Economist's Outlook

Latest Home Price 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 home price measures.

  • FHFA and Case Shiller data today both confirmed that home price increases continued in July.  Previously, NAR released median price data that showed a gain of 12.9 percent for the year ending in July.  Data from FHFA today showed a gain of 8.8 percent while CaseShiller estimated the gain for the year ending July to be 12.4 percent for the 20-city index—nearly exactly in line with CoreLogic’s earlier estimate.  Case Shiller’s 10-city index showed a year over year gain of 12.3 percent.  This is the 5th consecutive month of double-digit year over year gains in both Case Shiller indexes.
  • NAR reports the median price of all homes that have sold while Case Shiller, CoreLogic, and FHFA report the results of a weighted repeat-sales index.  Because home sales among higher priced properties have been growing more than among lower price tiers, the NAR median price has risen by more than the weighted repeat sales index—which computes price change based on repeat sales of the same property.
  • FHFA differs primarily from Case Shiller and CoreLogic because it sources data primarily from Fannie and Freddie mortgages, transactions using prime conventional financing, and misses out on cash transactions as well as jumbo, subprime, and government backed transactions such as those using VA or FHA financing.  Case Shiller and CoreLogic use public records data which offer very comprehensive data in most areas, but sometimes have a reporting lag.
  • To deal with the lag, Case Shiller data is based on a 3 month moving average, so reported July prices include information from repeat transactions closed in May, June, and July.  For this reason, the changes in the NAR median price tend to lead Case Shiller.  NAR data showed continued double-digit growth in August, so expect repeat prices to follow suit.
  • By market in the 20 cities covered by Case Shiller, metros in the West lead the pack.  Las Vegas posted the biggest year over year increase with a gain of 27.5 percent followed closely by San Francisco at 24.8 percent.  Los Angeles and San Diego rounded out the top 4.  The slowest growing metro in the last year according to Case Shiller was New York where home prices increased only 3.5 percent.  Still, all 20 metros showed year over year gains, and 11 of these were double-digit gains.
  • FHFA releases data at the regional level and it confirms the trend seen in other measures.  The most robust gains were in the West.  Year over year prices rose 20.8 percent in the Pacific division which includes Hawaii, Alaska, Washington, Oregon, and California and 12.7 percent in the Mountain division which includes Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona, and New Mexico.

2013 Firm Survey: Benefits, Education, and Training

  • The most common benefit that firms offer to independent contractors, licensees, agents is errors and omissions/liability insurance at 79 percent.
  • Firms reported that 72 percent of their staff has academic degrees.
  • Thirty percent of firms report that all of their employees have a designation or certification in real estate.
  • Firms typically require 21 hours of training for new sales agents, 12 hours of training for experienced sales agents, and two hours of training for other staff.
  • For more on the 2013 Firm Survey, click here.

REALTOR® Confidence for the Next 6 Months Eases in August

REALTORS’® confidence about market conditions for the next six months remains “above moderate”, but weakened for all markets in August compared to July. The index for single family homes fell to 65 (69 in July). The index for townhouses went below moderate to 48 (51 in July), while the index for condominiums further slid to 43 (46 in July).

The prospect of further increases in interest rates, the continued difficulties in accessing mortgage financing, appraisal problems, modest job growth, and higher flood insurance rates in some areas were the main concerns reported by respondents in the August REALTORS® Confidence Index Survey.

Although all real estate is local, real estate markets around the country have experienced good price and sales growth in the past 12 months. REALTOR® confidence is still high compared to previous years, so some leveling off to slower growth rates will help to avoid speculative behavior—the type of behavior that created major problems a few years ago.

2013 Firm Survey: Business Activity of Firms

  • Firms with only one office had a median brokerage sales volume of $3.6 million in 2012, while firms with four or more offices had a median brokerage sales volume of $145.6 million in 2012.
  • Firms with one office had a total of 15 real estate transaction sides in 2012, while firms with four or more offices typically had 750 real estate transaction sides in 2012.
  • Firms typically had 10 percent of their sales volume generated through their website.
  • Forty-five percent of firms do use a secure or encrypted web platform and 33 percent encrypt their e-mail.
  • For more on the 2013 Firm Survey, click here.

Latest Diffusion Index of Foot Traffic

Foot traffic is a strong leading indicator of future trends in contracts and closing for home sales. NAR Research monitors foot traffic patterns in roughly 170 markets. Traffic has been expanding in most markets since the spring of 2011. However, relative to August of 2012, foot traffic fell in the majority of markets in August of 2013, though the magnitude of the decline is not clear. This change likely reflects the recent increase in mortgage rates and tight inventories.

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 August, the diffusion index for foot traffic fell 24.9 points to 34.1.

Mortgage rates have risen roughly 1.2% since May and stood above 4.5% at the end of August. This trend coupled with strong price appreciation has eroded affordability. However, inventories have been on the decline as well, limiting the top end of the foot traffic index to band between 60 and 70 since the fall of 2012.

This month’s reading is the first decline in the index since March of this year. March of 2012 was a particularly strong month for traffic, so that decline reflects the strength of the market in 2012. The index fell below the important “50” mark in August, which indicates that more than half of the markets in this panel had stronger foot traffic in July of 2013 than the same month a year earlier. This reading does not suggest how much of an increase in decline there was, just that the majority of markets experienced more foot traffic in August of 2012 compared to last month.

On a metro level, the decline appears widespread from high priced coastal markets to the Midwest and Southwest. It is not clear though whether tight inventories, higher mortgage rates or a combination of factors was the driver of this trend. While the decline in traffic from 59 to 34.1 was large, it is important to remember that this decline was from a high level a year ago during an atypically strong end of summer. By comparison, the decline in traffic that followed the expiration of the home buyer tax credit was much larger falling from 64.8 to 19.3 in a single month.

Foot traffic fell sharply in August likely reflecting the strong increase in mortgage rates, tight inventories, and strength of last year’s market. Consumers are likely to take a pause and to reevaluate affordability conditions this fall, but rates remain well below levels during much of the market expansion in the early 2000s and prices have yet to reach those peaks. A reversion to historic price growth would benefit the long-term stability of the market.

2013 Firm Survey: Characteristics of Real Estate Firms

  • Eighty percent of real estate firms have a single office, typically with two full-time real estate licensees.
  • Seventy-nine percent of firms specialize in residential brokerage.
  • 32 percent of firms are LLCs, 29 percent are sole proprietorship, 27 percent are S-Corps, and 10 percent are C-Corps.
  • The typical residential firm has been operating for 12 years, while the typical commercial firm has been operating for 18 years.
  • For more on the 2013 Firm Survey, click here.

Latest Consumer Inflation

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 inflation.

  • Rents continue to climb higher even as broad consumer prices remain tame. Rents rose 3.0 percent over the past 12 months (August 2012 to August 2013), the fastest increase in nearly five years.
  • The broader consumer price index rose much more modestly, by 1.5 percent, thanks to a slight decline in energy prices this year compared to last.
  • Food prices rose 1.4 percent. Clothing prices rose 1.8 percent. Gasoline prices were down 2.4 percent. House related costs of window and floor covering, appliances, and furniture all experienced a slight fall in prices.
  • Home prices are not considered in computing consumer price index. It is considered an asset, and like stock prices, the changes in home prices impact people’s wealth but not cost of living changes. However, a strangely funny component called the “owner’ equivalency rent” is included. It is what the homeowner would pay in rent if the house is rented. This component rose by 2.2 percent, also the highest increase in nearly five years.
  • Apartment owners and small time landlords should be mindful that the cost of running a home, such as water, trash, and sewage costs, increased by 3.5 percent. Many landlords in the high income category will also be subject to a new 3.8 percent tax starting this year (that is, in the next year’s tax return forms) arising from the need to fund health care. Rents may need to rise further to compensate for these rising costs. Moreover, low vacancy rates across most of the country assure continuing pressure for rising rents going into next year.
  • The “Rents are Too Damn High” party is unlikely to win the mayoral race in New York City. Only more new construction can alleviate the rent pressure over time. However, the difficulty of obtaining construction loans, where many lenders are attributing to the onerous and confusing Dodd-Frank financial regulation, is preventing more new supply from reaching the market.
  • Based on this year’s consumer price trend, social security recipients can expect a cost-of-living-adjustment of about 2 percent next year.
  • Core inflation – price changes after excluding the volatile food and energy components – rose 1.8 percent. This measure is what the Federal Reserve monitors to fine tune its monetary policy. As long as it is rising less than 2 percent, an ultra-loose monetary policy can be expected. Should it rise above 2 percent, then inflation will start to become a concern for the Fed. If above 3 percent on core inflation, interest rates on everything will be rising.

Latest Producer 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 update discusses the latest producer price index.

  • Inflation at the producer level is not concerning. The producer price index rose a tame 0.3 percent in August and by 1.4 percent over the past 12 months. This inflation measure captures the price pressure that producers are paying to buy stuff.
  • Consumer prices generally follow the trends from producer prices. Both measures move similarly in terms of ups and downs, though not necessarily by the same magnitude. Over the past decade, producer prices increased 38 percent while consumer prices rose 26 percent. The difference in magnitude arises largely because many service items, like getting a haircut or paying college tuition, are accounted for in consumer prices but not in producer prices.
  • Little inflation provides more room to maneuver for the Federal Reserve. The bond buying program (by printing money) can continue for a longer period. Some degree of ‘tapering’ of bond buying will occur soon, which is the main reason for the rise in mortgage rates over the past 3 months, but the pace of tapering can be slow rather than abrupt so long as inflation does not pop out.
  • A complete end of bond buying will have to occur at some point, probably by the spring of next year. Printing of money forever is not a sustainable policy. When Germany did just that after the First World War, hyperinflation was the result. One widow farmer, aloof to economic data, sold a cow and then deposited the money in the bank. After a month, to her utter dismay, the retrieved money could only buy a can of sardines. Extreme politicians would have an easy time getting votes from people who feel cheated out of hard work.
  • Fortunately in America today, the bond-buying program has not led to any degree of inflation. Consumer prices are up only 2 percent from one year ago. In the worst case scenario, consumer price may rise at a 4 to 5 percent rate in a few years. That is not hyperinflation and is not even the 1970s style double-digit rate of inflation.

Claims for Unemployment Insurance Drop to Lowest in 13 years

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 7 dropped to 292,000, the lowest in 13 years. The first release of the data is preliminary and is generally upwardly revised the following week, although on a minor scale. Weekly claims data for unemployment insurance also fluctuates widely. Despite the caveat, the report is positive and claims have generally been on the downtrend in 2013, with the latest 4-week moving average at 321,250, a level close to what most analysts consider normal.
  • What this means to REALTORS®: A lower level of initial claims indicates greater job stability and security for those currently employed, which is important to the housing market that relies on a steady and reliable stream of long-term income growth.

Mortgage Purchase Applications

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 mortgage purchase applications.

  • Rising rates continue to have an impact on home purchase applications. The Mortgage Bankers Association released its weekly survey of mortgage applications this morning. The purchase component eased 2.7% this week relative to last and has fallen 16.8% since the first week in May on a seasonally adjusted basis. Rates reversed course last week and turned upward after easing in the prior week. The average rate for a 30-year fixed rate mortgage was 4.57% last week according to Freddie Mac.
  • While the average rate has been on the rise, the Federal Housing Finance Agency is considering reducing the size of the mortgages that can be backed by Fannie Mae and Freddie Mac. Currently, the GSEs can support loans up to $417,000 in most markets and up to $625,500 in higher cost markets, while loans above this are supported by the private “jumbo” market made up of banks and private MBS securitizers. Rates on jumbo loans have eased to party or slightly better than conforming loans in recent months as banks have started taking more loans into portfolio to compensate for weak commercial and refinance business. However, these loans are very high quality with large down payments and high FICO scores. The concern then is that if the loan limits decline, the private sector may still not be ready to pick up the non-pristine lending activity in the high cost portion of the market, cutting off access to credit for this portion of the market.
  • Mortgage rates have had an impact on mortgage activity in recent weeks. Some borrowers will be able to adjust to higher rates either through larger down payments or purchasing lower priced homes. However, the higher rates may curb some home purchases as affordability wanes. A reduction in loan limits would only amplify this effect, particularly in the high cost markets that they currently support.

Markets with the Largest and Smallest Employment Change

Fundamentals like employment and affordability are key to sustained housing recoveries.  Among the markets with the strongest improvements in employment over the 24-month period ending in June are Bismarck and Fargo, both of which have benefited from the oil boom in North Dakota.  However, two of the top-five markets were in Texas which was only modestly impacted by the housing bust and subsequent financial crisis.  The markets with weak employment growth are more idiosyncratic and reflect local trends.  For additional information on employment trends in a particular market including industry trends, see the Local Market Reports for the 2nd quarter of 2013.

2013 Firm Survey: Future Outlook of Firms

  • Forty-five percent of firms reported they are actively recruiting sales agents in 2013.
  • Seven in ten firms expect profitability (net income) from all real estate activities to increase in the next two years.
  • Two-thirds of firms do have the expectation that competition will increase in the next two years from marketplace and non-traditional marketplace participants.
  • Profitability, local or regional economic conditions, keeping up with technology, and maintaining sufficient inventory are among the biggest challenges cited for firms in the next two years.
  • For more on the 2013 Firm Survey, click here.

Declining Distressed Sales

  • Distressed property sales reached a new cyclical low in the past two months. Only 15 percent of all transactions were classified as being due to a foreclosure or needing a short-sale approval from a bank. This is a marked change from nearly one-third of all sales being distressed from 2008 to 2011. Last year, the figure decreased to 26 percent. This year, it is likely to hit 17 percent for the entire year.
  • Better news yet – distressed sales will hit 11 to 13 percent in 2014, and then fall to a single-digit percentage in 2015. Why? The number of seriously delinquent mortgages in the pipeline has been steadily falling. With fewer in the pipeline, fewer distressed properties will show up as for-sale. Fewer distressed home sales also mean higher home prices. Higher prices in turn mean more people getting lifted out of the underwater status and hence will not face a distressed situation.

Sacrifices Made to Purchase Home

  • Despite low interest rates and affordability of homes today, buyers are still making sacrifices to purchase a home.
  • First-time buyers are most likely to make sacifices.
  • The most common sacrifices are cutting spending on luxury items or non-essential items, cutting spending on entertainment, and cutting spending on clothes.
  • For more information from the annual NAR Profile of Home Buyers and Sellers, click here.

Latest Housing Affordability Data

At the national level, housing affordability is down due to higher prices and steady rising mortgage rates. What is affordability like in your market?

  • Housing affordability is down for the month of July in the United States, as prices remain 13.4% higher than a year ago. Mortgage rates, as measured by the FHFA monthly survey based on July home sales closing, are the highest since February 2012.
  • Incomes are slightly higher and mortgage rates are up abruptly from last month and a year ago, but the average homebuyer can still take advantage of historically low rates.
  • By region, affordability is down from one month ago in all regions, with the West having the biggest drop. From one year ago, affordability is down in all regions. The West has had the largest price gain, at 18.4%, while the Northeast has had the smallest, at 6%.
  • Affordability will probably decline again next month if prices continue to rise along with very little movement in income levels. Affordability could strengthen in the months to come, as prices have decreased from a month ago and most likely reached their seasonal peak for the year. Even with rates increasing, certain metro areas have healthy inventory levels and consumers can still look to purchase before those historically low rates are a thing of the past.
  • 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.

Home Buyer Compromises

  • Recent home buyers are often willing to make sacrifices when purchasing a home.
  • The most common sacrifices are compromising on the price, size and condition of the home they purchased.
  • Those who have children under the 18 in their home are the most likely to make sacrifices when buying a home; as buyers, the last compromise they are willing to make is in the quality of and distance to the school.

Latest Job Situation

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 jobs data.

  • Jobs are being added to the economy. The 169,000 net new jobs in August brings the 12-month total to 2.2 million net total additions to the economy. From the low point 5 years ago when 8 million jobs were shed, to-date nearly 7 million new ones have been recovered. By spring of next year, the economy is likely to retouch the prior peak in total jobs. Unfortunately, however, over the 5 year period it took to recover the jobs there has been a constant stream of high school and college graduates looking for work.
  • Jobs in residential construction fell by 600 in August (probably a fluke in one month data and inconsistent with rising housing starts) but general contractors jobs rose by 4,900.
  • Jobs in the federal government continued to slide down due to sequestration. There are now 71,000 fewer people on the federal employment payroll since a year ago.
  • The average hourly earnings rose by 2.2 percent in 12 months, one of the fastest raises since the recession. This is good news for those with work and is not yet a concern in relation to adding to inflationary pressure.
  • The unemployment rate declined a notch to 7.3 percent. We should not celebrate because it was driven by a greater number of people moving out of the labor force. A person without a job that does not actively seek one is not counted in the statistics. The latest labor force participation rate of 63.2 percent is at a 35-year low. The labor participation by men is the lowest since the data was collected, and may even be the lowest rate ever since the founding of the country. One simple technique for successful living in the past was working. What has happened?
  • By contrast, for women, the participation rate remains near historic highs even with some declines in recent years. Even at today’s G20 meeting among the industrialized countries, Angela Merkel – currently the world’s most powerful woman – appears to be the only person smiling, due to the well-performing German economy.

Home Buyer Compromises

  • Recent home buyers are often willing to make sacrifices when purchasing a home.
  • The most common sacrifices are compromising on the price, size and condition of the home they purchased.
  • Those who have children under the 18 in their home are the least likely to make sacrifices when buying a home; as buyers, the last compromise they are willing to make is in the quality of and distance to the school.

Click chart to view larger version.

Fewer Claims for Unemployment Insurance in August Portend Lower Unemployment Rate

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 dropped in the last week of August to 323,000 claims, the lowest number of claims filed since the economy fell under the Great Recession. This brings the weekly average number of claims filed in August to 329,771 claims, which is fewer than the number of claims filed in July and the year-to-date average for 2013. The number of claims is now well below the 350,000 which is considered the normal level for a healthy economy.
  • Although initial claims data is not used to compute the overall unemployment rate because those filing initial claims cover only a segment of the labor market, fewer unemployment claims filed portend a lower unemployment rate since those currently employed are not losing their jobs.
  • The Department of Labor will release the unemployment rate figure for August tomorrow, but the favorable claims data and the stronger GDP growth in the second quarter point to a positive report tomorrow.

Markets with the Largest Change in Homeownership Rate

  • The national homeownership rate peaked at 69% in 2004, but fell four percentage points to 65% in the 2nd quarter of 2013.
  • Despite having experienced the large number of foreclosures in California and Florida, those states are not among the top five states in terms of change in homeownership, though Nevada is.
  • In a moderate surprise, Kansas and Colorado experienced some of the largest declines.
  • The housing market in Washington, DC benefited from strong employment conditions driven by the Federal government.
  • Homeownership in New Hampshire and Massachusetts increased over this period.
  • For additional information on homeownership trends in your state, see NAR’s Local Market Reports for the 2nd quarter of 2013.