Some Highlights: Interest rates are projected to increase steadily throughout 2019, but buyers will still be able to lock in a rate lower than their parents or grandparents did when they bought their homes! Home prices will rise at a rate of 4.8% over the course of 2019 according to CoreLogic. All four major reporting agencies believe that home sales will outpace 2018
Home prices are at the top of everyone’s minds. Can they maintain their current pace of appreciation? Will rising mortgage rates negatively impact home values? Will the next economic slowdown cause prices to crash?
Let’s try to answer these questions based on what has happened in the past as well as what we know about the current real estate market.
The Impact of Rising Interest Rates
We explained earlier this year that rising mortgage rates have not negatively impacted home prices in the past and probably wouldn’t this time either. Freddie Mac’s comments were very direct:
“In the current housing market, the driving force behind the increase in prices is a low supply of both new and existing homes combined with historically low rates. As mortgage rates increase, the demand for home purchases will likely remain strong relative to the constrained supply and continue to put upward pressure on home prices.”
They were correct. So far this year, home values have continued to appreciate above normal historic percentages and it appears the gradual increase in rates has had little impact on prices.
The Impact of an Economic Slowdown
Many people fear that when the economy turns, we may see the same depreciation in home values as we did a decade ago.
However, we recently reported that the same group of economists, real estate experts, and investment & market strategists who predicted the next recession will occur in the next 18-24 months have also projected that house prices will continue to appreciate for the next five years, albeit at smaller percentages.
It Comes Down to Supply and Demand
As always, home prices will be determined by the demand to purchase compared to the available inventory of homes for sale. For the last six years, demand has far exceeded the available supply which has resulted in the average annual appreciation to top 6% since 2012. That is far greater than the historic norm of 3.6% annual appreciation that we saw prior to the housing boom.
There are currently small signs that housing inventory is slowly beginning to increase. Months supply of houses for sale matched last year’s numbers for the last two months after 37 consecutive months of decreasing inventory. New construction data has also shown positive signs that inventory will be increasing.
As inventory begins to meet demand, we will see appreciation return to more normal levels. We are already seeing projections coming in lower than the 6.2% annual average we have seen more recently.
Mark Fleming, Chief Economist at First American, explained it best:
“We’re seeing the first indications that price appreciation may be slowing, but the underlying fundamental housing market conditions support a natural moderation of house prices rather than a sharp decline.”
With home prices continuing to appreciate above historic levels, some are concerned that we may be heading for another housing ‘boom & bust.’ It is important to remember, however, that today’s market is quite different than the bubble market of twelve years ago.
Here are four key metrics that will explain why:
- Home Prices
- Mortgage Standards
- Foreclosure Rates
- Housing Affordability
1. HOME PRICES
There is no doubt that home prices have reached 2006 levels in many markets across the country. However, after more than a decade, home prices should be much higher based on inflation alone.
Last week, CoreLogic reported that,
“The inflation-adjusted U.S. median sale price in June 2006 was $247,110 (or $199,899 in 2006 dollars), compared with $213,400 in March 2018.” (This is the latest data available.)
2. MORTGAGE STANDARDS
Many are concerned that lending institutions are again easing standards to a level that helped create the last housing bubble. However, there is proof that today’s standards are nowhere near as lenient as they were leading up to the crash.
The Urban Institute’s Housing Finance Policy Center issues a monthly index which,
“…measures the percentage of home purchase loans that are likely to default—that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.”
Their July Housing Credit Availability Index revealed:
“Significant space remains to safely expand the credit box. If the current default risk was doubled across all channels, risk would still be well within the pre-crisis standard of 12.5 percent from 2001 to 2003 for the whole mortgage market.”
3. FORECLOSURE RATES
A major cause of the housing crash last decade was the number of foreclosures that hit the market. They not only increased the supply of homes for sale but were also being sold at 20-50% discounts. Foreclosures helped drive down all home values.
Today, foreclosure numbers are lower than they were before the housing boom. Here are the number of consumers with new foreclosures according to the Federal Reserve’s most recent Household Debt and Credit Report:
- 2003: 203,320 (earliest reported numbers)
- 2009: 566,180 (at the valley of the crash)
- Today: 76,480
Foreclosures today are less than 40% of what they were in 2003.
4. HOUSING AFFORDABILITY
Contrary to many headlines, home affordability is better now than it was prior to the last housing boom. In the same article referenced in #1, CoreLogic revealed that in the vast majority of markets, “the inflation-adjusted, principal-and-interest mortgage payments that homebuyers have committed to this year remain much lower than their pre-crisis peaks.”
They went on to explain:
“The main reason the typical mortgage payment remains well below record levels in most of the country is that the average mortgage rate back in June 2006, when the U.S. typical mortgage payment peaked, was about 6.7 percent, compared with an average mortgage rate of about 4.4 percent in March 2018.”
The “price” of a home may be higher, but the “cost” is still below historic norms.
After using these four key housing metrics to compare today to last decade, we can see that the current market is not anything like that bubble market
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COMMENTARY by Tom Ruff of The Information Market 8 ARMLS STAT APRIL 2017
Fix and Flip: A property purchased and sold again within 61 and 365 days, or 366 days in a leap year, of the original purchase date via a nonbrokerage model mously said, “The secret to success is to own nothing, but control everything.” Wholesalers will take this adage to heart. A dozen or so companies dominate our local market. They actively solicit distressed properties, estate sales, absentee and out-of-state owners. The primary players in this market will have an active list of investors to whom they market their properties. These properties will also appear for sale on their individual websites. The median year built for all homes acquired by wholesalers in Maricopa County is 1971 with a median purchase price of $120,000. As for the markup by the wholesaler, it’s what the market will bear and the percentage gains can vary wildly. By our definition, wholesaling accounts for 13.96% of all flips.
The Light Fix For the purposes of our discussion, light fixes are properties that are purchased and sold again between 31 and 60 days. The days between sales are calculated from the publicly recorded deeds and do not necessary imply the true days between acquisition and resale. These flips will involve cosmetic upgrades like new carpet and paint. Our definition of light fix ups account for 5.06% of our flip market. Only 26% of these flips were purchased on the MLS. The median year built for these homes is 1981 with a median purchase price of $140,000. At the conclusion of the flip, these properties will sell on average 22% higher than the original purchase price. The Fix and Flip Fix and flips are fun to study. In fact, that 45% are originally purchased on the MLS and 89% are sold on the MLS gives us ample opportunity to view the before and after pictures. Fix and flips are first and foremost a business modNew Brokerage Model While each of their business models have distinct differences, they both buy directly from the seller and by acquisition of properties through their various marketing and advertising campaigns. Their acquisitions are purchased off of the MLS, but the majority of their sales are listed. They are also active at trustee sales. Over the past year in Maricopa County, the two together have accounted for 15.82% of all flips in Maricopa County. The rate of their acquisitions has been increasing as has their funding. In May of last year, they accounted for 8% of all flips. In March of this year, that percentage rose to nearly 23%. The median sales price of their acquisitions over the past year was $204,946 and the median year built for these acquisitions was 2000. The center point for the number of days between the original purchase and when the property is sold is 104 days. There are a handful of properties that sold within 30 days as well as a handful that took up to nearly a year to sell.
Wholesale Real estate wholesaling is flipping, except the time frame is much shorter and no repairs are made to the home before the wholesaler sells it. A double escrow is a set of real estate transactions involving two contracts of sale for the same property to two different back-to-back buyers, for the same or different price, arranged to close on the same day. Nelson Rockefeller fa- 9 ARMLS STAT APRIL 2017 el. A single flip can show us the lowest price in a neighborhood and on the flip side, the highest price. They also show us what design upgrades are popular and the features that current buyers prefer. Again, fix and flips are a business, they know what sells. Our definition of fix and flips account for 65.16% of all flips in our market. The average flip takes 180 days with an average gross margin of 43%. Even with a high gross average, this is not an arena for amateurs inspired by reality TV. Losses do occur. The median purchase price of the original purchase is $164,900 and the median and average year of construction is 1981. Fix and flips are really about opportunity by purchasing an undervalued asset, improving that asset and then selling that asset at a profit. The Sun City ZIP code of 85351 is surprisingly a perfect example, it’s the ZIP code with the highest number of fix and flips in the Valley over the past year. Another aspect of fix and flips that is fun to watch has to do with gentrification, older neighborhoods getting hip. A close eye on what’s happening in the fix and flip arena will offer insights into the next hot and upcoming hood. The ARMLS Pending Price Index (PPI) Last month STAT projected a median sales price for March of $233,000. The actual median sales price was $234,000, $1,000 higher than the mathematical model projection. Our mathematical projections have been trending slightly lower than the actual results. Looking ahead to May 2017, the PPI projects a median sales price of $239,900. With limited supply and steady demand, particularly at the lower price points, the median sales price will definitely increase in May. 10 ARMLS STAT APRIL 2017 MLS sales volume in March 2017 was 8,666, 4.5% higher than the 8,293 total last year. This accounted for 134 fewer sales than our projected total of 8,800. Sales volume for the first four months of 2017 is 9.4% higher than 2017, with 30,149 sales in 2017 compared to 27,554 for the first 4 months of 2016. It should be noted, there was one more business day last April than this April. If we look at a daily sales average there were 433.3 sales per day in 2017 and only 395.9 sales per day in 2016 or a 9.45% increase, which is directly in line with our year-over-year sales total. We begin May with 7,427 pending contracts, 4,701 UCB listings and 583 CCBS, giving us a total of 12,711 residential listings practically under contract. This compares to 13,115 of the same type of listings at this time last year. Even though we enter May with fewer residential listings practically under contract this year, I’m still projecting the sales volume in May 2017 to exceed the volume of 8,676 of May 2016. STAT is projecting 8,950 sales in May, a number I obviously just pulled out of a hat. There were 20 business days in 2016 and 21 business days this year.
My favorite Real Estate Stats from Arizona Multiple Listing Service. The facts and trends created by the Realtors out there working the field. No spin here!
Sales continue to be hot, even taking into consideration the fact that we are in the high season. MLS sales volume for the first three months of 2017 was 11.54% higher than 2016. There were 21,483 sales reported in Q1 2017 compared to 19,261 for the first quarter of 2016. Looking at public record resale sales volume in Maricopa County for the first quarter of 2017, we see that it was the third highest volume in the 19 years we’ve reported data. Only the peak bubble years of 2005 and 2006 had higher resale sales volume. A cool top and a smoking hot bottom doesn’t just describe my upcoming summer wardrobe, it’s also an apt description of the current state of our resale housing market. This month in STAT we take a closer look at our feverish bottom price ranges. Contract ratios were created by Michael Orr of the Cromford Report as a means to communicate the relationship between supply and demand in a given market area. Cromford translates the contract ratio as: 0-20 is Cool, 21-40 is Warm, 41-74 is Warmer, 75-99 is Hot and 100+ is a FRENZY!
The next map below shows the contract ratio by ZIP code for the frenzied markets in the Phoenix Metropolitan Area. The contract ratio is calculated by dividing the number of homes under contract by the number of active listings. The map below also identifies the areas where the contract ratio is greater than 100, meaning the number of homes under contract is greater than the number of active listings. An example would be 85033 where currently there are 108 homes under contract and 73 active listings leaving a contract ratio of 147. Also displayed are the frenzied ZIP codes, not to be confused with the friend zone. 8 ARMLS STAT MARCH 2017 The common thread for the hottest of the hot sectors of our market is price point.
With insufficient supply and strong demand from entry level buyers, I see no relief in sight. We are just now seeing the beginning ground swell of millennial buyers. Couple a large population base of looming buyers with a median new build price of $320,000 and I see little to no immediate relief of added inventory for homes priced below $300,000. Home prices in these areas will continue to rise as will our overall median sales price. Properties listed in these areas and price points find the selling agents confident and the buying agents frantic
The ARMLS Pending Price Index (PPI) Last month STAT projected a median sales price for March of $229,000. The actual median sales price was $230,000, $1,000 higher than the $229,000 projected by our mathematical model. In 2016 our mathematical projections tended to be lower than the actual results for most of the year, it appears our model is following a similar path in 2017. Looking ahead to April, the ARMLS Pending Price Index projects a median sales price of $233,000. With limited supply and steady demand, particularly at the lower price points, I fully expect the median in April to exceed March. MLS sales volume in March was 9,116 or 8.4% higher than the total of 8,412 last year, accounting for 166 more sales than our projected total of 8,950. Sales volume for the first three months of 2017 is 11.54% higher than 2017, with 21,483 sales in 2017 compared to 19,261 in the first quarter of 2016. We begin April with 7,616 pending contracts, 4,629 UCB listings and 544 CCBS giving us a total of 12,789 residential listings practically under contract. This com- 9 ARMLS STAT MARCH 2017 pares to 12,545 of the same type of listings at this time last year suggesting the sales volume in April 2017 will surpass the 8,293 of April 2016. STAT is projecting 8,800 sales in April. Note, there were 21 business days in 2016 and only 20 business days this year.
For all the figures and insight continue to read http://armls.com/docs/STAT-MARCH-2017.pdf
I hope you enjoy these facts as much as I do .
Be sure to call if you have any questions about this report or about how the market is performing. Would you like to know what is happening in your neighborhood?
Would you like to know the value of your home?
Do you need help deciding whether to sell or not or would you like to know if now is the right time to buy?
We would be happy to have that conversation with you. My personal cell is 602 980 0760.
You Can Never Have TMI about PMI
When it comes to buying a home, whether it is your first time or your fifth, it is always important to know all the facts. With the large number of mortgage programs available that allow buyers to purchase a home with a down payment below 20%, you can never have Too Much Information (TMI)about Private Mortgage Insurance (PMI).
What is Private Mortgage Insurance (PMI)?
Freddie Mac defines PMI as:
“An insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%.
Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your mortgage payment.”
As the borrower, you pay the monthly premiums for the insurance policy, and the lender is the beneficiary. Freddie Mac goes on to explain that:
“The cost of PMI varies based on your loan-to-value ratio – the amount you owe on your mortgage compared to its value – and credit score, but you can expect to pay between $30 and $70 per month for every $100,000 borrowed.”
According to the National Association of Realtors, the average down payment for all buyers last year was 10%. For first-time buyers, that number dropped to 6%, while repeat buyers put down 14% (no doubt aided by the sale of their home). This just goes to show that for a large number of buyers last year, PMI did not stop them from buying their dream homes.
Here’s an example of the cost of a mortgage on a $200,000 home with a 5% down payment & PMI, compared to a 20% down payment without PMI:
The larger the down payment you can make, the lower your monthly housing cost will be, but Freddie Mac urges you to remember:
“It’s no doubt an added cost, but it’s enabling you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.”
If you have questions about whether you should buy now or wait until you’ve saved a larger down payment, let’s get together to discuss our market’s conditions and to help you make the best decision for you and your family.