Discussing housing hitting a peak, home prices and home price growth, consumer financial expectations, rising mortgage rates and affordability plus more
A Peak in the U.S. Real Estate Cycle
From the latest Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index:
Current signs indicate that most U.S. housing markets are approaching a peak in the real estate cycle, but there’s little evidence to suggest prices will plummet as they have in the past.
You may have missed yesterday’s post that included a long discussion on why we are not seeing another housing bubble. This report confirms what I shared yesterday.
Ken Johnson, Ph.D., a real estate economist at FAU College of Business said:
Housing markets are slowing, suggesting that we are nearing a peak in housing markets around the US. But this is good news, as we are pulling back from the brink, unlike we did in 2007.
Eli Beracha, Ph.D., associate professor in the Hollo School of Real Estate at FIU said:
Our data indicates that prices are above their 40-year trend but not significantly so as they were in 2007. Rather than a crash, I anticipate slower growth in prices accompanied by longer marketing times for sellers and increasing inventories, which should bring prices back in conjunction with their 40-year trend.
Buying still beat renting according to their research. This does not reflect what is best for each individual and only looks at whether buying or renting is better at wealth creation.
When it comes to home prices, remember that slow, steady and sustainable wins the race! Of course, with statistics, almost any point can be proven…
Home Prices Soar High
From The Hill:
From 1987 to 2000, the average inflation-adjusted annual increase in U.S. home prices was 0.3 percent. This 0.3 percent annual rate is the same as the very long term trend increase in U.S. real home prices, as calculated over the 117 years from 1900 to 2017, by the Credit Suisse global investment returns yearbook for 2018. In other words, in addition to giving you a nice place to live, it appears that over time on average, homes provide a good inflation hedge, plus a little, but not plus very much. After 2000, in real terms the housing bubble expanded and contracted quite symmetrically, bottoming out in 2012 just about on its trend line.
But it did not resume its trend behavior. The Fed was on the case, and up real home prices went rapidly again, rising over 5 percent a year on average from 2012 to 2017. Their current real level is equal to that of mid-2004, when the bubble was already well inflated, and it is far over — 28 percent over — their trend line as extended from 2000.
The key is to remember that the way that home prices have increased AFTER the housing crash has been a reaction to home prices dropping too much. So yes, home prices did increase at a dramatic pace during 2012-2017 BUT you really need to look at the long range trends.
We are starting to enter a period of slower US home price growth that should be closer to the historical norm. But as always, talking to a local experienced Realtor is your best bet to understanding what is happening in your area.
Consumers’ Expectations About Their Finances Continued to Improve
The Federal Reserve Bank of New York’s Center for Microeconomic Data released the February 2018 Survey of Consumer Expectations, which shows a slight increase in short- and medium- term inflation expectations. Consumers’ expectations about their personal financial situations continued to improve. Expectations about changes in taxes declined to a new series’ low, while expectations about growth in government debt increased sharply.
Some of the highlights:
- Median inflation expectations increased at both the 1-year and 3-year horizons to 2.8% and 2.9% respectively
- Median home price change expectations declined to 3.3% in February
- Median one-year ahead earnings growth expectations remained flat at 2.7% in February
- Median expected household income growth increased to 3.0% in February
- Consumers’ expectations about their financial situations compared to a year ago improved
- Consumers’ expectations about their financial situations reached its highest level since June 2013
Very encouraging to see strong consumer expectations. If this will translate into more home sales and economic growth is unknown but it is still good news.
Rising Mortgage Rates Threaten Housing Affordability and Inventory
From Zillow Research:
A sustained upswing in mortgage interest rates is likely to be felt by current and would-be homeowners alike, denting mortgage affordability in many large markets and complicating the financial decision on when or whether to move to a different home.
Currently hovering around 4.3 percent for a standard, 30-year, fixed-rate loan, mortgage interest rates remain very low by historic standards, a silver lining in today’s ultra-competitive housing market that helps keep monthly payments relatively affordable even as home prices reach new peaks. In large part because of these low rates, buyers purchasing the median U.S. home as of the end of 2017 should have expected to spend 15.7 percent of their income on a monthly mortgage payment.
In the late 1980s and 1990s, mortgage payments took up 21 percent of the typical income, on average. Mortgage rates will need to reach close to 7 percent for the share of income needed to afford the monthly mortgage payments on the nation’s typical home to exceed historic norms.
What is affordable varies from one person to the next, there is no doubt that rising mortgage rates will have a negative impact on the purchasing power of home buyers. If you are dreaming about buying a home, my advice is to take the first step and talk to a mortgage lender ASAP!
Achieving the American Dream
Do you think that home ownership is a big part of achieving the American Dream? Probably so if you are reading a real estate blog…
But there are lots of renters that ALSO think that owning a home is a big part of achieving the American Dream according to NAR’s latest Aspiring Home Buyers Profile. NAR reported that 82% of those surveyed want to own a home and 80% think that owning is a big part of achieving the American Dream.
So if this many renters think that owning a home is a good thing, you must be wondering why they have not already bought a home? What is stopping them?
OK but what will it take to get renters to buy a home?
If buying a home is in your future, I suggest you get the ball rolling now. Mortgage rates and home prices are both increasing and this will have a negative impact on how much home you can safely afford.
Companies Putting Tax Savings in Pockets of Shareholders
Companies have been feverishly putting the savings they reaped from the tax breaks passed in December into their investors’ pockets this year.
Share buybacks in 2018 have averaged $4.8 billion a day, double the pace for the same period last year, according to market data firm TrimTabs. That comes following Congress’s move to slash the corporate tax rate from the highest-in-the-world 35 percent to 21 percent.
The article goes on to say that companies ARE also using the tax breaks to pay for capital investments and manpower.
BUT the percentage being used for stock buybacks is BIG and probably won’t help the majority of Americans
Congress Snuck Dozens of Tax Breaks Into the Budget Deal
“Tax extenders” are overlooked, underpublicized and painfully arcane, known by a name that doesn’t even make sense — they should be called “tax cut extenders,” because extending the duration of temporary tax cuts is what they do.
In practice, tax extenders are legislative favors, often slipped into folds of federal bills notable for funding bigger-ticket items — such as military programs, disaster relief, infrastructure overhauls.
And despite President Donald Trump’s promise to drain the Washington “swamp,” elected officials and lobbyists conceived a new round of extenders, where they became law inside the bloat of last month’s 652-page budget bill with little public input.
Congress’ Joint Committee on Taxation estimates that tax extenders and related temporary tax provisions lawmakers passed as part of the February budget deal will cost the U.S. Treasury about $16 billion in lost revenue over a decade.
Given that the Congressional Budget Office predicts the federal government’s overall budget deficit will soon balloon, potentially necessitating expensive borrowing and draconian budget cuts, these are funds the federal government can ill afford to lose, particularly when one considers the $1.5 trillion tax cut Congress passed in December.
Sad to read this because the deficit is HUGE and it appears that Washington does not care. Money does not grow on trees and the deficit is a problem that must be addressed instead of kicking the can down the road!
Small Business Economy Heats Up
Small business owners are showing unprecedented confidence in the economy as the optimism index continues at record high numbers, rising to 107.6 in February, according to the NFIB Small Business Economic Trends Survey, released today. The historically high numbers include a jump in small business owners increasing capital outlays and raising compensation.
NFIB President and CEO Juanita Duggan said:
When small business owners have confidence and certainty in the economy, they’re able to hire more workers and invest in their businesses. The historically high readings indicate that policy changes – lower taxes and fewer regulations – are transformative for small businesses. After years of standing on the sidelines and not benefiting from the so-called recovery, Main Street is on fire again.
NFIB Chief Economist Bill Dunkelberg said:
Small business owners are telling us loud and clear that they’re optimistic, ready to hire, and prepared to raise wages – it’s one of the strongest readings I’ve seen in the 45-year history of the Index. The fact that several components saw significant increases tells us that small businesses are flourishing in a way we haven’t seen in over a decade.
Fantastic new and hopefully this optimism will lead to an even stronger economy. Remember, we need a strong economy to have a strong housing market.
U.S. Residential Loan Originations Decrease 19%
More than 1.9 million loans secured by residential property (1 to 4 units) were originated in Q4 2017. This is down 20% from the previous quarter and down 19% from a year ago.
Purchase loans were down 22% from the previous quarter and down 1% from a year ago. Refinance loans were down 17% from the previous quarter and down 34% from a year ago.
The median down payment on single family homes and condos purchased with financing in Q4 2017 was $18,000, down from a record high $19,100 in the previous quarter but up 20 percent from $14,950 in Q4 2016.
The median down payment of $18,000 was 7.1 percent of the median sales price of the homes purchased with financing during the quarter, down from a four-year high OF 7.3 percent in the previous quarter but still up from 6.2 percent in Q4 2016.
Residential loans backed by the Federal Housing Administration (FHA) accounted for 12.0 percent of all residential property loans originated in Q4 2017, down from 12.9 percent in the previous quarter and down from 12.3 percent a year ago to the lowest share since Q4 2014 — a three-year low.
A total of 29,357 construction loans backed by residential real estate (1 to 4 units) were originated in Q4 2017, up 12 percent from the previous quarter and up 33 percent from a year ago to the highest level since Q3 2015 — a more than two-year high. Construction loans are those that finance improvements to real estate.
Daren Blomquist, senior vice president at ATTOM Data Solutions, said:
The falloff in refinance originations continued for the third straight quarter, but purchase originations held steady compared to a year ago despite ballooning down payment amounts that make it more difficult for first-time homebuyers to compete — as evidenced by the three-year low in the share of FHA buyers.
And while the rise in construction loans in part reflects homeowners reconstructing in the wake of hurricane Harvey in southeast Texas, the widespread rise in construction loans in other parts of the country indicates that more homeowners are staying put and remodeling rather than trying to move up into another home that comes with a big down payment and probably a higher mortgage interest rate.
Refinances are down due to the higher interest rates and the increase in construction loans indicates that home owners are improving or remodeling instead of selling.
That is all for today! Be sure to hit the share buttons if you enjoyed this post!