Economist's Outlook

Home Staging Could Pay for Itself and Increase Seller Equity

According to 31 percent of REALTORS® who work with buyers, staging a home before listing it for sale on the market could have a price increase of up to five or 10 percent. On a $300,000 home, that could add between $15,000 and $30,000, paying for the cost of home staging and increasing a seller’s equity.

In a new NAR report 2017 Profile of Home Staging, 59 percent of REALTORS® who work with sellers said that staging a home could increase the dollar value buyers offer. Twenty-nine percent said it can increase the dollar value offered by one to five percent and 21 percent said it could increase the dollar value offered by six to 10 percent. If there is no impact on dollar value, home staging can help speed up the time it takes to sell a home, 62 percent said it slightly or greatly decreased a home’s time on market.

How to Stage a Home

Forty-nine percent of agents representing home buyers said that home staging positively impacts their view of the home. Seventy-seven percent of agents said that home staging made it easier for buyers to visualize the property as their future home. The living room was listed at the top as rooms that are very important to stage (55 percent), followed by the master bedroom (51 percent), and the kitchen (41 percent). Thirty-eight percent of seller’s agents suggest that sellers stage all homes for sale and 37 percent recommend that if a seller does not stage that they should declutter and fix property faults.

Paying for Home Staging

Most often, the seller pays before they list their home on the market, said 25 percent of agents. In some cases, the REALTOR® personally offers to stage a home (21 percent). A REALTOR® can also offer to recommend a reliable and affordable home staging service (14 percent).

In Which States Did Properties Sell Most Quickly in July 2017?

Amid strong demand and tight supply, REALTORS® reported that  properties that sold in May–July 2017 were typically on the market for less than 31 days in 29 states and in the District of Columbia, according to the July 2017 REALTORS® Confidence Index Survey.[1] Properties sold quickly in states such as Washington (20 days), Colorado and Kansas (21 days), and California (22 days). Only in seven states did properties typically stay on the market for two months or more: Wyoming, Louisiana, Mississippi, Alabama, West Virginia, Vermont, and Connecticut.

Nationally, properties typically stayed on the market for 30 days in July 2017 days (28 days in June 2017; 36 days in July 2016).[2]  For comparison, properties were typically on the market for 97 days in 2011.

Nationally, 51 percent of properties that sold in July 2017 were on the market for less than a month (54 percent in June 2017; 47 percent in July 2016).[3] Only nine percent of properties were on the market for six months or longer.

[1] In generating the median days on market at the state level, NAR uses 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 fewer than 30 observations.

[2]The survey asks, “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.

[3] Days on market usually refers to the time from listing date to contract date.

Labor Day 2017: Celebrating Hard-Working REALTORS®

Looking at data from the 2017 Member Profile we recognize REALTORS® for their hard work and successes this Labor Day.

  • Sixty-five percent of REALTORS® are licensed as sales agents, 22 percent as brokers, 15 percent as broker associates, and two percent as appraisers.
  • The majority of REALTORS® specialize in residential brokerage at 70 percent, with commercial brokerage making up two percent.
  • The typical member has been in the real estate industry for a median of 10 years, and has been at their present firm for a median of four years.
  • Ninety-five percent of REALTORS® were certain that they will remain active as a real estate professional during the next two years.
  • In 2016 the typical member had a median of 12 transactions, and a median sales volume of $1.9 million.
  • REALTORS® worked a median of 40 hours per week in 2016, with 65 percent working 40 or more hours per week.
  • Only four percent of members cite real estate as their first career, prior full-time careers include:
    • Management/Business/Financial: 17 percent
    • Sales/Retail: 16 percent
    • Office/Admin support: 9 percent
    • Education: Seven percent
    • Healthcare: Five percent
    • Homemaker: Four percent
  • For 74 percent of REALTORS® real estate is their only occupation. This percentage increases with experience. Eighty-four percent of members with 16 years or more of experience cited real estate as their only occupation.

View the Labor Day infographic and find out more about REALTORS® in the 2017 Member Profile.

A Breakdown of NAR Commercial Members’ Income

Half of all members are brokers (47 percent) and a third are sales agents (30 percent). The median gross income for brokers in 2016 was $154,900 compared to sales agents at $81,300. The median annual gross income for all commercial members was $120,800 in 2016, an increase from $108,800 in 2015, but slightly below 2014 when it was $126,900—the highest recorded since 2006.

Eighty percent of all commercial members work more than 40 hours a week and 23 percent work more than 60 hours. Despite the income difference, brokers and sales agents work comparably the same amount of hours per week. More than half of brokers and sales agents work 40 to 59 hours a week (56 and 55 percent respectively) and one-quarter work more than 60 hours a week (25 and 23 percent respectively). For those members that worked 40 to 59 hours per week, the median annual gross income was $126,900; for those that worked 60 hours or more, the median annual gross income was $171,300.

Seventy-two percent of commercial members are compensated by percentage commission split (39 percent) and 100% commission (33 percent). However, 41 percent of brokers are compensated on a 100% commission basis and 54 percent of sales agents are compensated by a percentage commission split basis. Compensation by a percentage commission split basis decreases with experience and 100% commission basis increases with experience.

The median share of annual income that commercial members receive from all types of commercial activity is 75 percent. Sixty-three percent of commercial members derived 50 percent or more of their income from all commercial real estate in 2016. A quarter of women (26 percent) derive one to 25 percent of their income from commercial activities, compared to 16 percent of men. As years of experience increases, so does the median share—the median share for those with less than two years of experience is 14 percent compared to 80 percent for those with 26 or more years of experience.

The median share of annual income that commercial members derive from commercial sales is 71 percent, 61 percent for women and 75 percent for men. The median share of income from leasing activity is 23 percent and seven percent from property management.

Appraisers make up only five percent of NAR members. While this is a small subset of the commercial real estate industry, the median gross annual income for appraisers in 2016 was $115,400. The median share of annual income that appraisers receive from all types of commercial activity is 80 percent. Sixty percent of appraisers work between 40 and 59 hours per week. More than other license types, 41 percent of appraisers receive their income from a straight salary compensation basis. Appraisers derive a median of 13 percent of their income from commercial sales activity and the majority receive no income from leasing or property management.

REALTORS® Reported More Home Tours but Fewer Offers in July 2017

One indicator of the strength of homebuying demand is the number of client home tours. REALTORS® reported that, on average, they took about six clients on a home tour in July 2017, up from four clients one year ago, according to NAR’s July 2017 REALTORS® Confidence Index Survey.

However, even as more clients went on a home tour, REALTORS® wrote on average 2.2 offers per client taken on a home tour, which appears to be slightly lower than the 2.5 written offers per client taken on a home tour in the same period last year. Higher price appreciation that have made homes less affordable may explain why fewer offers were written per client. Home prices have been appreciating in the face of tight supply of homes for sale.

The desire to buy a home remains strong as mortgage rates have fallen to below four percent again since February 2017 and 16.2 million jobs created since October 2010. However, inventory remains woefully low, with inventory of existing and new homes for sale as of the end of July 2017 equivalent to 4.4 months of the monthly pace of sales. Inventory has been tight for the last 12 years (4.5 months’ supply in May 2005).

Tracing the Beaten Path

Foot traffic, the number of times a property is shown to potential homebuyers, is a strong indicator of housing demand and future home sales. Each month NAR Research publishes a diffusion index for foot traffic, but recent efforts have expanded on this work to create other indexes. NAR Research is likely to continue to exploit this rich source of information.

Tracking Home Showings

Every month SentriLock, LLC. provides NAR Research with data on the number of properties shown by a REALTOR®. Lockboxes made by SentriLock, LLC. are used in roughly a third of home showings across the nation. This data has been culled for several years to create NAR’s diffusion index of foot traffic.

The diffusion index aggregates the number of markets that have experienced traffic that is stronger, weaker, or unchanged from a year earlier. A reading of “50” indicates that on average markets are unchanged from a year earlier, while a reading greater than that indicates that on average markets experienced stronger traffic than a year earlier. While useful, this measure provides no insights as to the magnitude of any change.

Something New

A new volume index for foot traffic was created by aggregating the total traffic each month from a panel of REALTOR® boards from across the United States. The aggregate volume data is then seasonally adjusted and annualized (SAAR). By seasonally adjusting the volume data, typical fluctuations from winter to summer are accounted for so that one month can be compared to the next. Annualizing the data allows one to compare the trend over a longer period.

Foot traffic based on the volume index rose 4.1 percent in July compared to June. Relative to July of 2016, traffic was up just 1.2 percent, but that was the first year-over-year gain in nearly six months. The steady downward trend in inventory has taken a toll on foot traffic.

As depicted above, a one-period lag of the foot traffic index (SAAR) tracks the trend for existing home sales (SAAR) closely. In fact, a simple regression of foot traffic from the current and prior two periods on existing homes sales shows a high degree of explanatory power with an r-square near 0.9, or nearly 90 percent of the variation in sales accounted for by variation in current and past foot traffic.

Paths Diverge, and Come Back Together

However, the foot traffic measure does not always track existing home sales well. When inventories are high, an individual consumer may view a property multiple times. In a tighter market with quick offers and a short time-on-market, she may only view a property once, while in an extreme case, a homebuyer may not even view the property before making an offer. Thus, shifts in the relationship of supply to demand can cause the trend in these two measures to diverge temporarily. Periods that cause a sudden increase in demand, like a sharp drop in mortgage rates or the homebuyer tax credits of 2009 and 2010, are examples of this phenomenon.

Finally, another factor that could cause a divergence is the makeup of the two indexes. Different panels are used to construct each series and thus they will include different local markets. Likewise, the existing home sales series is much older and the seasonal factors may differ as a result.

NAR Research has used foot traffic to gauge market trends for several years even at the local level. The new foot traffic volume index will add more color and understanding of current market dynamics. It also has potential for use in forecasting and providing insights at the local level. Foot traffic will continue to provide new measures, insights, and analytics in the years ahead.

 

Nearly 20 Percent of Sellers Move Out After Leaseback Period

Selling a home and simultaneously purchasing another property can be agitating. Ideally, the seller of the property will also have found another residence by the time the buyer is moving in, but this may not always happen because of delays in contract settlement.[1] In these cases, a seller may request to enter into a leaseback with the buyer. NAR’s monthly REALTORS® Confidence Index Survey finds about 20 percent of sellers vacated the property after the end of the leaseback period.

A seller leaseback, also called a sale leaseback or rent back, is a transaction in which the seller sells the property and then leases back the property from the new owner.[2] Both seller and buyer may benefit from this transaction if the leaseback clearly delineates the rights and responsibilities of the buyer and seller. Obviously, sellers benefit because they have more time to move out after selling their property and they get the proceeds from the sale which they can then use at closing of their new property purchase. But buyers who do not need to move in right away also benefit because by closing now, they can lock in their mortgage rate, which is beneficial especially when mortgage rates are on the uptrend. Buyers also start getting some returns from the rental payments from the leaseback, assuming the rent covers all costs (principal, interest, mortgage insurance, home insurance, real estate taxes).

Because buyers may also need to move in right away and because the risks of the leaseback are borne by the buyer (e.g.  the property will not be in the same condition at the end of the leaseback as at the time of closing), buyers who are most likely to agree to a leaseback are those don’t have to move in immediately or who may have purchased the property for investment or vacation use. According to the REALTORS® Confidence Index Survey, about 13 percent of homebuyers are non-primary residence buyers.

The leaseback transaction will generally consider the following aspects so that the buyer’s interests are protected during the leaseback period:[3]

1)     Drawing up the legal agreement that clearly stipulates the date the seller will vacate the property and the rights and responsibilities of the buyer and seller. Common stipulations pertain to property maintenance (usually seller’s responsibility), the right of the buyer to enter the property and make repairs, subletting (usually, seller may not sublet), uses of the property (not for illegal purposes, etc.), property insurance (seller insures his own property), payment of utilities (seller pays until move out), and payment of late charges in the event of late payment. The form of the agreement can be a purchase agreement addendum or a rental agreement, depending on the duration of the leaseback. For example, in California, leasebacks of less than 30 days only require a purchase agreement addendum while leasebacks of more than 30 days require a residential lease. To note, a purchase addendum will likely be the preferred form because a rental agreement creates rights for landlords and tenants that may complicate the process for the buyer in case the seller (tenant) fails to fulfill his responsibilities. For example, in California, a tenant can only be evicted if the landlord files a lawsuit.[4]

2)     Requiring the seller to pay a security deposit to be held in escrow until the buyer approves refunding back the deposit to the seller at the end of the escrow period.

3)     Stipulating a lease amount that covers the buyer’s total expenses, such as mortgage payment, taxes, insurance, utilities (or the utilities remain in the seller’s name until he moves out).

4)     Stipulating late charges in the event of late payment by the seller.

5)     Conducting a walk-through before closing and a final walk-through at the end of the leaseback period to verify the property condition before and after the leaseback period.

What this Means to REALTORS®: A leaseback may be necessary when the seller needs more time to move out. In a leaseback, the buyer bears the risk that the property will not be in the same condition at the end of the leaseback as it was at the time of closing/settlement. REALTORS® need to work closely with their buyer clients in crafting an agreement that minimizes this risk and protects their ownership rights.

[1] According to NAR’s monthly REALTORS® Confidence Index Survey, 25 percent of contracts that closed or terminated during April through July 2017 were delayed for a variety of reasons relating to obtaining financing, appraisal, inspection, and other issues

[2] Roxanne Minot, “What is a Seller Leaseback?”, Legal Match, https://www.legalmatch.com/law-library/article/what-is-a-seller-leaseback.html. Downloaded April 8, 2017.

 

[3] Realtor.com Team, “Can We Lease Back the Property at Closing?”, Realtor.com, http://www.realtor.com/advice/sell/can-we-lease-back-a-property-at-the-closing/, date of publication on Dec 30, 2011.

[4] “How to Evict a Tenant in California”, upcounsel, https://www.upcounsel.com/how-to-evict-a-tenant-in-california

 

Instant Reaction: June Owners’ Gains Forecast

The S&P CoreLogic Case-Shiller National Index shows that U.S. prices of single-family homes continue to rise. The national index level in June reached a new high and is up 5.8 percent from a year earlier.  But what does this mean for homeowners?

Home prices affect the wealth of homeowners. As the price of housing increases, the wealth of homeowners increases as well. Based on the above increase of home prices, it is estimated that value of owners’ household real estate was increased by 1.3 trillion in the last year and 107 billion came from home price increases in June. That means that 75 million homeowners each gained $17,070 on average in June 2017 from a year earlier.

Fed’s Change Means Higher, More Volatile Rates

Major changes are coming to housing finance. The Federal Reserve is about to unwind a program that has held mortgage rates low for several years. How will this change impact housing? Lenders weighed-in in NAR’s most recent Survey of Mortgage Originators.

Operation Twist

In the wake of the great recession, the housing market hit historic lows with prices falling roughly 30 percent and home sales falling by more than half. To stimulate the economy, the Fed launched a new policy tool to buy government and private assets dubbed the large asset purchase program (LSAPs). In particular, the Fed began buying long-term Treasuries and agency (Fannie Mae, Freddie Mac, and Ginnie Mae) mortgage backs securities. The Fed’s final round of LSAPs, called “operation twist” was solely focused on buying long-term assets.

The rate on a mortgage is inversely related to its price, so the idea behind the program was for the Fed to buy and hold long-term mortgage debt, thereby driving up MBS prices and down mortgage rates. The plan worked and analysts estimate that mortgage rates fell 30 to 65 basis points as a result. By the end of the program, the Fed held roughly $4.5 trillion in Treasuries and agency MBS.

In late 2013, the then Fed Chairman Ben Bernanke ended the program, but the Fed held onto its massive stockpiles.  To prevent a jump in rates, the Fed bought new MBS and Treasuries with monies it received when loans in its stockpile of MBS were refinanced or repaid. In this way, the Fed was still an avid player in the market, even though it was just maintaining its $4.5 trillion in holdings.

At its peak, the Fed was buying roughly 77 percent of all agency MBS. Even after the Fed’s buying program ended, maintaining its massive holdings required it to buy up nearly a fifth of the market. While mortgage rates remain historically low, they have risen nearly 50 basis points from the lows of 2016. As a result, there are fewer persons for whom refinancing makes sense. The decline in refinancing means that the Fed has fewer dollars to reinvest each month and its role in the market has shrunk. At the same time, private demand for Treasuries and agency MBS has increased. Any further increase in private demand for these assets would help to moderate rate increases.

If It Isn’t Broken…

Why would the Fed end the program that is keeping mortgage rates low? In order to give itself room to respond to the next crisis.

The Fed’s purview is the entire banking system and all of the many industries it supports. In the next crisis, it may need to extend additional support. If the Fed has to repurchase $30 to $50 billion dollars of Treasuries and agency MBS each month, then it may be hamstrung and unable to provide that support. Furthermore, the Fed must be careful not to overstimulate a particular sector, thereby fomenting the next crisis. Allowing market forces to buy and sell these assets based on perceived risks and returns may curb any excess risk taking.

How Much Will Affordability Bite?

Academic research suggests that rates improved 30 to 65 basis points because of the Fed’s purchase program. If the Fed’s exit from the market were symmetric, one might expect an equal increase in rates. However, the Fed has indicated that it favors to end its reinvestment program and then to allow its stockpile of Treasuries and agency MBS to slowly decline over time as current homeowners refinance, pay off their mortgage, or sell their homes.

According to Freddie Mac, the current average rate for a 30-year fixed rate mortgage is 3.89 percent. Thus, rates might rise to between 4.19 percent and 4.49 percent…roughly the range they were at the begging of 2017. On a $200,000 mortgage that would cost an extra $35 to $42 each month. Affordability would fall, but sales did not moderate when rates reached this level in early 2017. Mortgage rates are expected to rise further, though, as economic growth solidifies and they could rise sharply if the President’s proposed tax cuts, infrastructure spending, and regulatory relief programs take hold.

What are Lenders Saying?

Lenders were asked about the end of the Fed’s reinvestment program and the potential impact on housing in NAR’s most recent Survey of Mortgage Originators. 28.6 percent of lenders felt that the change would cause rates to rise. An additional 42.9 percent indicated that rates would rise and become more volatile.  Only 7.1 percent thought that the change would not have an impact on rates.

When asked about an end to the Fed’s reinvestment program, 40 percent of respondents thought the impact from the end of the FED’s reinvestment program would be felt in advance of implementation. However, 30 percent felt that the full impact would take 6 to 12 months to be absorbed and another 20 percent thought it would take up to two years. A 50 basis point increase to rates was the most frequently cited impact.

The Fed is about to end a program that has helped to keep mortgage rates low for several years. Mortgage rates are likely to rise as a result, but roughly in line with levels that the market has seen in recent months. However, mortgage rates are likely to rise further in the coming years weighing on affordability and with the Fed’s pullback, rates will become more volatile as market forces play a stronger role.

July 2017 Existing Home Sales

  • NAR released a summary of existing-home sales data showing that housing market activity this July fell 1.3 percent from last month but improved 2.1 percent from last year. July’s existing home sales reached 5.44 million seasonally adjusted annual rate.
  • The national median existing-home price for all housing types was $258,300 in June, up 6.2 percent from a year ago. This marks the 65th consecutive month of year over year’s gains as prices reach an all time high.
  • Regionally, all four regions showed growth in prices from a year ago, with the West leading all regions with an incline of 7.6 percent. The South had a gain of 6.7 percent followed by the Midwest with a gain of 5.9 percent. The Northeast had the smallest gain of 4.1 percent from July 2016.

 

  • From June, two of the four regions experienced gains in sales. The West inclined 5.0 percent. The South rose 2.2 percent. The Northeast had the biggest drop of 14.5 percent. The Midwest had the smallest decline of 5.3 percent.
  • Two of the four regions showed an increase in sales from a year ago. The West had a gain of 5.0 percent. The South had an incline of 3.6 percent. The Midwest had a drop in sales of 1.6 percent followed by the Northeast with a decline of 1.5 percent. The South led all regions in percentage of national sales, accounting for 41.9 percent of total, while the Northeast had the smallest share at 11.9 percent.

 

  • July’s inventory figures are down 1.0 percent from last month to 1.92 million homes for sale. Inventories are down 9.0 percent from a year ago, marking 26 months of year over year declines. It will take 4.2 months to move the current level of inventory at the current sales pace. Transactions are moving faster and it takes approximately 30 days for a home to go from listing to a contract in the current housing market, down from 36 days a year ago.

 

  • In July, single-family sales decreased 0.8 percent and condominiums sales were down 4.8 percent compared to last month. Single-family home sales inclined 1.7 percent and condominium sales were up 5.3 percent compared to a year ago. Both single-family and condominiums had an increase in price with single-family up 6.3 percent at $260,600 and condominiums up 5.3 percent at $239,800 from July 2016.

 

 

 

 

 

 

 

Lenders Optimistic on DTI Change

Fannie Mae recently raised the cap on its maximum debt-to-income (DTI) ratio to 50 percent. Will it help?  NAR Research queried lenders about this change in the Survey of Mortgage Originators for the 2nd quarter of 2017. Lenders were optimistic about the change, but some will maintain overlays to mitigate potential risks.

In July, Fannie Mae began buying and insuring loans with DTIs up to 50 percent. This change was an increase from the DTI cap of 45 percent maintained by Fannie Mae in recent years. Some analysts pointed to this change as a potential expansion of the credit box which would result in more home sales in the face of rising home prices and student debt. Others have panned it as simply taking loans from the Federal Housing Administration (FHA) or other channels.

57.1 percent of lenders in the survey indicated that the change would result in a modest increase in total originations as more borrowers take advantage of the change. Only 21.4 percent felt that this market segment was already served by the FHA, while 7.1 percent felt that the risk was too great to originate.

When asked whether they or the investor/aggregator with whom they work would impose an overlay or charge on loans these new loans with DTI>45 percent, only 14.3 percent indicated that they would impose an overlay with an average fee of 0.5 percent.  However, 75.1 percent of respondents were still uncertain suggesting that the share with overlays could rise.

In the wake of the great recessions, lenders pulled back from the risky products, underwriting, and lending practices that helped to foment the market’s downturn. More recently, this pattern has reversed with lenders taking on incremental risks, first with declines in down payments, declines in credit scores, and now modestly higher DTIs. This change may only have a marginal impact on overall lending, but it points to continued recovery in one of the last vestiges of the great recession: tight lending.

 

How Lapses of the National Flood Insurance Program Affect Home Sales

While The National Flood Insurance Program’s (NFIP) authority to write flood insurance expires at the end of next month, NAR conducted an analysis to estimate the impact of NFIP lapses on home sales.  Based on the latest available data, NAR has put together an estimate of the number of home sale closings that will be delayed or cancelled if there will be a lapse of the program after September 30.

What is the NFIP?

The NFIP is a program created by Congress in 1968. The program enables property owners in participating communities to purchase insurance protection against losses from flooding, and requires flood insurance for all loans or lines of credit that are secured by existing buildings, manufactured homes, or buildings under construction that are located in a community that participates in the NFIP. As of May 2017, the program insured about 5 million homes.

The NFIP was last up for reauthorization in 2012. After a two-month shutdown[1], the Biggert-Waters Flood Insurance Reform Act of 2012 extended the National Flood Insurance Program’s authority through Sept. 30, 2017. NAR estimated that 80,000 home sales in total were delayed or cancelled because of the two-month shutdown in the period 2008-2012.

The Data: How We Calculated the Numbers

The ultimate goal of this analysis is to estimate the number of home sales affected by a NFIP lapse.

First, we calculated the share of housing units that are located in 100-year floodplains called Special Flood Hazard Areas (SFHAs). The Federal Emergency Management Agency (FEMA) publishes the National Flood Hazard Layer (NFHL)[2], which enables us to determine the flood zone, base flood elevation, and floodway status for a particular location. Meanwhile, the 2010 Decennial Census includes the housing units counts for particular locations. Overlaying these two datasets, we estimated the share of housing units that lay in a 100-year floodplain.

NAR releases the number of existing home sales by region, while Census provides information about the number of new home sales. Applying the share of housing units in a 100-year floodplain by location to new and existing home sales, NAR estimated the number of home sales affected by a NFIP lapse.

Highlights & Main Findings

Nationwide, it is estimated that each day that NFIP lapses, 1,223 home sale closings will be delayed or cancelled nationwide. On a monthly basis, NAR estimates that each lapse would jeopardize 36,700 closings across the nation.

While nearly 9.6 million homes[3] (7.2 percent of the total housing units in the United States) are located in FEMA’s 100-year floodplains, some regions have a larger share of the housing stock located in SFHAs. Thus, the impact of a lapse on the housing is expected to be larger in regions with a higher share of homes in flood zones. As data shows, the majority of delays or cancellations in home closings is expected to occur in the South, where 11.6 percent of the total housing is located in a 100-year floodplain.

The visualization below shows the impact of a NFIP’s lapse on home sales by region:


Methodology

[1] The total shutdown period lasted two months. Between 2008 and 2012, Congress passed 18 short-term extensions while there were tiny gaps between extensions.

[2] National Flood Hazard Layer (NFHL) last updated in March 2017.

[3] Based on the number of housing units from the 2011-2015 American Community Survey (ACS).

More Foreign Buyers Purchased in Cities/Suburbs Than in Resort Areas

An increasing share of foreign buyers[1] are purchasing property in a central city/suburban area, while fewer foreign buyers are purchasing property in a resort area, according to NAR’s recently released 2017 Profile of International Activity in U.S. Residential Real Estate. The percentage of foreign buyers purchasing property in a resort area has declined, while only six percent of resident foreign buyers purchased in a resort area. Among non-resident foreign buyers, only 13 percent purchased in a resort area compared to one percent among resident foreign buyers.

 The declining percentage of foreign buyer purchases in resort areas can be traced to the decline in the share of Canadian and U.K. buyers who tend to purchase property for vacation use and/or to rent out.

Meanwhile, most Chinese, Indian, and Mexican foreign buyers, who are typically resident foreign buyers, tend to purchase property in a central city/urban or suburban area.

Among all major foreign buyers, Mexican and Canadian buyers were the most likely to purchase property in a rural area.

[1] The term international or foreign client refers to two types of clients: Non-resident foreigners (Type A) who are non-U.S. citizens with permanent residences outside the United States, and who typically purchase property as an investment, for vacations, or other visits of less than six months to the United States; Resident foreigners (Type B) who are non-U.S. citizens who are recent immigrants (in the country less than two years at the time of the transaction) or temporary visa holders residing for more than six months in the United States for professional, educational, or other reasons.

June 2017 Housing Affordability Index

At the national level, housing affordability is down from last month and down from a year ago. Mortgage rates increased to 4.14 percent this June, up compared to 3.84 percent a year ago.

  • Housing affordability declined from a year ago in June moving the index down 7.3 percent from 155.8 to 144.5. The median sales price for a single family home sold in June in the US was $266,200 up 6.6 percent from a year ago.
  • Nationally, mortgage rates were up 30 basis point from one year ago (one percentage point equals 100 basis points) while median family incomes rose 2.4 percent.
  • Regionally, the Midwest recorded the biggest increase in price at 7.8 percent. The West had an increase of 7.5 percent while the South had a gain of 6.3 percent. The Northeast had the smallest incline in price of 3.5 percent.
  • Regionally, all four regions saw a decline in affordability from a year ago. The West had the biggest decline of 8.8 percent. The South followed with a decline of 8.4 percent. The Midwest had a decline of 8.1 while the Northeast had the smallest decline of 3.7 percent.
  • On a monthly basis, affordability is also down from last month in all four regions. The Midwest had the biggest decline of 6.6 percent followed by the South, which had a decline of 6.1 percent. The Northeast had a drop of 4.9 percent. The West had the smallest decline in affordability of 3.6 percent.
  • Despite month-to-month changes, the most affordable region was the Midwest, with an index value of 177.3.  The least affordable region remained the West where the index was 105.3. In the West region properties were moving at a fast pace. For comparison, the index was 144.5 in the South, and 150.5 in the Northeast.
  • Mortgage applications are currently up. There was plenty of housing demand based on the pace of sales. Homeowners appear to be staying in their homes longer slowing turnover rates. Prices remain too high to compete with income growth. New home sales are lacking in production, which continues to put the burden on inventory levels.
  • 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 (principal and interest payment to income). See further details on the methodology and assumptions behind the calculation here.

Foreign Buyers Typically Spent 30 Percent More Than Domestic Buyers

Foreign buyers, typically purchased properties that are more expensive than properties purchased by domestic buyers, according to NAR’s recently released 2017 Profile of International Activity in U.S. Residential Real Estate.[1]

Among foreign buyers who purchased property in April 2016–March 2017, the median price was $302,290, which is about 30 percent more than the median[2] purchase of $235,792 for all existing homes sold in the United States in the same period. Using average[3] price as a measure, the average price among foreign buyers is $536,900, or about double the average price among domestic buyers of $277,700.

Among the major foreign buyers, Chinese buyers typically purchased residential properties that were more expensive than properties purchased by other buyers. This can be attributed to the tendency of Chinese buyers to purchase residential properties in central cities and suburban areas with relatively higher property prices such as California, New Jersey, and New York.

Foreign buyers are more likely to pay in cash than domestic buyers.[4] Non-resident foreign buyers are more likely to purchase in cash than resident foreign buyers who are more likely to obtain mortgage financing from U.S. sources. Seventy-two percent of non-resident foreign buyers made an all-cash purchase compared to 35 percent of resident foreign buyers.

Most foreign buyers from Canada and China made an all-cash purchase. Meanwhile, foreign buyers from India, most of whom are resident foreigners buying primary residences, obtained mortgage financing from U.S. sources.

[1] The term international or foreign client refers to two types of clients: Non-resident foreigners (Type A) who are non-U.S. citizens with permanent residences outside the United States, and who typically purchase property as an investment, for vacations, or other visits of less than six months to the United States; Resident foreigners (Type B) who are non-U.S. citizens who are recent immigrants (in the country less than two years at the time of the transaction) or temporary visa holders residing for more than six months in the United States for professional, educational, or other reasons.

[2] The median is the middle value of the distribution. Half of all purchases fall below this value and half are above this value. Because home values tend to skew to the higher end, the median is often a better reflection of typical market activity.

[3] The average or mean price is more sensitive to capturing extreme points, in this case, high-end purchases among foreign buyers.

[4] On average, cash sales were 23 percent of existing home sales during the period April 2016–March 2017, based on NAR’s REALTORS® Confidence Index.

Florida, Texas, and California: Top State Destinations Among Foreign Buyers in April 2016–March 2017

Five states accounted for slightly more than half of all foreign buyers who purchased U.S. residential property in April 2016–March 2017: Florida (22 percent), Texas (12 percent), California (12 percent), New Jersey (four percent) and Arizona (four percent), according to NAR’s recently released 2017 Profile of International Activity in U.S. Residential Real Estate. Other preferred destinations were Illinois, North Carolina, Georgia, and New York.[1]

Proximity to the home country, the presence of relatives, friends and associates, job and educational opportunities, and climate and location appear to be important considerations in deciding where to purchase a property. Florida and Arizona attracted buyers from Latin America, Europe, and Canada who tend to purchase properties in warm climates for vacation purposes. California and New Jersey drew Asian buyers, most likely for reasons related to geographic proximity, cultural similarities, and job opportunities. Texas, which is physically close to Latin America and home to a large Latino population, attracted buyers from Latin America and the Caribbean as well as Asian buyers.

Most Canadian buyers purchased residential property in Florida, Arizona, California, Texas, Georgia, Minnesota, and Nevada. Canadian buyers typically purchase properties for use as vacation homes, so they tend to locate in states with warm climates and resort areas. The increase in resident Canadian buyers may have helped put Minnesota on the list of major destinations in 2017.

More than a third of Chinese buyers purchased residential property in California, most likely because of its proximity to and cultural affinity with Asia. Texas, Florida, Illinois, New Jersey, Massachusetts, New York, Indiana, and Virginia were also preferred destinations.

Compared to other major foreign buyers, Indian buyers are not as concentrated in any state. While California, New Jersey, Texas, Massachusetts, and Kentucky were top destinations, more than two in five Indian buyers purchased in another state. Most Indian buyers purchased properties to use as a primary residence in these states where they most likely found jobs.

Most buyers from Mexico purchased properties in Texas and California, which are both geographically close to and have cultural similarity with Mexico. Other states in the South and West regions of the United States such as Arizona, Tennessee, Colorado, Florida, South Carolina, and Alabama were also major destinations.

U.K. buyers mainly purchased residential property for vacation use. Two-thirds of U.K. buyers purchased in the warm-weather states of Florida, Arizona, California, Texas, and Georgia.

REALTOR.com provides data on the market interest of global buyers searching for properties in the United States (see Global Buyers Searching in the United States).

[1] The term international or foreign client refers to two types of clients: Non-resident foreigners (Type A) who are non-U.S. citizens with permanent residences outside the United States, and who typically purchase property as an investment, for vacations, or other visits of less than six months to the United States; Resident foreigners (Type B) who are non-U.S. citizens who are recent immigrants (in the country less than two years at the time of the transaction) or temporary visa holders residing for more than six months in the United States for professional, educational, or other reasons.

Who Can Afford to Buy a Home in California?

California’s five metropolitan areas have become one of the 10 most expensive places for homebuyers. As of the first quarter of 2017, the median home prices for single-family homes are[1]: San Jose-Sunnyvale-Santa Clara, $1.1 million; San Francisco-Oakland-Hayward, $0.85 million; Los Angeles-Long-Beach-Anaheim, $0.49 million; Anaheim-Sta. Ana-Irvine[2], $0.75 million; and San Diego-Carlsbad, $0.564 million. At these level of prices, who can afford to purchase a home in these metro areas?

Home prices are just one aspect of affordability; the other aspect is to compare the home prices to income. I calculated the income that is required for a 2-earner family so that the mortgage payment on a fixed rate 30-year mortgage is no more than 25 percent of the family income, assuming a mortgage rate of four percent and a five percent down payment on a mortgage for a home valued at the median price for single-family homes as of the first quarter of 2017.[3] Table 1 shows the calculations for some CA metro areas where 2017 Q1 price data are available.

Table 1 shows that home prices are now unaffordable in San Jose-Sunnyvale-Sta. Clara, San Francisco-Oakland-Hayward, Anaheim-Sta. Ana-Irvine, and San Diego-Carlsbad. In these four areas, the share of mortgage payments to income is above 25 percent. Putting this in another way, the level of income that a 2-earner family currently receives is below the level of income that so that mortgage payments are no more than 25 percent of this income.[4] For example, in San Jose-Sunnyvale-Sta. Clara, even a 2-earner family earning $165,546 will not be able to afford a home without being cost-burdened because the mortgage payment takes up 35 percent of income. Another way to look at this is a family needs $232,940 in income (compared to actual income of 165,546) so that the mortgage payment represents no more than 25 percent of income.

Home prices are still affordable in the metropolitan areas of Los-Angeles-Long Beach-Anaheim However, with mortgage payments at 23 percent of income, although home prices are bordering on becoming unaffordable. Already, mortgage payments in the metropolitan division of Anaheim-Sta. Ana-Irvine now account for 35 percent of income. Home prices are still affordable in the metropolitan areas of Riverside-San Bernardino-Ontario and Sacramento-Roseville-Arden Arcade.

Saving for a down payment is another constraint to a home purchase. Even at a five percent down payment, one needs about forty to fifty thousand in San Jose-Sunnyvale-Sta. Clara and in San Francisco-Oakland-Hayward. To note, workers in these areas, particularly those in the technology companies, may have stock options[5] that provide a source of income or cash for down payment. The down payments for a property in Riverside-San Bernardino-Ontario and Sacramento-Roseville-Arden Arcade are more manageable, about twenty thousand.

Table 2 shows that home prices in San Jose-Sunnyvale-Sta. Clara have become so pricey that only workers in three types of occupations have incomes that are commensurate to the high cost of property so that they are not cost-burdened: high-end medical profession, computer/software engineers and managers, and business/finance managers. For people in other professions, including real estate agents, a home purchase in this area is not affordable, and if they do purchase a property, the mortgage payment will be a severe cost burden.

Why have prices become so unaffordable in California? The reason is extreme lack of supply amid strong job growth. On the supply side, the number of listings has considerably fallen in all metro areas compared to one year ago, except for Yuba City, Hanford-Corcoran, and Oxnard- Thousand Oaks-Ventura, based on July 2017 data from Realtor.com.  In San Jose-Sunnyvale-Sta. Clara, listings are down by 40 percent. On the demand side, job growth has been strong in many areas, with the number of new homes constructed below the number of jobs created, according to an NAR analysis by Evangelou.[6]  Clearly, more home construction is the only way to bring down prices and make homes more affordable.

[1] National Association of REALTORS® 2017 Q1 median single-family home prices

[2] Anaheim-Sta. Ana-Irvine is a metropolitan division of the Los-Angeles-Long Beach-Anaheim metropolitan statistical area.

[3] The rule-of-thumb for a cost-burdened household is when housing expenditures are 30 percent or more. Because the homeowner will spend on other costs related to owning a home (property taxes, utilities, home maintenance), we allow for these expenditures and assume that mortgage payments are 25 percent of income.

[4] The latest available data on mean annual income by occupation from the Bureau of Labor Statistics’ Occupational Employment Statistics is for May 2016. I inflated the 2016 metro-level income data by the 4.78 percent change in California’s personal income from 2016 Q1 to 2017 Q1. The state personal income data is released on a quarterly basis by the Bureau of Economic Analysis. The statewide growth rate is an approximation to the growth rate of income in the various metropolitan areas.

[5]stock option is a privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy or sell a stock at an agreed-upon price within a certain period of time.

[6] Evangelou, Nadia, “Where Does Job Growth Outpace New Housing Construction?”, Economists Outlook, NAR

June 2017 Pending Home Sales

  • NAR released a summary of pending home sales data showing that June’s pending home sales pace is up 1.5 percent from last month and up 0.5 percent from a year ago.
  • Pending sales represent homes that have a signed contract to purchase on them but have yet to close. They tend to lead existing-home sales data by 1 to 2 months.
  • Two of the four regions showed declines from a year ago. The Northeast had an incline of 2.9 percent followed by the South with an increase of 2.6 percent. The West had a decline of 1.1 percent. The Midwest had the biggest decline of 3.4 percent.
  • From last month, three of the four regions showed gains in sales. The Midwest was the only region to show a decline of 0.5 percent. The West had the biggest incline of 2.9 percent. The South had an increase of 2.1 percent. The Northeast had the smallest incline of 0.7 percent.
  • The U.S. pending home sales index level for the month was 110.2. May’s data was revised down slightly to 108.6.
  • In spite of the decline, this is the pending index’s 38th consecutive month over the 100 level.
  • The 100 level is based on a 2001 benchmark and is consistent with a healthy market and existing home sales above the 5 million mark.

Where Does Job Growth Outpace New Housing Construction?

In the last five years, San Francisco metropolitan area added 345,700 new jobs, but issued permits for only 20,241 single-family units. Meanwhile, home prices increased by 54 percent[1]. During the same period, Houston created 307,500 new jobs and permitted 173,638 new single-family units. Home prices rose 32 percent in Houston metropolitan area.

This example reveals the difficulty in San Francisco of construction keeping up with job growth. But which other metro areas are dealing with housing shortages? While housing is the logical result of economic forces – demand and supply- we calculated the Jobs/Permits ratio for the 100 largest metro areas.

We simply divided the number of new jobs (ending in June 2017) by the number of single-family units permitted in 2016. Six months lagged permits are a good proxy for single-family supply, since the average length of time from start to completion was 6.6 months according to Census[2]. The ratio shows the number of single-family units permitted for every new job. Higher ratio means that more jobs created than units did. Based on the data, ratio varies from -2 to 17. A negative ratio means that there was not any new job in the area. In fact, it shows that fewer jobs were in the area in 2017 compared to 2012.

The national ratio is 3.8 which means that a new single-family is permitted for every four new jobs. Areas with a ratio higher than the national level are considered as areas where job growth outpaces new single-family construction. Data reveals that the majority (65%) of the 100 largest metro areas had a lower ratio than nationwide[3].

Here are the top five metro areas with the highest and lowest ratios of new jobs to permits issued:


The result of this imbalance between the supply and demand for housing is the increasing home prices. Indeed, we observe that, from 2012 through 2016, home prices increased by 36 percent on average in areas with high ratio (median home price: $296,700) while prices rose 24 percent in the areas with low ratio (median home price = $187,900). The shortage of new housing drives up home prices while inventory of existing homes has reached historic lows.

But, why don’t builders build more single-family units? Higher-priced markets seem to have fewer permits and more expensive construction in 2016, according to one of our previous studies. Shortages of labor and subcontractors may be one of the reasons that construction cost is high in these areas. Based on the NAHB Survey, the share of builders reporting either some or a serious shortage has skyrocketed from a low of 21 percent in 2012, to 46 percent in 2014, 52 percent in 2015, and 56 percent in 2016. The net result of the labor shortage, based on the survey, is that 75% of builders say they have had to pay higher wages and bids, 64% have delayed projects, and 68% have raised home prices.

Furthermore, regulatory cost[4] has an impact on home building. Although regulatory cost is nearly the same since 2011, home prices have been increased substantially. Based on NAHB the regulatory cost in 2011 accounted for 25 percent while it slightly decreased to 24.3 percent[5] in 2016. However, median home price of a new single family home sold increased from $227,200 to $316,200 in 2016. We calculated the regulatory cost as a share of the final home price for both years and we found that regulatory cost actually increased 35 percent because of the price increase.

DATA for the 100 largest metropolitan areas.

 

[1] NAR Existing Home Sales, Median home price for single-family homes only (2016-2012).

[2] U.S. Census Bureau, New Residential Construction.

[3] Also, it is interesting to note that 40 percent of the 100 largest metro areas had a ratio lower than the average household size. Based on the American Community Survey the average household size in 2015 was 3.

[4]Based on NAHB, regulatory cost includes pure cost of delay, cost of applying for zoning/subdivision approval, costs incurred after approval/before construction, value of land dedicated/left unbuilt and impact of changes in development standards.

[5]NAHB, Government Regulation in the price of a new home, May 2, 2016

http://www.nahbclassic.org/generic.aspx?sectionID=734&genericContentID=250611&channelID=311&_ga=2.198136621.363006066.1501185072-906526032.1501185072

June 2017 Existing-Home Sales

• NAR released a summary of existing-home sales data showing that housing market activity this June fell 1.8 percent from last month but improved 0.7 percent from last year. June’s existing home sales reached the 5.52 million seasonally adjusted annual rate.

• The national median existing-home price for all housing types was $263,800 in June, up 6.5 percent from a year ago. This marks 64th consecutive month of year over year’s gains as prices reach an all time high.

• Regionally, all four regions showed growth in prices from a year ago, with the Midwest leading all regions with an incline of 7.7 percent. The West had a gain of 7.4 percent followed by the South with a gain of 6.2 percent. The Northeast had the smallest gain of 4.1 percent from June 2016.

• From May, only one of the four regions experienced gains in sales. The Midwest inclined 3.1 percent. The South had the biggest decline of 4.7 percent followed by the Northeast, which had a decline of 2.6 percent in sales. The West had the smallest decline of 0.8 percent.

• Two of the four regions showed an increase in sales from a year ago with the South and Midwest remained flat. The West had a gain of 2.5 percent. The Northeast had an incline of 1.3 percent. The South headed all regions in percentage of national sales at 40.4 percent while the Northeast has the smallest share at 13.8 percent.

• June’s inventory figures are down 0.5 percent from last month to 1.96 million homes for sale. Inventories are down 7.1 percent from a year ago which is 25 months of year over year declines. It will take 4.3 months to move the current level of inventory at the current sales pace. Transactions are moving faster and it takes approximately 28 days for a home to go from listing to a contract in the current housing market, down from 34 days a year ago.

• In June, single-family sales decreased 2.0 percent and condominiums sales were flat compared to last month. Single-family home sales inclined 0.6 percent and condominium sales were up 1.6 percent compared to a year ago. Both single-family and condominiums had an increase in price with single-family up 6.6 percent at $266,200 and condominiums up 6.5 percent at $245,900 from June 2016.

•NAR released a summary of existing-home sales data showing that housing market activity this June fell 1.8 percent from last month but improved 0.7 percent from last year. June’s existing home sales reached the 5.52 million seasonally adjusted annual rate. •The national median existing-home price for all housing types was $263,800 in June, up 6.5 percent from a year ago. This marks 64th consecutive month of year over year’s gains as prices reach an all time high.  •Regionally, all four regions showed growth in prices from a year ago, with the Midwest leading all regions with an incline of 7.7 percent. The West had a gain of 7.4 percent followed by the South with a gain of 6.2 percent. The Northeast had the smallest gain of 4.1 percent from June 2016. •From May, only one of the four regions experienced gains in sales. The Midwest inclined 3.1 percent. The South had the biggest decline of 4.7 percent followed by the Northeast, which had a decline of 2.6 percent in sales. The West had the smallest decline of 0.8 percent. •Two of the four regions showed an increase in sales from a year ago with the South and Midwest remained flat. The West had a gain of 2.5 percent. The Northeast had an incline of 1.3 percent. The South headed all regions in percentage of national sales at 40.4 percent while the Northeast has the smallest share at 13.8 percent. •June’s inventory figures are down 0.5 percent from last month to 1.96 million homes for sale. Inventories are down 7.1 percent from a year ago which is 25 months of year over year declines. It will take 4.3 months to move the current level of inventory at the current sales pace. Transactions are moving faster and it takes approximately 28 days for a home to go from listing to a contract in the current housing market, down from 34 days a year ago.•In June, single-family sales decreased 2.0 percent and condominiums sales were flat compared to last month. Single-family home sales inclined 0.6 percent and condominium sales were up 1.6 percent compared to a year ago. Both single-family and condominiums had an increase in price with single-family up 6.6 percent at $266,200 and condominiums up 6.5 percent at $245,900 from June 2016.