January 26th, 2016
When it comes to investing in the stock market, you may lose your shirt, but you probably won’t lose your home. In fact, when the equity market gets rough, real estate tends to be a life raft for investors seeking safety.
“Real estate is Americans’ preferred investment for money that they won’t need for at least 10 years and that hasn’t changed,” said Greg McBride, chief financial analyst with New York-based Bankrate.com. “Nervous investors always look to real estate rather than shy away from it in times of volatility.”
While stocks around the globe are off to a rough start in 2016, it doesn’t necessarily mean déjà vu all over again, at least when it comes to a repeat of the real estate tumble that began in 2007 but accelerated sharply following the 2008 rout of the equities market, when home prices in late 2011 were down more than 20% from their peak in spring of 2007.
Here’s why you shouldn’t be panicking if you’re looking to buy or sell a home:
Interest rates should stay low
With the latest bout of declining equities, the pace of further Federal Reserve rate increases is likely to slow, according to Kevin Finkel, senior vice president of Resource America Inc. REXI, +2.88% , a real-estate investment trust in Philadelphia. “It would take a lot more than the volatility we’re seeing now for them to get knocked off the current course of raising rates, but will they slow down [coming rate hikes]? Probably.”
The Federal Reserve raised interest rates a quarter point last month, the first time since 2006, but minutes from the Dec. 15 to Dec. 16 meeting showed that not all of the bankers were completely on board with the initial rate hike, despite the unanimous vote, because of concerns over inflation being less than expected.
The Fed isn’t “chomping to follow up last month’s rate hike as early as this month, or possibly even in March unless the economy, and possibly inflation, shows more spunk than shown recently,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.
While the refinancing boom has slowed, that’s only because the majority of Americans who could refinance to a fixed rate have already done so, so the impact of “rate-shock” when short-term adjustable rate mortgages (ARMs) readjust will be minor compared with what happened between 2007 and 2012, when many Americans could no longer afford their new housing payments and defaulted.
Currently, despite an increase in bank repossessions rising almost 60% in November 2015 compared with a year earlier, the percentage of loans in foreclosure nationally is the lowest level since 2007, according to the Mortgage Bankers Association. Foreclosures reached a peak of 4.6% in 2011 at the height of the real estate bust.
“The recent rise in bank repossessions represents banks flushing out old distress rather than new distress being pushed into the pipeline,” said Daren Blomquist, vice president of Irvine, Calif.- based RealtyTrac, a real-estate research company.
There’s less risk of a new mortgage bubble
Unlike the 2005 to 2012 mortgage meltdown, when so-called liar loans and exploding ARMs flooded the market, the subsequent pullback in credit may have been overly tight, but it does mean in 2016 there are fewer real estate bubbles waiting to pop. While it’s true there are markets that have seen incredibly inflated real-estate values such as San Francisco and New York, it’s not fueled by unsustainably loose credit standards.
“The changes that have taken place over the past five to seven years have built a more stable foundation” in the mortgage industry, said Michael McPartland, a managing director and head of investment finance for North America at Citigroup’sC, +2.40% private bank. “There just aren’t a lot of the exotic products like interest-only [loans] and super-high loan-to-value [mortgages],” he said. “If things slow down, there will be a contraction, but not a pop.”
McPartland says it may be harder for borrowers to afford a 20% down payment and monthly interest payments that are principal and interest, instead of just interest-only, but the flip side is increased home equity (the national average is 30% equity), so home buyers are less likely to leave the keys on the counter and walk away if things go bad. Foreclosure starts in July of just over 45,000 were the lowest level since November 2005, nearly a 10-year low, according to RealtyTrac.
Foreclosure starts in November 2015 of just over 36,000 were the lowest level since December of 2005, near a 10-year low, according to a Dec. 10 report from real estate data firm RealtyTrac. “What we can expect is for foreclosures to continue falling as banks clear through their backlog of inventory,” Matthew Gardner, chief economist at Windermere Real Estate in Seattle, told RealtyTrac last month.
Help for first-time home buyers
Last year, the Federal Housing Administration began reducing mortgage insurance premiums on loans by an average of $900 a year, in an effort to nudge first-time home buyers and millennial borrowers who might not have much cash for a down payment to finally enter the housing market. The effort appears to have worked, with FHA loans jumping to 23% of all financed purchases in the second quarter of 2015, up from 19% a year earlier, according to RealtyTrac data. The FHA and other federal moves to increase credit, along with a strengthening economy, may just help boost the market for new mortgages in 2016 as much as 10% over last year despite the increase in interest rates, Mike Fratantoni, the chief economist for the Mortgage Bankers Association, said in December.
Those other federal moves include Fannie Mae and Freddie Mac making lower down payment loan options available to more borrowers. In 2014, the agencies began to buy loans with just a 3% down payment, or 97% loan-to-value ratio. Fannie Mae also announced in 2015 that it would allow income from a non-borrower household members to be considered as part of a loan applicant’s debt-to-income ratio. That could help some borrowers, who might have family members on Social Security or disability living with them, or a renter in a basement apartment, to boost their income levels and help them qualify for a loan.
Lower oil prices
At the end of 2008, gasoline prices, which had risen to a record $4 a gallon nationwide that summer, had crashed to under $2 a gallon. In that case, the cheap gas (and diesel) wasn’t a good thing, as the worldwide economy was shuddering to a halt.
While China’s economy is still contracting, the U.S. economy isn’t, so the lowest gas prices since 2009, with the national average now under $2 a gallon, are likely to help the housing market.
“The continuing drop in gas prices is freeing up valuable disposable income,” says Resource America’s Finkel, which can help Americans absorb higher rent payments, or move up to a more expensive property.
While jobs typically are a lagging indicator of an economic downturn, the U.S. has had a slow but steady rate of job creation for the past five years. Even with weakness seen during the summer, job gains in 2015 will top 2.5 million, making it the second-best calendar year for U.S. job growth in this millennium, after last year’s 3.1 million. The last time more jobs were created in a two-year period was at the height of the dot-com boom, in 1998-1999.
“The economy continues to create jobs, and the quality of jobs being created has improved as the economic recovery has progressed, with professional and business services leading the way,” said Bankrate’s McBride. “This is indicative of an economic recovery that is sustainable.”
And while in this economy, wages have been slow to recover, and it’s been a challenge to get long-term unemployed Americans who no longer count in the official jobless statistics to return to the job market, the job growth has been good enough to boost the housing sector and lure millennial borrowers off the fence.
“If wage growth materializes in a broader way, this will be the catalyst for many existing homeowners to put their homes on the market and finally look for the move-up buy, boosting housing and alleviating the inventory shortage,” McBride said.