Discussing the outlook for housing and the economy, new home sales in March 2018, the strategic default myth, economic inequality, an interesting survey of REALTORS, challenges first time buyers face and the myths that may stop them from buying a home and much more
Freddie Mac’s Economic and Housing Outlook April 2018
Highlights from the latest Freddie Mac Economic and Housing Outlook:
While housing inventory is still tight, we expect the increased construction of new homes to help reduce the pressure on house price appreciation, which is currently at an annual rate of around seven percent. Home sales are holding up despite the increase in mortgage rates compared to last year.
Home sales have been recovering since 2010. Total home sales (the sum of new and existing home sales) have increased each year since 2010, with 2014 the lone exception largely due to higher mortgage rates. But higher rates don’t necessarily mean home sales will slow. From 2016 to 2017, home sales rose with mortgage rates.
Given population trends, the U.S. should be adding over a million households each year for the next few years. Over time, slower population growth rates should reduce household formation rates. But that reduction is still several years away. There is also substantial pent up demand.
The U.S. economy is not building enough housing units to meet demand. The single-family housing market lags significantly behind both historical averages and our estimates of long-run housing demand.
Without construction of new homes or a supply of available for-sale vacant homes, the housing market cannot grow. The low level of for-sale single-family homes reflects a tight repeat sales market and presents a conundrum to the housing market.
Since most sellers of existing homes are also looking to buy a home, low levels of inventory work to suppress inventory. Existing homeowners who are tempted to list their home may hesitate if they face the prospect of selling their current home rapidly and being unable to find a home to buy.
With low levels of new home construction, few vacant homes and a dearth of existing homes for sale, supply constraints are holding back the housing market.
The labor market drives housing demand, as a stronger labor market equates to more jobs and higher incomes. U.S. employers have added 17.9 million jobs since October 2010. In addition, labor force participation has increased while unemployment remains at the lowest level in 17 years.
Income growth is likely to get a boost as a result of recent tax reform. Per the Congressional Budget Office, total salaries are likely to increase by an average of 0.9 percent over the next decade due to the Tax Cuts and Jobs Act. The full effect of the tax reform might not show up until next year as homeowners begin to pay higher taxes due to the reduced deductibility of mortgage interest and property taxes. These changes on the employment and income fronts are likely to boost incomes and have a positive effect on home sales, at least in the short run.
In recent years, about 80 percent of all home sales are financed with a mortgage. Historically, the share has been about 90 percent.
Higher mortgage rates reduce home sales by increasing the monthly payments required of prospective buyers. Mortgage rates are up about half of a percentage point since the beginning of the year.
If rates continue to rise, that could slow home sales. However, if rates are rising due to a stronger economy, then rising incomes could offset the increase in rates.
The increase in mortgage rates may push for-sale inventory even lower.
While there may be room to safely expand credit in the current environment, credit constraints are not the dominant constraint on home sales. The dominant constraint on sales lay on the supply side of the housing market.
The broader economic environment remains favorable for home sales. But without new home construction and increased housing supply, home sales in the U.S. will have a hard time growing from current levels. If incomes grow and mortgage rate increases are gradual, then the housing market should post modest growth this year and next.
Freddie is just as concerned as I am about the lack of homes for sale. They are forecasting increasing mortgage rates and home prices yet do not see home sales falling.
The key thing is that the lack of supply and the lack of new homes being built is really hurting the housing market. It isn’t a matter of credit being tight as much as it is too few homes for sale.
New Home Sales March 2018
Sales of new single-family houses in March 2018 were 4.0% above the revised February rate and 8.8% above the March 2017 estimate.
The median sales price of new houses sold in March 2018 was $337,200. The average sales price was $369,900.
The seasonally adjusted estimate of new houses for sale at the end of March was 301,000. This represents a supply of 5.2 months at the current sales rate.
I used a chart showing the LONG range view of single family home sales to show how we have improved compared to after the housing market crashed. But you also see that we are just getting back to about where we should be.
Imagine if the low inventory problem was not plaguing the housing market?
The Strategic Default Myth
From Market Watch:
Throughout much of the housing downturn a decade ago, the plight of underwater borrowers sparked fierce debates. Many industry participants fretted about homeowners making “strategic defaults” — calculating that it would be smarter to cut their losses and walk away from the home, leaving an empty house and a broken promise to pay.
While there’s lots of evidence that most homeowners who defaulted did so because they had no other choice, the issue is still controversial.
Still, a survey published by the New York Fed this week sheds some light on how homeowners think about their mortgage payments when they’re underwater — or at least how they say they think about it.
Maybe because it angered me so much, but I remember how some seemed to blame people that were foreclosed on for the housing market crash. While there were SOME that were reckless or irresponsible when buying a home, the blame is spread around to include the banks, lenders, Wall Street, etc.
According to the Fed, there are almost 2 million home owners that owe more on their mortgage than their home is currently worth. The Fed asked underwater home owners why they are still making payments and the results speak for themselves:
- 77.6% said “I like my home and don’t want to lose it.”
- 10.9% said “House prices will recover, and my home will eventually be worth more than the debt on the home.”
- 19.1% said “Not making payments will negatively affect my credit score.”
- 15.5% said “I think it is morally wrong to stop making payments.”
I know that things are very different now compared to after the housing market crashed. Back then, the headlines screamed about home prices decreasing every month.
But for those that COULD hold on, home prices have recovered in most areas of the country. The number of people that strategically defaulted was very small and most were defaulting on properties that were not their home.
Still, painful lessons were taught during the housing downturn. This is why I preach so much about buying a home that is very affordable.
Winners and Losers From Rising American Inequality
Income inequality in the US has increased dramatically in recent decades. Most of the increase can be traced to gains going to those near the top of the income distribution. As emphasised by Piketty (2014: 297), from 1977 to 2007 three-quarters of the income growth in the US economy went to the top 10% of households.
The increase in US income inequality over the past half-century can be traced to gains made by those near the top of the income distribution – where financial wealth and corporate stock ownership is highly concentrated. The economic and political implications of this pattern of rising inequality have garnered substantial attention among researchers and policymakers. Overall, our results suggest that there is room for policy actions that could offset the negative consequences of rising income inequality.
So what are the chances that we will see any changes that might reverse this trend? I would say it is somewhere between slim and none…
This is why YOU must do what is best for securing your future. Save every penny you can, do not spend frivolously and start building wealth by owning a home!
Highlights from the March 2018 REALTOR Confidence Survey
- Properties were on the market for an average of 30 days
- 89% said that home prices increased or stayed the same compared to March 2017
- 30% of sales were to first time home buyers
- 20% of sales were cash sales
- Low inventory and interest rates were the major problems affecting sales in March 2018
- 37% of properties sold at original price or at net premium from listing price
- Buyers wrote an average of 2.4 offers
- Sellers received an average of 2.5 offers
- 66% of properties sold were the seller’s primary residence
- 14% decided NOT to sell so they could keep their current mortgage rate
This is a survey of REALTORS across the US but much of what they said can be seen in the Anderson SC area. For more information about what is happening in Anderson County, you can read the Market Reports or Contact Me!
The Challenges First-Time Home Buyers Face Today
Homeownership costs continue to grow faster than incomes, making homeownership more difficult. As a result, buyers—especially first-timers—are forced to make compromises when purchasing a home. Nationally, monthly housing costs for an entry-level buyer rose $136 to $1,641 nationwide, a 9% increase in the last year.
In conclusion, home buyers can afford less homes today than they could one year ago. Buyers have to make tradeoffs, either delaying their purchase or looking at homes with the following characteristics:
- a smaller square footage or lot size
- attached homes instead of detached homes
- locations further from work
- older resale homes
Builders have reacted similarly, buying land further from the job centers, increasing the density per acre, and building smaller homes.
This is the reality check of today’s real estate market for many. A house that isn’t exactly what you dreamed about can still make a great home, a great investment and a great wealth builder!
There are many myths about buying a home that could be causing you to have doubts about if you can buy a home. Check out some of the myths about buying a home:
As you can see, there are many myths that might stop some people from buying a home. If you want to enjoy the benefits of home ownership now, it is quite possible you do not need to wait!
If you have any questions about buying a home in Anderson County SC, please do not hesitate to Contact Me!