We love tradition at One South. With the many holiday rites comes one task we especially look forward to: looking out on the horizon to help our clients know what to expect in the coming year. The past year was an incredibly compelling year from a real estate perspective, and we think we’re going to get more of the same in 2016.
Let’s get into it.
Market Conditions
I am neither excited by the market nor daunted by it.
Let me explain.
Many of us set some personal records in 2015. The market was very active. Price points were strong—pretty much everywhere, at all price levels and among the different types of product. We needed this. But it’s also important to note that this environment was greatly helped by low interest rates and limited inventory.
As you can see, the general trend for pricing is upwards, which is good. But it’s not all puppies and ice cream. There are some factors about both the U.S. and global economies that should make us pause and recognize that we’re not fully recovered from the Great Recession. So in the end I want to say the market is “pretty not bad” or even “all right.” But I think it’s somewhere in the middle of the highs of 2006 and the lows of 2010.
So where do prices go? I’m anticipating moderate increases across the board, with stronger increases in markets that are more “inventory-constrained.”
Seasonality
No matter what label you throw on this market, there have been some interesting developments of the past few years that will have an impact on 2016 transactions. None is more important than the concept of seasonal velocity. Sales are concentrating in the spring—March through May—with greater frequency than ever before.
This chart shows how most transactions are going into contract during this intense period:
If you look closely, you’ll see the secondary spike in pending transactions (the best indicator of market activity), which usually happens in September and October, has shrunk in each succeeding year. And it practically disappeared last year. Who knows what affect the coming election will have this year, but I think it’s safe to say the autumn bump has disappeared for a while.
So how might this affect your actions and/or clients? If you’re selling, price competitively, and don’t expect anything great to happen in the fall. Spring is ideal if you can do it. But if you are looking at spring comparable sales to set your price in the fall, you are probably going to miss the market. And with the election looming, expect 2016’s seasonality to be even more pronounced than 2015.
Rates
The Federal Reserve made history in December. It increased its Federal Funds Rate by .25% (one quarter of one percent). That was the first upward bump in nearly a decade. That is not a typo—a DECADE.
The action itself is far more consequential than the size of the increase. I’m not going to get too deep into monetary policy, but you may understand that one of the Fed’s critical responsibilities is to control inflation. By lifting the figurative foot off the pedal ever so slightly (reducing free money) and tapping that brake (increasing the cost of borrowing), the Fed is signaling that it may see the potential for some inflation at some point in the somewhat foreseeable future (and yes, that is about as committal as I will get.)
But this is not a time for grief. These rates are still crazy low. Take a look:
Still pretty shocking
Now this .25% increase in the Federal Funds Rate is, on the surface, pretty negligible. If the threat of real, sustained inflation keeps its distance, long term interest rates (think ’30 Year Fixed Mortgage rates’) should be pretty stable. And with the global economy in something of a funk, including a stagnant American employment market, the threat of inflation spiking in the near term (or even medium term) is fairly low.
So remember, this rate increase coming from the Fed doesn’t translate into higher mortgage rates. But banks are incurring slightly higher borrowing costs. This rise in short term rates might actually pull down mortgage rates but regardless, a quarter point rise in mortgage rates works out to about $15 per month for every $100,000 you borrow.
So what to expect? Look for mortgage rates to drift somewhat higher in the spring as the demand for mortgages increases, and then rates should flatten and perhaps reverse come August as the market slows and our focus turns to politics.
Inventory
I’ve been hip deep in this business for more than two decades, and I’ve never seen inventory as tight as it is today.
Take a look at the following charts …
This chart shows the rate at which the country builds houses—or housing starts—across a relevant time period. Beginning in the early 90s (which marked the end of the 87 recession), housing starts increased every year until we ran head-on into a tractor trailer known most famously as 2007, and all construction stopped practically on a dime.
We still haven’t reached the pre-recession rates, and demand is outpacing inventory. This past year the starts are barely above the lowest rate of the last recession. The chart shows what it looks like when you have high demand and no inventory:
Inventory is off by nearly half the flight days of the middle aughts. Ask anyone who has bought recently and they will tell you how inventory challenged we truly are.
How can you use this going forward? If you are looking for a specific type of home (location, school, price, style) be aggressive and make a play when you see it. If you have specific interests, odds are that others do as well and potential buyers will swarm. If you’re not prepared for this kind of environment, late to game, or you make a weak offer, you will miss your opportunity. And with this level of inventory, you never know when that home will become available again.
Don’t say I didn’t tell you so.
Demographics
At One South, we get a lot of inquiries for urban living—contemporary apartments, sprawling lofts. There are a lot of empty nesters out there with three of their four bedrooms vacant, lots of square footage going unused, and not benefiting from the good school district they once prized. They want to restaurants and night life and the action they’ve missed out on.
For the most part, demographics are telling us that more and more people are moving back into the city, and inventory statistics agree:
Looking at the chart above, beginning in Q4 of 2013, all of the inventory levels (23220 Fan, 23059 Glen Allen and 23113 Midlothian) were strikingly similar but began to diverge quickly … backing the narrative of differing demand for each zip code. Now there will always be demand for suburbia, but there are clear indications that the fixed-inventory urban markets (Fan, Museum District, Near West End, Ginter Park) are in higher demand than the burbs.
So what to do if you want to be part of this migration? Similar to my advice above, be ready to be aggressive. Come with cash and know exactly what you’re getting into. Quality housing (renovated, good plans, attractive lots) are hard to find and in great demand so act with urgency. Don’t nickel and dime the negotiations because sellers will likely be able to move down the line. It’s a seller’s market when you’re dealing with quality properties in mature, walkable neighborhoods. And it most likely always will be.
TRID – Speed bump, Stoplight or Worse?
As we head into 2016, there are a couple of BIG unknowns. The first has to do with governing. We are going to have a new president, and that could be anybody at this point in time. On top of that, 34 senators, 12 governors and all of the House will be trying to win back their jobs. But hold that thought for a minute.
But there’s a bigger wildcard. Have you heard of TRID? It’s a radical transformation to the process of buying residential real estate, and frankly, it’s scary. Since I entered the business in the early 1990s, it is the single most disruptive piece of legislation to come to the real estate industry, and it could make for an awful spring.
What is TRID you ask? In a nutshell, TRID is a revamped closing process designed to increase the buyer awareness about the type of loan they are getting. It stems from the 2010 Dodd-Frank Financial Protection Act created in the wake of the Great Recession. Among other things, TRID introduces a series of time-based review periods throughout the loan process. The objective (and I do believe it is an honorable one) was to allow ample time for a buyer to review the documents and disclosures they receive when receiving a mortgage loan, which can be extremely confusing.
But the problem—and this is hardly the first time our elected officials have conceived of legislation without thinking through the consequences—is that TRID will greatly hamper lenders and attorneys as they work out last-minute adjustments to a transaction, as they’ve been doing for decades. Instead of being able to make adjustments to the closing statement in real time, a three-day review period is mandated to prevent the unscrupulous lenders from playing games at closing.
So imagine this: you’re doing your walkthrough, and you find three items that need attention before closing. But you had intended to close that very afternoon. Not anymore. You’re closing just got pushed back three days minimum. And then imagine what happens to all the transactions that are dependent on yours—someone’s sales proceeds is very often their next down payment. Now they’re going to be delayed, too. This could end up being a disaster, especially when dealing with tight deadlines.
So what do we do about TRID? Read these articles called You’re Going to Be Mad at Us and Using Your Realtor’s Recommendations to understand the best plans to minimize TRID’s impact on you this spring.
The Election
I’m a professional real estate guy, not a politics guy. So this will be brief.
When we’re electing a president, all markets tends to slow down. Why? Uncertainty. Markets don’t like it. It’s hard to plan for the future when you’re not sure about tax rates, insurance costs, or other industry-related policy and even though we have one of the most independent economies in the world, no economy is immune from government influence. Especially in the business world, organizations slow things down to a crawl in election years when it comes to hiring, relocating, restructuring, and so on.
In the coming months, we’ll start to see a new government take shape, starting at the top with someone new at the White House and lots of possible change at a number of state houses. This makes it difficult to plan.
Regardless of which side of the aisle you sit on, you should expect a lethargy to take over in the second half of the year.
So what do we do about the election? Buy/sell your houses in the spring, if possible, and then hash out the politics via Facebook in the fall …
Summary
No matter how complicated 2016 can be, just keep in mind that we’re going to be fine. In 2007 the challenge was how to win a bidding war. By 2009, people were trying to keep their chins above water. In 2013, you had to fight for your appraised value. Last year, you just needed to find a home first before getting into the bidding war.
But here are your key takeaways:
- Prices should rise again this spring, but many not the same as they did last year.
- TRID is going to make things interesting, and you’ll see more attorneys and lenders going grey (or bald).
- Federal Reserve activity is probably a good thing for long term rates … but a slight rise should occur in the spring.
- The second half of the year will slow down as businesses look for the fallout of the election season.
A final note on TRID: make sure build in some flexibility to your closing options, even if costs you a couple bucks. Something will likely go wrong, and you don’t want to be left paying a bigger price. Roughly 60% of the entire 2016 transactional volume in the marketplace will occur between March through June. So get ready. Those who are prepared will win the day.
Happy hunting in 2016!
