Economist's Outlook

Home Improvements After the Home Purchase

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  • Fifty-three percent of buyers undertook a home improvement project within three months of their home purchase.
  • Buyers who purchased older, previously-owned homes were the most likely to undertake a home improvement project. Seventy-three percent of those who purchased a home that was built in 1920 or earlier did make a home improvement soon after buying the home, compared to only 33 percent of those who purchased a home built between 2010 and 2012.
  • Remodeling the kitchen was the most common home improvement project among recent buyers—47 percent of buyers who did undertake a home improvement project remodeled the kitchen. Bathrooms were a close second at 44 percent.
  • For more information, check out the 2013 Home Features Survey.

Latest Consumer Confidence and No Data

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 consumer confidence.

  • With most of government-produced economic data under shutdown, the focus has turned more keenly to privately produced data.  Today’s data on consumer sentiment from the University of Michigan is not good news, however.  People felt worse in the first part of October.
  • Consumer sentiment index fell in October, no doubt influenced by Washington dysfunction.  But the index had also fallen in the two prior months.  The latest read of 75.2 is the second lowest monthly figure this year.  The economic expansion, albeit it has only been plodding along, could be in jeopardy if consumers continue to express pessimism.  As of now, the economic growth in the fourth quarter will take a modest hit such that the GDP growth rate is less than 2 percent (from previously projected growth of 2.5 percent)
  • Retail Sales is one of the data missing in action.  No information for September.  Up to August, retail sales had been making steady progress.  Retail spaces were thereby getting absorbed and pushing down the vacancy rates.  Now what will happen?
  • The producer price index is also missing in action.  Though less critical than the consumer price index, all the inflationary pressure coming out of producer prices would be valuable information on gauging how slowly to taper printing of the money.  To August, the producer prices had been fairly tame.
  • The frustrations of not able to visit a national park or the halting of USDA mortgage loans are real.  But the bigger impact to the national economy from unruly politicians appears to be the indirect impact of hammering down consumer confidence.  How satisfying it would be if there was an app to “Delete All” for current elected officials.

64% of International Clients Buy Detached Single-Family Houses

About 64 percent of international clients typically buy detached single-family homes, which they intend to use for primary residence and for longer than six months.   This information is based on the National Association of REALTORS®  2013 Profile of International Home Buying Activity, which captures transactions of REALTOR® respondents with international clients in the 12 months ended March 2013.

International clients include persons who principally reside in another country (Type A) and recent immigrants and foreigners on temporary visas in the U.S (Type B).  About 49 percent of REALTOR® respondents reported that their international client was a Type B client.

Resident foreigners include recent immigrants, professional and managerial employees of businesses and institutions, and International students enrolled in U.S. colleges and universities who are in the U.S. on a temporary but extended visit; all of these groups may plan on using the property year round for primary residence.

Non-resident foreigners are limited to 6-month stays in the U.S., so these international buyers generally expect to use the property for vacation/rental purposes and as an investment. Purchasing a residential/rental property may be economically advantageous for an international buyer, for the buyer is able to use the property as a secondary/vacation home while being able to rent out the property during the times when the owners are not personally using the property.

There is a good chance of having a foreign buyer, whose expectations and needs may differ from those of U.S. buyers.  The site provides a substantial amount of information that may be of help to REALTORS® not experienced in dealing with international clients.

Unemployment Claims Spike One Week Into Government Shut Down

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 unemployment claims.

  • One week after the government shut down on October 1,  the seasonally adjusted initial claims for unemployment insurance filed in the week ending October 5 shot up to 374,000, a hefty increase of 66,000 claims from the previous week’s level.
  • This is one of the very few economic data being released during the shutdown. The Department of Labor releases the details of the data later, so there is yet no official breakdown of the change into federal and civilian components. Still, one could surmise that the shutdown has some relation to the increase, particularly among government contractors.

  • What this Means for REALTORS®: NAR’s assessment of market conditions is that the effect of the shutdown on the real estate market is still minimal. However, if the shutdown continues, then more loans will not get processed in a timely manner. Expect the longer the shutdown, the more measurable the impact on the real estate sector.

How many children per bedroom in the typical American home?

  • A friend of mine recently remarked that my neighbors, who have two young children in a 2 bedroom apartment, would surely not be around for long since they would need more space on account of the children. Children need their own rooms, he argued.
  • Since I grew up with two sisters and recall sharing a room more often than having my own space as a child, I thought this viewpoint couldn’t possibly be correct.
  • On account of government data being unavailable for the time being (see, I took a look at recent data from our Profile of Home Buyers and Sellers which is based on a survey of recent home buyers. The experience of all households which would include renters and long-time owners as well as recent buyers may be different, but examining the Profile gives us good insight into the actions of recent home buyers.
  • What I found probably explains why my friend and I had different thoughts on the matter. I am from a family of three children. My friend has only one brother.
  • According to recent profile data, roughly a third (32.7 percent) of homes purchased by buyers with three children under the age of 18 had 3 or fewer bedrooms. Assuming that one of these bedrooms is used by the adult(s) in the household, roughly a third of 3-child purchasers would likely have children sharing a room.
  • By contrast, among households with two children only 4.1 percent of recent home buyers were purchasing a house that implied some sharing for the children (2 bedroom or smaller).
  • Sharing a bedroom is the norm among households with 4 or more children under 18. Nearly seven in ten 4-children households lived in a 4-bedroom or smaller home, implying sharing among the children.
  • The chart below shows median number of bathrooms and bedrooms broken down by number of children under 18 in the house. The more children, the more bedrooms the typical or median family has.

  • What are your clients’ attitudes on the number of children for each bedroom? Is there a clear norm in your market?

Housing Affordability Stress Test

  • Increases in home prices and mortgage rates have made sharp cuts to the housing affordability index. The most recent figure is 156. Should it hang at this level, it would mark the lowest affordability in 5 years.
  • Even with the decline, a housing affordability index figure of around 150 would still mark the 5th most favorable year in 40 years, with the most affordable conditions occurring only in recent prior years. In other words, there are still good market conditions for buyers.
  • Income rises very slowly. Home prices generally change at a faster pace – both ups and downs. Changes in these variables can therefore impact affordability. However, changes in interest rates have been the principal driver of changes in housing affordability.
  • It is therefore worth doing a stress test as to where affordability will settle from changing interest rate conditions. When the affordability index hovered at around 120 (measurably lower than the current 156) the housing market was still fine. That is, for the most of the 1990s and early 2000s, the housing market was quite uneventful with no major changes in home prices. For the affordability index to fall to 120, the mortgage rate would need to rise to 7 percent.
  • When the affordability index touches 100 or lower the housing market faces significant problems. Back in the early 1980s, home sales plunged by more than half. Around 2005 and 2006, a bubble price developed, which then crashed into sharp pains. For the affordability index to fall to 100, the mortgage rate would need to rise to 9 percent.
  • Currently, mortgage rates in recent months have been bouncing along at 4.3 percent to 4.7 percent. Rates are projected to rise to 5 percent by mid-summer of next year. Maybe 6 percent is in the cards by sometime in 2015. In short, the affordability index does not look like it will plunge to any alarming levels in the next two years.

Profile of International Clients from China

Next to the Canadians, Chinese buyers represented the second largest group of international buyers of U.S. property, based on the National Association of REALTORS® 2013 Profile of International Home Buying Activity, which captures transactions of respondents in the 12 months ended March 2013.

Approximately 53 percent of reported purchases by Chinese buyers were in California. About 92 percent of reported purchases were in urban and suburban areas. According to information from ® based on access to the website, the five markets of greatest interest to potential Chinese buyers are Detroit, Los Angeles, Irvine, Las Vegas, and Orlando.
Other information about buyers from China:

  • Buyers purchased an even mix of detached single-family and multifamily homes;
  • 52 percent purchased in a suburban area and 40 percent in a central/urban city;
  • The median price was $425,000;
  • About 69 percent of purchases reported as all-cash purchases.

There is a good chance of having a foreign buyer, whose expectations and needs may differ from those of U.S. buyers. The site provides a substantial amount of information that may be of help to REALTORS® not experienced in dealing with international clients.

The Latest on the Job Market

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 on the job market.

  • Because of the government shutdown, there is no jobs report as had been originally scheduled. However, one can gauge the overall job market movement from other data.
  • ADP, a private sector company which processes paychecks for many private companies, reported 166,000 net new job creations in September. Over the past year 2.1 million net new jobs have been created. Though there are deviations in monthly job additions between the official government data series and ADP, the data closely align in measurements over the 12 month period. Therefore, one can reasonably assume that 1.9 to 2.3 million net new jobs were created had the official data been released today.
  • Job additions naturally help fill the pipeline of potential homebuyers and increase net absorption of commercial real estate properties. From the depths of the recession in 2010, essentially 7 million net new jobs have been added to the economy in both measurements.
  • Once the official data is eventually released after the government shutdown, the data to watch is ‘employment rate’. The oft-mentioned ‘unemployment rate’ has been falling and making steady progress, from a near 10 percent jobless rate to 7.3 percent in August (with no info on September). But the ‘employment rate’ has not improved, stuck at 58 percent, compared to a 63 percent employment rate prior to the recession. The interpretation is that jobs are being created, but not fast enough to quickly absorb newly minted college graduates who are seeking meaningful work.
  • Many fine products were created during economic hard times through ingenious entrepreneurs. Think Mickey Mouse and Disney, Microsoft, and the Apple Computer. The magnificent things in the beautiful city of Florence, Italy were mostly created right after the very depressing situation in the aftermath of the Great Plague. Let’s hope the jobless do not lose hope and rather are able to create new fine things.

Latest Housing Affordability Index Release

At the national level, housing affordability is down due to higher mortgage rates and prices though rates are set to stabilize for weeks to come. What is affordability like in your market?

  • Housing affordability is down for the month of August in the U.S. as prices are up 14.4 percent from August 2012. The median home price is down from last month but August marks the strongest year-over-year price gain since October 2005.
  • Mortgage rates are up slightly from last month and up 19.2% from a year ago. Job growth and less restriction to lending will bring more consumers back into the market.
  • By region, affordability is down from one month ago in all regions, with the Northeast having the biggest drop. From one year ago, affordability is down in all regions. The West has had the largest price gain at 17.7 % while the Northeast had the smallest at 7.6%.
  • Affordability may rise next month if the lower rates equalize home prices. The Fed’s decision to continue to purchase bonds will likely result in a break from rising mortgage rates. Home buyers will have a few more weeks to lock in lower rates as they are expected to continue to increase once the Fed scales back on those purchases.
  • Check out 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.

The Latest on Unemployment Insurance Claims

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 unemployment insurance claims.

  • Initial claims for unemployment insurance filed in the week ending September 28 totaled 308,000, a minor increase of 1,000 claims from last week’s level. Weekly claims data register some volatility, but the trend has been one of a solid decline, an indication of an improving job market.
  • Relatedly, furloughed federal employees are eligible to file for unemployment insurance, so some temporary spike may be likely in the coming weeks.
  • What this Means for REALTORS®: Employment conditions have been improving solidly, although modestly. At the current pace of growth and job creation, NAR expects existing home sales to hit a level of 5.2 million in 2012, an 11 percent year-on-year gain.

Did You Know: Pent Up Demand Among Young Adults Could Boost Home Sales by 200,000

  • In 2012, there were more than 71 million young adults aged 18 to 34 living in the US—more than the roughly 69 million when the baby-boomers were in this age group in the mid-1980s.
  • The share of adults under age 35 living at home, especially among those aged 25 to 34, is at the highest level since 1981. More than 30 percent of those 18 to 34 lived with parents [1]; the historical average is 28 percent.
  • The share was 13.6 percent among those aged 25 to 34. The historical average for this group is only 11.7 percent. While a 2 percent difference sounds like a small amount, this translates into roughly 800,000 individuals.
  • The share among those aged 18 to 24 was 56.2 percent compared to a 52.9 percent long term average. This translates into roughly 1 million individuals.
  • At the same time, nearly 26 million households were headed by those under age 35. This group has a homeownership rate that has declined dramatically from its peak of over 43 percent in 2004 and 2005. In 2012 the homeownership rate was roughly 37 percent—the lowest level since publication of this data in the early 1980s.
  • Breaking it down further, households headed by those aged 25 to 34 have a homeownership rate of 41.5 percent compared to 21.7 percent for those under 25. While both rates represent a decline from recent years, ownership rates for those households headed by an individual under 25 actually remain above the long-term average of 19.6 percent. For those aged 25 to 34, however, the current homeownership rate is at an all-time low, well below the 45.8 percent historical average.
  • Assuming consistent population to household ratios and homeownership ratios, the 1.8 million individuals currently living at home would translate into an additional 590,000 households and roughly 200,000 additional home owners—roughly a boost of about 4 percent to the projected level of sales in 2013. In fact, existing home sales have made significant gains in 2013 over 2012, the most recent frame of reference for most of this government data, so it is possible that 2013 data will show considerable improvement over 2012 measures [2].
  • Note that there is a striking difference between predominant ownership rates and living at home rates among the 18 to 24 age group and the 25 to 34 age group. This is because many coming-of-age milestones happen in this time period. Age at first marriage is typically 25 to 29 in recent years [3], and the age of the first home purchase is 30 to 32 [4].

  • In addition to the fact that more individuals of this age are living with parents and that homeownership rates are currently lower than the longer term average for 25 to 34 year olds, one further reason for the lower household to population ratio is that the 18 to 34 age group is younger than at any time since the early 1980s. The average share of 18 to 24 year olds among the 18 to 34 year old age population cohort is 39.9 since 1983. In 2011 and 2012, 18 to 24 year olds were 42.2 percent of the total age group. This means that the average for the entire 18 to 34 year old group will be more representative of 18 to 24 year olds than is typical. A similar trend is seen among households.

  • In fact, adjusting for the higher share of 18 to 24 year olds in the group, the story is the same, but more or less dramatically so depending on the statistics. The share of adults aged 25 to 34 living at home holding constant the shares of each age sub-group is at a record-high 30.6 percent—even higher than the unadjusted figure—while the homeownership rate is somewhat better due to the higher homeownership rate among 18 to 24 year olds now compared to other times in history.
  • For more information on home buyers and home buying and selling trends among generations, both young and old, visit

[1] Note: In CPS data, unmarried college students living in dormitories are counted as living in their parent(s) home.
[2] All data is subject to sampling and non-sampling error. These point estimates have been presented without corresponding margins of error that would account for sampling error and may not be comparable to other survey measures due to nonsampling error. A technical discussion of these errors in the CPS and CPS/HVS is available here: and here:
[4] Data from the Profile of Home Buyers and Sellers, National Association of Realtors®

REALTORS® Expect Modest Price Growth in the Next 12 Months

About 92 percent  of  REALTOR®  respondents  in the August REALTORS® Confidence Index Survey expect prices to remain stable or to continue to increase in the next 12 months although at a rate of about 4 percent[1], significantly lower than recent experience.   Tight inventory, pent-up demand, and the drop in foreclosure inventory have provided much of the lift in prices, but the increase in interest rates in recent months is raising the prospect of softer demand.

Across the states, the median expected price changes  based on data from the June-August surveys are most upbeat in the Western states  as well states like Florida where inventory is extremely low. See report at

[1] This is the median expected increase. 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.

Sellers With Previous Foreclosure or Short Sale: Access to Mortgage Financing

Homeowners who had experienced a foreclosure or short sale are starting to return as homeowners, although access to financing is posing a constraint, according to information in the August REALTORS® Confidence Index Survey report.

  • About 23 percent of respondents reported working with a buyer who previously experienced a foreclosure or short sale since 2005.
  • About 46 percent of responding REALTORS® reported that these buyers they worked with could not obtain mortgage financing.
  • In reference to these buyers who did not obtain mortgage financing, 65 percent of respondents reported that the reason was related to the previous foreclosure or short sale.

Household Net Worth

  • The net worth of households and non-profits is now more than $5 trillion above its pre-recession peak at $74.8 trillion in the second quarter of 2013 according to data from the Federal Reserve Flow of Funds.
  • This level indicates a sharp recovery—growth of 11.5 percent from a year ago. This is the 4th consecutive quarter of year over year growth exceeding 9 percent and the 15th consecutive quarter of positive year over year growth.
  • While a reduction of debt led to some increase in net worth earlier in the recovery, the last 3 quarters have showed that total liabilities were roughly stable after 16 consecutive quarters of year over year decline.
  • The bigger driver of increases in net worth now is the recovery of home and stock prices.  Household real estate accounts for $18.6 of the $88 trillion in household assets and owner’s equity in household real estate is $9.3 trillion of the $70 trillion in net worth.  In fact, in the recent quarter, gains were split roughly equally between real estate and financial assets, with each seeing growth between $600 and $700 billion.
  • During the recession, the net worth of households and non-profits—the sum total of tangible assets such as real estate and financial assets such as savings and equities minus liabilities such as mortgages and other debt—took a beating, declining by roughly $13 trillion from the first quarter of 2007 to the first quarter of 2009..
  • Households and non-profits are grouped together because current data collection by the Fed is not at a level of detail that would make separation of the two groups possible.

Distressed Sales Continue to Fall

In line with the broad decline in foreclosure inventory, distressed sales continue to make up for a smaller share of overall residential sales. Approximately 12 percent of respondents who reported a sale in the August REALTORS® Confidence Index Survey sold a distressed property, substantially down from levels seen a few years ago.

For the past 12 months, properties in “above average” condition have been discounted by an average of 10-11 percent, while properties in “below average” condition were discounted at an average of 15-20 percent.

2013 Firm Survey: Franchised Firms

  • Fifteen percent of firms are franchised firms.
  • The typical firm has been affiliated with their current franchise for 11 years.
  • Eighty-seven percent of firms reported their current franchise affiliation improved their firm name recognition.
  • Many franchised firms have the capability to offer in-house ancillary services to real estate clients. The most common in-house service is business brokerage.
  • For more on the 2013 Firm Survey, click here.

Homeowner Equity

  • Housing equity rose 30% or more than $2 trillion over the past year as prices rose, home purchases rebounded, and mortgages outstanding continued to decline according to second quarter data from the Federal Reserve’s Flow of Funds.
  • Mortgage debt outstanding fell by slightly less than $200 billion while the market value of household real estate surged 12 percent, topping $18.6 trillion.
  • The rise in the value of household real estate is welcome relief to owners, but as prices rise and affordability starts to wane, some wonder whether we are seeing a return of a housing bubble.  Here are some reasons that is unlikely the current case.
  • In spite of the rise in house prices, the total value of household real estate remains roughly 18 percent below the peak in 2006.  Additionally, mortgage debt has been on the decline.
  • The housing market has rebounded in spite of falling mortgage debt in large part because of all-cash or high cash purchases.  Scholastica Cororaton discusses the latest results from the Realtors® Confidence Index here, which show that 29 percent of recent transactions in July were all-cash purchases.  This trend has been quite consistent over the last few years in spite of low mortgage rates.

Demand for Residential Rental Properties Still Strong

The demand for rental units appears to remain strong, judging by rental price trends. Approximately half of REALTORS® responding in the REALTORS® Confidence Index Survey reported higher residential rents compared to 12 months ago. About 23 percent of REALTORS® reported conducting an apartment rental.

There have been reports that Millenials (the generation born approximately 1978/9 and subsequently) may be unable or unwilling to participate in homeownership to the same degree as previous generations–based on tough job markets and higher levels of student debt. This conclusion is not substantiated by a recent survey—but the Millenial generation is still evolving in preferences and age. In the July REALTORS® Confidence Index survey, approximately 52 percent of transactions went to clients aged 35-55 years old. Those aged 20 to 34 and under (that part of the Millenial generation currently of home-buying age) accounted for 26 percent of reported sales and numbered 28 percent of the over age 20 population.

Latest New Home Sales

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 new home sales.

  • Sales of new homes jumped 8.3% from July to August to a seasonally adjusted annualized rate of 421,000.  This was an important, though soft improvement from last month’s sharp downward movement and revisions to the two prior months.  While there were again downward revisions to the estimates for July and June, they were not as large as the re-estimates done in July.
  • Sales of new homes have been constrained by low inventories for several quarters, though.  The months’ supply of new homes jumped in July, but eased to 5 months in August, well below the 6.5 months that would be more indicative of a market in balance.
  • Low inventories place upward press on the median price, which was $254,600 in August, the 14th consecutive year-over-year increase.   The median existing home price was 20.0% lower at $212,200, above the historical average spread of a 12.3%, suggesting that existing homes are a bargain by historical standards.
  • The sharp increase in mortgage rates during the late spring has had an impact on new home sales.  New sales remain constrained by low production though, which in turn weighs on job creation and creates price spikes in some markets where inventories are particularly low.  Still, this month’s movement upward in sales and steady in prices suggests that consumers are adjusting to the higher rate environment and sales will continue at a more subdued level that is stronger than recent years and more in line with historical norms.

Latest Consumer Confidence

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 consumer confidence.

  • Consumers felt slightly less confident about the economy in September compared to recent months.  But broadly speaking, consumers are in a much better mood this year compared to the past 5 years.
  • The September gauge of 79.7 is still well under 100 – historical normal and the point where more than half of America would say things are moving in the right direction.  It is this sub-100 reading that leads many to think that we are still in a recession even though the economy has been growing the past 3 years with nearly 7 million net new job creations.
  • Consumer confidence needs to rise to America into a virtuous self-feeding circle:
    • higher confidence leads to more spending
    • more spending leads to more jobs
    • more jobs leads to even higher confidence
    • Cycle repeats
  • Confidence and optimism, at times, can be lifted by great leaders and is the cheapest stimulus to economic activity.  FDR’s effort to turn the country around with “You have nothing to fear but fear itself,” and Ronald Reagan’s “It’s morning again in America” were effective in lifting country’s mood and thereby automatically inducing people and companies to spend more.  These quotes did not cost a single penny of taxpayers’ money.
  • There is a large amount of cash on the sidelines.  Business spending in relation to company profits is very sub-par at the moment.  Historically, total business spending should be measurably higher than profits since many small start-up companies are borrowing to spend and expand (i.e., the blue line in the chart below should be much higher than the red bar charts).  That is not happening right now.
  • It is unclear what Angela Merkel, the newly re-elected German leader, had said to the country in boosting its economy.  Germany was one major holdout in not implementing a stimulus measure after the financial crisis of several years ago.  As a result, it does not have a budget deficit.  Yet, Germany’s economy grew and grew, from the evident boost to German confidence, thereby driving the unemployment rate to very low levels.
  • The only significant European leaders of the past 50 years that come to mind are two ladies: Margaret Thatcher of Britain and Angela Merkel of Germany.  It’s been the Maggie and Angie show, if you will, in the otherwise diminished European power over the past half century.  They also set a good example of a woman’s ability to be a fine powerful leader.  Is America ready?  Hilary Clinton will be speaking at NAR’s annual convention in November.  She is popular and also divisive as have been other past speakers at NAR events such as George Bush and Condoleezza Rice.  Will Hilary come out and say something that will excite and get the support of REALTORS®, such as when Ronald Reagan told the crowd “never mess with mortgage interest deduction?”  REALTORS® will wait and see.