U.S. Real Estate Forecast From A Supply
On any given day, people can easily find articles and news stories describing an impending bust of the so-called real estate bubble. Despite this gloomy prediction, many experts believe that the recent slowdown in housing will be a gradual and modest readjustment rather than sharp bust or decline. These experts believe that factors that lead to a sharp decline in the real estate market are just not present in the current economic outlook. In fact, a recent study by the Joint Center for Housing Studies at Harvard University noted that “despite the current cool-down, the long-term outlook for housing is bright.”
The rise and fall of the real estate market is subject to the forces of supply and demand, and these factors point to stable and positive growth in the real estate segment.
SUPPLY FACTORS
Limited supply of real estate makes it scarce and usually pushes home prices up. In contrast, an oversupply of real estate tends to put downward pressure on home prices. Despite the current slow down in the real estate market, factors that impact limited supply favor continued growth in the real estate market. Some of these factors include:
1. Builders have readjusted growth plans in regions that have an oversupply of new housing. Over time, any excess inventory is likely to be depleted and equilibrium achieved between supply and demand.
2. The availability of land in certain regions, as well land use regulations and associated compliance costs will continue to restrict the supply of new homes.
DEMAND FACTORS:
Housing located in regions with high demand tend to be more expensive than homes in regions with low demand. Factors that impact the demand for housing suggests a favorable long-term housing outlook. Some of these factors include:
1. No current evidence of significant and across-the-board job losses; forecasts of relatively low unemployment rates.
2. Long-term increased demand for second homes, vacation homes and senior housing by baby boomers.
3. Long-term increased demand for entry-level homes by the children of baby boomers.
4. Long-term increased demand for entry-level homes by immigrants.
5. Long-term increased demand for entry-level homes by second-generation Americans.
6. Forecasts that the outflows and inflows of the U.S. population in and out different regions will not significantly impact the overall U.S. real estate housing market.
7. Relative stability in interest rates.
8. Continued stability in long-term home appreciation rates.
9. Overall, rising rate of wealth across all age groups.
SUMMARY
In summary, strong household growth, overall rising incomes and wealth, and a stable economy all bode well for continued long-term growth in the real estate market. While the overall housing outlook is favorable, affordability will continue to be a challenge, as wages, especially in the lower income levels, have not kept up with housing costs.
Baby Boomers Will Drive Real Estate Growth
Baby boomers, baby boomers, baby boomers; we all hear this term over and over again. So who are the baby boomers? Baby boomers are people in the United States who were born between 1946 and 1964. Approximately 78.2 million people fall into this category.
As a group, baby boomers comprise the largest population cohort in the history of the United States. The size of the group gives it vast influence over American politics, popular cultural, and of course, real estate. To evaluate the influence of the baby boomers on the future of real estate, the National Association of Realtors (NAR) conducted a study in 2006. The findings of the research were published in report entitled Baby Boomers and Real Estate: Today and Tomorrow. Below are some highlights from the NAR study.
AGE DISTRBUTION
According to the NAR report, baby boomers now range in age from 42 to 60 years old. The typical baby boomer is 50 years old, and the oldest of the baby boomers turned 60 in 2006. About 46% of baby boomers are in their 40s, and about 25% are at least 55 years old.
HOUSEHOLD INCOME
As a group, baby boomers are in their peak earning years. In 2005, baby boomers had a household income of $64,700, and about 25% them had a household income of at least $100,000 per year.
HOME OWNERSHIP
About 78% of baby boomers own a home, which is higher than the national ownership rate of 69%. About 96% of baby boomers believe that home ownership is a good financial investment.
FUTURE REAL ESTATE PURCHASES
About 10%, or 7.8 million of all baby boomers, said they were likely to purchase additional real estate in the next 12 months. Of these potential buyers, two-thirds were planning on buying a primary residence, 26% want to buy land, 19% want rental property, 15% want a vacation home or seasonal home, and 14% want a commercial property.
WHAT FEATURES ATTRACT BOOMERS
When baby boomers were asked about what features are most important to them, 38% wanted a lower cost of living, 38% wanted to be near family, 38% wanted easy access to quality health care, 37% wanted a better climate, and 36% wanted to be near a body of water.
PREFERRED COMMUNITY AMENITIES
When baby boomers were asked about the type of community amenities that interest them most, about 18% wanted to be near cultural offerings, 9% wanted to be closer to their family, 4% wanted to be on a golf course, and 3% wanted easy access to educational facilities.
WHERE DO BOOMERS WANT TO RETIRE
When baby boomers were asked about where they want to retire, 33% of them want to retire in a rural area, 30% in a small town, 25% in a suburban area, and only 12% in an urban community.
BOOMERS AND THEIR REAL ESTATE AGENTS
Baby boomers consistently use the services of a real estate agent. Approximately 60% of homebuyers and 79% of home sellers used a real estate agent in their last transaction.
SUMMARY
The baby boomers have had and will continue to have a significant impact on the real estate market. As the boomers near retirement, they continue to value real estate and will continue to invest in properties and land. Real estate agents would be well served to understand what baby boomers want in terms of their real estate investments, and design strategies that target the needs of this enormous population cohort. For more information, read the NAR report entitled, Baby Boomers and Real Estate: Today and Tomorrow
SARB New Lending Numbers For 3rd Quarter Show Noticeable Progress On The Long Road To Better Times
Value of new residential loans granted nearing positive year-on-year growth
After a lengthy spell of non-stop year-on-year decline spanning beck to June 2007, the =month that the National Credit Act was implemented, the value of new residential mortgage loans granted is steadily nearing a return to positive year-on-year growth. In September 2009, the rate of year-on-year decline had been reduced to -13.8%, and while this still appears to be significant decline, it is significantly better than the -27.5% just one month before, and hugely better than the -62.2% rate of decline as recently as April. On a month-on-month basis, broad growth has been in progress since early-2009.
For the 3rd quarter as a whole, the year-on-year decline was -22.2%, which had more than halved on the -49.6% of the previous quarter, while the quarter-on-quarter growth rate had grown at an impressive rate of +30.3%.
The SARB numbers are beginning to show more concrete confirmation of the increased volumes that we have been feeling since earlier in the year, with September’s R18,8 bn being the highest value of residential grants this year, and more than double that of January. While improving, though, the value remains less than half of the all-time high of R39.5bn reached in May 2007.
The noticeable improvement in value of loans granted since the beginning of the year reflects the positive impact of 5 percentage points’ worth of interest rate cuts since late-2008, banks responding to better environment with some relaxation in lending criteria, and a mildly improving economic growth performance.
Commercial mortgages following a similar trend to residential
In recent years, the trend in commercial property loans granted has also taken on a similar shape over the past two years or so, having shown negative growth since earlier back in 2006, reaching an extreme rate of year-on-year of -86.9% in December 2008.
Much of this weakness may reflect residential development finance, but the commercial property sector has probably also played a major role, with the returns of the major 3 sub-sectors of commercial property, namely retail, industrial and office space all showing significant deteriorations in performance from 2008, as the recession started to bite.
Since the beginning of 2009, however, the year-on-year rate of decline for commercial loans granted has diminished steadily to a mere -11.6% in September, while over the third quarter its quarter-on-quarter growth rate had turned slightly positive to the tune of +5.4%.
The focus of growth has been mainly on loans on existing properties, with the numbers still reflecting tough times for new developments
Breaking new loans granted up in a different fashion, the severe weakness in the new development market, compared to the existing property market, is apparent.
The breakdown of new mortgages by loans on existing buildings, on construction of buildings, and on vacant land, lumps residential and commercial property together. (although residential property is the dominant segment in the mortgage market). Whereas the year-on-year decline in the value of mortgage loans granted on existing buildings has diminished steadily from a low of -56.9% in February 2009 to -17.2% as at September, loans granted for construction of new buildings showed a more extreme -43.4% decline as at September, while vacant land mortgage grants were -71.3% down year-on-year. The weaker state of loans on construction and vacant land confirms the lagging status of the new building market, versus that of the existing market. On the residential side at least, this has much to do with a combination of a weak “existing property” market and a surge in input cost inflation for builders in 2007 and 2008, which opened up a wider gap between new and existing home prices, making it difficult to bring competitively priced new stock to the market.
Capital repayments growth has overtaken payouts growth, which could send total Mortgage loans outstanding into negative growth soon
A noticeable feature of the mortgage market as of late has been the steady recovery in capital repayments, which showed positive year-on-year growth in value in September to the tune of 17.9%, possibly a partial reflection of a more cautious household sector determined to reduce its level of indebtedness in many instances (given that household borrowing for residential purposes is the dominant force in the mortgage market). This is in sharp contrast to mortgage payout value growth, which was still in sharp year-on-year decline at -44.2% as at September (although starting to turn for the better slowly).
The large difference in growth rates between capital repayments and payouts has meant that the value of capital repayments has been catching up to that of payouts. The bygone years of booming growth in new lending had seen the value of capital repayments as a percentage of payouts declining from a 99.7% in March 1999 all the way to 37.9% by November 2008 (although by 2008 the low percentage was more a reflection of financial stress than booming new lending)
This percentage has rebounded sharply in 2009 to record 92.4% at September 2009. The combination of negative growth in payout value and positive growth in capital repayments translates into ongoing decline in year-on-year growth in the value of total mortgage advances outstanding, registering a meagre 3.6% in October and looking increasingly likely to head into negative territory within the next few months. Such is the typical lag between new lending turnarounds and trend changes in growth in the value of outstanding mortgages, the latter being dependent on the relative performances of payouts vs capital repayments.
Outlook
The steady rise in new residential mortgage loans granted is expected to continue until at least mid-2010, where-after one may see some flattening out in the level as the positive impact of the 2009 interest rate cuts wears off. This rise in grants is starting to spill over into an improving payouts situation with something of a lag. Noticeable increase in building loans is only anticipated in the second half of 2010, once the decline in oversupply of existing properties on the market makes new developments viable on a larger scale.
However, in a generally more conservative environment compared with a few years ago, capital repayments growth looks set to outstrip new loan growth for a while, and this is expected to translate into a decline in total value of outstanding mortgage loans over the year of 2010, to the tune of around -5% year-on-year at next year’s end.
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