Economist's Outlook

REALTOR® Confidence Continues to Wane in October 2013

The REALTOR® Confidence Index (RCI) for current market conditions continued to drop in October across all property types. An index of 50 marks “moderate” conditions [1]. About 3,500 REALTORS® responded to the October survey: October REALTORS® Confidence Index Survey

A variety of factors were reported as negatively affecting confidence: impacts of the government shutdown, increases in mortgage rates, tight housing inventories, and the impending increase in home flood insurance rates.

[1] To assess their confidence about current conditions, REALTORS® were asked: “How would you describe the market where you make most of your sales? Concerning their expectations for the next six months, they were asked “What are your expectations for the housing market over the next 6 months where you make most of your sales?”An index of 50 delineates “moderate” conditions and indicates a balance of respondents having “weak”(index=0) and “strong” (index=100) expectations. The index is not adjusted for seasonality effects.

September housing price data follows NAR price trend: higher prices

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s second update discusses the Case-Shiller and FHFA price series.

  • Last week NAR released October sales and price data and in the blog summary accompanying the release, we used NAR data to predict today’s home price releases from Case-Shiller and the Federal Housing Finance Authority (FHFA).
  • NAR estimated a 12 to 13 percent price gain from Case-Shiller and a 7 to 8 percent gain as reported by the FHFA. Today’s data from Case-Shiller reports a gain of 13.3 percent from a year ago and FHFA data show that prices rose 8.5 percent from a year ago, suggesting that the timeliness of NAR’s data makes it a valuable market leading indicator.
  • Digging deeper into today’s data releases, we see that the Case-Shiller metro areas with the biggest price gains are in the West, just as the NAR data shows the biggest price gains in that region. All four metros that showed home prices with gains of 20% or more in the last year were in the West: Las Vegas (29.1%), San Francisco (25.7%), Los Angeles (21.8%), and San Diego (20.9%).
  • On a quarterly basis, the FHFA reports state-level price change data. In the 3rd quarter, 48 states and D.C. saw prices rise. From one year ago, all 50 states and D.C. saw prices increase. The map pictured below shows the intensity of annual price appreciation for each state. As seen in the NAR and Case-Shiller data, the largest gains were concentrated in the West, specifically in Nevada (25.2%) and California (22.8%).

The Latest on Housing Permits

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the latest housing permits data.

  • Housing permits finally crossed the one million unit mark for the first time in over 5 years.  In October there were 1.03 million housing units authorized for new construction on an annualized basis.
  • Permits for multifamily unit construction rose strongly while single-family units have been moving mostly sideways since the beginning of the year.  Given rising rents it is understandable for the builders to add more apartments.  However, there is still a housing inventory shortage, particularly in the West region, but frustratingly no meaningful pick up in single-family permits there.
  • Permits are not actual construction – they are only a permission slip to build.  Housing starts data would show how much actual digging of the earth to bring new units to the market.  But this data is not available because of the lingering impact of the government shutdown.  Housing analysts are flying blind a bit about new construction activity.  The market needs 1.5 million units.  The last available housing starts info showed 883,000 units way back in August.   Never in modern U.S. economy have the housing starts been this low for 5 straight years.
  • For practitioners, what the data means is that the housing shortage will again be noticed come spring home buying season.  Home prices will continue to rise, not at the double-digit rate of appreciation of this year, but probably in the high single-digit rate in most of the country.
  • In New York City, rather than new construction the newly elected mayor has hinted at rent control on a broader number of apartments.  The mayor should keep in mind that there are two ways to destroy a great city: either through bombing or through rent control.  The first method is quick.  The latter takes a much longer time but the lack of incentive to properly spend on maintenance will steadily become visible over the years as good apartments turn into ugly buildings.

Commercial Investments Advance 26% in Third Quarter 2013

While the summer season was in full swing, economic performance during the third quarter of the year accelerated, based on initial estimates from the Bureau of Economic Analysis. The main measure of economic activity—gross domestic product—rose at an annual rate of 2.9 percent. The boost came from upward inventory adjustments. Consumer spending was positive, buoyed by spending on travel and leisure, recreation and home purchases and furnishing. Business spending was cautious, as the specter of a government shutdown loomed large. Net exports were positive to the tune of $44.8 billion for the quarter. And with stronger balance sheets, state and local governments upped their spending, overcoming the federal government’s negative contribution to GDP.

Against this background, commercial properties notched another upbeat quarter. Sales of major properties (over $2.5M) advanced 26 percent on a yearly basis during the third quarter of this year, totaling $89.7 billion, based on Real Capital Analytics (RCA) data. Several property types attracted stellar investor interest, registering double- or triple-digit growth rates. Sales of retail assets rose 104 percent from the same period in 2012, while industrial sales volume advanced 70 percent.

Based on National Association of REALTORS® data, sales of properties at the lower end of the price range (mostly below $2.5 million) increased 11 percent on a yearly basis. Based on three quarters worth of data, total sales volume is expected to surpass 2012’s $300 billion.

Portfolio sales contributed a major portion to the total sales volume during the quarter, accounting for $30.2 billion. Blackstone was involved in two major portfolio transactions, one for apartments and the other for industrial properties, totaling over $3.1 billion. Sprint Realty Capital spent $7.7 billion on a portfolio of mixed properties. On the individual property side, office transactions dominated the market for top properties. The building at 650 Madison Avenue in New York sold for $1.3 billion in the third quarter, taking the top spot. It was followed by a couple of office properties in Los Angeles, City National Plaza and One Wilshire, which traded for $858 million and $439 million, respectively.

As demand for properties grew, prices rose 9.3 percent in the third quarter, according to RCA’s Commercial Property Price Index. Apartments continued to be the clear winners, as prices advanced 14 percent. The average apartment unit price reached $107,240. Retail properties witnessed a 12 percent price appreciation, trading for an average $170 per square foot. Prices for office buildings gained 9 percent, changing hands for an average of $233 per square foot. Industrial properties posted average prices of $65 per square foot, a 1 percent decline from a year ago.

Cap rates inched up 7 basis points, to an average 6.8 percent nationally across all property types, based on RCA data. For lower priced properties (below $2.5M), prices increased 4 percent year-over-year, based on survey data from the National Association of REALTORS®, while cap rates increased 50 basis points to an average 9.2 percent.

As asset values rose, new commercial distress continued on a downward trend. New distress in the third quarter accounted for $2.5 billion, a 30 percent decline from the same period in 2012.

For the full Commercial Real Estate Outlook report, visit

Inflation Watch

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the latest consumer price and producer price indices.

  • There is no inflation at the moment in both the consumer price index (CPI) and the producer price index (PPI). However, the housing rent component is moving higher.
  • In October, consumer inflation was only 0.9 percent over the past year. Falling gasoline prices (down by 10 percent) were the principle reason for the non-existent broad inflation. Likewise, inflation facing producers to buy their stuff before turning into consumer items rose by only 0.3 percent due partly to falling energy costs.
  • Housing inflation continue to move up. Home prices rose at 12 percent, according to the NAR median price, and by 13 percent, according to the repeat-price measurement of Case-Shiller. However, home price is not part of the inflation measure since it is considered an asset, just as stock prices are not included in the inflation measure. What is included is the rent component. Rents paid by renters rose by 2.8 percent while homeowner equivalency rent rose by 2.3 percent. Be mindful that these rent components are the biggest weight to CPI. Energy prices tend to be volatile and any reversal in direction, combined with higher rents, could mean an uncomfortable position for the Federal Reserve.
  • The Fed implicitly considers 3 percent inflation as the red line not to cross. And 3 percent inflation in 2014 is a distinct possibility. That will force the Fed’s hand to move away from the ultra-loose monetary policy sooner than planned. Higher mortgage rates will then be the case next year.
  • One item of note with a major price change is coffee beans. The commodity price of coffee has plunged by over 60 percent in the past 3 years. Yet this mildly poisonous drink still carries hefty prices by fancy retail coffee shops, that is, we are getting ripped off at Starbucks. But we still stand in line as a form of escapism, not having to think about work for several minutes while pretending to speak a foreign language.
  • It is worth remembering that coffee was prohibited in the Christian world and only began to be drunk in Europe from around 1600 after the Pope gave the go-ahead. Soon afterward, coffee was delivered on a land-route via Turkey to Venice, Verona, and Vienna. But after the discovery of the New World, the French planted beans in its tropical islands while the Spanish did it in Colombia. Not to be outdone, the Portuguese grew it in Brazil. The Dutch, with no real possession in America, had to sail around the globe and picked the Java Islands in Indonesia to get its coffee. Britain, not yet a power, had to settle for its traditional warm beer until it colonized Ceylon and India where tea leaves were found.

Latest Diffusion Index of Foot Traffic

In no surprise, the sharp rise in mortgage rates from June through September had an impact on the market. The July and August readings of the diffusion index for foot traffic reflected the impact by way of a sharp decline. However, by September the decline had reversed course with slightly lower mortgage rates, making up some of the ground. This recovery trend was modestly extended in October suggesting a bottom or plateau at a strong level by recent standards.

Every month SentriLock, LLC. provides NAR Research with data on the number of properties shown by a REALTOR®. Foot traffic has a strong correlation with future contracts and home sales, so it can be viewed as a peek ahead at sales trends two to three months into the future. For the month of October, the diffusion index for foot traffic rose 0.6 points to 51.2.

Mortgage rates ticked upward in the first half of October as MBS and Treasury prices fell in the buildup to the Federal debt limit, but were still down from the 4.5% to 4.7% levels seen in late summer. Furthermore, furlough and job uncertainties as well as financing issues due to the government shutdown should have impacted consumer sentiment. However, foot traffic inched upward for a second consecutive month contrary to some anecdotes. Inventories remain tight in some markets, which could limit the upside to foot traffic until additional nascent inventory comes to the market.

This month’s reading extended last month’s recovery. The index inched just above the important “50” mark in August which indicates that more than half of the markets in this panel had stronger foot traffic in October of 2013 than the same month a year earlier. This reading does not suggest how much of an increase in traffic there was, just that the majority of markets experienced more foot traffic in October of 2013 compared to a year earlier.

The recovery in foot traffic appears to have taken hold suggesting a more steady market at a high plateau by recent historical standards through winter months. However, this month’s reading provides a clearer picture of the impact from higher mortgage rates as the modest decline in rates from the summer rates provided some lift to the market, even during potential disruptions from the government shutdown. A longer sustained period of mortgage rates north of 4.5% could have a stronger impact on foot traffic, contracts, and home sales.

Jobs More Stable: Fewer Unemployment Insurance Claims Filed

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the latest data on unemployment insurance claims.

  • Fewer initial claims for unemployment insurance were filed in the week ending November 16, an indication of improving job stability. There were 323,000 claims filed by those starting a period of unemployment, 21,000 less than the previous week’s figure.
  • The unemployment rate remains tame across states: for the week ending November 2, no state experienced a rate of unemployment that that was high enough to trigger the extension of additional benefits on the Extended Benefits Program.
  • For the week ending November 9, the states that reported the largest increases in initial claims were California (+4,737), New York (+2,853), Pennsylvania (+2,711), Michigan (+2,271), and New Jersey (+2,210). The largest decreases were in Florida (-1,055), Kentucky (-580), Ohio (-409), Kansas (-169), and Puerto Rico (-144).
  • What this means for REALTORS®:  Greater job security and certainty is good for the real estate industry that depends on long-term job stability.

Latest Housing Affordability Data

The seasonal slowdown in home prices has combined with roughly steady mortgage rates and rising income to give a slight boost to affordability, but the trend from a year ago remains down. What is affordability like in your market?

  • Housing affordability is up for the month of September in the US and 3 of 4 regions as prices eased seasonally from August.  The median single-family home price is down roughly 5 percent from last month even as August marks tenth consecutive month of double-digit year-over-year price gains for single-family homes.
  • This easing of prices helped boost the affordability index 6 points from a month ago nationally and boosted the index by 8 points from what it might have been if the price level in August were combined with September’s mortgage rates and income.
  • Because home prices remained roughly steady in the West, it was the only region not to see a boost in affordability from August to September.
  • Mortgage rates, while still climbing, slowed from the nearly half and quarter point jumps seen in July and August.  Mortgage rates were up 12 basis points from August and 85 basis points from September a year ago.  At current prices and with a 20 percent down payment, the rise in rates means roughly $12 extra in a monthly mortgage payment from a month ago and roughly $79 more than a year ago.
  • While incomes continue to rise, they are not keeping pace with home price gains and mortgage rate increases from a year ago.   Nationally, affordability is down from 198.4 in September 2012 to 164.3 in September 2013.  Affordability is also down from a year ago in all 4 regions, and coincides with rising prices.  The biggest drop in affordability has been in the West followed by the South, Midwest, and Northeast.  September prices were up 16 percent in the West from a year ago while they show a gain of only 1 percent in the Northeast from September 2012.
  • This slight easing of affordability is welcome for potential buyers, but uncertainty remains.  While rates have eased slightly in response to confirmation hearings for Janet Yellen, the current nominee for Chairwoman of the Federal Reserve, the Federal Reserve has committed to pushing rates higher as needed to stanch inflation as the economy improves.  The Fed has a tricky balancing act ahead, and assuming the forecast economic improvement finally materializes the trajectory for rates in the future is higher.  If prices hold steady, the long run trend for housing affordability will be lower.  For a look at how the housing market might respond to higher rates, I recommend this Stress Test by Chief Economist Lawrence Yun.
  • 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.

US Homeownership Rates, 2010-2012

  • Did you know that the US homeownership rate in 2010-2012 is (statistically speaking) no different than the rates in Colorado and Georgia?
  • On November 14, the Census Bureau released a review of homeownership rates and housing values based on data from the American Community Survey (ACS) 3-year estimates.  These estimates are based on surveys of homeowners from a broad, 3-year period that enable researchers to examine trends in more localized areas, places with populations as small as 20,000.  (The 1-year estimates from the ACS cover areas with populations of 65,000 or more.)
  • The national homeownership rate measured by the ACS fell 1.7 percentage points from 66.4 in 2007-2009 to 64.7 in 2010-2012.  In 2010-2012, the national homeownership rate of 64.7 was closest to that in Georgia, 64.9 (± 0.2) and Colorado 64.9 (±0.3).
  • West Virginia had the highest homeownership rate in 2010-2012 at 72.9 percent.  In the 2007-2009 period, Minnesota had the highest homeownership rate at 74.2 percent.
  • The District of Columbia (41.6 percent ) and New York (53.9 percent) had the lowest homeownership rates among states and DC in 2010-2012.  These two areas also had the lowest rates in 2007-2009.
  • Forty-one states and DC saw statistically significant declines in homeownership rates in 2010-2012 compared with 2007-2009.  Nationally, the increase in households was not quite enough to offset the decrease in homeownership rate meaning that there were roughly 600,000 fewer homeowners nationally in the later period.   How did your state fare?
  • The ACS data is based on surveys of homeowners.  The 2007-2009 estimates are based on surveys taken from January 2007 to December 2009.  The 2010-2012 estimates are based on surveys taken from January 2010 to December 2012.

October Existing-Home Sales Cool but Low Inventory Drives Prices Higher

  • Today NAR released a summary of existing home sales data showing that overall existing home sales fell by 3.2 percent from September to October 2013 but are 6 percent higher than October 2012.
  • The national median existing-home price for all housing types was $199,500 in October, up 12.8 percent from October 2012, which is the 11th consecutive month of double-digit year-over-year increases.
  • Low inventories, a lower distressed sales share from a year ago, and gains in sales at the high end of the market combined with falling sales at the low end of the market were all factors pushing prices higher.
  • Next Tuesday, both Case Shiller and FHFA house price data will be released for September. Based on NAR data for the comparable period, expect Case Shiller to show a 12 to 13 percent price gain while FHFA should show a 7 to 8 percent gain.
  • See the full NAR Existing Home Sales press release here and data tables here.
  • Find a full graphical summary of the data here.

The Latest on Industrial Production

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the latest data on industrial production.

  • It’s a bit surprising that industrial production fell a notch (falling 0.1%) in the latest month, but is nothing to be worried about.  This series has generally been on an upward trajectory of 2 to 4 steps forward followed by one step back.  Industrial production is up 3.3 percent from one year ago.
  • Today’s data is essentially matching the prior cyclical peak activity right before the big recession in 2008-09.  It’s been a long and steady climb out from the hole but good progress has been made.  However, much of the production increases have been due, it appears, to improved automation and other labor-saving measures.  Jobs in the manufacturing sector are not climbing as fast as production.
  • Home sales have also been making progress but not to the degree of industrial production.  Home sales would need to rise by another 40 percent to get us back to the prior peak in 2005.  This will not happen for at least a decade because the 7 million existing home sales came about from lax credit conditions and fortunately we will not return to bubble lending conditions.
  • One long-term chart to be mindful of is the decline in manufacturing employment even with the rise in production.  Though very painful for the workers involved, it is also a measure of progress for the country.  Just as in agriculture, we have more food even with fewer farmers.  Many bright minds are getting employed in industries such as medical technology, software development, and other new product areas.  No one would have thought of carrying capabilities like watching TV, phone, Hollywood movies, library books, and picture albums on such a small device like an iPhone ten years ago.  But that is progress in life from more production at all levels in older industries with fewer workers.  That is why education and job training to satisfy new industries become ever more important.

Business Activity of REALTORS®

  • Earlier today we took a look at labor productivity.  REALTORS® on average are very productive, and labor productivity across the board has long term ramifications on homebuyers’ purchasing power.
  • In 2012, the typical agent had 12 residential transaction sides—an increase from 10 transaction sides in 2011 and eight in 2010.
  • Additionally, 26 percent of members reported having at least one commercial transaction side. Members who are residential specialists typically had a total of 12 transaction sides overall compared to commercial specialists who typically had a total of 10 transaction sides overall.
  • REALTORS® with two years of experience or less had a median of four transactions, compared to brokerage specialists with 16 years of experience or more who had a median of 13 transactions.
  • The typical member had one transaction side involving a short sale and one transaction involving a foreclosure.
  • REALTORS® are hard working. The typical REALTOR® worked 40 hours per week in 2012, a trend that has continued for several years. Managers and appraisers reported working the most hours, at 50 per week. All other members reported working 40 hours per week.

The Latest on Labor Productivity

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the latest data on labor productivity.

  • U.S. worker productivity rose in the latest data.  It rose 1.9 percent on an annualized basis, but the latest gain is coming after the declines in the prior quarters.  From one year ago, productivity barely changed, rising by only 0.1 percent.
  • Productivity is a very important gauge of long-term prosperity.  The rapid productivity gains on a consistent basis as happened during the Industrial Revolution in the 1800s in Britain and during the post-War period in the U.S. in the 1950s assured that the younger generation will be living much better than their parents.  In countries like South Korea where productivity increases have been very fast along with the expansion of schooling, the current working generation is earning about 5 times more than their grandparents.
  • It seems more Americans are beginning to doubt whether such prosperity can be passed on to the next generation.  However, productivity data still points to about 1 to 2 percent annual productivity gains in America.  In the last 10 years, from 2003 to 2013, productivity has advanced by 1.9 percent annually.  That means the real income (purchasing power after adjusting for inflation) of a typical American should double in about 40 years.

Foreign-Born Population: An Increasing Potential Base of Homeowners

The foreign-born population accounts for approximately 13 percent of the total U.S. population, up from about 5 percent in 1960.  California, New York, New Jersey, Florida, and Nevada are the top states in which the foreign born comprise approximately 20 percent of the population.

What this means for REALTORS®: U.S. foreign born residents tend to place a high value on homeownership, frequently purchasing homes significantly above the median price.  This is a growing and potentially profitable market, generally with sound prospects for home ownership. Information on the characteristics of the foreign-born is available at

Characteristics of Home Buyers

The characteristics of home buyers has changed, likely due to tightened credit conditions. There is a higher share of married couples and a suppressed level of single buyers. There is also a lower than historical share of first-time buyers, and higher incomes among buyers in general. Here are two charts that display this trend:

For more information on the 2013 Profile of Home Buyers and Sellers, click here >

Demand for Residential Rental Properties Still Strong

With potential home owners finding it tough to buy their first home, there is still strong demand for rental units, judging by rental price trends. REALTORS® reported rents that are higher compared to a year ago.

Rising rents add an additional incentive for homeownership. Homeownership provides families with enhanced lifestyles—and a chance to cap major parts of their living costs.

What does this mean for REALTORS®? Homeownership advantages for discussion with clients include housing costs (generally less owning a home), quality of life for the family, continued relatively low mortgage rates, and home affordability. Rents continue to go up, and at the end of the lease the renter has a stack of rent receipts as the final product.

The Foreign Born Population: Renters Today, Home Owners Tomorrow

As of 2012, the foreign-born population accounted for about 13 percent of the total U.S. population, up from only about 5 percent in 1960. What are the prospects for homeownership of the foreign born? Data indicate the majority of the foreign-born become homeowners. Foreign-born home ownership is at par with the homeownership rate of native-born U.S. citizens.

The prospects for home ownership of the foreign-born are bright because they are generally well-educated and comparably earn higher incomes.

What this means to REALTORS®: Increasing contact with the foreign-born is becoming more critical given the increasing presence of the foreign-born and their sound prospects for home ownership. Information on the characteristics of the foreign-born is available at

REALTORS® Expect Prices to Increase Modestly in the Next 12 Months

About 90 percent of REALTORS® responding to the September REALTOR® Confidence Index Survey expect constant or higher prices in the next 12 months (92 percent in August), with the median expected price increase projected at approximately 4 percent [1].

What does this mean for REALTORS®? Market expansion appears to be continuing on a measured basis—not the potential bubble mentioned from time-to-time in recent months.

[1] The median is the middle value. A median expected price change of 4 percent means that 50 percent of respondents expect prices to increase above 4 percent while the other 50 percent expect prices to increase (or decrease) at less than 4 percent.

2013 Profile of Home Buyer and Sellers: Technology Trends

The 2013 NAR Profile of Home Buyers and Sellers was released on November 4, and as it does each year the report examined the demographics, preferences, motivations, plans, and experiences of recent buyers and sellers.

One recent trend discussed is how much consumers now embrace technology during the home search process. Did you know that…

  • Fifty-six percent of buyers start their home search online, 43 percent found the home they ultimately purchased online (edging out all other sources), and 92 percent used the internet at some point during their search process.
  • Forty-five percent of recent buyers used a mobile or tablet website or application during their home search and among those who did 22 percent found the home they purchased online.

Here are a few charts from the Profile that highlight the growth in technology usage over the years:

How Seller Sold Home, 1991-2012

  • The share of home sellers who sold their home without the assistance of a real estate agent was 9 percent. One-third of those sellers knew the buyer prior to home purchase.
  • The primary reason that sellers choose to sell their home without the assistance of a real estate agent to a buyer they did not know was that they did not want to pay a fee or commission (43 percent).
  • One-third of FSBO sellers took no action to market their home, and 60 percent did not offer any incentives to attract buyers.
  • The typical FSBO home sold for $174,900 compared to $210,000 among agent-assisted home sales.

  • For more information on the annual Profile of Home Buyers and Sellers, click here. The 2013 report will be released next Monday, November 4.