The Supply & Demand Problem Plaguing New Construction

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The Supply & Demand Problem Plaguing New Construction | Simplifying The Market

Many real estate economists have called on new home builders to ramp up production to help relieve the shortage of inventory of homes for sale throughout the United States. The added inventory would no doubt aid buyers in their search to secure their dream home, while also helping to ease price increases throughout the country.

Unfortunately for builders, there are many forces that are making it difficult for them to do just that!

Last week at the National Association of Real Estate Editors 51st Annual Conference, CoreLogic’s Chief Economist Frank Nothaft broke down the 4 ‘L’s of New Home Construction: Lots, Labor, Lumber, and Lending.

The concept of supply and demand is ripe in the new home construction industry. The four ‘L’s of new home construction are each suffering a supply problem, and with that comes added costs. Let’s break it down!

Lots – There is a shortage of land near metros at an affordable price, causing builders to move farther and farther away from cities to keep costs down. This isn’t always an attractive option for those who want to stay close to work.

Labor – The Great Recession forced many skilled construction and trade workers to find other sources of income once their jobs were lost at the time of the crash. Even though the overall housing market has recovered, these workers have not returned. Those who remain are starting to age out and retire, causing even more of a shortage and additional costs.

Lumber – The cost to build a new home is directly tied to the cost of the lot and the cost of the supplies needed to build the home. Lumber costs continue to escalate due to policies restricting the importation of Canadian lumber, making larger luxury homes an attractive option to recoup costs when selling, rather than building smaller single-family homes and making less profit.

Below is a graph showing the increase in cost of 1,000 board feet of framing lumber.

Cost of Framing Lumber | Simplifying The Market

Year-over-year, lumber costs are up 13% after reaching a high of $433 in the second week of April.

Lending – During the Great Recession, many small community banks were forced to close their doors. These banks were a great source of capital and lending for builders looking to borrow money at a low interest rate in the community in which they were building. Tougher lending standards have made borrowing funds more expensive and more difficult for builders.

Bottom Line

Additional costs across all 4 ‘L’s have made building luxury properties more attractive to builders as they are able to make a larger margin with the higher sales price. The move to scale down to starter and trade up homes to help with supply will mean any additional costs are absorbed by the builders unless the supply of the 4 ‘L’s can increase!


Source: KMC

Buying Is Now 33.1% Cheaper Than Renting in the US

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Buying Is Now 33.1% Cheaper Than Renting in the US | Simplifying The Market

The results of the latest Rent vs. Buy Report from Trulia show that homeownership remains cheaper than renting with a traditional 30-year fixed rate mortgage in the 100 largest metro areas in the United States.

The updated numbers actually show that the range is an average of 3.5% less expensive in San Jose (CA), all the way up to 50.1% less expensive in Baton Rouge (LA), and 33.1% nationwide!

Other interesting findings in the report include:

  • Interest rates have remained low and, even though home prices have appreciated around the country, they haven’t greatly outpaced rental appreciation.
  • With rents & home values moving in tandem, shifts in the ‘rent vs. buy’ decision are largely driven by changes in mortgage interest rates.
  • Nationally, rates would have to reach 9.1%, a 128% increase over today’s average of 4.0%, for renting to be cheaper than buying. Rates haven’t been that high since January of 1995, according to Freddie Mac.

Bottom Line

Buying a home makes sense socially and financially. If you are one of the many renters out there who would like to evaluate your ability to buy this year, let’s get together to find your dream home.


Source: KMC

Are Home Prices Approaching Bubble Territory?

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Are Home Prices Approaching Bubble Territory? | Simplifying The Market

As home values continue to rise, some are questioning whether we are approaching another housing bubble. Zillow just reported that:

“National home values have surpassed the peak hit during the housing bubble and are at their highest value in more than a decade.”

Though that statement is correct, we must realize that just catching prices of a decade ago does not mean we are at bubble numbers. Here is a graph of median prices as reported by the National Association of Realtors (NAR).

Are Home Prices Approaching Bubble Territory? | Simplifying The Market

We can see that prices rose during the early 2000s, fell during the crash and have risen since 2013.

However, let’s assume there was no housing bubble and crash and that home prices appreciated at normal historic levels (3.6% annually) over the last ten years.

Here is a graph comparing actual price appreciation (tan bars) with what prices would have been with normal appreciation (blue bars).

Are Home Prices Approaching Bubble Territory? | Simplifying The Market

Bottom Line

As we can see, had there not been a boom and bust, home values would essentially be where they are right now.


Source: KMC

The TRUTH Behind the RENT vs. BUY Debate

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The TRUTH Behind the RENT vs. BUY Debate | Simplifying The Market

In a blog post published last Friday, CNBC’s Diana Olnick reported on the latest results of the FAU Buy vs. Rent Index. The index examines the entire US housing market and then isolates 23 major markets for comparison. The researchers at FAU use a “‘horse race’ comparison between an individual that is buying a home and an individual that rents a similar-quality home and reinvests all monies otherwise invested in homeownership.”

Having read both the index and the blog post, we would like to clear up any confusion that may exist. There are three major points that we would like to counter:

1. The Title

The CNBC blog post was titled, “Don’t put your money in a house, says a new report.” The title of the press release about the report on FAU’s website was “FAU Buy vs. Rent Index Shows Rising Prices and Mortgage Rates Moving Housing Markets in the Direction of Renting.”

Now, we all know headlines can attract readers and the stronger the headline the more readership you can attract, but after dissecting the report, this headline may have gone too far. The FAU report notes that rising home prices and the threat of increasing mortgage rates could make the decision of whether to rent or to buy a harder one in three metros, but does not say not to buy a home.

2. Mortgage Interest Rates are Rising

According to Freddie Mac, mortgage interest rates reached their lowest mark of 2017 last week at 3.89%. Interest rates have hovered around 4% for the majority of 2017, giving many buyers relief from rising home prices and helping with affordability.

While experts predict that rates will increase by the end of 2017, the latest projections have softened, with Freddie Mac predicting that rates will rise to 4.3% in Q4.

3. “Renting may be a better option than buying, according to the report.”

Of the 23 metros that the study reports on, 11 of them are firmly in buy territory, including New York, Boston, Chicago, Cleveland, and more. This means that in nearly half of all the major cities in the US, it makes more financial sense to buy a home than to continue renting one.

In 9 of the remaining metros, the decision as to whether to rent or buy is closer to a toss-up right now. This means that all things being equal, the cost to rent or buy is nearly the same. That leaves the decision up to the individual or family as to whether they want to renew their lease or buy a home of their own.

The 3 remaining metros Dallas, Denver and Houston, have experienced high levels of price appreciation and have been reported to be in rent territory for well over a year now, so that’s not news…

Beer & Cookies

One of the three authors of the study, Dr. Ken Johnson has long reported on homeownership and the decision between renting and buying a home. The methodology behind the report goes on to explain that even in a market where a renter would be able to spend less on housing, they would have to be disciplined enough to reinvest their remaining income in stocks/bonds/other investments for renting a home to be a more attractive alternative to buying.

Johnson himself has said:

“However, in perhaps a more realistic setting where renters can spend on consumption (beer, cookies, education, healthcare, etc.), ownership is the clear winner in wealth accumulation. Said another way, homeownership is a self-imposed savings plan on the part of those that choose to own.” 

Bottom Line

In the end, you and your family are the only ones who can decide if homeownership is the right path to go down. Real estate is local and every market is different. Let’s get together to discuss what’s really going on in your area and how we can help you make the best, most informed decision for you and your family.


Source: KMC

Inventory Challenges Continue! [INFOGRAPHIC]

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Inventory Challenges Continue! [INFOGRAPHIC] | Simplifying The Market

Some Highlights:

  • After a surge in March, existing home sales and new home sales slowed due to a drop in inventory available for sale in the start-up and trade-up categories.
  • Median existing home prices surged for the 62nd straight month, up 6.0% over last year to $244,800.
  • New home prices slowed as builders have started to turn their focus toward single family, smaller homes.


Source: KMC

How’s the Real Estate Market? Find Out What the Experts Are Saying

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How's the Real Estate Market? Find Out What the Experts Are Saying | Simplifying The Market

As we head into summer, it is a great time to review how the 2017 real estate market is doing so far. Here is what the experts are saying:

Doug Duncan, Fannie Mae Chief Economist

“Positive demographic factors should continue to reshape the housing market, as rising employment and incomes appear to be positively influencing millennial homeownership rates.”

Diana Olick, CNBC

“Even as more homes come on the market for this traditionally popular sales season, they’re flying off fast, with bidding wars par for the course. Home prices have now surpassed their last peak, and at the entry level, where demand is highest, sellers are firmly in the driver’s seat.”

Daren Blomquist, Senior VP at Attom

“I am guessing we will see it get even better… If you are considering moving, it could be a really good time to sell.”

Lawrence Yun, NAR Chief Economist

“The early returns so far this spring buying season look very promising as a rising number of households dipped their toes into the market and were successfully able to close on a home last month. Although finding available properties to buy continues to be a strenuous task for many buyers, there was enough of a monthly increase in listings…for sales to muster a strong gain. Sales will go up as long as inventory does.”

Mark Fleming, First American Chief Economist

“Despite higher mortgage rates, the potential for home sales increased on an annual basis driven by steady income and job growth, along with a surge in building permits. While it may be a little late for this spring, the increase in building permits is a welcome sign that some relief may be in sight for the inventory shortages that are holding back many markets from realizing their full potential this spring.”


Source: KMC

Is Now a Good Time to Rent?

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Is Now a Good Time to Rent? | Simplifying The Market

People often ask if now is a good time to buy a home, but nobody ever asks when a good time to rent is. Regardless, we want to make certain that everyone understands that today is NOT a good time to rent.

The Census Bureau recently released their 2017 first quarter median rent numbers. Here is a graph showing rent increases from 1988 until today:

Is Now a Good Time to Rent? | Simplifying The Market

As you can see, rents have steadily increased and are showing no signs of slowing down. If you are faced with making the decision of whether or not you should renew your lease, you might be pleasantly surprised at your ability to buy a home of your own instead.

Bottom Line

One way to protect yourself from rising rents is to lock in your housing expense by buying a home. If you are ready and willing to buy, let’s meet to determine if you are able to today!


Source: KMC

3 Reasons the Housing Market is NOT in a Bubble

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3 Reasons the Housing Market is NOT in a Bubble | Simplifying The Market

With housing prices appreciating at levels that far exceed historical norms, some are fearful that the market is heading for another bubble. To alleviate that fear, we just need to look back at the reasons that caused the bubble ten years ago.

Last decade, demand for housing was artificially propped up because mortgage lending standards were way too lenient. People that were not qualified to purchase were able to attain a mortgage anyway. Prices began to skyrocket. This increase in demand caused homebuilders in many markets to overbuild.

Eventually, the excess in new construction and the flooding of the market with distressed properties (foreclosures & short sales), caused by the lack of appropriate lending standards, led to the housing crash.

Where we are today…

1. If we look at lending standards based on the Mortgage Credit Availability Index released monthly by the Mortgage Bankers Association, we can see that, though standards have become more reasonable over the last few years, they are nowhere near where they were in the early 2000s.

3 Reasons the Housing Market is NOT in a Bubble | Simplifying The Market

2. If we look at new construction, we can see that builders are not “over building.” Average annual housing starts in the first quarter of this year were not just below numbers recorded in 2002-2006, they are below starts going all the way back to 1980.

3 Reasons the Housing Market is NOT in a Bubble | Simplifying The Market

3. If we look at home prices, most homes haven’t even returned to prices seen a decade ago. Trulia just released a report that explained:

“When it comes to the value of individual homes, the U.S. housing market has yet to recover. In fact, just 34.2% of homes nationally have seen their value surpass their pre-recession peak.”

Bottom Line

Mortgage lending standards are appropriate, new construction is below what is necessary and home prices haven’t even recovered. It appears fears of a housing bubble are over-exaggerated.


Source: KMC

Inventory Shortages Are Slowing Down the Market

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Inventory Shortages Are Slowing Down the Market | Simplifying The Market

The real estate market is moving more and more into a complete recovery. Home values are up. Home sales are up. Distressed sales (foreclosures and short sales) have fallen dramatically. It seems that 2017 will be the year that the housing market races forward again.

However, there is one thing that may cause the industry to tap the brakes: a lack of housing inventory. While buyer demand looks like it will remain strong throughout the summer, supply is not keeping up.

Here are the thoughts of a few industry experts on the subject:

Lawrence Yun, Chief Economist at NAR:

“Sellers are in the driver’s seat this spring as the intense competition for the few homes for sale is forcing many buyers to be aggressive in their offers. Buyers are showing resiliency given the challenging conditions. However, at some point — and the sooner the better — price growth must ease to a healthier rate. Otherwise sales could slow if affordability conditions worsen.”

Tom O’Grady, Pro Teck CEO

“The lack of inventory is very real and could have a severe impact on home sales in the months to come. Traditionally, a balanced market would have an MRI (Months Remaining Inventory) between six and 10 months.

This month, only eight metros we track have MRIs over 10, compared to 27 last year and 48 two years ago—illustrating that this lack of inventory is not being driven by traditionally ‘hot’ markets, but is rather a broad-based, national phenomenon.”

Ralph McLaughlin, Chief Economist at Trulia

“Nationally, housing inventory dropped to its lowest level on record in 2017 Q1. The number of homes on the market dropped for the eighth consecutive quarter, falling 5.1% over the past year.”

Freddie Mac

“Tight housing inventory has been an important feature of the housing market at least since 2016. For-sale housing inventory, especially of starter homes, is currently at its lowest level in over ten years. If inventory continues to remain tight, home sales will likely decline from their 2016 levels. …all eyes are on housing inventory and whether or not it will meet the high demand.”

Bottom Line

If you are thinking of selling, now may be the time. Demand for your house will be strongest at a time when there is very little competition. That could lead to a quick sale for a really good price.


Source: KMC

 

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Get All the Facts about PMI

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Get All the Facts about PMI | Simplifying The Market

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 about Private Mortgage Insurance (PMI).

What is 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:

Get All the Facts about PMI | Simplifying The Market

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.”

Bottom Line

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.


Source: KMC