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Updated: 54 min 23 sec ago

Applications for Purchase Mortgages

Wed, 10/07/2015 - 10:57
  • Applications for purchase mortgages spiked 27.4 percent for the week ending October 2nd, likely a result from implementation of the new TILA RESPA Integrated Documentation (TRID) closing documents and process also known as the Know Before You Owe rule on October 3rd. Some originators are concerned that the implementation could cause delays and have advised clients to close earlier.

  • 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.
  • The increase in weekly purchase applications was nearly uniform between the conventional and government spaces which rose 27.1 percent and 27.9 percent, respectively. Relative to last year, the increase was even more pronounced at 48.9 percent.
  • Mortgage rates slipped eight basis points to 3.99 percent from a week earlier and were 31 basis points lower than the same time a year earlier. While the drop in rates may have spurred more refinance business, purchase applications rarely respond this robustly to changes in mortgage rates.

 

  • This week’s surge in applications pushed the index to its highest level since the week of May 7th, 2010 when the first-time home buyer tax credit expired, but it likely to be transitory with a decline or choppy pattern in applications in the week or weeks ahead as demand that would have occurred in the future was pulled forward. The new rules may result in longer lock periods and costs for some consumer in order to hold onto low rates as closing times may close. Furthermore, as some lenders may not be fully prepared, those that are prepared may see higher volumes that result in delays.
  • 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.
  • Consumers and Realtors concerned about delays may want to shop around for lenders who are best prepared and can close on time.

More Loans Getting Approved, But Applications Still Low

Wed, 10/07/2015 - 09:49

The share of home purchase loan originations to total home purchase loan applications improved steadily if slightly, based on the latest Home Mortgage Disclosure Act (HMDA) loan level data as of 2014 (most recent). However, consumers remained reluctant to borrow as credit standards remained difficult, even for middle-income earners. FHA-insured mortgages have higher debt-to-income requirements and are more accessible to non-high income earners.

Loan approvals continue to increase although modestly

The share of loan originations to the total loan applications has been improving steadily, although modestly since 2011. In 2014, 69.4 percent of all home purchase loan applications resulted in a loan origination, a slight increase from 66.6 percent in 2011. Conversely, the share of loan applications that were denied decreased from 15.6 percent in 2011 to 13.4 percent in 2014. The combined share of loans that were approved but not accepted by the applicant and loans that were withdrawn by the applicant also decreased from 15.6 percent in 2011 to 14.7 percent in 2014 (Chart 1).

Across income group categories, the shares of home purchase loans originated to loan applications have increased since 2011, although modestly (Chart 2)[1]. Among applicants whose income is 80 percent or more of the median family income of the metropolitan statistical area (MSA) in which the applicant’s census tract is located, the share of loans originated was greater than 70 percent in 2014.  Among applicants whose income is below 80 percent of the MSA median family income, the percentage of loan applications that were originated also improved to 64.9 percent in 2014 from 62.5 percent in 2011. The likelihood of having a loan originated increases as income increases.

 “Middle” to “higher income” borrowers increasing, but “lower” income borrowers still reluctant to borrowAlthough the share of loan originations to total applications has been improving across all income groups, the number of loan originations has increased only among applicants earning 80 percent or more of the MSA median family income.  Meanwhile, the number of loan originations among applicants earning below 80 percent of the MSA median family income has stayed at about the same level since 2010 (Chart 3). Loan originations from this latter group were essentially flat because loan applications have barely budged since 2011. In contrast, applications from those earning 80 percent or more of the MSA median family income have steadily increased, especially among applicants earning 120 percent or higher of the MSA median family income (Chart 4).Altogether, the number of home purchase loan originations increased only modestly to 3.14 million in 2014 from about 3.02 million in 2013, a slower pace compared to the turnaround in 2012-2013. The number of loan originations remains far below the 6.81 million level in 2005.

Access to credit remains difficult for middle-income earners

One reason why the number of applications has barely increased among those earning below 80 percent of the MSA median family income and has improved only modestly overall is that credit access remains tight. Underwriting standards such as FICO credit scores, debt-to-income ratios, and ability to make a down payment are all related to income, and these standards have become more stringent.[1] Amid modest income growth, tight inventory conditions have also caused a rapid rise in prices that made homes more unaffordable. Finally, lower-income borrowers also tend to avail of FHA loans, and FHA’s increase in the annual mortgage insurance premiums from 55 basis points in 2010 to 135 basis points by 2014 also likely affected low-to middle-income earners during this period.[2]

The reduction in the upfront mortgage insurance premium by 0.5 percent in 2015 is intended to lower the cost of credit for FHA-insured loans and attract more first-time homebuyers. As noted in a NAR analysis by Ken Fears, NAR’s Director for Regional Economics and Housing Finance, this change in policy appears to have been well-received by consumers with lower credit scores whose optimism towards housing demand improved dramatically over the 12-month period ending in March of 2015.

What this means to REALTORS®. Among those who do make a decision to purchase a home and apply for a loan, access to credit has been improving, especially for those earning above average incomes. However, access to credit still remains generally difficult, even for middle-income earners. REALTORS® need to work with borrowers to access FHA-insured loans or loans backed by state housing finance agencies where income-related requirements are less stringent.

[1] The Urban Institute reported in its September 2015 Housing Finance at a Glance Monthly Chartbook that “the mean and median FICO scores on new originations have both drifted up about 43 and 48 points over the last decade. The 10th percentile of FICO scores, which represents the lower bound of creditworthiness needed to qualify for a mortgage, stood at 668 as of June 2015. Prior to the housing crisis, this threshold held steady in the low 600s.” See http://www.urban.org/sites/default/files/alfresco/publication-pdfs/2000421-Housing-Finance-Housing%20Finance-At-A-Glance-A-Monthly-Chartbook-September-2015.pdf

[2] In the New York Federal Reserve Board’s various surveys on consumer expectation regarding credit access to a mortgage from February 2014 thru June 2015, respondents’ perceived likelihood of being rejected was nearly 40 percent. See http://www.newyorkfed.org/microeconomics/sce/credit-access.html#indicators/overall-credit-rates-t2/g29

[1] A detailed breakdown of the action taken on a loan application was reported by lending institutions starting in 2011. Previously, reporting lending institutions only reported if the loan was originated or purchased from another institution. In counting loan applications, NAR used the “Action Data” counts. In counting total applications, we excluded preapprovals and loans purchased by the institution to eliminate double counting.

Sales to First-Time Buyers: 32 Percent of Sales in August 2015

Tue, 10/06/2015 - 10:58

First-time home buyers accounted for 32 percent of existing-home sales in August 2015 (28 percent in July 2015; 29 percent in August 2014): August 2015 REALTORS® Confidence Index Survey.12

Sustained net job creation, a low interest rate environment with 30-year fixed rates at below four percent for most of 2015, and better pricing of FHA-insured mortgages appear to be helping first-time homebuyers. The prospect of an interest rate increase by the Federal Reserve Board may also have spurred first-time home buying activity.[1] REALTOR® respondents reported that tight inventory, increasingly unaffordable prices, and weak credit profiles that fail to meet tighter underwriting standards are conditions that continue to work against first-time home buyers.

Buyers age 34 and under accounted for 29 percent of sales reported by the respondents. Nearly half of buyers were in the age group 35 to 55 years.

Renters accounted for 38 percent of sales, essentially unchanged compared to past months. Although rents are rising faster than mortgage payments, the rate of renting has remained elevated, likely due to a mix of factors related to lifestyle choice, household formation, financial constraints for younger households, and tighter underwriting standards.

12 First-time buyers accounted for about 33 percent of all home buyers based on data from NAR’s 2014 Profile of Home Buyers and Sellers (HBS). The HBS is a survey of primary residence home buyers and does not capture investor purchases but does cover both existing and new home sales. The RCI Survey is a survey of REALTORS® about their transactions and captures purchases for investment purposes and second homes for existing homes.

12 First-time buyers accounted for about 33 percent of all home buyers based on data from NAR’s 2014 Profile of Home Buyers and Sellers (HBS). The HBS is a survey of primary residence home buyers and does not capture investor purchases but does cover both existing and new home sales. The RCI Survey is a survey of REALTORS® about their transactions and captures purchases for investment purposes and second homes for existing homes.

[1] The Federal Open Market Committee, in its September 17 statement, decided to maintain at 0 to ¼ percent target range for the federal funds rate, a benchmark rate that influences all rates, including mortgage rates.

REALTORS® Expect Price Growth Moderate in Next 12 Months

Mon, 10/05/2015 - 10:13

REALTORS® who responded to the August 2015 survey expected prices to increase by 3.5 percent over the next 12 months (3.6 percent in July 2015; 3.5 percent in August 2014): August 2015 REALTORS® Confidence Index Survey. 9

The map shows the median expected price change in the next 12 months for each state based on the June-August 2015 RCI surveys.10 REALTOR® respondents from Florida had the most upbeat price expectations, with a median expected price growth in the range of five to six percent. In Washington, Oregon, Colorado, and Georgia, the median expected price growth among respondents was four to five percent.

REALTOR® respondents reported that they expect price growth to moderate after a strong price recovery that has made homes less affordable.

9 A comparison of the expected price growth for the next 12 months compared to the actual price growth shows the expected price growth to be more conservative than the actual price growth, but both are generally headed in the same direction.

10 In generating the median price expectation at the state level, we use data for the last three surveys to have close to 30 observations. Small states such as AK,ND, SD, MT, VT, WY, WV, DE, and D.C., may have less than 30 observations.

Latest National Employment Figures (September 2015)

Fri, 10/02/2015 - 09:53
  • Jobs continue to be added to the economy, but the momentum is less strong than before. Even so, the latest monthly addition of 142,000 is not shabby and brings the 12-month total to an impressive 2.75 million net new jobs.
  • Both residential and commercial real estate markets have been improving principally because of jobs. One can see the differences in the recovery pace between states with fast job creation (e.g., Utah and Florida) versus states with slow or no job creations (e.g., West Virginia and North Dakota). Given that jobs are being added at a respectable pace, the real estate markets should continue to improve.
  • The lost in momentum can be seen in the 12-month job change. The pace had been 3 million or so from late last year to the early summer months of this year. Now, rather than 3 million, it is 2.75 million net new jobs.
  • No mystery that the collapse in the oil price has forced job cuts in the oil extraction. The low oil prices, however, are helping consumers save extra money to spend elsewhere. Retail spending and auto sales have been solidly positive.
  • It is a big mystery that jobs in home building are not being added more aggressively. There is a housing shortage in many local markets, yet builders have been complaining of the difficulty of finding qualified construction workers, even though the pay is well over the minimum wage.
  • No government shutdown for now, but could happen in December. As part of uncongenial debates, shouting, and bluffs, a sequestration came into effect a few years ago, resulting in a steady decline in government workers and military personnel. Those sequestration impacts are all but over now and new people are being hired. One thing people should know is if there is to be a government shutdown in December, it will be when a new budget needs to get passed. After the shutdown all government employees get paid retroactively. Employees, in essence, have joked that government shutdown is nothing more than a paid vacation time while the rest of America suffers inconvenience of not having this or that service.

Credit Conditions Continue Tighter than Normal

Thu, 10/01/2015 - 11:33

REALTORS® have reported that credit conditions remain generally tight, with significant loan processing delays: August 2015 REALTORS® Confidence Index Survey. One indicator of credit tightness is the distribution of FICO scores on approved loans.

About 53 percent of REALTORS® providing transaction credit score information reported FICO credit scores in the range of 740+. For comparison, in the period 1999-2004, only 37 percent of Fannie Mae’s and 33 percent of Freddie Mac’s 30-year, fixed rate, fully amortizing loans had FICO scores greater than 750.16

Among first-time home buyers, 32 percent of buyers were reported to have FICO scores of 740 or higher. Among buyers age 34 years and under, 37 percent had FICO scores of 700 or over. Borrowers with FICO scores of 740+ put in a higher down payment while the majority of borrowers with FICO scores of less than 740 availed of “low” down payment loans (zero to six percent). For example, 73 percent of borrowers with FICO scores of below 620 made a down payment of zero to six percent.

16 Source: Urban Institute Housing Finance Policy Center, “Housing Finance at a Glance”, May 2015 chartbook.  http://www.urban.org/sites/default/files/alfresco/publication-pdfs/2000231-Housing-Finance-At-A-Glance-Monthly-Chartbook-May-2015.pdf

 

August 2015 EHS Over Ten Years

Wed, 09/30/2015 - 15:56

View the August 2015 EHS Over Ten Years slides.

Every month NAR produces existing-home sales, median sales prices and inventory figures. The reporting of this data is always 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 August months and how that might compare to the “ten year August average” which is an average of the data from the past ten August months.

  • The total number of homes sold in the US for August 2015 is higher than the ten year August average. Regionally, the Northeast was slightly below the ten year August average, while all other regions showed stronger sales. The Midwest had the largest increase above the average by 10 percent; the South was also up 7 percent while West was only up 1 percent essentially level with the August average. The West had consistently been second to the South in August sales, but over the last three years the Midwest has taken the lead.
  • Comparing August of 2005 to August of 2015 fewer homes were sold in 2015 in the US and all regions, the Northeast undergoing the biggest decline of 42.1 percent. The Midwest and the South both had the smallest drop in sales at 21 percent over the ten year period.
  • This August the median home price is higher than the ten year August average median price for the US and all four regions.
  • Comparing August of 2015 to August 2005, the median price of a home increased only in the Midwest and South. The US had a slight decline in price while the Northeast dipped 4 percent and the West experienced a 7 percent decline in price.
  • Looking at year over year changes the West led all regions in price growth until 2007 when the Northeast had the fastest growing home prices. Since 2012 the West has resumed the lead in August price growth, coming in as the top or second-place region measured by growth rate. By price level, the Northeast took the lead from the West in 2008 and held it until 2013 when it fell to the second highest price region. The median for the West surpassed the $300,000 mark while the Northeast median remains under that threshold.
  • The median price year over year percentage change shows that home prices began to fall in 2006 nationally, and prices dipped by double digits in 2009 for all regions. The trend for median home prices turned around completely in 2012, when all regions including the US showed price gains. Because of this, all regions and the US saw their lowest August median price in 2011. The West had the largest gain in price of 16 percent, while the Northeast had the smallest gain at 2 percent from 2011 to 2012.  This August the West (7.1%) had the highest year over year price percentage change over the US and the other three regions.
  • There are currently fewer homes available for sale in the US this August than the ten year August average.  In 2005 the US had the fastest pace of homes sold relative to the inventory when months supply was 4.7 months. In 2010 the US had the slowest relative pace when it would have taken 11.5 months to sell the supply of homes on the market at the prevailing sales pace. Relative to all supply, the condo market had the biggest challenge in 2008 when it would have taken almost 16 months to sell all available inventory at the prevailing sales pace. Since 2011 supply levels for both single family and condos have gradually come down to a healthy balance of inventories.
  • The ten year August average national months supply is 7.5, and this August we are at 5.2 months supply. The ten year average month supply for August for condos is 8.8 months and the single family supply is 7.3 months.

In What States Did Properties Sell Quickly in June-August 2015?

Wed, 09/30/2015 - 09:53

In the monthly REALTORS® Confidence Index Survey, NAR asks REALTORS® “For the last house that you closed in the past month, how long was it on the market from listing time to the time the seller accepted the buyer’s offer?” The map below shows the median days on market of respondents about their sales from June-August 2015: August 2015 REALTORS® Confidence Index Survey.[1]

Properties typically sold within a month in Washington, Oregon, California, Utah, Colorado, North Dakota, Texas, Michigan, Massachusetts, and the District of Columbia. In Vermont, properties were typically on the market for longer than 90 days when sold. Nationally, properties that closed in August 2015 were typically on the market for 47 days (42 days in July 2015; 53 days in August 2014).11 Days on market typically increase after June due to the seasonal slowing down in demand. Respondents reported that it typically took another 42 days to close the sale.  All real estate is local. State-level data is provided for REALTORS® who may want to compare local markets against the state and national summary.

[1] The median days on market is the value such that half of properties stayed in the market below the median days and half of properties stayed on the market above the median days.

11 Respondents were asked “For the last house that you closed in the past month, how long was it on the market from listing time to the time the seller accepted the buyer’s offer?” The median is the number of days at which half of the properties stayed on the market.

REALTOR® Lending Highlights: Small Business Administration

Tue, 09/29/2015 - 15:30

Commercial real estate investments trends have been positive in 2015, as global economic volatility has driven investors to the relative safety and performance of U.S. assets. Sales of large CRE transactions (LCRE)—over $2.5M—advanced 36 percent year-over-year in the first half of 2015, totaling $255 billion, based on Real Capital Analytics (RCA) data. Prices in LCRE markets rose by 3.1 percent during the second quarter of this year, based on RCA’s Commercial Property Price Index.

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

Based on National Association of REALTORS® (NAR) data for the SCRE market, sales volume in the first half of the year advanced 11 percent year-over-year. With the shortage of available inventory reported as the number one concern for NAR members, price growth accelerated in SCRE markets during the second quarter of 2015, with properties trading at 6.6 percent higher average prices compared with the same period in 2014. The average transaction price increased from $1.7 million in the first quarter 2015 to $2.0 million in the second quarter 2015.

With rising transactions and asset valuations, capital availability has broadened. According to the REALTORS® Commercial Lending Trends 2015 report, major capital providers found new energy in revitalized commercial markets and competed for deals. In LCRE markets, national banks accounted for the bulk of capital providers, riding the wave of low interest rates and offering low cost floating rate lending. Government-sponsored enterprises (GSEs) were the second largest debt originator, dominating the financing in the multi-family segment. CMBS conduits and life insurance companies also increased their originations.

Based on NAR’s data, the capital picture displays a fundamentally different landscape. Local and community banks were the largest lending groups in REALTORS® commercial markets in 2014, accounting for 32 percent of transactions. Private investors and national banks accounted for the third and fourth largest funding sources.

The Small Business Administration (SBA) comprised six percent of funding for REALTORS® real estate transactions. SBA provided $26.6 billion in loans during 2015, a 19 percent increase from 2014. The bulk of SBA lending was in the form of a General Small Business Loan, also known as a 7(a) loan, which comprised 85 percent of total. The Real Estate & Equipment Loan—CDC/504—accounted for the rest.

REALTORS® indicated in a separate survey that they used SBA loans in the course of business activity. In keeping with the trend, the most popular SBA loan product used by REALTORS® was the SBA 7(a) loan, used by 48 percent of NAR members. The second most popular loan type was the Real Estate & Equipment Loan CDC/504, accessed by 31 percent of respondents. Disaster loans and those offered under SBA’s Microloan Program were the remaining lending facilities employed. The average SBA loan amount was $422,310.

While only 12 percent of REALTORS® indicated that they contacted the SBA for resources other than loans, most did so for advice on working with the SBA and training. Members also sought small business mentoring and information about other federal or state programs.

 

To access the Commercial Lending Trends, visit http://www.realtor.org/reports/commercial-lending-trends-survey.

 

Raw Count of Home Sales (August 2015)

Tue, 09/29/2015 - 10:26
  • Existing-home sales decreased 4.8 percent in August from one month prior while new home sales increased 5.8 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 compared to the seasonally adjusted figures. The raw count determines income and helps better assess how busy the market has been.
  • Specifically, 505,000 existing-homes were sold in August while new home sales totaled 45,000.  These raw counts represent an 8 percent loss for existing-home sales from one month prior while new home sales rose 2 percent. What was the trend in the recent years? Sales from July to August increased by 2 percent on average in the prior three years for existing-homes and decreased by 3 percent on average for new homes. So this year, existing-homes underperformed compared to their recent norm while new home sales outperformed.
  • 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 less activity in September for existing-home sales. For example, in the past 3 years, September sales dropped by 9 to 22 percent from August. In contrast, existing-home sales increased in October by 2 to 8 percent. For the new home sales market, the raw sales activity in September and October tends to be better compared to those occurring in August. For example, in the past 3 years, October sales rose by 6 to 16 percent from August.

REALTORS® Reported Slower Buyer and Seller Traffic in August 2015

Mon, 09/28/2015 - 15:50

REALTORS® generally reported “strong” demand amid “weak” supply conditions in their local markets in the August 2015 REALTORS® Confidence Index Survey.[1]

The REALTORS® Buyer Traffic Index registered at 60 (62 in July 2015; 55 in August 2014). Buyer traffic is seasonally slower in August than in July, with the start of the school season.

Inventory remained tight, with more respondents reporting “weak” than “strong” seller traffic. The REALTORS® Seller Traffic Index was essentially unchanged at 45 (46 in July 2015; 45 in August 2014). While the construction of new privately owned housing units improved to 1.1 million units as of the second quarter of 2015, the figure is still short of the normal 1.5 million units required by household formation and the replacement of obsolete housing. Moreover, about 40 percent of new construction is of multi-unit structures, generally for rental use. REALTORS® reported low inventory of properties in the lower price range and for those that are move-in ready.

[1] Respondents were asked “How do you rate the past month’s traffic in the neighborhood(s) or area(s) where you make most of your sales?” The responses were “Strong”, “Moderate,” and “Weak.”

August Existing-Home Sales

Mon, 09/28/2015 - 10:49
  • NAR released a summary of existing-home sales data showing that August’s existing-home sales slipped after three straight months of gains, as sales reached the 5.31 million seasonally adjusted annual rate. Previous months were strong, so despite the 4.8 percent month-to-month drop in sales, the current level remains strong. August’s existing-home sales mark 11 consecutive months of year-over-year gains, and sales are up 6.2 percent from a year ago.
  •  The national median existing-home price for all housing types was $228,700 in August, up 4.7 percent from a year ago August 2014. Moderate price growth is welcome after months of unhealthy price gains.
  •  Regionally, all four regions showed growth in prices from a year ago. The West had the largest gain at 7.1 percent while the Northeast had the slightest gain at 2.4 percent from last August.
  • From July, the Northeast remained flat while all the other regions dipped in sales. The West had the biggest decline at 7.8 percent while the Midwest decreased 1.5 percent. However, all regions showed an increase in sales from a year ago. The Midwest had the smallest increase of 5.8 percent while the West had the biggest gain of 7.2 percent. The South leads all regions in percentage of national sales at 41 percent while the Northeast has the smallest share at 13.5 percent.
  • August’s inventory figures modestly increased 1.3 percent from last month but are down 1.7 percent from a year ago. It will take 5.2 months to move the current level of inventory at the current sales pace. It takes approximately 47 days for a home to go from listing to a contract in the current housing market.
  • Single-family sales fell 5.3 percent while condos fell 1.6 percent from last month. However, single-family home sales increased 6.1 percent and condo sales are up 6.9 percent from a year ago. Both single-family and condos had an increase in price with single family up 5.1 percent and condo up 2.2 percent from a year ago August 2014.

 

Baby Boomers Lead Recent Household Formation

Fri, 09/25/2015 - 10:18

The United States Census Bureau compiles data on households through the Current Population Survey, a joint project with the U.S. Bureau of Labor Statistics. Based on the latest data, there were 124.5 million households in the U.S. in 2015. The number of households in 2015 was 0.5 percent higher than in 2014.

Household formation (HHF) is an important driver of real estate demand, both for single and multifamily properties. Household formation averaged 1.3 million every year over the 1958-2007 period. Between 2008 and 2013, the average number of new households dropped to 579,000 per year, underscoring the severity of the Great Recession and ensuing slow recovery. In 2014, net HHF jumped to 2.2 million, as employment growth encouraged more young people to strike it on their own. In the second quarter of 2015, HHF continued the upward trends with the addition of 480,000 new households.

When looking at recent HHF data by age, Baby Boomers are the driving force of growth. Based on data comparing the first half of 2014 with the first half of 2015, the highest gains in HHF were recorded by 65-74 year olds, who accounted for 860,000 new households[1]. The 55-64 age group accounted for the second highest HHF figure—391,000. The group with the third largest HHF number was made up of people over 75 years of age, who formed 264,000 new households during the twelve month period.

The younger age groups had mixed HHF numbers. In the 20-24 age range, there was a negative net HHF of 85,000 households. The 25-34 year old group proved the only bright spot, with 159,000 new households.

Separately, in a recent presentation at the REALTOR® University Speaker Series[2], Jordan Rappaport of the Federal Reserve Bank of Kansas City outlined several important trends in household formation and its impact upon multifamily home construction:

  • The share of U.S. population living with parents has risen from 1980 – 2013 across the age spectrum. For the 25-29 year old group, the proportion increased from a little over 10 percent to 25 percent over the period. The increases became smaller as the data moved higher in the age ranges, however the trend remained noticeable.
  •  The share of the population to have ever been married declined significantly. For 25-29 year olds, the percentage dropped from about 70 percent in 1980 to less than 40 percent in 2013. The decline in marriage was present in each age group up to 65-69 year olds.
  • The age at which adults have children has been steadily rising.
  •  For seniors, the share living with a partner has increased over time. For the 75-79 year old population, the proportion of those living with a partner rose from about 30 percent in 1980 to approximately 50 percent in 2013.

His conclusions are that while young adults have been the main driver of the recent rebound in multifamily construction, the baby-boom generation will be the leading force of the long-term demand for multifamily space and constru

[1] Kolko, J. “Who Is Actually Forming New Households?” August 17, 2015. U.C. Berkeley Terner Center for Housing Innovation.

[2] Rappaport, J. “Millennials, Baby Boomers, and Rebounding Multifamily Home Construction.” http://www.realtor.org/topics/realtor-university/videos/realtor-university-speaker-series.

Strong Demand from Baby Boomers to Continue to Drive Multifamily Home Construction:

Tue, 09/22/2015 - 15:33

In a presentation at a REALTOR® University Speaker Series held recently,[1] Dr. Jordan Rappaport, Senior Economist of the Federal Reserve Bank of Kansas City, discussed the demographic trends and preferences of millennials and baby boomers that has driven multifamily housing demand since 2000 and in the coming decades.

According to Dr. Rappaport’s research, young adults (ages 20-34) drove the strong rebound in multifamily construction in 2007-2013, but it is the older adults (ages 50-59) who have accounted for the increase in occupancy from 2000-2013. Young adults provided the rebound in multifamily demand as they swung back toward living in apartments (+ 500,000 units) following a shift away from apartments (-500,000) during the housing boom, but over the period 2000-2013, there was no net increase in demand from young adults. Meanwhile, older adults contributed relatively little to the construction rebound because of more stable demand for multifamily units, but accounted for most of the increase in multifamily occupancy from 2000-2013  of nearly 2.6 million units. (See Rappaport, Chart 1 below).

What factors explain the shift towards multifamily units? Among young adults, Dr. Rappaport notes a long-term trend of delayed marriages as well as the cyclical downturn in income growth since 2007. Among older adults, the long-term trends of improving health and longevity have pushed back the age at which older adults typically downsize from single-family to multifamily unit by twenty-five years since 1980. With nearly 26 million baby boomers projected to enter the age – 70 years – where this downsizing accelerates from 2015-2030, Dr. Rappaport projects that demand for multifamily units is likely to continue to increase over the next decade, peaking to about half a million per year (baseline scenario) in 2018-2020 (Rappaport, Chart 2).

REALTOR® University provides on-line education on real estate and other topics at the MBA and undergraduate levels. The REALTOR® University Speaker Series provides a venue to learn about and stimulate discussion of economic and real estate issues in support of NAR’s mission as the Voice of Real Estate.

[1] The REALTOR®  University Speaker Series on “Millennials, Baby Boomers, and Rebounding Multifamily Home Construction” with Dr. Jordan Rappaport, Senior Economist, Federal Reserve Bank of Kansas City, was held on September 21, 2015.

 

Like-Kind Exchanges: Highlights from Virginia

Fri, 09/18/2015 - 11:32

Based on the latest data from the Bureau of Economic Analysis[1], the real estate industry accounted for $67.7 billion in Virginia. The figure accounted for 14.6 percent of Virginia’s Gross State Product. The figure includes real estate transactions—sales, leasing, property management, etc.

For a significant proportion of real estate market participants in Virginia, like-kind exchanges (LKE) provide an important vehicle to sell and acquire property. The Internal Revenue Code (IRC) Section 1031 codifies that the tax owed on any gain after a sale may be deferred as long as the proceeds are reinvested in a similar property through a like-kind exchange.  The Internal Revenue Service (IRS) makes note of the fact that while the gain “is tax-deferred […] it is not tax-free.”[2]

Like-kind exchanges can be utilized by individuals, partnerships, corporations, limited liability companies, and trusts. IRC Section 1031 allows investors to defer taxes when disposing of property, as long as the proceeds are reinvested in another property of like kind within 180 days. This tax deferral feature allows increased investment in properties and encourages a more active real estate market.

The Like-Kind Exchanges: Real Estate Market Perspectives 2015 report provides information about LKEs and their impact on real estate markets. The report is based on a national survey of REALTORS. In Virginia, 91 percent of respondents indicated that they engaged in 1 – 6 LKE transactions during 2011-14. An additional 9 percent indicated that they closed more than 12 transactions during the same timeframe.

Like-kind transactions were especially important to small businesses and investors in Virginia. Individuals or sole proprietorships comprised 52 percent of all LKE transactions. S-corporations made up 42 percent of exchanges, while C-corporations and REITs accounted for 6 percent of all transactions.

Just as importantly, LKE transactions in Virginia involved properties held for a longer duration. Sixty-eight percent of LKEs featured properties held for 5 – 14 years. An additional 18 percent comprised properties held for 15 – 29 years.

Like-kind exchange transactions lead to additional investment in real estate properties, as 90 percent of respondents from Virginia’s sample indicated. The majority—82 percent—indicated that the average capital investment in property improvements was between 10% – 49% of the property’s fair market value. The additional capital investment translated into additional jobs, leading to increases in Virginia’s Gross State Product.

Respondents to the survey were asked how the repeal of IRC Section 1031 would change the real estate market. Highlighting the importance of LKE transactions for Virginia, 59 percent of respondents indicated that, without the tax deferral provision, their LKE transactions would not have occurred. In addition, 36 percent of the state’s respondents also pointed out that without IRC Section 1031 the holding period would increase by “Greater than 50% of [a property’s] useful life.”

To access the Like-Kind Exchanges: Real Estate Market Perspectives 2015 report, visit http://www.realtor.org/reports/like-kind-exchange-survey.

[1] Bureau of Economic Analysis, Regional Data: GDP & Personal Income. http://www.bea.gov/iTable/index_regional.cfm.

[2] Internal Revenue Service, Like-Kind Exchanges Under IRC Code Section 1031, FS-2008-18, February 2008.

Like-Kind Exchanges: Highlights from Texas

Thu, 09/17/2015 - 15:28

Based on the latest data from the Bureau of Economic Analysis[1], the real estate industry accounted for $150.1 billion in Texas. The figure accounted for 9.1 percent of Texas’s Gross State Product. The figure includes real estate transactions—sales, leasing, property management, etc.

For a significant proportion of real estate market participants in Texas, like-kind exchanges (LKE) provide an important vehicle to sell and acquire property. The Internal Revenue Code (IRC) Section 1031 codifies that the tax owed on any gain after a sale may be deferred as long as the proceeds are reinvested in a similar property through a like-kind exchange. The Internal Revenue Service (IRS) makes note of the fact that while the gain “is tax-deferred […] it is not tax-free.”[2]

Like-kind exchanges can be utilized by individuals, partnerships, corporations, limited liability companies, and trusts. IRC Section 1031 allows investors to defer taxes when disposing of property, as long as the proceeds are reinvested in another property of like kind within 180 days. This tax deferral feature allows increased investment in properties and encourages a more active real estate market.

The Like-Kind Exchanges: Real Estate Market Perspectives 2015 report provides information about LKEs and their impact on real estate markets. The report is based on a national survey of REALTORS. In Texas, 87 percent of respondents indicated that they engaged in 1 – 6 LKE transactions during 2011-14. An additional 9 percent indicated that they closed more than 12 transactions during the same timeframe.

Like-kind transactions were especially important to small businesses and investors in Texas. Individuals or sole proprietorships comprised 52 percent of all LKE transactions. S-corporations made up 34 percent of exchanges, while C-corporations and REITs accounted for 15 percent of all transactions.Just as importantly, LKE transactions in Texas involved properties held for a longer duration. Seventy-seven percent of LKEs featured properties held for 5 – 14 years. An additional four percent comprised properties held for 15 – 29 years.

Like-kind exchange transactions lead to additional investment in real estate properties, as 89 percent of the respondents from Texas’s sample indicated. The majority—84 percent—indicated that the average capital investment in property improvements was between 10% – 49% of the property’s fair market value. The additional capital investment translated into additional jobs, leading to increases in Texas’s Gross State Product.

Respondents to the survey were asked how the repeal of IRC Section 1031 would change the real estate market. Twenty-five percent of Texas respondents indicated that, without the tax deferral provision, their LKE transactions would not have occurred. In addition, 38 percent of the state’s respondents also pointed out that without IRC Section 1031 the holding period would increase by “Greater than 50% of [a property’s] useful life.”

To access the Like-Kind Exchanges: Real Estate Market Perspectives 2015 report, visit http://www.realtor.org/reports/like-kind-exchange-survey.

[1] Bureau of Economic Analysis, Regional Data: GDP & Personal Income. http://www.bea.gov/iTable/index_regional.cfm.

[2] Internal Revenue Service, Like-Kind Exchanges Under IRC Code Section 1031, FS-2008-18, February 2008.

Latest Housing Starts (August 2015)

Thu, 09/17/2015 - 10:47
  • Homebuilders are not building enough. In August, housing starts fell for the second straight month. Without a robust addition of newly constructed homes, an inventory shortage will continue.
  • Specifically, housing starts fell to 1.13 million units (annualized pace) in August. That is seven percent below the recent peak set two months ago. More importantly, the current pace is well below the historical normal pace of 1.5 million units annualized pace. The hurt is concentrated in single-family home construction. Single-family home construction was at 739,000, compared to around 1.2 million normal activity. Multifamily apartment construction is doing fine. Multifamily construction was 387,000, which is slightly above the long-term average.
  • It’s logical that more apartments are being built with rising rental demand. It is, however, strange that single-family homes are not being robustly built even though there is an inventory shortage and rising home prices.
  • Regionally speaking, the South is doing relatively better over the past several years. The West region is witnessing moderate growth. The Midwest and the Northeast regions are not seeing any measurable gains.
  • A survey of homebuilders has shown great optimism – reaching the highest level in a decade. But the results are less meaningful and likely biased. After all, housing starts are only half the activity of a decade ago. The expressed rising confidence is likely reflecting larger-sized homebuilders who are having no problem finding a buyer and thereby making a good profit. However, many small-sized builders are struggling to get back into the game and evidently are not responding to surveys.
  • What’s holding back the small-time homebuilders are two things: (1) the difficulty obtaining construction loans and (2) the inability to compete with large builders in obtaining skilled workers. The average construction workers’ wage of $25.27 per hour much above the minimum wage. Yet, very few workers want to enter this profession.

Like-Kind Exchanges: Highlights from Ohio

Wed, 09/16/2015 - 15:36

Based on the latest data from the Bureau of Economic Analysis[1], the real estate industry accounted for $65.5 billion in Ohio. The figure accounted for 11.2 percent of Ohio’s Gross State Product. The figure includes real estate transactions—sales, leasing, property management, etc.

For a significant proportion of real estate market participants in Ohio, like-kind exchanges (LKE) provide an important vehicle to sell and acquire property. The Internal Revenue Code (IRC) Section 1031 codifies that the tax owed on any gain after a sale may be deferred as long as the proceeds are reinvested in a similar property through a like-kind exchange.  The Internal Revenue Service (IRS) makes note of the fact that while the gain “is tax-deferred […] it is not tax-free.”[2]

Like-kind exchanges can be utilized by individuals, partnerships, corporations, limited liability companies, and trusts. IRC Section 1031 allows investors to defer taxes when disposing of property, as long as the proceeds are reinvested in another property of like kind within 180 days. This tax deferral feature allows increased investment in properties and encourages a more active real estate market.

The Like-Kind Exchanges: Real Estate Market Perspectives 2015 report provides information about LKEs and their impact on real estate markets. The report is based on a national survey of REALTORS. In Ohio, 77 percent of respondents indicated that they engaged in 1 – 6 LKE transactions during 2011-14. An additional 14 percent indicated that they closed more than 12 transactions during the same timeframe.

Like-kind transactions were especially important to small businesses and investors in North Carolina. Individuals or sole proprietorships comprised 41 percent of all LKE transactions. S-corporations made up 39 percent of exchanges, while C-corporations and REITs accounted for 19 percent of all transactions.

Just as importantly, LKE transactions in North Carolina involved properties held for a longer duration. Close to half of LKEs featured properties held for 5 – 14 years. An additional 23 percent comprised properties held for 15 – 29 years.

Like-kind exchange transactions lead to additional investment in real estate properties, as all of the respondents from North Carolina’s sample indicated. The majority—82 percent—indicated that the average capital investment in property improvements was between 10% – 49% of the property’s fair market value. The additional capital investment translated into additional jobs, leading to increases in North Carolina’s Gross State Product.

Respondents to the survey were asked how the repeal of IRC Section 1031 would change the real estate market. Highlighting the importance of LKE transactions for North Carolina, 45 percent of respondents indicated that, without the tax deferral provision, their LKE transactions would not have occurred. In addition, 71 percent of the state’s respondents also pointed out that without IRC Section 1031 the holding period would increase by “Greater than 50% of [a property’s] useful life.”

[1] Bureau of Economic Analysis, Regional Data: GDP & Personal Income. http://www.bea.gov/iTable/index_regional.cfm.

[2] Internal Revenue Service, Like-Kind Exchanges Under IRC Code Section 1031, FS-2008-18, February 2008.

Industrial Production Numbers: August

Tue, 09/15/2015 - 11:05
  • The nation’s factories cut back total production in the past month, implying a marked reduction in economic momentum.  Though GDP in the second quarter grew at brisk pace of 3.7 percent, activity in the second half will be notably weaker at around two percent growth.
  • Specifically, industrial production fell 0.4 percent in August from a month ago and is now higher by only 0.9 percent from one year ago.  That is the bare minimum needed to keep the economy moving ahead.
  • The production of consumer goods is moving ahead at a decent pace of 2.6 percent.  But the production of business equipment and construction supplies is lagging behind.
  • Manufacturing sector jobs, in the meantime, have been falling.  Just as agriculture production has been largely mechanized over the long haul, repetitive assembly line work could be vulnerable to automation.  The jobs that are being created are for those who build machines and robots.  As such, employment in professional and technical services (such as computer systems design and engineering services) is rising.
  • It is projected that possibly over half of current jobs could be replaced by machines and robots within 50 years.  The Luddites and socialists in Britain at the beginning of Industrial Revolution went from factory to factory to smash machines.  Of course we know in hindsight that it was the Industrial Revolution that pushed Britain, and subsequently other Western economies, to rise and greatly improve people’s standard of living over time.  However the replacement of brawn with brain will lead to greater income inequality.  That is, workers at Google and Facebook will do well while those working in factories may have to constantly look over their shoulder.

Housing Affordability Numbers for July

Tue, 09/15/2015 - 10:13

At the national level, housing affordability is down from a year ago and for the month of July as rates top four percent the levels of 2014 and home prices are still outgrowing incomes that are only rising two percent.

Housing affordability is down from a year ago in July as the median price for a single family home in the US is up from a year ago. Regionally, the West had the biggest increase in price at 8.4 percent while the Northeast experienced the slowest price growth at 1.8 percent. The Midwest price increased 6.5 percent while the South had gains of 7.1 percent.

The median single-family home price is $ 235,500 up 5.8 percent from July 2014. July’s mortgage rate is 4.19, down 6 basis points (one percentage point equals 100 basis points) from last year. Nationally, affordability is down from 155.4 in July 2014 to 151.2 in July 2015.

Affordability is down from one month ago in all regions, and the West had the largest drop in the affordability index of 2.1 percent while the South fell only 0.4 percent. From one year ago, affordability is down in all regions except the Northeast which had an increase of 2.0 percent. The West saw the biggest decline in affordability at 4.3 percent and the Midwest had the smallest decline of 3.0 percent.

 Despite month to month changes, the most affordable region is the Midwest where the index is 191.9. The index is 160 in the South, 150.7 in the Northeast, and 114.4 in the West.

Housing markets with low inventory levels may continue to experience rising home prices however, improvement in job creation and steady income gains helps offset major price growth. Mortgage applications are currently down for new and existing homes which could be seasonal or a sign that rising rates are having an impact on affordability.

What does housing affordability look like in your market?  View the full data release here.

The Housing Affordability Index calculation assumes a 20 percent down payment and a 25 percent qualifying ratio (principle and interest payment to income).  See further details on the methodology and assumptions behind the calculation here.

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