Month: July 2015

Home sales reach 8-year highs but what comes next?

Gradually rising rates shouldn’t dampen market

Housing activity has strengthened in recent months, as gains in both new and existing home sales in May pushed total sales up to their highest level in eight years.

Analysts say a combination of job creation growth and an overdue upturn in mortgage lending, along with high levels of consumer confidence should ensure that this strength continues.

But for how long, and what could change it? What’s it mean for the rest of 2015?

“From 5.4 million in 2014, we expect total home sales to average at least 5.7 million this year, before rising to around 6 million by 2017. That would be the strongest performance of home sales in 10 years,” says Ed Stansfield, chief property economist for Capital Economics.

Stansfield says events both domestic and abroad are either good for housing, or won’t have any negative affect.

“The U.S. economy and financial system’s links with Greece are minimal, while exports to the entire EU accounted for just 1.5% of US GDP last year. As a result, further turmoil in the region – even a Greek exit from the euro-zone – is unlikely to throw the economy off course,” Stansfield says. “What’s more, beyond a temporary impact on investor sentiment, the slump in China’s equity market is unlikely to have much effect on the US economy either.”

Indeed, he said, evidence of a second quarter rebound in economic growth is now widespread.

On the issue of the job market, June’s Employment Report looked fairly strong, with non-farm payrolls rising by 223,000 and the unemployment rate falling to 5.3%.

Looking deeper, though, the details were mixed.

There were downward revisions to previous payrolls figures, while the drop in the unemployment rate was largely due to a sizeable decline in the labor force, which shows an underlying weakness.

Then there’s the issue of mortgage rates. Mortgage interest rates have risen steadily in recent months.

At 4.17% on average in June, the MBA’s measure of 30-year fixed mortgage rates was at its highest level since November last year, having increased by around 30 bps in the past two months alone.

But recently, Stansfield noted, Treasury yields have dropped back due to increased safe-haven flows resulting from the crisis in the euro-zone.

“It’s possible that mortgage rates could therefore follow yields lower, at least in the short term,” he said.

Indeed, that’s what happened. Mortgage rates stopped their upward trend and dropped back down due to global uncertainty, the latest Freddie Mac Primary Mortgage Market Survey said.

The 30-year fixed-rate mortgage averaged 4.04% for the week ended July 9, down fromlast week’s average of 4.08%. A year ago, the 30-year FRM averaged 4.15%.

Still, the inevitable rise won’t hit housing too hard, Stansfield argued.

“The 1% point rise in mortgage interest rates will not be enough to cause a significant deterioration in affordability,” he said. “We estimate that the average monthly mortgage payment equates to around 15% of median family income. We expect this to rise to no more than 18% by the end of next year.”

Home purchase applications once again weathered the rise in interest rates by edging up by 1% in June from May’s levels.

“The pace of growth has certainly slowed, and there is still a significant gap between applications and home sales. Nonetheless, the conditions seem to be in place for a more meaningful, sustained upturn,” he said.

For the first time in at least five years, most consumers think that now would be a good time to sell a home, if recent surveys are right.

May home prices nationwide, including distressed sales, increased by 6.3% in May 2015 compared with May 2014, according to the home price report from CoreLogic (CLGX).

This change represents 39 months of consecutive year-over-year increases in home prices nationally. On a month-over-month basis, home prices nationwide, including distressed sales, increased by 1.7% in May 2015 compared with April 2015.

“Mortgage rates on 30-year fixed-rate loans remained below 4% through May, helping to fuel home-purchase activity,” said Frank Nothaft, chief economist for CoreLogic. “Our homes-for-sale listing data shows that markets with high demand and limited supply, such as San Francisco, are recording double-digit appreciation rates over the past year.”

The surge in the rate of monthly price gains shown by the CoreLogic index at the start of the year always looked odd when the economy contracted in the first quarter and consumer spending was unusually weak, Stansfield said.

Are Millennials sold on using a real estate agent?

Yes, but it’s a close call

Do Millennials, or first-time homebuyers for that matter, want to use a real estate agent? The majority do, but it’s a pretty close call.

This seems to be a reoccurring debate in the market as firms like Zillow (Z) or Redfin start to offer a lot more options in online shopping.

Digital Risk recently conducted a housing survey on Millennials in the housing market, surveying 1,344 Millennials who are between the ages of 18 and 34, distributed nationally by their age, gender and census geography.

The survey asked three telling questions about the role of real estate agents:

  1. Where did you find the home you most recently purchased?
  2. Would you prefer to search for a home through a real estate agent or on your own?
  3. What resources did you find most helpful in your home search?

This first set of charts includes all the responses from Millennials.

Click to enlarge

Digital Risk

Digital Risk

Digital Risk

This second set of charts breaks out respondents who are interested in purchasing a home within the next five years.

Digital Risk

Digital Risk

Digital Risk

Sources: (Digital Risk)

Although the helpfulness and benefit of a real estate agent still wins the majority of these buyers, the gap is narrow.

This article from Yahoo News does a good job explaining the important factors in choosing an agent and lists nine red flags to watch for when choosing one.

Here is just one example of what to watch for: The agent doesn’t know the real estate landscape in your neighborhood.

Finding a neighborhood expert is especially important in areas where moving a block can raise or lower the value of a home by $100,000. An agent who specializes in a neighborhood may also be in touch with buyers who are looking for a home just like yours or sellers who haven’t put their home on the market yet. 

As for why Millennials might not want to use a real estate agent, I think there are cases where it just isn’t necessary.

Before I go on, let me say that I have not purchased a home before, and despite reporting on the housing market daily, there is still a lot I have to learn. I do welcome your advice in the comments. However, I do fit into this survey’s requirements of someone being between the ages of 18 and 34 who wants to buy a home in the next five years.

Right now, it’s a seller’s market in my area and having an agent could make the difference in landing a house or not, especially if they have connections. But what if it was a buyer’s market or I didn’t live in a hot housing metro? Depending on the situation, there is a lot to be gleaned from the Internet. And given the status of the market and my situation, it could persuade someone to not use an agent.

There are a lot of real estate agents who know what they are talking about and have been in business awhile. I simply want to present some reasons for why I see Millennials veering away from that choice.

Look at the facts: We love technology. Approximately 94% of Millennials are active users of online banking, 72% are active users of mobile banking and 92% are active users of social media, an Accenture’s report on the “Digital Disruption in Banking” revealed.

Millennials are changing the face of housing because of what they want and expect.

Yellen reiterates rates likely to increase this year

Will the Fed finally begin normalizing monetary policy?

Federal Reserve Chair Janet Yellen reaffirmed in a speech to The City Club of Cleveland that she still expects it will be appropriate later this year to take the first step to raise the federal funds rate and begin normalizing monetary policy.

“My own outlook for the economy and inflation is broadly consistent with the central tendency of the projections submitted by FOMC participants at the time of our June meeting,” Yellen said.

“But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step,” she added.

Back in May, Yellen said in a speech at the Providence Chamber of Commerce in Providence, Rhode Island, that the Fed is seeing widespread economic improvement and expects that improvement to continue. And if the economy improves as expected, she believes it will be “appropriate” for the Fed to raise the Federal Funds Rate this year, which in turn, would affect mortgage interest rates.

Although Yellen noted that many of the fundamental factors underlying U.S. economic activity are solid and should lead to some pickup in the pace of economic growth in the coming years, there are still a couple factors that could restrain economic growth.

1. First, business owners and managers remain cautious and have not substantially increased their capital expenditures despite the solid fundamentals and brighter prospects for consumer spending. Businesses are holding large amounts of cash on their balance sheets, which may suggest that greater risk aversion is playing a role. Indeed, some economic analysis suggests that uncertainty about the strength of the recovery and about government economic policies could be contributing to the restraint in business investment.

2. A second factor that could restrain economic growth regards housing. While national home prices have been rising for a few years and home sales have improved recently, residential construction has remained quite soft. Many households still find it difficult to obtain mortgage credit, but, more generally, the weak job market and slow wage gains in recent years appear to have induced people to double-up on housing.

So what’s the current status of the Fed?

Looking at the latest minutes from the June meeting of the Federal Open Market Committee, nearly all the committee members and the Federal Reserve are still hesitant to increase the federal funds rate.

Despite signs of economic progress, only one of the 10 FOMC members was ready to increase the federal funds rate during the June meeting.

“The committee concluded that, although it had seen some progress, the conditions warranting an increase in the target range for the federal funds rate had not yet been met, and that additional information on the outlook, particularly for labor markets and inflation, would be necessary before deciding to implement such an increase,” the FOMC minutes stated.

Clear Capital: Housing the second half of 2015 not so hot

Reaffirms this is a “non-growth year”

The housing forecast for the second half of 2015 fails to show any positive data, with trends predicted to go downhill.

According to the latest market report from analytics firm Clear Capital, nationally, the data is more of the same. Data through June looks similar to data through May 2015, with no change in quarterly growth at 0.6% and a slight drop of 0.1% in yearly growth, from 5.3% to 5.2%.

What’s worse is that the best of the year is already past since the spring and summer seasons typically reflect the peak of the housing demand cycle. And 0.6% quarterly growth is a foreboding sign of how the remainder of 2015 may play out, the report explained.

“With a first full look of the spring buying season and six-month update to the forecast, our data through June confirms our initial projection that 2015 would be a non-growth year,” said Alex Villacorta, vice president of research and analytics at Clear Capital.

“In January 2015, we forecasted total 2015 national growth would come in at 1.3%, more than five percentage points from where we ended 2014 at 6.7% national growth. Here we are six months later, and there is very little evidence to change our view that the year will end up with price growth coming in just around the rate of inflation. Our adjusted forecast calls for year-end national growth of 2.6%, falling within our initial projected range of between 1% to 3%,” Villacorta continued.

The numbers don’t look too much better at the regional level, with growth across all regions remaining flat.

Click to enlarge

Clear Capital

(Source: Clear Capital)

In terms of price growth, the West continues to be strongest at 1% quarterly growth, while the Midwest saw an increase in quarterly growth, from 0.1% to 0.3%.

“Along with this flattening across all four regions, distressed saturation fell, as is seasonally expected during the busy buying seasons,” the report said.

The report also gave an update on the tough housing situation going on in San Francisco and San Jose.

The report noted that while San Francisco’s and San Jose’s year-end growth rates are projected to remain positive, at 3.4% and 3.2%, growth for both regions through the second half of 2015 is forecasted to fall into negative territory, at -0.2% and -0.4%.

Why could this become a bigger issue? Well, the bad news comes after the summer buying season and two years of consecutive, yet unsustainable, gains.

“In our June report, we went on record with concern of bubble markets across the U.S. Now San Jose is starting to go the way of San Francisco, at peak levels and now leveling off. Both San Francisco and San Jose have been red hot markets, supported in large part by strong job growth,” said Villacorta.

“The latest numbers reveal, however, that both markets have reached their apex in the most recent upward price swing and are projected to take a slight dip into negative territory through the second half of 2015, by -0.2% and -0.4%. While both markets are projected to have total 2015 yearly growth rates of around 3%, entering winter 2015-2016 on the down side is of great concern. What started as ‘red hot’ at the start of 2014 may end as ‘in the red’ come 2016,” continued Villacorta.