Following a year of success, 2017 has big shoes to fill
By Genevieve Smith
By all accounts, 2016 was a great year for the industry. Numbers are up, recovery price-wise nearly complete, and everyone is now looking beyond the successes of 2016 towards the New Year, wondering what the future may hold. Most experts are breaking out the yearly crystal ball and doing their best fortune teller impressions, giving their educated guesses on how areas of interest might play out.
At the top of the list is the interest rate hike; it’s the first one of 2016 and only the second since the 2008-2009 financial crisis. The quarter percentage point increase at least means improvement in the labor market and a strengthening U.S. economy. But, of course, rising interest rates make for a difficult borrowing environment, affecting home buyers and thereby homebuilders.
Central to this the issue is concern for affordability. Decreased inventory has also driven up prices and made it more difficult to get into the housing market. According to Trulia, available starter home supply has dropped more than 10 percent. Factors like significantly decreased starts in November haven’t calmed worry about supply, nor has labor shortage or ever-tighter code, sending builders in pursuit of move-up buyers and higher profit margins.
That being said, CBS News business analyst Jill Schlesinger, as she told CBS This Morning, thinks this is nothing to worry about: “I think it’s fine,” said Schlesinger. “It’s been a good year for both existing and new home sales.”
Data from both the National Association of Realtors and the U.S. Census Bureau corroborate that point, showing that existing home sales have increased 5.9 percent from last year, and new homes 17.8 percent. So, Schlesinger is right, at least on the sales side.
She also has confidence in the rising economy and people’s ability to afford slightly higher mortgages, as wages start to increase. Again, as quoted from CBS This Morning: “Let’s look at sort of the average house – $250,000 house. You get a $2,000 mortgage,” Schlesinger said, giving an example. “A month or two ago, with a 3.5 percent 40-year fixed mortgage rate, the monthly payment would have been $898. At 4.5 percent, it would be $1,013.”
She conceded that not everybody can necessarily pull in that extra $115 a month, but then countered her own point with “a lot of people can and the economy is slowly improving.”
Unfortunately, the key word there is slowly. The affordability index tracked by Attom Data Solutions hit its lowest level in the past eight years. It showed home prices growing faster than wages in eight of 10 markets and home prices have shot up 60 percent since bottoming out in 2012. That’s compared to a wage increase of just 1 percent. This means that in the areas with the highest demand and highest potential for profit, potential buyers are incapable of purchasing the products that home manufacturers want to sell them, simply because their increase in income has not matched the increase in economic recovery.
Beth Braverman of the Fiscal Times sees this as a “one-two punch” to affordability: “at the same time that homes are getting less affordable, it’s also getting more difficult to get a mortgage.” She cited a separate study from CoreLogic that found the average credit score for homebuyers in the third quarter increased to 739.
Also found in the study, borrowers have slightly less debt and are putting down slightly higher down payments than borrowers were a year ago. In fact, the study found that “loans originated in Q3 2016 are among the highest-quality home loans originated since the year 2001.” Perhaps it’s a by-product of tightened loan restrictions, but if sales numbers are up and we see an increase in people’s ability to meet the tighter restrictions by producing a large number of quality loans, home ownership should start becoming an easier path rather than more difficult.
She sees these facts manifest in the record number of young adults living at home. A new report from Trulia and The Wall Street Journal finds that nearly 40 percent of adults under age 34 were living with either their parents, siblings or other relatives – the highest percentage since 1940.
Whatever the rate, wages are improving. The labor shortage is on the upswing and builders will adapt to new code as they always do. More worrisome is how the new administration may handle their proposed tax reform, as there has been talk of limiting itemized deductions (read: mortgage interests). You’d need a real fortune teller and crystal ball for that one, though – no best guesses here. This issue calls for the industry’s close attention and for associations large and small to fight hard against reforms that would be a further deterrent to those entering the market.
Genevieve Smith is the Editor at Builder and Developer magazine. She may be reached at email@example.com.