Real Estate Report 7/31/2013

Here Comes Another Employment Report

In a few days, we shall see the release of another monthly jobs report which will end a week of massive data releases. These releases include private sector payroll growth for July, personal income and spending for June and the first reading of economic growth for the second quarter. As important as all of these releases are, they pale in importance to the jobs report which has had a great effect upon the markets each month thus far this year. This has been especially true with regard to the release's effect upon interest rates. Positive releases at the beginning of the year caused rates to start creeping up. A disappointing release for March caused rates to ease back, however this process was reversed one month later when March's numbers were revised.

The past two months have seen positive reports and it is no coincidence that rates have continued their climb--with a spike after the July release. Rates have eased back a bit from that point and analysts are busy trying to determine what the next report will bring to the markets. What do we believe? Eventually, employment gains of close to 200,000 per month should become a common place event and it will take even larger numbers to move the markets significantly. Does that mean that we have already reached this point and any number well below 200,000 will be seen as a disappointment which may cause rates to decrease and the stock market to fall back? We will find out the answer to this question in only a few days. Keep in mind that each month contains a revision of the previous month's numbers and these revisions can affect the analysis as well.

With housing inventories so low, why aren’t homebuilders jumping in by ramping up production to meet demand? A new housing report by Arizona State University suggests that homebuilders are methodically holding back their inventories and keeping the rate of new-home building low, despite population growth projections. “New-home builders don’t appear too anxious to help meet the demand,” says Michael Orr, a real estate expert at ASU’s W.P. Carey School of Business. A few years ago, during the housing bubble, homebuilding outpaced population growth. But builders are taking the opposite approach this time around. In an environment with tight underwriting for loans, builders are exercising some caution and restraint. “They are trying to make sure they don’t overbuild like they did before the housing crisis, and they want to keep prices moving up,” Orr says. For example, Orr notes that in the Phoenix area, new-home sales rates are less than one-third of what is needed to keep pace with the projected population growth. He added that, with limited supply, builders are able to increase prices for new homes. Those in the building industry have cited labor shortages, tight underwriting standards, and the rise in lot prices as a reason building hasn’t kept pace. Source: Phoenix Business Journal

“Boomerang buyers”—former home owners who have gone through a short sale, foreclosure, or bankruptcy in the past few years and are saving up for a down payment to purchase a home again—are coming back. They're expected to flood markets in some of the hardest hit areas for short sales and foreclosures in the coming years. For example, boomerang buyers are predicted to account for nearly one in every five home sales in the metro Phoenix area this year—double the projected U.S. rate. Rising rents and the desire to own again now that the economy is more stable are driving many boomerang buyers to re-enter the market. They also want to jump in before interest rates and home prices climb too much higher. But how soon they can jump back in will depend on the type of loan they had as a previous home owner. For example, boomerang buyers who had FHA loans may need to wait only three years if they can prove that a hardship, such as job loss or death of a wage earner, led to their foreclosure or short sale. Borrowers have typically been required to wait five to seven years to qualify for another loan, but mortgage giants have begun to change their rules to allow home owners who underwent a foreclosure or short sale to qualify sooner. Those who underwent a short sale will likely qualify the soonest. However, not all lenders are participating, so borrowers will need to shop around. Freddie Mac’s wait time is usually four years following a short sale or deed-in-lieu, and seven years after a foreclosure. Fannie Mae may require a seven-year wait for a foreclosure, but only a two-year wait following a short sale as long as the borrower can provide a 20 percent down payment. Source: The Examiner

It’s a crucial question for many first-time and moderate-income buyers in rebounding markets across the country: Where do we find the loans with the lowest down payment and lowest monthly costs? The answers are changing. True zero-down alternatives are rare and tend to be tightly restricted. If you’re a veteran or active military, a VA-guaranteed home loan might be ideal since it requires no down payment. The same is true for certain rural housing loans administered by the Department of Agriculture, but purchases must be in designated areas outside large population centers. Some state housing finance agency programs may also be helpful, but they often come with income limits and other requirements. For most shoppers looking for mini down payments, there are much larger, less restrictive sources. The Federal Housing Administration is probably the traditional favorite since it requires just 3.5 percent down. But beware: In the wake of a series of insurance premium increases and a highly controversial move to make premiums non-cancellable for the life of the loan for most new borrowers, FHA no longer rules the low-cost roost. Fannie Mae, the giant federal mortgage investor, may now do better. And for some applicants, so might Freddie Mac, Fannie’s smaller competitor. Here’s the head-to-head: Say you want to buy a $180,000 house but you don’t have much cash for a down payment. If you go with a 3.5 percent FHA loan, you would need to come up with $6,300. If you select Fannie’s 3 percent loan, it’s $5,400. Important for buyers who plan to hold on to their home for years, Fannie’s insurance charges disappear when the principal balance on the loan reaches 78 percent of the purchase price of the home — knocking $123.68 off the monthly bill. FHA’s insurance fees of $195.41 a month, by contrast, are a drag until you pay off the loan. FHA had previously allowed cancellation, but that changed June 3, when the agency revoked the privilege for most new borrowers. There are some noteworthy restrictions to the Fannie program that might stand in the way of some buyers, however. There are income limits pegged to median incomes in the metropolitan area where the house is located. Fannie generally requires higher credit scores. FHA also allows borrowers to use gift funds as part of their down payments, but the Fannie program requires the full down payment to come from the borrowers’ own resources such as savings accounts. Source: The Washington Post, Ken Harney, Nations Housing

 

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The Real Estate Report 7/17/2013

Why Predictions Don't Work

In the past couple of months we have seen how futile it can be to try and predict the future. If one were to look at the stock market for the first half of the year, everything seemed to be coming up roses. Who can complain about a ten percent increase in the major stock indices in just six months? On the other hand, many analysts predicted that the price of oil would come down this summer. Events in Egypt reminded us quickly that predictions are useless. Oil moved up significantly at the end of June. The next question is whether higher gas prices will cause the economy to slow down while consumers adjust their spending patterns. The same can be said about interest rates.

Many analysts predicted that long-term rates would rise this year. Few predicted the scope of the rise as rates on home loans have moved up from historic lows overnight. Will this increase affect consumer spending? In the short run it appears that consumers are coming off the fence and purchasing homes in reaction to the increase in rates. This is giving real estate another shot in the arm. But what about the long-run? For a year we have warned consumers that there would be no notice when rates rise and the sale on America's real estate ends. We could not predict when and how quickly it would happen. Now we know. The good news is that rates are still low when measured against historical patterns. Those who are older remember rates on home loans which were 8.0% or higher. Today, we will not predict whether higher oil prices or interest rates will slow the economic recovery which finally seems to be gaining steam. But we certainly will hold out that possibility.

CoreLogic released its May CoreLogic Home Price Index (HPI) report. Home prices nationwide, including distressed sales, increased 12.2 percent on a year-over-year basis in May 2013 compared to May 2012. This change represents the biggest year-over-year increase since February 2006 and the 15th consecutive monthly increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 2.6 percent in May 2013 compared to April 2013. Excluding distressed sales, home prices increased on a year-over-year basis by 11.6 percent in May 2013 compared to May 2012. On a month-over-month basis, excluding distressed sales, home prices increased 2.3 percent in May 2013 compared to April 2013. Distressed sales include short sales and real estate owned (REO) transactions. The CoreLogic Pending HPI indicates that June 2013 home prices, including distressed sales, are expected to rise by 13.2 percent on a year-over-year basis from June 2012 and rise by 2.9 percent on a month-over-month basis from May 2013. Excluding distressed sales, June 2013 home prices are poised to rise 12 percent year over year from June 2012 and by 2 percent month over month from May 2013. The CoreLogic Pending HPI is a proprietary and exclusive metric that provides the most current indication of trends in home prices. It is based on Multiple Listing Service (MLS) data that measure price changes for the most recent month. "It's been more than seven years since the housing market last experienced the increases that we saw in May, with indications that the summer months will continue to see significant gains," said Dr. Mark Fleming, chief economist for CoreLogic. "As we approach the half-way point of 2013, home prices continue to respond positively to the reductions in home inventory thus far." Source: NAMP Daily

Twenty-six percent of renters are denied in getting their security deposits back when they move out, a Rent.com survey finds of 1,000 renters. Landlords cite the biggest reason for withholding security deposits was a tenant who moved out too early. Indeed, 44 percent of the renters surveyed between the ages of 18 and 24 said they broke the lease agreement early and that’s why they didn’t get their security deposit returned. Nine percent of women and 3 percent of men surveyed say they lost their security deposits due to pet damage. Thirty-six percent of the survey respondents said that their landlords failed to offer an explanation why their security deposits were being withheld. In some places, that’s illegal. For example, in New York, landlords are required to return security deposits -- excluding any legal deductions -- within a certain time frame. Landlord.com offers up a list of security deposit laws for all 50 states. Source: AOL Real Estate

"Transit-oriented development" sounds like a solution to a variety of urban problems. If people could live and work within walking distance of a train or bus stop, people could save money on gas, people without cars could commute more easily, neighborhoods could reduce congestion and pollution, and economic growth could follow. Generally, it makes sense for cities to invest in the hubs that connect people and the places they need to go. However, not every rail stop is equally primed for a new apartment complex or retail development, and determining why is a significant challenge. For example, there is little sense in pushing transit-oriented development in a community where every household already has multiple cars, and likewise there is little sense in developing stops in areas divided by highways and mega blocks where people are unlikely to walk to a train. In early February, the Center for Transit-Oriented Development released a study of more than 100 transit stops in the Pittsburgh area, assessing the suitability for transit-oriented development. A quarter to half of the station areas in the system could benefit from a small infrastructure investment, such as a pedestrian bridge or tunnel, signage showing where the station is, or paved pathways or sidewalks. The assessment uses pentagonal graphs to illustrate ways that density, land use, care dependency and distance all shape communities differently. "It’s a very simplistic way of measuring what you need," says CTOD director Abigail Thorne-Lyman. "But if you don’t have the resources to even know where to begin, it’s very powerful to say ‘I’m just going to look at these five things, and what do I need to improve to push myself into a more transit-oriented urban form?'" Source: The Atlantic Cities

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July 10, 2013 Real Estate Report

 

The Link -- Higher Home Prices and Rates

For the past two weeks we have assessed the reasons that home prices are rising. Without rehashing this data, suffice it to say that home prices are rising because the real estate market is finally recovering from a horrible slump. Many analysts are now debating whether recently rising interest rates may put a halt to the real estate recovery and the stock market rally as well. In our mind there is a direct relationship between rising home prices and higher rates. Why? For the past three plus years, we have seen a tepid economic recovery from a very deep recession. If one looks at the numbers today, the recovery still does not look strong. The economy has grown at an average of just over 1.0% for the past two quarters. That is not exactly robust numbers. The difference is that today the economy is being supported by positive growth from the real estate markets.

Real estate is a big part of the economy that fuels important behaviors such as consumer spending. When someone buys a house, they also tend to purchase furniture and undertake home improvements. We believe the markets are thinking about the future, not the past two quarters. Two years ago when economic growth slowed down, there was significant talk of another recession. Today, you don't see the same level of fear. Home prices are up because the real estate markets are recovering. Rates are up because the economic recovery is on more sound footing with a real estate recovery supporting the upturn. The jobs report released on Friday was definitely indicative of this better news. Not only was the 195,000 jobs added more than forecast, the previous two months were revised higher by 70,000 jobs and hourly earnings had a solid advance as well.

New home sales continue to climb, rising to 476,000 completed transactions in May, according to government data. When evaluating single-family homes specifically, sales inched up 2.1% in May, above the revised April rate of 466,000 units. Last month’s sales are 29% above the May 2012 estimate of 369,000 sales, the Census Bureau and the Department of Housing and Urban Development noted in a report released June 25. "The housing market is without question surging. Last week's report on existing home sales was very strong as is today's report for new home sales which came in at a stronger-than-expected annual rate of 476,000 in May," noted analysts at Econoday. At the end of May, the number of new homes for sale increased to 161,000 units, compared to 156,000 units in April. This represents a 4.1-month supply of homes at today’s sales pace, up slightly from April’s 4-month supply. Supply is moving higher as builders pick up the pace, noted analysts at Econoday. "Rising supply will help boost sales in the months ahead." They added, "The housing sector is now the bread-and-butter strength of the economy." Also pending home sales rose in May to the highest level since late 2006, implying a possible spark as rates began to rise, according to the National Association of Realtors®. The Pending Home Sales Index, a forward-looking indicator based on contract signings, increased 6.7 percent to 112.3 in May from a downwardly revised 105.2 in April, and is 12.1 percent above May 2012 when it was 100.2. Contract activity is at its strongest pace since December 2006, when it reached 112.8. Also, pending sales have been above year-ago levels for the past 25 months. Lawrence Yun, NAR chief economist, said there may be a fence-jumping effect. “Even with limited choices, it appears some of the rise in contract signings could be from buyers wanting to take advantage of current affordability conditions before rates move higher,” he said. Source: HousingWire and NAR

Inventories of for-sale homes are increasing as more owners see rising home prices and faster sales as a reason to try to sell now, according to industry reports. In April, the number of listings was higher than the level of homes that were under contract in that month, according to a study by the real estate brokerage ZipRealty, which measured listings in 24 major metro markets. “It’s less of an indication of buyer momentum flagging and more of seller momentum picking up, finally,” says Lanny Baker, the company’s chief executive. The reports find that homes are selling faster—on average, within 32 days of being listed. In April 2012, that average stood at 48 days for homes to sell. “A market in which the sale prices are happening very close to the list prices, a market in which the list prices seem to be moving sequentially higher, and a market in which any of those houses are selling speedily is one that is bringing sellers back,” Baker says. “That makes it feel to a seller that this isn’t going to be a long passive despair that I tried three years ago.” Source: The Wall Street Journal

A rebound in homebuilding after a six-year slump should generate as many as 500,000 jobs in 2013 and 700,000 in 2014 including related services, estimates Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit and the top forecaster of employment for the past two years, according to data compiled by Bloomberg. "Housing is like a coiled spring" driven by "a lot of pent-up demand," said Glenn Hubbard, dean of Columbia University's business school in New York, who was chairman of the White House Council of Economic Advisers under President George W. Bush. "It is a real source of strength in the economy — from construction jobs and all the vendors who play into it." About half the jobs created by homebuilding are outside of construction, estimates the National Association of Home Builders, a Washington-based trade group. More than three jobs are created for each single-family home built, including related work, a 2008 study by the group estimates. "A revival in new home construction will have a huge stimulative effect on the larger economy," said Brad Hunter, Palm Beach Gardens, Fla.-based chief economist for housing research firm Metrostudy. "When home construction goes up, so does demand for furniture, tile, lumber, concrete, draperies, paint, and appliances of all sorts." The increase in construction jobs so far has lagged new activity because workers have had their hours increased, said David Crowe, NAHB chief economist in Washington. Weekly hours have risen to an average of 36.8 the past year, the highest since December 2006. "We have seen increasing hours, but there is a limit to that," he said. "I'm expecting to see a more direct correlation between increases in housing starts and increases in construction employment." Source: Bloomberg

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Interesting July Facts...

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