Real Estate News
August 5th, 2013
Real estate transactions place a particularly complex set of psychological and emotional stressors on buyers and sellers. Clients are supposed to make wise financial decisions, find (but manage!) their emotional passion for a property, do diligent research, and handle an uncanny list of logistics – all at once.
This has been the case since the dawn of the real estate business. But the last decade has added two line items to this list of stressors that have sent some buyers and sellers over the edge – and pushed many others right to the (deal-breaking) brink:
- The biggest recession in American history is one — this has ratcheted up buyers’ and sellers’ financial fears and the pressure to make smart, sustainable decisions.
- The advent of the internet is the other — now that every bit of market data and advice is literally at hand, real estate consumers can overwhelm themselves and fall prey to “analysis paralysis” in the effort to get informed.
Client mindsets, unmanaged, kill deals. And you can’t manage what you don’t first understand. Even worse than glitching up your close rate, some of these anxieties can actually cause panic, paralysis and poor decisions. Let’s take a little trip inside the minds of our post-recession, constantly-connected home buyers and sellers, to get a better understanding for their freak-out moments and sticking points.
Neurosis #1: Interest Rate Fixation.
The buyer and refi-er with interest-rate fixation checks interest rates online all day, every day. They hang on Bernanke’s every word – and text or call you immediately after his every press conference to see what you think about it. They notice rates rise and fall by .375% one week, and have done the amortization math to reveal that this difference would save them $2,750 over their 30 year loan. As a result, interest rate fixated buyers and home owners often freeze up when it’s time to lock rates, hesitating out of the hope/fear that rates will decline, even by a smidgen, tomorrow.
As with most human neuroses, interest rate fixation starts from a good place: the desire to be a smart, informed, wise money manager and real estate decision-maker. But it can spiral to a place where it borders on delusional. Something about the ease of access and constant information about every moment’s variation in interest rates makes mortgage borrowers perceive that they have more control over the precise timing of their rate lock and their transaction than they actually do.
How you can help
If you have someone with interest rate fixation on your hands, it might help to keep them mindful of the overall goal of buying the right home at an affordable price and terms, or saving money and paying their home off early, via their refinance. Explain that they should be aggressive about moving their house hunt and refinance forward. But also inform them that their contingency and underwriting timelines have more impact on the timing nuances that dictate their precise interest rate than obsessively watching CNBC ever will.
Neurosis #2: House-Stalking Syndrome.
Your house stalkers are those buyers who are constantly asking you about homes that are not on the market, having seen a late-night infomercial that urged them to write letters to owners asking them to sell – and finance – their homes. These are also the buyers who see a ‘Coming Soon’ sign go up on the most luxurious home in town and start checking online, calling the listing agent and emailing you 5 times a day to know the moment it comes on the market. Then, when it is listed at a price far beyond their means, they go to the Open House, put in a lowball offer (with a picture of their Yorkie) and go into mourning when the place sells for hundreds of thousands more than they could every have paid.
Believe it or not, these are the most benign symptoms of house stalking syndrome. I’ve heard of house stalking buyers who track the sellers down on Facebook, knock on their doors, and even attempt to sabotage their open houses. But by and large, house-stalkers reserve their fixation for late-night internet research into a property’s permit history, floorplans, owners and neighbors, estimated value, days on market and listing agent history.
How you can help
Historically, house stalkers were seeking to be the first to hear of a price reduction. But on today’s seller’s market, house stalkers are often legitimate buyers driven slightly nuts by the prospect of getting outbid (again).
To minimize this mania, it’s essential for you, the agent, to be the calming presence in a crazy market. Create a sensible house hunting plan and strategy, encourage them to view homes priced low enough that they can compete and stay within budget, and brief them up front about how many offers buyers normally are having to make before snapping up their ultimate home.
Neurosis #3: Home Voyeurism, aka Looky-Loo Syndrome, aka Property Peeping Tom Tendencies.
Home voyeurs are related to the aforementioned home-stalkers, with one big difference: they have no interest in actually buying a home! Hence, these Property Peeping Tom’s can be the bane of an agent’s existence, because their phone calls, emails and texts place a real drain on the time you could be spending with serious clients.
As long as there have been open houses, there have been looky loos. But the advent of the internet has exacerbated their symptoms and encouraged their bad behavior by rendering so much more information about properties and the people involved with them publicly available.
How you can help
The toughest type of Property Peeping Tom to deal with are those friends and relatives who beg you to use your real estate agent superpowers to constantly pull comps, get insider information or even provide access to listed homes for what you know will turn out to be no good reason. One word: “no”. Wait – one more word: “boundaries”.
Neurosis #4: Décor Expectations Disorder.
Reality TV, real estate shows and design magazines have created some pretty unrealistic expectations about what the interior of a home should look like on any given day. While the average human being isn’t put off by some unopened mail in the basket or a pair of sneakers in the hallway, those with Décor Expectations Disorder are shocked and outraged by even the slightest signs of real life inside the homes they view. They are aghast when every pillow isn’t fluffed and completely incensed by out-of-date appliances. No window valances? Quelle horreur.
How you can help
Truth is, the ante has certainly been upped. Buyers at all price points do have the right to expect listings to be clean and prepared for sale – and listing agents must know that homes which don’t measure up will not command top dollar. If your buyer client has Décor Expectations Disorder, remind them that the perfectly staged homes tend to get more offers and sell for more, so that a poorly prepared property might present a good opportunity for them. Encourage them to visualize the place in the pristine condition they’ll keep it, if and when they end up owning the place.
And take every opportunity to remind your home sellers that the competition is fierce. In fact, remind them that they are not just competing against nearby listings, but also against the standard of cleaniness and decor that buyers see in the media. Encourage them to be vigilant about keeping their home pristine and clutter-free while it’s listed and being shown. Stagers, housekeepers and storage units are property preparation investments that can have pay off big, at closing.
by Dr. Maya Bailey
Be honest with yourself and ask yourself if you've been avoiding the very action step that could make all the difference in your business. In today's new market especially, if you don't prospect you may miss out on a sudden surge business that has just come up.
When you call a client, you are calling to see if they need some help from you. For example if you call someone in the category of for sale by owners, then you're asking them if they might be able to use your services. The chances are very high that they can use your services. They didn't realize when they got into selling their home by themselves that it would be such a hassle. Usually they don't succeed and often they will hire you when you contact them with the right approach the right tone in your voice.
Most of you are suffering from old, subconscious self-limiting beliefs that you may not even be aware of, that stop you from picking up the phone. Most real estate agents consciously or subconsciously are carrying this belief: "If I call people, I'm bothering them".
However, fear of rejection is subjective and how you define it. If you look at it objectively, you will see that there really is no such thing as rejection when you are prospecting for leads.
Why? Because you are looking for someone who matches the services you offer. You have an expertise in helping people to buy and sell homes. You can be proud of that expertise. When you do lead generation, you're exploring to see if you can find a match for someone who's looking for your expertise. If someone is interested in your services, you found a match. If they are not interested in your services, they are not rejecting you. It simply is not a match. Thank them and move on to the next.
So instead of thinking with your old belief, you can easily cultivate a new belief: "I easily attract people who match the services I offer."
Another self-limiting belief is this: "If I call people, I won't know what to say."
There is no shortage of places to go where you can find very good prospecting scripts. You can Google on real estate prospecting scripts, you can find real estate teachers who specialize in prospecting and go to their websites, and you can read books on lead generation. You can also be creative and make up your own scripts.
But the script is only the lead in. Once you have the person's attention, you should be working on connecting with the person you're talking to. Convey to your prospective client through the tone of your voice that you are here to be of service and you care.
Have you heard the expression, "People don't care how much you know until they know how much you care"? Express your caring with your warmth and through being in alignment with the intention of your heart, which is to be of service and help people.
If you are in alignment with your purpose, this will be reflected in your voice. Your voice won't sound abrasive, it will sound invitational. It will have a lilt. People will be attracted to your voice and your energy, no matter which exact words you use.
The truth is you have a valuable service to offer. When you call people you are calling to see if you can be of service. You're calling from your heart to see if you might be able to help them.
When you come from an attitude of contribution, people will pick up on that and will be very receptive to you.
You will also begin to understand that there is no such thing as rejection. There is either a "match or not match". If it's not a match, you're not being rejected; the person simply does not need your service at this time, so you move on. Wake up in the morning with the thought, "Who can I help today"?
By Megan Hopkins
• August 1, 2013 • 9:30am
In the first quarter of 2013, home prices rose by 10.2%, the first double-digit gain since the peak of the housing bubble seven years ago, according to data from CoreLogic.
As rising home prices and mortgage interest rates begin to affect affordability and demand and home inventory becomes more balance, analysis from CoreLogic ($28.88 0.98%) forecasts that price appreciation will start to decelerate in 2014.
Slowly, as more and more homeowners consider selling their homes to lock in capital gains, the pressure that has been driving prices upward will subside.
"Record levels of affordability, a slowly improving job market, and very small inventories of new and existing homes for sale will continue to drive U.S. home price appreciation during the summer," said David Stiff, chief economist for CoreLogic Case-Shiller.
"Although a small number of metropolitan areas show year-over-year declines, it is likely that home prices in these cities will turn positive by the end of the year," added Stiff.
Long Island, N.Y., Waukegan-Kenosha, Ill-Wis. and Poughkeepsie, N.Y., were three of the metros that experienced a small year-over-year home price drop, down 1%, 2% and 4%, respectively.
Conversely, some of the cities that were right in the middle of the housing bubble have made quite the turnaround. For instance, Phoenix were up a sharp 23% year-over-year, while Sacramento was up 21%. Detroit and Miami jumped 18 and 14%, respectively.
It’s no surprise that these markets are also facing extremely tight inventories of homes for sale. In Bismarck, N.D., which was up 13% year-over-year, housing demand from an influx of oil and natural gas workers is running ahead of supply.
In markets that are particularly favorable to sellers, inventory is extremely tight. Detroit, Phoenix and Sacramento have approximately a three-month supply of active listings, while Miami hovers around five and a half months.
With inventory so tight in many markets, new housing construction is also ramping up, although more slowly than expected. CoreLogic notes that builder confidence, which bodes well for construction activity, has been soaring, so it is expected that the pace of new construction is expected to increase more rapidly.
"Although double-digit gains usually indicate unsustainable appreciation and, possibly, bubbles in some metro areas, there is less need for concern now since home prices remain 26% below their peak nationally and are even lower in many metro markets," said Stiff.
The latest survey from Redfin revealed a surge of concern over rising mortgage interest rates. Of those surveyed, 32% claimed they had no major concerns about selling, while 47% cited concern that rising rates would cause a drop in buyer demand, which has more than doubled the percentage from last quarter.
Despite recent concerns about rising interest rates, 48% of respondents believe now is still a good time to sell, an increase from 45% in the second quarter. Even more surprising, there was a slight increase in respondents that believe now is a good time to buy, with 45% believing now is a good time to buy, up slightly from 44% in the second quarter
"Of course home sellers are worried about interest rates, but the reality is that many buyers believe that rates will continue to go up," said Redfin Los Angeles real estate agent Eric Tan. "They know if they don't move now, they might be kicking themselves all over again in three months."
Of those polled, 17% believe home prices will rise "a lot" in their area in the next 12 months, up from 15% in the second quarter. The number of respondents that believe home prices will rise in their area in the next 12 months remained unchanged from last quarter at 85%.
"Results from our seller survey point to growing confidence in the US economy, and recognition that broad economic gains could erode sellers' advantages in the housing market as mortgage rates rise," explained Redfin economist Ellen Haberle.
With ongoing issues like higher interest rates and low inventory levels, the real estate recovery story is facing several headwinds. And last month, pending home sales retreated from six-year highs.
The Pending Home Sales Index, a forward-looking indicator based on contract signings, dropped 0.4 percent to 110.9 in June, compared to a downwardly revised 111.3 in May, according to the National Association of Realtors. The pace in May was the strongest since December 2006, when the index hit 112.8.
Compared to last year, the index is 10.9 percent higher. Pending sales have now been above year-ago levels for 26 consecutive months. An index reading of 100 equals the average level of contract signings during 2001.
Lawrence Yun, the National Association of Realtors’s chief economist, believes affordability is on the decline. He said in a press release: “Mortgage interest rates began to rise in May, taking some of the momentum out of contract activity in June. The persistent lack of inventory also is contributing to lower contract signings.”
Between the beginning of May and the end of June, the average interest rate for a 30-year fixed-rate mortgage surged from 3.59 percent to 4.68 percent — the highest level since July 2011, according to the Mortgage Bankers Association.
Yun continued: “There are some homebuyers who sign contracts with strong lender commitment letters, but have floating mortgage interest rates. Those rates can be locked as late as 10 to 14 days before closing, so some homebuyers may change their minds if the rate rises too much, which apparently happened with some sales scheduled to close in June. Closed sales may edge down a bit in the months ahead, but they’ll stay above year-ago levels.”
Overall, the Pending Home Sales Index was mostly flat or lower across major regions of the country. The index was unchanged at 87.2 in the Northeast but is 12.2 percent above year-ago levels. In the Midwest, the index declined 1 percent to 114.3 in June. Sales in the South fell 2.1 percent to 118.3, while the West region posted a gain of 3.3 percent.
Existing-home sales are expected to increase 8.5 percent to 9 percent this year to approximately 5.07 million sales this year — the highest in seven years. The National Association of Realtors expects the national median existing-home price to gain about 10 percent to reach $195,000 in 2013, in what would be the strongest increase since 2005. Earlier this year, the organization estimated a price increase of 8 percent.
By Christina Mlynski
• July 29, 2013 • 9:26am
After reaching a six-year high, pending home sales fell in June.
The decline in pending home sales is attributed to rising mortgage interest rates, which are beginning to impact the housing market, the National Association of Realtors reports.
NAR’s Pending Home Sales Index edged down 0.4% to an index score of 110.9 in June, dropping from a downwardly revised 111.3 in May. From last year, the index is up 10.9%.
"Mortgage interest rates began to rise in May, taking some of the momentum out of contract activity in June," said NAR chief economist Lawrence Yun.
He added, "The persistent lack of inventory also is contributing to lower contract signings."
On the upside, pending sales have been above year-ago levels for the past 26 months.
Nationwide Insurance chief economist David Berson told HousingWire that although mortgage rates tend to dampen housing demand, stronger job growth, rising numbers of households and increasing household wealth can offset rising interest rates.
"Despite an increase of about half a percentage point for mortgage rates in June, however, the index remains at a high level (other than in May, the index is at the highest level since the end of 2006)," Berson stated.
He added, "This suggests that reported home sales will remain strong for the next couple of months (especially when combined with the large jump in the Index in May)."
Meanwhile, not all pending sales contracts are closing.
The issue is that there are some homebuyers who sign contracts with strong lender commitment letters, but have floating mortgage interest rates.
"Those rates can be locked as late as 10 to 14 days before closing, so some homebuyers may change their mind if the rate rises too much, which apparently happened with some sales scheduled to close in June," Yun explained.
As a result, closed sales are expected to edge down in the months ahead, but will stay above year-ago levels, according to NAR's chief economist.
The PHSI in the Northeast remained unchanged at 87.2 in June but is 12.2% above year ago levels.
In the Midwest, the index slipped 1% to 114.3 in June and is 19.5% higher than in June 2012.
Pending home sales in the South fell 2.1% to an index score of 118.3 in June, up 9.5% from a year ago.
Meanwhile, the index for the West jumped 3.3% to 114.2 and is 4.4% above year ago levels.
Existing-home sales are expected to rise more than 8% for the remainder of the year.
Additionally, investor shortages will lead the median home price to rise by nearly 11% this year, NAR concluded.
The U.S. housing recovery continues to make gains. New home sales have surged 38% since last year, hitting a five-year high in June, according to the newest figures from the Commerce Department. And despite a monthly drop in activity, sales of previously owned homes remain 15% higher than last year as well, according to the National Association of Realtors.
If housing in the first six months of 2013 could be summed up in one sentence, it would go something like this: Inventory is painfully tight, sales activity is surging and home prices have jumping.
Now real estate experts are sounding off on the trends that will help shape the sector in the second half of 2013. Here’s what you need to know.
We Are Not Re-inflating A Bubble
Home prices have clocked double-digit price appreciation this year. Prices across the 20 major U.S. metro markets were 12% higher in April than they were a year before, according to the S&P/Case-Shiller Home Price Index. Other indexes have registered similarly dramatic gains. The last time prices appreciated by double digits were during the last housing bubble, motivating to question whether a new bubble is beginning to inflate.
It isn’t. The current pace of growth, while certainly unsustainable for long term market health, is nothing to worry about just yet. “Prices are now rising as fast as they were during the bubble years, but they are still low relative to the levels where they were back then,” explains Jed Kolko, chief economist of Trulia TRLA -1.39%, a San Francisco, Calif.-based real estate site.
He says prices are actually undervalued across most of the country, lower not just than their bubble-era peaks but also lower than their historical norms when adjusted for inflation.
“You can sort of think of it as we overshot on the way down and this is sort of a correction back to something more normal,” adds Mark Fleming, chief economist of CoreLogic, an Irvine, Calif.-based real estate data firm.
Economists do believe home prices will continue to climb throughout the rest of this year. CoreLogic CLGX -0.4% projects 2013 will end with a 6% increase over 2012. And Altos Research, a Mountain View, Calif.-based firm that tracks real estate data in real time, believes 2013’s final tally will be even higher. “Based on the actual supply and demand data, we are looking at 12% year-over-year,” says Michael Simonsen, chief executive of Altos Research.
Still, it won’t last. They say several variables, including increased inventory and higher mortgage rates, will slow the pace growth, which to be clear, is expected to stay positive over the next several years.
More Homes Coming To Market
I’ve said it before. The abnormally tight inventory levels fueling the return of such frothy buyer practices as bidding wars and contingency-free offers will slowly begin to ease. Inventory – which hit a 12-year low earlier this year — is already starting to increase and economists believe that trend will continue despite the season.
In June, there were 7% less home for sale than a year earlier, according to Realtor.com, but the monthly numbers offer the forward-looking story. From May to June, inventory grew by 4%; last year that monthly increase was only 1%.
“We think inventory levels on a year-over-year basis will probably flatten out by the end of this year. That will be the first time since 2007,” says Errol Samuelson, president of Realtor.com. “I think you are actually going to see inventory growth on a year-on-year basis starting in the fall, but prices nonetheless will continue to appreciate.”
“Inventory started to expand very slowly maybe about four months ago,” echoes Kolko. “We will see that continue as rising prices help owners get back above water and help other sellers decide to take advantage of price appreciation.”
Still, some experts, like Simonsen, believe we could see housing shortages in the most sought after locales as far out as the next three years.
It will come down to new construction as more homebuilders continue to gain confidence and roll new developments. Kolko expects to see more construction commence in places like Texas, the Carolinas, Northern California and other parts of country where there’s strong housing demand, spurring job growth in both construction and housing-related industries.
Since an unusually large portion of new construction is multifamily, increased inventory won’t just help slow the rapid rate of home price growth but also quell rent prices. As many as six million more households will join the rental market ranks over the next decade, according to the National Association of Realtors; more building in major cities will help keep rents from rising too much in response.
Mortgage Rates Will Keep Climbing
Mortgage rates have risen over the past two months. A recent Trulia survey found rising rates was the number one worry among prospective buyers right now.
Economists believe rates will continue to climb, though at a much less feverish pace than recently witnessed. But while the higher rates – the 30-year fixed loan is about a point higher than it was in early May – mean borrowing is getting more expensive, housing won’t become unaffordable anytime soon.
“Prices are still low relative to rents, so at 4.5%, it’s still more than a third cheaper to buy than to rent on average across the U.S.,” notes Kolko. “Not every market will remain cheaper to buy but on average… buying will stay cheaper than renting until rates reach 10.5% — a level we haven’t seen since 1990.”
Still, in metro areas like San Francisco, San Jose, New York and Honolulu, markets that were always historically cheaper to rent than buy before the downturn, rates will begin to tip the scale back toward renting once they rise above 5%.
“Our estimation is it would take a 6.5% interest rate to bring affordability just back up to the level of early 2000s, [meaning] neither too affordable nor unaffordable,” adds CoreLogic’s Fleming. “There’s plenty of room for appreciation and rate increases before that and we will probably get a little of both.”
Rising rates may help fuel another trend in the coming months: an easing of tight mortgage credit that has hampered the purchases of even qualified homebuyers. As rates rise, refinancing business dries up, pushing lenders to begin ramping up the mortgages they underwrite for prospective buyers.
Distressed Decline
Foreclosure activity is on the decline. RealtyTrac, an Irvine, Calif.-based foreclosure site, reports that 800,000 properties had foreclosure filings on them nationwide in the first half of 2013. That’s down 19% from the second half of 2012 and down 23% from the six months before that. In June there were 127,000 filings across the U.S. – the lowest number logged since December 2006.
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“On a nationwide basis we will continue to see the numbers go down,” projects Daren Blomquist, vice president of RealtyTrac. “We will still have the flare-ups in state and local markets…but nothing that is going to overwhelm the momentum we have in the market right now.”
He says the exceptions to that downward trend will continue to be states where foreclosures undergo a judicial process. Florida, New York, New Jersey, Illinois, and Maryland has all seen increases in activity this year, in part because lenders are finally dealing with distressed inventory that had been delayed. Another market that may experience a “last gasp” of foreclosures is California, since the state’s Homeowner Bill of Rights has slowed down the foreclosure process.
Short sales continue to increase, with lenders arranging deals before they even process their first foreclosure filing on a delinquent homeowner’s property. In the first quarter of 2013 short sales increased 79% versus a year earlier, thanks in part to the fact that short sale guidelines were loosened by the government sponsored enterprises.
Another trend that will continue: investor activity, especially among institutions. Institutional investors funded by Wall Street capital have been buying up distressed single family homes and converting them into rentals. According to RealtyTrac’s data, which defines institutional investors as entities that have purchased 10 or more properties in the past year, purchases have continued to increase, with southeastern markets like Florida and Georgia logging 200%-plus yearly increases.
“The one big pool of risk is the underwater homeowners,” says Daren Blomquist, vice president of RealtyTrac, an Irvine, Calif.-based foreclosure site. He estimates that there are as many as 11.3 million borrowers holding mortgage notes worth more than their homes. “It’s going to take two or three years before they actually have equity in their homes. Until we have those people in a place where they can participate in the market, there will be a slight drag on the housing market.”
Talk of another housing bubble is spreading as prices and rates rise and inventory plummets.
However, Pro Teck Valuation Services’ July Home Value Forecast Update takes a look at how bubbles are created and why the current market indicators are not, in fact, pointing to another housing bubble.
"The rapid recovery in home prices in a number of U.S. metros already had some observers to suggest that we are in another home price bubble," said Tom O'Grady, CEO of Pro Teck and Michael Sklarz, principal of Collateral Analytics. "Our feeling is that while price increases have been sharp, they should be viewed as corrections to the overshooting of prices on the downside in the 2009-2011 period and not the beginning of new home price bubbles."
The authors of the forecast note that they have been writing about bubbles for more than 10 years and that they’ve seen a common theme used to describe bubbles in other markets — such as the stock market in 1929, gold prices in 1979-80 and the Japanese real estate market in 1989-90. In each of these markets, prices jumped to levels that couldn’t be justified by underlying fundamentals.
In the late stages of a bubble, the authors noted, prices keep rising primarily because they are expected to keep rising.
"Our finding was that a simple measure of how much the market has increased over a five-year period has proven to be an excellent indicator of most bubbles," added O'Grady and Sklarz. "In the case of the U.S. stock market over the past 100 years, we found that whenever the 5-year rate of change of the S&P 500 Index has exceeded 200%, a significant market top has occurred followed by overall stock market crashes."
Studying price changes over a 5-year time frame is sufficiently enough time to filter out shorter-term trends, the authors wrote.
The July forecast also includes a listing of the top-10 best and worst performing metros as ranked by its market-condition ranking model.
"All of the top 10 markets this month are exhibiting positive trends in all of the market indicators we follow," added Sklarz. "Two new entrants to the list are Cambridge, MA and Providence, RI from New England, which is interesting because the Northeast had been lagging the nationwide real estate recovery. Other markets included in the top are in Texas and in North Carolina."
"Once again, the bottom ranked metros also represent an interesting mix around the U.S. While all have higher single or double-digit Months of Remaining Inventory, many of the indicators are showing positive trends, including increasing sold prices over the past year," added Sklarz.
According to the 2013 Current Population Survey data, there are still 2.3 households out there that are just missing. This is extremely close to the peak of 2.6 million back in 2010 and 2011 — the peak of the recession. So where are these "missing households?"
Most of these missing households are youngsters who have yet to leave their parents' casa. The share of 18-34 year-olds — also known as Millennials — living with their parents increased from around 27% before the housing crisis to 31%, where it remains in 2013. Of those living with their parents, 44% of 18-34 year-olds were unemployed, while 25% held a job.
But here’s the catch. The housing recovery depends on household formation to continue recovering. The likelihood that young people live with their parents is just 8% back to normal, according to Trulia. The other recovery measures tracked by Trulia are much further along: existing home sales are 82% back to normal, the delinquency + foreclosure rate is 57% back to normal, and even construction starts are 43% back to normal. In contrast, household formation has barely begun to recover, writes Kolko.
So how can we get these kids out of their parents’ houses and into their own? Jobs will be a huge factor. However, Millennials have a lot further to go than other generations. And besides, even when the Millennials do start landing jobs again, it will take some time to accrue enough money to move out on their own. All we can do is wait, and hope that other generations can make up a portion of these “missing households” for now.
Is a topsy-turvy U.S. housing market about to settle down?
After a boom, a bust, and a heady rebound, many loan officers, real estate agents and economists I've spoken to recently are anticipating something that's eluded them for the last decade: a return to a "normal" market.
The new stability comes as a result of opposite, competing pressures. Higher interest rates and higher home prices are cooling off demand, while low inventories are straining supply, heating the market up. The forces cancel each other out, at least in part, which might be a good thing.
The interest rate on a 30-year fixed mortgage, adjusted for inflation, has risen 1.33 percentage points since May. That rate of increase is "unheard-of," Jon Shrum, a loan officer in Southern California, told me. That change would raise the monthly payment by 15.2 percent.
The first impact of that rise has been to pop the bubble in mortgage refinancing. Shrum said that interest in refinancing had evaporated almost instantly. "We've taken a major hit on that," Shrum said. Data from the Mortgage Bankers' Association shows that refinancing applications are down by half since May.
"Unlike home purchases, refinancing can respond swiftly to changes in rates," said Jed Kolko, chief economist at Trulia, an online listing site. "It's a purely financial decision, and for many borrowers, it's no longer worth it to refinance."
The impact of higher borrowing costs is less clear for buyers. If buyers anticipate further appreciation, it might not be that much of a discouragement. "If anything, the increase in interest rates will get more people into the market as people will want to beat the rise," said Mark Pullinger, Southwest regional vice president for Coldwell Banker Real Estate LLC.
Another outcome may be to drive buyers who would have otherwise taken out fixed-rate mortgages into adjustable-rate loans. The Washington Post's Jim Tankersley worries this means "America has learned nothing from the financial crisis," as payments on adjustable-rate mortgages will jump if rates continue to rise.
The sharp spike in rates has even caused some lenders to stop offering long-term fixed-rate mortgages for now. Weeks of 50-basis-point changes terrify them. "Lenders are facing significant risk because people are locking in rates and then rates jump by the time the loan is funded," said Glenn Kelman, CEO of Redfin, an online real estate brokerage.
Most said, though, that the real estate market is now strong enough to withstand rising interest rates. "It hasn’t affected our sales," Pullinger said. "Inventory has really been the more important factor."
But all acknowledged that it will take away the appetite of investors looking to flip homes for a profit, who were a record 27 percent of all home sales in 2011, according to the National Association of Realtors. It may also cool demand as buyers are surprised by higher costs.
Three signs of that: The number of listings on Redfin that receive multiple bids has dropped from 76 percent in March to 69 percent in June. Redfin also saw a 10 percent drop in bids as mortgage rates broke 4 percent. Closing ratios, which track the share of potential sales that go through, are down by 45 percentage points, said Shrum.
Adding to the impact of rates, home prices are up 14 percent since January 2012, according to the Case-Shiller Index of 20 U.S. cities. The National Association of Realtors' Housing Affordability Index has also declined 18 percent since January, a trend that's expected to continue. "Buyers are more hesitant," Kelman of Redfin said, "and this will limit the magnitude of price increases."
What this won't do is derail the housing recovery. Tight inventories will boost construction, whatever rates and prices do, many of the experts said. Adjusting for seasonality, there were only 161,000 single-family homes for sale in the U.S as of June. Inventories have begun to rise again, but nowhere near as quickly as the pickup in demand. Homes take time to build. Home completions usually lag permits by a year, according to aggregate data. At least permits may now be growing apace with future demand, Kelman said: "Three months ago, the market was limited by inventory, but that's begun to abate."
To write of a single U.S. real estate market simplifies too much. Southern California, where Shrum works, is much stronger than other regions; the Midwest is just beginning to turn around, as Federal Reserve Bank of Chicago Vice President William Testa has written. Testa built an index that tracks permits and prices in his Fed district at a county-by-county level. It just turned positive -- that is, there were more counties with improving markets than worsening ones, for the first quarter since 2006.
Other data from Redfin paint stark contrasts. A whopping 92 percent of buyers in San Francisco paid more than the asking price in June. Only 20 percent of buyers did so in Chicago. After a long period in which macroeconomic trends drove prices up or down across the country uniformly, a "patchiness" depending on the area is returning to the market, said Kelman,
Another factor sending local markets in different directions will be the share of all-cash buyers. In San Francisco, for instance, many people liquidate holdings in technology stocks to buy homes. "That makes them completely unfazed by what's happening to interest rates and the broader economy outside of their world," Kelman said.
As Kolko of Trulia sees it, the rise in mortgage rates was just what the housing market needed: "Anyone who was worried about a new home-price bubble was forming should be thrilled."
Kelman agreed. "The market had been in an unsustainable situation. We were seeing 3 or 4 percent monthly increases in price of an asset that should appreciate 2 percent per year," he said. "Cooling off doesn't mean were moving to the abyss. It just means markets have stabilized. That seems like a healthy place to be."
Housing seems to want this return to normal. More so, even, than another boom. Maybe, just maybe, the industry has learned its lesson.
