If You are Thinking of Selling, Now’s the Time

If you thought about selling your house this year, now may be the time to do it. The inventory of homes for sale is well below historic norms and buyer demand is skyrocketing. We were still in high school when we learned the concept of supply and demand: the best time to sell something is when supply of that item is low and demand for that item is high. That defines today’s real estate market.

Jonathan Smoke, the chief economist of realtor.com, in a recent article revealed:

“Our preliminary review of April activity on realtor.com shows that traffic, searches, and listing views are up more than 35% over last year. With 3 million jobs created and close to 1.5 million new households formed in the past 12 months, many more people want a new home of their own, and they want it bad. Their patience will be tested with tight supply—indeed, the No. 1 impediment of active shoppers in April was not being able to find a home that meets their needs.”

In this type of market, a seller may hold a major negotiating advantage when it comes to price and other aspects of the real estate transaction including the inspection, appraisal and financing contingencies.

Bottom Line

As a potential seller, you are in the driver’s seat right now. It might be time to hit the gas.

Homeownership as an Investment: The Role of Price Appreciation

We recently posted on the results from the latest Home Price Expectation Survey(HPES) showing where residential home prices are headed over the next five years. Today, we want to show you what the results of the report could mean to you.

A good portion of every family’s wealth comes from the equity in the home they live in. As the value of their home (an asset) increases so does their equity. Let’s look at a possible case scenario based on the latest HPES.

Here is a chart showing the survey’s projections on annual appreciation over the next five years:

We then looked at the five-year impact this would have on the equity of a family that purchased a home in January for $250,000:

Their family wealth (based on increased equity) would increase by $47,772 over those five years.

Bottom Line

If you don’t yet own, perhaps you should be thinking about purchasing. If you already own, maybe it’s time to move up to enjoy your dream home and also ride the increase in equity of the larger asset.

Home Prices Are Climbing Faster and Faster, but This Is Not a Bubble

This spring buying season is off to a strong start—in fact, prices are going up faster than they were just a few months ago, according to nearly every recent metric. So does that mean we’re in a bubble?

Nope, that’s just what happens when demand increases faster than supply. After all, existing-home sales were up 9% year over year in March, according to the National Association of Realtors®. Inventory is also increasing, but not as fast as sales, resulting in a tight supply getting even tighter.

An equilibrium level of supply on the market is considered to be six to seven months; supply has been under five months since December. Looking at every quarter since 1988, when supply was under five months, prices rose 8% year over year on average. When supply was in the equilibrium range, prices went up only 4% on average.

The median existing home price in March was $212,100, up 8% over last year, according to the NAR. The median list price in March on realtor.com® was $220,000, which was up 11% over last year.

During the peak years of the housing bubble, from 2003 to 2005, the data on supply versus price appreciation looked very similar to what we are seeing now. But there are key differences, which is why I’m confident that on the national level, this is no bubble.

Here’s why, this time, the price increases should stick:

The level of the current price appreciation is not like the bubble. Prices went up 7% and 12% in 2012 and 2013, respectively, as the market corrected for too-severe price declines in the prior years. Last year, the appreciation level moderated. Even factoring in the one-time bounce from the prior overcorrection, median prices have grown less than 8% on a compounded annual basis over the past three years. Median prices, by comparison, grew 10% on a compounded annual basis from 2002 to 2005, without any bounce from a prior decline.  On an inflation-adjusted basis, we are 30% beneath the peak set in 2005.

Likewise, relative to rents or incomes, median home prices are not “unhinged” from long-term averages. The price-to-rent ratio is similar to the rate in the mid-1990s. It was 35% higher in 2005. The price-to-income ratio is now where it was in 2001, and it was about 30% higher in 2005.

During the housing bubble, we saw both prices and sales grow to historical levels fueled by a rapid expansion in mortgage financing. We are clearly not experiencing record sales or record mortgage originations now.

As a result, we are not seeing vacancies increase like they did at the end of the bubble. In 2005, vacancies started to rise before sales and prices reached their peak as a result of flipping activity and overleveraged speculative investing. On the contrary now, vacancies have slowly trended back to more normal levels.

So, today’s higher prices are only to be expected as the economy improves and first-time buyers gradually return to the market. Eventually, those higher prices should encourage more owners to list their homes and builders to start construction on new housing—which in turn should solve the problem of supply.

All Gave Some. Some Gave All

Where Are Prices Headed In The Next 5 Years?

Today, many real estate conversations center on housing prices and where they may be headed. That is why we like the Home Price Expectation Survey.

Every quarter, Pulsenomics surveys a nationwide panel of over one hundred economists, real estate experts and investment & market strategists about where prices are headed over the next five years. They then average the projections of all 100+ experts into a single number. 

The results of their latest survey

• Home values will appreciate by 4.3% in 2015.
• The cumulative appreciation will be 19.4% by 2019.
• That means the average annual appreciation will be 3.6% over the next 5 years.
• Even the experts making up the most bearish quartile of the survey still are projecting a cumulative appreciation of 11.8% by 2019.

Individual opinions make headlines. We believe the survey is a fairer depiction of future values.

More Home Buyers Putting Less Down

A recent post by the National Association of Realtors (NAR) revealed that in the months of December 2014 through February 2015, there was an increase in the number of first-time buyers making a down payment of 6% or less as compared to last year:

• 2014: 61% of first time home buyers
• 2015: 66% of first time home buyers

While the number of small down payments is lower than it was in 2009 when 77% of down payments were 6% or less, it does show the recent decisions by both Fannie Mae and Freddie Mac to offer 3% down payment options to certain buyers is impacting the market. FHFA Director Mel Watt recently explained why Freddie and Fannie made this decision:

“The new lending guidelines by Fannie Mae and Freddie Mac will enable creditworthy borrowers who can afford a mortgage, but lack the resources to pay a substantial down payment plus closing costs, to get a mortgage with 3% down. These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices.”

This is great news to millions of purchasers that have been denied the opportunity to own their own home because of the almost impossible burden of saving for a 20% down payment.

Will these programs create future challenges?

Certain pundits fear that low down payment programs will create a wave of foreclosures down the road. Mr. Watt also addressed this concern:

“To mitigate risk, Fannie Mae and Freddie Mac will use their automated underwriting systems, which include compensating factors to evaluate a borrower’s creditworthiness. In addition, the new offerings will also include homeownership counseling, which improves borrower performance. FHFA will monitor the ongoing performance of these loans.”

Also, the Urban Institute revealed data showing what impact substantially lower down payments would have on default rates in today’s mortgage environment. Their study revealed:

“Those who have criticized low-down payment lending as excessively risky should know that if the past is a guide, only a narrow group of borrowers will receive these loans, and the overall impact on default rates is likely to be negligible. This low down payment lending was never more than 3.5 percent of the Fannie Mae book of business, and in recent years, had been even less. If executed carefully, this constitutes a small step forward in opening the credit box—one that safely, but only incrementally, expands the pool of who can qualify for a mortgage.”

Here are the direct links to the guidelines for each program:

Fannie Mae 3% Down Program

Freddie Mac 3% Down Program

Remember, as with any new program, there will be some confusion. Contact your mortgage professional for a deeper understanding.

Buying a Home is 35% Less Expensive than Renting!

In the latest Rent vs. Buy Report from Trulia, they explained that homeownership remains cheaper than renting with a traditional 30-year fixed rate mortgage throughout the 100 largest metro areas in the United States.

The updated numbers actually show that the range is from an average of 16% in Honolulu (HI), all the way to 55% in Sarasota (FL), and 35% Nationwide!

The other interesting findings in the report include:

• Interest rates have remained low and even though home prices have appreciated around the country (3.9%), they haven’t greatly outpaced rental appreciation (3.7%). “In the past year, these two trends have made homeownership even more affordable compared with renting.”
• Some markets might tip in favor of renting if home prices increase at a greater rate than rents and if – as most economists expect – mortgage rates rise, due to the strengthening economy.
• Nationally, rates would have to rise to 10.6% for renting to be cheaper than buying – and rates haven’t been that high since 1989. 

Bottom Line

Buying a home makes sense socially and financially. Rents are predicted to increasesubstantially in the next year, so lock in your housing cost with a mortgage payment now.

Housing Update: Demand Up, Supply Down, Prices Increasing

Earlier this week, the National Association of Realtors (NAR) released their latest quarterly report. The report covered three important aspects of the housing market:

1. Buyer Demand
2. Supply of Housing Inventory
3. Single Family Residential Prices

Today, we want to break down the highlights of the report along with several quotes from Lawrence Yun, the Chief Economist at NAR.

Buyer Demand

Total existing-home sales (which include single family and condo) were at an annual rate of 4.97 million in the first quarter of 2015. This represents a number which is 6.2 percent higher than the pace during the first quarter of 2014.

Yun: "Sales activity to start the year was notably higher than a year ago, as steady hiring and low interest rates encouraged more buyers to enter the market."

Supply of Housing Inventory

There were 2 million existing homes available for sale at the end of the first quarter of 2015 which represents a 4.6 months’ supply of inventory which is down from 4.9 months a year ago. A healthy balance of supply between buyers and sellers is 6 to 7 months.

Yun: "With supply remaining tight—especially at the entry-level price range—buyers will need the expertise and local market insight of a Realtor® to help them through each intricate step of the buying process."

Single Family Residential Prices

Home prices accelerated in 148 out of 174 metro areas (85%) during the first quarter of 2015 and the number of areas experiencing double-digit price appreciation doubled compared to last quarter. Compared to last quarter, the number of regions experiencing double-digit price appreciation doubled.

The national median existing single-family home price in the first quarter was $205,200, compared to $191,100 in first quarter of 2014. This represents a 7.4% increase year-over-year.

Yun: “…stronger demand without increasing supply led to faster price growth in many markets…Homeowners throughout the country have enjoyed accumulating household wealth through the steady rise in home values in the past few years."

Bottom Line

Whether you are thinking about buying your first home or selling your current residence to buy the home of your dreams, meet with a professional in your market to discuss how the numbers above have affected your neighborhood's prices.

Attaining the American Dream: The 5 Financial Reasons to Buy

We have reported many times that the American Dream of homeownership is alive and well. The personal reasons to own differ for each buyer, with many basic similarities.

Eric Belsky, the Managing Director of the Joint Center of Housing Studies at Harvard University expanded on the top 5 financial benefits of homeownership in his paper -The Dream Lives On: the Future of Homeownership in America.

Here are the five reasons, each followed by an excerpt from the study:

1.) Housing is typically the one leveraged investment available.

“Few households are interested in borrowing money to buy stocks and bonds and few lenders are willing to lend them the money. As a result, homeownership allows households to amplify any appreciation on the value of their homes by a leverage factor. Even a hefty 20 percent down payment results in a leverage factor of five so that every percentage point rise in the value of the home is a 5 percent return on their equity. With many buyers putting 10 percent or less down, their leverage factor is 10 or more.”

2.) You're paying for housing whether you own or rent.

“Homeowners pay debt service to pay down their own principal while households that rent pay down the principal of a landlord.”

3.) Owning is usually a form of “forced savings”.

“Since many people have trouble saving and have to make a housing payment one way or the other, owning a home can overcome people’s tendency to defer savings to another day.”

4.) There are substantial tax benefits to owning.

“Homeowners are able to deduct mortgage interest and property taxes from income...On top of all this, capital gains up to $250,000 are excluded from income for single filers and up to $500,000 for married couples if they sell their homes for a gain.”

5.) Owning is a hedge against inflation.

“Housing costs and rents have tended over most time periods to go up at or higher than the rate of inflation, making owning an attractive proposition.”

Bottom Line

We realize that homeownership makes sense for many Americans for an assortment of social and family reasons. It also makes sense financially. If you are considering a purchase this year, contact a local professional who can help evaluate your ability to do so.

Either way you're paying a mortgage, why not have it be yours?

Homeownership Still a Great Investment!

Four recent news articles confirmed that most Americans still see real estate as a great long term investment. The Gallup organization polled the American people and discovered that they believe that real estate is a better long term investment than stocks/mutual funds, gold, savings or bonds:

http://goo.gl/craj1U

A second survey was done by Edelman Berland which showed that:

http://goo.gl/craj1U

At the same time, Tim Rood, chairman of the business advisory firm The Collingwood Group, explained that real estate is:

“…one of the last legitimate wealth creation opportunities…The leveraged return if you put down 10 percent on a house, the trajectory of appreciation lately is you’re going to get your money back inside of a year and then after that 5 to 10 percent appreciation rates. It's phenomenal."

Bottom Line

Real estate continues to be a sensational long term investment. If you need help with any of your real estate needs, contact a local real estate professional and discuss the opportunities available in today’s market.

Homeowners: We Need to Sell Your House Twice

Every house on the market has to be sold twice; once to a prospective buyer and then to the bank (through the bank’s appraisal). In a housing market where supply is very low and demand is very high, home values increase rapidly. One major challenge in such a market is that bank appraisal. If prices are jumping, it is difficult for appraisers to find adequate comparable sales (similar houses in the neighborhood that closed recently) to defend the price when doing the appraisal for the bank.

With escalating prices, the second sale might be even more difficult than the first. And now, there may be a second issue further complicating the appraisal issue.

The Mortgage News Daily (MND) recently published an article titled Conservative Appraisals Increasingly Mentioned in 2015; Did Something Change?

The article revealed that there was a “flurry” of comments on their website from members expressing concern about…

“…a sudden increase in appraisals reflecting market values well below what had been expected. In some cases the low appraisals had merely required the restructuring of the loan, in others they killed the deal.”

The National Association of Realtors revealed this month that 8% of the contracts that fell through over the last three months were terminated because of appraisal issues.

MND decided to survey their members and ask why this sudden increase in “short” appraisals could be taking place. Here is one result of that survey:

“Almost everyone we spoke to mentioned Fannie Mae's new Collateral Underwriter (CU).”

Collateral Underwriter provides a risk score on individual appraisals which will lead to a ranking of appraisals by risk profile, allowing lenders to identify appraisals with heightened risk of quality issues, overvaluation, and compliance violations. It went on-line on January 26.

Marianne Sullivan, senior vice president of single-family business capability with Fannie Mae believes that CU is not a problem for appraisers. She claimed:

“From an appraiser perspective, one of the lender's responsibilities has always been to review the quality of an appraiser, and they have been using various methods to do that forever. I don’t think appraisers will find this tool to be disruptive.”

However, some think that CU has caused appraisers to become too cautious with their appraised values. One mortgage professional in the MND article explained it this way:

"My personal opinion is that appraisers are being overly conservative in choosing comps because of CU. If CU questions the comps, adjustments, etc., the appraiser would have to do a lot of extra work to justify them. I had anticipated that CU would cause delays because of this extra work, but it seems that appraisers are one step ahead and are being ultra conservative, thus avoiding the extra work in the first place. I haven't spoken to an appraiser about it; this is just my interpretation of what I am seeing."

Ryan Lundquist, a Certified Residential Appraiser in the Sacramento area, agreed:

“One of the unintended consequences of CU may be more conservative appraisals.”

Bottom Line

We must realize that, in today’s housing market, every house must be sold twice and the second sale (to the bank’s appraiser) could be the more difficult one.

4 Reasons To Move-Up This Spring

Spring is in full force; the summer months are right around the corner. If you are debating moving up to your dream home, here are four great reasons to consider buying today instead of waiting.

1.) Buyer Demand is High & Inventory Is Low

Recent numbers show that buyer demand is at the highest peak experienced in years, and inventory for sale is at a 4.6 months supply, which is still markedly lower than the 6.0 months needed for a historically normal market.

The National Association of Realtors, Chief Economist, Lawrence Yun put it this way,"Demand in many markets is far exceeding supply, and properties in March sold at a faster rate than any month since last summer."

Listing your home today can greatly increase exposure to buyers who are out in force and ready to act.

2.) Prices Will Continue to Rise

The Home Price Expectation Survey polls a distinguished panel of over 100 economists, investment strategists, and housing market analysts. Their most recent report projects appreciation in home values over the next five years to be between 11.7% (most pessimistic) and 27.5% (most optimistic).

The bottom in home prices has come and gone. Home values will continue to appreciate for years. Waiting for your current home’s value to increase before selling could price you out of your new home if you aren’t careful.

3.) Mortgage Interest Rates Are Still Near Record Lows

As we reported last week, interest rates have remained below 4% for some time now, and are substantially lower than the rate previous generations paid when getting a mortgage.

The Mortgage Bankers Association, Fannie Mae, Freddie Mac & the National Association of Realtors are in unison projecting that rates will rise over the next 12 months.

An increase in rates will impact YOUR monthly mortgage payment. Even an increase of half a percentage point can put a dent in your family’s net worth. Whether you are moving up or buying your first home, your housing expense will be more a year from now if a mortgage is necessary to purchase your home.

4.) It’s Time to Move On with Your Life

The ‘cost’ of a home is determined by two major components: the price of the home and the current mortgage rate. It appears that both are on the rise. But, what if they weren’t? Would you wait?

Look at the actual reason you are buying and decide whether it is worth waiting. Have you always wanted to live in a certain neighborhood? Would a climate change be just what the doctor ordered? Would you like to be closer to family?

Bottom Line

If the right thing for you and your family is to move up to your dream home this year, buying sooner rather than later could lead to substantial savings.