Friday, January 27, 2017

Robust Economic Acceleration Equals Higher Interest Rates

The engine of the American economy is starting to fire on all cylinders. The DJI average busted up over 20k for the first time ever this week and the 'bull' is on the loose. Companies seem to be poised for expansion and hiring; all of this leads to strong economic growth. That is a good thing and will be much needed relief to the anemic post-recession economy.

There is of course a slight downside. Strong bull economies lead almost invariably to higher interest rates. As with everything in capitalistic economies, the market is based largely on supply and demand. As the stock market begins to soak up cash to chase the bull, interest bearing bonds, bank accounts and home loans begin to look less attractive. Rates rise to increase the demand and thus buying a home with borrowed funds becomes more expensive.

Buyers are in a precarious place of having to deal with stingy sellers and the threat of rising rates. Losing a deal by bickering over a few grand with the seller could cost tens of thousands later, in the form of a 1/2 point spike in rates.

I have written many times on this blog that higher interest rates are a much bigger deterrent than price. Any rate under 5% is historically a FANTASTIC rate and any rate under 6% is still historically better than average. But I fear Americans have gotten used to the 3.5%-4.5% mortgages we have had for the last 5-6 years. People under 35 can't remember rates much higher than 5%. The last ten years has been an aberration caused by a sluggish economic growth rate and a huge recession in 2008-2009.

Buyers that lock in a low sub-five rate will be dancing for joy a few years from now when rates are back in the "normal" range of the low 6's.  Back in 2015 I went into extensive detail about rate versus price; check that article out here : "Rate Usually Beats Price" February 9th, 2015.

Friday, January 20, 2017

New Administration in Washington, What of our Industry?

Alex Wong/Getty Images
At noon today Eastern Time just a little while ago, the 45th President of the United States was inaugurated. What will this mean for the real estate industry? Will it be good? Bad? Indifferent? Well could go either way really.

Most industry analysts feel that President Trump will move to soften some of the regulatory portions of the Dodd-Frank law that created a number of positive protections but also has allowed for problems with lending that has excluded many Americans from getting a home.

The President should use caution when making these changes, but if we can get appraisal companies to conform to better practises to help end the outrageous gouging and poor service that has resulted in the aftermath of the Dodd-Frank rules, that will be a great benefit to our industry.

If our new President's policies lead to a stronger overall economy there will be increased pressure on interest rates. This will lead to a higher cost of home ownership and that could cause some slowdowns in both price appreciation and the number of eligible buyers in the marketplace.

I would caution buyers from thinking that a softening price condition with higher rates is good for the long term. it is not. Paying $300,000 for a home at 4% is better than paying $280,000 for the same house at 5% unless one plans to live in the house for less than five years. As an important note, I do not see a softening in actual price but like most industry experts are saying, I see a slowdown in the rate of price growth. It is double jeopardy for buyers on the edge of the bubble as prices may not rise as fast in 2017 they will probably still rise. Rising rates are ultimately the bigger threat to affordability and that appears to be the direction for 2017 as well.

The bottom line is that buyers need to get off the fence and jump into a purchase before the market yanks them off on the renter side.

Friday, January 13, 2017

Wages still not keeping up with housing.

The following is an article published nine months ago and based on trending data at that time. The market has softened up a bit, but the rising interest rates coupled with the wage problems discussed in this article could spell trouble if something doesn't give. The President-Elect of the United States is driving at skilled labor jobs and if he is successful that could alleviate the wage to housing slide we have been in for a good long time.

Home prices have returned in most markets to the peaks of 2006-07 but wages have not seen significant increases over that time. Let's hope our economy can start producing real jobs so more Americans can afford a home. In the meantime buyers should pay close attention to rate they perked up in December and appear to have leveled off, for a little while at least.

Fast-Rising Home Prices Plus Slower Wage Growth Could Equal a Problem

By Clare Trapasso | Mar 24, 2016 originally posted here.

As Scooby-Doo would say: Ruh-roh!

Housing prices are rising at a faster pace than wages across the U.S.—and that could spell extra trouble for those looking for a home to call their own, according to a recent RealtyTrac report.

The average worker typically spent about 30.2% of his or her paycheck on the combined mortgages, property taxes, and insurance premiums on a median-price home costing $199,000, according to the report. RealtyTrac looked at housing prices for the first two-and-a-half months of this year as well as U.S. Bureau of Labor Statistics wage data from the third quarter of last year, the most recent available, for the report.

That’s a hefty 26.4% over the first quarter of last year.

Home price growth outpaced earnings in nearly two-thirds, or 61%, of the markets tracked in the report.

“We’re heading in a direction where people are no longer going to be able to afford homes,” says RealtyTrac spokesman Daren Blomquist. “The fear: Is this heading in the direction of a housing bubble?”

The numbers are also a big jump from early 2012 when workers plunked down only about 22.2% of their earnings on their new homes. But it’s a significant drop from the titanic 53.2% that homeowners spent at the peak of the pre-collapse real estate market in 2006.

The report looked at public sales deeds in counties with at least 100,000 residents and average earnings data from the U.S. Bureau of Labor Statistics. Affordability was calculated based on the percent of earnings required to meet a 3% down payment (which, in the world of down payments, is pretty low) as well as make payments on the property taxes, insurance premiums, and a 30-year, fixed-rate mortgage for a median-price home.

Lower interest rates on mortgages have kept home buying still reasonably affordable.

But if those rates, along with home prices, continue to rise—while wages don’t—Blomquist worries only the superwealthy will be able to afford to become homeowners. Or prices could plateau or even plummet.

The worst-hit area tracked by the study: Denver. Buyers in that fast-growing city saw the biggest hikes in the percentage of their wages they shelled out to purchase a new home compared with what buyers had paid in the past.

“Our home values are increasing about 1% a month,” says Denver-area real estate agent Kristal Kraft at the Berkshire Group. “It’s insane. I’ve never seen anything like it.”

The Colorado capital was followed by counties in New York City; Omaha, NE; Austin, TX; San Francisco; and St. Louis.

Brooklyn, NY, was ranked the most populated county where homeowners saw the biggest increase in what they forked over for their personal palaces compared with previous years.

The most affordable market for wannabe homeowners was Boston, when looking historically at how much of home buyers’ paychecks went toward the purchase compared with previous years.

Next up were counties in Baltimore; Birmingham, AL; Providence, RI; and Chicago.

Here’s a surprise: The most populated and more affordable county was Los Angeles.

When housing costs rise faster than salaries, workers will often take a closer look at which jobs they can afford to accept and which parts of the country they can afford to live in, says Daniel Shoag, a public policy professor at Harvard University.

“You basically have a situation where it’s not worth it to move to expensive cities, if you don’t have a high-paying job,” he says. Or they’re just loaded.

However, it isn’t “out of whack” for homeowners nationally to spend about 30% of their paychecks for the roof over their heads, he says.

“But it could put the strain on budgets if [prices] continue to rise,” Shoag says.

Clare Trapasso is the senior news editor of and an adjunct journalism professor. She previously wrote for a Financial Times publication and the New York Daily News. Contact her at Follow @claretrap

Friday, January 6, 2017

Hello 2017!

Well a new administration is coming into power shortly and some are speculating that the Dodd Frank legislation may be repealed or modified. I am not certain repeal is necessary but there are some provisions in the law that has led to some serious problems for home buyers.

Hopefully the 115th Congress will look at some of the provisions that have created a logjam in home mortgages and a bit of a racket for appraisal companies that have jacked rates into the stratosphere and seriously hurt first time home buyers from getting a chance at the dream.

Regardless of one' political leanings, some rules changes would genuinely help home buyers and with home ownership at a 40 year low, buyers can use some help.

Rates are creeping up, I have been all over this issue and buyers are now jumping in. Sellers, sharpen up that pencil and make your deals, because once rates get up another point or so, this sellers market will go neutral quickly.

Buyers jump in now before that 4.25% rate becomes a 5% rate. I saw some November locks in the low threes and December locks were mostly in the upper threes. Now rates are above 4%. Let's be real clear friends, any rate below 5.5% is still historically a low rate. But the higher the rate, the bigger the payment and for many buyers it can be the difference between buying and renting.

This is a great time for real estate so let's make 2017 a fabulous year!

Happy New Year!