Weekly Mortgage and Real Estate Report – Week of January 29, 2018

Double Feature


As we have mentioned previously, it has already been a busy year with major storms, wildfires that turned into mudslides, a new tax plan and the in-fighting in Washington seemingly getting worse. And that is just the first month of the year. We end the first month and start the second month with another busy week, at least on the economic front. This week we have the first meeting of the year for the Federal Reserve Board and also the first reading on jobs which contains 2018 data.

Thus far this year it seems that the economy continues to move forward, even without the anticipated effects of the tax plan. Of course, the anticipation itself has fueled much optimism which can be seen in record stock market closes. The performance of the economy is all about optimism. Since the Fed just raised their benchmark rates in mid-December, most analysts are not expecting another increase so soon. However, even if they do not raise short-term rates at this meeting, they will be discussing how much and how quickly they will be raising rates this year.

How much and how fast will depend upon the strength of the economy. And major evidence of this strength will be released a few days after they meet in the form of the January employment report. December’s job gains were a bit under forecast, and thus we will be looking at not only January’s numbers, but revisions to the previous months’ data. A really strong report could move the Fed to raise rates at their next meeting in March. Even if they do not, one thing is certain — unless something happens to derail the economy, their only move is up this year.

 Renters are feeling the financial pinch in housing. Median rent across the nation rose 2.6 percent since last December, the fastest pace of appreciation since June 2016, to a median payment of $1,439 per month — the highest median rent Zillow has ever reported. Zillow also noted there was synergy between rent prices and incomes, with the latter increasing 2.5 percent year-over-year. “After about a two-year slowdown, rent growth is starting to pick back up across the nation,” said Zillow Senior Economist Aaron Terrazas. “The slowdown in rental appreciation, combined with consistent income growth, gave renters some reprieve from worsening rental affordability over the past few years. But as rental growth begins to catch up with income growth, affordability will deteriorate, placing a squeeze on budget-constrained renters. Looking into 2018, rent is expected to continue gaining steam in growing employment centers.” Source: ZillowA vast majority of Americans are confident that they will be able to pay off their home loans and achieve other long-term financial goals, according to the results of an Investor Pulse Poll released by Morgan Stanley. The survey revealed that 91% of respondents believed that they are on track to achieve their long-term financial goals. Paying off a home loan was revealed to be a priority long-term goal for the respondents at 32%. Other top long-term goals were saving for retirement at 35% and transitioning wealth to the next generation at 33%. Slightly fewer millennials, or those between 25 and 35, were confident that they were on their way to reaching their long-term financial goals; 88% of respondents in the age group said they believed they were on track. Their long-term financial priorities were similar with those of all respondents, with 42% saying paying off a mortgage was a top goal. Other priorities were saving for retirement at 44% and paying for the education of a child or grandchild at 35%. Source: Morgan Stanley

American Enterprise Institute’s Center on Housing Markets and Finance Co-director Edward Pinto gave four points he expects to see from the housing market in 2018. Many of his predictions, including low inventory and rising home prices, are shared by other housing experts. However, Pinto forecasted home prices will increase at a faster rate in 2018, while other experts expect they will slow down.

  • The historically tight supply of single-family homes will tighten further in 2018 after hitting a record low in November 2017.
  • The national home price boom that began in mid-2012, will continue, and given the unprecedented low levels of inventory, will even accelerate further:
  • First-time buyers will face even higher home price gains for entry level homes and first-time buyers will continue to take on even more leverage in an effort to keep up with the home price gains on entry level homes. Source: HousingWire

Weekly Mortgage and Real Estate Report – Week of January 22, 2018

The Downside is the Upside 

The stock market is setting records. We have a new tax plan which lowers taxes significantly for companies and moderately for individuals. We just had a decent retail holiday season with higher home sales closing out the year. In other words–everything is looking up for the economy. Most economists are cautiously optimistic that the good times will continue through at least 2018.

Unfortunately, with the economy gaining momentum, some of the movements upwards are actually turning out to be downers. More specifically, we are referring to interest rates and oil prices. The price of oil is now over $60 per barrel after oscillating above and below the $50 level for more than a year. Certainly, higher oil prices is the price we have to pay for having a better economy that increases oil demand. However, oil prices could still fall if the news on the supply side becomes more optimistic. There have been plenty of forecasts showing at least the potential of this occurring.

Not so with interest rates. You can’t pump money out of the ground. The better economy has caused the Federal Reserve Board to raise short-term interest rates five times over the past two years. Long-term rates have also been trending upward as the economy has improved. Most are not expecting another increase by the Fed when they meet at the end of this month. But that does not mean that long-term rates won’t keep rising if we get the news that the economy is still rolling. As a matter of fact, the threat of higher interest rates is one reason that real estate is so hot. Most want to purchase before rates go up further. Will rates keep moving up? That depends upon whether the economy stays strong in 2018.

 Suburban and urban areas are combining to create a new kind of living style known as the “surban.” Many in the real estate industry are predicting it to be one of the hottest housing trends to watch. A surban offers greater walkability to retail and restaurants from a home or apartment, but in a suburban area. It’s a blend of both suburbia and city life. Previously, urban planners dubbed these areas “mixed-use.” These spots tend to be anchored by highly rated schools, low crime rates, and shopping areas within walking distance. Surbans are dominated by several housing options, such as single-family residences, condos, and townhomes, explains Len Elder, an instructor at McKissock Learning and Superior School of Real Estate, in a recent article at RISMedia. The Urban Land Institute estimates that surban areas will draw at least 80 percent of new households and attract the most families over the next decade. Suburban downtowns are already growing nationwide. Surban developments may replace shopping centers, and more retail stores within walking distances of housing likely will morph into selling more experiences rather than merely just goods, Elder writes. “For the most part, housing areas have historically been categorized based on single-family residences, townhomes, condominiums or multifamily buildings,” Elder notes. “The development and advancement of surban living have already begun blending housing options in a selected area. It will not be uncommon to find townhomes and condos mixed in with single-family residences. Ownership and rentals will exist in closer proximity to widen the retail base of the homes and provide an array of options for millennials.” Source: RIS MediaAs 2017 came to a close, Zillow has estimated the total value of all U.S. homes is now $31.8 trillion. This 6.5 percent value increase is the fasted annual growth in four years. As for the nation’s renters, they spent a record $485.6 billion in 2017, an increase of $4.9 billion from 2016. “This was a record year for home values as the national housing stock reached record heights in 2017,” said Zillow Senior Economist Aaron Terrazas. “Strong demand from buyers and the ongoing inventory shortage keep pushing values higher, especially in some of the nation’s booming coastal markets. Renters spent more than ever on rent this year, but the amount they spent grew at the slowest pace in recent years as more renters transitioned into homeownership and new rental supply slowed rent growth across the country. Despite recent changes to federal tax laws that have historically made homeownership financially attractive, the long-term dynamics pushing up home values and rents are unlikely to change significantly in 2018.” Source: National Mortgage Professional

An analysis of 21 million first-time homebuyers over a 24-year period shows that demand in the third quarter of 2017 was the highest since the millennium. Genworth Mortgage Insurance says that 601,000 homes were bought by first-timers in the three months to the end of September 2017, up from 567,000 a year earlier, a 6% rise. This was contrary to the wider housing market with repeat buyers in the quarter down 5% year-over-year (888,000) as affordability issues for movers is exacerbated by low supply. First-time buyers accounted for 40% of all homes bought. “First-time homebuyers bought the most homes in a quarter since the third quarter of 2000, buoying the broader housing market that had slowed during this period (-1% growth compared to Q3 of 2016). The surge in first-time homebuyer demand, and the decline in overall purchases, was driven by supply-demand imbalances in today’s housing market,” said Genworth chief economist Tian Liu. Source: Mortgage Professional America

Weekly Mortgage and Real Estate Report – Week of January 15, 2018

Mid-January Report 

Believe it or not, we are halfway through the first month of the year. While a few weeks passing may not seem like much, these are very exciting times. Americans are reacting to a new tax plan, stocks have already broken records and we have had the first natural disaster of the year — a bomb-cyclone. A few weeks ago, most of us had never heard of a bomb-cyclone. And even though we did not know, since we are publishing from the east coast, we certainly felt the cold. When it snows in Florida, it is definitely a weather event.

The question is–what have we learned since the beginning of the year? We have learned that the stock market’s surge in anticipation of the adoption of the tax plan is not over now that the plan has come to fruition. There was some concern that all the gains were built into the pricing of stocks, but the New Year has brought more good news in this regard. Of course, this does not mean that the gains will last all year — but it was a good start.

In addition, stocks are not the only items that are going up in price. Oil prices have topped $60 per barrel for the first time since 2015. Interest rates have also risen, though the move has been more pronounced with regard to shorter-term rates. Again, this does not mean that oil prices and rates are moving up all year. On the other hand, if the economy does continue to expand and this expansion accelerates because of lower tax rates, it makes sense that rates and commodity prices will move up. Yes, it is hard to get a feel for a year based upon two weeks of activity, but we already have some interesting news to reflect upon this year.

 Existing home sales increased more than expected in November, hitting their highest level in nearly 11 years, the latest indication that housing was regaining momentum after almost stalling this year. The report from the National Association of Realtors® also added to data ranging from the labor market to retail sales that have suggested the economy was ending 2017 on a strong note. “The greater home sales will stoke the fires for stronger economic growth next year as consumers spend more to furnish their new homes with new appliances and furniture and all the decorations and trimmings,” said Chris Rupkey, chief economist MUFG in New York. Existing home sales surged 5.6 percent to a seasonally adjusted annual rate of 5.81 million units last month amid continued recovery in areas in the South ravaged by Hurricanes Harvey and Irma, and solid gains in other parts of the country. That was the highest level since December 2006 and marked the third straight monthly rise. Economists had forecast home sales rising only 0.9 percent to a 5.52 million-unit rate in November. Source: ReutersThough many are stuck renting out of financial necessity, millennials show the same desire for homeownership as their parents and grandparents—and traditional suburban properties appeal to them more than renting or buying in cities, Bloomberg reports. Many economists have acknowledged that the slow path to homeownership for young adults is contributing to record-low homeownership rates. But for two consecutive quarters, the homeownership rate among those ages 35 and younger has been on the rise. Some economists predict that millennials will eventually own homes at similar rates as their parents. Rents, however, are taking a bigger bite out of household budgets, making it difficult for young adults to save enough for a down payment. Young adults who are ready for homeownership are also facing a shortage of homes in the market. “The result is that price gains continue to exceed income growth through scarcity, particularly in that smaller home market, which is the hardest market for a builder to essentially reach and build to these days,” Robert Dietz, chief economist at the National Association of Home Builders, told Bloomberg. Overall, though, economists seem to be upbeat about millennials. They’re getting married and having children later than their parents did, but they are starting to “cross barriers typically associated with buying,” Bloomberg reports. “Right now, probably a third of our housing business is young couples coming out of the apartments,” Chris Nelson, a builder in Simsbury, Conn., told Bloomberg. “We really think that’s just the beginning—that over the next three to five years, we’re going to see a ton of people coming out of the apartments, buying homes.” Source: Bloomberg

America’s seniors are increasingly opting to stay in their own homes as they get older, which will generate home refinances and HELOCs. A survey by HomeAdvisor found that aging homeowners are taking steps such as installing smart thermostats and replacing appliances to make their homes more efficient and easier to live in, rather than age-specific enhancements. “By taking a holistic approach to home improvement, homeowners will get their homes in good working order before aging-specific home improvements become necessary,” said Marianne Cusato, Adjunct Associate Professor at the University of Notre Dame’s School of Architecture. “Take the front walkway for example. If there are cracks or dips in the concrete, homeowners need to address those existing safety issues before completing a project like adding grab bars, which they may or may not need in the future.” The HomeAdvisor Aging in Place Report 2017 reveals that many seniors have watched friends or relatives struggle with living in their own homes as they age and are determined not to face the same issues. Almost half of the over 75s polled said they have renovated their homes in anticipation of getting older. Source: Mortgage Professional America

Weekly Mortgage and Real Estate Report – Week of January 8, 2018

Amazing Consistently 

After a deep recession in which we lost approximately eight million jobs, America’s economy has been quite consistent with regard to the creation of jobs during the past several years. For example, during the period of 2013 to 2017, just over 10 million jobs were created. That comes to just over 200,000 jobs per month. Though the numbers are still preliminary, the December jobs report indicates that we have added 2.1 million jobs in 2017, which is slightly below, but very close to what we have created in the past four years.

This is why our country’s unemployment rate has fallen from 10% to December’s reading of 4.1%, a number most economists consider close to full employment. This is quite a dramatic drop, and the next question is — where do we go from here? Does full employment mean that we can’t improve? There are two numbers which indicate that there is still room for improvement. The labor participation rate of 62.7% is close to long-term lows and attracting the long-term unemployed back into the economy is still an important goal.

We can also improve upon the types of jobs created. Wage growth of only 2.5% over the past year tells us that we are not creating enough high-paying jobs. Thus, we have come a very long-way. The economy is in much better shape than it was during our recession of a decade ago. But there is still room to add more jobs and better paying jobs — without the economy being beset by inflation. Inflation is a concern because with inflation comes higher interest rates and low rates have buoyed our recovery.

 Despite the efforts of housing counselors, real estate agents, lenders and the Consumer Financial Protection Bureau (CFPB), many Americans lack basic knowledge of home loans and the home-buying process. A recent survey by FreeandClear.com, a site that provides mortgage education, found that 20 percent of borrowers think it is impossible to buy a home with a down payment of less than 5 percent. Yet the FHA loan program requires just 3.5 percent, VA loans have no down payment requirement and conventional loans are available with 3 percent down payment options. The primary source of information about home loans, as with most subjects today, is the Internet, with 24 percent of borrowers researching on various sites. However, just 2 percent of borrowers said they learned about home financing from the CFPB. The survey found that 30 percent chose to work with their existing bank and 29 percent chose a lender based on their real estate agent’s referral. Borrowers appear to err on the side of caution when borrowing. When asked what percentage of a buyer’s gross income should be spent on housing costs and all other debt repayment, half answered 34 percent, which is lower than the maximum allowance of 43 percent for most loans. Source: The Washington PostWe’ve heard the dire predictions about the suburbs: they’re “boring” and “unimaginative.” Shopping malls are dying. Millennials would rather live in cities. Not so fast, says Zillow Inc., Seattle. The company predicted a shift toward suburban living next year as low inventory and rising construction costs reach a tipping point, forcing builders and buyers to consider new options–even “old” options such as suburban living. Next year, Zillow said, current homeowners will look to remodel their homes rather than sell, further limiting inventory, and with limited space to add new homes in city centers, suburban sprawl will make a return. Newly built homes will be designed with both millennials and aging adults in mind, as both generations are looking for similar features. “We’re on the other side of the housing recovery, and the real estate market looks quite different than it did 15 or even five years ago,” said Zillow Chief Economist Svenja Gudell. “We have a huge generation entering the market. They really want to be homeowners, and they’re faced with an inventory crisis that leaves them with few options.” Gudell said home builders can’t ignore this “hungry” market. “We’ll start to see a rise in new construction at the more affordable end, instead of all the luxury buildings we’ve seen lately,” she said. “However, builders are also facing high costs, so instead of adding density in cities where zoning laws and land costs often preclude affordable building, we’ll see the suburbs grow and expand outward.” Source: Zillow

The rental market’s decade-long boom may soon reach its finale, as fewer new renter households are forming, rental vacancies are rising, and rent increases are slowing, according to the 2017 America’s Rental Housing report, released by the Joint Center for Housing Studies of Harvard University. Still, rents remain high and continue to take a significant chunk out of households’ monthly incomes—more than what most experts consider “affordable.” “This year’s report paints a complicated picture of the rental market,” says Christopher Herbert, managing director of the Joint Center. “We’re finally seeing the record growth in renters slow down, but while the market has responded to rental housing needs for higher-income households, there are alarming trends that suggest a growing inability to supply housing that is affordable for middle- and working-class renters, let alone those with very low incomes. Addressing these challenges will require bold leadership and hard choices from both the public and private sector.” While renters tend to skew younger and have lower incomes, a growing share are older and more financially stable, the report shows. The number of renter households earning more than $100,000 per year rose from 3.3 million in 2006 to 6.1 million in 2016. And more rental inventory is catering to the high end of the market. The share of new units renting for $1,500 or more rose from 15 percent in 2001 to 40 percent in 2016, according to the report. Meanwhile, the share of new units renting for less than $850 per month dropped from 42 percent to 18 percent. Source: Joint Center for Housing Studies of Harvard University

Weekly Mortgage and Real Estate Report – Week of January 1, 2018

Tax Law Makes Projections Even HarderIt is the first of the year and we have been inundated with projections regarding the economy, interest rates, real estate and more. It is always hard to predict the future and this year is going to be even harder to predict because of a new variable — the tax law. As we have mentioned previously, the lowering of tax rates is likely to stimulate an already strengthening economy. This should be good news for jobs, retailers and more. The question remains how strong will the economy get and what will the effects be on interest rates, oil prices — and ultimately inflation. We have already seen rates and oil prices creeping up in anticipation of the action.

When we move to real estate, the prediction game gets even harder. Economists were already predicting continued inventory shortages, more new homes coming on-line and moderating price increases. But the change in the standard and mortgage deductions will certainly have to be factored into the equation. The doubling of the standard deduction means that those purchasing on the lower end of the scale are more likely to not take advantage of the deduction of interest on home loans. Likewise, those who own higher priced homes are less likely to make a move because they would lose part of their present deduction.

Here is the good news. There are four solid economic reasons to own a home and the tax deduction is only one of these four. The home will still serve as a leveraged investment, a forced savings plan and protection against inflation. As a matter of fact, we feel the tax law’s effect upon interest rates may be a more important factor in determining the direction of the real estate markets than the tweaks made in the deductions. In this regard, those who feel that rates will ultimately rise because of the economic effects of the law may very well be inclined to purchase now rather than later. 

 The new tax law brings many changes for individuals and corporations. While some of the individual changes may not appear to be totally positive for home ownership, the net-effect upon housing could very well turn out to be positive. Putting more spending money in the hands of consumers could boost the economy, which would create jobs and more demand for housing.The new law did not change the benefit of owning and then selling a home as compared to other investments, as the capital gains exclusion for primary residences was not touched. Therefore, while the benefit of tax write-offs may become less important, a home could become an even better investment. In addition to the investment benefit, homes also provide protection against inflation and forced savings plans, while renting provides none of these benefits.The tax law is designed to put more money in the hands of consumers by lowering the tax rates and increasing the standard deduction. The higher standard deduction will mean that fewer individuals will itemize deductions. The maximum mortgage amount for which interest can be written off has been lowered from one million dollars to $750,000, though this provision does not apply to existing financing in place. Along with the lower maximum loan amount, deductions for state and local income and property taxes are capped at $10,000 starting in 2018 and home equity loan interest is no longer deductible.

Note that the tax law is very new, and the IRS has not issued regulations or instructions to implement the law. This information provided is based only upon what has been published by the media reporting upon the law. We expect many clarifications, and perhaps even technical amendments, to the law in the coming months. We suggest you speak with your accountant for tax advice based upon the new law and for updates as they are issued. If you do not have a relationship with a tax advisor, we would be happy to refer you to one when you have the need.