National Snapshot: What’s Ahead for Housing?

Housing Market

The U.S. unemployment rate is at a 50-year low, and consumer confidence remains high. In fact, the University of Michigan’s latest Surveys of Consumers found that Americans have their most positive personal finance outlook since 2003.1

However, if you follow national news, you’ve probably heard speculation that we could be headed toward a recession. Global trade tensions and a slow down in the GDP growth rate has sparked volatility in the stock market, leading to economic uncertainty.

Given these differing signals, you may be wondering: How has the U.S. housing market been impacted? Where is it headed? And more importantly … what does it mean for me?

 

MORTGAGE RATES ARE NEAR HISTORIC LOWS

In August, Freddie Mac reported that the average 30-year fixed mortgage rate hit its lowest level since November 2016, falling to 3.6%, down a full percentage point from a year earlier.Variable mortgage rates also fell when the Federal Reserve cut interest rates at the end of July for the first time since 2008.3

This was welcome news for many in the real estate industry. Freddie Mac predicts that low interest rates and a robust job market will help the housing market remain strong despite the threat of recession. 

“There is a tug of war in the financial markets between weaker business sentiment and consumer sentiment,” said Sam Khater, Freddie Mac’s chief economist. “Business sentiment is declining on negative trade and manufacturing headlines, but consumer sentiment remains buoyed by a strong labor market and low rates that will continue to drive home sales into the fall.”2

 

What does it mean for you?

If you’re looking to buy a home, now is a great time to lock in a low mortgage rate. It will shrink your monthly payment and could save you a bundle over the long term. Or if you plan to stay in your current home for a while, consider whether it makes sense to refinance your mortgage at today’s lower rates.

 

PRICES CONTINUE TO RISE AT A MODEST PACE

According to the S&P CoreLogic Case-Shiller Indices, housing prices continue to rise. But the rate at which prices are rising is slowing down. For May 2019, the National Home Price Index rose by 3.4%, down from 3.5% the previous month.4

Of course, national averages often don’t present the whole picture. Some markets have seen modest declines, while other areas are witnessing double-digit increases. The key differentiating factor in most cases? Housing affordability.5

Since 2012, home prices have increased at about three times the pace of wages, according to National Association of Realtors chief economist Lawrence Yun.6

“Housing unaffordability will hinder sales irrespective of the local job market conditions,” said Yun. “This is evident in the very expensive markets as home prices are either topping off or slightly falling.”5

But what about all this talk of a recession? Will we see housing values plummet like they did in 2008? Economists say no.

If we look at history, the real estate crash experienced during the Great Recession isn’t typical.

The recent Housing and Mortgage Market Review report from Arch Mortgage Insurance provides data to support this. “What we found is that the next recession is likely to be far less severe on the housing market than the last one. It’s not that this time is different; it’s that last time was really different from historic norms.”6

“A large decline in national home prices is unlikely in the next recession,” Arch economists write. “A persistent housing shortage should help cushion home price declines.”6

 

What does it mean for you?

If you have the ability and desire to buy a home now, don’t let the threat of a recession hold you in limbo. The market is cyclical, and it will experience ups and downs. But over the long term, real estate has consistently proven to be a good investment.

 

 

STARTER INVENTORY REMAINS TIGHT WHILE LUXURY MARKET SOFTENS

As we’ve seen in the past, it’s become a tale of two sectors.

The low-end of the market remains highly competitive as buyers compete for affordable housing. A lack of new construction during the last recession led to an undersupply of starter homes. This trend continues—despite growing demand—due to a lack of skilled workers, rising land and material costs, and a slow permitting process in many areas.7

The result? There’s a shortage of homes for sale that Americans can actually afford to buy.

The luxury market, on the other hand, has softened. Economic uncertainty, changes to tax laws, and rising prices have slowed demand. Plus, to recoup their higher costs, builders flocked to this segment—causing an overabundance of supply in some areas.

“If you’re selling an entry level home, you’re probably still looking at a pretty competitive market in most places,” according to Danielle Hale, chief economist at Realtor.com. “But if you’re selling a more expensive home you probably have to adjust your expectations.”8

 

What does it mean for you?

Move-up buyers, you’re in luck! If you’re ready to trade in your starter home for something more luxurious, you may get the best of both sectors. We’re still witnessing strong demand for entry-level homes, giving sellers the upper hand. At the same time, buyers of high-end homes are finding a greater selection (and more negotiating power) than they’ve had in years.

 

INVESTORS ARE BUYING HOMES AT RECORD LEVELS

There’s one group that hasn’t been slowed down by lack of affordability or economic uncertainty: investors.

According to CoreLogic, investors are purchasing homes at a record pace. In 2018, the share of U.S. homes bought by investors reached 11.3%—the highest level since the company began tracking nearly 20 years ago.9

Notably, this increased activity wasn’t led by institutional investors, but instead by small and individual investors focused on the starter-home segment.Declining interest rates and an uncertain stock market has led investors to flock to real estate as they seek out greater stability and higher returns.

“With declining mortgage rates … they’re searching for a better return for their money,” said NAR chief economist Lawrence Yun.10

 

What does it mean for you?

If you’re looking for a way to “recession proof” your money, you might want to consider investing in real estate. People will always need a place to live, and (unlike the stock market) a rental property can provide a steady source of cash flow during uncertain economic times.

 

WE’RE HERE TO GUIDE YOU

While national real estate numbers can provide a “big picture” outlook, real estate is local. As local market experts, we can guide you through the ins and outs of our market and the issues most likely to impact sales and home values in your particular neighborhood. 

If you have specific questions or would like more information about how market changes could affect you, please contact us to schedule a free consultation. We’re here to help you navigate this shifting real estate landscape.

 

Sources:

  1. University of Michigan Surveys of Consumers – http://www.sca.isr.umich.edu/
  2. Freddie Mac – https://freddiemac.gcs-web.com/news-releases/news-release-details/mortgage-rates-drop-significantly?_ga=2.29332539.689041222.1565464527-928629548.1565464527
  3. CNN – https://www.cnn.com/2019/07/31/business/fed-rate-cut-july-meeting/index.html
  4. S&P Dow Jones Indices – https://us.spindices.com/documents/indexnews/announcements/20190730-965771/965771_cshomeprice-release-0730.pdf?force_download=true
  5. National Association of Realtors – https://www.nar.realtor/newsroom/metro-home-prices-increase-in-91-of-metro-areas-in-second-quarter-of-2019
  6. Forbes – https://www.forbes.com/sites/alyyale/2019/04/18/with-a-recession-looming-is-now-the-time-to-sell-your-home/#7d3a21665bce
  7. CNN – https://www.cnn.com/2019/08/09/economy/mortgages-home-buyers/index.html
  8. Forbes – https://www.forbes.com/sites/carolinefeeney/2019/07/01/halfway-into-2019-how-is-the-housing-market-holding-up/#7e656e3ec5d8
  9. CoreLogic – https://www.corelogic.com/blog/2019/06/special-report-investor-home-buying.aspx
  10. Fox Business – https://www.foxbusiness.com/economy/investors-snapping-up-homes-at-record-levels

Starter homes: How and Where to Find Them

via Bankrate.com

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First-time homebuyers might well wonder: Where are all the starter houses?

Indeed, such properties can seem scarce in many housing markets.

A few reasons:

* Investors have snapped up a lot of smaller houses and turned them into rental properties.
* Flippers have bought smaller homes and remodeled them so they’re no longer within the reach of first-time buyers.
* Many current homeowners don’t have enough equity to move or would rather add on to a smaller house than give up a low-rate mortgage.
* Builders have opted to construct pricier trade-up homes instead of affordable starters.

How long will this last?
The slow pace of new home construction suggests that the dearth of starter homes might continue for some time.

That could prove challenging for first-home buyers, according to the National Association of Realtors.

States such as California, Florida, Indiana, Montana and Utah, where job growth has been especially strong, “could face persistent housing shortage and affordability issues” unless local job gains are matched by increases in housing construction, the association says.

So how — or more precisely, where — can first-time buyers find a modest home they like and can afford?

Older houses cost less

One strategy is to look for an older home in a well-established neighborhood.

Used homes typically cost less than brand-new homes, says Bradley Hunter, chief economist for Metrostudy, a housing market research firm in Palm Beach Gardens, Florida.

Older homes typically need more maintenance and repairs, which offsets some of the cost savings. However, Hunter says, buyers who opt for a used home might be able to do repairs and renovations over time, pacing themselves to make the cost manageable.

First-timers who are determined to purchase a brand-new home should look for a local or regional builder that caters to this market.

“Some builders — not the majority of them, but some — are targeting first-time homebuyers,” Hunter says.

Think ‘starter’ home

Buyers shopping for their first home need to be open-minded about the location, size and condition of the home they want to buy, says Tim Deihl, associate broker with Gibson Sotheby’s International Realty in Boston.

For many buyers, a classic starter home, which traditionally doesn’t have many amenities, is more achievable.

“If your first home is the place you’re going to have your family, maybe build an addition and stay there forever, that’s one set of criteria. If your starter home will be a financial launchpad into a larger, better home, that’s a different approach,” Deihl says.

Rethink location

Hunter points to some older neighborhoods in Florida where homes were built decades ago on a so-called “scattered lot” basis. These neighborhoods lack the homogeneity of newer housing tracts and might not include such amenities as sidewalks or street lights. Yet, such houses can be more affordable.

Buyers who want to start a family, but don’t yet have children, sometimes focus too much on their home’s location, size and school district, Deihl suggests. Resetting those parameters can make it easier to buy a first home.

“Buyers may be in a position where schools won’t impact them for six or seven years,” Deihl says. “That’s a good opportunity to buy in the city, make some money and roll that into a community where they want to be longer term with the kids.”

How about a foreclosed home?
A bank-owned foreclosure also might be a good option, though those aren’t as common as they were a few years ago.

First-home buyers shouldn’t be scared off by the stigma or horror stories about the poor condition of foreclosure homes, Deihl says. Some properties might need to be cleaned, but many have major components like plumbing, electric, heating and air-conditioning system and kitchen appliances in working condition.

City or suburb?

Buyers who sacrifice location for affordability can find themselves in a neighborhood far from major job centers with a long daily commute and expensive transportation costs.

Sometimes that trade-off makes sense, but not always, says Cathy Coneway, a broker for Stanberry & Associates Realtors in Austin, Texas.

“You have to look at how much you make and how much you can afford to spend for gas,” Coneway says. “You might actually be better off buying a house that’s closer to town so you have more cash flow for property taxes, insurance and living expenses.”

Compete with a loan approval

When a well-priced starter house comes on the market, the quest to buy it can be what Deihl characterizes as “super-competitive.”

One way to strengthen an offer is to present a loan preapproval that includes everything but a title search, appraisal and hazard insurance, says Jay Dacey, a mortgage broker at Metropolitan Financial Mortgage Co. in Minneapolis.

A strategic phone call might help, too.

“We call the listing agent and say, ‘Mr. and Mrs. Jones submitted an offer on your property. Not only are they preapproved, but they’ve gone through the underwriting approval process with our bank,'” Dacey says. “That makes the offer stronger.”

 

By Marcie Geffner • Bankrate.com