Economist's Outlook

Rates Moderate, For Now

After surging in the wake of the election, mortgage rate are back on the decline. The average rate for a 30-year fixed rate mortgage was 3.97 percent for three-day period ending April 19th according a release from Freddie Mac this morning. Lower rates should help consumers currently in the market, but rates are still expected to rise through the year.

The recent decline in rates was driven by a movement of money out of stocks and into bonds. This shift was initially driven by a realization that tax reform and other pro-growth policies might take longer to implement than expected. Then an increase in international tensions drove investor further towards bonds as a safe haven.

The most recent reading is 35 basis points lower than the post-election peak of 4.32 percent from the last week in December. That decline translates into a $40 reduction in the monthly payment on a $200,000 mortgage. While this is an improvement, it remains $51 higher than the monthly payment at 3.52 percent, the rate recorded just before the election.

While higher rates will weigh on affordability, they are not necessarily a bad thing if they are the result of a stronger economy and if they bring stronger income growth as a result. Income growth can offset rising rates, stabilize household balance sheets, and drive growth. NAR is forecasting the average rate for a 30-year fixed rate mortgage to finish 2017 near 4.6 percent before rising to an average of 5.0 percent in 2017.

Turbulence in Lending, Not a Trend

The Federal Housing Administration (FHA) plays a critical role in the housing market by guaranteeing financing to underserved portions of the population and by providing support to the broader housing market during cyclical downturns. In late 2016, a measure of delinquency hinted at budding stress for the FHA, but recent data suggests that conditions have improved.

In the 4th quarter of last year, the 30-day delinquency rate on FHA, VA, and conventional loans all rose relative to the 4th quarter of 2015. The FHA in particular jumped to 5.05% from 4.72% a year earlier according to the Mortgage Bankers Association. The 30-day delinquency rate measures the number of borrowers who are 30-days late on their mortgage payment and serves as an early signal that a borrower may default on their loan. An increase in delinquencies could signal a coming market decline and was cited by some to argue against the FHA’s fee reduction in January of this year.

As depicted above, the FHA’s 30-day delinquency rate is highly cyclical rising sharply in the fall and plummeting each spring. Strong spring hiring patterns as well as greater use of tax refunds by FHA borrowers to “cure” or catch up on their lapsed payment have been credited for this seasonal improvement. The chart above also depicts the steady decline in early-stage delinquencies from 2012.

The chart above depicts two data series based on data published by the FHA, but there are two important differences between them. The red line comes from the FHA’s monthly “Neighborhood Watch” report, as culled by Brian Chappelle of Potomac Partners LLC, which provides data on loans originated within the last two years. The blue line comes from the FHA’s Single-Family Loan Performance Trends Report and covers early delinquencies in the FHA’s entire portfolio. Because most defaults occur in the first two to three years after origination, the delinquency rate on the Neighborhood Watch data tends to be higher than for the entire portfolio. However, the two measures tracks closely.

The other major difference between these two series is that the Neighborhood Watch data is released one to two months earlier than FHA’s performance report. Consequently, the Neighborhood Watch data provides an early indicator of performance in the entire FHA portfolio. The chart above depicts the last five years of 30-day delinquency data by month from Neighborhood Watch. The seasonal pattern is apparent with early delinquencies rising through the fall. The measure jumped in late 2016 (orange line) eclipsing the level for 2015 and even 2013. However, the rate has since fallen sharply (turquoise) and as of March stood at 3.82 percent, its lowest level in 5 years. Likewise, the Performance Report shows a sharp decline in delinquencies for January and February, but the data for March that may corroborate this robust improvement will be published in the coming weeks. It is also worth noting that the 2015 pattern was unique in that the normal seasonal peak was not in 2015, but in January of 2016, which accentuates the difference between the 4th quarters of 2016 and 2015.

The sudden rise in early defaults on FHA, VA and conventional loans last fall was a surprise given the relative economic strength and low unemployment rate. Furthermore, the total delinquency rate, which includes borrowers who are closer to defaulting, is near a decade low. Early default measures now suggest an improvement in the 12-month trend but the question of what drove the market-wide uptick in delinquencies last fall remains.

Not a Beautiful First Quarter GDP Growth

Economic growth numbers for the first quarter will be announced next week, and it looks like it will be a huge miss. The numbers could well be just a hair above the zero growth line. The average growth rate from 1950 to 2000 was 3.7%. President Bush’s term from 2001 to 2008 generated an average GDP annual growth rate of 2.1%, while President Obama’s term yielded 1.5%. President Trump campaigned on pulling the economy back above 3%, and will therefore be sorely disappointed.

One big reason for the weak first quarter is that vehicle sales are no longer rising. After hitting over 18 million annualized vehicle sales in the final quarter of last year, the first quarter sales were 17.3 million. That figure is fine and healthy, but no longer rising. Even though consumer confidence has soared to a decade high, the actual consumer consumption increases have yet to play out. Retail sales have been solid with 5% growth, but more of the growth appears to be from price increases than from unit sale increases. Only the latter counts toward the GDP to reflect an improved standard of living.

 

View the full article here.

Consumer Sentiment on Housing: 2016 & 2017 Compared

Each month, the Housing Opportunities and Market Experience (HOME) survey tracks changes in consumer views regarding the housing market. With HOME being launched in the first quarter of 2016, we can now compare what consumers are thinking about trends in real estate in the last year.

Across the board, consumers felt that home prices increased in the last year and each quarter was better than the previous to sell a home. Specifically, in Q1 of 2016, 50 percent of consumers said that home prices had increased in the last 12 months. That figure jumped up to 60 percent of consumers in Q1 of 2017. About 45 percent of respondents in 2016 felt that home prices would continue to go up in the next six months. That number also increased to 51 percent of consumers in Q1 of 2017. In Q1 of 2016, 56 percent of consumers felt strongly that now is a good time to sell a home. That figure also jumped up to 69 percent of consumers in Q1 of 2017.

On a positive note, consumers’ view of the economy has also improved in the last year. In Q1 of 2016, just under half of all respondents felt that the economy was improving at 48 percent. In Q1 of 2017, that number jumps up to 62 percent of consumers that feel the economy is improving. This sentiment is most strongly felt by consumers 54 years and younger. The Northeast was the least likely to feel the economy is improving and was consumer sentiment consistent across rural, suburban, and urban areas. Home owners are the most optimistic on the outlook of the economy compared to renters and those that live with someone else.

While there was a dip in consumer sentiment on whether now is a good time to buy a home from Q1 (75 percent) to Q4 (70 percent) in 2016, consumers’ view that now is a good time to buy slightly rebounded to 72 percent in Q1 of 2017. The sentiment that now is a good time to buy increases with age and income. The West region was the least likely to feel that now is a good time to buy and the most likely to feel that now is a good time to sell. Renters were the least optimistic that now is a good time to buy.

February 2017 Housing Affordability Index

At the national level, housing affordability is down from last month and down from a year ago. Mortgage rates increased to 4.43 percent this February, up compared to 4.04 a year ago.

  • Housing affordability declined from a year ago in February moving the index down 8.7 percent from 175.9 to 160.6. The median sales price for a single family home sold in February in the US was $229,900 up 7.6 percent from a year ago.
  • Nationally, mortgage rates were up 39 basis point from one year ago (one percentage point equals 100 basis points) while incomes rose 2.9 percent.
  • Regionally, the West had the biggest increase in price at 9.9 percent. The South had an increase of 9.7 percent while the Midwest had a 6.0 percent gain in price. The Northeast had the smallest incline in price of 3.5 percent.
  • Regionally, all four regions saw a decline in affordability from a year ago. The West had the biggest decline of 11.2 percent. The South followed with a decline of 10.9 percent. The Midwest had a decline in affordability of 7.8 percent while the Northeast had the smallest decline of 4.8 percent.
  • By region, affordability is down from last month except in the Northeast where there was no change. The South had the biggest decline of 2.6 followed by the West who had a decline of 1.7 percent. The Midwest had the smallest decline in affordability of 0.3 percent.
  • Despite month-to-month changes, the most affordable region is the Midwest where the index is 210.7.  The least affordable region remains the West where the index is 112.9.  For comparison, the index is 158.2 in the South, 169.5 in the Northeast.
  • Mortgage applications are currently up this week. Even with a rise in rates, interest in purchasing a home remains strong. Prices continue to outpace incomes and demand may become choked off.  Potential homeowners will benefit from investing their time working on the preapproval process.
  • What does housing affordability look like in your market? View the full data release here.
  • The Housing Affordability Index calculation assumes a 20 percent down payment and a 25 percent qualifying ratio (principal and interest payment to income). See further details on the methodology and assumptions behind the calculation here.

Millennials: Tech-Savvy, First-Time Home Buyers in the Suburbs

Millennials, buyers ages 36 years and younger, make up the largest share of home buyers by generation at 34 percent of all home buyers in 2016 (down from 35 percent in 2015). This group was born between 1980 and 1998 and is the largest share of buyers for the fourth consecutive year. Sixty-six percent of Millennials are married couples and this age group has the largest share of unmarried couples at 13 percent. Millennials have smaller families—they have the largest share with only one child under the age of 18 years living at home at 22 percent. Overall, 49 percent have one or more children.

Millennials are most likely to rent an apartment (56 percent) or live with friends or family (20 percent) as their previous living arrangement. The primary reason that this generation purchase homes is the desire to own a home of their own at 50 percent and they state that it is just the right time to buy (60 percent).

Millennials account for the largest share of first-time home buyers at 66 percent. This generation primarily buy previously owned homes (89 percent) for a better price (44 percent) and new homes (11 percent) to avoid renovations or problems with electricity and plumbing (48 percent). Millennials account for the smallest share to purchase multi-generational homes at seven percent. When they did purchase multi-generational homes, the primary reason is for cost savings at 34 percent.

Buyers aged 36 years and younger are the most likely to purchase in the suburbs or a subdivision at 57 percent. Equal to buyers 37 to 51 years, they purchase within a median of 10 miles from their previous residence. More than other generations, they purchase homes for the quality of the neighborhood (66 percent), convenience to a job (65 percent), overall affordability of homes (50 percent), quality of school districts (40 percent), convenience to entertainment and leisure activities (25 percent), and convenience to parks and recreational facilities (22 percent).

They have a median household income of $82,000. They purchase the least expensive homes at a median home price of $205,000. This generation of buyers purchase the smallest homes in size at a median square feet of 1,800, equivalent to buyers 62 years and older. They also purchase the oldest homes at a median year of 1984.

 

Commuting costs are the most important to Millennials, 39 percent said this was very important. Compared to other generations, Millennials are also the most likely to say that they compromised on the price of the home, size of the home, lot size, style of the home, and distance from their job. Millennials have the shortest expected tenure in the home at a median of 10 years, on par with buyers 71 years and over.

 

More than other generations, Millennials are the most likely to look online for information about home buying and talk with a friend or relative as the first step in their home search process. They are the most likely to find the home they purchased using the internet (56 percent), most likely to frequently use the internet in their search (93 percent), and most likely to use a mobile device to search for homes (86 percent). Finding the right property is the most difficult step for Millennials at 57 percent. Millennials are the most likely to move with life changes (29 percent), move with a job or career change (20 percent), outgrow the home (19 percent), and want a nicer home with added features (10 percent).

 

Millennials are the most likely to finance their home purchase at 98 percent. The median percent financed is 93 percent, the highest share among the generations. Millennials are the most likely to use savings (75 percent) and a gift or loan from a friend or relative (29 percent) as the source of their downpayment. Buyers 36 years and younger are the most likely to say saving for the downpayment is the most difficult step in the home buying process at 23 percent. Among those who had difficulty saving, 55 percent of Millennials have student loan debt and 32 percent have car loans, more than other age groups. Overall, 46 percent of Millennial home buyers had student loan debt. They are the most likely to use an FHA loan (27 percent) and least likely to use a conventional loan (56 percent) compared to other generations. Millennials are the most likely to feel that their home purchase was a good financial investment at 85 percent.

 

Generation X: Buying the Biggest Homes & Biggest Home Sellers

Generation X, buyers ages 37 to 51 years, make up the second largest share of home buyers by generation at 28 percent of all home buyers in 2016. The median age for this group is 43 years old and they were born between 1965 and 1979. They tend to have the largest families; 62 percent of these buyers have one or more children under the age of 18 years living at home—30 percent have two children under 18 years at home—and they make up the highest share of buyers that are married couples at 68 percent. The primary reasons that Generation X purchases homes is the desire for a larger home, job-related relocation, and change in family situation more than other generations.

Generation X make up the second largest share of first-time home buyers at 26 percent. Correspondingly, they make up the largest share to purchase detached single-family homes at 87 percent. They also have the highest median household income at $106,600, boosted by double income couples. They also purchase homes in accordance with their incomes and buy the most expensive homes of all generations—a median home price of $261,000. This generation of buyers also purchases the largest homes in size at a median square feet of 2,100.

Buyers 37 to 51 years are also the most racially and ethnically diverse group of home buyers, with 21 percent identifying as a race other than White/Caucasian. This group also have the highest percentage of home buyers that speak another language besides English. Thirteen percent of buyers 37 to 51 years were not born in the United States.

Generation X purchases new homes for the ability to choose and customize design features and previously owned homes for more charm and character. These buyers, like Millennials, purchase the shortest median distance from their previous home at a median of 10 miles. Generation X are the most likely to purchase in neighborhoods that were convenient to schools. This group is the most likely to compromise on the condition of the home at 21 percent. The length of the home search is the longest for Generation X buyers at 12 weeks, while all other generations search for a median of 10 weeks.

Generation X primarily uses savings and proceeds from a previous sale for the downpayment of their home purchase. However, these buyers are delayed four years from purchasing a home due to debt. Eighteen percent of buyers 37 to 51 are delayed five years and 27 percent are delayed more than five years from buying a home. Of these buyers that said saving for the downpayment was the most difficult step in the buying process, 41 percent have credit card debt and 15 percent have child care expenses, more than other generations. This group of buyers also have the highest median amount of student loan debt at $30,000. This group of buyers cancels vacations more than other age groups in order to save for a home. Equal with Millennials, 45 percent said that the mortgage application was not difficult or no more difficult than expected. Of the six percent that have a mortgage lender reject their application, 20 percent said it was due to their debt to income ratio. Generation X also has the highest share that sold a distressed property at 14 percent, primarily in 2011. More than other generations, buyers 37 to 51 use a fixed-rate mortgage at 93 percent.

Generation X is the largest share of home sellers at 29 percent. They also have the highest median selling incomes at $122,100 and sell median priced homes at $240,000. Among Generation X sellers, one in five wanted to sell earlier but could not because their home was worse less than their mortgage. Sellers typically purchased their home 10 years ago, in 2006. Generation X sellers equally are the most racially and ethnically diverse of the generations. On par with Millennials, they move within the same state at the highest rates. Buyers 37 to 51 sell the most homes in urban and central city areas and move the shortest distances. Their primary reasons for selling is a job relocation, the neighborhood is less desirable, and a change in family situation.

Sustainability Practices in Real Estate: Room for Growth

The National Association of REALTORS® surveyed its members to learn more about sustainability issues real estate agents face in their industry. More specifically, what environmentally sustainable features are buyers looking for when they purchase a home, how do wind and solar energy factor into a buyer’s perception of the home’s value, and what market considerations could improve sustainability practices?

First, NAR members affirmatively said that promoting energy efficiency features in their listing was very or somewhat valuable at 71 percent. The availability and demand for green features in the home, on the other hand, was still a relatively small market. Seventy percent of agents and brokers were not involved in a transaction with a property that had green features in the last 12 months. Sixty percent of agents said that buyers were interested in sustainability issues.

 

Agents said buyers considered the following as very important: comfortable living spaces (71 percent), proximity to frequently visited places (40 percent), windows, doors, and siding features (39 percent), and a home’s utility bills (28 percent).

Eighty percent of real estate agents said solar panels were available for home owners in their markets. Forty-two percent of agents said solar panels increased the perceived value of the property, compared to 31 percent that said they had no effect. As for wind farms, 71 percent said these were not available in their markets and 38 percent said wind farms had no effect on the perceived property value. Only 24 percent of agents said that tiny homes were available in their markets at this time (tiny homes defined as a home that is 600 square feet or less).

With room for growth, real estate agents listed a number of issues and market considerations that need attention to connect buyers to sustainable practices. The top issues include: understanding lending options for energy upgrades or solar panels (44 percent), improving the energy efficiency of existing housing stock (40 percent), lack of MLS data on home performance and/or solar installations (34 percent), and the valuation of homes with solar panels (30 percent).

Younger Boomers: Purchase Multigenerational Homes

Younger Boomers, buyers ages 52 to 61 years, make up 16 percent of all home buyers in 2016. The median age for this group is 57 years old and they were born between 1955 and 1964. This age group is the most likely to purchase a multi-generational home at 20 percent. Their reasons for purchasing a multigenerational home are children or relatives over the age of 18 years moving back in (20 percent), health/caretaking of aging parents (15 percent), to spend time with aging parents (11 percent), and children over 18 years that never left (10 percent).

For Younger Boomers, the primary reasons they purchased homes are a job-related relocation or move (11 percent), desire to be closer to friends and family (10 percent), and the desire for a smaller home (10 percent), more than other generations. Compared to other buyers, they are the most likely to say that they did not have much choice and they had to purchase when they did (22 percent).

Younger Boomers are the least likely to purchase in the suburbs (49 percent) and most likely to purchase in rural areas (13 percent) compared to other generations. They have the second highest median household income at $93,800. They also purchase the second most expensive homes of all generations with a median home price of $230,000. This generation of buyers also purchase the second largest homes in size at a median square footage of 1,900.

Younger Boomers are the most likely to consider heating and cooling costs very important. This age group is the least likely to compromise on the price of the home as well as the quality of and distance from schools. Younger Boomers move from their previous residence at a median of 15 miles from their previous residence.

Younger Boomers are the most likely to look online for properties for sale as their first step in the home search process (53 percent). They are also the most likely to utilize online video sites as useful search information on homes (63 percent).

Younger Boomers are the most likely to use money from a 401K or pension fund including a loan for the downpayment of their home purchase. This age group is the most likely to feel that the mortgage application and approval process is easier than expected (24 percent).

Younger Boomers are the third largest share of home sellers last year at 20 percent. They have the second highest median incomes for sellers at $111,100 and sold the highest median priced homes at $279,800. Younger Boomers are the most likely to sell a detached single-family home and sell the largest homes at a median of 2,200 square feet. They are the most likely to offer home warranty incentives to help sell the home.

24 Percent of Contracts in December 2016—February 2017 Had a Delayed Settlement

In the monthly REALTORS® Confidence Index Survey, the National Association of REALTORS® asks membersIn the past three months, think of your most recent sales contract that was either settled/closed or terminated. Please explain how the deal concluded (settled, delayed, terminated, sale is pending, no contract signed).”

Among contracts that went into settlement or were terminated over the period December 2016–February 2017, 24 percent had a delayed settlement, according to the February 2017 REALTORS® Confidence Index Survey Report, a monthly survey of REALTORS® about their sales activity and local market conditions.[1]

Among contracts that had a delayed settlement (24 percent), 36 percent faced issues related to obtaining financing and 20 percent had appraisal issues. Regarding appraisal issues, respondents reported facing appraisal delays due to a shortage of appraisers, valuations that are not in line with market conditions, and “out-of-town” appraisers who are not familiar with local conditions. In NAR’s Survey of Mortgage Originators, 55 percent who took part in the survey reported some level of issues getting appraisals.[2] Other specific issues that led to delays involved titling, sale contingencies, problems related to distressed sales, home/hazard/flood insurance issues, and the buyer losing a job.

 Among contracts that were terminated (five percent), 30 percent faced issues related to home inspections and 22 percent had issues related to the buyer’s ability to obtain financing.

[1]The author thanks Danielle Hale, Managing Director, Housing Research; Meredith Dunn, Research Communications Manager; and Amanda Riggs, Research Survey Analyst for their comments. Any errors are attributable to the author.

[2] Ken Fears, 2016 Survey of Mortgage Originators, Fourth Quarter, Economists Outlook Blog. See http://economistsoutlook.blogs.realtor.org/2017/02/07/survey-of-mortgage-originators/

Older Boomers: Most Satisfied Buyers Purchasing Forever Homes

Older Boomers, buyers aged 62 to 70 years, make up 14 percent of all home buyers in 2016. The median age for this group is 66 years old and they were born between 1946 and 1954. Within this group, they have the largest share of single female buyers at 21 percent. Their primary reason for purchasing a home, more than other generations, is for retirement (19 percent), followed by the desire to live closer to friends and family (19 percent).

Combined, Older Boomers own the highest share of investment (11 percent) and vacation (six percent) properties. Equal to the Silent Generation, Older Boomers are the most likely to purchase homes in a small town (24 percent) and in a rural area (11 percent).

Compared to other buyers, they move the greatest distances at a median of 25 miles. Older Boomers are the least likely to purchase homes for the quality of school districts or convenience to schools. Rather, they purchase homes for the quality of the neighborhood and for convenience to friends and family. This age group finds energy efficient appliances and lighting to be very important. Overall, Older Boomers are the most likely to have made no compromises on the home when they purchased (50 percent), cited that they are never moving and this is their forever home (31 percent).

In their home search process, Older Boomers are the most likely to drive by homes and neighborhoods and they are the least likely to find the paperwork a difficult step. Older Boomers are the most satisfied with the home buying process at 91 percent.

 

Older Boomers’ income is below the median income of all buyers ($88,500) at just $76,800 and they purchase homes at a median price of $225,000. Older Boomers are the most likely to use the proceeds from the sale of a primary residence as the source of their downpayment (56 percent) and from an IRA account (six percent). They are the largest group of home buyers to save for a downpayment for more than two years (35 percent).

Older Boomers are the second largest share of home sellers at 21 percent in 2016. The median age for Older Boomer seller is 66 years. They have the second lowest median income at $86,400. They are the most likely to sell to be closer to friends and family (26 percent) and for retirement (21 percent), in another region of the country (24 percent), and at a median distance of 36 miles from the home they recently purchased. They are also the most likely to sell when they wanted to (95 percent). They receive the highest equity at 36 percent and second highest dollar value at $60,000.

The Silent Generation: Downsizing Homes & Joining Senior-Related Housing

The Silent Generation, buyers ages 71 to 91 years, make up the smallest share of home buyers by generation at only eight percent of all home buyers in 2016. The median age for this group is 75 years old and they were born between 1925 and 1945. They tend to have the smallest families; 97 percent of these buyers have no children living at home under the age of 18 years and they make up the highest share of single male buyers at 10 percent. Of the generations, buyers 71 to 91 years buy fewer multi-generational home at 11 percent. For those that purchase a multi-generational home, the reason is for the health and caretaking of aging relatives at 21 percent.

The Silent Generation have the smallest share of first-time home buyers at only four percent, which is expected as they are the oldest in age. Correspondingly, they make up the largest share to move directly from a home that was owned at 91 percent. They also have the lowest median household income at $66,600, likely living off retirement funds. They manage their finances accordingly and buy homes with the second lowest median home price at $220,000. They also purchase the newest homes last year with a median age of 1999.

Buyers 71 to 91 years are also the largest share to buy a new home at 21 percent and the largest share to purchase for the amenities of new home construction communities (22 percent). These buyers are the most likely to purchase a duplex, apartment, or condominium at 17 percent and townhouse at nine percent. They are also the most likely to buy a home in senior-related housing at 24 percent. The neighborhood influence with these buyers is the desire to own a home convenient to shopping (39 percent) and for the design of the neighborhood (29 percent). They are the least likely to buy homes in an area for the quality of the school district, convenient to schools, or the availability of larger lots of acreage. They are also the least likely to compromise on the condition of the home (13 percent). The Silent Generation makes up the largest share, on par with buyers 62 to 70 years, to buy in a small town at 24 percent.

The age group of buyers 71 to 91 years are the highest share among generations to purchase for the desire for a smaller home and to be closer to friends and family (both at 23 percent). In tandem with Millennials, they have the shortest expected tenure in the home with a median of 10 years. They are the most likely to move due to a household member’s health and least likely to move for a nicer home with added features or to outgrow home.

Eighty Percent of First-time Homebuyers Put Down Less than 20 Percent Downpayment (Based on December 2016–February 2017 Closed Sales)

More first-time homebuyers take advantage of a low downpayment loan compared to all homebuyers, according to the February 2017 REALTORS® Confidence Index Survey Report, a monthly survey of REALTORS® about their sales activity and local market conditions.[1]

Among all buyers whose transaction closed in February 2017, 62 percent of those who obtained a mortgage made a downpayment of less than 20 percent. Among first-time homebuyers who obtained a mortgage and whose transactions closed in December 2016–February 2017, 80 percent made a downpayment of less than 20 percent.[2]

 

Among first-time homebuyers, 65 percent put down a zero to six percent downpayment, a decrease from the 74 percent share in June 2009 when NAR started collecting this information in the RCI Survey.

 The Federal Housing Administration (FHA) and the Government Sponsored Enterprises (GSEs) have implemented policies to make credit more widely available, such as FHA’s reduction of its annual mortgage insurance premiums and the Government Sponsored Enterprises (GSEs) acceptance of three percent downpayment mortgages. However, the impact of these measures in attracting first-time homebuyers appears to be modest for a variety of reasons. Lack of information about these products may be one reason. In fact, NAR’s 2016 Q3 Housing Opportunities and Market Experience (HOME) Survey found that only 13 percent of those aged 34 or under believe they need a downpayment of five percent or less.[3] Additionally, although low downpayment loans are available, some buyers may want to save for a bigger downpayment to meet underwriting standards (e.g., debt-to-income ratios, loan-to-value ratios), save on mortgage insurance, or get a lower interest rate.

[1]The author thanks Danielle Hale, Managing Director, Housing Research; Meredith Dunn, Research Communications Manager; and Amanda Riggs, Research Survey Analyst for their comments. Any errors are attributable to the author.

[2] To increase the sample size for first-time homebuyers, NAR uses information from the last three surveys.

[3] See: http://www.realtor.org/reports/2016-q3-homeownership-opportunities-and-market-experience-home-survey.

Using Your Tax Refund for a Down Payment

Recently GO Banking Rates put out some interesting information in their survey on how Americans spend their tax return. This was a very relevant topic because one thing that comes to mind in reference to potential homebuyers is the always-elusive down payment. With a sizable tax refund, the average American would have a decent down payment depending on which region or market you live in. The average tax refund was $2,860 for most Americans last year. Based on that refund approximately five percent of all respondents indicated they would make a major purchase which does not seem like a lot. However, there is a bigger group 41 percent who see saving the tax return is best and that group could be potential homebuyers if they are not already. Some good information can be found in the age groups who would invest and how likely they were to invest.

The survey states that of those between the ages of 18-34, six percent would use their tax refund to make a purchase of a car, home etc.  Among those who are in the age range of 35-44, nine percent were likely to make an investment in a car or home etc. However, those ages 45-54 only planned to use one percent of their tax refund to make an investment of a car, home etc. That makes the 18-44 group the most likely to invest and possibly take advantage of using their tax refund to partake of the American dream. The younger generation is still burdened with debt while the older generation is in a better position to save and invest.

Let us take a look at the data from NAR’s 2017 Home Buyer and Seller Generational Trends:

  • First-time buyers made up 35 percent of all homebuyers, an increase over last year’s near all-time low of 32 percent.
  • Sixty-six percent of buyers 36 years and younger were first-time buyers, followed by buyers 37 to 51 years at 26 percent. (First time home buyers group would use between six and nine percent to invest) (Second group 37-51 years would use 31%-41% of their tax return to put into savings)
  • At 34 percent, buyers 36 years and younger continue to be the largest generational group of homebuyers with a median of 31 years old.
  • Home buyers between the ages of 37 and 51 were reported to have the highest household incomes among any other generation at $106,600, followed by buyers between 51 and 60 that had an income at $93,800 (down from $100,200).

With higher incomes and a tax refund of approximately $2,860, those who are most likely to purchase may actually be in good shape financially when it comes to being a future homeowner. While some may not have planned to use all or part of that $2,860 this year, next year is still a good strategy to plan ahead to use that refund or part of it for that down payment. We can see at least 5 percent is thinking of how to invest their money and home ownership is a means of developing wealth.

Charts are from Go Banking Rates’ survey

 

Commercial Lending Conditions Tighten in REALTORS® CRE Markets

Commercial real estate (CRE) notched another year of growth in 2015, favored by continued macroeconomic growth and broadening capital markets, according to the Expectations & Market Realities in Real Estate 2016: Navigating through the Crosscurrents report, released by Deloitte, the National Association of REALTORS®, and Situs RERC. While global economies decelerated, leading to volatility in financial indices, U.S. gross domestic product rose, employment growth accelerated toward the tail end of the year, and housing prices reached new heights. In addition, the Federal Reserve signaled a shift in its monetary policy by raising its target funds rate, as core inflation hovered around its target range of 2.0 percent.

Commercial vacancy rates declined for the core property types. Availability is expected to continue contracting for office, industrial and retail properties in 2016. Vacancies for apartments are estimated to rise, due to gains in supply.  Commercial rents have risen across the board, and are projected to advance this year in the 2.5 percent to 4.0 percent range.

CRE sales volume continued its positive trend in 2015, with $534 billion in closed transactions, compared with $432 billion in 2014, based on data from Real Capital Analytics (RCA).  Most of the transactions reported by RCA are based on data aggregated at the top end of the market—above $2.5 million.

In contrast to the large commercial transactions reported by RCA, commercial REALTORS® managed transactions averaging $1.8 million per deal, frequently located in secondary and tertiary markets, and focused on small businesses and entrepreneurs.  The Commercial Real Estate Lending Trends 2016 report shines the spotlight on this significant segment of the economy—a segment which tends to be somewhat obscured by reports on Class A trophy commercial properties.

Most financing indicators in REALTOR® markets notched another year of sustainable recovery.  As CRE asset prices strengthened, financing improved in 2015. However, on the broader issue of lending conditions, REALTORS® pointed to a marked shift from the trend of the past five years. In 2016, 33 percent of respondents reported tightening lending conditions, a noticeable increase from the prior year’s 23 percent.  At the same time, the percentage of members who reported that lending eased dropped from 42 percent in 2015 to 31 percent in 2016.

The change in lending conditions seems to coincide with financial regulators’ renewed focus on banks’ CRE loans. Regulators have expressed concern that in light of CRE markets’ rapid rise in prices over the past couple of years, banks have loosened underwriting standards. While the rise in prices during 2015 was pronounced at the high end of the market ($2.5 million and above), in REALTOR® markets, price appreciation was more moderate. Moreover, prices have been declining at the higher end for the first few months of 2016.

Bank lending remains an important source of CRE funding in REALTOR® markets, comprising 64.0 percent of capital. Local and community banks played a central role, with 31.0 percent of the market, followed by regional banks, at 25.0 percent. National and international banks accounted for a combined 9.0 percent of capital.

The incidence of failed transactions, due to lack of financing reached a new low. REALTORS® cite uncertainty from legislative and regulatory initiatives as the most relevant cause of bank capital shortage for CRE.

For more information and the full report, access NAR’s Commercial Real Estate Lending Trends 2016 at http://www.realtor.org/reports/commercial-lending-trends-survey.

Vacation Properties: Short Term Rentals

In the age of social media interconnectedness, online vacation rental sites like AirBnb and HomeAway have gotten popular with travelers both at home and abroad. This could be benefitting vacation property buyers in some areas. In comparison to investors, who generally plan on renting their properties for 365 days, vacation buyers prefer short term rentals – those rentals that are 30 days or less at a time. Data from the latest Investment and Vacation Home Buyers Survey shows that 40 percent of buyers of vacation homes will at least try or plan to rent out their properties for a short term in 2016, while 24 percent rented or tried to rent their property in 2015.

Twelve percent of vacation buyers who rented in 2015 plan to do so again in 2016. Twelve percent of those who tried to rent in 2015 plan to try again in 2016. Of those who didn’t try to rent in 2015, 8 percent plan to rent in 2016 and of those who didn’t rent (didn’t try to rent it) in 2015, 8 percent plan to in 2016.

Seasons are important in deciding when to rent. Thirty-eight percent of vacation buyers will rent their property in the summer, 17 percent in the winter, 14 percent in the fall and 11 percent in the spring, making spring a lower popularity time of year. Thirteen percent are willing to rent any time of year. Vacation buyers are more likely to use a property manager or social media to rent their property, while investors are more likely to use a traditional real estate agency.

Vacation buyers are motivated to rent their properties for additional income.  More often than investors, they want rental income to help pay down the mortgage faster. Eighty-nine percent of vacation buyers reported potential rental income at least moderately impacted the monthly costs of ownership through additional income to mortgage.

Millennials and the Desire to Buy by Region

In the latest HOME (Housing Opportunities and Market Experience) Survey, 96 percent of buyers 34 and under answered yes to the question: “Do you ever want to buy a home in the future?” Millennials are already the largest group of home buyers compared to other generations at 35 percent, but many of them face distinct speed bumps or even detours on the road to homeownership (such as student debt, rising home prices in some areas, and tightness of credit availability). This post looks at Millennials’ desire to own and compares it by region and to the national figures.

Nationally, 85 percent of those buyers aged 34 and under believe that buying a home is a good financial decision. Twenty-seven percent own their own home, while 48 percent are renters. The main reason they currently don’t own is because they can’t afford to buy, at 57 percent, while 40 percent say that a lifestyle change such as marriage, starting a family, or a new job situation would be the major impetus for becoming homeowners in the future. Eighty-eight percent believe that homeownership is part of their American dream.

In the Northeast, 84 percent of Millennials believe buying a home is a good financial decision, while 88 percent believe homeownership is part of their American dream. In the Midwest, 84 percent also believe buying a home is a good decision and 84 percent believe ownership is part of their American dream. In the South, the numbers are slightly higher with 85 percent in favor of buying as a good financial decision and 91 percent believe that homeownership is part of their American dream. Finally, in the West, the numbers are 86 percent and 90 percent respectively.

Gen X: Millennials Are Not the Only Generation that Wants to Buy

While Millennials, or Gen Y, are the largest group of homebuyers, Gen X is also an important generational group. For starters they comprise 26 percent of recent buyers and are the most racially and ethnically diverse population of buyers[1]. They also are in their peak income-making years and have the highest median priced home of all other buyers and the largest homes in median square footage and bedrooms. According to the latest HOME (Housing Opportunities and Market Experience) Survey, they are more certain than Millennials that buying a home is a good financial decision at 90 percent, and less sure than buying a home is part of their American dream at 87 percent.

More Gen X respondents own than rent, at 66 to 30 percent respectively. However, like Millennials, those that aren’t buying cite the inability to afford to buy a home as their main reason for not doing so.  The circumstances that would have to change for them to become homeowners in the future was twofold: an improvement in their financial situation and a lifestyle change such as marriage, starting a family or new job situation were both tied at 29 percent. When asked if they ever want to own a home in the future, 88 percent answered yes.

Looking at regional attitudes towards buying, Gen X is fairly optimistic across the board although there are differences. In the Northeast, 86 percent feel that buying a home is a good financial decision while 79 percent feel ownership is part of their American dream. In the Midwest, 93 percent feel that buying is a good financial decision while 86 percent believe owning is part of their American dream. In the South, 90 percent feel that buying is a good financial decision and that ownership is part of the American dream for 91 percent. Finally, in the West 92 were percent in favor of buying as good financial decision and 86 percent believe owning is part of their American dream.

[1] 2016 Home Buyer and Seller Generational Trends Report

Steady Improvement as TRID Effects Wane

Lenders appear to be making headway in the TRID environment. With the busy spring market underway, this trend bodes well for the looming surge in seasonal volumes.

The average time-to-close was unchanged from February at 43.3. To adjust for seasonal affects it is best to compare March to March of 2015. Relative to the same time in 2015, the time-to-close was 3.3 days higher reflecting TRID-related delays. However, the February year-over-year increase was 5.2. The decline in days delayed suggests that lenders are adjusting to the TRID regulations and reducing time to close.

There was a shift in the distribution of closing from February to March as well. The share of closing that took longer than 45 days fell from 45.0 percent to 43.8 percent. Conversely, the share that took less than 30 days slipped from 23.6 percent to 22.3 percent. On net, there was a shift in time to close to the 30 to 45-day range. The decline in closing that took under 30 day and the increase in the middle range repeated the pattern from February to March of 2015 and was likely due to a seasonal increase in closing volume weighing on production resources. However, the decline in closing that took longer than 45 days was unique and suggests a net improvement.

The March reading of time-to-close was another positive step in the post-TRID environment. Volumes will rise in the weeks and months ahead as the spring market peaks. Partnering with lenders who are collaborative and who have successfully navigated TRID without delays will help to assure smooth settlements in 2016.

 

February 2016 Housing Affordability Index

While home price growth eased to a slower pace last month, at the national level, housing affordability is down from a year ago as rates are modestly higher and price growth continues to outstrip household income growth.

Housing affordability declined from a year ago in February pushing the index from 181.3 to 174.9. The median sales price for a single family home sold in February in the US was $212,300, up 4.3 percent from a year ago.

  • Nationally, mortgage rates were up 12 basis points from one year ago (one percentage point equals 100 basis points) while incomes rose approximately 2.1 percent. Income growth means the median family earns $118 more per month than February 2015.
  • Regionally, three of the four regions saw declines in affordability from a year ago. The Northeast had the only increase of 2.3 percent. The Midwest had the biggest decline in the affordability index of 6.1 percent followed by the West with 5.2 percent. The South had the smallest dip in affordability at 4.9 percent.
  • The West had the biggest increase in price at 7.4 percent while the Northeast experienced a slight decline in prices at -1.0 percent. The Midwest and the South had sizeable gains in prices of 6.3 percent and 4.5 percent increase in single family home prices, respectively.
  • By region, affordability is up in all regions from last month. The Northeast (2.7 percent) had the biggest increase and both the Midwest and South shared the smaller increase of (1.9 percent) and the West had the least at (1.8 percent).
  • Despite month to month changes, the most affordable region is the Midwest where the index is 223.8. The least affordable region remains the West where the index is 126.8.  For comparison, the index is 181.3 in the South, 177.4 in the Northeast.
  • Currently mortgage applications are up and rates have not made the jump as expected. A shortage of inventory is having an impact on sales across many metro markets. New homes sales would support this inventory issue and be assisted by increases in permits and land to build on, and hiring of construction workers.
  • 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.