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February – Real Estate Newsletter

February Real Estate Newsletter

GENERAL PROGNOSIS

“We are currently experiencing the best real estate returns since the bottom in July of 2012 when prices rose at a 5.9% real annual rate. Given history, this trend is unlikely to be sustained.”– David M. Blitzer, Chairman of the Index Committee, S&P Dow Jones Indices.

TOP STORY: 2017: Still Strong, But May Start to Slow

Going into the fifth straight year of growth, the national real estate market will continue to improve in 2017, if a little more slowly than it did last year, most economists believe. Last year, in fact, was a strong year that outperformed some predictions. At the same time, the market grew less in 2016 than in the previous year.

What does this mean? The sky isn’t falling, but the market is sending smoke signals that a plateau or even a downturn is on the distant horizon, sometime after 2017.

While most economists agree that the market Will eventually cool off, they also agree that 2017 should be a pretty good year. The disagreement among the experts, rather, is when the expected downturn will occur.

No Recession Anytime Soon

Those sorts of questions are comparable to asking when it’s going to rain when the sun is still shining. Even if most economists see the signs of rain in the distance, economic conditions are looking favorable for the rest of the year, according to Mark Zandi, chief economist of Moody’s Analytics. “I think the economy is performing well and its prospects, over the next year or two, are good.”

“We are creating lots of jobs, the economy is closing in on full employment, wage growth is picking up, there’s a record number of open job positions and layoffs are at record lows,” he adds. “There’s nothing there to suggest that the economy is going to enter a recession anytime soon.”

To get a better handle on economic reality, it would be good to take a look at last year’s results and some predictions for 2017. On the whole, they’re reassuring. Here’s a sampling:

Strong Forecast for ‘17

According to the National Association of Realtors (NAR), home sales this year will increase to 5.36 million, making 2017 the best year in sales since 2006, the pre-recessionary benchmark. (That factoid alone should be enough to put any pessimists to flight.) Housing starts will increase 5.3% this year, for a total 1.22 million.

While that’s good news, it’s not good enough for Lawrence Yun, chief economist of the NAR. The country needs at least 1.5 million new homes in 2017, he says, to “make up the shortfall in recent years and keep up with the growing demand.”

Sales of new single – family homes will climb to 620,000 units in 2017 compared to 570,000 last year. The age profile of first-time buyers, 32, remains comfortably in the Millennial range, with the median age of first-time homebuyers increasing one year (31) over that of 2015 and the four preceding years.

Prices Predicted to Increase

The median sales price is expected to rise 4% nationally, according to NAR, slightly less than the 5.5% increase recorded last year – an impressive benchmark. Last year’s price rise, in fact, “surpassed the peak set in July 2006 as the housing boom topped out,” according to S&P Core Logic Case – Shiller Indices, an oft – cited yardstick of U.S. home prices.

“The new peak set by the …National Index will be seen as marking a shift from the housing recovery to the hoped – for start of a new advance,” says David M. Blitzer, managing director at S&P Dow Jones Indices.

He adds a word of caution against unbounded optimism, however. Even though the national market is experiencing its best returns since bottoming out in June 2012, Blitzer thinks annual increases in home values of nearly 6% annually are “unsustainable.”

He points out that a number of highflying markets have still not recovered fully from the recession: “While seven of the 20 cities previously reached new post – recession peaks, those that experienced the biggest booms – Miami, Tampa, Phoenix and Las Vegas – remain well below their all-time highs.”

As of last November, Portland was the top – performing market in the first eleven months of 2016, with an 14.9% year – to – year price increase, followed by Seattle (13.3%) and Denver (9.8%).

The first-time home buyer in 2016 had a higher household income ($72,000) than last year ($69,400), according to NAR. Last year’s first-time buyer also purchased a slightly larger home (1,650 square – feet vs. 1,620-square – feet in 2015) and paid a tad more than the year before ($182,500 vs. $170,000).

Millennials Boost Sales

NAR surveys of both renters and recent buyers “prove that there’s an overwhelmingly strong desire among the younger generation to own a home of their own,” says Lawrence Yun.

“The housing market over the next couple of years should get a big lift in demand from these new buyers,” he continues. “The one caveat is it’s essential that there’s enough new and existing supply and entry – level prices for [buyers] to reach the market.”

The typical repeat buyer was 52 years old vs. 53 in 2015, earned $98,000 vs. $98,700, and bought a home of 2,000 square feet vs. 2,020 square feet in 2015. The repeat buyer paid slightly more ($250,000 vs. $246,400 in 2015) for that slightly smaller house. Again, NAR is the source.

Inventory Problems Not Improving

Inventory numbers from the Realtors’ trade group show that Yun has reason to be concerned about whether there are enough homes on the market: Inventory is currently down an average of 11% in the top 100 metros in the U.S..

“The conditions…limiting home supply are not expected to change in 2017,” says NAR. Popular home markets, not surprisingly, are more competitive: In the top 100 metros, homes spend 68 days on the market or 11 days less than in the country as a whole.

APPRECIATION SLOWING IN SOME AREAS

“The strong national sales price numbers mask a shift in the market where we are seeing home price appreciation weaken in some previously highflying and high – priced markets while continuing to strengthen in some of the secondary markets…Based on bellwether markets across the country, where sales volume has been decreasing often for several months, I would expect sales volume nationally also to slow down in 2017…That slowdown could be accelerated by rising mortgage rates but even without rising interest rates I think enough markets are now hitting affordability and inventory constraints that demand will slow down. And as demand slows, inventory will gradually increase in 2017.” Daren Biomquist, Sr. Vice President, ATTOM Data Solutions.

One positive outcome from rising home values is that many American homeowners have rebuilt their home equity, according to Case Shiller. “After hitting a trough in June 2011, the value of the nation’s single – family housing stock grew 40% by June 2016. Home equity wealth has more than doubled during that period, rising from $6.1 trillion to $12.7 trillion.” By rebuilding this component of household wealth, “the recovery in home equity has helped to support consumption spending and renovation expenditures.”

For example, Moody’s Analytics has estimated that for every $100 rise in housing wealth, consumption spending rises roughly $2. In other words, a $6 trillion rise in housing wealth has lifted consumer spending by more than $100 billion during the last five years.

That’s the (mostly) good news. And while not all economists agree, there is a general consensus that the market, while still strong and showing room for growth, may be due for a slowdown.

Real Estate Headwinds

The “underlying fundamentals continue to support overall home sales growth, but headwinds, such as global economic uncertainty and deteriorating housing affordability, will temper stronger sales activity,” says Leslie Appleton – Young, chief economist for the California Association of Realtors.

One such headwind may be the planned increase in interest rates this year. Last December, the Federal Reserve announced it was finally raising rates in 2017 after years of speculation. The Mortgage Banking Association predicts that mortgage interest rates will be in the 4.8% range by the end of 2017.

“Even the best-case scenario suggests that the historically low rates that have been in place for the last few years are firmly in the rear-view mirror,” economist Matthew Gardner told Inman News in December.

Millennials Are Biggest Buyer Group

Realtor.com, the NAR web magazine, says that rate increases will hit the Millennial market hardest, reducing the market share of Twenty – and Thirty – somethings from 38% last year to an expected 33% in 2017.

Even with that hit, however, Millennial will remain the single – largest buyer segment, according to NAR.

Baby Boomers, in contrast, represent 30% of the market, but are more resilient financially than their younger counterparts. Why? Boomers on the whole are less dependent on financing than younger home buyers. For that reason, Boomers are “anticipated to be more successful when it comes to closing.”

Strength in Midwestern Markets

If rising interest rates may impact some buyers, the increased cost of borrowing does not appear to affect expectations of a strong performance of Midwestern cities in the coming year, according to some experts.

“Midwestern cities are anticipated to continue to beat the national average in Millennial purchase market share in 2017, with Madison, Wl; Columbus, OH; Omaha, NE; Des Moines, IA; and Minneapolis, MN, leading the pack.”

“This year,” says Realtor.com, the “average Millennial market share in these markets is 42%, far higher than the U.S. average of 38%.” With strong affordability in the largest Midwestern markets, “we expect this trend to continue in 2017 even as interest rates increase.”

Factors Slowing Down the Market

Rising interest rates are not the biggest concern among some housing experts, however. A recent survey asked 25 top economists to name the factors that could hamstring the housing market in 2017. Here are some of the factors currently slowing the home market:

Slow income growth is hindering many would-be homebuyers. “The real reason (for the housing slowdown) is the lack of real wage growth for the majority of middle – class workers,” says Scott Brown, chief economist for Raymond James.

Seth Harris, former deputy at the U.S. Dept, of Labor, blames the “slack in the labor market and its sibling, stagnant wages.”

FACTORS THAT WILL DRIVE SALES

“Strong household formation coupled with further job /growth, rising wages and continuing home price appreciation will drive strong growth in purchase originations in the coming years…The world is an uncertain place, and there is always a chance that rates could drop again in response to global turmoil. But we expect that refinance volume will be much lower over the next few years as homeowners have repeatedly had the opportunity to lower their rates, and there will be fewer households with an incentive to refinance if rates follow the path we are projecting.” Mike Fratantoni, chief economist, Mortgage Bankers Association

STILL A GOOD TIME TO BUY

“Younger households, renters and those living in the costlier West region – where prices have soared in recent months – are the least optimistic about buying. Although the economy is expected to continue to expand with around 2 million net new job creations, existing home sales are expected to see little expansion next year because of affordability tensions from rising mortgage rates and prices continuing to outpace income growth.” Lawrence Yun, Chief Economist, National Association of Realtors

Credit Requirements Tougher

Lenders and their tough credit requirements are turning homebuyers away, according to other economists. “Tight lending conditions are the primary reason for a soft housing market,” says real estate economist Robert Johnson. “Potential Buyers still have to jump through way too many hoops to get a loan.” The average FICO score of approved mortgages, he adds, “remains elevated compared to pre – recession levels.”

In agreement is Alan MacEachin, corporate economist at Navy Federal Credit Union. “The main reason the housing market remains relatively weak is tightened credit standards,” he says. “The post – mortgage crisis and changes to underwriting and down payment requirements removed a significant layer of buyers from the market all at once.”

Tight Credit May Loosen in ‘17

Separate from the economist survey, at least one real estate industry expert seems to believe that credit will loosen up for homebuyers in the coming year. The reason, he says, is the perceived pro – business climate of the new administration.

“The pendulum has been swinging toward the loosening of the credit box a bit,” says Blomquist of ATTOM Data Solutions. “I don’t think we’ll see a reversal of that with the new administration,” he adds. Instead, “we’ll likely see an acceleration.”

To sum up, the consensus among experts is that 2017 will continue the growth curve, even if that curve begins to flatten a little.

Prospective buyers may want to move decisively before prices and interest rates rise much further. The sun is still shining and the sky is a brilliant blue, but there may be storm clouds on the distant horizon. But that’s for the far – off future. For the time being, the market is still strong and it remains a great time to buy a home.

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