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Debunking the Biggest Homebuying Myths

Beach House

The process of buying or selling a home is incredibly complex, especially for those diving in for the first time. That's why it might not come as a shock to learn that many misconceptions and myths persist regarding various steps of the homebuying process. Here are the most pervasive points of confusion for homebuyers of all stripes:

Market Preview: September Rate Hike Highly Unlikely

Log Cabin

Mortgage rates appear to have gone on a fly-and-flop vacation. We’ve seen little movement over the past week. Even an exceptionally strong employment report for July did little to roil lending rates. Credit-market participants responded mostly with a collective shrug.

Homeowner Wealth Continues to Outpace Renters

Homeowner Wealth

Buying a house is more than simply having some extra space all to yourself - it also serves as an investment. Even with the high costs involved in real estate purchases, that investment is still paying off for most American homeowners.

Pending Home Sales Up; Bipartisan Congressional Bill Would Change Credit Scoring

DC Rowhomes

Higher home sales could reside in the immediate future. The pending home sales index was up a strong 1.5% in June. This is after three months of consecutive declines. During those months, existing home-sales growth has been tepid. 

Tesla's Solar Roof and the Future of Home Tech

Home Tech

The concept of a "smart home" has been around since the time of "The Jetsons," but it's one that's increasingly becoming a reality. However, today's real smart homes might not be exactly what most people imagined half a century ago. While robot butlers and flying cars have not yet penetrated the market, there are some incredible new pieces of home tech that are reshaping homeownership.

A Mixed Bag on the Home Front

Inventory

The pending homes index foreshadows the future. The index trended lower over the past couple months. Existing home sales trended lower last month. 

Existing home sales fell 1.8% to an annualized rate of 5.52 million units in June. Sales have found it difficult to gain traction in 2017. Year over year, existing home sales are up only 0.7%. 

Everyone is aware of the problems that plague existing home sales. Low inventory and unrelenting price appreciation lead the way.

The median price of an existing home at the national level is $263,800, a 6.5% increase in the median price that existed last year. Supply, on the other hand, dipped 0.5%. Year over year, the supply of existing homes for sale is down 7.1%.

If you think your home will command a better price in the future, you’re less likely to list it today. A self-perpetuating dynamic is at work with existing homes: The more prices rise, the fewer existing homes that come to market. 

This dynamic -- of rising prices and falling supply -- hits hardest on the most important demography. Many young first-time buyers find themselves again priced out of the market. First-time buyers accounted for 32% of existing home sales in June, down from 33% in May. This time last year, they accounted for 35% of sales. 

As for new home sales, they’ve been brisker of late. New home sales rose 0.8% to 610,000 units on an annualized rate in June. New home sales are up 10.9% year over year. 

Lower prices helped move inventory. We’re seeing more discounting with new homes. The median price of a new home is down 3.3% to $310,800. The discounting appears concentrated in the higher echelons of the market. And who would be surprised? Lower-echelon new homes are gone in a New York second because fewer of them are offered for sale. A mere 13% of new homes sold last month cost less than $200,00 compared with 17% in 2016 and 19% in 2015.

Many market watchers view relentlessly rising home prices as a good thing. One market watcher even called rising home prices “the leading strength of the economy.”

It’s more nuanced than that. 

For most of us, our house is really more akin to a consumable good. It’s an asset that we use, as opposed to an investment (rental property) to generate cash flow. We wouldn’t view a relentless rise in other consumables, such as fuel or food, as a good thing. We shouldn’t necessarily view a relentless rise in home prices as a good thing. 

Of course, one could argue that fuel and food are destroyed when consumed; they’re gone forever. That’s true, but a house will always degrade because of use. Regular maintenance and capital improvements are required to ensure that a house remains a usable asset. A house that is used with no concurrent maintenance and improvement will eventually be destroyed. 

We’re not against home-price appreciation. An asset that can maintain its value is generally a good thing. But too much of a good thing can lead to not-so-good things -- a stratified market, a distorted market, and even a bubble market.

What to Consider as a First-Time Homebuyer

First Home

Buying a home for the first time can be intimidating.

Whether you're fresh out of college or buying for the first time later in life, there are several things potential homeowners need to consider before making a purchase. Making a wrong decision when it comes to buying a home will not only be disappointing, it will be costly.

Housing Starts Recover; Home Builders Are Unimpressed

 

Housing Starts

Home-builder sentiment has turned a bit dour of late. The housing market index -- an indicator of home-builder sentiment -- dropped to 64 in July. This is the lowest reading since November.  Sentiment has trended lower since peaking in March.

The latest sentiment report cited high lumber costs as one reason for the tempering optimism. (This is one of many reasons why the tariff on Canadian lumber is bad economics.) It also cited moderating buyer traffic. 

Builders still have reason to see the cup as half full, though.  Starts picked up since last month. Starts posted at 1.215 million on an annualized rate in June. Single-family starts rose to 849,000 on an annualized rate. These numbers were higher than most analysts had expected. 

Better yet, permits point to starts trending even higher. Permits were up 7.4% for June compared with May. Year over year, starts are up 5.1%. Construction activity remains brisk. 

Perhaps builders have tempered their optimism because they have had a good run for so long. The iShares Dow Jones US Home Construction Fund, a fund of publicly traded home builder stocks, has doubled since 2012. 

But the longer you’re into the run, the harder it is to maintain the pace: materials, land, and qualified workers become more difficult to secure on the margin. Costs rise, and these costs weigh on operating margins and profits.  The sky is never the limit. 

But neither is Hades. We don’t see housing (and home building) trending toward the downside. The market is still strong, though we wouldn’t be surprised if it’s less strong going forward than it has been in recent years. 

Housing has been the one constant (constant good) in the economy for the past five years. There are no signs it will relinquish its standing in the near or distant future.  We see it that way, and so do most home builders. Home-builder optimism has dropped in recent months, but home builders are still mostly optimistic, and rightly so.

Fannie Mae to Ease Mortgage Standards

Fannie Mae

Fannie Mae, the government-sponsored lending institution, is one of the biggest players in the U.S. mortgage market. That's why a recent announcement reported by The Washington Post is good news for some borrowers or current homeowners. Starting July 29, Fannie Mae will ease its mortgage application standards, allowing borrowers with a higher debt-to-income ratio to earn approval for a loan. 

An Impossible Proposition

Fed July

Mortgage rates have held steady for the past week. That said, they’ve held steady near a three-month high.

Much of the recent inertia is attributed to the moment. Federal Reserve Chair Janet Yellen gave testimony before Congress this past week. Market watchers parsed every word. Because Yellen knew they would parse every word, she was careful to say as much as she could without saying much of anything (such are the tendencies of central bankers).

Yellen did confirm that additional federal fund rate increases are likely in order, but this is common knowledge. The goal with the fed funds rates is to maintain a neutral rate of interest. This means that the Fed attempts to set the fed funds rate to where it’s neither expansive nor recessive.

In Yellen’s opinion, the neutral rate, guided by the fed funds rate, will need to rise gradually over the next few years. She also opines that because the neutral rate is low by historical standards, the fed funds rate won’t need to rise much to maintain a neutral rate. 

It sounds neat, tidy, and doable. The fact is, though, that the Fed is really groping in the dark. You can’t know what a change in the federal funds rate will do to the neutral interest (an unobserved rate at the present) until it has been done. It’s no easier to divine a neutral interest rate by committee than it is to divine the neutral corn price in Iowa by committee. But this is what the Fed is charged to do. Fed officials understand the difficulty in delivering on their charge.

So what’s all this mean to us?

Market participants believe the Fed is moving in a more dovish direction. This is evinced by Yellen’s testimony. As she talked, her talking was more cautious than expected. The yield on the 10-year U.S. Treasury note drifted lower. Mortgage rates remained in a narrow band, though they have drifted lower (albeit slightly). 

The key for us is Yellen’s stance on the “neutral” interest rate. The Fed continues to anticipate that the longer-run neutral-inducing level of the federal funds rate is likely to remain below levels that prevailed in previous decades. This suggests to us that mortgage rates will remain below levels that prevailed in previous decades. 

But it doesn’t mean mortgage rates will remain below levels that prevailed in previous years. Yes, we’ve seen quotes on the prime 30-year fixed rate mortgage dip to 4%, but they’ve subsequently moved higher. The dips were lock-in opportunities.

We think that dynamic will continue.  But we think it will continue to with dips occurring on a rising (albeit slightly rising) rate trend. With the Fed and other central banks cautiously exploring higher levels of interest rates, we think that locking on the dips remains a sound strategy. But don’t be surprised if the dips occur on a rising plane.