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Monthly Archives: April 2017

Factors That Can Hurt Home Value

Most of us are aware of the effect that certain environmental facets of a home and its surroundings can have on our health. Government agencies and businesses everywhere have made huge strides toward combating air pollution in cities, for example, since smoke and engine exhaust are known to be harmful to humans and the environment. But there is another form of pollution that is invisible yet perhaps equally harmful: noise.

"Local noise could be a nuisance as well as a detriment to home values."

Environmental noise, even if it's as typical as the sounds of a busy city, can have surprising, detrimental effects on health, according to a growing body of research. Reuters reported that, based on recent studies from public health experts, urban noise could be contributing to as much as $3 billion per year in extra health care costs in the U.S. This is due to the well-known effects of noise that many would consider little more than an annoyance - car horns, busy sidewalks, commuter trains. Research cited by Reuters estimated that 46.2 million Americans are exposed to daily noise that could lead to a 17 percent higher chance of chronic conditions like high blood pressure and heart disease.

Perhaps this research makes it more clear why homes in louder areas tend to be assessed at lower values compared to nearby properties. According to an article from Realtor.com, even seemingly innocuous neighborhood features could be the cause of significant reductions in appraised value or listing price. Some of the more surprising discounts for noise disturbances include:

  • Places of worship: Believe it or not, living near a church, synagogue, mosque or other religious institution with weekly attendance of 2,000 people or more could reduce surrounding property value by 5.2 percent. This effect could be demonstrated from as far as a half-mile radius from the building itself.
  • 24-hour supermarket: While certainly convenient, 24-hour markets reduce nearby home prices by 5.1 percent on average, according to Realtor.com's research. This effect only applies within a 0.1 mile radius.
Emergency services: Living close to a hospital emergency room or fire station could lead to a major price reduction. A hospital with an ER was found to slash home prices by 7.6 percent on average, while fire stations imparted a more modest 1.8 percent reduction.

Will Lower Growth Lead to Lower Housing Activity?

Our expectations for meaningful first-quarter economic growth are low. We’re not alone in our sour sentiment. Many economists -- those at the Atlanta Federal Reserve Bank, Goldman Sachs, and the International Monetary Fund -- also expect little in the way of economic growth. Anything above 2% (annualized) for the quarter would be a minor miracle. 

Many segments of the economy have fallen into inertia. Of greater immediate concern, sentiment has turned less optimistic in the one segment that has continually chugged ahead for the past five years. 

Housing has led the economy since 2012. Over that time, home-builder optimism has trended in one direction -- up. The trend took a detour in April. The home-builder sentiment index posted at 68 for the month. The posting is still positive, but not as positive as in March. 

It’s understandable that home builder sentiment should slip given the recent data on housing starts.

The first quarter ended with a thud, with starts dropping 6.8% month over month to 1.215 million an annualized rate (1.5 million is the historical long-term average) in March. This was the weakest posting since November. The drop in starts dropped quarter-over-quarter growth to break even. A meaningful pickup in starts might not arise until the more distant future. Permits for single-family starts fell 1.1% month over month. 

Of course, one month of data neither makes nor breaks a trend. Starts can be notoriously volatile month to month. Still, we’re eager to see starts regain traction. New-home construction, and all the ancillary businesses it supports, is vital to sustaining what little economic growth is occurring. With many segments of the economy underperforming, the one reliable engine -- housing -- needs to keep things moving in the right direction. 

We’re also eager to see an upshot in corporate earnings -- another indicator of a straightening economy. So far, the numbers are encouraging. Data provider FactSet reports that 6% of the companies that compose the S&P 500 have reported first-quarter financial results. Seventy-six percent of these companies have beaten the mean earnings-per-share estimate; 59% have beaten the mean sales estimate.

The economy might be sputtering at the moment, but we’re still optimistic that we could see it hitting on all cylinders before the year is over. 

How Buyers Can Be Preapproved for a Mortgage

Potential buyers who want to stand out from their competition should obtain a mortgage preapproval. Doing so indicates to sellers that buyers are serious about making an offer on a listing and can match the asking price.

But lenders don't preapprove every buyer. Certain requirements must be met.

Here are a few tips to help individuals increase the odds of being preapproved:

Pay debt

Every individual has to make an effort to pay off debt while still tackling monthly bills. By reducing his or her debt level, a buyer boosts his or her credit score and demonstrates a positive payment history to lenders.

A person may need to be strategic when deciding which debt to pay off first, however. Buyers should handle delinquent accounts first to improve their credit scores. They should then move onto paying off high-interest debt.

Correct credit report mistakes

Credit reports aren't perfect, and buyers must fix those errors. If a report contains false or incorrect information, it should be addressed early in the homebuying process. Doing so will help eliminate unforeseen hiccups during the loan process.

Gather documents

According to HSH.com, buyers will typically need to provide the following documents during the preapproval process:

  • Two years of federal tax returns.
  • Two years of W2s.
  • Thirty days' worth of pay stubs.
  • Sixty days (or a quarterly statement) detailing all assets in checking, savings and investment accounts.

Control spending

Taking on more debt or opening new lines of credit are a few ways to be denied a mortgage preapproval. Buyers can avoid being denied by sticking to a budget and lowering spending, NerdWallet explained.

With 2017 projected to be another hot year for purchasing homes, potential buyers should follow the above tips to better their odds of being preapproved for a mortgage.

Why Are Mortgage Rates at 2017 Lows?

Three months ago, talk of accelerating economic growth and rising inflation was all the rage. Business activity would accelerate once President Trump implemented his pro-growth agenda, which included repeal of the Affordable Care Act and lower income tax rates for businesses and consumers.

In such a scenario, surely the Federal Reserve would be aggressive in raising the federal funds rate -- at least three increases were in the cards. In anticipation of such a scenario, interest rates across the board begin to rise. The yield on the 10-year U.S. Treasury note hit 2.6%; quotes of 4.375% on the prime 30-year conventional loan were occurring with greater frequency. 

Fast forward to the present and we find the outlook has materially changed. Many economists have throttled back their growth expectations, and it appears for good reason when one vets the latest employment numbers. Payroll growth posted at a paltry 98,000 for March. This was the lowest monthly increase since June 2016. 

President Trump’s pro-growth agenda, which was expected to be pushed through Congress at maximum velocity, has hit a political brick wall. Here we are in April, and Trump and the GOP have abandoned the Affordable Care Act issue. What’s more, the Trump administration has signaled there won't be any attempts at tax-rate cuts anytime soon. 

Over the past month, exuberance has given way to apathy, which is reflected in a downturn in stock prices and an increase in risk avoidance. The yield on the 10-year Treasury note has dropped below 2.3%. Traders in fed funds rate futures contracts are giving good odds for a second Fed interest-rate increase; they’re giving only fair odds for a third rate increase. A month ago, they were giving good odds all around. 

So it appears we are caught in an economic stasis. Given the gridlock in Washington, outside of war (which would be an obvious bad thing), there isn’t much on the horizon to get the economy or interest rates moving one way or another. Therefore, we see current rates continuing to dominate, though today we’d be even less surprised to see sub-4% quotes on a 30-year loan pop up with greater frequency.

Why Millennials Still Have Difficulties Finding a Home

Despite historically low interest rates and a growing economy, millennial homebuyers still run into obstacles when trying to buy a home.

These days, millennial buyers simply can't find a home to purchase.

Inventory remains tight

According to the National Association of Realtors, housing inventory increased 2.4 percent in January to about 1.7 million homes, which is equal to a supply of about 3.6 months. However, inventory levels still remain at their lowest point since the NAR started tracking the statistic in 1999, and have declined year over year for the previous 20 months.

Many millennials now find themselves in the challenging position of wanting to buy a home, but there aren't any to purchase. A housing shortage directly affects millennial buyers in three ways.

First, having fewer available homes makes it difficult for buyers to take advantage of low interest rates before future hikes.

Second, a low supply prevents millennials from building more equity and wealth, as they may have to wait months or years to finally find a home, The Washington Post stated.

Finally, low inventory drives up home prices. Millennials finally think they can afford a starter home, but competition between other prospective buyers eventually puts a home out of financial reach. Not only are starter homes becoming more expensive, but they aren't lasting long on the market.

The Unrelenting Ascent

Another week and another indicator show that home prices continue to rise relentlessly. 

The S&P/Case-Shiller Home Price Index confirmed last week what we already know: homes prices continue to rise, as they have since the end of the 2009 recession. This week CoreLogic seconds the confirmation: Its home price index showed prices in February were up 1% month over month. Year over year, CoreLogic’s index shows that prices are up 7%.

CoreLogic sees no end in sight. Its soothsayers see their home price index rising 4.7% in 2017, with monthly increases coming in 0.4% increments. 

Most of the major home-price-data providers  -- Case-Shiller, CoreLogic, Trulia, Zillow -- present their numbers based on a distilled national average of prices. All these national averages have been rising consecutively month-over-month for the past five years. The relentless ascent has upped the “bubble” chatter. 

But as we mentioned last week, there is a mitigating factor to bubble concerns: The indexes are reported in nominal dollars. When adjusted for consumer-price inflation, prices are somewhat less bubbly. In real terms (inflation adjusted), prices are actually still below the 2006 peaks. 

But we have another concern related to relentlessly rising prices: reduced affordability. 

The U.S. Home Affordability Index from ATTOM Data Solutions shows affordability at its lowest level in eight years. In the first quarter, affordability slipped below the average historical lows in 25% of the markets ATTOM follows. 

But again we have a mitigating factor: Averages rarely, if even apply, to any single market. (In fact, averages rarely apply to any individual or any single business.)  What’s occurring in the housing market in San Francisco could be diametrically opposed to what’s occurring in the housing market in Houston. If the two markets are averaged, a figure is produced that would likely be meaningless in describing the economic reality of either market. 

Yes, we frequently report the big nationwide macro numbers (the averages and the aggregates). But it’s important to remember that these numbers have no independent life of their own that’s separate from the individual markets that form them. 

Questions remain on housing market, economy

Is the economy moving too fast or not fast enough?

​The March 15 decision from the Federal Reserve to raise interest rates for the third time since before the 2008 financial crisis has largely been seen as a positive development, even if it could cause mortgages and other forms of debt to become slightly more expensive. More promising was the general consensus view of the U.S. economy's trajectory over the next few years. Fed officials seemed to signal a willingness to continue to raise interest rates incrementally, potentially instituting two more rate hikes in 2017 alone. Since interest rates are increased to slow the rise of inflation, and inflation is generally tied to spending and growth projections, most take this decision as a sign that the U.S. economy is healthier than it's been in some time.

"Economists aren't sure if inflation will become a problem in the near future."

But like so much in economics, there are two sides to this coin. As explained in analysis from Freddie Mac, experts disagree as to whether the economy is over- or under-performing as it relates to inflation.

​On the one hand, inflation as measured by the Consumer Price Index is rising, almost at the rate of 2 percent per year which the Fed considers an optimal level. But with job growth and other indicators as strong as they are currently, some say inflation should actually be higher. Moreover, mortgage interest rates remain historically low as home values continue to rise.

By examining the relationship between inflation and the housing market, Freddie Mac's analysis offers three different scenarios, each with a high, medium or low degree of likelihood (as judged by the current political and economic climate):

​Most likely: Government approves stimulus through tax cuts and spending​

A steady yet manageable rise in inflation leads to a continuation of low mortgage interest rates and just under 5 percent annual appreciation of home prices.​ This scenario is deemed most likely by Freddie Mac.

​Somewhat likely: Government approves major tax cuts and federal spending hikes that exceed expectations

The second-most likely scenario is essentially the first projection on overdrive. With a strong grip on Congress, the U.S. could pass "expansionary fiscal policy [that] exceeds expectations." This would include major tax cuts as well as more federal spending. The result would push total economic growth higher, but also boost mortgage interest rates, home prices and inflation. This could cause home sales to drop precipitously.

​Least likely: Government forgoes stimulus and/or stimulus fails

The least-likely scenario is one where fiscal stimulus either fails in its objectives, or is never enacted. Home sales would rise as lower mortgage rates make it easier to enter the housing market, but real estate investors and financial institutions would suffer.

The latest actions by the Fed have broad implications on the U.S. housing market.

Is there room to grow?

The key question at the heart of this discussion is how close the U.S. economy in general is to its full growth potential. As Neil Irwin of The New York Times explained, answering that question requires first understanding what maximum growth even is. The Congressional Budget Office estimated that the country's gross domestic product will improve to a 2.5 percent growth rate at the end of 2017. However, newly elected President Donald Trump has expressed a willingness to grow the economy at almost twice that rate.

Unlike with how an individual or even a business manages finances, though, high growth can be too much of a good thing. When GDP rises quickly, rapid inflation is often the result. To reach full growth potential, Irwin explained, the U.S. needs to focus on operating more efficiently. Using three different metrics, Irwin noted that the nation may not be reaching the same economic heights as it was in the mid-2000s. Unused manufacturing capacity, office vacancy and, most critically, the unemployment rate of working-age people, are all still higher than they were 10 years ago.

If the U.S. can put people back to work who stopped trying to even reenter the job market after the recession, it could see sustainable growth in the form of more affordable homes, appreciation of real estate and more. How we get to that point, though, is yet another matter entirely.