What will the real estate market in 2018 look like?
On Wednesday, October 18th, I attended the Austin Board of Realtor’s annual Realty Roundup meeting, that included an economic forecast from the National Association of Realtor's Chief Economist, Lawrence Yun. Mr. Yun went through various economic indicators of both the local, state and national level.
On the national level, the biggest issue is the proposed tax reform plan. The NAR (National Association of Realtors) is very concerned about the unintended consequences of raising taxes on homeowners. This could cause a shock to the housing market. One of the impacts of the proposed tax reform from President Trump is that taxes for some homeowners will increase and make the tax advantage for some homeowners less appealing. This is a concern to NAR and there is a call-to-action to realtors around the country to call or write their elected state officials.
National Existing Homes Sales Report
If you look at the graphs for existing home sales, we are nowhere near the number of sales that we saw in the subprime housing crisis. It’s still harder to own a home now than it was before 2007.
Dips in home sales between 2009 and today explained
Looking at the graph above you'll see that since 2008 home sales have continued to rise. Two occurrences happened when home sales dipped or paused. One was in 2009 when foreclosures were starting to hit the market. In 2008/2009 a tax credit of $8000 was issued and that worked but only short term. After that ended there was another modest decline in home sales.
From 2011 to 2014 there was a rise and then another dip/pause. This is thought to have been the result of comments from Ben Bernanke when asked: “when are you going to stop printing money”. When he replied something to the effect of “surely we can’t continue to keep doing this”. Overnight interest rates spiked and consumers got skittish.
Shortly after, jobs reports showed strong growth and the increase continued.
We also saw a decline in home sales nationally this year. Yun attributes this to the surprise election results of Donald Trump. Partially due to surprise election results that lead to an increase in mortgage rates (see graph below). The news of the presidential election increased rates. from 3.5 to 4.2.
Animal spirit of consumers - an economist term meaning physiology has an outcome on the market. A company in New York tracks this trend. Post-election, consumer confidence is higher. Asking questions to business owners the “animal spirit” spiked from business owners.
One concern moving forward is that there aren’t enough home starts in the country. We are still well below the national average of new home starts. Most consumers don’t buy new homes but this highly contributes to overall inventory for the national real estate market.
Why are they not building? Local officials are not “development friendly”. The labor shortage is another issue and this is in large part to the current immigration environment. Why aren’t domestic workers doing this labor? It pays well. Now we have a situation where there is a large population that isn’t working in labor force? Opioid situation? These are things that economists are thinking about when considering what’s stopping people from re-entering the labor market.
The other part of the shortage in new housing is lending. Historically more home building was done by “mom and pop” home builders rather than larger corporations. Now it’s primarily large corporations. This is due to the financing issues that prevent “mom and pop” builders. This is thought to be caused by Dodd-Frank. Washington is evaluating this now. If Washington changes this we could see an uptick in new homes.
Austin Real Estate Market Report
On average the new home time on market is 2.9 months. It’s the single-family construction that is dragging. We are matching the year 2000 for new homes built, but remember that Austin is a fast growing city.
September in Austin home sales is up 3.1%. Med price is up 6%. Inventory is 3 months. This is a decrease in year over year growth and appreciation.
Home price index - constant quality on Austin. Home values have tripled since 1995. You may say “is this a bubble?” Yun says no, this is all due to inventory shortage.
Default rates in Texas - there are fewer defaults in Texas - FHA has a higher default than consumers. VA mortgages are the lowest of defaults but all the default rates are trending down. This is largely due to the tighter guidelines that were put in place after the last mortgage crisis.
President Trump reversed the FHA premium reduction that Obama enacted in 2016 so now insurance premium is higher. His team said that the intention was to reverse any orders that Obama enacted after the election results and that they are considering reducing the FHA insurance premium again.
Ben Carson, HUD secretary has run a skeleton crew since the election. He has now got back on track and NAR is campaigning to have him reduce the FHA insurance premium which would have a positive effect on the real estate market.
Are Millennials Buying Homes?
The homeownership rate the US is still near a 50 year low. It was thought that maybe the change is due to a mind shift with millennials. Do Millennials want to rent versus own? NAR conducted a survey of consumers and when asked if they believe in the dream of homeownership, 80% says yes. When asked if they plan to buy in the future, over 85% said yes.
One factor that is preventing millennial from buying is student debt. Student debt has tripled in 10 years. The number one impact of student debt is that it prevents those in debt from buying a home.
GDP and the Jobs
GDP growth - first quarter under Trump was under 1% but q2 was almost 3 percent. 3rd quarter will likely be good due to hurricanes.
From the year 2000 today, National job growth was 11%. In Austin, job growth was a whopping 48%.
Economic forecast is that there will not be a recession in 2018
There is a shortage of people that should be buying that aren’t. Who are they? Young adults living with parents. It is believed that this is a temporary issue. When they finally decide to move out of the parent's homes the problem will again be housing supply.
Going into next year he believes we will see an uptick. We need more home construction. Changes to Dodd-Frank at the community bank level will be positive for increasing supply.
Fannie/Freddie and mortgage availability- now that bailout money has been paid back they are back to business as usual
EPA- conservationist maybe being too stringent. Washington is looking into this.
Tax simplification - in this process they are raising the standard deduction. This means that more families will get standard reduction raises. The winners in this scenario are renters. NAR analyzes that homeowners will pay about $500 more in taxes. Trump is listening to NAR about this aspect of the tax plan.