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Rising rates, health care among top 10 issues affecting real estate

WRITTEN BY STAFF REPORTSTuesday, November 19, 2013 11:19 am

 

Rising interest and capitalization rates top the list of issues that have future implications for real estate. That’s according to an industry expert at the “Top 10 Issues Affecting Real Estate” session at the 2013 Realtors Conference and Expo in San Francisco.

Scott Muldavin, industry veteran and president of The Muldavin Company Inc., a consulting firm in San Rafael, Calif., shared his insights into top issues that could potentially impact homeowners, real estate markets and the industry in the coming years.

He said the top issue affecting real estate is that historically low interest rates have driven the economy and real estate markets in recent years, but as rates start to rise, it could raise capitalization rates, the ratio between the income produced by an asset and its cost, which could create anxiety about investing in real estate.

“Interest rates are going to rise significantly, so my advice is to be careful about your investments today and lock in those low rates if you can,” said Muldavin.

He said that health care is also an important issue that has implications for real estate. As the population ages, there will be greater demand for senior housing, requiring a change in the configuration and size of available housing, and for greater medical care, resulting in an expansion in medical facilities.

Muldavin said there’s been a capital market resurgence, which is good news for residential and commercial real estate. In commercial markets, transaction volume is up, credit is available, underwriting has loosened and a full range of debt options is back.

For residential markets, underwriting remains tougher, but rates are near historic lows and affordability remains high.

Future housing demand from “echo boomers,” the 80 million Americans born between 1982 and 1995, will also impact real estate markets, he said.

“We are the only developed country that has had an echo boom and that’s a positive thing if the country can react and respond to it,” said Muldavin.

Echo boomers often prefer a more flexible and active urban lifestyle, they rely heavily on mass transit, and are often willing to trade home size for location. However, Muldavin said that the suburbs are fighting back with better mass transit, new bike paths, and repurposed properties to attract more future buyers.

Climate change and more extreme weather patterns will also continue to have a strong impact on coastal homes and many other properties across the country. Muldavin cited the impact of recent storms like Hurricanes Katrina and Sandy, and how property owners in these markets are now dealing with changes in code and zoning standards and paying significantly higher insurance premiums.

Like weather and geologic events, major global events can also impact real estate markets, such as acts of terrorism, war, global debt crisis and financial and economic downturns, he said.

“The risk of future events is high, and while it’s always hard to anticipate these risks, they need to be considered because their impact is often great,” said Muldavin.

Increased natural gas and oil production in the United States, which has an impact on the economy and environment, is another issue with implications for real estate. He said there’s been an increase in fracking and oil and natural gas production in recent years, and while this is creating greater employment opportunities and reducing U.S. dependence on foreign oil, it’s also contributing to climate change, environmental degradation and contamination.

Muldavin cited globalization, foreign investment and the economies of other countries as variables that will continue to have a greater impact on the U.S. economy and real estate market.

Another issue is how technology will continue to impact office spaces. Muldavin said many corporations are employing work-from-home policies and other mobility solutions that are allowing individuals to work when and where they want, significantly reducing office space requirements.

“Many people are replacing physical items with electronics and free or virtual products, such as e-books and smartphones enabled with cameras, GPS and flashlights. This means businesses will continue to require less retail space, so I believe the trend in the future will be for fewer and smaller stores,” he said.

Muldavin said the impact of the Internet on bricks-and-mortar retail stores is also a growing issue. He said retail demand is down across the country due to an increase in Internet sales, which are expected to rise from the current 6.5 percent to nearly 15 percent by 2020.

The National Association of Realtors is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries. Learn more at realtor.org.

Slight Cooling in Housing a Good Thing:

U.S. housing prices rose 8.5% through August even as higher mortgage rates hurt demand, according to a Federal Housing Finance Agency report.

Though home prices continue to rise, real estate research from Zillow (Z) finds evidence the housing market is cooling. The pace of home value appreciation slowed in the third quarter to 1.2%, about half the pace of the second quarter of this year. And as Stan Humphries, chief economist at Zillow, tells The Daily Ticker in the above video -- that’s “a pretty good thing.”

Why?

“We have been wanting to see a little bit of moderation in the pace of home value gains because they’ve been rising at a very fast pace off the bottom. And in order to get back to a normal pace we need to start to see things moderate,” he tells us. “The normal pace in the housing market looks more like 3.5% [growth in values] a year, so in the past several months we’ve been rising at almost twice that pace.”
In other words, you want the housing recovery to be sustainable so in some cases (like now) a slowdown is good.

Seven Year Low in Foreclosures:

The number of U.S. homes set on the path to foreclosure slid to a seven-year low in the third quarter, reflecting a gradually improving housing market and fewer homeowners falling behind on mortgage payments.

Lenders initiated foreclosure action on 174,366 homes in the July-September period, the lowest level since the second quarter of 2006, foreclosure listing firm RealtyTrac said Thursday.

Foreclosure starts declined 13 percent from the previous quarter and were down 39 percent from the third quarter last year, the firm said. Foreclosures peaked in 2010 at 1.05 million units and have been declining ever since.

The national slowdown in foreclosure starts comes as the U.S. housing market continues to recover from a deep slump, a rebound driven by rising home prices, steady job growth and fewer troubled loans dating back to the housing bubble days. Fewer homes entering the foreclosure pipeline should translate into fewer properties that eventually end up lost to foreclosure.

Existing-Home Sales Reach Highest Pace Since February '07

DAILY REAL ESTATE NEWS | FRIDAY, SEPTEMBER 20, 2013

Existing-home sales increased in August, reaching their highest level in 6 1/2 years. What's more, the median price shows nine consecutive months of double-digit year-over-year increases, according to the National Association of REALTORS®.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums, and co-ops, rose 1.7 percent to a seasonally adjusted annual rate of 5.48 million in August from 5.39 million in July. They're also 13.2 percent higher than the 4.84 million-unit level in August 2012.

Sales are at the highest pace since February 2007, when they hit 5.79 million, and have remained above year-ago levels for the past 26 months.

Lawrence Yun, NAR chief economist, said the market may be experiencing a temporary peak.

“Rising mortgage interest rates pushed more buyers to close deals, but monthly sales are likely to be uneven in the months ahead from several market frictions,” he said. “Tight inventory is limiting choices in many areas, higher mortgage interest rates mean affordability isn’t as favorable as it was, and restrictive mortgage lending standards are keeping some otherwise qualified buyers from completing a purchase.”

Total housing inventory at the end of August increased 0.4 percent to 2.25 million existing homes available for sale, which represents a 4.9-month supply at the current sales pace, down from a 5.0-month supply in July. Unsold inventory is 6.3 percent below a year ago, when there was a 6-month supply. “Limited inventory in some areas means multiple bidding remains a factor; 17 percent of all homes sold above the asking price in August, although 63 percent sold below list price,” said Yun.

Data from realtor.com®, NAR’s listing site, shows large declines in inventory from a year ago in the following areas:

• Naples, Fla.: down 23.5 percent
• Detroit metro: down 23.3 percent
• Greater Boston: down 20.7 percent

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 4.46 percent in August from 4.37 percent in July, and is the highest since July 2011 when it was 4.55 percent; the rate was 3.60 percent in August 2012.

The national median existing-home price for all housing types was $212,100 in August, up 14.7 percent from August 2012. This is the strongest year-over-year price gain since October 2005 when the median rose 16.6 percent, and marks 18 consecutive months of year-over-year price increases.

Distressed homes – foreclosures and short sales – accounted for 12 percent of August sales, down from 15 percent in July, and are the lowest share since monthly tracking began in October 2008; they were 23 percent in August 2012. Ongoing declines in the share of distressed sales are responsible for some of the growth in median price.

Eight percent of August sales were foreclosures, and 4 percent were short sales. Foreclosures sold for an average discount of 16 percent below market value in August, while short sales were discounted 12 percent.

NAR President Gary Thomas, broker-owner of Evergreen Realty in Villa Park, Calif., said rising home values will encourage more people to sell.

“As the equity position of most homeowners continues to improve, some who have been on the sidelines will list their home for sale,” he said. “Most of those owners also will be buying another home, but higher levels of new home construction going into 2014, combined with some reduction in demand from less favorable affordability conditions, will help to moderate price growth to more sustainable levels.”

The median time on market for all homes was 43 days in August, little changed from 42 days in July, but is much faster than the 70 days on market in August 2012. Short sales were on the market for a median of 98 days, while foreclosures typically sold in 52, days and non-distressed homes took 41 days. Forty-three percent of homes sold in August were on the market for less than a month.

First-time buyers accounted for 28 percent of purchases in August, down from 29 percent in July and 31 percent in August 2012.

All-cash sales comprised 32 percent of transactions in August, up from 31 percent in July and 27 percent in August 2012. Individual investors, who account for many cash sales, purchased 17 percent of homes in August, compared with 16 percent in July and 18 percent in August 2012. Last month, three out of four investors paid cash.

Single-family home sales rose 1.7 percent to a seasonally adjusted annual rate of 4.84 million in August from 4.76 million in July, and are 12.8 percent above the 4.29 million-unit pace in August 2012. The median existing single-family home price was $212,200 in August, which is 14.4 percent higher than a year ago.

Existing condominium and co-op sales rose 1.6 percent to an annual rate of 640,000 units in August from 630,000 in July, and are 16.4 percent above the 550,000-unit level a year ago. The median existing condo price was $211,700 in August, up 17.7 percent from August 2012.

Existing-home sales by region:

Northeast: Existing-home sales were unchanged at an annual rate of 710,000 in August but are 12.7 percent above August 2012. The median price in the Northeast was $268,800, up 7.6 percent from a year ago.

Midwest: Existing-home sales increased 3.1 percent in August to a pace of 1.32 million, and are 18.9 percent higher than a year ago. The median price in the Midwest was $166,100, which is 10.0 percent above August 2012.

South: Existing-home sales rose 3.8 percent to an annual level of 2.19 million in August and are 13.5 percent above August 2012. The median price in the South was $181,000, up 14.6 percent from a year ago.

West: Existing-home sales declined 2.3 percent to a pace of 1.26 million in August but are 7.7 percent higher than a year ago. With the tightest regional inventory conditions, the median price in the West rose to $287,500, which is 18.8 percent above August 2012.

National Foreclosure Nightmare Coming to an End?

The number of new foreclosure filings in August hit its lowest level in nearly eight years, according to RealtyTrac, an online marketer of foreclosed properties.

Soaring home prices and a big decline in underwater borrowers -- those who owe more on their mortgage loans than their homes are worth -- have helped drive the trend.

August's initial foreclosure filings fell 44% to 55,575, just below the 56,063 that were recorded in October 2005. The foreclosure crunch began in summer 2006, at about the same time that housing prices hit their peak.

"This is a strong indicator that the crisis is over," said Daren Blomquist, vice president at RealtyTrac. "The foreclosure floodwaters have receded in most parts of the country, although lenders and communities continue to clean up the damage left behind," he added.

The mopping-up process continues, however. In August, for example, the number of homes repossessed by lenders rose 6%, compared with July, to 39,277. But that still represents a drop of 25% year-over-year, and is more than 60% below the peak of repossessions in September, 2010.