House prices and rental prices are about to switch roles after three years of soaring home prices and tepid growth in rental prices, a new Capital Economics report said.
Over the next few years, Capital Economics predicts that rents are likely to rise at an annual average rate of 5% or more, while house price inflation will settle around 4%.
A subdued labor market, soft income growth, the low cost of servicing a mortgage and a ready supply of homes to rent has kept rents in check, only rising at a modest 8% since the market reached a turning point in late 2011. This is compared to a 20% rise in the Case-Shiller national house price index.
The report outlines 4 forecasts that will impact the rental and housing market.
- Improving job market
Since late 2011, the unemployment rate has dropped by a third, while the number of people working part-time out of necessity rather than choice has also tumbled.
The report expects the tightening in the labor market already seen to push average hourly earnings growth up from 2% this year, to 3% in 2015 and perhaps 3.7% in 2016.
- Dropping rental vacancy rate
The steady demand for rental housing that has been seen over the past few years has made a significant dent in the rental vacancy rate. Indeed, despite the fact that the share of property being built for rent is at record highs, the vacancy rate dropped to 7.4% in the third quarter. At current levels, the vacancy rate is signaling that rental growth is likely to rise to perhaps 5% per annum over the next 9-12 months.
Comparison of the costs of renting and buying suggests that the risks to that figure lie to the upside. After all, record low mortgage interest rates mean that the monthly repayments on a mortgage are only a little higher than the cost of a typical monthly rental payment.
However, Capital Economics’ forecasts imply that the monthly costs of a mortgage are likely to rise by a third over the next two years as mortgage interest rates head back towards 6%.
- Renting affordability
Assuming that is right, to keep the relative cost of renting and buying unchanged at current levels, rents would have to rise by 12% in both 2015 and 2016. If rents rise by 5% a year, in a relative sense renting will become considerably more affordable. In turn, that should help to underpin the demand for rental homes.
As a result, Capital Economics said that renters face affordability constraints. “Standard valuation measures show that average house prices are currently around 8% too low relative to income per capita, but around 8% too high relative to rents,” the report said. “The implication must be that rents are relatively low compared to incomes. Accordingly, with earnings set to rise by 3% to 4% per annum over the next two years, rental growth of 5% per annum seems perfectly plausible.”
Posted by Brena Swanson- HousingwireRead More
Among its five largest predictions for next year, Realtor.com expects first-time buyers will return to the market in full force after years of retrenchment that has dampened the recovery of the housing market. This push will be led by millennials, now settling into their families, careers, and 30s, who are eager to buy into the American dream.
This prediction mirrors that of Zillow, which earlier this month forecast that millennial buyers will become the driving force behind the American housing market in 2015.
According to that report, 42 percent of millennials say they want to buy a home within the next five years. Millennials have, according to most accounts, stayed away from buying because they have eschewed settling into marriages and families until later in their lives.
With millennial family growth on the rise and economic conditions improving for younger Americans and the nation in general, Realtor.com foresees more buying among the under-35 set.
“In 2015, increases in employment opportunities will empower younger buyers to return to the market and fuel the continued housing recovery,” said Jonathan Smoke, chief economist for Realtor.com. “If access to credit improves, we could see substantially larger numbers of young buyers in the market.”
Smoke predicts that millennials will drive two-thirds of household formations over the next five years. Next year’s addition of 2.75 million jobs and increased household formation will be the two key factors driving first-time buyer sales, he said. “However, given a high dependency on financial qualifications, this activity will be skewed to geographic areas with higher affordability, such as the Midwest and South.”
The report sees Dallas, Atlanta, Denver, Des Moines, and Houston as the most promising growth areas in 2015, and expects between 5 and 14 percent growth in home sales in these areas.
And though the site expects homeownership overall to decrease, despite a growth in ownership for those under 35, Realtor.com predicts that existing-home sales will increase 8 percent as buyers become more motivated by the belief that rates and prices will continue to rise. The increase in home sales year-over-year will be similar to 2012, but this time the composition of properties sold will be more normal with minimal levels of distressed properties, the report noted.
Overall, Realtor.com expects home prices to increase 4–5 percent nationally, which in turn will help make homes 5 to 10 percent less affordable in 2015. On the mortgage front, Smoke expects fixed rates to top out at 5 percent by year’s end, as rates on adjustable-rate mortgages will increase little.
Posted By Scott Morgan DS News
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If walls could talk, do you know what your investment property would be saying? I think most of us probably cringe at the thought of what might have occurred at a property before we bought it, especially considering the condition in which we oftentimes find them. In most cases it’s easier to just follow the old adage, “out of sight, out of mind” and focus on the future of the property, and how to renovate it for the next owner. However, there is one activity from the past that, if ignored, could come back to haunt you.
Unfortunately there is a new epidemic in our country of homes being used as meth labs, and it’s not just limited to the low income, high crime areas of town, as some would expect. The recent foreclosure crisis has created a glut of vacant homes around the country, and many of these properties are the perfect hideout for those looking to cook up their deadly concoction. If investors are not careful, they could get more than they bargained for when purchasing that distressed foreclosure property.
What’s the Big Deal?
The stigma from drug activity that accompanies a home can dramatically impact the value of the property, as well as the value of homes nearby. In fact, a study presented in 2011 by researcher Joshua Congdon-Hohman, the assistant professor of economics at the College of the Holy Cross, found that this stigma and negative impact on value can extend to homes that are up to a half a mile away. Nearby homes can lose anywhere from 10-19% up to a year later when they are located close to a home where meth production was carried out.
However, the problems with a former meth lab go far beyond just the possible stigma that could be attached to the house and surrounding area. In many of these drug-producing homes, the electrical wiring has been tampered with or compromised, which could be very expensive to replace. Depending on the size of the home and the level of contamination, the cost to remedy the faulty wiring could be up to $10,000 or more.
Of additional concern are the fumes and residue that are emitted as a result of the drug manufacturing process. These contaminants seep into the surfaces of a home, permeating many areas such as the insulation and drywall. The result of living in this poisonous environment can be the catalyst for a host of health problems for unsuspecting homeowners, ranging from respiratory illnesses to neurological problems that require serious medical treatment.
How Do You Know Whether a Home was a Meth Lab?
One of the most important aspects to determining whether your home was ever a meth lab is understanding what you can NOT rely on when it comes to normal home buying due diligence: property disclosure laws and home inspections. Potentially hazardous substances like asbestos, and radon are usually a state-based disclosure requirement, with the exception of lead-based paint, which is a federal mandate. At this time, however, only about 50% of states require both homeowners and realtors to disclose the history of known meth activity in houses that are on the market. So buyers beware in states like Florida, Tennessee, Michigan, and Georgia that have no disclosure requirements in place.
Additionally, most home inspectors do not test for drug residue as a part of their standard home inspection. Though this is becoming more of a problem for investors and owner-occupants alike, it hasn’t quite reached the level of nationalized standards or federal regulations. Therefore, the onus is on the buyer to make the necessary inspections to protect their investment in a property.
The first and most obvious step is to inspect the home for any signs of the materials used to make crystal meth, such as boxes of cold medicine that contain ephedrine or pseudoephedrine, lye solution, filter cloths, etc. It’s also a good idea to talk to the neighbors, who will typically know the story behind what happened at the property before it became vacant. Recently I had a neighbor walk up to tell me that the recently renovated property down the street from my new purchase was a former meth lab, but thankfully that wasn’t the story behind my project.
Secondly, you can have a test conducted that will check for the presence of methamphetamine in the home. A professional test can cost you anywhere from $500-$700. However, there are numerous at-home tests on the market for as little as $25 that are capable of accurately testing whether these harmful chemicals reside on the various surfaces of the home.
Lastly, you can also search the DEA’s National Clandestine Laboratory Register to find any properties where meth labs have been discovered and identified by law enforcement. While your home’s absence from this list isn’t a guarantee it’s never been used in meth creation, if you find your potential investment on the website, you’ve guaranteed yourself a significant increase to your renovation budget.
In conclusion, while the existence of meth labs in a home is rare, it’s something that all investors should be aware of when analyzing a property for purchase. With foreclosures hitting an all-time high in the last few years, the glut of vacant homes has lured many bad actors into using these properties to produce illegal drugs. The number of meth labs has doubled and tripled in some locations, particularly in southern and Midwestern states, so it is wise to do some thorough investigation on any potential property for purchase. Always remember that a dime bag…erhhh, I mean an ounce of prevention is always worth a pound of cure, so perform your necessary due diligence to make sure your next investment is a home run!Read More
An examination of break-even inflation rates suggests sharply lower oil prices are a key driver of the 90 basis points rally in 10-year Treasurys and the 60 basis points drop in mortgage rates in 2014, according to analysts at BofA Merrill Lynch.
Most real estate economists are forecasting mortgage rates will rise in 2015, but the recent steep drop in oil prices could change all that.
“The possibility of further declines in oil prices increases the chances that mortgage rates drop to the 3.25%-3.5% range that we believe is necessary to get housing back to affordable levels for many,” says Chris Flannigan, ABS and MBS strategist at BAML. “We have maintained the view that 4% mortgage rates are too high to allow for sustainable recovery in housing. In our view, a drop to the 3.25%-3.5% mortgage rate range would eliminate the current benign technical conditions prevailing in the agency MBS market, increasing supply from both refinancing and purchase mortgage channels. Such a rate drop would also create significant upside risk to our forecast of roughly $1 trillion of mortgage production in 2015.”
Flannigan says that if sustained low rates were realized, which could be possible if sustained low oil prices are realized, the market could see realized mortgage production, which was pegged at a 2.3% 10yr, exceed the forecast by 30%-50%.
Non-agency MBS and consumer ABS would be clear beneficiaries from a lower mortgage rate, lower oil price scenario, he added.
“We continue to recommend an overweight of lower priced subprime mezz, non-judicial option ARMs and consumer loan ABS. Given this week’s weakness in agency MBS, we maintain our neutral view of the sector for now, but re-emphasize our down-in-coupon, long duration bias,” he said. “We are underweight IOS. CLOs and CMBS should broadly benefit from lower interest rates and lower oil prices, but energy specific exposures could be problematic in some transactions and further spread tiering based on relative energy exposure…”
Posted by Trey Garrison on Housingwire
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Where the U.S. housing market is concerned, Fannie Mae chief economist Doug Duncan said he is anticipating overall weaker home sales in 2014 than in 2013. But he expects that overall home sales in 2015 will post their best performance since 2007 despite seeing only moderate growth for the year.
The forecast on the state of the nation’s housing market and on the overall economy were included in the Fannie Mae Economic & Strategic Research Group’s October 2014 Economic Outlook, published on Thursday.
“We lowered our expectation for housing starts just slightly to one million units for 2014, but our view of mortgage originations has not changed,” Duncan said. “Our estimate for 2013 was in line with the recent release of 2013 data under the Home Mortgage Disclosure Act, and our projection of total production in 2014 is little changed at approximately $1.1 trillion. For 2015, we are cautiously optimistic that ongoing labor market improvements, low mortgage rates, rising inventories, and some easing of lending standards will boost home sales by roughly 5.0 percent. However, we still believe housing will continue along its upward grind rather than have the breakout year some are expecting.”
Economic growth has been slow on a global scale this year, but that has not dimmed the outlook for the U.S. economy, according to the findings of Fannie Mae’s ESR Group. Real economic growth in the U.S. seems poised to exceed 3.0 percent for the second half of 2014, which is expected to provide a solid basis for continued growth into 2015.The slow global economic growth may prevent the Federal Reserve Board from making any interest rate policy changes until Q3 2014, it has not prevented a positive outlook for the economy in the U.S.
“Given the expected strengthening economic activity in the U.S. in the second half of the year, we continue to expect to finish just above 2 percent growth for all of 2014,” Duncan said. “The risks are tilted to the downside due to current geopolitical events in Russia, Ukraine, Hong Kong, and the Middle East, as well as the economic slowdown in the Eurozone, China, and Japan. However, recent data suggest these factors have not significantly swayed American consumers. Real consumer spending is poised to pick up in the second half of 2014 from the first half, due in large part to improving labor market conditions, continued declines in gasoline prices, and a subdued pace of inflation.”
Posted By Brian Honea DSNews
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