Economist's Outlook

Latest Monthly Housing Affordability Index

At the national level, housing affordability is down due to higher home prices even though mortgage rates have come down. What is affordability like in your market?

  • Housing affordability is down for the month of May in the US as prices reach their highest level since July of 2008. Mortgage rates, as measured by the FHFA monthly survey based on May home sales closing, ticked down a notch this month, easing the pressure on May affordability.
  • While mortgage rates are still lower than a year ago and incomes are higher, home prices increased again bringing affordability down. Additionally, because mortgage rates began a swift rise in early May from record low levels, this is likely the last month that they provide a boost to affordability from the previous month or year even though they remain at historically low levels.
  • By region, affordability is down from one month ago in all regions, with the South seeing the biggest drop. From one year ago, affordability is down in all regions, with the West seeing the biggest drop in affordability due to the largest price gain (19.5%).
  • While affordability will certainly weaken in the months ahead, it is coming down from such a high level that affordability should remain historically favorable in spite of mortgage rate and continued price increases on the horizon.
  • 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.

Lending for Small Investors in Commercial Real Estate Markets Records Slight Improvements in 2013

For most commercial REALTORS®, investment activity registered slight improvements over the past year. Members posted gains in transactions of office properties, which took the top spot. Industrial, multifamily and retail/land deals followed close behind.

In terms of valuation, most properties exchanged hands at the $2 million mark and below. The figures indicate that a significant segment of the commercial market is flying below the radar of the established data aggregators, such as Real Capital Analytics. In addition, commercial REALTORS® handled a wide range of properties, from free standing buildings and mixed use, to churches, restaurants and self-storage.

The 2013 Commercial Real Estate Lending survey points to the fact that capital availability has shown signs of easing, but tight lending standards remain the norm in many markets. In 2012, only 31 percent of respondents indicated that capital availability had eased, compared with 70 percent who reported shrinking or unchanged availability. Over the same period, 72 percent of commercial REALTORS® indicated that loan underwriting standards are just as stringent, or tighter than in 2011.

Cash remained a dominant source of financing, accounting for 33 percent of transactions, an increase from the 27 percent figure in 2011. Down-payment conditions remained conservative—71.0 percent of closed sales required a down-payment larger than 20% to secure financing, with 21.0 percent of loans requiring 50%-60% loan-to-value ratios.

Marking a noticeable improvement from last year, 52.0 percent of commercial REALTORS reported having a sales transaction fail due to financing issues (compared with 70.0 in 2011). In addition, 42.0 percent of REALTORS mentioned that they or their clients failed to complete a refinancing process during the past 12 months. Much of this seems to stem from the fact that 72.0 percent of loan underwriters had standards which were just as or more stringent than the prior year.

When asked about the most relevant causes for lack of sufficient bank capital for commercial lending, REALTORS pointed to a twin salvo of reasons: regulatory uncertainty for financial institutions and new and proposed legislative and regulatory initiatives. Reduced NOI, property values and equity came in a close second.

For the full report of the Commercial Lending Survey, visit

International Sales at $68.2 Billion in 12 Months Ending March 2013

The recently released 2013 Profile of International Home Buying Activity reports that total residential sales dollar volume to international clients was at its second highest level in recent years for the 12 months ending March 2013. International clients are estimated to have purchased $68.2 billion of residential property in the U.S., approximately 6.3 percent of the total dollar value of the U.S. Existing Homes Sales (EHS) market of $ 1.08 trillion. The information covers property sold by REALTORS® through the Multiple Listing Services and is based on responses by over 3,300 REALTORS®.

Although sales dropped from the previous level of $82.5 billion, the dip is believed to be due to transitory economic conditions. Slower growth in a number of major economies, rising U.S. prices for residential real estate, the strengthening of the dollar against other currencies resulting in higher effective prices for foreign buyers, a slow recovery of the U.S. economy, tight credit standards, and lower housing inventories are believed to have contributed to the decline.

What Does This Mean to REALTORS®? There is significant major foreign interest in U.S. properties. None of the conditions that slowed international transactions in 2012 appear to be permanent and should dissipate over time.

Basel III Down: The Specter of Regulation Eases

Yesterday marked an important turning point for housing finance. The Federal Reserve voted on a final Basel III rule that is significantly friendlier to residential housing finance than the earlier proposal. While the FDIC and OCC must still vote on it, the finalization of this rule is important as it opens the door for completion of the qualified residential mortgage rule. The completion of this set of rules will in turn provide clarity to the banking and capital markets, allowing them to pursue expanded mortgage lending as interest rates and profitability rise with the improving economy.

The initial proposal for Basel III would have created a new structure of risk weights on residential mortgages, creating variation in how much capital, a cushion against losses, banks must hold against mortgages based on the size of downpayments. Mortgage insurance could not be used as a compensating factor for low downpayment loans. Thus, banks would have to hold additional capital against loans with downpayments less than 20% as compared to earlier standards. This extra regulatory capital creates a cost for banks as the return is less than would be achieved if it were invested. Banks would pass this cost onto the consumers in the form of higher mortgage rates. One estimate put the cost at an additional 80 to 85 basis points on top of the retail rate for a prime mortgage with 5% downpayment (e.g. if today’s rate on a 30-year FRM with 5% down is 4.5%, then the rate under Basel III would be 5.3%). An increase of that size would have a significant impact on affordability; an impact that would increase over the decade as we move into an environment of higher mortgage rates. Under the finalized rule, there is no change to the capital requirements for mortgages; an important change for the housing industry!

Another important change from the proposed rule is how Basel III will impact smaller banks and community lenders. These entities will be largely exempt from the more onerous regulations imposed on larger and systemically important banks.

However, there remain issues that might affect residential mortgages. Banks will be limited in the amount of mortgage servicing rights that they can hold, reducing its value to banks. Servicing mortgages, collecting payments and passing them onto investors, can be a lucrative business for banks. This change will likely shift much of the servicing to non-bank financial companies and to smaller banks, thus reducing the high concentration of mortgage servicing among the largest banks and enhancing competition and thereby lowering the price of servicing which should result in lower mortgage rates. However, this change could raise the cost in the short term if the non-bank sector cannot expand to match the supply during the transition. The Fed extended the phase-in period for smaller banks, which should help to ameliorate this impact.

In addition, the largest banks which are deemed systemically important financial institutions (SIFI) will still be subject to enhanced accounting and capital requirements. Thus, this change may cause them to shy away from holding assets such as higher LTV mortgages. This could reduce demand for these assets in the near term putting upward pressure on mortgage rates, but shift them to smaller banks in the long term. This change could raise the cost marginally as smaller banks will need to improve oversight to monitor these loans in accordance with Basel III and many have a higher cost of capital than the large banks. However, it might also sync well with efforts to improve and expand the number of securitizers. One academic study found that mortgages which were originated and securitized by the same institutions had lower delinquency rates during the subprime crisis. The authors of the study suggested that the closeness in the production chain allowed for soft information about the borrower or the loan to be passed onto the securitizer, which enabled more accurate pricing and a better ability to manage default risks. Thus, expanding the number of small banks that originate and securitize loans following the FHA-Ginnie Mae model could improve the performance of securitized mortgages without the need for risk retention as suggested in the QRM rule. This model would dovetail with some suggestions for reform of the GSEs.

Finally, the regulators indicated that one reason for not adopting the new risk weighting scheme is the other forthcoming regulations that will impact the housing finance industry. This reference is to the qualified mortgage (QM), which is largely complete, and the qualified residential mortgage (QRM) rules which define the underwriting and origination of loans and the securitization of mortgages, respectively. The QM rule significantly improves underwriting of mortgages and bars several risky product features such as interest only, negative amortization loans, and amortizations longer than 30 years. However, the yet to be decided QRM rule would require a 20% downpament requirement for mortgages that are securitized, which would have a large impact on the home purchase market as 85% of first time buyers who finance their purchase put down less than 20% for downpayment. A Basel III rule with risk weights would effectively have the same impact on low downpayment loans, forcing the QRM rule to do the same or create distortions in the market. Since the Federal Reserve is one of the regulators involved in deciding the QRM regulation, this change to Basel III suggests that regulators may be coming around to recognition of the dangers of a system that requires high downpayments in lieu of stronger underwriting and product controls. Comments by Fed staff suggested that they are leaving this open until after the QM and QRM are decided.

Yesterday’s vote on a final Basel III rule by the Federal Reserve is a second important step in conjunction with the QM rule to bringing clarity to housing finance. The final Basel III rule as voted on by the Fed avoids raising the cost of low downpayment mortgage, though it could modestly raise some rates. Still the change is a boost to the housing industry and bodes well for the final major regulatory hurdle, the QRM rule.

Latest Mortgage Applications 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 the latest mortgage applications data.

  • No surprise. Mortgage applications for refinances are collapsing with a rise in mortgage rates. They fell 16 percent in one week and are down 43 percent from this time last year.
  • Mortgage applications to buy a home, however, are holding their ground despite the higher interest rates. Though down slightly from the prior week, they are up 11 percent from one year ago. The increased consumer confidence about home buying is simply too strong at the moment to be neutered by higher rates.
  • Expect further steep declines in refinance activity. If mortgage rates rise by another 50 basis points – from current 4.5% to 5.0% – then expect a slide in home buying in coastal regions of the country where home prices are very high. In the vast middle of the country and in the South, the rise in mortgage payments will be slight and will therefore not be a big hindrance to home buying.
  • One positive of falling refinance activity is that mortgage brokers and banks will now increase staffing resources to process home purchase applications. Last year when mortgage rates were at unimaginable lows, significant resources had to be dedicated to refis. Now those resources can be redeployed to process home purchase applications. Your home buyer should get quicker responses now. Moreover, commercial loans may also receive their due diligence, rather than being ignored, even though regulatory compliance remains quite burdensome for these type of construction and commercial real estate investment loans.

CoreLogic 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 the latest CoreLogic home price data.

  • CoreLogic home price data out today shows that at the national level, home prices continue to advance at a double-digit pace. From a year ago, May home prices are up 12.2 percent.
  • This is the third consecutive month that CoreLogic has reported double-digit price increases from a year ago. By comparison, NAR released data nearly two weeks ago showing that May prices rose by 15.4 percent from a year ago. This was the 6th consecutive month of double-digit price gains in the NAR data.
  • On the graph above, NAR and CoreLogic price data are pictured with a few other price series that reported April data last week. As you can see, the NAR data shows price increases early, but all price series have followed the trend of increases first captured in the NAR data.
  • CoreLogic releases a few price measures. One index, from which we see the headline figure, includes distressed sales such as short-sales and REOs; another excludes them. Notably the CoreLogic index excluding distressed sales was up by 11.6 percent from a year ago, somewhat less than the all-encompassing index.
  • NAR’s Realtors Confidence Index data may shed some light on this phenomenon. Data from a survey of members shows that the average price discount for short sales and foreclosed properties has trended down. The average discount in May was 15 percent below market for foreclosed properties and 12 percent for short-sales. Just one year ago, the average discounts for foreclosed and short-sales were 18 and 14 percent, respectively.
  • With reported price gains nearing records and the memory of the housing crisis not completely forgotten, some have asked if the current pattern is sustainable. Supply constraints, pent-up demand, and economic growth all favor continued gains in home prices. Risks to that forecast come from the idea that prices cannot continue to grow faster than incomes long-term, rising mortgage rates put pressure on affordability, particularly in high-cost areas, and there are some still-lingering regulatory uncertainty in lending rules. But even these risks could become boosts to further price gains, if incomes grow faster, mortgage rates rise more gradually, and regulatory uncertainty is resolved in a manner that improves market function.

Latest Metro Employment Conditions

Common sense says where there are jobs, there are better home sales and commercial leasing opportunities.  So which markets are generating jobs and which are not?

  • The fastest job creating large cities over the past 12 months:
    • Austin, TX                  (+3.8%)
    • Nashville, TN              (+3.7%)
    • Dallas-Ft. Worth, TX (+3.6%)
    • Houston, TX               (+3.4%)
  • The fastest job creating small towns over the past 12 months:
    • Santa Cruz, CA           (+6.2%)
    • Midland, TX               (+5.6%)
    • Winchester, VA          (+5.6%)
    • Odessa, TX                 (+5.0%)
  • By comparison, the U.S. job growth rate as a whole is 1.6 percent.
  • Unfortunately, there are still areas where jobs are being cut, and the notable ones are:
    • Cleveland
    • Atlantic City
    • Peoria
  • One market with a long streak of job creation is Bismarck, ND.  The unemployment rate is only 2.4 percent. Menial jobs such as that of cashier at McDonalds earn near $20 per hour.  Oil and gas workers are at near $100,000 per year.
  • A tribute goes out to those people moving from say Cleveland to North Dakota in search of work.  Though disruptive on many levels, there is something noteworthy and patriotic about people seeking out and making a long-distance move, particularly to a non-weather friendly region, in order to get off of unemployment and into a good paying job. Based on a few anecdotal stories from local REALTORS®, the new arrivals into the northern plains are said to be liking it as a good place to raise family.

Summer Webinar Series from NAR Research

This summer, NAR Research will be premiering a series of free webinars that take an in-depth look at several of our most popular surveys and profiles.  Manager of Member and Consumer Survey Research Jessica Lautz will be leading the webinars and discussing the highlights of each report.  The summer webinar series kicks off next Tuesday, July 9th at 2pm EDT with an overview of the annual Profile of Home Buyers and Sellers.

Here is the schedule of webinars on offer during this summer series (all are offered at 2pm EDT):

  • July 9th: Overview of the latest Profile of Home Buyers and Sellers
  • July 16th: Overview of the 2013 Profile of Home Buyers and Sellers Generational Trends Report
  • July 23rd: Overview of the 2013 Home Features Survey
  • July 30th: Overview of the 2013 Commercial Member Profile, and the 2013 Member Profile
  • August 6th: Overview of the 2013 Investment and Vacation Home Buyers Survey

You can register for the July 9th webinar here.  Follow NAR Research on Twitter or Facebook to get updates on the other webinar links as well as information on upcoming Twitter chats, the latest data releases, and more.

GDP Forecast

  • With the exception of the strong housing market recovery, the broad U.S. economy continues to underperform.  This week data on the GDP growth of 1.8 percent in the first quarter was uninspiring.  The long-term historical average GDP growth is 3 percent.  After a recession, GDP tends to grow even faster at 4 to 6 percent in order to compensate for the lost output during the recession.  That has not been happening this time.  After the harsh 2008-2009 Great Recession, this year will mark four consecutive years of subpar 2 percent GDP growth in the U.S.
  • Housing is one bright spot.  Residential construction rose at 14 percent in the latest data.  Moreover, consumers are spending at a respectable pace thanks to the gains in the housing wealth.  In all likelihood, without the housing market recovery the U.S. would be teetering on a recession.
  • A quick review of the individual components of the economy (a fun exercise for those who took an Econ 101 course) shows that the prospects of economic growth remain in place:
    • Consumer spending grew at a respectable 2.6 percent.  With housing wealth rising and some jobs being added, consumer spending will continue to be at around 2 to 3 percent.
    • Business investment spending grew at a 0.4 percent.  Quite disappointing.  But the prospect for growth is good because big companies have massive piles of cash and profits ready to be deployed.  Big businesses, however, have been indicating less favorable business climate to spend that cash while small businesses start-up activity is still trending low.
    • Government spending fell 4.8 percent.  Sequestration is part of the story as well as the need to balance the budget by state and local governments.  Though the government spending cuts are clearly a drag to the current economic growth, lower deficits can enhance future prospects for the economy.  A case of short-term pain for long-term gain?  The amount of spending cuts will steadily diminish in the upcoming months since many state and local governments are now running budget surplus.
    • Net exports are not moving anywhere.  Though the U.S. still imports more than it exports, there was no change in figure so the net exports had essentially no impact on overall GDP growth.  The prospect for improvements in net exports looks good because of the energy renaissance in the U.S.  Both oil and natural gas production have been rising in places like North Dakota and Pennsylvania and that will reduce the level of imports over time.
  • The forecast is for GDP growth of 1.8 percent for all of 2013 and then picking up speed to 2.7 percent for all of 2014.  That translates into about 2 million net new jobs this year and maybe 2.5 million next year.
  • Note: while the U.S. is trying hard to grow at 3 percent (the historical average rate), China has been growing at 7 to 10 percent a year.  If such a trend continues then China’s broad GDP will surpass America’s within 15 years.
  • As a practical matter of China’s keen focus on economic growth, China invests twice as much money in Africa compared to the U.S. even though China’s current GDP is only half the size of the U.S. economy.  China knows from its experience that the best way to lift people out of poverty is through economic growth.  After Chairman Mao died with his brand of communism, growth policies of subsequent Chinese leaders led to over 500 million Chinese escaping poverty.
  • Here are the NAR GDP forecast figures in detail. (PDF)