Can you Outthink the Market?
Every year the thought leaders at Teles Properties hold their annual conference call to share predicted real estate trends and themes for the year ahead. Here is a summary of the conference call for your reading pleasure . . . .
1. Housing Market Normalization
2. Rising Interest Rate Landscape
3. Converging Millennial and Boomer demographics prime the engine
4. Lack of affordability drives new growth markets
5. Rent v. Buy: Overcoming Analysis Paralysis
6. Wildcard: Trump
Housing Market Normalization
It has been a long time since we can all remember a “normal” market, where buyers generally have access to an inventory of homes, sellers are used to a more predictable timeline to sell a home, interest rates are fairly predictable so you can lock in mortgage payments, and there is pricing and value stability in the market.
We predict a continued healthy trend of inventory balancing across markets, where demand and supply are starting to find common ground given the current market price points. Months Supply of Inventory (MSI) is a good metric to track the health of inventory, where a low MSI signals a seller’s market and a high MSI signals a buyer’s market, with a general balanced market indicated by an MSI of 6 – 7 (months). It is crucial to note that a more balanced market will mean smoother sailing for everyone with less overall volatility in emotions and pricing (modest 4-6% increases), both for buyers in search of “value”, and for sellers who want to unlock equity value and even turn around and become buyers themselves.
Rising Interest Rate Landscape
How long have we been talking about mortgage rates being poised to rise? No more crying “wolf” as 2017 will witness rate increases by the Fed and it will have a trickle down impact on consumer mortgage rates. Consumers often forget that mortgage rates track closely to the 10-year treasury and also to the demand/supply and trading in the mortgage securities market. While we are tracking with the Fed and predicting a 0.25% increase in the overnight rate quarter over quarter, the corresponding impact in the mortgage rate market will lag based on the overall health of the US economy (particularly related to the demand of the 10-year Treasury). However you slice it, we are marching into higher, but still historically low, rate territory and we advise consumers to act on any rate-based financial decisions sooner rather than later. With chatter of banking regulations possibly loosening, more creative mortgage products may also become available to consumers.
Converging Millennial and Boomer demographics prime the engine
We believe that studying aggregate demand is the key to tracking various structural changes in our ecosystem. In addition to traditional market demand for housing, we join various economists in predicting that 2017 will kick off the convergence of two unique demographic trends in Millennials and Boomers, creating an unprecedented reshaping of the real estate consumer for the next 5 years.
Now representing more than 1/3 of the workforce, we expect Millennials to dominate the first-time home buyer category and begin to represent the largest share of homebuyers (approximately 42%) beginning in 2017 and continuing to do so for many years to come. On the other hand, Boomers make up 35% of the homeowner population, and their growing numbers and associated life-change events are going to result in multi-dimensional transactional volume (sell and buy), especially as they leave areas where they currently live and work and move to areas where they may want to retire. One uniting trait of these two diverse groups is their belief in the value of homeownership and its role in the pursuit of the so-called American Dream.
Lack of affordability drives new growth markets
The luxury markets of California seem to have an interesting phenomenon that has become more apparent in recent years: people who live here love living here; people who don’t live here yet want to live here. This creates an inherent imbalance in the supply/demand equation and this has been exposed in recent affordability trends where first-time home buyers are coming to the realization that they may not be able to live in their first choice of neighborhood as inventory thins and organic demand steadily increases year over year. At some point, these buyers are going to buy elsewhere and we project that this “pricing out” will spawn the establishment and rapid growth of new real estate markets in the years to come.
As we discuss new growth markets, we are continuing to track a trend that we have been watching for a few years now that we call “The Emerging Lifestyle Homebuyer”. We believe that this profile of a Lifestyle Homebuyer will continue to be an uncorrelated demand driver over the next decade. With the war for talent and the rise of the internet entrepreneur, employers are being extremely flexible with working remotely, which has begun the era of truly distributed human capital in organizations where people are choosing to live where they want to live as opposed to being forced to live near their workplace and commute in every day.
Rent vs. Buy: Overcoming Analysis Paralysis
Over the last 5 years, there has been a significant dislocation in Rents v. Home Values which priced out several buyers and forced them to rent. In several markets rents increased 10-20% while home values increased 25-35%.
We are moving into a market where we have visibility on the three factors related to the Rent v. Buy analysis: (1) Rents are stabilizing (2) Home values / Pricing is less volatile and (3) Rates are poised to increase, but still historically low. This means that droves of buyers are crunching the numbers on what it means to continue to rent, what they can afford to buy now, and how much their purchasing power will be reduced if the rates increase. While looking for a rental, 58% consider buying a home instead, and as these aforementioned factors are time-bound and have not occurred simultaneously since the 2008 downturn, we predict increase in organic buyer demand from renters who feel like this is an opportunity of a lifetime to grab the American Dream.
Wildcard – Trump
We have no idea what Trump is going to do. Period. However, we see that more as a positive than a negative for the real estate industry because whatever initiatives are being put in place the fundamentals of demand, supply, demographics, and rates are going drive the housing engine in the meantime. We recommend a deep focus on market fundamentals with an eye toward consumer confidence. This means there is no excuse to not track key ongoing metrics in each micro-market, specifically at a neighborhood / zip code level and understand its impact on the demand and pricing for your home based on guidance from your real estate professional.
As a firm, we are focusing more on the questions than we are the answers at this time. We, of course, all know that Trump has a real estate background and has proposed growth oriented infrastructure spending and has also proposed loosening banking regulations, so we surmise at this time, that the Trump Presidency will not negatively affect the real estate industry. But how will Trump’s $550 Billion transportation and infrastructure plan work and will it be a demand driver for housing? What stance is Trump going to take on immigration and how does that impact foreign direct investment even though the US is still considered a flight to quality? Is Trump serious about creating more regulatory ease for builders to bring more new inventory to the market especially given that most of the regulations that impact builders are at a local level, where his administration will have minimal influence? Is the Trump administration going to have a collaborative relationship with the Fed given his public dislike for Chair Janet Yellen? Where do Fannie and Freddie fall on his priority list and is he going to deliver them to private hands? These are just a few of the unknowns, so hurry up and wait to see what happens.