As has become tradition at One South, we try to write a piece this time of year that looks forward in the coming year and helps our clients know what to expect. 2015 was yet another fascinating year in the business of real estate and we anticipate that 2016 will be no less fascinating.
So with no more introduction, here are our predictions for 2016.
So How’s the Market?
The market, simply put, is ‘not awful.’
Now, allow me to qualify a bit.
For many of us, 2015 was record-setting. Activity was strong and prices went up in almost all geographies, asset types and price points. And while price appreciation was needed to heal our market, the fact interest rates are low and inventories are scant is a big reason prices increased.
As you can see, the general trend for pricing is upwards, which is good. But when you examine the fundamentals of the US economy as well as the global economy, we should not get too cocky that the market is fully recovered from the implosion of 2007 – 2012. So I feel comfortable in calling the market ‘decent‘ or ‘ok‘ or even ‘not bad,’ but it is probably as far from ‘2006 Good’ as it is from ‘2010 Bad.’
So what to expect from pricing? Expect moderate price increases across the board, with stronger increases the more ‘inventory-constrained’ your market is or the more walkable it is.
But whether or not the market is good, bad, ok or decent, some interesting trends have been developing in the past several years that savvy buyers and sellers need to be aware of — the most important one is that the seasonal velocity of transactions is stronger than ever and has shifted more and more to the spring (March – May) market.
Take a look at the chart below showing when homes go under contract:
If you notice, the secondary spike in pending transactions (the best indicator of market activity) that typically occurs in the fall (September/October) has become less and less pronounced each sequential year — and in 2015, it completely disappeared. With the election coming in the fall of 2016 and the fact that it will be extremely contentious (I guess all elections are these days), expect this shape to hold true for 2016.
So what does this mean? As a seller, price accordingly and be extremely leery of the fall market. If you can sell in the spring, 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.
The Federal Reserve raised the Federal Funds Rate by .25% (one quarter of one percent) in December of 2015 and it represented the first upward move in nearly a decade. Yes, I said ‘DECADE.’
The .25% that the rate moved is pretty inconsequential, but its significance is not. Without getting into a dissertation on monetary policy, one of the Fed’s primary missions is to control inflation. By beginning to ever so slightly move their proverbial foot from the gas pedal (free money) to the brake (increasingly expensive money), they are signaling that they 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.)
To get a sense of how low rates STILL are, look at this.
Now a .25% increase in the Federal Funds rate is like the difference between the wind blowing 0 mph and 1 mph on a mid-summer afternoon … it really doesn’t make that much difference. As long as the threat of inflation remains relatively low or far off, the long term interest rates (think ’30 Year Fixed Mortgage rates’) should also remain relatively stable. And with Europe in economic flux, China floundering and stagnant American employment, the threat of inflation spiking in the near term (or even medium term) is fairly low.
So remember, the Federal Reserve raising their rate does not mean that mortgage rates are heading up, it only means that the rate at which banks borrow money went up ever so slightly. In many cases, a rise in short term rates actually can help bring mortgage rates down (you can read more about that here) but know that every quarter point rise in the mortgage rates is about $15/month for every $100,000 you borrow.
So what to expect? Look for rates to rise somewhat throughout the spring as home buyers increase the demand for mortgages and then to flatten and/or pull back come August as the market slows and our focus turns to politics.
Inventory is as tight as I have ever seen it (and I have been at this for loooong time.)
Take a look at the following charts …
This chart shows housing starts across the US (the rate at which we build houses.) Beginning in the early 1990’s (which markeed the end of the 87′ recession), we started building homes again at an increasing rate until we ran head-on into a cement mixer sometime in 2007 and largely stopped building.
When the most recent crash happened, new home construction effectively ceased and to this day, we are still lagging behind what we need to keep pace with demand (note that 2015 housing starts are barely above the lowest rate of the last recession.) The lack of homebuilding manifests itself in overall inventory levels, vividly illustrated below:
Inventory is still off by close to half (or more in some markets) from the go-go days of the middle 2000’s. Ask anyone who has bought recently and they will tell you how inventory challenged we truly are.
So what does this mean? If you are looking for a specific type of home (location, school, price, style) then be aggressive when you see it. Odds are that if you are seeking a specific type of home, so are several other buyers, and if you are not prepared, late to game or make a weak offer, you will miss it … and it may be a while before a comparable home comes to market again.
One of the most frequent requests we get as agents is for the cool flat or loft in the city. The group that makes this request most often is the suburban ‘down-sizer’ who is selling their 4,000 SF 5 bedroom colonial on a cul-de-sac in a good school district because their kids are gone and they want to be able to walk to a restaurant, farmer’s market, River, green space, festival, museum or other fun thing about living in the city.
For the most part, demographics are pointing to the population moving back into the city and inventory statistics seem to support this trend:
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. While it not saying that demand for suburbia is gone, it does seem to indicate that the demand for the fixed-inventory city/urban markets (Fan, Museum District, Near West End, Ginter Park) is increasing relative to the demand in suburban markets.
So what do you do if you are moving from ‘out’ to ‘in’? Be prepared to act and act quickly. Do your homework, get liquid and be willing to match the sellers terms. Quality housing (renovated, good plans, attractive lots) are hard to find and in great demand so act with urgency and don’t be petty in negotiations. Quality properties in mature and walkable neighborhoods is a seller market and will continue to be so for some time.
TRID – The ‘Wild Card’
As we head into 2016, we face two extremely large unknowns. The first unknown is that 2016 is a presidential election year where we WILL have a new president (unless we repeal the 22nd Amendment between now and November.) Additionally, 34 Senators, 12 Governors and all of the House must stand for re-election … but more on this in a minute.
The second unknown, and the one that is potentially more scary to those looking to buy or sell this year, is the introduction of TRID to the process of buying residential real estate. Since I entered the business in the early 1990’s, it is the single most important and restrictive piece of legislation I have encountered and the changes it mandates will make things miserable for all of us this 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. Born from the Dodd-Frank Financial Protection Act (signed in 2010) created in the wake of the Great Recession, TRID, among other things, introduces a series of time-based review periods throughout the loan process. The goal (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 what has ended up happening is that TRID has greatly hampered the ability for lenders and attorneys to make the necessary last minute adjustments that have been integral to the closing process for decades. Instead of being able to make adjustments to the closing statement in real time, a 3 day review period is mandated to prevent the unscrupulous lenders from playing games at closing.
So imagine this — at your walk through, a seller didn’t fix 3 items on the repair list and agrees to give you a credit for the repairs. Well guess what? You are not closing for 3 more days at the minimum. Or worse, yet, imagine that the person buying the home from the person buying yours is delayed 3 days. Now imagine that the proceeds from that closing is going to fund the next one which funds the following one … you get the picture. It is going to be INCREDIBLY frustrating for many deals, especially those on tight deadlines.
I am going to keep this short and sweet as political conversations are not my forte.
Each and every election year, all markets tends to slow down. Why? The most basic reason is that markets hate uncertainty. Businesses cannot make plans about the future if they are unsure about tax rates, tariffs, health care 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. When business stand pat and wait, they don’t hire new employees, relocate existing ones, invest less in capital improvements nor introduce new programs.
And as we head towards the 2016 election, we will not only be electing a new President, but many members of Congress and potentially 12 new Governors … that is a great deal of change … and given the political polarity that exists, the possible directional change that the election may bring could be extreme. Not knowing who is likely to be in the Oval Office nor who will control congress makes it extremely to plan.
Just know that regardless of where you stand on the political spectrum, expect the second half of the year to be a bit slower as we go to the booths to pull arms, poke chads or otherwise make our collective voices heard.
So what do we do about the election? Do your housing business in the spring if at all possible and then argue with your friends on Facebook about politics in the fall.
2016 will present its own set of challenges, but you know what? We will be fine. Every year presents its unique set of challenges. In 2007 the challenge was how to win a bidding war and by 2009, it was how to not go bankrupt. In 2013, appraisals were the challenge and in 2015, it was finding a suitable home AND THEN winning a bidding war.
But here are the main points to remember:
- Prices should rise again this spring, even if at a rate less than last year’s rate.
- Spring activity will be intense but subject to the great unknown of TRID.
- Federal Reserve activity is probably a good thing for long term rates … but a slight rise should occur in the spring.
- The 2016 Election will dampen activity in the fall as businesses postpone strategic decision making in the face of uncertainty.
A final note on TRID – Make sure that you have built in flexibility to your closing options, even if slightly more expensive, to make sure that when something goes wrong that is beyond anyone’s control, you will not be left holding the bag. Roughly 60% of the entire 2016 transactional volume in the marketplace will occur between March through June, so just be prepared. An ounce of prevention is worth a pound of cure.
Happy hunting in 2016!