Where have all the houses gone? That’s the question economists and, more importantly, would-be homebuyers are asking themselves. Demand is healthy and home values are rising. Owning a home remains a better deal than renting one and mortgage rates are near record lows, meaning borrowing money to buy is cheap. Nevertheless, inventory is scarce and falling. “At a time when rising prices should be inducing inventory, exactly the opposite is happening,” explains Ralph McLaughlin, chief economist at real estate data firm Trulia. “That has been the biggest story in the last six months and it will continue to be a story for the rest of the year.” According to Zillow, also a data firm, in May inventory of low- and middle-tier homes fell 8.9% and 9.7% respectively, compared to a year earlier. Top-tier inventory fell 0.5%. Now that we’re halfway through 2016, here’s a glimpse how the rest of the year is likely to play out:
The Dynamics. Mortgage rates could reach all-time lows. Fitch Ratings expects U.S. mortgage rates to reach all-time lows following the United Kingdom’s vote to leave the European Union. This is because Brexit pushed the Treasury rates that serve as a benchmark for mortgage rates to new lows. The 30-year fixed-rate hit a record low of 3.31% in 2012 and is currently about 3.6%. Low rates could spur demand for homes, as well as a spat of current loan refinancing.
Brexit has drawn new attention to rates, but mortgage have been relatively cheap for so long that economists have finally stopped forecasting a rise. According to a Trulia survey this is in line with average consumers, who rank interest rates a distant third among their housing market concerns–behind finding a home they like and qualifying for a mortgage.
New construction remains slow. In May, groundbreakings stood at an annual rate of 1.138 million, below the 1.5 million needed to get supply back in line with demand. Adding to the pain–most of the homes that have been built in recent years have been for the luxury consumer, rather than lower price starter homes.
It is often asked if Millennials will ever buy homes, but the better question may be will builders ever build homes Millennials can buy? Maybe. Price growth has slowed to about 4% at the top end of the market but has risen to 8% on lower end. (The median home price has risen 5.4%.) Economic theory suggests rising starter home prices should entice new construction in the segment, says McLaughlin.
Homeowners aren’t selling. Meanwhile, people aren’t moving as often, meaning fewer existing homes are coming onto the market. Prices have risen so much that potential sellers can’t afford to buy that next level home in their current neighborhood. McLaughlin calls the phenomenon “gridlock.” While Svenja Gudell, chief economist at Zillow, describes it as a game of musical chairs where someone is left without a seat. Says Nela Richardson, chief economist at web-based broker Redfin: “Yes people can sell their home in a New York or San Francisco minute, but they won’t have anything to buy.” Demand is still strong. Home values are currently appreciating an annual rate of 5%, well above the historical average of around 3% to 3.5% and a pick up from a year ago. Gudell attributes the strength to low inventory, low mortgage rates and a strong labor market. (Yes, the May jobs report was disappointing, but trend is still solid and wages seem to be picking up.) Plus across the country buying remains more attractive than renting. Zillow finds that the current breakeven point for home ownership–the time you would have to live in a house before buying would be financially advantageous over renting–is 1.8 years. Trulia judges that interest rates would need to cross 7% for that national dynamic to change.
What it means for you.
Have your checkbook ready. Right now the typical home is selling in just 42 days; in markets like Denver, Portland and Seattle sales are happening in a week or less. That is the shortest time on market Redfin has seen since it began tracking in 2009 and it is a full week faster than a year ago, meaning this ultra-fast market is speeding up. With no clear supply bump on the horizon this trend is likely to continue.
Be prepared to pay asking. At 95.3% of asking price the average sale-to-list percentage is also the highest Redfin has seen. In some markets, including around San Francisco and other West Coast cities, the sale-to-list percentage is over 100%. In San Francisco homes are selling about 7% over asking price, though that’s down from 10% a year ago. “The faster the market, the more likely the buyer is to overpay,” explains Richardson. “People who need to act quickly can’t negotiate.” Other things to watch.
The Fed. The Federal Reserve isn’t expected to hike short term rates more than once this year, meaning monetary policy will have negligible sway on mortgage rates. However, if markets are caught off guard by a hike there could be some ripple effect, but this is unlikely.
The Election. Brokers are noticing some hesitation to list or buy a home given the uncertainty surrounding the presidential election. At the same time, in a survey of housing economists Zillow found that market forecasts would not be affected or even positively affected if someone like Hillary Clinton were elected. However if someone more outside the mainstream like Donald Trump were to become president (at the time of the survey Ted Cruz and Bernie Sanders were still eligible candidates) the economists’ forecasts would be negatively impacted.
However, a new person occupying the White House is not expected to have a major impact on the overall housing market. Says McLaughlin: “It is a big ogre, it’s tough to move.”
Source: realestate_iq
