The "State of the Beach Address"
As we head into 2015 we are already on a wild ride. With the stock market looking as though we were going into a correction but then rallying again, gas prices dropping and interest rates in mid-January being at an 18 month low. All this points to a gradual improvement in the economy and housing going into 2015.
Lawrence Yun, Chief Economist for the National Association of REALTORS®, believes “an uptrend is expected with healthy underlying demand over the balance of the year and through 2015.” He went on to say the U.S. population has been growing steadily, but job creation has not. “When you look at the jobs-to-population ratio, the current period is weaker than it was from the late 1990s through 2007,” he said. “This explains why Main Street America does not fully feel the recovery.” Yun said that growth in the Gross Domestic Product slowed in the first quarter, and possibly contracted. “There are no fresh signs of recession, and the second quarter could grow about 3 percent,” he added.
Yun said the home sales-to-population ratio also has been below normal since 2008. Despite a large pent-up demand from years of below-normal home sales, inventory constraints and tight credit conditions continue to impede the market, in combination with strongly rising home prices and higher mortgage interest rates.
Although existing-home sales rose more than 9 percent to nearly 5.1 million in 2013, sales activity retrenched during the past six months. Even with gradual improvement moving forward, they are projected to decline about 3 percent for the year to just over 4.9 million, but should trend up to more than 5.2 million in 2015.
Because of tight inventories and rising sales last year, the median existing-home price rose 11.5 percent to just over $197,000. Home price growth is likely to moderate from more new home construction, with the median price increasing about 6 percent in 2014 to $209,000 and reaching nearly $219,000 next year as market conditions begin to balance.
An upside of rising prices is a recovery in home equity. “Based on our forecast for this year, the median home equity gain over three years is expected to be $40,000,” Yun noted. “A gap between new and existing-home prices from rising construction costs shows that prices are well supported by fundamentals in most of the country.”
He expects the Federal Reserve to end tapering of monetary policy by the end of the year and to hike the Fed funds rates in the first quarter of 2015.
Although the pattern is uneven month-to-month, mortgage interest rates are forecast to gradually rise, with the 30-year fixed rate averaging 4.7 percent this year and 5.5 percent in 2015. “Inevitably, rising mortgage interest rates will hurt housing affordability,” Yun said.
Housing starts have stayed below 1 million a year for the past six years, but need to reach the long-term average of 1.5 million to balance the market. “Because of the prolonged slowdown in construction, we now need 1.7 million housing starts per year to catch up,” Yun said. While improving, housing construction is seen at nearly 1.1 million this year and approximately 1.4 million in 2015.
The sluggish recovery in housing starts is impacted by construction costs rising faster than inflation, labor shortages in the building trades, and the difficulty for small local home builders to obtain construction loans. “Onerous financial regulations are preventing small banks from originating construction loans,” Yun said.
Job growth, which is the key to overall economic health, has essentially recovered all of the eight million jobs lost since the great recession. Employment is expected to improve, with job growth rising 1.6 percent in 2014 and 1.9 percent next year, after growing 1.7 percent in 2013; consumer confidence should gradually rise.
The Gross Domestic Product should grow 2.2 percent this year and about 2.9 percent in 2015; GDP grew 1.9 percent in 2013. Inflation, as measured by the Consumer Price Index, was a tame 1.4 percent in 2013 but is projected to rise to 2.5 percent this year and 3.5 percent in 2015.
Eric Belsky, managing director of the Joint Center for Housing Studies at Harvard University, agreed we’re unlikely to see a back-up in GDP. “Growth in the stock market and the recovery in housing along with pent-up demand are major factors driving the economy,” he said.
“There are three federal surveys that measure household growth and that are inconsistent, but we had real growth in 2012 that fell back last year,” Belsky said. “Even the survey with the strongest household growth shows we’re a million below where we should be, but we’re probably two million below. We could see a notable uptick in household formation later this year.”
Belsky noted there are nearly three million more young adults who lived with their parents in 2012 than in 2007, and the median incomes for all young adults have declined since the great recession.
According to the Federal Reserve Bank of New York, student loan default rates have soared from just over 6 percent in 2003 to nearly 12 percent last year. Student debt is hurting credit scores and hindering the ability of some young adults to qualify for a mortgage; it could be a problem for as many as one in 10 renters who are in their 20s.
The Joint Center for Housing Studies projects household growth to rival or top the annual average pace from 1995 to 2000, and projects 76 percent of the growth over the next decade will be from minority households. The greatest increase is expected to be among households age 65 and older.
According to Fannie Mae, roughly nine out of 10 people under the age of 45 expect to buy a home in the future, but Belsky said mortgage underwriting standards are dramatically tighter, which disproportionately impacts minorities and those with lower incomes.
Dennis McGill, director of research for Zelman & Associates in New York, also focused on trends in housing demand. “Our analysis of Census Data shows an average of only 720,000 housing starts annually from 2010 through 2013, but our projections over the next five years exceed an average of 1.9 million,” he said.
“We won’t ramp up to that level right away, but if you average housing starts for the entire period from 2010 to 2019, it would be about 1.44 million,” McGill said. “There is a strong tailwind to housing starts. We’re starting to see capital come back to single family construction, which is very favorable.”
McGill notes trends in residential electric consumption mirror the growth in households, and also young adult employment, which is driving the growth.
The percentage of 24 to 34 year old married couples has risen since the last recession, but they are delaying a transition to homeownership. Zelman believes that the majority of this recent change has been due to recessionary impacts that should start to unwind.
McGill said their analysis shows the existing-home inventory relative to the number of households in the first quarter of this year is 30 percent lower than the average of the past two decades. In addition, total sales closings in 2013 were 20 percent lower than the 25-year average. “If we don’t bring capacity back to the market, home prices will continue to rise strongly,” he said.
A Zelman consumer survey shows most young adults believe a lack of savings for a down payment is their biggest hurdle to obtaining a mortgage, but most of them think they need a much larger down payment than is actually required.
For example, 25 percent believe they need a down payment of 16 to 20 percent, and another 15 percent believe they need a down payment of more than 20 percent. However, the actual requirement for an FHA loan is 3.5 percent.
Even with the well-known debt issues, nearly one-quarter of people under the age of 35 are debt free, which is better than the historic average. In addition, the Zelman survey shows that contrary to fears, there is no correlation between student loan debt and household formation. “A lot of this is a recessionary impact that we think is overlooked,” McGill said.
Here is the resort areas of Bethany Beach, Fenwick Island and surrounding areas we are still at the mercy of the consumers’ discretionary cash. The report, Baby Boomers & Their Homes: On Their Own Terms – released by The Demand Institute, a non-advocacy, nonprofit think tank– doesn't expect this generation to stick to the script when it comes to retirement and housing decisions. The research, which surveyed more than 4,000 Boomer households (ages 50-69), revealed that few Baby Boomers have intentions of downsizing or moving to warmer climates far from their families. "During the financial crisis, Baby Boomers saw their wealth drop dramatically. While many have been forced to adapt their retirement and housing plans to new financial realities, they haven't abandoned those plans entirely," said Louise Keely, president of The Demand Institute. "For the most part, they are still retiring in their mid-sixties and staying in their homes. They value strong family relationships; they want to be near their children and grandchildren. Additionally, many Boomers maintain plans to upsize their homes."
This is actually good news for the Bethany/Fenwick area in that as the Baby Boomer gets financially stronger out market will be a perfect choice to down size and more to a more quiet environment all the while only being a few hours from their families and grandkids.
So, we are optimistic about the upcoming year, interest rates are good, gas prices are down, the home prices are stable and rising a bit and as the inventory grows so will the resort economy.
Thank you for taking the time to read this and if we can be of any service to you please do not hesitate to contact us, we will be happy to help.
Audrey & Frank Serio, CRS
REMAX By The Sea
Bethany Beach DE 19930
Direct: 302.537.3171
Frank@TheSerios.com
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