The Growing Housing Affordability Problem


This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 


 

 


Hello there, I’m Windermere’s Chief Economist Matthew Gardner and welcome to this month’s episode of Monday with Matthew.

If you’ve listened to me at all over the past several years, you’ll know that I am pretty passionate about one subject: housing affordability. And, given the significant price growth that we’ve seen over the past decade, as well as the recent spike in mortgage rates, I wanted to talk a little bit about what might be done to address this very serious issue.

The Growing Housing Affordability Problem

Now, when we think about housing affordability and how it might be solved, a lot of people get tied up in the minutiae when, quite frankly, it really isn’t that hard a problem to solve. You see, there’s one very simple way to address this: to build more housing units. But, as easy as that may sound, there are a lot of obstacles that are holding new supply back. But before I get to that, I want to share some data with you that might help to demonstrate how serious an issue we all face.

Every quarter, the National Association of Homebuilders puts out its affordability numbers for metro areas across the country. An analysis of sales and incomes allows them to show the number of homes—both new and existing—sold in a quarter that were affordable to households making median income.

Housing is Increasingly Unaffordable

Here you will see numbers from just a few of the 240 metropolitan areas across the country and the share of sales in the first quarter of this year that were “technically” affordable. I think you’ll agree that it’s eye opening.

 

Although I am only showing you a few of the U.S. markets I will tell you that the ten least affordable US housing markets were all in California. The Golden State is also home to 21 of the top 25 least affordable markets in the country. But what you might also find interesting is that our primary cities aren’t the only ones that are suffering from affordability issues, with markets like Bend, Oregon; Boise, Idaho; and even Las Vegas, Nevada becoming increasingly unaffordable for a lot of households.

And it’s worth mentioning that that 48 of the 69 markets where less than half of the homes sold were affordable were in states that have at some point in the past implemented comprehensive planning and growth management legislation. And when governments mandate where homes can and cannot be built, one thing happens: it pushes land prices higher which makes new homes more expensive and limits the amount of new supply that builders are able to provide. So, what can be done?

Well, I will start out by saying that states who have implemented growth management plans, which they generally did to slow or stop suburban sprawl, remain disinclined to move these boundaries, and that means it becomes paramount to not look further out but to concentrate within the urban growth boundaries and decide whether it’s time to think about removing single-family zoning altogether.

This is a fascinating thought, but I must add that I am not suggesting that we do away with single-family homes. Absolutely not! What I am thinking about is the ability for a market to decide what makes the most sense. In order to do so, single-family zones need to allow for the development of denser housing, but also allow the market to decide what’s best. Areas that have implemented such change has given rise to a movement in order to address what is being referred to as “missing middle housing.” For those of you who are unfamiliar with this term let me try and explain.

Missing Middle Housing

A depiction of different housing types from Optico Design Inc. that illuminates the "missing middle" housing types that were common prior to World War II but are now far less common and, therefore, "missing". The housing types in the "missing middle" include duplexes, fourplexes, courtyard buildings, cottage corts, townhouses, medium-sized multiplexers, stacked triplexes, and live-work buildings. The housing types outside of the "missing middle" include detached single-family houses and mid-rise apartment buildings.

 

This is a great image courtesy of Opticos, a team of urban designers, architects, and strategists who are passionate about adding sorely needed housing options.

They came up with the term “missing middle” as it describes housing types that were actually very common prior to World War II where duplexes, row-homes, and courtyard apartments were in high demand. Unfortunately, however, they are now far less common and, therefore, “missing.”

And the key function of this type of housing is to meet the rising demand for walkable neighborhoods, respond to changing demographics, and provide housing at different price points. You see, rather than focusing on the number of units in a structure—think high rise apartments or condominiums—this type of housing emphasizes scale and heights that are appropriate for and sympathetic to single-family or transitional neighborhoods.

The Decline of Missing Middle Housing Construction

A bar chart showing the number of duplexes to 8-unit buildings built over roughly the past half-century dating back to 1974. The years 1974 through 2021 appear on the x-axis and the number of completed units built appears in thousands on the y-axis, ranging from 0 to 300. On the z-axis, the chart shows what percentage of total new homes completed the y-axis values for that year accounted for. The z-axis ranges from 0% to 18%. The highest values in the chart are 1974 and 1984, when roughly 250,000 units were completed, which was roughly 15% of the total new homes completed that year. The chart gradually declines from the mid-1980s to present day. Since 2007, there hasn't been a single year where over 50,000 units were completed.

 

And to show you how supply of these types of units has changed, this chart shows the number of duplexes to eight-unit buildings built over the past almost half-century and you can clearly see that up until the late 1980s they were being built in decent numbers, but the 1990s saw a significant shift toward traditional single-family home ownership and builders followed the demand and this type of product started to become scarcer.

Almost 16% of total new homes built in America in the early 1980s were of this style, but that number has now shrunk to just 1.4%—or a paltry 19,000 units.

But I see demand for these housing types growing as we move forward and that buyers or renters, young and old, will be attracted as it will meet their requirements not only in regards to the type of home they would want to live in but, more importantly, it can be built cheaper than traditional single-family housing and therefore it will be more affordable.

But although this sounds like it’s a remarkably simple solution that can solve all our woes, in reality it’s not that easy for two very specific reasons. The first is that many markets are already essentially built out, meaning that in order to develop this type of product, a builder would have to purchase a number of existing homes and raze them in order to rebuild. But given current home values, it’s very hard for a builder to be able to make such a proposal financially.

And the second issue is that current residents within these “transition” areas—which have been developed as traditional single-family neighborhood—simply don’t want to see change. But is this type of product bad? Here are some examples.

This shows row-homes in Brooklyn on the left and traditional “triple-deckers” in Massachusetts on the right:

A side-by-side look at two different types of East Coast building types: the horizontal Brooklyn Row-Homes and the more vertically constructed Massachusetts "Triple Deckers."

 

This is a bungalow court project in California:

 

An interconnected building of California "Bungalow Courts" with low-pitched roofs and small porches, all connected by a winding sidewalk.

 

Here are some Live/Work Units in Colorado:

 

A white live/work unit in Buena Vista, Colorado with a second-story patio built onto the right side of the building.

 

These are some amazing mews homes in Utah:

 

A community of Mews Homes in South Jordan, Utah painted white with arched windows and small eaves hanging above the doorsteps.

 

And finally, a new terrace housing project that will be built in Washington DC:

 

A drawing of Terrace Housing in Washington DC showing facades with many windows lined side-by-side on a city street.

 

Don’t get me wrong, I’m sure that some of you who simply aren’t inspired by this type of architecture, and that is understandable. But can we simply stick with the status-quo? I don’t think so. And some state legislators have already implemented significant zoning amendments in order to try and encourage this type of development.

Back in 2018, Minneapolis was the first city to allow this type of development inside single-family zoned areas. This was followed by Oregon State in 2019. Senate Bill 9 was signed by Governor Newsom of California last year which made it legal for property owners to subdivide lots into two parcels and turn single-family homes into duplexes, effectively legalizing fourplexes on land previously reserved for single-family homes. So, we are starting to see some change.

This is a good start but as I mentioned earlier in areas that are already built out, even this type of forward-thinking legislation will not be the panacea that some want. But I’m not giving up hope.

Addressing the “missing middle housing” would allow for homes of all shapes and sizes, for people of all incomes including workers who are essential to our economy and community. Here I am talking about our teachers, firefighters, administrative assistants, childcare providers, and nurses—just to name a few!

There are currently 45 million Americans aged between 25 and 34 and most aspire to homeownership. However, the massive price growth which, by the way, many of us have benefitted from over the past several years, has simply put a “starter home” out of their reach.

I will leave you with one last statistic. Over 28% of American households today are made up of a single people living alone, and it is anticipated that up to 85% of all U.S. households will not include children by the year 2025. Finally, by 2030, one in five Americans will be over the age of 65.

Are we going to meet the needs of the country’s changing demographic going forward? I certainly hope so, but it will take a lot of work for us to get there. As always, if you have any questions or comments about this particular topic, please do reach out to me but, in the meantime, stay safe out there and I look forward to visiting with you all again next month.

Bye now.

The post The Growing Housing Affordability Problem appeared first on Windermere Real Estate.

Moving Patterns for U.S. Homeowners and Renters in 2021


This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 


 


Hello there. I’m Windermere Real Estate’s Chief Economist Matthew Gardner and welcome to the latest episode of Monday with Matthew. Over the past few months, analysts like myself have been starting to get our hands on early numbers from the Census Bureau and, although we won’t get the bulk of the data for another several months, I thought it would be interesting to take a quick look at some of the information that the government has put out specifically as it relates to patterns.

This is a relevant topic given the pandemic, with many people wondering if we saw a mass shift in where we choose to live because of COVID-19. This belief that we packed up and moved because of the pandemic is, at face value, quite credible, especially given that home sales in 2021 were at levels we haven’t seen since 2006. But the reality, at least from the data we have received so far, actually tells a different story.

Moving Patterns for U.S. Homeowners and Renters in 2021

We Move More Infrequently

 

This first chart looks at people and not households and it shows that, contrary to popular belief,  we’re actually moving less frequently now then we have done in decades, with the share of people not moving in a single year rising from just about 84% to over 91½%. Of course, we are having fewer children now than we did, but not to the degree that would change the trend.

Unsurprisingly, Renters Move More Often than Owners

Two charts showing that on average, renters move more often than owners in the span of years between 2000 and 2021. Over this stretch of time, the percentage of renters staying put rose from 67.5% to 84%, while homeowners staying put rose from 90.9% to 95.1%.

 

And when we break this down between homeowners and renters there is quite the discrepancy between the two groups. Although the number of renters not moving has risen from 67½ percent up to 84% since 2000, the number of homeowners staying put has moved from almost 91% all the way up to 95% last year.

So, the data thus far is not suggesting that we saw any form of mass exodus following the pandemic, in fact we haven’t been moving as much for the past 2-decades, but people did move since COVID-19 hit and the reasons they did were fascinating. The following charts are broken up into four categories of movers: those who moved for family reasons; those who moved for employment related reasons; those that moved for housing related reasons; and finally, those that moved for other reasons.

Reasons to Move (1)

A chart showing the reasons why owners and renters moved. Moving due to a change in marital status was virtually the same, while more renters moved for things like getting a new job and moving closer to work. More owners moved due to retirement and because they lost their job.

 

So, starting with family-related reasons, it was not surprising to see the major reason for both owners and renters to move was to establish a new household, nor was it surprising to see a greater share of renters headed out on their own than homeowners. Finally, the share of those moving because of a change in marital status was essentially the same between renters and homeowners. And when we look at employment related reasons for people moving last year, a greater share of renters moved because of a new job than homeowners, and more renters moved to be closer to their workplaces than did homeowners. Again, not really surprising, given that a large share of renters work in service-based industries and therefore proximity to their workplaces is important. You will also see that a greater share of homeowners than renters moved because they lost their jobs and, finally—and not at all surprisingly—far more homeowners moved because they chose to retire than renters.

Reasons to Move (2)

A graph showing the housing-related reasons to move for both owners and renters. Noticeable differences include that more renters moved to find cheaper housing and to attend or leave college, while more owners moved for change of climate and health reasons.

 

And when we look at housing related reasons that people moved, a large share of owners and renters moved from their current home or apartment and into a new, bigger, better house or apartment. A statistically significant share looked to move into a better neighborhood, and I do wonder whether owners were doing this because of the ability to work from home and possibly move to a better location further away from their workplaces. And even though renters tend to stay closer to their workplaces, I wonder whether these renters weren’t in white-collar industries and that the ability to work from home has led them to move into an area that they perceive to be better suited to them.

And finally, a significant share of renters moved because of the fact that rents have been skyrocketing over the past 18-months or so. This clearly impacted some homeowners, too. And finally, under the “other” category, more renters than owners moved because they were either entering or exiting a relationship with a domestic partner, and more renters left to either go to college or because they had completed their degrees.

Health-related reasons for moving had a significant impact on homeowners over renters, and I found it particularly interesting to see a lot of owners saying that “climate” was a reason for their move. Of course, I can only hypothesize as to whether people are simply looking to move to warmer climates or whether climate change is starting to have an increasingly large influence on where we choose to live. My gut tells me that climate change is becoming a far more important consideration for homeowners, although we can’t deny that a lot of people, specifically on the East Coast, moved South during the pandemic.

These next few charts break down movers not just by whether they our owners or renters but also by ethnicity.

2021 Mobility by Ethnicity & Tenure: Owners vs Renters Movers and Non-Movers

Six pie charts showing the non-moving and moving percentages for 2021 among populations of White, Black, and Asian owners (95.1%, 95.6%, and 95.7% respectively for non-movers and 4.9%, 4.4%, and 4.3% respectively for movers) and White, Black, and Asian renters (83.7%, 85.3%, and 84.9% for non-movers respectively, and 16.3%, 14.7%, and 15.1% for movers respectively.)

 

Here you can see that homeowners across these three ethnicities were pretty much uniform in their desire to stay in their existing home with only 4 to 5% moving. And renters who, as we have already seen, did move more frequently last year than homeowners, were also in a very tight range at between 83 and 85%.

2021 Mobility by Ethnicity & Tenure: Owners vs Renters Movers and Non-Movers (2)

Six pie charts showing the non-moving and moving percentages for 2021 among populations of Hispanic, Mixed (White & Other), and Mixed (Black & Other) owners (94.8%, 95%, and 94.9% respectively for non-movers and 5.2%, 5%, and 5.1% respectively for movers) and Hispanic, Mixed (White & Other), and Mixed (Black & Other) renters (87.7%, 83.6%, and 85.2% for non-movers respectively, and 12.3%, 16.4%, and 14.8% for movers respectively.)

 

And the same can be said about Hispanic owners and mixed race families, with about 95% not moving last year. Now this is modestly lower than White, Black, or Asian households, but the difference is very marginal. As for renters, between 83 and almost 88% of them within these three ethnicities moved last year, but you will see a bigger share of Hispanic renters stayed put as opposed to all the other ethnicities shown here.

2021 Mobility by Ethnicity & Tenure: Moves In & Out of State

Six pie charts showing the percentages of staying in state vs moving out of state for 2021 among populations of White, Black, and Asian owners (82.1%, 81.8%, and 75.2% respectively for those who stayed in state and 17.9%, 18.2%, and 24.8% respectively for out-of-state movers) and White, Black, and Asian renters (82.6%, 81.4%, and 74.1% for those who stayed in state respectively, and 17.4%, 18.6%, and 25.9% for out-of-state movers respectively.)

 

Looking closer now at those who did move, even though fewer Asian households moved when compared to all other ethnicities, far more left the state than stayed, and the same was true for Asian renters with over a quarter moving out of state.

2021 Mobility by Ethnicity & Tenure: Moves In & Out of State (2)

Six pie charts showing the percentages of staying in state vs moving out of state for 2021 among populations of Hispanic, Mixed (White & Other), and Mixed (Black & Other) owners (86.6%, 81.9%, and 80.9% respectively for those who stayed in state and 13.4%, 18.1%, and 19.1% respectively for out-of-state movers) and Hispanic, Mixed (White & Other), and Mixed (Black & Other) renters (83.6%, 82.4%, and 81.1% for those who stayed in state respectively, and 16.4%, 17.6%, and 18.9% for out-of-state movers respectively.)

 

Again, a greater share of the Hispanic homeowners who did move last year stayed in the state where their old house was, and the share of mixed households was roughly at the average for all ethnicities. And the share of Hispanic and mixed-race renters who stayed in State was also about average.

What I see from the data is that the huge shift that many expected during COVID has not been affirmed—at least not by the numbers we have looked at. That said, we are sure to see numerous revisions because of the issues that COVID 19 has posed on Census takers, so we may get a different story as more data is released and revisions posted. What I found to be most interesting in the numbers we have looked at was the massive increase in renters moving in with their “significant others.” But I am not surprised, given that there are around 48½ million people aged between 20 and 30, and this is their time!

And I was also interested in the share of the population who moved due to climate. I will be doing some more digging around in the darkest recesses of the Census Bureau website to see if I can find out more about this. Although I can’t confirm it, my gut tells me that climate—and specifically climate change—will be a factor of growing importance when people are thinking about where they want to live.

And there you have it. As always, if you have any questions or comments about this particular topic, please do reach out to me but, in the meantime, stay safe out there and I look forward to visiting with you all again next month.

Bye now.

The post Moving Patterns for U.S. Homeowners and Renters in 2021 appeared first on Windermere Real Estate.

The Current State of the U.S. Housing Market


This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 


 


Hello there, I’m Windermere’s Chief Economist Matthew Gardner, and welcome to this month’s episode of Monday with Matthew. With home prices continuing to defy gravity, mortgage rates spiking, the Fed raising interest rates significantly, a yield curve that is just keeping its nose above water, and some becoming vocal about the possibility that we are going to enter a recession sooner rather than later, it’s not at all surprising that many of you have been asking me whether the housing market is going to pull back significantly, and a few of you have asked whether we aren’t in some sort of “bubble” again.

Because this topic appears to be giving many of you heartburn, I decided that it’s a good time to reflect on where the housing market is today and give you my thoughts on the impact of rising mortgage rates on what has been an historically hot market.

The Current State of the U.S. Housing Market

Home Sale Prices

 

As usual, a little perspective. Between 1990 and the pre-bubble peak in 2006, home prices rose by 142%, which was a pretty impressive annual increase of 5.6% over a 16 1/2-year period. When the market crashed, prices dropped by 33%, but from the 2012 low to today, prices have risen by 131%, or at an even faster annual rate of 8.6% over a shorter period of time—10 years.

You may think that prices rising at an annual rate that exceeds the pace seen before the market crash is what has some brokers and home buyers concerned, but that really isn’t what has many people scared. It’s this.

Mortgage Rates in 2022

A slide titled "Mortgage Rates in 2022" showing the increase in 30-year fixed conforming mortgage rates between December 30, 2021 (3.11%) and April 14, 2022 (5%).

 

At the start of 2022, the average 30-year fixed mortgage rate was just a little above 3%. But, over a brief 15-week period, they have skyrocketed to 5%. This has led some to worry that the market is about to implode. Of course, nobody can say that the run-up in home prices hasn’t been phenomenal over the past few years, and it’s certainly human nature to think that “what goes up, must come down,” but is there really any reason to panic? I think not, and to explain my reasoning, let’s look back in time to periods when rates rose significantly and see how increasing mortgage rates impacted the marketplace.

Housing and Mortgage Markets During Times of Rising Rates

A slide titled "Housing & Mortgage Markets During Times of Rising Rates." Two extreme statistics are as follow: Between June 2005 and July 2006 there was a negative 32.3% change in housing starts and between October 1993 and December 1994 there was a negative 12.7% change in home sales.

 

This table shows seven periods over the past 30 years when mortgage rates rose significantly. On average, rates trended higher for just over a year before pulling back, and the average increase was 1.4%. But now look at how it impacted home prices: it really didn’t. On average, during these periods of rising financing costs, home prices still rose by just over 5%.  Clearly, not what some might have expected. But there were some negatives from mortgage rates trending higher, and these came in the form of lower sales in all but one period and new housing starts also pulled back.

So, if history is any indicator, the impact of the current jump in mortgage rates is likely to be seen in the form of lower transactions rather than lower prices. And this makes sense. Although rising financing costs puts additional pressure on housing affordability, what people don’t appear to think about is that mortgage rates actually tend to rise during periods of economic prosperity. And what does a flourishing economy bring? That’s right. Rising wages. Increasing incomes can certainly offset at least some of the impacts of rising mortgage rates.

Static Equilibrium Analysis – 1/3

A slide titled "Static Equilibrium Analysis" showing that the P&I payment would be $1,365 for a $357,300 home with a 4% mortgage rate, using the February 2022 U.S. median sale price. This assumes the buyer has put down 20% on the home.

 

To try and explain this, I’m using the median US sale price in February of this year, assuming a 20% down payment and the mortgage rate of 4%. And you can see that the monthly P&I payment would be $1,365. But as mortgage rates rise, and if buyers wanted to keep the same monthly payment, then they would have to buy a cheaper home. Using a rate of 5%, a buyer could afford a home that was 9% cheaper if they wanted to keep the payment the same as it would have been if rates were still at 4%.

But, as I mentioned earlier, an expanding economy brings higher wages, and this is being felt today more than usual, given the worker shortage that exists and businesses having to raise compensation. Average weekly wages have risen by over five-and-a-half percent over the past year—well above the pre-pandemic average of two-and-a-half percent. Although increasing incomes would not totally offset rising mortgage rates, it does have an impact.

Static Equilibrium Analysis – 2/3

A slide titled "Static Equilibrium Analysis" showing what home buyers would be able to afford at different mortgage rates, using the U.S. average household income of $70,611, assuming they've put 20% of their gross income down for the down payment. At 4%, they could afford a home just under $360,000 and at 5%, they could afford a home at $321,038.

 

To demonstrate this, let’s use the U.S. average household income of $70,611.  Assuming that they’ve put aside 20% of their gross income for a down payment, they could afford a home priced just under $360,000 if mortgage rates were at 4%. As rates rise—and assuming that their income doesn’t—their buying power is reduced by over 10%, or just over $38,000.

Static Equilibrium Analysis – 3/3

A follow up to the "Static Equilibrium Analysis" slide showing that if the average income were raised to $74,848, the buyer would be able to afford a home of $340,302 at a 5% mortgage rate.

 

But if we believe that incomes will rise, then the picture looks very different. Assuming wages rise by 6%, their buying power drops by just 5% if rates rose from 4% to 5%, or a bit less than $19,000.

Although rates have risen dramatically in a short period, because they started from an historic low, the overall impacts are not yet very significant. If history is any indicator, mortgage rates increasing are likely to have a more significant impact on sales, but a far smaller impact on prices.

But there are other factors that come into play, too. Here I’m talking about demand. The only time since 1968 that home prices have dropped on an annualized basis was in 2007 through 2009 and in 2011, and this was due to a massive increase in the supply of homes for sale. When supply exceeds demand, prices drop.

So, how is it different this time around? Well, we know that the supply glut that we saw starting to build in mid-2006 was mainly not just because households were getting mortgages that, quite frankly, they should never have gotten in the first place, but a very large share held adjustable rate mortgages which, when the fixed interest rate floated, they found themselves faced with payments that they could not afford. Many homeowners either listed their homes for sale or simply walked away.

Although it’s true that over the past two or so months more buyers have started taking ARMs as rates rose, it’s not only a far smaller share than we saw before the bubble burst, but down payments and credit quality remained far higher than we saw back then.

So, if we aren’t faced with a surge of inventory, I simply don’t see any reason why the market will see prices pull back significantly. But even if we do see listing activity increase, I still anticipate that there will be more than enough demand from would-be buyers. I say this for several reasons, the first of which is inflation.

What a lot of people aren’t talking about is the proven fact that owning real estate is a significant hedge against rising inflation. You see, most buyers have a mortgage, and a vast majority use fixed-rate financing. This is the hedge because even as consumer prices are rising, a homeowner’s monthly payments aren’t.  They remain static and, more than that, their monthly payments actually become lower over time as the value of the dollar diminishes. Simply put, the value of a dollar in—let’s say 2025—will be lower than the value of a dollar today.

But this isn’t the only reason that inflation can actually stimulate the housing market. Home prices historically have grown at a faster pace than inflation.

Hedge Against Inflation

A slide titled "Hedge Against Inflation" showing a line graph of the average annual inflation and change in median home price from 1969 to 2021. While the average annual inflation fluctuates between 1% and 5% for most of the chart except for the mid-70s and early-80s, the change in median home price fluctuates between 25% in the late-70s to roughly negative 12% in 2009.

 

This chart looks at the annual change in total CPI going back to 1969. Now let’s overlay the annual change in median U.S. home prices over the same time period. Other than when home prices crashed with the bursting of the housing bubble, for more than fifty years home price growth has outpaced inflation. And this means we are offsetting high consumer prices because home values are increasing at an even faster rate.

But inflation has additional impacts on buyers. Now I’m talking about savings. As we all know, the interest paid on savings today is pretty abysmal. In fact, the best money market accounts I could find were offering interest rates between 0.5% and 0.7%. And given that this is significantly below the rate of inflation, it means that dollars saved continue to be worth less and less over time while inflation remains hot.

Now, rather than watching their money drop in value because of rising prices, it’s natural that households would look to put their cash to work by investing in assets where the return is above the rate of inflation—meaning that their money is no longer losing value—and where better place to put it than into a home.

Housing as a Hedge Against Inflation

A slide titled "Housing as a Hedge Against Inflation" showing that most home buyers finance their purchase at a fixed-rate of interest, which is not susceptible to inflation. Mortgage payments are fixed, therefore as incomes rise, the payments actually become cheaper.

 

So, the bottom line here is that inflation supports demand from home buyers because:

  1. Most are borrowing at a fixed rate that will not be impacted by rising inflation
  2. Monthly payments are fixed, and these payments going forward become lower as incomes rise, unlike renters out there who continue to see their monthly housing costs increase
  3. With inflation at a level not seen since the early 1980s, borrowers facing 5% mortgage rates are still getting an amazing deal. In fact, by my calculations, mortgage rates would have to break above 7% to significantly slow demand, which I find highly unlikely, and
  4. If history holds true, home price appreciation will continue to outpace inflation

Demand appears to still be robust, and supply remains anemic. Although off the all-time low inventory levels we saw in January, the number of homes for sale in March was the lowest of any March since record keeping began in the early 1980’s.

But even though I’m not worried about the impact of rates rising on the market in general, I do worry about first-time buyers. These are households who have never seen mortgage rates above 5% and they just don’t know how to deal with it! Remember that the last time the 30-year fixed averaged more than 5% for a month was back in March of 2010!

And given the fact that these young would-be home buyers have not benefited from rising home prices as existing homeowners have, as well as the fact that they are faced with soaring rents, making it harder for them to save up for a down payment on their first home, many are in a rather tight spot and it’s likely that rising rates will lower their share of the market.

So, the bottom line as far as I am concerned is that mortgage rates normalizing should not lead you to feel any sort of panic, and that current rates are highly unlikely to be the cause of a market correction.

And I will leave you with this one thought. If you agree with me that a systemic drop in home prices has to be caused by a significant increase in supply, and that buyers who are currently taking out adjustable-rate mortgages are more qualified, and therefore able to manage to refinance their homes when rates do revert at some point in the future, then what will cause listings to rise to a point that can negatively impact prices?

It’s true that a significant increase in new home development might cause this, but that is unlikely. And as far as existing owners are concerned, I worry far more about a prolonged lack of inventory. I say this for one very simple reason and that is because a vast majority off homeowners either purchased when mortgage rates were at or near their historic lows, or they refinanced their current homes when rates dropped.

And this could be the biggest problem for the market. Even if rates don’t rise at all from current levels, I question how many owners would think about selling if they were to lose the historically low mortgage rates that they have locked into. It is quite possible that for this one reason, we may experience a tight housing market for several more years.

As always, if you have any questions or comments about this particular topic, please do reach out to me but, in the meantime, stay safe out there and I look forward to visiting with you all again next month.

Bye now.

The post The Current State of the U.S. Housing Market appeared first on Windermere Real Estate.

Blockchain Technology and Cryptocurrencies in Real Estate


This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 


 

 


Hello there, I’m Windermere Real Estate’s chief economist, Matthew Gardner, and welcome to the latest episode of Mondays with Matthew. This month we’re going to take a look at Blockchain technology and cryptocurrencies themselves and how both may impact home buyers and sellers in the future.

But before we dive into the potential impacts of cryptocurrency on the residential housing market, I must preface this by saying that the very word “crypto” is one that certainly divides people. Some see it as revolutionary, a tangible asset that will take over one day as the de-facto global currency, while others believe it to be unsustainable and ultimately valueless. And there are even some who firmly believe that it’s nothing more than a Ponzi scheme.

Now, everyone is certainly entitled to their opinion, and I will refrain from offering my own view on the currencies themselves, but, although still in its infancy, it continues to evolve and is garnering significant interest from individuals and large corporations alike.

Why are corporations interested, you ask? Well, a recent report from Crypto.com1 put the number of people around the globe who own some form of cryptocurrency at more than 295 million and they are forecasting this number to explode this year and hit the 1 billion mark! And the value of all these currencies today? As of March 14, the combined value of all cryptocurrencies was 1.74 trillion dollars2 with the largest, Bitcoin, valued at almost 740 billion dollars. So, it should not be a surprise to see many mainstream companies across multiple industry sectors start to introduce ways to accept crypto as payment for goods and services.

Companies moving into this space include AMC movie Theaters3 who recently announced their plan to accept coins by the end of this year. Fintech companies like Paypal and Square are also betting on crypto by allowing users to buy currency on their platforms. And, unsurprising to most, Tesla is also interested, but have yet to confirm whether they will accept coins as payment for their vehicles or not.

With cryptocurrencies now gaining traction in mainstream businesses, the housing sector has started to take an interest too with the emergence of companies like Propy, whose goal is to totally automate the home sales process by introducing Blockchain based technology to allow transactions to occur entirely online using smart contracts. Other companies are figuring out how to use blockchain technology to grow the “fractional-ownership” segment of the housing market.

But when it comes to simply buying a house—well that is an entirely different situation. Of course, a home buyer could easily cash out the Crypto they have and use those funds for a down payment, or even to buy a house outright. But we don’t see more of this today as they understand selling their currency is a taxable event and, more than likely, taxes owed will hit their balance sheets pretty hard. And knowing that this is a real issue in the market, it should come as no surprise that a company has come up with a plan to overcome what is seen as one of the biggest obstacles to using digital currency for home buying.

Blockchain Technology and Cryptocurrencies in Real Estate

 

And they are Milo, who claim to offer the world’s first “crypto-mortgage”. Essentially, they will allow borrowers to use Bitcoin—but only Bitcoin as of right now—as collateral for a 30-year mortgage.

How this works is pretty simple. All buyers have to do is to “pledge” their coins on a one-for-one basis. Simply put, someone looking for a $500,000 mortgage would have to put up $500,000 worth of Bitcoin. This way, they don’t actually have to sell their coins, so there are no tax implications. And instead of going through a FICO credit check and showing proof of income to evaluate a borrower’s creditworthiness, Milo evaluates them based on their crypto wealth as well as the value of the property they are hoping to buy.

And in exchange for locking up their crypto, borrowers get a 30-year mortgage for their home purchase can also make their mortgage payments via traditional currency or Bitcoin. But there are differences between this and a traditional mortgage. First off is the interest rate. It currently ranges anywhere from 5 to 8% depending on the loan-to-value ratio. This is higher than the rate they could get today.

And the interest rate is not fixed, but variable, and based on the prevailing price of Bitcoin. The rate can go up or down depending on the value of the Bitcoin they have pledged, and this mortgage rate will be adjusted every year. Interestingly, if the price of Bitcoin goes up, borrowers can actually take back some of their crypto once a year. If the price of Bitcoin goes down, they may be asked to provide more crypto as collateral.

And finally, when the buyer sells, on closing Milo is paid back in U.S. dollars, and then the seller gets the Bitcoins they used for collateral back, along with the profit made on the sale.

I think that this is certainly an interesting play in the ownership housing sector and, although still in its infancy, looks to meet the needs of crypto owners who don’t want to face the tax obligation that would occur if they were to sell their coins to buy a home. Now, I must make clear that Windermere is certainly not endorsing Milo. In fact, I personally have concerns about the program given how volatile cryptocurrencies are.

You see, it is possible that users may be caught out by the value of their Bitcoin dropping significantly and, if this occurs at or around their anniversary date, it could significantly raise the interest rate—and therefore the monthly payment—on that loan, and if the price drops too far, then they may have to go through what is, in essence, a margin call, where they will have to submit more funds to the lender to bring them back to a point where equity in the home combined with the value of the Bitcoin covers the loan itself.

And I would add that if for some reason the buyer has to sell the home within the first three years4 of purchase there are pre-payment penalties that will be incurred. All in all, it is an interesting model, but it is still in its infancy. As always, time will tell how well it gets adopted.

The bottom line for me is that the likelihood of Cryptocurrency revolutionizing the way we buy homes from a finance perspective is still several years away, but after that, who knows! Something that does have the capacity to be adopted into the mainstream far quicker is the blockchain technology itself. I personally see title insurance as a segment that could benefit significantly and may well adopt this tech sooner than others.

With title insurance companies responsible for verifying and ensuring that a buyer or lender (depending on the type of title insurance) gets either clean ownership or a lien position in the land in question, Blockchain could change many aspects of how these processes are carried out. Here are some of the benefits:

The Potential Benefits of Blockchain Technology in Real Estate

A slide showing the benefits of Blockchain technology in real estate transactions, namely added security.

 

Security. More than 25 percent of title reports (alta.org) detail some form of defect to the title itself, but the ability of blockchain to immediately detect erroneous or potentially fraudulent information can significantly help to support the reliability of the records, therefore making the job of title insurance companies much more straightforward.

 

A slide showing the benefits of Blockchain technology in real estate, smart contracts, for example.

 

And then there’s smart contracts, which are actually a form of e-closing that is already beginning to be embraced by some in the industry. This technology makes the transfer of ownership almost seamless. Literally, it would take just a few clicks of a mouse. And this is also a massive benefit for the industry as the closing process would also change dramatically and become far more effortless and less time consuming than today’s standard means of closing on a home purchase.

 

A slide showing the benefits of Blockchain technology in real estate, improved record-keeping included.

 

And finally, record-keeping. While fraud and tampering are huge concerns for title companies, blockchain could all but eliminate these instances within ownership records. And, as it would convert land records to a distributed ledger, it cannot be altered within the blockchain itself, therefore making it safe in perpetuity. Blockchain, by design, prevents bad information from disrupting the chain and any attempt to tamper with it can be easily detected and therefore avoided. This is a massive upgrade from the county ledger that title insurance companies find themselves working with today.

No one can deny that Blockchain and cryptocurrencies, while still relatively new, do not appear to be just a flash in the pan. As we have discussed today, a number of companies continue to make inroads into the real estate world. Will some fail? Of course. But others will succeed. So, while still in its infancy, we should all have some sort of understanding of its potential to be a disruptor in the housing space in the future.

It’s my own personal belief that the Blockchain tech itself will be the thing that gets adopted by the real estate world faster than the rise of crypto as a way to buy or finance a home but, whatever your thoughts on this topic are, I think that it is highly unlikely that we will see it simply fade away over time.

As always, if you have any questions or comments about this particular topic, please do reach out to me but, in the meantime, stay safe out there and I look forward to visiting with you all again next month. Bye now.

 

References:

  1. https://crypto.com/
  2. https://coinmarketcap.com/
  3. https://www.reuters.com/
  4. https://help.milocredit.com/

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The Impact of Rising Mortgage Rates


This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 


 

 


The Impact of Rising Mortgage Rates

Hello there. I’m Windermere Real Estate’s Chief Economist Matthew Gardner. Welcome to the latest episode of Monday with Matthew.

Over the past several weeks I’ve gotten a lot of messages from you wanting me to discuss the spike in mortgage rates that followed comments by the Federal Reserve, but also asking me if there will be any impacts to the housing market following Russia’s invasion of the Ukraine. This is clearly a hot topic right now, so today we are going to take a look at how these events have impacted mortgage rates, but also look at how this may have changed my mortgage rate outlook for 2022. So, let’s get to it.

Weekly Mortgage Rates

 

Here is a chart that shows how rates have moved over the past two years or so using Freddie Mac’s average weekly rate for a conforming 30-year mortgage. You’ll see that rates were falling in early 2020, but when COVID-19 was announced as a pandemic they spiked, but almost immediately the Fed announced their support for the economy by implementing a broad array of actions to keep credit flowing and limit the economic damage that the pandemic would likely create. And part of that support included large purchases of U.S. government and mortgage-backed securities. With the Fed as a major buyer of mortgage securities, rates dropped ending 2020 at a level never seen in the more than 50 years that the 30-year mortgage has been with us.

In early 2021, rates started to rise again as the country became more confident that the pandemic was coming under control, but all that changed with the rise the Delta variant of COVID-19 which pushed rates lower through mid-summer. As we again started to believe that COVID was under control and a booster shot became available, you’ll see rates resumed their upward trend in August.

What has everyone worried today is this spike that really took off at the end of last year. A jump of almost a full percentage point in just eight short weeks understandably has a lot of agents, buyers, and sellers, concerned about what impacts this might have on what has been a remarkably buoyant housing market. Now, rates rising so quickly was unusual, but not unprecedented. If you really wanted to be scared, I’d regale you with stories from 1980 when mortgage rates jumped by over 3.5% in less than eight weeks.

Anyway, before we really dig into this topic, some of you may be thinking to yourselves that my numbers have to be wrong because they differ from the rates you have been looking at. This is due to the fact that the Freddie Mac survey methodology is different from other rate surveys but, even though their rates may not match the ones you’ve been seeing from other data providers, the trend is still consistent.

So, let’s chat for a bit about what caused the spike in rates. You know, it’s always good to have a villain in any story and the primary but certainly not sole culprit responsible for the jump in rates is—you guessed it—the Federal Reserve.

As I mentioned earlier, the Fed was the biggest buyer of pools of home loans (otherwise known as mortgage-backed securities) as we moved through the pandemic, but last December they announced an end to what had been an era of easy money by winding down these purchases in order to lay the groundwork for shrinking their 2.7 trillion—yes I said “trillion”—dollar stockpile of MBS paper they had built up. This decision to move from “quantitative easing” to “quantitative tightening” so rapidly had an almost immediate impact on mortgage rates simply because the market was going to lose its biggest buyer of mortgage bonds.

Immediately on the heels of their announcement, bond sellers raised the interest rate on their bond offerings to try and find buyers other than the Fed, so lenders raised the rates on mortgages housed within these bond offerings. Finally, mortgage brokers moved quickly to raise the rates that they were quoting to the public. The result of all this was that rates leapt. Although we know that the primary party responsible for rates rising was the Fed, there were other players too, and here I am talking about inflation—and as you are no doubt aware—it too started to spike at the beginning of this year and now stands at a level not seen since 1982. And if you’re wondering why inflation is important. Well, high inflation is a disincentive to bond buyers because if the rate of return, or interest on mortgage bonds, is lower than inflation, investors lose interest pretty quickly.

So, we can blame the Fed, we can blame inflation, but what about Russia? Well, their invasion of the Ukraine on February 24 has certainly influenced mortgage rates, but maybe not in the way you might expect. In general, when there’s any sort of global or national geopolitical event, investors tend to gravitate to safety, and this invariably means a shift out of equities and into bonds.

So you would be correct is thinking that at face value Russia was actually responsible for the tiny drop in rates we saw following the invasion, and also the more significant drop we saw last week when the market saw the biggest two-day drop in rates in over a decade. But before you start to think that rates are headed back to where they were a year ago, I’ve got some bad news for you. That is almost guaranteed not to happen.

Given what we know today, the terrible conflict in Eastern Europe is highly unlikely to push rates back down to where they were at the start of this year, but they will—at least for now—act as a headwind to rates continuing to head higher at the pace we have seen over recent weeks. That will continue until the conflict is hopefully peaceably concluded. And although the Ukraine situation is unlikely to have any significant impact up or down on mortgage rates, there are some indirect impacts which could negatively hit the housing market. Now I’m talking about oil.

Russia is the third largest energy producer in the world and an already tight global oil supply could get even tighter following newly announced financial sanctions on Russia. A barrel of oil has jumped by almost $20 to $109 a barrel since the start of the occupation and, if the occupation is sustained, and Russia is faced with even greater sanctions, I wouldn’t be surprised to see the price of gas rise by between 20 and 40 cents a gallon. And it’s this, in concert with already high inflation, which will directly hit consumers wallets and this itself could certainly impact mortgage borrowing. So we can blame the Fed, we can blame inflation and we can blame Russia for the jump in rates, but are the rates you are seeing today really something to lose sleep over? I actually don’t think so. At least not yet.

Even with mortgage rates where they are today, I look at them and think to myself that they are still exceptionally low by historic standards and that there really is no need for panic. But let me explain my thinking to you. To do this, we will take a look at the impact of rising mortgage rates, not as it relates to buyers’ ability to finance a home purchase, but on how it impacts their monthly payments.

Hypothetical Home Purchase

A graphic title "Hypothetical Home Purchase." It shows that a home sold at the same price of $370,100 in June 2021 versus February 2022, financed at 2.96% and 4.06% respectively, generates a PITI payment of $1,682 and $1,864 respectively, meaning that buyers will pay just $182 more per month to buy the same home.

 

For this example, we’ll use the peak sale price for a single-family home in America, which was just over $370,000 back in June of last year. And to finance this purchase, a buyer was lucky enough to lock in the lowest mortgage rate for that month at 2.96%. Assuming that they put 20% down, and are paying the U.S. average homeowners insurance premium and average property taxes a buyer closing on that home in June of last year would have a monthly payment of $1,682.

Now, what if a buyer had bought the exact same house but in February of this year? Well, the average rate for the third week of February was 4.06%—a big jump from last June—and higher mortgage rates would have increased their payment to $1,864. What does this all mean? Well, a jump of over a full percentage point means that the monthly payment is more, but only a relatively modest $182. So, even though rates have risen by almost a full percentage point, the increase in payments was, I think you’ll agree, relatively nominal.

But what if rates had risen to 5%? Well, that would be a very different picture with payments increasing by a far more significant $348. Of course, this is a very simplistic way of looking at it as I have not included any other debt payments that a buyer may have, but I hope that it does demonstrate that, even though mortgage rates are certainly significantly higher than they were last summer, because we started from such a low basis, monthly payments have seen a relatively modest increase. The bottom line is that rates were never going to hold at the record lows we have seen, and we need to just accept the fact that they will continue trending higher as we move through the year but are yet at a level that suggests impending doom for the housing arena. So, where do I think that rates will be by the end of this year? Well, here is my very latest forecast for the rest of this year.

Mortgage Rates Forecast

A bar graph titled "Mortgage Rates Forecast" showing the average 30-year mortgage rate history. In Q1 of 2020, the rate is at 3.51%, dipping to 2.76% in Q4 2020 before rising back up to 3.08% in Q4 2021. Matthew Gardner forecasts a rate of 3.71% in Q1 2022, 3.84% in Q2 2022, 3.92% in Q3 2022, and 4.07% in Q4 2022.

 

Given all we know in respect to the Fed and the current situation in Ukraine, my model suggests a significant jump in the first quarter, but then the pace of increase slows significantly and we will end this year at a rate that is almost half a percentage point above the forecast I offered at the start of the year.

Forecasts From Various Analysts

A bar graph titled "Forecasts from Various Analysts" showing Q4 2022 forecasts for conventional 30-year fixed rate mortgages. Fannie Mae forecasts 3.7%, Freddie Mac forecasts 3.74%, NAR forecasts 3.9%, Redfin forecasts 3.9%, Kiplinger and Wells Fargo both forecast 4%, Mortgage Bankers Association forecasts 4.3%, and Matthew Gardner forecasts 4.07%.

 

Of course, this is the opinion of just one economist, so I thought it would be useful for you to see what others are thinking. And amazingly enough, most of us—at least for now—are still in a pretty tight range regarding our expectations for the average rate in the 4th quarter of 2022 with Fannie Mae at the low end of the spectrum and the Mortgage Bankers Association at the high end.

I honestly believe that, all things being equal, the impact of higher mortgage rates is unlikely to significantly impact the U.S. market this year and, even with rates rising, the market will remain tight in terms of supply and will continue to favor home sellers. That said, once we break above 4.5%, I would expect to see the increased cost of financing having a greater impact on not just on demand but on price growth, too.

And if you are wondering why I am so sure about this, it’s simply because we saw the exact same situation in 2018 when rates rose to 4.9% and we saw a palpable pull back in sales; which dropped from an annual rate of 5.4 million to 5 million units and the pace of price growth dropped from 5.9% to 3.3%. Now, I don’t see rates getting close to 5% for quite some time and therefore still expect demand to remain robust—off the all-time highs we have seen—but still solid given demographically-driven demand as well as increasing demand from buyers trying to find a new home before rates much further.

Of course, the impact of rates rising will not be felt equally across all markets. Many areas, and especially in coastal States, have seen home values skyrocket to levels that are well above the national average. Although incomes are generally higher in these markets, buyers in more expensive areas will feel more pain from higher financing costs.

And there you have it. I hope that today’s chat has not only given you some additional tools to use in your day-to-day business but has also given you enough information to hopefully ease some of the worry that many of you are feeling right now. As always, if you have any questions or comments about this particular topic, please do reach out to me but, in the meantime, stay safe out there and I look forward to visiting with you all again next month.

Bye now.

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11/15/2021 Housing and Economic Update from Matthew Gardner

This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 

 


Hello there!  I’m Windermere Real Estate’s Chief Economist, Matthew Gardner, and welcome to the latest episode of Mondays with Matthew.

Before I get started, I wanted to let you know that this will be the final episode of Monday with Matthew for 2021 as I’m going to be taking Christmas off. So it’s time to offer you my forecasts for the U.S. economy and the country’s housing market in 2022.

Although many people – including myself – had hoped that COVID-19 would have become a somewhat distant memory by now, and that the economy would have recovered this was – sadly – not to be the case, and the pandemic’s influence on the economy is still being felt and all the datasets I track tell me that, although we are certainly healing, COVID continues to act as a drag on economic growth and I expect that to continue through the spring of next year – if not a little longer.

Economic Recovery & Growth

And it’s because of this that I – along with many other economists – have spent the last few months lowering our forecasts for economic growth – at least through the middle of 2022. So, let’s look at this a little closer. 

 

 

Here is my forecast for economic growth through the end of next year and you will note that, even though I am cautious in regard to the economy as we move through the winter and into 2022, I am still expecting to see a fairly decent bounce back in the fourth quarter of this year following the very disappointing rate that we saw in Q-3.

And on an annualized basis, I believe that the economy will have expanded by just shy of 5% this year and come in a little below 4% in 2022.

Simply put, the impacts of COVID-19 are going to continue to act as a drag on virus sensitive consumer services next year and ongoing supply chain issues will also delay inventory restocking. Both of these impacts have a depressing effect, in more ways than one, on economic growth, but I don’t see any chance that we will fall back into a recession.

 

A bar graph titled "Non-Farm Payrolls: Average Monthly Change & Forecast," with Q4 2019 through Q4 2022 on the x-axis and figures in the thousands from negative 5,000 to 2,000 on the y-axis. The low was negative 4,333 on Q2 2020 and the high was 1,342 in Q3 2020.

 

Looking at the employment picture this chart shows my forecast for average monthly growth in jobs during a quarter and to give you some context, over the last decade or so the country has added an average of around 200,000 jobs per month during any one quarter and my forecast is for more robust employment growth as we move through 2022 and, if correct, I expect to see the country return to pre-COVID employment levels in the second half of the year.

 

A bar graph titled "U.S. Unemployment Rate & Forecast," showing January 2020 to Q4 2022 on the x-axis and percentage figures on the y-axis, from 2% to 16%. The high was close to 15 percent in April 2020 and the low was just over 3 percent in January and February 2020.

 

And with jobs continuing to return I’m looking for the unemployment rate to continue trending lower and breaking south of 4% during the final quarter of the year. With the expiration of enhanced unemployment benefits – in concert with wages rising significantly in many face-to-face industries such as leisure and hospitality – prospects for people currently unemployed are looking rather good. That said, there are still millions of unemployed Americans who are not looking for work even with wages rising, the labor force still down by 3 million from its pre-pandemic peak, and this is worrying as businesses continue to have a hard time finding employees which raises the expectation that inflation will remain higher for longer than I would have liked to see.

Measures of Inflation

And that leads nicely into my final economic forecast and that is my outlook for inflation. As we have discussed, supply chain issues and labor shortages have increased prices significantly and this top chart shows annual changes in all consumer prices which I expect to remain around 5% until next spring, before gradually dropping down to below 3% by the end of the year.

 

A slide titled "Measures of Inflation" with two line graphs. One is titled "Consumer Prices" and shows the percentage changes on the y-axis and the quarters from Q4 2018 to Q4 2022 on the x-axis. It shows an expected drop from Q4 2021 to Q4 2022. The "Core Consumer Prices" graphs showing the same measurements on each axis. It shows an expected increase in core consumer prices in Q1 2022 followed by an expected drop toward Q4 2022.

 

But the core inflation rate – which excludes the volatile food and energy sectors – won’t peak until early next year before it too starts to gradually pull back and, at these levels, the Federal Reserve will undoubtedly have started to raise interest rates to counteract inflationary pressures. This is not pretty, but I absolutely do not believe that we are in some sort of inflationary spiral, or that “stagflation” will raise its ugly head again.

 

A slide titled "Solid Growth This Year & Next" with a bar graph titled "U.S. Existing Home Sales w/ Forecast." It shows the existing home sales in millions every year from 2021 to 2022. 2021 and 2022 have the highest figures on the graph, at 6.02 and 5.98 million respectively.

 

U.S. Housing Market

Okay! Now it’s time to turn our attention to the U.S. housing market which was a beacon of hope during the pandemic period and, given the massive spike in demand that started last June, I’m looking for a little more than 6 million existing homes will have changed hands in 2021, but I don’t see this level increasing in 2022 – mainly due to ongoing supply limitations as well as rising affordability issues, and I’m therefore forecasting sales to pull back  – albeit very modestly – next year. That said, the country has never seen more than 6 million home selling in a single year since records were first kept so the number is still very impressive.

 

A slide titled " Sales Prices Slow in 2022," with a bar graph titled "U.S. Median Sale Price of Existing Homes & Forecast," which shows the annual percentage change of single-family and multifamily units for the years 2012 through 2022. The highest figure is 16.4 percent in 2021, whereas the lowest in both in 2018 and 2019 at 4.9 percent.

 

And with the market as tight as it has been so far this year, it shouldn’t be any surprise to see median sale prices skyrocketing and, even though we have 3 more months of sales data yet to be released, I still anticipate prices will have risen by almost 16 and a half % in 2021- a quite remarkable number. This pace of appreciation has never been seen before. In fact, the closest was back in 2005 – when the housing bubble was inflating rapidly – but even then, prices only rose by 12.2%.

But, as I mentioned in my sales forecast, this pace of growth is unsustainable and I am expecting to see some of the heat to come off the market next year but, a growth rate of 7.3% is certainly nothing to sniff at.

There are three major reasons why we will see the pace of growth slow. I have already mentioned my concerns regarding housing affordability, but mortgage rates and new supply will both influence the slowdown in sales and price growth in the resale arena.

 

A slide titled "Mortgage Rates Will Remain Favorable" with a bar graph titled "Average 30-Year Mortgage Rate History & Forecast." It shows a predicted increase mortgage rates from Q4 2021 at 3.13 percent to 3.78 percent in Q4 2022.

 

Although I do not prepare a forecast for housing affordability, this is my where I expect to see mortgage rates through the end of next year and I am looking for them to continue “stair-stepping” higher but still ending 2022 below 4% – very low by historic standards given that the long-term average for a conventional 30-year mortgage is somewhere around 7 1/2%.

Obviously, as rates notch higher that starts to compress price growth as it puts a lower ceiling on how much a buyer can afford to pay for a home.

 

A slide titled "New Home Starts Pick Up," with a bar graph titled "Single-Family Housing Starts w/ Forecast." The graph shows the housing starts in the thousands for the years 2012 through 2022. There is a gradual increase, from 535,000 in 2012 to an expected figure of over 1.2 million in 2022.

 

And slowing growth in existing home prices and sales will also be a function of additional supply and this chart shows my forecast for single-family starts this year and next. I expect more than a million homes to start construction in 2022 – continuing the trend that started in mid-2020 – but I am sure that some of you may be asking yourselves that if starts are already robust, how have existing home sales been able to increase so significantly if there has been solid supply coming from homebuilders – and that would be a great question.

And I would answer this by telling you that the way the Census gathers data on start is to count the number of home foundations that have been poured, but vertical construction has not necessarily started. And what we have been seeing is a lot of foundations but not so many homes actually being built – and we know this by looking at the number of homes that are for sale but have yet to be started. So, it’s important to look at a separate number that the Census Bureau also puts out which counts the number of units actually under construction, and that number has been growing significantly over the course of the last 18 months or so.

 

A slide titled "Growth Picks Up in 2022," with a bar graph titled "U.S. Single Family New Home Sales with Forecast." The graph shows the new home sales in thousands for the years 2012 through 2022. Sales were at a low of 368,000 in 2012, jumped to 835,000 in 2020, and are predicted to peak at 927,000 in 2022.

 

Builders have been hamstrung with rising labor and material costs which will lead new home sales this year to fall below the number seen in 2020; however, I do expect this to pick up significantly next year and my current forecast calls for 927,000 new homes to be sold in 2022.

So, there you have it, my economic and housing market forecast for 2022.

Of course, there are still a number of variables that could lead me to revise this forecast but, as an old economics professor of mine used to tell me, “Gardner, forecast well, but forecast often!”

If everything goes according to my plan, you should expect to see the housing market start to move towards some sort of balance next year, but I am afraid that it will still remain out of equilibrium until at least 2023.

And if you’re wondering, no, I don’t see a housing bubble forming and I’m also not at all concerned about homeowners currently in forbearance, but it would be silly to say that there aren’t any issues in the housing market that concern me because there are and the biggest of which is housing affordability and this will have a significant impact on the millennial generation who are continuing to get older, and they are all – well most – thinking about settling down and, possibly, having children, and I wonder how hard it will be for many of them to be able to afford to buy their first home because most really do want to become homeowners. Will builders figure out how to build to this massive pent-up demand? I guarantee you that whoever can solve this puzzle will do very, very well.

COVID-19 caused an unparalleled shock to the US economy and the rise of the delta variant has certainly impacted the speed of our recovery but, rest assured, this particular forecaster firmly believes that we will recover and that the economy will continue to grow.

Demand for ownership housing remains remarkably buoyant and, in fact, it is quite likely that demand may actually increase with the work from home paradigm that will start to gain momentum next year. It will be fascinating to watch how this impacts not just demand, but where these buyers will ultimately choose to live.

In closing, I very much hope that you have all enjoyed the videos that I have shared this year as much as I have enjoyed making them.

As always if you have any questions or comments about this topic, please do reach out to me but, in the meantime, stay safe out there and I look forward the visiting with you all again next year.

Bye now.

The post 11/15/2021 Housing and Economic Update from Matthew Gardner appeared first on Windermere Real Estate.

10/25/2021 Housing and Economic Update from Matthew Gardner

This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market.  

 


 

Hello there!  I’m Windermere Real Estate’s Chief Economist, Matthew Gardner, and welcome to the latest episode of Mondays with Matthew.

 

A few weeks ago, one of my viewers on You Tube sent me a note asking when I was expecting mortgage rates to start to rise and, if I believed that they were going to go up, how fast will they rise, and what impacts will higher rates have on home prices.

Well, I would like to thank this particular viewer for the question, and it’s going to be the topic of today’s video.

How Mortgage Rates Are Set

But before we start looking at the future of mortgage rates, I was speaking to some of our interns here at the office a while ago and one of them asked me to explain how mortgage rates are set and – because this is somewhat pertinent to today’s topic – I thought that I’d take just a minute or two to explain to you how this all works.

Of course, there are a lot of factors that impact the rate that a home buyer themselves will get, and they include credit quality, loan-to-value ratios and the like, but the base rate is set not by looking at a home buyer, but at the economy itself and, specifically, the bond market – and even more specifically, the interest rate of 10-year US treasuries.

Now, if you’re asking yourself why 30-year mortgages are based off 10-year bonds and not 30-year?  Well, that would be a good question, and this is the answer. You see we move, on average, every 10 years and that’s why!

 

 

Here is a chart showing the average yield – or interest rate – on 10-year treasury bills by month going back to 2010 in light blue, and the average 30-year mortgage rate in dark blue. I hope that you can see the tight relationship they have to each other.

Of course, there are times when bond yields can go down and mortgage rates rise, and vice-versa but, in general, they track each other pretty closely.

And if you’re wondering why the rates aren’t simply the same, well it’s because a treasury bond has no risk – as its backed by the US government – but there is some risk associated with a mortgage, so buyers of mortgage bonds expect a premium to be added because of this risk, and this has averaged just over 1.5% since the 30-year mortgage came into being back in the early ‘70’s.

Now, there are some people out there who think that the interest rate on 10-year treasuries doesn’t set mortgage rates, rather its better to track the interest paid on mortgage bonds and, although I do see why they might think  this, the base mortgage rate is actually set by treasury yields and the interest on mortgage bonds is set using that base and adjusting it to manage the prevailing risk tolerance that investors are prepared to accept so I believe that watching movements in the interest paid on 10-year treasuries is the right way to go.

And that, in essence, is how the 30-year mortgage rate is set.

The History of Mortgage Rates

If you are a regular viewer of these videos you will now that I like to start off with some context to the subject I am addressing and this chart will show the average rate for conforming 30-year fixed rate mortgages going back to their genesis in the early 1970’s.

 

Slide is titled Mortgage Rates over 4 Decades and the information is sourced from Freddie Mac Average Rate for 30-year fixed mortgages. Area graph shows a timeline from 1970 to 2021 on x-axis and percentage rates on the y-axis from 0% to 20% at the top. The colors of the graph splits these dates into decades. Overall the graph peaks in the early 1980 above 18% and slowly trends downward until 2020 where rates are the lowest ever.

 

Back in ‘71 rates were in the mid-7% range, rising to just under 10% in ‘74, before pulling back but, as you can clearly see, they started to spiral upward in ’77, ending the decade at almost 13% and if you’re wondering what led to this massive jump, well this was because the country had entered a period of high inflation.

In the ‘70s the country was pushed into a recession basically due to an oil embargo that led to the price of oil quadrupling and that led to a period of so-called stagflation which is when inflation rises, and economic activity slows.

And in the early ‘80’s we entered a period of so-called hyperinflation, as another oil embargo was took hold and the Fed was forced to step in and raised short-term rates which led rates along the yield curve to rise and this – of course – included 10-year treasuries which hit 15.3% in the fall of 1981 and that, as we have discussed, caused mortgage rates to hit an all-time high in October of 1981 at close to 18.5%. Rates then started to pull back and

In the 90’s, rates started to trend lower but jumped again in ’94 as the Fed tightened monetary policy given the significant growth that the country was seeing, but they started to pull back in the second half of the decade, falling to the mid-6’s before notching higher in ’99.

In the 2000’s, rates dropped to 5.3% in 2003 as the housing market boomed but, as we all know, it wasn’t all unicorns & rainbows in this decade of what was then – historically low rates.

The housing crash led the Fed to jump in by cutting interest rates, but they also started a massive purchase of mortgage bonds at very low interest rates as they were happy to take a low return as long as it stabilized the housing market. As a result of their efforts, mortgage rates fell almost a full percentage point, averaging just a hair above 5 % in 2009.

Riding the wave of low bank borrowing costs, mortgage rates entered the new decade around 4.7% and continued to fall steadily, dropping to the mid-3’s by 2012. But in 2013 you can see that rates headed higher. Why? Well, a big part of this has to do with some panic in the bond market, but we will get to that shortly.

Anyway, rates went up in 2014 before dropping to 3.85% in 2015 as the market calmed down.

They rose again after the 2016 presidential election, reaching their peak at the end of 2018 and start of 2019, but still ending the decade below 4%.

As for the current decade, well, it’s all been about COVID-19.

 

Slide is titled Weekly 30-year mortgage rates and the information is sources from Freddie Mac. Along the x-axis is dates from January 2020 to October 2021, and the y axis has percentages from 2% at the bottom and 4% at the top. 2 spots are highlighted, the first is in March 2020, a spike in mortgage rates at the beginning of the pandemic chaos. The other spike was in March 2021, due to a variety of factors explained in the main text and video.

 

To understand what’s happened over the past couple of years, we need to look at the weekly average rate and I am sure that you have noticed the first spike in the graph.

And it was totally due to the Coronavirus which created an unprecedented situation for all rates (not just mortgages, but US Treasuries and everything else).

You see, investors were panicking during the early stages of the pandemic, not just because the country – essentially – shut down for a brief period, but there were rumors about a thing called forbearance, and investors were panicking that they would not get paid for the mortgage bonds they held, and they did what we all do when we get worried about the economy and, specifically, our investments. They get out of their investment positions and into cash and that’s absolutely what they did, but I should add that I am not talking about them stashing dollars under the mattress.  No, they moved into cash positions in financial markets, which are the most liquid, nimble place an investor in the US can be.

And with a lot of institutions and individuals getting out of bonds and not many buyers out there, what happened to rates? That’s right, they rose to attract buyers and rise they did. So much so, in fact, that on a single day in March of 2020, mortgage bonds prices changed 5 times! Quite unprecedented.

Anyway, the Fed reverted to their old playbook and went on a massive bond buying spree with the biggest ever purchase of mortgage-backed securities on Thursday March 19 but, quite remarkably, they announced the very next day that they were going to buy even more.  How much more, you ask… Well, they decided to buy three times more than the record purchase they made just the day before!

And because of this, rates dropped dramatically and continued to pretty much head lower for the rest of the year and into early 2021.

But then the music stopped, as you can see in the second highlighted spike in the above graph.

You see, a special election was being held in Georgia and the bond market decided to take a conservative stance prior to the election and that led rates higher again. But the election wasn’t the only reason why rates rose.

You see, COVID 19 cases that were dropping, improved vaccine distribution appeared to be in place, there were several stronger than expected economic reports released, and progress on a fiscal stimulus package.  All of these factors led rates higher because, as you know, when economic news is positive, that is actually bad for bond yields as people move back into equities and out of bonds which is obviously bad for mortgage rates as bonds need to offer a higher interest rate to attract the few buyers that were out there.

Mortgage Rate Forecast

So that’s where we are today, but what of the future?

 

Slide titled “10-year bond forecast” sourced from Federal Reserve History & Windermere Economics Forecasts Quarterly Average. Bar chart shows the past 10-year US treasure Yield History quarterly from Q1 2020 to Q3 2021. These bars show a valley at the end of 2020 and trend upward in early 2021. The next set of bars show Windermere Economic’s forecast for the next 5 quarters, showing a steady increase each quarter until a high at 2% in Q4 2021.

 

Here is my forecast for 10-Year treasuries through the end of next year and you will see that I am looking for rates to rise gradually as we move into next year and this will lead mortgage rates to start notching higher as well.

 

Slide titled “Average 30-year rate history and forecast” sourced from Freddie Mac history & Windermere Economic Forecasts. Bar chart shows the history of the average 30-year mortgage rate from Q1 2020 to Q3 2021, which show a quick decrease from Q1 2020 to Q4 2020, and a steady plateau in 2021. Windermere Economics forecasts a steady increase starting Q4 2021 until Q4 2022, ending at 3.81%.

 

And here is my forecast for mortgage rates. Although they should move higher, I am still not seeing rates break above 4% until 2023 at the earliest and – even as they start to increase – I really don’t see it as a major deterrent to home buyers.

But before you start to say that this is only one person’s forecast and it could be wrong, lets look at my forecast compared to some of my industry colleagues.

 

Slide titled “ and Industry Colleagues Mostly Agree.” Bar chart shows the forecasts of Fannie Mae, National Association of Realtors, Wells Fargo, Freddie Mac, and Mortgage Brokers Association compared to Windermere Economic’s forecast.

 

As you can see, we are all in a pretty tight range when it comes to forecasting the average rate this year and next.

The bottom line is that although rates will rise, they will remain very competitive when compared to historic averages and the upward trend in rates is unlikely to have any significant impact on prices. That said, many markets are already having an affordability crisis and rising rates will certainly act as an additional headwind to price growth; however, it would take a significantly greater increase in rates to negatively impact prices.

Well, I hope that you have found this month’s discussion to be interesting. As always if you have any questions or comments about this topic, please do reach out to me but, in the meantime, stay safe out there and I look forward the visiting with you all again, next month.

Bye now!

The post 10/25/2021 Housing and Economic Update from Matthew Gardner appeared first on Windermere Real Estate.

9/27/2021 Housing and Economic Update from Matthew Gardner

This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market.  

 

Hello there!  I’m Windermere Real Estate’s Chief Economist, Matthew Gardner, and welcome to the latest episode of Mondays with Matthew.

 

Today we are going to take a look at the latest Home Purchase Sentiment Index survey that was just put out by Fannie Mae. And for those of you who may not be familiar with this survey, it’s actually pretty important and one that I track closely as it’s the only national, monthly, survey of consumers that’s focused primarily on housing.

 

The survey shows the responses of 1,000 consumers across the country to roughly 100 survey questions on a wide range of housing-related topics. Now, don’t worry, we aren’t going to look at all 100 questions – just the ones that solicit consumers’ evaluations of housing market conditions and that also address topics related to their home purchase decisions.

 

So, as you can see here, the overall index was trending higher pretty consistently until the pandemic happened which had massive, but temporary, impacts. And looking the last 3-years, you can get a better idea as to the speed of the pandemic induced drop – pretty remarkable.

Now, you will also see that the index recovered quite quickly; however, it fell again last fall as the pandemic was not going away at the speed many had hoped for – it rose again this spring but has been pulling back for the past few months but, that said, the August index level essentially matched the level seen in July.

Now let’s look at the questions that are used to create of the index number and how consumers responded.

 

Three lines on the same graph on a slide titled “Is it a Good Time to Buy?” which shows sentiment compared to those who think it’s a good time to buy and those who think it’s a bad time to buy. The graph’s x axis shows the percentage of respondents and the y axis shows dates from August 2018 to August 2021. The navy line indicates “Good Time to Buy” the light blue indicates bad time to buy, and the red indicates the net percentage good time to buy. The navy line sits above the other two lines for the most part, but it dips below and switches places with the light blue line in April 2021. The net share of those who say it’s a good time to buy jumped 7%, which is the first time it’s improved in the last four months.

 

When asked whether it was a good time to buy a home, the percentage who agreed with that statement rose from 28 to 32%, while the share who thought that it is a bad time to buy dropped from 66 to 63%. And, as a result, the net share of those who say it is a good time to buy jumped 7 points month over month and its notable that this is the first time the net share number has improved in the past 4-months.

What I see here is that – although improving modestly, the general consensus is that it is not a good time to buy and that sentiment is being driven by two things: One – there are still not enough homes on the market, and two, rapidly rising prices are scaring some people.

 

Three lines on the same graph which shows seller sentiment. The presentation slide I titled “Is it a Good Time to Sell? The graph’s x-axis shows percentages from -60% to 100% and the y-axis shows thedates from August 2018 to August 2021. The navy line represents those who think it’s a good time to sell, the light blue line indicated those who think it’s a bad time to sell,and the red line indicates the net percentage of people who think it’s a good time to sell. The navy line is mostly on the higher end, sitting in the 65% range, until March 2020 when it flips with the light blue line. They switch back in August 2020 when they are 48% and 44%. The different grows in the last few months, landing at 54% net difference in August 21.

 

And when asked if they thought it was a good time to sell their homes it was interesting to see that share drop from 75 to 73% while the percentage who said that it’s a bad time to sell dropped 1 point to 19% and as a result, the net share of those who said it was a good time to sell pulled back by 1% but it still indicates that more owners think that it is a good time to sell than don’t.

 

Three lines on the ame grah to compare different sentiments about whether home prices will go up in the next 12 months. The slide is titled “Will Prices Go Up or Down Over the Next 12-Months” and the x-axis shows the percentage of respondents from -20% to 60%, and the y-axis shows the dates from August 2018 to August 2021. The navy lineindicates the respondents who thinkprices will go up, the light blue line shows the respondents who think prices will go down, and the red line shows the net percentage difference. In August 2021 net share of Americans who say home prices will go up dropped by 9 points – from 25%, down to 16%.

 

 

Looking now at the direction of home prices over the next 12-months, the percentage who think that home prices will rise fell from 46 to 40%, while the percentage who expected home prices to drop rose from 21 to 24%.

As a result, the net share of Americans who say home prices will go up dropped by 9 points – from 25%, down to 16%.

Although this may sound concerning, I should add that the share of respondents who thought that home prices will remain static over the next year rose from 27% to 31%.

 

Three lines on the same graph comparing the different expectations of people considering the mortgages rates of the next 12 months. The slide is titled “Mortgage Rate Expectations for the Next 12-Months” and the graph’s x-axis goes from -80% to 80% and the y axis shows dates from August 2018 to August 2021. The navy line indicates respondents who think mortgage rates will go up, the medium blue line shows those who think mortgage rates will go down, and the red lines shows the net percentage rates will go down. Most people think rates will go up. The net share of Americans who believed that mortgage rates will go down over the next 12 months rose by 5%

 

On the financing side, the share who think mortgage rates will rise over the next 12 months dropped from 57 to 53%, while the percentage who believed rates would be lower rose from 5% to 6% and, as a result, the net share of Americans who believed that mortgage rates will go down over the next 12 months rose by 5%, and with 35% of respondents thinking that that rates will hold steady – it’s clear to me that a vast majority are not worried about mortgage rates rising.

The takeaways for me so far are that consumers tempered both their recent pessimism about homebuying conditions and their upward expectations of home price growth.

Most notably, a greater share of consumers believe that it’s a good time to buy a home – though that population remains firmly in the minority at only 32% – while the ongoing plurality of respondents who expect home prices to go up over the next 12 months dropped but was still well above the 24% of consumers who believe home prices will fall.

Now, there are two more questions that are worth looking at which aren’t directly related to home buyers and sellers but are still important as they look at employment and incomes.

 

Titled “Are you worries about losing your job in the next 12 months” three lines on the same grph show the comparison of respondents between Augut 2018 and August 2021. The navy line represents the respondents who are not concerned, the light blueline shows those who are concerned, and the red line shows the net percentage not concerned. The net share of Americans who say they are not concerned about losing their job fell by 4 percentage points month over month, but remains well above the level seen a year ago.

 

The percentage of respondents who said that they are not concerned about losing their job in the next 12 months remains very high at 82%, but it did drop by 2 points month-over-month, while the percentage who said that they are concerned ticked up to 15% from 13%. As a result, the net share of Americans who say they are not concerned about losing their job fell by 4 percentage points month over month, but remains well above the level seen a year ago.

 

This slide is titled “Is your household income higher now than it was 12-months ago?” the graph has 3 lines on it comparing different responses from the survey. The x-axis goes from -5% to 40% and the y-axis shows the dates from August 2018 to August 2021. The navy line indicates respondents who reported a higher income, the light blue indicates those with lower income and the red line shoes the net percentage who have higher income. The navy line is mostly the largest portion staying on the top of the graph, but it dips below the light blue line in April 2020, May 2020, and February 2021. The red line say a 1% increase in the last month, but rose from 9% in August 2020 to 14% in August 2021.

 

And finally, when households were asked about their own personal finances, the percentage of respondents who said that their household income is significantly higher now than it was 12 months ago pulled back one point to 26%, while the percentage who said that their household income is significantly lower dropped to 12%.

As a result, the net share of those who said that their household income is significantly higher than it was a year ago rose by 1 percent month over month and came in 5 points higher than a year ago. It’s also worthwhile noting that most said that their household income is about the same as it was a year ago with that share rising from 56 all the way up to 59%.

 

Looking at all the numbers in aggregate, the index level was relatively flat in August with three of the index’s six components rising month over month, while the other three fell, and that tells me that the continued strength of demand for housing and definitely favorable conditions for home sellers may well be offsetting broader concerns about the Delta variant of COVID-19 as well as rising inflation that have both negatively impacted other consumer confidence indices.

Most consumers continued to report that it’s a good time to sell a home – but a bad time to buy – and they most frequently cite high home prices and a lack of supply as their primary rationale.

 

However, the ‘good time to buy’ component, while still near a survey low, did tick up for the first time since March, perhaps owing in part to the very favorable mortgage rate environment as well as growing expectations that home price appreciation will begin to moderate over the next year. A sentiment that I personally agree with.

Well, I hope that you have found this month’s discussion to be interesting. As always if you have any questions or comments about this topic, please do reach out to me but, in the meantime, stay safe out there and I look forward the visiting with you all again, next month.

 

Bye now!

The post 9/27/2021 Housing and Economic Update from Matthew Gardner appeared first on Windermere Real Estate.

8/30/2021 Housing and Economic Update from Matthew Gardner

 

This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 


Hello there!  I’m Windermere Real Estate’s Chief Economist, Matthew Gardner, and welcome to the latest episode of Mondays with Matthew.

Today I wanted to take a look at the several housing related data releases that came out in August, and I am going to start off with the new home sector and the July numbers for housing permits and starts.

 

 

New home permits – and here I am referring to single-family permits – fell by 1.7% (or roughly 18,000 units) in July to an annualized rate of 1.048 million units and have been heading backwards since March.

But I always like to put things into perspective and you can see here that although we have seen a pullback over the past few months, the trend has actually been heading higher since we emerged from the financial crisis in 2011.Of course, COVID had a very pronounced impact on permit activity, but it bounced back rather impressively, that is until the parabolic increase in lumber and other costs really started to hit builders hard. 

 

A bar graph and a line graph, both titled "Single-Family Home Starts." The bar graph show number of starts in the thousands on the y-axis, from 600 to 1,400 and dates on the x-axis from July 2019 to July 2021. Year-over-year in July, the number of starts went from 887,000 in 2019, to 995,000 in 2020, to 1.11 million in 2021. The line graph shows the number of starts in the thousands from 0 to 2,500 on the y-axis and years 2005 - 2021 on the x-axis. In 2005, the number of starts was around 4 million, hitting a low point in 2009 at around 500,000, returning to over 1.5 million in 2021.

 

And the slowdown in permits obviously impacted housing starts which dropped by 4.5% – or 52,000 units – to an annual rate of 1.11 million.

Starts fell across most regions, with the exception of the west which rose by 0.9%. Declines were led by the Northeast (-6.3%), followed by the Midwest (-2.3%) and the South (-2.0%).

But again, for perspective, you can see that the longer term trend is still improving, but I am afraid not to the degree needed to address the massive housing shortage that the country faces.

If you have watched these videos for any length of time you will know that I like to look at homes under construction as opposed to housing starts – which many do not – as I believe it offers a better gauge of the market that permits or starts data. And for those who might not be aware of the difference between housing starts and houses under construction, a home is technically started if a foundation has been poured, but it does not mean that vertical construction has started, but homes under construction show just that.

 

A bar graph and a line graph, both titled "Single-Family Homes under Construction." The bar graph shows the number of homes in the thousands the y-axis, from 400 to 750 and months on the x-axis from July 2019 to July 2021. The bar graph shows that in July 2019 there were 524,000 homes under construction, 517,000 in July 2020, and a peak of 689,000 in 2021. The line graph shows homes under construction in the thousands on the y-axis, from 200 to 1,200 and years on the x-axis from 2004 to 2021. In 2004, there were 800,000 homes under construction, a low of roughly 200,000 in 2012, and back up to over 600,000 in 2021.

 

And the number of homes actually being built rose by 1.5% in July to an annual rate of 689,000 units, and that is 33% higher than the same time a year ago.

All regions other than the Northeast – which dropped by 1.6% – saw the pace of vertical construction rise versus June with the South leading the way with a 2.7% increase. This was followed by the Midwest which rose by 1.1%, and the West saw a more modest increase of 0.5%.

Again, when we look at a longer timelines, the growth is actually rather impressive, but, again, it still falls well short of demand.

So, what I see in this data is that the pullback in housing starts was not a surprise, given that permitting activity (which is a leading indicator for starts) having fallen in each of the prior three months. But despite this, the overall pace of new homebuilding actually remains relatively healthy, with the six-month moving average of homes under construction above the pre-pandemic trend at a little more than 655,000 units.

Although rising material costs, a significant shortage of qualified labor, and affordability challenges are all still keeping builders awake at night, I believe that the fundamentals for homebuilding remain solid, thanks mostly to an improving labor market backdrop and still exceptionally low inventory levels.

Additionally, a recent easing in mortgage rates, and a significant pullback in lumber prices which have fallen sharply since peaking in mid-May and are now back to pre-pandemic levels, also provide support to growing new construction activity.

 

Two line graphs, titled "Single-Family New Homes For Sale in the U.S." and "U.S. Single-Family New Home Sales." The "New Homes For Sale" line graph shows the number of homes in thousands on the y-axis, from 240 to 380 and months on the x-axis from July 2019 to July 2021. In July 2019 there were roughly 330,000 new homes for sale, while in July 2021 there was a high of over 360,000. The "New Home Sales" line graph shows the number of homes in the thousands on the y-axis from 400 to 1,100, and months on the x-axis, from July 2019 to July 2021. In July 2019, there were around 600,000 new home sales, a low of under 600,000 in April 202, and a high in January 2021 of nearly 1 million.

 

Moving on to new home sales in July and it was a bit of a mixed bag. As you can see here, the number of new homes for sale continues its upward trend – which bottomed out last Fall – and rose by 5.5% versus June and is up by over 26% from a year ago.

Now, this may sound to be great news but as I dug though the data, I saw a different story. You see, the jump in listings was driven by a record rise in homes for sale that have yet to be built.

In fact, the number of houses for sale that have yet to break ground accounted for almost 29% of total inventory. Why is this? It’s because many builders are very cautious about the market given expensive raw materials as well as limited land supply and construction workers.

 

A map showing the single-family U.S. home sales by region. In the west, there were 215,000 homes sold, a 14.4 % one-month change. In the midwest, there were 71,000 homes sold, a negative 20.2% change. In the northeast there were 22,000 homes sold, a negative 24.1 % change. In the southeast, there were 400,000 homes sold, a 1.3% one-month increase.

 

On the sales side of the equation, contract signings were up by 1% versus June to a seasonally adjusted annual rate of 708,000, but that is down by 27% from a year ago.

Last month’s gain in new home sales was driven by a 1.3% rise in the populous South and a 14.4% jump in the West, but sales plunged 24.1% in the Northeast and were 20.2% lower in the Midwest.

There can be no doubt that affordability is becoming an increasing issue in the new-home market. The median sale price is up almost 18% from its pre-pandemic level, which is a touch lower than the run-up in sales prices in the existing-home market, but still enough to deter potential homebuyers.

And cost is another factor – in addition to COVID-19 – that is accelerating the migration to suburban markets and metro areas in lower-cost states such as Arizona, Utah, Texas and Florida. But, by contrast, new home sales have weakened in areas where population growth has slowed, in part due to an outflow of residents seeking more affordable real estate, lower taxes and other lifestyle advantages. It will be very interesting to see if this is a trend that continues as we head into 2022.

 

Two line graphs titled "NAHB U.S. Housing Market Index" ad "Components of the HMI." The housing market index graph shows numbers from 0 to 100 on the y-axis and months from August 2019 to August 2021 on the x-axis. The index was at just below 70 in August 2019, dipped to a low of 30 in April 2020, hit a peak of 90 in November 2020, and was back to roughly 75 in August 2021. The HMI line graph shoows numbers from 0 to 100 on the y-axis and months from August 2019 to August 2021 on the x-axis. There are thrre lines: single family sales in orange, expectations in grey, and traffic in navy blue. All three follow the same shape, though traffic has stayed roughly twenty points below sales and expectations, bottoming out in April 2020 and peaking in November 2020.

 

Moving on – the National Association of Homebuilders published their Index of Builder Sentiment in August, and the data rather echoes the numbers that we have just been discussing.  You can see that sentiment in the single-family market has been easing gradually in recent months, but it remains well above the 50 level, suggesting that more builders are seeing the market as good, rather than bad, even if the current index is at its lowest level in 13 months.

And when we look at the components of the index, sales conditions fell five points to 81 and the component measuring traffic of prospective buyers also posted a five-point decline to 60. But the gauge charting sales expectations in the next six months held steady at 81.

As we have talked about, builders are facing significant obstacles and this is impacting the pace of new development. According to Freddie Mac, the U.S. housing market is 3.8 million single-family homes short of what is needed to meet the country’s demand and in order to catch up, builders would need to construct between 1.1 million and 1.2 million single-family homes a year to meet long-term demand but, in truth, the start rate would need to be even higher to shrink the existing deficit that we are currently experiencing.

And with more demand than new supply, what happens? That’s right, buyers turn their attentions to the existing home market and that is a neat segue into the final dataset that dropped this month, and that’s the existing home sales numbers for July.

 

Two line graphs titled "Inventory of Homes For Sale in the U.S." and "Y/Y Change in New U.S. Listing." The inventory graph shows the number of homes for sale in the millions on the y-axis, from 1.0 to 4.5 and each December from 1999 to 2020 on the x-axis. Inventory was around 2 millin i nDecember 1999, peaking at nearly 4 million in December 2007, and down to just above 1 million in December 2020. The Y/Y graph shows the percentage changes on the y-axis from negative 100 percent to 60%, and months from March 2020 to July 2021 on the y-axis. In March 2020, the year-over-year change was around +10%. It dipped to below negative 40% in April 2020 and didn't resurface above 0% until December 2020. Peaking in April 2021 at +40%, the y/y change is hovering close to zero as of July 2021.

 

It was pleasing to see that, for the 5th month in a row, Inventory levels ticked higher and, unadjusted for seasonality, were measured at 1.32M units, but I like to look at the seasonally adjusted number and that came in at a still respectable 1.0246M units.

I also like to look at the number of new listings which gives a better view on the market – and as you can see here, they are up year-over-year and that is allowing sales to accelerate.

You see, the inventory number that NAR puts out represents the number of homes for sale at a set date in the month; however, new listings show the total number of homes that came on the market during that month and if a sale is agreed upon in the same month that it comes to market, then it is not included in the overall inventory number.

 

Three line graphs, titled "Existing U.S. Home Sales," "U.S. Single-Family Home Sales," and U.S. Condo/Co-op Home Sales." The existing sales graph shows the number in millions on the y-axis from 3 to 7 and months on the x-axis from January 2012 to March 2021. Sales were at roughly 4.5 million in January 2012, bottomed out at roughly 4 million in May 2020, and peaked at nearly 6 million in October 2020. The single-family home sales graph shows sales from 200,000 to 550,000 oon the y-axis and months from January 2019 to July 2021 on the y-axis. Sales were at just above 350,000 in January 2019, dipped to 300,000 in May 20-20, and returned to nearly 450,000 in July 2021. The condo / co-op sales remained around 50,000 from January 2019 to January 202, dipped to below 30,000 in May 2020, and rose to roughly 60,000 by September 2020, staying consistent until a slight drop off in July 2021.

 

And because new listing activity is still pretty robust, it has allowed sales to tick back up as you can see here. On a seasonally adjusted, annualized basis, sales came in at 5.99M – up for the second month in a row but still well below the numbers we saw last Fall.

On a month-over-month basis, single-family home sales rose by 1% to almost 442,000, but multifamily sales dropped by over 10%, but were still up by 15% from a year ago.

 

Three line graphs titled "Median Sale Price of U.S. Existing Homes," "Median Sale Price of Single-Family Homes," and "Median Sale Price of Multifamily Homes." The median sale price graph shows prices from $180,000 to $380,000 on the y-axis and January dates from 2015 to 2021 on the x-axis. From January 2015 to January 2021, the median sale price has increased from roughly $200,000 to $359,900. Over those same dates, the median sale price of single-family homes graph shows an increase from roughly $200,000 to $367,000, while the multifamily homes graph shows an increase from roughly $200,000 to $307,100.

 

Home prices took a little breather in July – dropping by 0.8% month over month – but are still 17.8% higher than seen a year ago.

Single-family home prices also dipped by 0.8% to $367,000 – but are up by 18.6% from a year ago and multifamily sale prices dropped by 1.3% to $307,100 but were up 14.1% from July of 2020.

 

Three line graphs titled "Months of Inventory" The first one shows single-family and multifamily units. From January 2012, to January 2021, the graph shows an overall decrease from roughly 7 months of inventory to 2.6. The second graph shows just single-family homes decreasing from roughly 6 months of inventory to 2.6 over those same dates, while the third graph showing condo and co-op homes shows a drop from over 7 months of inventory in 2012 to 3.0 in January 2021.

 

Even though we saw modest increases in listing inventory, the market is still far from balanced. At the existing sale pace, there is only 2.6 months of supply, well below the 4-6 months that is considered balanced, but certainly better than the 1.9 months we saw back in January.

The same was seen in the single-family arena which also showed 2.6 months of supply and things were slightly better in the condo and co-op world where there is currently 3 months of inventory.

As I went through the report in more detail, there were a few more nuggets worthwhile mentioning. Although it is true that inventory levels are somewhat higher – which is certainly a good thing – but the market remains remarkably tight.

For example, for every offer accepted on a home in July, there were 3.5 additional offers; half of all offers made in July were above the list price and, because the market remains highly competitive, the number of all-cash offers rose from 16% a year ago to 23% in July. And with 89% of homes going pending in the same month that they were listed, and the average days on market coming in at just 17, we are still quite far away from experiencing a normal housing market.

Well, I hope that you have found this month’s discussion to be interesting. As always if you have any questions or comments about this topic, please do reach out to me but, in the meantime, stay safe out there and I look forward the visiting with you all again, next month.

Bye now.

The post 8/30/2021 Housing and Economic Update from Matthew Gardner appeared first on Windermere Real Estate.

7/26/2021 Housing and Economic Update from Matthew Gardner

 

This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 

 


 

Hello there!  I’m Windermere Real Estate’s Chief Economist, Matthew Gardner, and welcome to the latest episode of Mondays with Matthew.

This month, we are going to take another look at forbearance activity across the U.S.  Now I know that we have talked about this subject several times over the past year, but it is worthwhile to look at it again if only for the fact that the program stopped taking new applications for forbearance at the end of June.

So, let’s take a look at where we were when the forbearance program started and where we are today.

 

 

And as you can see from this first chart, the situation today is a vast improvement from where we were last May when there were more than 4.76 million homes in the program. For context, that meant that more than 9% of all homes with a mortgage were in the program last May – a huge number.

But the latest data from Black Knight Financial shows that – by mid-July of this year – the number had dropped to just over 1.86 million homes, or roughly 3.5% of houses with a mortgage.

This is certainly a pretty impressive recovery, as it means that 2.9 million homeowners left the program between May of 2020 and mid-July 2021.

 

Power point slide titled “Forbearance Plans by Lender” showing a graph of active forbearance plans. The x-axis shows the dates from April 16 2020 to July 6 2021 and the y-axis shows the number of active plans starting at 0 at the bottom and increasing by 500,000 each line with 2.5 million at the top. Three lines represent the different lenders, light blue is Fannie/Freddie, Orange is FHA/VA, and green is Other. They all follow a similar trend, peaking in May and June or 2020 and steadily decreasing until they reach their lowest in July 2021 to the far right of the graph. The source is Black Knight Financial.

 

And when we look at the makeup of mortgages in forbearance, the largest share came from loans backed by Fannie Mae and Freddie Mac – not surprising given the size of their mortgage portfolio – with, at the peak, just shy of two million homes in the program – roughly 7.2% of their total portfolio.

But that number has now dropped to 582,000 or just 2.1% of loans outstanding.

Loans backed by the FHA or VA also peaked last May at about 1.53 million or 12.6% of their portfolio.

But today that number has dropped to 755,000 or 6.2% of the mortgages they hold.

And finally, loans showed here as “other” represent private label securities or portfolio loans, and it’s interesting to see that their numbers didn’t peak until late June when just short of 1.25 million homes – or 9.6% of their portfolio – were in the program.

However, today that number had dropped to 524,000, or 4% of mortgages backed by these entities.

 

What I see from the slides that we have looked at is that the number of active forbearance plans continues to fall; however, the pace of the drop has certainly slowed over the last quarter or so.

After seeing a monthly drop of 12% in April – as a large volume all plans hit their 12-month review date – the pace of improvement has since slowed to just 5% over the past 30 days.

Although the number of homes in forbearance is still higher than I would like to see, fewer than 4% of all mortgages are in the program and we haven’t seen this level since April of 2020, just as the pandemic was kicking in.

 

Power point slide titled “Scheduled Forbearance Plan Expirations” with a bar graph. The x-axis of the bar graph shows months, starting with February 2021 and ending with December 2021. The bars show that a majority of the plans are expiring in June, July, August, September and October. The source is Black Knight Financial.

 

As we look forward, you can see that almost 600,000 homes currently in forbearance are coming up for review so the potential for a greater rate of improvement in the overall number of homes in the program is certainly possible – but not guaranteed.

 

Power point slide titled “Nominal & Inflation-Adjusted Home Prices” with a line graph that shows the Forbearance plans starts. The x-axis is labeled with dates from May 5, 2020 to June 15, 2021 and the y-axis has the number of plans starting at 0 and increasing by 50,000 until 300,000 at the top. There are three lines, the teal line shows the new starts, green shows the re-starts, and the light blue shows the Forbearance plans start. The teal and the light blue line closely match each other, with a peak in May 2020 and a slow decrease since then, while the green line starts low and matches the blue lines starting in September 2020 and then following the same trend from there. The source is Black Knight Financial.

 

Unsurprisingly the number of homes entering the program for the first time as well as repeat plan starts is lower than we saw last summer but again the pace of improvement has slowed. That said, overall starts are down by 3% on the month and when we combine new and repeat starts the number is 3 to 4% lower.

 

Power point slide titled “Nominal & Inflation-Adjusted Home Prices” with a line graph that shows forbearance plans removals and extensions. The x-axis shows the dates from April 21 2020 to June 15 2021, y-axis shows the number of plans starting at 0 at the bottom and increasing my 100,000 until 900,000 at the top. The blue line represents the forbearance plan removals and the green line shows the plan extensions. The green line has a clear spike in June/July of 2020 and the blue line has a clear spike in October 2020. The source of this information is from Black Knight Financial.

 

Of the roughly 460,000 homes in forbearance that were reviewed for either extension or removal from the program in the first two weeks of June, 33% left the program while 67% had the term extended.  This is a lower removal rate than we saw during the first two weeks of either April or May, but I expect to see more homeowners come out of the program, but only as long as the country continues to reopen, and that is not a certainty given the rise of the Delta and Lambda variants of the COVID-19 virus.

Power point slide titled “Nominal & Inflation-Adjusted Home Prices” with a line graph that shows the final expiration month of active forbearance plans that assumes the plans expire in 18 months. The x-axis is the plan final expiration month from May 2021 to July 2022 and the z-axis shows the number of plans from 0 to 450,000. The line spikes in September 2021 around 400,000 and then quickly goes down so that by November the line evens out in the 150,000 range. The source of this information is Black Knight Financial.

 

I actually found this chart to be very interesting. Of the more than two million active forbearance plans, approximately half are scheduled to reach their 18-month terminal expiration date in September and October of this year.

And if we take this data, and then project a fairly modest 3% monthly rate of homeowners leaving the forbearance program, it means that over 900,000 homes would exit the program in the third and fourth quarters of this year.

And with 575,000 thousand plans scheduled to expire in September and October alone – that means that mortgage services will be faced with the daunting task of having to process nearly 15,000 plans per business day during that time. It’s going to be a lot of work!

 

Power point slide titled “Nominal and Real Monthly Payment” with a pie graph that shows the current status of COVID-19 related forbearances as of June 15, 2021. 46% of the pie is orange, representing the total removed or expired plans. 26% of the pie is light blue representing the 1.863 million plans that are active because of a term extension. 18% of the pie is navy representing the 1.292 million who are paid off. 4% is green showing the removed/expired – delinquent and active loss mit. Another 3% is brown, showing the number of plans that were removed/expired because they were delinquent. And the last 3% is grey showing the plans that are active in their original term. The source of this information is Black Knight Financial.

 

Roughly 7.25 million borrowers have used the forbearance program at one time or another through the course of the pandemic and that represents roughly 14% of all homeowners in the country.

Of that 7.25 million, the chart here shows that 72% have left the plan, and 28% remain in active forbearance, but you can also see that loan performance remains pretty robust among homeowners who have left the program with 46% of them getting things squared away with their lenders in regard to missed payments, and 18% having paid off their loan in full – likely from selling or refinancing with a different lender.

You will also see that the number of borrowers in post forbearance loss mitigation is down a tad to 333,000, while those who have left forbearance but still remain delinquent and not in loss mitigation accounts for roughly 3% of total loans in the program or just 195,000.

 

So, the way I see it, although the number of homes leaving the program has certainly slowed which, quite frankly, doesn’t surprise me, I still expect further improvement as we move through the year not just because the economy continues to reopen and people are getting reestablished at work, but also because we won’t be seeing any new owners enter the program.

And finally, I want to show you what parts of the country have a high share of homes in forbearance.

 

Power point slide titled “Nominal and Real Monthly Payments” with a map of the United States of America. Each state is shaded in a color that represents how many homes are still in forbearance. Washington is green at 3.7%; Oregon is green at 3.2%; California is yellow at 4.6%; Idaho is green at 2.3%, Nevada is dark orange at 6.5%; Montana is green at 2.6%, Colorado is green-yellow at 4.3%; Utah is green at 3.9%; Hawaii is orange at 6.8%. Texas and Louisiana are the states with the most, sitting at 7% and 7.9% respectively. Note this data is from March, as State and County data suffer a 3 month delay before it’s released. The source of this is from Windermere Economics analysis of Atlanta Fed data.

 

I must tell you first off, that this data isn’t that timely – in fact these numbers are from March as the data I get at the State and County grain is subject to a three month lag.

Anyway, as you can see from this map, not all states are created equal, with the share of homes in forbearance still elevated in Louisiana, Texas and, to a lesser degree, New York State.

Out here in the West, the rate in Nevada is still high, and California and New Mexico are both somewhat higher than I would like to have seen but, as I just said, this data is a little old, and I believe that the share of homes in forbearance in both Nevada and California is lower today than you see here.

 

Given everything that we’ve looked at today, there are a couple of conclusions that can be drawn.

The first, and most obvious, is that anyone believing but there will be a flood of homes that will be foreclosed on either toward the end of this year or in 2022, is likely to be disappointed. Even if every home still in the program does enter foreclosure which, by the way, is basically impossible, the number of homes that would be foreclosed on would be minimal when compared to the fallout following the financial crisis of more than a decade ago.

And when I say that it’s virtually impossible to expect to see all homes will be foreclosed on, it’s mainly because of the remarkable run up in home values that the country has seen since 2012.

The buildup of equity that all homeowners have seen whether they bought before 2012, or even as recently as the past 2 or 3 years, suggests that if, for whatever circumstance, owners in forbearance can’t get their heads back above water, they will choose to sell their home – in order to keep the equity that they have accumulated.

A typical homeowner in forbearance has a sizeable equity in their home, with median equity of a homeowner in the program measured at just over $100,000. And this significant amount of cash in their homes would allow them to pay the bank back any missed payments, sell, and still walk away with a sizable amount of equity.

The bottom line is that have the forbearance program was needed and it can be said that it has been successful so far in warding off home foreclosures because of the remarkable impact of the pandemic.

Although it would be naïve to suggest that foreclosure rates won’t rise at all, as the forbearance program winds down, I do see them ticking higher but, given all the data that I’ve been looking at, I would be very surprised to see overall foreclosure rates rise to a level significantly above the long-term average.

Well, I hope that you have found this month’s discussion to be interesting. As always if you have any questions or comments about this topic, please do reach out to me but, in the meantime, stay safe out there and I look forward the visiting with you all again, next month.

Bye now

 

The post 7/26/2021 Housing and Economic Update from Matthew Gardner appeared first on Windermere Real Estate.