Existing homes sales closed out 2016 as the best year in a decade. Existing homes include, single family, townhomes, condos, and co-ops. Lawrence Yun, NAR chief economist, says the housing market’s best year since the Great Recession ended on a healthy but somewhat softer note “Solid job creation throughout 2016 and exceptionally low mortgage rates translated into a good year for the housing market,” he said. “However, higher mortgage rates and home prices combined with record low inventory levels stunted sales in much of the country in December.” 32 percent of these sales came from first-time home buyers. Click here to read the entire article.
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For years, a large number of home owners were prevented from moving up because of negative equity. These “underwater” homeowners were locked in to their current home by rock-bottom real estate values. Now that the market has improved, some see a new problem: Homeowners who have refinanced in recent years don’t want to give up their rock-bottom interest rates. Economists, who always seem to find something to worry about, are worrying that this group will be reluctant to move now that interest rates are heading back up.
Researchers at the Institute of Housing Studies at DePaul University in Chicago say that interest rate lock-in may be more of an impediment to housing turnover than equity lock-in (those who can’t sell because they’re underwater). Their study, published in February, used the Chicago metro area as a test case to predict what rising home prices and interest rates will mean for housing turnover. The study assumed a 1% interest rate increase each year over a three-year period. They found that the number of households freed from equity lock-in by increasing home prices will not offset the number of home owners who are increasingly being locked in by low interest rates. At the end of the three-year period, the turnover rate in strong markets had decreased by 75%. The effect in weaker markets was slightly less extreme, but similar.
National Association of REALTORS® Chief Economist Lawrence Yun predicts that interest rates will follow that pattern over the next three years, increasing from current levels (around 4.2%) to nearly 5% by early next year. He says they will probably rise until they reach 6%, then stabilize there. Historically, 6% interest isn’t deadly, but a home owner paying about half that may take rates into account when deciding whether or not to move.
It’s hard to know exactly how this will unfold on the national arena. One CoreLogic executive recently estimated that up to 3.6 million home owners will be reluctant to sell this year because of rate lock-in. That will keep inventories low and home prices higher than they otherwise would be.
Looking back to other lock-in events can provide insight to what home owners might do in the face of interest rate lock-in. Historically, there has been “a substantial amount of renovation of houses” as home owners seek to put off moving. Among other options is keeping the home as a rental property – that’s a great option in Flagstaff where the rental prices are high.
Ultimately, selling a home and moving to a smaller or larger one, or one in a different city, is most dependent on the homeowners’ housing needs. Interest rates will play a role, but in most cases not a determining one.
As welcome as a long-awaited improvement in the American housing market may be, the unusually low level of homes for sale is creating problems for buyers and sellers alike
Flagstaff home buyers are coming out to buy in larger numbers than in recent years, but they are “disappointed in what they see for their money,” as one of my colleagues said to me last week. To some extent, that’s an old story in Flagstaff, where home prices drive our cost-of-living index above the national average. Still, coming out of a depressed housing market, buyers are expecting more for their money. Flagstaff sellers, meanwhile, seem to be holding out – our inventory remains very low. New home builders are gearing up to fill the gap, but those homes are four-12 months away from occupancy dates.
It’s against this local Flagstaff real estate market backdrop that I found this article from last week’s New York Times business section interesting. My advice is not to get carried away with some of the “hype” in the article’s quotations. Yes, we see multiple offers on Flagstaff properties. Yes, we see the beginning of price increases, but in the lower price ranges only. The market “recovery” is all relative. Inventory is so low that it is hard to say if a slight increase – to a healthy level of exchange – might level out or even reduce prices again.
The national housing market is becoming less unhealthy, as I reported in several blog posts last week. That’s good because we need it to improve for all sorts of reasons. But without 15 million sub-prime borrowers being pumped into the bottom and mortgage lending practices going haywire again, the market isn’t going to boom like it did in 2005-06. And, that’s probably a good thing for all of us.
Buying or selling a home in Flagstaff has never been more complex. When you’re ready, give us a call at 928.714.0001 or get acquainted with our Flagstaff homes website. We’re part of the international RE/MAX network and delighted to give Flagstaff the best local real estate service.
1) The big increases in home prices we’ve been hearing about in the news are only big because they are compared to very weak home prices in the second half of 2011. So, when you read about year-on-year gain of 10%, that’s compared to a very weak 2011.
2) Increases in median prices are being driven by a change in the mix of sales: Larger and slightly higher-priced homes are selling again, so the median price is up.
3) Another mix of sales has changed: There are fewer foreclosed homes for sale. If you believe that foreclosed homes sell for less than “traditional sales,” as the National Association of Realtors® calls them, the median price is going to be higher as fewer foreclosures sell.
Controlling for mix of sales, Radar Logic says that individual property values have gone up at half the rate of the published median sales price reports. And, that increase is off a low-bottom. So, individual sellers need to be realistic about what’s happening in the market when they are ready to sell.