Rising rates can’t stop this market

Nationally and regionally home prices have been increasing for more than a year, spurred by high buyer demand and a shortage of inventory. When the head of the Federal Reserve announced the tapering of Quantitative Easing (QE is an unconventional monetary policy used by central banks to stimulate the national economy when standard monetary policy has become ineffective) which would scale back its massive bond-buying program, the markets reacted predictably. The stock market lost 350+ points on that day, a ‘knee jerk reaction’ to the long awaited announcement.

The next announcement was that the slowing of buying Mortgage Backed Securities would ‘harm’ the housing recovery. Of course, everyone looked at national housing indexes (Case Shiller, etc.) and were surprised that the markets appear unharmed. Number one, the indexes are based on two month old history or older, so it doesn’t show current market reaction. Secondly, other portions of the economy have gained traction helping consumers gain economic traction after the slowness of the last five years. The housing market has been one of the chief drivers of economic growth as buyers rush in to make the most of historically low mortgage rates and record affordability.

But mortgage rates have risen over the past month and have been steadily rising since the first of the year, with many analysts and economists expecting an economic slowdown as the Fed prepares to taper its bond purchases. Higher rates could encourage more buyers to quickly lock in a deal, while pricing some alternatives out of consumer’s economic reach. Either way, economists say, it could be potentially destabilizing to the housing market.

Here’s the thing: the data can be a bit misleading. When an area’s home values have been very, very depressed for long, it simply doesn’t take that vast of an uptick to generate double-digit percentage point increases. When you look at the top five recovery markets, according to the Case-Shiller index, four of them: Phoenix, Las Vegas, Miami and Tampa – ranked among the hardest hit markets in the foreclosure crisis and resulting downturn (San Francisco was the anomaly). When you look at other markets that skated through the recession relatively unscathed, like New York and Texas, you see the percentage point increase year-over-year was much less impressive/ less scary (depending on your outlook), at 2.6 percent. And if you average the appreciation of most of these markets over the last 5 years, the appreciation is more realistic. So again will we see the slowing of the recovery? We may see a plateauing, but not a stop.

Is real estate appreciating too quickly?

If you look at the often quoted Case-Shiller home price index, American home prices increased an average of 10.6 percent between March 2012 and March 2013. Twelve of the twenty major metro areas tracked had year-over-year median home price increases in the double-digits. The list was topped by Phoenix, San Francisco and Las Vegas, all of which saw 20 percent or greater annual home price increases. That seems to fast in a short period of time. So aggressive, in fact, so similar to before, that it’s created the fear that the current market’s exuberance will re-create the steep incline and decline in home values that we all remember harshly from the last boom-bust cycle.

Here’s the deal: markets have cycles, period. Real estate, stocks, precious metals, pork futures, etc; this is the nature of capitalism. And we assure you, some markets will have a bit of a bubble due to lack of inventory and then a quick supply for that demand. But as a general rule, I can guarantee you that the ups and downs will repeat, though hopefully not to such extremes. Part of what made the last down cycle so extreme was the fact that lenders were so liberal in their underwriting of home loans to borrowers without requiring them to document their ability to pay for the property over the long term. Buyers, in turn, overextended themselves regularly. Today’s loans are allowing people to buy without putting much down, but I haven’t seen almost any examples of the fully stated income or so-called “liar’s” loans that really got people in trouble.

Are investors driving demand?

In most areas of the country, investors are buying up lots of low-priced homes. From big Wall Street investment groups to mom-and-pop investors, people who don’t plan to live in the homes they’re buying were responsible for about 20% of May home sales. But this number is actually on a downward path – investors were responsible for 22% of home sales in April, and investor activity should continue to decline as prices increase, putting a cap on the profits investors can realize. The large residential REITs are not able to get the discounts and leverage they had 6 to 12 months ago. And in Texas they have little to no impact due to their lack of ability to find the returns they need to satisfy their investors.

While investor activity is declining, buyer demand is increasing, as evidenced by increasing numbers of cash transactions, offers per property and speed of homes leaving the market. First-time buyers are responsible for 36% of current buyer activity and repeat homeowners for over 43%. Investors have been active, but by no means are they responsible for creating the intense buyer demand that now characterizes the market. So no, investors are not driving demand.

Are home sellers stuck in underwater homes?

This time, let’s start with what’s true. Many, many sellers in hot markets are in the midst of a Catch-22: they can finally sell their homes, which have been underwater for years. But now they struggle to buy, amidst the multiple offers over the asking price. They report having to make offers on dozens of homes, or even having to rent a place until they can buy one. As I see it, sellers aren’t stuck as much as they are being forced into being strategic about their sale and purchase. They need to think about sequencing their transactions and potentially moving to another neighborhood. During the recession, millions of sellers had no equity – or negative equity. That meant they couldn’t sell, which meant they didn’t have the money to buy – heck, many couldn’t even refinance. That’s what I call stuck. Now, they have the option to pull cash out to buy first, the option to refinance and stay put, and the option to sell – period. So in my opinion, today’s sellers are nowhere near stuck, and as the national and regional markets continue to improve more and more are at near their needed value

If you’re selling in a hot market, put a strategy in place. Consider buying first, if you have the means or can get them. Or list your home with a Seller’s Contingency or a rent-back agreement (where your home’s buyer rents it back to you for a short time), to buy yourself some extra time to score a new place. Your agent and mortgage experts can help.

The homeowner is in a much better place than they were a year ago. Many more are no longer underwater on their values vs. what they owe. This is because the nation is seeing and feeling a housing recovery.

Foreclosures are a thing of the past

Through the recession, many banks and mortgage servicers began to hold hundreds of thousands of foreclosed homes off the market to avoid flooding it, depressing prices even further than they already were. And even now, these institutions continue to trickle them onto the market, rather than creating a deluge of home inventory. Additionally, mortgage regulators now allow servicers to rent out REOs, versus selling them, and to hold them as long as 5 or 10 years following foreclosure, if needed. In Texas, foreclosures have been a non factor with less than 2% of all homes experiencing the foreclosure process……not all were foreclosed on. This is a minute amount compared to markets where over 50% were foreclosures.

If there is a foreclosure in your neighborhood it is an issue. And unfortunately, foreclosure tend to happen in clusters in neighborhoods, so yes it affects values in those communities. But again, not much of an issue in Texas.

While we are seeing a steep decline in the number of newly foreclosure homes, we can expect to have a higher-than-average number of foreclosed homes – REOs – on the market for some years to come. This so-called “shadow inventory” had declined over 10% nationwide between January 2012 and January 2013. And with the uptick in demand, we should continue to see this so-called “shadow inventory” of homes decline as banks take the opportunity to get these homes off their books.

Home prices continued to climb in May as more buyers chased fewer homes for sale

Reduced supply, greater demand, and economics in action. In fact, the continued aggressive improvement has prompted some economists to have concern that the home price growth is too fast, and only additional supply would be able to moderate future price growth. Median home prices were up by 15.4% from a year ago, which partly reflects the fact that the share of more expensive properties being sold has increased and the share of foreclosed-property sales has declined.

If anything, a bit of a slowdown would help the market repopulate supply. In Austin and San Antonio, median values have increased somewhere between 8 to 10%, which is a healthy gain. In reviewing values for larger metro areas, double digit annual gains whereas they are a welcome gain, they also show a market, which will attract speculation which in turn hurts the market.

Nationally, regionally and locally home sales have posted year-over-year gains for the last 23 months. Sales nationally in May were up by 12.9% from a year earlier, which was the largest year-over-year increase since October 2011. No signs of a slackening of demand or lack of a housing recovery in Texas metros where sales volume exceeds the previous years by at least 10+%. With the continued job creation and lack of supply, this should continue for 3+ years with current demand.

Inventory is beginning to repopulate

Nationally, the number of homes listed for sale rose by 3.3% in May, leaving 2.22 million homes available for sale. This is still 10.1% below last year’s May level, and many markets still favor sellers. At the current sales pace, there was a five-month supply of homes for sale on a seasonally adjusted basis. That’s up from a low of 4.7 months in January, but below last year’s level of 6.2 months. In both Austin and San Antonio, we have seen listings increase which in turn helps supply the tremendous demand, but has not slowed it.

Low mortgage rates

Have mortgage interest rates gone up? Yes. Is the Fed signaling they intend to raise rates, too? Yes – in 2015. Even today’s higher rates are not worth your worry. Nor is an increase of rates likely to cause all the pent-up buyer demand of the last few years to dissipate. Last year we saw the lowest mortgage rates we have seen in the last 60+ years, or the lowest since the Depression. Not only did this help affordability for the consumer, but at no other time, had they been able to buy as much home as they could last year. But as the economy, the housing market and the Federal Reserve begins to see stronger demand, these rates will go up. In the week ending Jan. 9, 2013, the average 30-year fixed rate climbed to 3.67 percent from 3.58 percent the prior week. Rates on 15-year fixed loans rose to 2.92 percent from 2.88 percent. Despite the increase, rates are still affordable comparatively, so locking them by purchasing should encourage consumers to buy homes before the low rates become history.

Let me remind you that people bought homes when rates were 15+% in the 80’s, and they will buy them now, even as they inch up – because they need shelter and want places to live.

Affordable pricing

During the bust we saw values drop over 60% in some markets. Those individuals that could buy, got values and borrowing power that they will not see again. But let’s talk about the boom, values were so strong in California, Florida, where we saw 30 to 40% annual appreciation over a number of years. This inflated price appreciation forced many to rent, rather than buy. With the crash, we saw some of those renters begin to have the ability to buy. And many did.

Buy before prices shoot up again.

So will rising rates cause the market to stop? No! It my slow the momentum down a bit. But locally and regionally values and rates are still some of the best we have seen in years and possibly will see in years.
So, let’s focus on the positive and expect the economic and housing recovery to last a while……at least in Texas.