Tuesday, January 10, 2017

How Rising Mortgage Rates May Not Matter to Housing

Mortgage rates are now sitting solidly at the highest level in two years and could move even higher in the coming weeks.
Granted, January  is not exactly the hottest season for the housing market — homes don't top the holiday gift list — but in February, all eyes move to the all-important spring season.
Even before a Fed move, the average rate on the popular 30-year fixed mortgage shot up from record lows immediately after the presidential election, as investors piled into the stock market and sold out of the bond market [mortgage rates loosely follow the yield of the U.S. 10-year Treasury].
They then continued to move slowly higher, with the resulting move going from about 3.5 percent to now 4.25 percent. The last time rates moved by that much, in June 2013, home sales suffered and house price gains dropped by half.
This time around, however, there is great debate over whether rising rates really matter to housing. After all, increasing rates are indicative of a stronger economy, and a stronger economy favors housing.
If interest rates are rising because the economy is growing more rapidly, then, typically, incomes also rise, and the rise in incomes offset the increase in the size of the mortgage payment, and housing goes just fine," said Doug Duncan, chief economist at Fannie Mae, in a recent interview with National Mortgage News.

Income growth is surely a driving factor for homeownership, but buying a home is the most emotional purchase a consumer can make. While a majority of current and prospective homeowners view the U.S. real estate market favorably, there is greater concern about how an increase in the Fed's benchmark interest rate, expected to be announced Wednesday, will hit housing affordability.
A report released Tuesday by Berkshire Hathaway HomeServices, a real estate brokerage, found 76 percent of current homeowners and 79 percent of prospective homeowners cite increasing interest rates as a challenge impacting today's housing market; those are 16 and 8 percentage-point jumps, respectively, from the same time last year — just before the central bank raised its benchmark rate for the first time in nearly a decade.
The survey also showed an increased number of buyers and owners would feel anxious if rates were to rise further. Perception is everything in housing.
"Mortgage rates remain near historic lows, although it may not seem that way to recent, first-time buyers and those considering a home purchase," said Stephen Phillips, president of Berkshire Hathaway HomeServices.
Real estate experts at Redfin, another real estate brokerage, predict that rates will not move that much higher in 2017, in fact no higher than 4.3 percent on the 30-year fixed. They also expect that access to credit will be easier:
"In 2016, large financial institutions such as Bank of America, JPMorgan, Wells Fargo and Quicken all introduced mortgages requiring as little as 1 percent to 3 percent down. We expect increases in the availability of low down payment mortgages to draw more millennial buyers into the housing market," said Nela Richardson, chief economist at Redfin.
Researchers at Zillow, a property listing and analytics company, surveyed consumer housing trends and found that buying a home is less tied to current mortgage rates and more closely linked to a consumer's financial well-being. Life events, such as job changes, promotions or change in the number of people in the household are the precipitating factors for a purchase.
"While those looking to buy a home are understandably concerned about the path of rates ahead, it's important to remember that borrowing costs remain exceptionally low by historical standards," said Erin Lantz, vice president of mortgages at Zillow.
"Rising rates may impact the location or size of the home they hope to purchase, but buyers that are fully committed to buying a home are unlikely to be swayed by the FOMC's [Federal Open Market Committee] decision to raise rates." 
Still, affordability is weakening for those who want to buy, especially first-time buyers. The number of homes available to the average first-time buyer fell more than 12 percent compared with 2015, according to Trulia, another real estate listing site owned by Zillow.
Starter homes make up less than one-quarter of available listings nationwide, while premium homes make up half. In addition, average first-time buyer households will need to spend 39 percent of monthly income to buy a home, which is nearly a 2 percentage-point increase over 2015.
The greatest barrier to a robust spring housing market next year is not, however, higher mortgage rates — it is lack of supply.
Listings dropped throughout 2016 compared with 2015 and show no signs of improving. While there are some signs of home price gains easing, especially in California, one of the nation's largest and priciest housing markets, sales cannot increase if there aren't more homes to buy. Homebuilders are still operating at well below historical norms, and while they increase production little by little, it is not nearly enough. Sellers are also staying put.
"We've seen housing tenure increase the past few years, and turnover is low relative to historical averages," said Richardson of Redfin. "The typical homeowner stays in their home twice as long as they did 15 years ago. An increase in rates will serve to strengthen this trend towards longer tenure and lock homeowners into their low-rate mortgages."
This happened after the rate jump in 2013 as well, and conditions for sellers are worse today — first and foremost that it's harder to find an affordable trade-up home. There is also more incentive for homeowners to trade up but keep their current home to rent.
"For a homeowner who has the gift of a 3.5 percent (or lower) 30-year fixed rate, it may pay to keep their home as an investment property even if they do decide to trade up," added Richardson.

Wednesday, January 4, 2017

2017 Real Estate Market Predictions from the Experts

In so many ways 2016 was an unprecedented, volatile and, for some, excruciating 12 months. And the housing market was not immune to the year’s whims. At the start experts anticipated a pick up in building activity, instead builders are still not producing enough homes. Meanwhile, home prices appreciated beyond expectations and mortgage rates toyed with record lows before crossing 4% for the first time in two years. "If the expectation was that the market would transition smoothly from deep red hot recovery to normal--that certainly didn’t happen," says Svenja Gudell, chief economist at real estate data firm Zillow.
Nevertheless, Gudell and others argue that on balance 2016 was a pretty good year for housing. National prices finally crossing the previous 2006 peak, mortgage rates remained historically low and there were some signs that Millennials, a generation which some feared would never buy homes, are beginning to enter the market. Through it all the election loomed large. In 2017 we'll see how profound it's effects.
Here are seven things housing experts expect to see in 2017:

1. Prices will continue to rise--but more slowly. 
Prices rose every month last year (through October) with the largest gains coming in the later half and a 5.61% increase in national. Experts expect prices will continue their climb, but gains will slow. "We believe price increases will hold steady despite slowing sales growth, because homebuyer demand is stronger now than it was at the same time last year, and because we foresee a small uptick in homes for sale," notes Nela Richardson, chief economist at real estate brokerage Redfin.
"With the current high consumer confidence numbers and low unemployment rate, affordability trends do not suggest an immediate reversal in home price trends," noted David Blitzer, chairman of the Index Committee at S&P Dow Jones Indices, in the December release of the Case-Shiller home price index. "Nevertheless, home prices cannot rise faster than incomes and inflation indefinitely.”
Redfin expects the median home sale prices to gain 5.3% in 2017 compared to 2016, which would not be a major change from the 5.5% year-over-year gain expected to close out this year. Zillow is forecasting the median home value to rise 3.2% from $192,500 between November 2016 to November 2017. Zillow's home value index rose 6.5% in the year ending November 30th.

2. Affordability will worsen. 
Wages are expected to grow in America's big cities this year, but the share of homes affordable to someone earning the median income is not. This trend, which has stymied many aspiring to buy their first home over the past few years, will be intensified by a continued shortage in low- to moderate-priced inventory and rising mortgage rates. "The irony of the modern housing market is that the places where we are seeing wage growth are places where people can't live because they are too un-affordable. There is a mismatch," says Nela Richardson, chief economist at real estate brokerage Redfin.
A decade ago a mismatch like this would not have been so apparent because buyers could get subprime loans, but now high credit is a requirement. The percent of new listings in the lowest price tier of the market has declined nearly every month in the last five years. Experts agree that even if builders are more active this year, they are unlikely to significantly add to the starter home stock in 2017.

3. Mortgage rates will be volatile. 
The two major political events of 2016 set mortgage rates moving in opposite directions. In June, the British vote to exit the European Union put rates near a record low. In November, the U.S. election of Donald Trump had the opposite effect, sending rates above 4% for the first time in two years. By historic standards rates are still low. In 2017 experts expect movement, but differ on where for the 30-year fixed rate will land. Estimates out there range from between 3.75% and 4.6%--not so far from where it is today.
"Mortgage rates going up is a bit of euphoria and optimism over [Trump's] promise to lower taxes, increase infrastructure spending and drive 4% econ growth," says Richardson. "As more details materialize and we get a realistic assessment, we will see rates bump around." Notes Gudell: "If you squint at line you will see nice upward trend, but it will happen at a volatile pace."
In December the Federal Reserve bumped short term interest rates o between 0.50% and 0.75%, the second hike in a decade. The 25 basis point move left rates low by historic standards and on did not have a huge impact on mortgage rates. However, the Fed's policy makers indicated they anticipate three hikes in 2017, which could have a larger effect. That's up from the two officials projected before Donald Trump was elected. That said, Fed projections can be taken with a grain of salt: they also originally thought they would hike three times in 2016.

4. Credit availability will improve--maybe. 
By and large early Trump administration priorities are not expected to deal directly with housing. However, the president-elect and his team have made it clear that they hope to roll back much of the post-crisis financial regulation laid out in the Dodd-Frank Act. In theory, this could open up banks to lend more freely to wide-range of would be buyers. Though not everyone is convinced this type of lending is the direction banks would go with any new found freedom. Meanwhile, there is speculation that Trump would return government-controlled mortgage companies Fannie Mae and Freddie Mac to private control. Investors have cheered the possibility, but some housing economists worry such a move would further restrict who could get credit to buy a home.

5. Supply will improve but remain short. 
Declining inventory was without a doubt the defining feature of the housing market in 2016. It led to price appreciation, as well as a hyper fast market for buyers and discouraged would-be-sellers who feared entering the buying fray. A complete turnaround is unlikely in 2017, but there are some signs the coming year could see a small bump in housing supply--at least on the new home front.
Homebuilder sentiment picked up late last year, as many expect Trump to be a friend to the industry. Meanwhile, strong demand should also encourage building. "Controlling for the number of households in the U.S., housing starts are still only 55% of the 50-year average," wrote Trulia Chief Economist Ralph McLaughlin. "The historical view looks like there’s also more room for housing starts to grow." Construction, however, is unlikely to improve the affordability picture because there is a growing premium for new homes and most building in recent years has been on the high-end, since builders feel they can get a better return there. 
When it comes to existing homes a phenomenon Richardson calls "rate lock" may constrain inventory. Homeowners who locked in a mortgage below 4% are likely to stay in low priced homes rather than upgrade, a pattern that last emerged when rates briefly rose in 2013.

6. More Millennials will become homeowners--and renters. 
According to Zillow half of all buyers are under age 36. Not every economist agrees with this assessment, however it is clear that Millennials will continue to make up a large and growing portion of the buyer pool. Of course much of this is due to the fact that Millennials--adults born after 1980--are now the largest adult generation and make up the greatest percentage of the workforce. Redfin expects Millennial homebuyers will move from the coasts to "inland markets" where starter homes are more affordable.

7. Competition will grow fiercer.
In 2017 sellers will maintain the edge over buyers as demand is expected to increase. In 2016 the typical homes stayed on the market for just 52 days, about a week faster than in 2015 and the fastest year since Redfin began measuring in 2009. The brokerage expects 2017 to be even faster.

Wednesday, December 14, 2016

Good Advise for Home Buyers or Sellers in 2017

Forget a tale of two cities: Extreme housing market fragmentation is now creating different experiences for home buyers and sellers in a wide range of locations and segments.

Nationally, home prices are expected to keep rising, albeit more slowly— 3.5% in 2017, vs. 4.5% in 2016, per Moody’s Analytics projections. But even more so than in recent years, your position is now going to hinge on what and where you’re buying or selling.
Hoping to escape a downtown condo for the suburbs? Your equity should go far: Small homes have seen much sharper price growth than larger ones, urban areas have appreciated faster than metro outskirts— and both trends are expected to continue in 2017.
If you’re in the reverse position, though, brace yourself: Inventory has tumbled among less expensive homes, and your money may not buy as much as you expect. Here are your best moves now:
Growing Families, Make Your Move
If you’re looking to trade up to a larger home, you’re in the housing market’s sweet spot, and the first part of 2017 should be a particularly good time to strike. Over the five years between 2011 and 2016, the average price on a two-bedroom house climbed 59% nationwide, while four-bedroom houses rose a more modest 41%, according to an analysis by Attom Data Solutions. Inventory has also risen at the higher end of the market, climbing almost 8% for homes in the $500,000 to $750,000 range.
Because you’re well positioned as a seller, and you want to walk away with as much money as possible for your next down payment, choose a higher offer over a speedier close, suggests Lawrence Yun, chief economist at the National Association of Realtors.
Aiming Small? Be Flexible
If you’re hoping to cash out and scale back—or if you’re a first-timer looking for a starter home—you face a tight market with low supply and greater competition from rival buyers. Yet the more flexible you are, the more choices you’ll have.
Willing to move farther from the city center, for instance? The average price per square foot in overall metro areas has risen 52% over the past five years, according to Redfin, but it has jumped 76% in the urban cores.
And while no one wants to tackle a major overhaul, buyers who are willing to make at least some upgrades can get a better deal, notes Svenja Gudell, Zillow’s chief economist. You won’t be alone: More than half of home owners who bought in the past year got a place that needed at least some updates, according to a recent Zillow survey.
Meanwhile, retirees looking to move to sunnier climes can profit from what are now bigger variations between U.S. metro areas than have existed at any time in the past two decades, Yun says. He singled out Greensboro, N.C., where home prices have slipped 0.3% over the past year, as a possible retirement destination.
Lock In a Lower Loan Rate
If you’re ready to buy, now is a good time to pull the trigger on financing, since the record-low mortgage rates seen in 2016 aren’t expected to last. Average rates could rise as much as half a percent in the next year, according to Dan Smith, president of Atlanta-based PrivatePlus Mortgage. That would mean an $864 increase in annual payments on a $250,000 mortgage if rates jump to 4.2% from the 3.7% average on 30-year fixed loans in November.

Thursday, December 8, 2016

10 of the Hottest Real Estate Markets for 2017

We’ve predicted a slight slowdown for the US Real Estate market next year, but the realtor.com economic team is forecasting that most of the nation’s hottest markets are going to keep blazing in 2017. And where will it be hottest? Head west! According to our forecasts, the western U.S. will continue to lead the nation in prices and sales.
“The top 10 markets all benefit from strong growth dynamics: population, jobs, and households,” says Jonathan Smoke, realtor.com’s chief economist, who analyzed the country’s 100 largest metropolitan markets for their growth potential. “They all have low unemployment that’s heading lower, which buoys consumer confidence.”
Western cities account for 11 of the top 25 metro markets on our list, including five in California. But whatever their location, all the top markets have in common relatively affordable rental prices, low unemployment, large populations of millennials and baby boomers, as well as a high number of listing views on realtor.com. The top 10 are forecast to see average price gains of 5.8% and sales growth of 6.3%, exceeding next year’s anticipated national growth of 3.9% and 1.9%, respectively.

And while the limited availability of homes for sale continues to be a problem for home buyers but a boon to homeowners, these markets are seeing growth in new construction that eases the supply shortage somewhat. Still, there isn’t enough new construction to keep up with the growth, Smoke says—and so prices continue to rise at above-average rates.
However, compared with last year, price growth in eight of the top 10 markets is expected to slow down, with only Los Angeles and Tucson, AZ, showing bigger increases over last year.
For all their commonalities, the top 10 metro markets have different buying patterns and price levels, Smoke notes. Millennials are more of a buying force in Boston and Los Angeles, while retiring boomers make their presence felt in Phoenix; Jacksonville and Orlando, FL; Raleigh, NC; Tucson; and Portland, OR. Veterans, meanwhile, come out in force in Jacksonville and Tucson.
See metrics for the top 20 markets below, and for the full list of 100 markets, check out the 2017 Housing Forecast:

RankTop MarketsMedian PricePrice GrowthSales Growth
1Phoenix, AZ$300,0005.94%7.24%
2Los Angeles, CA$675,0006.90%6.03%
3Boston, MA$480,0006.09%6.32%
4Sacramento, CA$420,0007.18%4.92%
5Riverside, CA$350,0004.98%6.88%
6Jacksonville, FL$284,0004.79%7.03%
7Orlando, FL$272,0005.69%6.10%
8Raleigh, NC$312,0004.16%7.55%
9Tucson, AZ$237,0006.10%5.47%
10Portland, OR$420,0006.55%5.02%
11Durham, NC$320,0002.55%8.95%
12Colorado Springs, CO$335,0004.77%6.71%
13Jackson, MS$207,0001.98%9.44%
14Detroit, MI$195,0005.17%6.22%
15San Diego, CA$620,0006.47%4.89%
16Salt Lake City, UT$345,0006.66%4.67%
17Deltona, FL$260,0003.10%8.23%
18Provo, UT$334,0005.16%5.84%
19Austin, TX$385,0003.50%7.40%
20Seattle, WA$430,0007.36%3.41%

Friday, December 2, 2016

5 Trends That Will Dominate Real Estate in 2017

We won’t pretend to know everything that 2017 will bring—heck, 2016 sure surprised us—but we’re pretty certain there will be changes. A lot of them. And while the surprise triumph of Donald Trump in the presidential election won’t alter the fundamentals shaping the 2017 real estate market, its impact is already being felt.
We’ve seen interest rates jump since the election, a movement that’s likely to affect the youngest generation of home buyers.
Just like last year, realtor.com®‘s economic data team analyzed our market data and economic indicators to come up with a picture of the key housing trends for 2017. As we prepare to bid farewell to 2016, it looks like we’ll be saying goodbye to the last of the record-low interest rates of the past few years, too. Interest rates have shot up 40 basis points, or 0.4 percentage points, since Trump’s election.
And that’s significant, especially for first-time home buyers, including many millennials.
“With more than 95% of first-time home buyers dependent on financing their home purchase, and a majority of first-time buyers reporting one or more financial challenges, the uptick we’ve already seen may price some first-timers out of the market,” says Chief Economist Jonathan Smoke, who pulled together the realtor.com 2017 housing forecast.
According to the forecast, the 2017 national real estate market is predicted to slow compared with the past two years, across the majority of economic indicators studied.  But maybe “slowdown” isn’t quite the right description.
“I would characterize our 2017 forecast as a moderation, as opposed to a slowdown,” says Smoke. “The pace of growth is still strong and, for pricing, still represents an above-average level of appreciation.”
Smoke says we’re mostly reverting to normal prices, after years of appreciation as the housing market recovered from its 2008 crash.
Recovery is good, but the flip side is that pricing is tougher for consumers, Smoke points out.
“Throw in higher mortgage rates, and it becomes more challenging to be able to afford homes compared to what it was over the course of this recovery,” he says.

Here are some of the key predictions for 2017:

1. Millennials and boomers will move markets

In 2017, the U.S. real estate market will be in the middle of two massive demographic waves that will power demand for at least the next 10 years.
Millennials and baby boomers, the two largest American generations in history, are both approaching life stages that typically motivate people to buy a home: marriage, having children, retirement, and becoming empty nesters.
Smoke predicts that millennials will make up 33% of buyers in 2017, lower than his original estimate due to those increasing interest rates.

2. Millennials will look to the Midwest

While the financial picture may look grim for our youngest home buyers, the Midwest, with its affordable cities, still looks good. We believe Midwestern cities will continue to beat the national average in terms of its proportion of millennial home buyers in 2017. Leading the pack are Madison, WI; Columbus, OH; Omaha, NE; Des Moines, IA; and Minneapolis.
“It’s easier for millennials to buy in more affordable markets like in the Midwest,” Smoke says. “We’re also seeing large numbers of millennials buying in Midwestern markets with or near big universities. So part of this is an effect of recent graduates with good jobs being able to settle down in these more affordable markets.”

3. Price appreciation will slow down

Nationally, home prices are forecast to slow to 3.9% growth year over year, from an estimated 4.9% in 2016.
“Prices are still likely to go up at an above-average pace as long as supply remains so tight,” Smoke says. “The inventory problem is not going away.”
Of the top 100 largest metros in the country, 26 markets are expected to see price acceleration of 1 percentage point or more, with Greensboro, NC; Akron, OH; and Baltimore experiencing the largest gains. Likewise, 46 markets are expected to see a slowdown in price growth of 1 percentage point or more, with Lakeland, FL; Durham, NC; and Jackson, MS, undergoing the biggest downshift.

4. Fewer homes, fast-moving markets

The inventory of homes available for sale is currently down an average of 11% year over year in the top 100 U.S. metropolitan markets—and the conditions limiting home supply are not expected to change in 2017. The median age of inventory, or the time it takes a home to sell, is currently 68 days in the top 100 metros, which is 14%, or 11 days, faster than the national average.

5. The West will lead the way

We’re expecting metropolitan markets in the West will see a price increase of 5.8% and sales increase of 4.7%, much higher than the U.S. overall. These markets also dominate the ranking of the realtor.com 2017 top housing markets (more on that tomorrow), making up five of the top 10 markets on the list: Los Angeles, Sacramento, and Riverside in California; Tucson, AZ; and Portland, OR.