Download Issue 1 2017 A Goldilocks Moment

Chairman’s Report 2017
THE
A Message from Lawrence F. Flick, IV Chairman and Chief Executive Officer
Berkshire Hathaway HomeServices Fox & Roach, REALTORS®and The Trident Group
2017 | ISSUE 1 · PHILADELPHIA METROPOLITAN REGION INCLUDING PA, NJ AND DE
A Goldilocks Moment
Economies and real estate markets are cyclical, and
sometimes can be either “too hot” or “too cold.”
We’re at a moment now where both our economy and
local real estate markets have created a “just right”
environment to buy a house. Here’s why:
The Philadelphia MSA, which includes the suburbs in
the surrounding three states, is especially favorable
now as compared to the past thirty years, and as
compared to other areas of the country:
• There is positive job growth
Housingand
andRental
Rental Costs
Housing
Costs
in
Top
Ten
Metropolitan
in Top Ten MetropolitanAreas
Areas
• There is also perceptible income growth
• Consumer confidence is at an all-time high
Metroplitan Area
2016 Q4 1985-2000
• Mortgage interest rates remain at historic lows
• Housing prices are stable and not yet rising
• Housing affordability is exceptionally favorable now
in our part of the country
The following chart illustrates the % of income spent
on housing in the top ten Metropolitan Service Areas.
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% income spent on mortgage % income spent on rent
United States
New York NY
Los Angeles CA
Chicago IL
Dallas TX
Philadelphia PA
Houston TX
Washington DC
Miami FL
Atlanta GA
Boston MA
15.8%
26.7%
43.0%
14.6%
15.1%
15.0%
13.2%
18.6%
22.1%
12.9%
23.7%
21.0%
29.7%
35.2%
22.8%
20.4%
20.0%
15.3%
22.3%
20.0%
19.1%
26.2%
2016 Q4 1985-2000
29.2%
40.5%
48.5%
29.8%
29.9%
28.0%
29.9%
26.5%
42.7%
25.4%
34.3%
25.8%
26.2%
36.2%
25.2%
21.8%
21.4%
24.3%
17.6%
28.5%
19.3%
26.3%
Source: RISMedia/Zillow.com
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We’re at a moment now where both our economy
and local real estate markets have created a
“just right” environment to buy a house.
The one exception to this shortage of housing
inventory is the highest price ranges in the suburbs.
But the situation is improving: there’s been a 50% decrease in the Month Supply of Inventory in properties
over $1 million since its peak in 2008. Nevertheless,
there is still a ways to go.
What can we expect for 2017?
The 2016 real estate market in our area ended
positively. Overall sales were up 10.5% (although
listing inventory declined 16%.) However, as the year
progressed, the rate of the increase in pended sales
began to decline. This chart illustrates the trend:
Pended
Sales
Percent
Month
Pended
Sales
Percent Change
Change perper
Month
2016
over
2016
over 2015
2015
15
10
Percent
The only shadow on this “Goldilocks” market is a
limited inventory of desirable houses for sale. One
would think that increased demand and decreased
supply would drive prices higher. But that’s not
necessarily the case. Homebuyers still remember the
frenzy of the last real estate boom, when prices rose at
unsustainable levels. As a result, they remain cautious
about overpaying for property. Rather than
purchasing a home based on emotions, or believing
that prices will rise so they can make a quick profit,
homebuyers desire a home that meets their family’s
needs and is also a good long-term investment. And
they, especially millennials, only want to move into a
property that is up-to-date and in good condition.
5
0
-5
-10
Source: Trend MLS
A Mortgage Moment
Larry Flick V
President, The Trident Group
Mortgage interest rates are a big part of this
Goldilocks story. If one looks at the average
30-year fixed mortgage rate over time, they are
astonishingly low:
30-Year
Fixed
Rate
History
30-Year
Fixed
RateMortgage
Mortgage History
20.0
17.5
Percent
15.0
It isn’t news that the Fed has begun implementing a series of interest rate
hikes that will probably continue into the near future. What does this mean
to a typical homebuyer? It means that it will cost more next year to own
the same house as it would this year. For example, for every $100,000 of
mortgage, the monthly cost (principal/interest) at different interest rates
are as follows:
4%
=
$477.42
4.5% =
$506.69
5%
=
$536.82
12.5
10.0
7.5
5.0
2.5
1980
1990
Source: Freddie Mac (Data 1/1/1972-12/30/2016)
2
These low rates are one of the primary reasons why housing affordability
is so good right now.
2000
2010
Higher rates reduce your buying power. If you would like to find out just
how much buying power you have with these low rates, contact your
Trident Mortgage consultant today. In addition to knowing what you can
comfortably afford, a mortgage prequalification will ensure that any offer
you do make on a property receives serious consideration.
With real estate, there is no final chapter, only cycles,
growth, resets, timing, and opportunities.
This Goldilocks moment will not last forever.
Looking at this data, I concluded that the pent-up
demand that had occurred during the Great Recession
had been satisfied, and that we would have a “normal”
market of single-digit growth in 2017. But January
and February showed a spike in pended sales similar
to the beginning of 2016. Was this due to weather that
was unseasonably warm? Perhaps the impending
mortgage interest rate increases moved more people
to action? It remains to be seen. Either way, 2017 is
off to a great start!
Industry surveys also indicate that the majority of
existing and prospective homeowners remain
optimistic about the real estate market. This is
especially true of millennials, where 74% have a
favorable view.
When do the bears come home?
As the number of sales continues to be strong and
inventory continues to decrease, at some point prices
will begin to rise at a more accelerated pace. And, as
the Federal Reserve continues its strategy of raising
interest rates to counteract the inflation that occurs
in a growing economy, housing will become less
affordable as the cost to borrow money increases.
Classic tales usually have an ending. With real estate,
there is no final chapter, only cycles, growth, resets,
timing, and opportunities. This Goldilocks moment
will not last forever — in fact, it may be fleeting. So if
you are seriously contemplating a move, contact your
BHHS Fox & Roach sales associate while things are
“just right.”
Lawrence F. Flick, IV
Chairman and Chief Executive Officer
Berkshire Hathaway HomeServices
Fox & Roach, REALTORS® and The Trident Group
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AN INDEPENDENT VIEW
Joel L. Naroff, Ph.D. is the President
and founder of Naroff Economic
Advisors. A nationally recognized
economic forecasting expert, Joel was
awarded the Lawrence Klein Award for
Blue Chip forecasting excellence and
was the Bloomberg Business News top
economic forecaster in 2008. In 2007,
he received the National Association of
Business Economists Outlook Award
and was named the top economic
forecaster by MSNBC in 2006.
Nationally, economic activity moderated at the end of 2016, but there
were some strong sectors. Most importantly, households continued to
spend like crazy and home construction added greatly to growth.
Looking forward, job gains are solid enough to keep unemployment
falling, wage gains accelerating and consumer demand growing. The
wild card in any economic forecast is the prospect of fiscal stimulus. It is
unclear to what extent taxes will be cut and spending increased. Some
changes will occur that will hype growth, but the impacts will depend
upon the structure of the tax changes and the timing of the added
spending. Fiscal policy will likely have little economic impact this year
but should add to growth in 2018.
With inflation near its target level, wage gains accelerating and
aggressive fiscal policy likely, the Federal Reserve stands at a crossroad.
The Fed will have to move more forcefully than just once a year. A major
tax cut and spending bill would provide the Fed with the cover needed
to speed up the rate normalization process. Expect at least three rate
hikes this year. The last one could be a one-half percentage point
increase, bringing the total rise to one percentage point. The first move
should come between March and June. Housing market participants
need to prepare themselves for the coming higher mortgage rate
environment.
Regionally, economic activity in the BHHS Fox & Roach region
moderated towards the end of 2016. Unemployment rates stopped
falling and in some cases rose as job gains slowed. However, it is likely
REAL ESTATE
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the softness was temporary. The Philadelphia economic upturn is
spreading to the suburbs.
City of Philadelphia: The longer-term trend of Millennials and
baby-boomers relocating to Philadelphia remains in place. Job growth
continues at the national rate and the unemployment rate is generally
declining. Housing completions in the Center City area were the highest
on record. Home prices, which had been soaring, flattened as a result.
If the Comcast Center does attract a significant number of new, highly
skilled workers into the region, as expected, the rate of price
appreciation should rebound. That may not happen until later in the
year, but there is little reason to fear any major slowdown in the City’s
housing market.
Southeastern Pennsylvania Suburbs: The Montgomery-BucksChester area continued to expand at a decent pace as job gains
generally matched the U.S. average while the unemployment rate
remained below the nation. The suburbs are benefitting from the
increases in costs in Center City Philadelphia for both residential and
commercial real estate. Rents and prices are rising decently after
years of sluggish gains. Still, the increases are nothing special. As
we go through the year, housing demand should improve with
an influx of people working at downtown and regional
technology-related companies.
Southern New Jersey Suburbs: The Camden Renaissance discussed
previously is starting to show in the data. Job gains are now at or even
above the nation and the unemployment rate in the County is nearing
4%. Camden could become the next “Brooklyn Heights” over the next
decade. The process has begun but it needs to be sustained by private
sector investment. Right now, the housing market and home prices are
improving, but in fits and starts.
Northern Delaware: Delaware’s economy is back on more solid
footing. Job gains are decent, though not strong, as the Dow/DuPont
merger is still being worked through. The state’s unemployment rate
is nearing 4%. The uncertainties facing Delaware are moderating
but there is little reason to think that in the near-term, strong growth
is likely.
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