Further Proof the Real Estate Market Is Coming Back

Last week, the National Association of Realtors (NAR) released their Pending Sales Report which showed that contracted sales were 12.8% higher than the same month last year and higher than any time since sales were impacted by the Homebuyers’ Credit back in April of 2010. The index stood at 101.4 which represents a level that is “historically healthy” (see methodology below).

Here is a graph showing pending sales over the last twelve months:


The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.

The index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity parallels the level of closed existing-home sales in the following two months.

An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales; it coincides with a level that is historically healthy.


Finding the Positives in Economic and Housing Conditions in 2012

While 2011 was clearly a challenging year, there is a lot to be positive about looking ahead. Economically, while buffeted by natural disasters and fiscal policy indecisiveness at home and a European sovereign debt crisis abroad, the U.S. economy was able to stave off economic stagnation in 2011 and is likely to continue to do so in 2012.

Housing statistics and the duration of the housing downturn to date indicate that 2012 may be the year we begin to turn the corner. In the summer of 2011, economic concerns peaked as the economy appeared to be on the brink of stagnation. Since the recession officially ended, this was a nadir for the economy as consumer confidence Data as of November 2011 plummeted, concern about a double-dip recession resurfaced, and fiscal policy indecisiveness reached its zenith. In the second half of the year, and heading into 2012, most major economic statistics are exhibiting an encouraging level of stability and positive, but weak, trends. Though the pace of growth is slow, it is to be expected in an economic recovery caused by a financial crisis.

Households are paying off their debts and at the same time accessing credit more easily. Surprisingly, households also added Home Equity Lines of Credit in the third quarter for the first time since the financial crisis began, which is a positive sign of access to liquidity that softens the impact of income shocks. A quarterly survey by the New York Federal Reserve Bank1 shows that total household debt continues to decline, but at a slowing pace. During 2012, households will need to find their equilibrium between household debt levels and consumption.

Consumer sentiment rebounded strongly in the latter part of 2011, posting a six-month high in December. While still low compared to pre-recession levels, this figure indicates an improving belief in the strength of the economy in 2012.

The labor market seems to be ever so slowly clawing its way toward recovery. In December, jobless claims were at their lowest level since 2008. The unemployment rate is proving stubbornly persistent and gains are often due to declines in the number of people participating in the labor force. The consensus is that unemployment will remain high in 2012 and that it will take a number of years to reduce the level significantly. Nonetheless, there has been consistent private sector job creation in the latter half of 2011. We can expect the persistence of unemployment to be a particularly contentious issue in the 2012 election year.

Housing is an industry with long business cycles. Typical regional housing recessions have taken anywhere from three to five years to find their bottom. The national housing recession has behaved similarly in that it has bounced along a bottom for the past two years. While prices are declining again to new lows, affordability is rising dramatically due to a combination of house price deflation along with rock-bottom mortgage interest rates. Adjusting for inflation, this has been a “lost decade for housing as prices are the same as at the beginning of the millennium.

The time is right in 2012 for prices to begin growing again and housing affordability will put a floor under any further significant declines in 2012. The spring and summer buying season in 2012 will be watched very closely for positive signs of demand.

Most housing statistics basically moved sideways in the latter part of 2011. Builder sentiment is improving ever so slowly, but remains at very low levels. Housing starts are also increasing, driven mostly by multifamily starts. Even single-family housing starts began increasing at the end of 2011. Both single family starts and permits rose at an annualized pace of 15 percent over the six months ending in November 2011. Existing home sales also started to trend upward at the end of 2011, and were 12 percent higher in November 2011 compared to January 2011.

Putting all of these statistics together indicates there is a very long way to go and that the housing market is likely to sustain these trends in 2012. While we cannot say with a high degree of certainty what 2012 has in store for us, indications based on the latter part of 2011 are that both the broad economy and the housing market are moving toward positive growth in 2012. However, some impediments do exist including slower global economic growth, a recession in Europe, and fiscal and political uncertainty in the U.S. Taking these facts and trends together, we are bullish on the prospect of improving economic performance in 2012 from 2011.

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Study reveals second home market is improving, what does the future hold?


Home buyers in 2011

The 2011 National Association of Realtors® Profile of Home Buyers and Sellers surveyed 5,708 home buyers and sellers, learning that the demographics of home buyers and types of homes being sold has shifted drastically this year, mostly due to job instability and insecurity as well as tightened lending.

Now, more buyers are married, older and have higher incomes and there is a striking lack of diversity in the home buyer pool with 85 percent of American buyers identifying themselves as Caucasian, and almost all were born in America and primarily speak English.

Why are consumers buying? They cite a desire to own a home as a top reason to buy with affordability close behind. Most people purchased a home because of life changes like a new baby, relocated job or empty nest, and because it was “just the right time to buy.”

What about second homes?

The NAR study reveals that 19 percent of recent home buyers own more than one home, which is very promising as this number is up five percent in a year that various other reports indicate the economy is so bad that buyers are hesitant to buy a first or second home. “The increase speaks to those who are able to purchase a home in this market,” NAR reports, reiterating that stable buyers are not the buyers falling off of the map as they can qualify for a mortgage despite tightened lending.

According to the study, 74 percent of buyers over the age of 65 own a second or third home, and only one percent of buyers aged 18 to 24 owning more than one property. Ten percent of buyers aged 45 and up own an investment property in addition to the home they most recently purchased.

What the future holds

So, the second home market is actually performing well because it pulls from a buyer pool that is financially stable, but what are buyers’ plans for the future?

We reported that Trulia’s American Dream Survey revealed that two thirds of consumers over the age of 55 still anticipate they will purchase a second home in the future, while Coldwell Banker’s study on Baby Boomers offered similar results, noting that 87 percent of agent/broker respondents said that they have baby boomer clients who already own or are looking to own a second property for investment.

The Coldwell Banker study split Baby Boomers up into two groups, the first aged 47 to 55 and the other aged 56 to 65, which revealed very different results in buyer habits. Regarding second homes, more than one in three younger boomers are interested in buying a second home while only one in five older boomers are interested in buying an investment property.

Although this market is performing well and buyers have future plans, the disparity between those capable and interested and investing and those that are on low, fixed incomes is becoming wider. A recent Pacific Investment Management Company, LLC (PIMCO) report entitled “Are There Any Rungs Left on the Housing Ladder?” revealed that many seniors are becoming renters as they are now required to contribute 10 percent more of their pay to their retirement savings and have less disposable income, limiting their ability or willingness to upgrade their home or buy second homes which has long been a tradition in this segment of America.

The second home market is healthy, and the buyer pool tends to be older and plans to keep the American dreams of homeownership, land ownership and investment alive, but the haves and have nots, like many demographics in America, are becoming disparate.

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Bullish on Home Ownership (Part 1 of 2)

Bull-150x150Dave Stevens, former head of FHA and the current President and CEO of the Mortgage Bankers’ Association, is bullish on home ownership. According to Stevens, there’s sunshine on the horizon and it may be here sooner than anyone realizes.

A few days ago I had a chance to interview Dave Stevens about his take on where we are in terms of a real estate recovery. I also asked if he had any good news he could share in light of the constant onslaught of bad economic news. Here’s what he had to say.

1. The Market is Stabilizing
According to Stevens, the real delinquency rate is down from 10 percent in the second of quarter of 2010 to 8.5 percent for the second quarter of 2011. New foreclosure starts are also down. In addition, three of the hardest hit states for foreclosures, Florida, Nevada, and Arizona, are also stabilizing. Furthermore, for standard fixed rates loans, the delinquency rate was 6 percent in 2010. That number has dropped to 5 percent in 2011. As Stevens put it, “This is very close to being in ‘normal’ territory.”

2. Most Sectors Are Experiencing Real Home Price Growth
The problems with negative equity and declining prices are actually concentrated in a few key states. For example, 24 percent of the foreclosure activity is concentrated in Florida. Fifty percent of the foreclosure activity is in five key states. Stevens says that people who quote declines in the average price of homes nationally are using “dangerous data,” since each market is different.

According to Stevens, price declines are not a national problem. “The fundamentals are better than ever.” In fact, if you remove the foreclosure properties from the equation, non-distressed properties have actually experienced an increase in prices.

The challenge is consumer sentiment. People are scared to purchase now because they don’t know whether they will have a job. Nevertheless, for those who are willing to purchase in this market, the opportunity has never been greater.

3. The Best Time Ever to Buy
Many people view the cost of home ownership based exclusively on the price they pay for the property. A more accurate way to judge the cost is how much you paid plus the cost of the interest that you pay over the term of the loan. To illustrate this point, assume that a buyer is going to purchase a home with a $200,000 loan. The interest rate is four percent. Many buyers are worried about prices falling more. If the prices were to decrease another 5 percent, that means that the property would decline in value by approximately $10,000.

If the interest rate increases from 4 to 6 percent, the cost of waiting is extremely high. Over the life of a 30-year loan, the borrower will pay $87,937 more in additional interest. The cost of owning that home costs a whopping $77,937 more than the apparent $10,000 they might have saved by buying at the bottom of the market.

4. The Coming Home Shortage
Stevens says that there are two primary factors that will contribute to a home shortage in the not too distant future. The first of these factors is the size of Gen Y (those born between 1977 and 1994), which is estimated to be approximately 80 million or 25 percent of the U.S. population. They are now entering their prime time for starting their careers, their families, and for buying a home.

The second variable is supply. There has been virtually no new construction, despite the predicted explosion in population growth. To illustrate the severity of this problem, the 2010 census put the U.S. population at approximately 309 million. By 2050, the prediction is that the U.S. population will be 439 million. That’s a 130 million increase in just 40 years. Regardless of whether they own or rent, they will still need housing.

5. Getting from Here to There
Stevens believes the major challenges we are facing in the short term are job creation and dealing with the tight credit situation. The GSEs (Fannie and Freddie) as well as FHA have tightened lending guidelines to such a degree that is extremely difficult for even well qualified buyers to obtain a loan.

Furthermore, the tremendous amount of new regulation creates additional problems. For example, the Dodd-Frank bill alone adds over 100 new regulations. Each of these regulations creates additional risk resulting in higher costs for the both the borrower and the lender. Lenders have to alter loan documents, create new systems, and retrain their people to handle these new requirements. Furthermore, the effect of “piling on” more and more regulations increases the cost to consumers as lenders must defend themselves against additional litigation risks.

According to Stevens, real estate is now at bargain levels that we will never see again in our lifetimes. If there were ever a time to buy a home, that time is now.

Want to know more? Call me at 206-713-3244 or Emmanuel@EmmanuelFonte.com