Apr242017
Will investor sales limit future home price appreciation?
At some point, the investors who bought distressed properties from 2009 through 2014 will want to liquidate their holdings. Will those sales provide additional overhead supply that will slow home price appreciation?
In a normal and healthy real estate market, owner occupants dominate sales. These owners accumulate equity through paying down a mortgage and home price appreciation, and they execute move-up trades seven to ten years after they buy their starter homes. Unfortunately, that isn’t the market we had from 2006 through 2014.
For several years owner occupant sales were stuck in a holding pattern at 1990s levels. Orange County home resale volumes were very weak by historic norms, and the only increase in sales volumes from 2012 through 2014 came entirely from investors. Unlike owner occupants, investors don’t accumulate equity for a move-up purchase. Most hold the property for a while, collect some rent, and sell when they feel they need the money for something else.
Ordinarily, investor purchases represent a small fraction of the total market, and they disperse over time. During the bust and early recovery, investor sales were a high fraction of total sales, and they were concentrated in time.
Most of the investors who purchased after the bust were very different from the over-leveraged speculators who bought during the housing bubble. Many paid cash for their investments, and the remainder put at least 20% down. Most were cashflow positive, so they feel little or no pressure to sell. However, many of them planned an exit strategy, and particularly with the hedge funds, many will sell these investments over the next several years.
A concentration of sales overhanging the market may limit future appreciation. As with cloud inventory of distressed sellers, most investors are withholding their properties from the market until prices reach some higher value, and they will hold out until prices get there before they sell. For the market to push prices higher, many new buyers will need to step up to absorb the cloud inventory of distressed sellers and the investor inventory waiting in the wings.
Right now many potential move-up buyers lack the equity to buy the home they want, so current MLS inventory is quite low. With investors also keeping their homes off the market, there is no respite from the depleted inventory problems we face today. With supply so low, it seems unlikely that the next generation of move-up sellers and property investors will find themselves competing with each other to sell later on. It could happen, but it wouldn’t happen suddenly, and many people would change their plans if this became a problem.
Some people have speculated that investors will panic and sell in a stampede that causes prices to crash. While that was true for over-leveraged speculators, that’s not what all-cash buyers will do. Most will wait patiently for prices to rise before they sell. They may form a ceiling but not an anchor.
Animation: The Collapse of the Middle Class in 20 Major U.S. Cities
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China’s credit excess is unlike anything the world has ever seen
From a global macroeconomic perspective, we encourage readers to consider that the world is experiencing an extended, rolling process of deflating its credit excesses. It is now simply China’s turn.
For context, Japan started deflating their credit bubble in the early 1990s, and has now experienced more than 20 years of deflation and very little growth since. The US began its process in 2008, and after eight years has only recently been showing signs of sustainable recovery. The euro zone entered this process in 2011 and is still struggling six years onward. We believe China is now entering the early stages of this process.
Having said that, we believe that Chinese authorities have a viable plan for deflating their credit excess in an orderly fashion. Please stay posted as we will review this multi-pronged, market-based approach in our next column.
For now, let’s turn our attention to the size of the credit excess that China created and why we estimate it to be the largest in the world.
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Mortgage Rates Tumble Below 4 Percent
MCLEAN, VA–(Marketwired – Apr 20, 2017) – Freddie Mac (OTCQB: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®), showing the 30-year mortgage rate dropping below four percent and hitting its lowest mark since November 2016.
News Facts
30-year fixed-rate mortgage (FRM) averaged 3.97 percent with an average 0.5 point for the week ending April 20, 2017, down from last week when it averaged 4.08 percent. A year ago at this time, the 30-year FRM averaged 3.59 percent.
15-year FRM this week averaged 3.23 percent with an average 0.5 point, down from last week when it averaged 3.34 percent. A year ago at this time, the 15-year FRM averaged 2.85 percent.
5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.10 percent this week with an average 0.4 point, down from last week when it averaged 3.18 percent. A year ago, the 5-year ARM averaged 2.81 percent.
Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Visit the following link for the Definitions. Borrowers may still pay closing costs which are not included in the survey.
Quote
Attributed to Sean Becketti, chief economist, Freddie Mac.
“The 30-year mortgage rate fell 11 basis points this week to 3.97 percent, dropping below the psychologically-important 4 percent level for the first time since November. Weak economic data and growing international tensions are driving investors out of riskier sectors and into Treasury securities. This shift in investment sentiment has propelled rates lower.”
I guess the lack of inventory isn’t holding back sales anymore, right?
US existing home sales surge in March, reaching highs not seen since 2007
U.S. home resales rose more than expected in March to the highest level in more than a decade, The National Association of Realtors (NAR) announced on Friday.
Existing home sales climbed 4.4 percent for the month, while economists were expecting a smaller increase of 2.5 percent, according to Thomson Reuters consensus estimates.
Sales have now increased to a seasonally adjusted annual rate of 5.71 million units as of last month, the NAR said. This is the highest level the gauge has seen since February 2007.
While the number of homes on the market rose 5.8 percent to 1.83 million units last month, housing inventory was down 6.6 percent from one year ago, implying that demand is outweighing supply.
Properties typically remained on the market for 34 days in March, compared to 45 days in February, the NAR added.
“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,” Lawrence Yun, a chief economist for the industry group, said in a statement. “Sales will go up as long as inventory does.”
Right!
Better yet….
*existing sales beating easy comps YoY equates to a “surge”
And.. the ‘open mouth/insert foot’ pièce de résistance….
*sales have now increased to a seasonally adjusted annual rate of 5.71 million units as of last month, the NAr
saidjust pointed out This is the highest level the gauge has seen since 2007. (aka the previous housing bubble top).Oh wait…. but sales beat economist expectations LMAO!!!!!!!!!!
The NAr always has a standard excuse they can blame when sales are poor or prices fall, but they conveniently forget about that excuse when the news is good. Right now, the excuse is lack of inventory. It’s absurd to the point that Yun actually says “Sales will go up as long as inventory does.” Well, inventory is near record lows, yet sales are strong. How does that work?
Americans Still Favor Real Estate for Long-Term Investment
One-third of Americans say real estate is best long-term investment
Residents of the West, men especially confident in real estate
Stocks rank second, with strongest support from higher-income adults
WASHINGTON, D.C. — Real estate remains Americans’ top choice as the best long-term investment one can make, beating out stocks and mutual funds, gold, savings accounts and CDs, and bonds. This is the fourth straight year real estate has been the unrivaled favorite.
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An investment is something that pays you each month, NOT something you have to pay it.
Class dismissed.
What is it called when you buy something that saves you money each month?
Below rental parity.
A good deal.
A forced savings acct with punitive maintenance and withdrawal costs
Wow… Gold has gotten pummelled in that chart. In 2011, it was believed to be the top long-term investment by the highest number of respondents. Today, only about half as many believe the hype surrounding gold. Sad!
If sentiment gets low enough, gold might actually form a bottom.
REMINDER: RE is currently believed to be the top long term investment @ 34%, right where gold sat back in 2011.
Oops!! Fumble alert 😉
As a result, expect housing to be pummelled in the months/years ahead to a point where about half as many believe the hype surrounding RE. Sad really.