At the beginning of each year, we try to write a piece offering our predictions for the coming season. 2015 was pretty interesting (to say the least) and we expect 2016 to be unique, too, albeit for some different reasons.
Without any further introduction, here are One South’s predictions and things to look out for in 2016.
‘So, How is the Market?’
We get some version of this question quite a bit. Here are some words to describe 2015:
2015 went a lot like this – from February to June, we had bidding wars, escalation clauses, sales-in-a-day, full price, non-contingent, appraisals waived, cash offers … all of which indicate extremely frothy conditions. And then, from July to November, it was quiet as a church mouse. While the summer is typically slow, it isn’t usually that slow. For the most part, agents and sellers thought that the 2015 market was done until December showed up, and it has suddenly become surprisingly busy again.
So as we enter 2016, the conditions that drove 2015 all still exist in much the same form (low interest rates, improving economy, less negative equity, constrained inventory) and set the table similarly for the coming year. That said, we need to discuss a few additional factors that will come to the forefront and will have a pretty big impact on the next 12 months.
Pricing – Up or Down?
Lets start with pricing … take a look at the chart below:
Pricing is trending higher, as it has been doing for several years, and that is a good thing. When home prices fell by 30-40% during the crash, it trapped a lot of people in their homes as the debt and the values became inverted. As long as houses were worth less than what was owed on them, people were going to stay put. As the prices have risen, much of the negative equity has been recovered and people can sell and walk away with some cash to go buy the next one. The rise in prices has done wonders to make the market far more fluid.
But don’t be fooled and think that the primary reason that prices have moved upwards is entirely due to a phenomenal economy … it isn’t. If you do a deep dive into the overall US economy, you will still see plenty of clouds on the horizon. More on this in a bit.
Just know that we are on far better ground than in 2012, but far from the go-go days of 2006.
So what to expect from pricing? Look for prices to move higher, but probably not at the same rate as 2014/15 … with some better increases if you are in a neighborhood that is walkable or in an inventory-constrained sub-market.
‘Tis the Season
An interesting trend has been developing in the past several years – stronger seasonality.
What do I mean by seasonality? Seasonality is really looking at when sales occur over the course of a year. The velocity of transactions peaks in the spring and begins a long slow decline from late summer on with a small secondary season in the September/October time frame, too … well at least until 2015.
Take a look at the chart below showing when homes go under contract:
Typically, sales peak in spring, slow in the summer and then experience a resurgence in the fall (you can see the smaller peaks in the September/October time frame in ’12, ’13 and ’14.)
But what happened to the secondary fall market in 2015? Dunno … it disappeared. Gone. Bu-bye. Adios. Au revioir. Aloha. I think many sellers made decisions based on the expectation of a fall market and consequently, were disappointed when it never materialized.
And with the election coming in the fall of 2016 plus the fact that I think we can all agree that this one will be a pretty contentious one, I would imagine that 2016 will look a like 2015.
So what does this mean? If you are a seller, make your best effort early in the year – I just don’t trust the second half of the year. But if your life dictates a fall sale, then be extremely careful about using spring comparable sales to set your price in the fall.
December 2015 marked the first time the Federal Reserve raised the Federal Funds rate since 2006. That is an entire decade, for those scoring at home. While the move was pretty much infinitesimal (they moved from 0% to .25% or one quarter of one percent,) it does in some small way indicate the Fed’s belief that the worst of the recession is behind us (at least for now.)
[graphiq id=”4KtPdN6XiUB” title=”Federal Funds Rate vs. Inflation” width=”600″ height=”524″ url=”https://w.graphiq.com/w/4KtPdN6XiUB” link=”http://banks.credio.com” link_text=”Federal Funds Rate vs. Inflation | Credio”]
Now, many assume that the Federal Reserve’s action impacts the mortgage rates … not really true. The Federal Funds rate is the rate at which banks borrow money, not consumers. By raising the rate, the Fed may actually have done more to keep long term rates low for mortgage borrowers well into the future. I know it sounds crazy, but it is true.
Without going into a detailed explanation on how interest rates are priced (you can find that post here), the Fed really didn’t do anything that could impact rates in the near future – so don’t worry that you are looking at 7% by year’s end … it is highly unlikely that the interest rate environment at the end of 2016 will be strikingly different than the environment at the beginning of the year.
But still, to see how stupid low rates still are, see below:
It is kind of amazing, really.
The .25% that the Fed raised its rates will have almost no impact – the rate increase is akin to bumping up your cruise control from 65 to 66 m.p.h. heading down I-64 to the beach. As long as the world economy plods along (and for the most part, the economies of Europe and Asia are pretty sluggish right now, as is Russia) and people view investment in America as the safest bet, we aren’t really in much danger of rates spiking. So remember, the Fed raising their rate is not the same as the mortgage company raising their rates. It is simply the Fed making it ever-so-slightly more expensive for banks to borrow money, not the consumer.
So what to expect? Rates will probably rise a bit in the spring as consumers demand mortgage money and then fall back when the market cools and demand for purchase money decreases. By and large, don’t expect transformative change in the mortgage markets in 2016 as they can’t go much lower and upwards pressure is still largely non-existent.
Ahhh … inventory.
Take a look at the following charts …
As you can see, we are not building new homes at the rate we once were … and it is not even close.
When the 2008 crash happened, we just stopped building (note the almost vertical line shooting straight down beginning in 2006/7) and have been largely undersupplying the market for what is approaching a decade. You can see the impact on overall inventory levels in this chart of available homes at any given point in Central Virginia:
From the height (2006/7) to now, we are still operating at levels roughly half of where they were. Where there used to be 10 houses to see, there are now 5 (and in some markets, the drop is even more pronounced.) That is a big difference.
So what does this mean? If you have a specific home in mind, then you best be aggressive when you find it. Don’t play around or someone else will buy it out from under you … at least in the spring. Be warned.
Each and every study we see about demographics points to an aging populous looking for a first floor master bedroom in a walkable neighborhood. We constantly get requests for a ‘cool flat‘ or ‘industrial loft‘ in the city from the ’50 to 60 something’ crowd that is downsizing (or at least reallocating their living space) and wants to move from the cul-de-sacs of Suburban Richmond to a more dense and mixed-use environment.
Statistics seem to support this trend:
In the 4th Quarter of 2013, all of the inventory levels (Fan/Glen Allen/Midlothian) were strikingly similar … but that changed quickly. The lesson to draw is that as we recover from the crash and rebuild our market, it appears as if tastes have shifted and each micro-market is operating independently. Supply and demand differ greatly even within areas in somewhat close proximity and what we were used to in our past may look far different than the future.
So while it may be premature to predict the death of suburbia, demand for home in 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’? Do your homework and be prepared to make a quick decision. Fixed inventory means undersupply and demand will only increase for walkable neighborhoods for the foreseeable future.
The term TRID is not yet a widely known term but it soon will be.
Ok then, what is TRID? TRID is the manifestation of the Dodd-Frank Financial Reform legislation signed into law by Obama in 2010. Designed to protect the consumer from the unscrupulous and predatory lenders who largely created the crash of 2008, TRID places mandatory time-based review periods into the closing process. In November of 2015, TRID went into effect and officially changed the closing process. The result is that it is now far harder to make changes to the closing statement that we (agents, lenders, attorneys, title companies) have used for as long as I have been in real estate.
Now, the goal was to protect the consumer (honorable intent, I do believe) but in reality, it is going to hurt, and hurt some people badly. All laws have unintended consequences and TRID is no different. Gone are the days when a closing statement can be amended in real time to correct errors or to change credits and in its place is a mandatory 3 day review period … yep, 3 days.
So imagine – Moving trucks are in your driveway, attorney is expecting you at 10 am, the cable company is (allegedly) coming between 1 and 5 and Nana and Pop are set to take the kids for the duration of moving day … and then the phone rings. Your agent is calling to let you know that the people buying your home have an issue because the people buying theirs have an issue with their loan … BOOM … and we all have to wait at least another 3 days to close. ARE YOU KIDDING ME?!?!?!?
It is going to happen.
The 2016 Election
This not political commentary so don’t read anything into it … it is simply commentary on the impact elections have on the market.
In election years, markets tend to slow down. Why? Because markets hate uncertainty and elections provide uncertainty in spades. Businesses cannot plan if they are unsure about the business climate. Tax rates, tariffs, environmental mandates, healthcare, incentives, regulation and any of millions of other factors are all in flux until we elect the President … and Governors … and Senators … and Representatives … and thousands of other local officials. Until corporate America has a sense of what the future looks like, hiring decreases, capital expenditures slow, relocation ceases and new initiatives lag.
So what do we do about the election? Regardless of your political views, once we get within shouting distance of the 2016 election, we are going to slow down. Do your housing business in the spring if at all possible … then feel free to watch the debates and yell at the TV.
So 2016 is going to present some unique challenges, but guess what? So did 2015 … and 2014 … and 2013 … and so on. Every year is unique and yet we always seem to make it through (ok, so 2009-11 we will exempt from that statement.)
But here are the keys to take from this post:
- Prices are likely to rise a bit more, but probably not at the same rate as before.
- Beware the impact of TRID, especially early spring until everyone figures out how to deal with it.
- Pay attention to the Fed’s next few moves as they will tell you what is going on in the world economy.
- The 2016 election will slow us all down come the 2nd half of the year.
Good Luck in 2016!