We Call a Bottom

March 18, 2015

The peak for the home ownership rate was just under 70% during the real estate boom. Why is it going up from here? There is a plethora of reasons. For one, it is getting easier to own a home because credit standards are lower. Secondly, the cost of renting keeps going up and it just makes more economic sense to own. When renting is more expensive than owning, before the benefits of tax deductions and the forced savings of principal reduction are taken into account, then the economic message can’t be ignored.

The most important reason? The time is right. More jobs are being created and that means the rate of household formation is increasing. A report recently issued by the Lusk Center For Real Estate at the University of Southern California indicates that we are now at pre-recessions levels of household formulations. That means that the Millennials are moving out and they will need places to live. The first quarter of 2015 statistics have not been released yet, but we think we are at or near the bottom and the rate of ownership will rise from here unless there is a major intervening economic variable.


The Markets.  Fixed rates rose in the past week, though they started easing during the week after a big reaction to the employment report on March 6. Freddie Mac announced that for the week ending March 12, 30-year fixed rates increased to 3.86% from 3.75% the week before. The average for 15-year loans rose to 3.10%. Adjustables were also higher, with the average for one-year adjustables rising slightly to 2.46% and five-year adjustables increasing to 3.01%. A year ago, 30-year fixed rates were at 4.37%, which continues to be approximately 0.50% higher than today’s levels. Attributed to Len Kiefer, deputy chief economist, Freddie Mac — “The average 30-year fixed-rate loan rose to 3.86 percent for this week following a strong labor market report, essentially bringing rates back to where they were at the start of the year. The U.S. economy created 295,000 jobs in February while the unemployment rate dipped to 5.5 percent from 5.7 percent in January, both outperforming market expectations.”  Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.  

Current Indices For Adjustable Rate Mortgages
Updated March 13, 2015
Daily Value Monthly Value
March 12 February
6-month Treasury Security  0.10%  0.07%
1-year Treasury Security  0.24%  0.22%
3-year Treasury Security  1.06%  0.99%
5-year Treasury Security  1.59%  1.47%
10-year Treasury Security  2.10%  1.98%
12-month LIBOR  0.660% (Feb)
12-month MTA  0.136% (Feb)
11th District Cost of Funds  0.698% (Jan)
Prime Rate  3.25%

Failing to refinance a home loan when interest rates fall can be a very costly mistake—tens of thousands of dollars in savings can be lost over the life of the loan. Yet about 20% of U.S. homeowners had fallen into this trap, according to a paper published this summer by the National Bureau of Economic Research. The median total of lost savings for those who didn’t refinance was about $11,500 in present-value terms, the paper said (meaning actual losses over the life of the loan would amount to more than that). The Wall Street Journal spoke with Devin G. Pope, an associate professor at the University of Chicago Booth School of Business, one of the study’s three authors, about how to get more people to refinance their homes when interest rates fall. The importance? Here is what Pope indicated — “One could argue that it doesn’t matter. It’s a transfer of money from homeowners to lenders. It’s a wash. But there can be real value in transferring money to homeowners as a way to stop the spiraling effect of foreclosures. Also, having people refinance their homes is a great way to put money in their pockets and stimulate the economy. Yet if people are not taking up the refinancing, then it’s not completely working as a stimulus.” Pope continued: “We find some evidence that people with lower education and incomes are more likely to be in the group that is failing to refinance, which could indicate that financial savvy comes into play. There was also some evidence of procrastination.” Source: The Wall Street Journal

New household formation in the United States has recovered from the widespread job losses that came with the recession, according to a new study from the Lusk Center for Real Estate at the University of Southern California. The study was conducted by Gary Painter, director of the Lusk Center, and doctoral candidate Jung Hyun Choi, to determine how long declines in household formation would last following a major economic shock such as a drop in employment that occurred during the recession. The study found that household formations consistently return to their previous levels in about three years regardless of whether employment has recovered at the same rate during that time. “This shows us that even a permanent increase in the unemployment rate will not have a permanent impact on housing formation,” Painter said. “As a result, policymakers and industry practitioners have a new level of predictability when it comes to how economic crises impact the rate of new households.” The researchers found in their study that household formations in the U.S. fell to almost zero during the recession’s peak years of 2008 to 2010, but then played three years of catch-up and have now recovered to pre-recession levels of about one million per year. Quarterly data from 1975 to 2011 showed that household recoveries typically lasted three years following periods of unemployment. “The freeze in formations is over and people are again moving out and forming households. This means that real estate professionals and policy makers should not keep waiting for pent-up demand,” Painter said. “So while a number of factors will continue to influence the housing recovery, household formation is no longer one of them.” Source: DSN News

Half of all American adults now live in one-person households, a rapidly growing number, according to the Bureau of Labor Statistics. The singles demographic is likely to reshape multifamily communities and single-family home designs going forward, according to Builder Online. In 1976, only 37 percent of adults were single. As of August, that percentage has bloomed to 50.2 percent, or about 124.6 million singles. It marks the first time that single Americans make up the majority of the adult population since the government began tracking such data. “Thanks to the growth of single-adult households, floor plans will go from static to flexible as living arrangements change more frequently,” Susan Yashinsky, vice president of innovation trends for Waterford, Mich.-based Sphere Trending, LLC, predicts on Builder Online. “Analysts project that this group of adults will job hop more often, bring new types of living arrangements into the housing market (think friends buying homes together), and expect their environments to adapt to their frequently changing lifestyles as easily as picking a favorite Keurig coffee flavor.” Affordability will be key, since single home buyers will have less income per household than dual-earner couples. Also, “housing developments will need to embed elements of community that address the social aspects singles need, similar to what we have seen in multifamily new builds,” according to Builder. “Builders, developers, and designers who create housing for single consumers need to consider fresh concepts, such as communal sheds for lawnmowers and snow blowers, and even cars that can be rented as needed versus owned. Work/live spaces will evolve to reflect the growing number of entrepreneurs working from home. And, backyard cottages will bring solutions for related and/or unrelated adults sharing a single lot.” Source: Builder On-Line

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