The Gardner Report – Fourth Quarter 2016

Economic Overview

Washington State finished the year on a high with jobs continuing to be added across the market. Additionally, we are seeing decent growth in the area’s smaller markets, which have not benefitted from the same robust growth as the larger metropolitan markets.

Unemployment rates throughout the region continue to drop and the levels in the central Puget Sound region suggest that we are at full employment. In the coming year, I anticipate that we will see substantial income growth as companies look to recruit new talent and keep existing employees happy.

 

Home Sales Activity

  • There were 19,745 home sales during the fourth quarter of 2016—up by a very impressive 13.4% from the same period in 2015, but 18.7% below the total number of sales seen in the third quarter of the year. (This is a function of seasonality and no cause for concern.)
  • Sales in Clallam County grew at the fastest rate over the past 12 months, with home sales up by 47%. There were also impressive sales increases in Grays Harbor and Thurston Counties. Jefferson County had a fairly modest decrease in sales.
  • The number of available listings continues to remain well below historic averages. The total number of homes for sale in the fourth quarter was down by 13.7% compared to the same period a year ago.
  • The key takeaway from this data is that 2017 will continue to be a seller’s market. We should see some improvement in listing activity, but it is highly likely that demand will exceed supply for another year.

 

Home Prices

  • Demand continued to exceed supply in the final three months of 2016 and this caused home prices to continue to rise. In the fourth quarter, average prices rose by 7.1% but were 0.4% higher than the third quarter of the year. The region’s average sales price is now $414,110.
  • In most parts of the region, home prices are well above historic highs and continue to trend upward.
  • When compared to the fourth quarter of 2015, price growth was most pronounced in Kittitas County. In total, there were eight counties where annual price growth exceeded 10%. We saw a drop in sales prices in the notoriously volatile San Juan County.
  • The aggressive home price growth that we’ve experienced in recent years should start to taper in 2017, but prices will continue to increase at rates that are higher than historic averages.

 

Days on Market

  • The average number of days it took to sell a home in the fourth quarter dropped by 15 days when compared to the fourth quarter of 2015.
  • King County was the only area where it took less than a month to sell a home, but all markets saw decent improvement in the time it took to sell a home when compared to a year ago.
  • In the final quarter of the year, it took an average of 64 days to sell a home. This is down from the 78 days it took in the third quarter of 2015, but up from the 52 days it took in the third quarter of 2016. (This is due to seasonality and not a cause for concern.)
  • We may experience a modest increase in the time it takes to sell a home in 2017, but only if there is a rapid increase in listings, which is certainly not a given.

 

Conclusions

This speedometer reflects the state of the region’s housing market using housing inventory, price gains, sales velocities, interest rates, and larger economic factors. For the fourth quarter of 2016, I actually moved the needle a little more in favor of buyers, but this is purely a function of the increase in interest rates that was seen after the election. Higher borrowing costs mean that buyers can afford less, which could ultimately put some modest downward pressure on home prices in 2017. That said, the region will still strongly favor sellers in the coming year.

This article originally appeared on the Windermere.com blog.

First Time Buyers, Millennials, and What to Expect in 2017



By Matthew Gardner, Chief Economist at Windermere Real Estate

I believe that the big story for the coming year will be first-time home buyers. Since they don’t need to sell before purchasing, their reemergence into the market ensures that sales will continue to increase, even while inventory is limited. Thirty-one percent of buyers currently in the real estate market are first-time buyers, but it would be more ideal if that figure was closer to 40 percent.

Why don’t we have enough first-time buyers in the market? With Baby Boomers working and living longer, we aren’t making much room for Millennials to start their careers. Plus, the major debt that the younger generation owes on student loans ($1.3 trillion today) hugely impacts the housing market. But the bigger issue is lack of down payments. Before the recession, many Millennials could look to their parents for help with down payments; however, these days that is not as much the case.

I would also contend that the notion of Millennials being a “renter generation” is nonsense. In a National Association of Realtors survey, 75 percent of them said that buying a home would be the most astute financial decision they’d ever make; however, 80 percent said they don’t think they could qualify for a mortgage. I do believe that Millennials will eventually buy, but they’re delaying their purchasing decisions by about three years when compared to previous generations, which is about the same amount of time they’re waiting to start families as well.

Mortgage rates have risen rapidly since the election, and unfortunately, I do not see a turnaround in this trend. That said, they will remain cheap when compared to historic averages.  Expect to see the yield on 30-year mortgages rise to around 4.7% by the end of 2017. For those who have grown accustomed to interest rates being at historic lows, this might seem high, but it’s all relative.

If I were to gaze all the way into 2018, my crystal ball takes me to the dreaded “R” word. Like taxes and death, recessions are another one of those unwanted realities that inevitably comes to visit every so often. Irrespective of who was voted into the White House, my view remains the same: prepare to see a business cycle recession by the end of 2018, but, rest assured, it will not be driven by real estate, nor will it resemble the Great Recession in any way.

This article originally appeared on the Windermere.com blog.

The Gardner Report – Third Quarter 2015

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Economic Overview

After a period of above-average growth, Washington State has seen a modest slowing in employment growth, but we continue to add jobs at a respectable rate. The State unemployment rate was measured at 5.3%, marginally above the national level, but it is trending in the right direction.

Although growth continues to be uneven across the state, there are some encouraging signs which suggest that all of our main metropolitan areas should see positive job growth for the foreseeable future.

Home Sales Activity

• There were 22,207 home sales during the third quarter of 2015, up by 14.1% from the same period in 2014.
• For the first time in several years, there were no counties that saw annual decreases in home sales.
• The growth in sales was most pronounced in Kittitas County, and all but two counties saw double-digit percentage increases from the same period last year.
• The lack of available inventory in the region continues to be a concern. Listings in the third quarter were down by 18% from the second quarter, and down by 24.5% from the third quarter of 2014.

Home Prices

• Prices in the region rose by an average of 6.3% on a year-over-year basis and were 9.6% higher than seen in the second quarter of 2015.
• The only county where home prices fell on an annualized basis was in Kittitas County, but the drop was a minuscule 0.5%. Kittitas County saw sale prices grow by 5.8% between the second and third quarters of this year.
• When compared to the third quarter of 2014, San Juan County showed the fastest price growth with an increase of 14.6%. Double-digit percentage gains were also seen in four other counties.
• As long as inventory constraints persist, it is likely that price growth will continue. However, if interest rates rise in 2016, as they’re expected to do, we will likely see price growth slow.

Days on Market

• The average number of days it took to sell a home dropped by nine days when compared to the third quarter of 2014.
• It took an average of 74 days to sell a home in the third quarter of this year—down from 84 in the second quarter.
• There were just two markets where the length of time it took to sell a home did rise, but the increases were minimal. Jefferson County saw an increase of eight days while Mason County rose by two days.
• King County remains the only market where it takes less than a month to sell a home.

Conclusions

This speedometer reflects the state of the region’s housing market using housing inventory, price gains, sales velocities, interest rates, and larger economics factors. For the third quarter of 2015 I have moved the needle a little farther in favor of sellers. Although sales did slow between the second and third quarters, I attribute this to a lack of inventory rather than any other factors. Additionally, interest rates dropped between the second and third quarters, which made buying more favorable.

The persistently low levels of inventory in the region remain a concern. Such an imbalance between supply and demand is unsustainable. When I look at the ratio between listings and pending sales there are some counties with less than two months of inventory, which is troublesome. Any number below four months is certainly considered to be a seller’s market and, in my experience, a prolonged period of time with less than six months of inventory results in an unstable market.

In normal housing market cycles, when such an imbalance exists we could expect home builders to fill in the gap with inventory, but this has not happened thus far. Unless we see a rapid escalation in construction activity, the market will remain remarkably tight well into 2016.

About Matthew Gardner

content_Headshot_-_Matthew_GardnerMatthew Gardner is the Chief Economist for Windermere Real Estate, specializing in residential market analysis, commercial/industrial market analysis, financial analysis, and land use and regional economics. He is the former Principal of Gardner Economics, and has over 25 years of professional experience both in the U.S. and U.K.

You’re welcome to download and view the full PDF report for more information. This blog was originally posted on the Windermere Blog.

This blog post originally appeared on the Windermere.com blog.

Will millennials be ‘perma-renters’?


This article originally appeared on Inman.com

Several factors have kept this generation renting, but they won’t last forever

Takeaways:

  • Many believe that millennials will continue to be renters and not homeowners for various reasons.
  • The first of the millennials were not even in a position to consider buying until roughly 2008.
  • Credit has become tighter for older buyers; therefore, the recent rise in first-time buyers actually can be attributed to millennials.

There has been a lot of buzz in the news recently suggesting that millennials will forever be renters and not homeowners.

Reasons for this theory are plentiful and include amenities that apartments offer, flexibility when it comes to moving and changing jobs, and inability to afford a home given the crushing student debt load that many are carrying.

So will this be the renter generation? Let’s take a look at the data.

Millennial homeownership rates

Those who believe in the “perma-renter” theory point to U.S. Census Bureau statistics that state the homeownership rate for individuals under the age of 35 has dropped from a peak of 43.6 percent in 2004 to 34.6 percent today.

Now, I can’t deny that this is a precipitous drop, but let’s not get carried away quite yet. To start with, the first of the millennials (born in 1982) were not even in a position to consider buying until roughly 2008. That accounts for four years of college followed by two years of work.

We all know that 2008 was a terrible year to buy a home, so let’s bring it forward a little further to 2012. At that time, the ownership rate was roughly 36.7 percent. Since then, it has dropped to the current level of 34.6 percent. This drop is hardly a drastic one, but it is a drop all the same — so what happened?

Fewer urban options

As mentioned earlier, some suggest that millennials are bypassing homeownership because they prefer to remain mobile and are drawn to the bells and whistles that modern apartment living offers.

I would add to this that urban life simply appeals more to younger people than living in the suburbs; especially to those who are just starting their careers and don’t yet have a family.

But the options to buy in many cities are few and far between. Since the Great Recession, there has been a shortage of new, for-sale multifamily development, which limits the availability of urban housing for buyers.

At the same time, new apartment projects are being built at a frenetic pace. According to REIS, 240,000 apartment units are scheduled to open their doors by the end of this year, which represents a 43 percent increase compared with 2014, and well over 100,000 units above the 10-year trailing annual average.

The makeup of first-time buyers

Now let’s turn to the National Association of Realtors’ data on the percentage of existing sales to first-time homebuyers. As the chart below shows, between 2008 and mid-2010, there was a rapid runup as a result of the first-time homebuyer tax credit.

After that program expired, the percentage naturally dropped and trended lower through the end of 2013. However, it’s clear that the share of sales to first-time buyers has been trending higher for the past 17 months. But not all of these buyers are millennials, so we need to dig a little deeper for answers.

Source: National Association of Realtors

To better understand the makeup of first-time buyers, I started by looking at their age distribution. There is some great data from the Federal Reserve Bank of Atlanta that sheds light on this through analysis of mortgage data and demographic attributes.

As is shown in the table below, first-time buyers are actually not getting older. Although their numbers tumble after the crash of the housing market, the age distribution did not change drastically.

Now, if we believe that the decline was driven by the millennials, surely we would have seen first-time buyers getting older, but interestingly enough, they didn’t.

Source: Federal Reserve Bank of New York

To add to this, analysis prepared by the Center for Real Estate Analytics suggests that the gap between median credit scores of younger buyers and older buyers has closed.

In other words, credit has become tighter for older buyers; therefore, the recent rise in first-time buyers actually can be attributed to millennials.

So, if credit quality isn’t the issue holding back millennials, and rents continue to increase at a frenetic pace, it stands to reason that we will see more and more members of this generation becoming homeowners.

I hope I’ve demonstrated that these broad statements that people are making about millennials being perma-renters are unfounded.

Are many of them delaying their purchasing decisions? It appears so, but I expect them to move into homeownership in greater numbers as they start to marry, have families or simply find themselves paying too much in rent.

So where are these millennials going to buy? I’ll tackle that topic in an upcoming post.

Matthew Gardner is the chief economist for Windermere Real Estate. He is the former principal of Gardner Economics and has over 25 years of professional experience both in the U.S. and U.K. Follow him on Twitter @windermere.