Here’s a market letter I sent out to my clients recently. Springtime means it’s time for a quick look at the housing market, nationally and in Florida. I try to offer my analysis of the housing market every March.
Market Update
CoreLogic, one of the industry’s principal analysts of housing data, just released a report that says the housing market has recovered from its lows of the Great Recession. Nationwide, the average home price in the 3rd quarter of 2017 is 1 percent above the peak in 2006.
Various states sit on either side of this recovery line: states that fell the most from their previous peak during the recession are still below their peak, while states which saw a small drop are significantly above their previous peak. Nevada fell 60%, and has risen but is still 23 percent below its peak. Iowa only fell 5%, and is now 15% above its 2006 peak.
To me, this says a lot about unrealistic price levels during the bubble that led up to the recession, and also about the enduring power of homes to appreciate in value year over year. Nationwide, according to the same CoreLogic report, home equity gain year-over-year now averages almost $15,000.
Areas with resilient jobs markets, such as technology sectors, have bounced back the most strongly, while those with less robust local economic fundamentals – which really means stable jobs and income generation – have lagged.
Florida has a low unemployment rate (3.9% at end of 2017), a favorable business climate, and no state income tax. Our property tax levels rank 27th in the nation; this puts us comfortably in the middle range from high to low. Florida’s economy has recovered well from the recession.
With the cold weather to the north this winter, the snowbirds are looking at Florida with increased longing – Canadian homeowners have good equity to trade on a second home and 2017 saw them become 9% of all foreign buyers in South Florida, up by 50% from their 6% stake in 2016.
Nationally, job creation is driving the economy, and – finally – real incomes are slowly rising. In 2011, only 13 percent of home builders said labor shortages were their biggest problem, but today that number is up to 84 percent. Almost all builders are saying there’s no labor available. Even so, the very welcome news is that housing starts jumped in January, up by 9.7%.
Mortgage rates are up, as everyone knows, and the Fed signals that its prime rate will continue to increase through 2018. Another CoreLogic forecast expects the cost of buying to increase 15% this year. And our NAR economist Lawrence Yun said over a year ago that he expected mortgage rates of 5% by the end of 2018.
Nobody expects this rate to keep on rising, however, and compared with the historical cost of money in this country, a 5% mortgage rate is still considered in the very low range by most analysts. A more traditional mortgage rate would settle in the 6-7 percent range. So in macro terms, this rate increase is just another adjustment for the market to make.
There’s no doubt that rate increases cut significant slices of buyers out of the market, but REALTORs report that buyer interest is still very strong. Furthermore, lenders have loosened up their lending somewhat, and credit scores are high. But low inventory can also discourage buyers, as prices rise and choices remain small. Combined with the rise in rates, many markets are becoming overpriced, without new listings to bring competition and more realistic price discovery.
What’s constraining the market is low inventory. It’s clear that many homeowners are now in a good equity position to sell their home, but with a general uncertainty about finding the next one, a lot of homeowners are standing still – they’ve stayed in their homes for ten years now, which is a record historically.
I argued long ago that sellers and buyers should accept contingencies, for the market to be called a “normal” market again, i.e. as it was before the recession. I’m seeing this happen now, where deals are being made contingent on sellers closing on their new home, and contingent on buyers closing on their previous home.
Even so, there’s a grid locking effect with the tight inventory. The surging rental market has had a large effect on this, but Lawrence Yun says that with multi-family developments now catching up with demand and slowing rents down, large investors holding multiple single-family homes should start to release these into the market, which will help a lot.
On balance, all forecasts for 2018 look for about the same performance from the housing market as in 2017. The national economy is on an upward curve, consumer confidence is very high, the value of home ownership is undiminished across all generations, and there remains a huge pent-up buyer demand.
And Florida remains a top destination to buy a principal or second home.
© Stephanie Passman
