In a Wall Street Journal article from May 11, 2017, by Laura Kusisto and Chris Kirkham, we read that millennials and other younger buyers are becoming much more focused on BUYING rather than renting in the past year. This trend is likely to continue.
It is not surprising with lower unemployment, still-low interest rates and FHA loans with 3.5% down payments available to home buyers (*buy to OWN, not as an investment). What effect does this have on us as investors? Seemingly it will drain the rental pool.
In reality, however, there is a great shortage of good single family homes since housing starts have not yet made up for the gap in new construction created during the recession. Thus renters are still likely to be quite plentiful. Prices, however, are likely to get a boost from this increased buying activity. The home buyers using the 3.5%-down FHA loan are less price-sensitive and willing to pay more for a home they like (after all the difference for them is only 3.5% of the extra amount which is negligible).
Appraisals will track higher as sales prices increase, creating a virtuous cycle of appreciation, also fueled by the inaccurate, but popular sites like Zillow, Trulia (etc.) which reflect the increasing prices in their estimates.
In some of our markets, it may not be a bad idea to sell and take profits. Some markets have already appreciated quite a bit in the past few years, markets like Phoenix, Las Vegas and Dallas. In other markets, as prices increase our equity builds up faster.
Another benefit is since the younger generation of buyers seeks less expensive homes, the builders are creating more and more of those see in the WSJ (article below). Since these homes have exactly the kind of size and price we seek as investors, it will widen the inventory pool from which to buy, as investors are sometimes faced with tight selections.
We will discuss this issue, as well as much more, including the improvement in FNMA’s loan guidelines affecting investors, during our 1-Day Expo on Saturday, May 20th near the San Francisco Airport. Mention this blog and you can attend free. There will be market teams, lenders, expert speakers on issues critical to investors, and lots of networking. To see some detail, please go to www.icgre.com/events. To register or contact us, please email firstname.lastname@example.org
The Wall Street Journal article is copied in its entirety below:
The Next Hot Housing Market: Starter Homes
Millennials are buying homes, steering builders toward lower price points
Home buyer Darin Fredericks and his wife Summer Fredericks in the kitchen of their new home in Ontario, Calif., last November. PHOTO: PATRICK T. FALLON FOR THE WALL STREET JOURNAL
Updated May 11, 2017 8:09 p.m. ET
First-time buyers are rushing to buy homes after a decade on the sidelines, promising to kick a housing market already flush with luxury sales into a higher gear.
Tracking home sales to a particular age group is hard, but a series of data points form a mosaic of a generation of young people ready to buy: The number of new-owner households was double the number of new renter households in the first quarter of this year, the share of first-time buyers is creeping back toward the historical average, and mortgages for first-timers are on the rise.
“They’re crawling out of their parents’ basements, they’re forming households and they’re looking to buy,” said Doug Bauer, chief executive of home builder Tri Pointe Group Inc., which operates in eight states.
In a shift, new households are overwhelmingly choosing to buy rather than rent. Some 854,000 new-owner households were formed during the first three months of the year, more than double the 365,000 new-renter households formed during the period, according to Census Bureau data. It was the first time in a decade there were more new buyers than renters, according to an analysis by home-tracker Trulia.
Homebuilders are beginning to shift their focus away from luxury homes and toward homes at lower price points to cater to this burgeoning millennial clientele. Demographers generally define millennials as people born between roughly 1980 and 2000.
In the first quarter of this year, 31% of the speculative homes built by major builders were smaller than 2,250 square feet, indicating they were in the starter-home range, according to housing-research firm Zelman & Associates. That is up from 27% a year ago and 24% in the first quarter of 2015.
“There’s an increasing confidence level in that part of the market,” said Gregg Nelson, co-founder of California home builder Trumark Cos. “The recovery is finally starting to take hold in a broader way.”
The shift reflects a reversal of a pattern that has driven the five-year housing-market expansion.
Up until now, the luxury market has soared, while the more affordable end of the market has struggled. Tough lending standards, slow wage growth, growing student-debt obligations and a newfound fear of homeownership have combined to crimp demand among millennials in particular.
Now, the return of first-time buyers is allaying fears that millennials might eschew homeownership permanently. But it also provides an infusion of new demand while housing supply is tight and home price growth is significantly outstripping wage gains.
Home prices in February increased by 5.8% over the same month a year earlier, according to the most recent S&P CoreLogic Case-Shiller U.S. National Home Price Index.
The return of first-time buyers is accelerating. In all, they have accounted for 42% of buyers this year, up from 38% in 2015 and 31% at the lowest point during the recent housing cycle in 2011, according to Fannie Mae, which defines first-time buyers as anyone who hasn’t owned a home in the past three years.
While economists and builders said lending standards have started to ease, getting a mortgage remains challenging for young buyers with shorter credit histories and, in many cases, student debt. Mortgage rates are also expected to rise further this year, posing an added challenge. Rates for a 30-year fixed-rate mortgage has risen to 4.05%, up from about 3.5% in November, according to Freddie Mac.
In Orange County, Calif., Trumark’s Mr. Nelson said he has been selling entry-level homes at nearly double the rate of his higher-end ones. He is even gaining confidence to build homes in more far-flung locations. The company is about to begin construction on a 114-home project in the Inland Empire east of Los Angeles and another development in Manteca, Calif., about 80 miles east of San Francisco. Both areas were hard-hit during the housing crash and were among the slowest to recover.
Builders largely avoided the exurbs after the bubble burst in 2006. But because the land there is cheaper, they can build lower-end homes more profitably.
“Most builders really preferred to stick straight down the fairway, right at the corner of Main and Main. They were afraid to go back into the rough where they built a lot of homes in the prior cycle,” said Alan Ratner, a senior home-building analyst at Zelman.
Outside Las Vegas, Tri Pointe has introduced a new home design that is specifically targeted to millennial buyers, featuring indoor-outdoor patios and deck spaces, as well as a separate downstairs bedroom-and-bathroom suite that could be rented out to a housemate. Mr. Bauer said the homes, geared toward first-time buyers, have been selling more rapidly than pricier homes.
Joey Liu, a 28-year-old technology worker, purchased his first home in San Jose, Calif., earlier this year. He said it is more expensive than renting but that he is getting to the stage in life where it was time to buy.
“A lot of friends of mine bought a home so I started thinking maybe it was time to buy a home and stop paying rent,” said Mr. Liu, who settled on a three-bedroom townhouse for $690,000. He plans to rent out a room to help with the expenses.
He had three housewarming parties to celebrate his newfound status. “This is my first house, so it definitely feels different,” he said.
Builders say their return to the starter-home market shouldn’t invite comparisons to the fevered construction of the mid-2000s.
“One of the misconceptions is that here we go again, this is another 2005, 2006 where all these builders are going to build hundreds of thousands of homes. We’re not going crazy,” said Brent Anderson, vice president of investor relations at Scottsdale, Ariz.-based Meritage Homes Corp. Mr. Anderson said that last year the company was building four to five speculative homes per community and is now up to 6.4 on average.
Building executives said one challenge is that many people are buying first homes later in life, meaning they have higher incomes and greater expectations molded by years of living in luxury downtown rentals. Such buyers also appear wary of driving farther out to get more space.
Sheryl Palmer, president, and chief executive of Scottsdale-Ariz.-based Taylor Morrison Home Corp., said to cater to this demographic the company is building more three-story townhouses or single-family homes on narrow lots. She said about one-third of the company’s buyers this year are millennials, up from 22% last year.
Even Toll Brothers Inc., which typically builds homes for the top end of the market, is venturing into lower price points. In Houston, the company is building homes starting in the mid-$300,000s range, while a typical Toll home in the area costs around $850,000.
In yesterday’s Wall Street Journal there was an article (below) by Nick Timiraos regarding the effects of home price appreciation on affordability. As the article states, rising interest rates, a dearth of housing stock in many markets, still-tight lending criteria and a slow builder’s resurgence, create a real difficulty for many people to buy their first home. Needless to say, investors reap a certain benefit from this situation by enjoying an expanding demand for rentals. Since many investors have the means and sophistication to buy homes, the expanding rental pool actually improves the investment situation.
Here is the article as it appeared yesterday:
Surging Home Prices Are a Double-Edged Sword
Affordability Troubles Grow, Especially for First-Time Buyers
The U.S. housing market faces a challenge at the start of the spring sales season: higher prices.
It is hard to overstate the benefits of rising prices to the economy broadly and to homeowners, banks and home builders specifically after years of declines. Price gains have pulled more Americans from the brink of foreclosure and given home buyers more confidence that they won’t get stuck with an asset whose value will decline.
But those gains have a painful edge, too, especially because prices have bounced back so strongly. The increases have rekindled concerns about affordability, particularly for first-time buyers, and could damp the gains of a housing rebound still in its early stages. The U.S. housing market faces an unexpected challenge at the start of the spring sales season: home prices are on a tear. Price gains have pulled more Americans from the brink of foreclosure and boosted demand from consumers no longer afraid to buy.
“Prices ran up so fast in 2013, it hurt first-timers’ ability to become homeowners,” said John Burns, chief executive of a home-building consulting firm in Irvine, Calif. “It’s going to be a slower recovery than people had hoped because a number of people have been priced out of the market.” Home values nationwide are up 11% over the past two years, according to real-estate information service Zillow Inc. and 14% below their 2007 peak. Mortgage rates, which jumped a full percentage point to about 4.5% in the past year, have sharpened worries over housing affordability.
Even as prices have increased, housing still appears affordable by one traditional gauge. Since 1990, American homeowners have spent about 24% of monthly income on their mortgage payments, according to data from Morgan Stanley. Today, that payment-to-income ratio stands at around 20%, below the long-run average. The problem with that view of affordability: It assumes borrowers have great credit and large down payments. The ratio isn’t favorable for first-time buyers and others with lower incomes and smaller down payments, which increases their monthly financing costs. The payment ratio for first-time buyers was around 24% at the end of last year, in line with its long-run average, according to the Morgan Stanley analysis.
This pinch on first-timers is troubling because, so far, the housing recovery has depended to an unusual degree on cash buyers and investors. The relatively weak position of entry-level buyers could further suppress the homeownership rate—now off more than four percentage points from its 2004 peak—as more of them rent, said Vishwanath Tirupattur, a managing director at Morgan Stanley. Making matters worse, home prices are going up fastest in markets that are already expensive, such as San Francisco and Los Angeles. Just 32% of California households at the end of last year could afford the monthly payments on a median-priced home in the state of $431,510, assuming a 20% down payment, according to the California Association of Realtors. That was down from 56% of households that could afford the payments on a $276,040 median-priced home in early 2012.
Rising prices are only part of the problem for first-time buyers. Inventory shortages and tougher mortgage-qualification standards benefit buyers who can make large down payments and those who can forgo a mortgage altogether. Because many markets have low supplies of homes for sale, all-cash buyers have routinely beat out first-time buyers by guaranteeing a quick, worry-free closing for sellers.
Meanwhile, federal officials have repeatedly increased insurance premiums on loans backed by the Federal Housing Administration, which serves many first-time buyers because it requires down payments of just 3.5%. While mortgage rates at the end of 2013 reached their highest levels in more than two years, the all-in cost of an FHA-backed loan—due to insurance-premium increases—was closer to a five-year high.
Rising prices are less of a problem for current homeowners seeking to trade up because they can tap growing home equity to make their next home purchase. An index tracking housing affordability from data firm CoreLogic Inc. shows that homes were 17% less affordable for first-time buyers at the end of last year compared with the year before, while the index was down just 6% for existing homeowners.
Ideally, higher prices would stimulate more home construction, which would ease inventory crunches that are partly responsible for price increases while boosting job growth. But builders have been slow to ramp up production, skittish after being caught with too much inventory when the 2008 downturn hit. Last year, many focused instead on higher-end houses, while entry-level construction was subdued. Sales of new homes last year rose by 14% from 2012, but the number of homes sold for less than $150,000 fell by 28%. Sales above $500,000 grew by 36%.
The worry is “a situation develops where construction remains low and prices continue to outpace incomes before first-time buyers can get in, and the next thing you know, you have to” bypass standard mortgage-qualification rules “to get people into homes,” said Thomas Lawler, an independent housing economist in Leesburg, Va.
Others fret that low interest rates have allowed prices to rise too fast relative to incomes, which have stagnated. While homes are still affordable on a monthly payment basis because of cheap financing, homes no longer look like a bargain when comparing prices to incomes. For the past few years, policy makers have focused on breaking a vicious downdraft in home prices. Now, it wouldn’t hurt housing to see price gains flatten out, especially if income growth remains tepid. If not, the housing market’s roller-coaster ride will continue.
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