1 % from July 2013 as year-over-year price gains are currently slowing down. Mortgage rates are up 12 basis points (one percentage point equals 100 basis points) from last year. Nationally, affordability is down from 160.7 in July 2013 to 153.8 in July 2014.
- Affordability is down slightly from one month ago in all regions except the Midwest. The Midwest was the only region to experience a slight gain in affordability due to lower home prices and qualifying incomes. From one year ago, affordability is down in all regions. The West saw the biggest decline in affordability at 4.6 %, with the other regions are not far behind.
- The rise in mortgage rates was modest this month, so purchases at this time are still favorable when you compare the locked-in monthly payment of a mortgage to the rise in rents. New home construction and an increase in inventory during a time of low rates could lead to more manageable price growth and more sales.
- The FHA has agreed to eliminate the pre-payment penalties, a positive change for borrowers that pay off their mortgage, starting in 2015.
- What does housing affordability look like in your market? View the full data release here.
- The Housing Affordability Index calculation assumes a 20 percent down payment and a 25 percent qualifying ratio (principle and interest payment to income). See further details on the methodology and assumptions behind the calculation here.
- Retail sales continue to make good, steady gains. The economy is clearly entering into a virtuous cycle of more jobs leading to more consumer spending. More retail sales in turn are leading to more job hiring by companies that produce things for consumers.
- In August, retail sales rose 5.0 percent from one year ago. That is the strongest gain in over a year. Spending related to the home is rising at a faster pace. Stores that sell building materials and garden equipment saw sales rise by 7 percent. Retail sales of furniture and appliances rose by a hefty 9 percent. Even so, the spending in this area is still in a recovery mode (not expansion mode) and still below the prior peak set during the housing bubble years.
- Past retail activity was also revised up a bit, translating into faster GDP growth. The second quarter GDP growth after revisions may be as high at 4.5 percent while the third quarter GDP growth is tracking to grow by 3.5 percent. Such solid GDP growth rate assures about 2.5 million net new jobs a year.
- When retail sales rise there should be a rise in demand for commercial retail spaces. Interestingly, the demand for retail commercial spaces has not been rising commensurately with the rise in retail sales. A big reason is that some sales are occurring through the internet. The demand for warehouse spaces has therefore been strengthening at a faster pace than for retail spaces.
- NAR projects the vacancy rate on industrial/warehouse space to decline from 8.9 percent a year ago to 8.4 percent by the year end. Meanwhile, the vacancy rate on retail space will barely budge from 9.8 percent to 9.6 percent.
- Most of the increase in retail sales appears to be driven from job creation and new income. But sales are also partly driven by an uptick in consumer debt, which has been on the rise recently. Debt in some cases makes good sense and provides nice returns. But in other cases it can cause unhappiness. Charles Dickens noted: “An annual income of 20 pounds and spending of 19 pounds results in happiness, while an annual income of 40 pounds and spending 41 pounds results in misery.”
Every month NAR produces existing home sales, median sales price and inventory figures. The reporting of this data is based on homes sold the previous month and the data is explained in comparison to the same month a year ago. We also provide a perspective of the market relative to last month, adjusting for seasonal factors, and comment on the potential direction of the housing market.
The data below shows what our current month data looks like in comparison to the last ten Julys and how that might compare to the “ten year July average”, which is an average of the data from the past ten Julys.
- Regionally, one of the first things that sticks out is that 2005 seems to be the best year of sales and 2010 seems to be the lowest point of sales activity. The South has been the strongest region in terms of transactions and the Northeast has had the least amount of sales. The difference in sales is largely a function of population differences in the regions.
- The median price year-over-year percentage change shows the West region went through the largest fluctuation, having the highest and the lowest price growth at different points in the ten year cycle. The West experienced its worst price percentage decline in 2009 and its best price increase in 2012.
- Inventory of homes for sale in the U.S. peaked in 2007, with its lowest point seen just last year. In 2010 the U.S. had the slowest pace of homes sold relative to inventory, with months supply at 11.9. The ten year July average months supply is 7.2. In July 2014 we stand at 5.5 months supply, somewhat below a typical July.
- July’s median price is higher than the ten year July average median price for the U.S. and all four regions. Regionally, while the Northeast and the West have recently experienced lower than the ten year average sales, the Midwest and the South both showed modestly higher sales. Total homes sold in the US for July 2014 is slightly higher than the ten year average, which is a good sign for housing recovery.
View the full PPT slidedeck: July 2014 EHS Vs Ten Year Average