The CoreLogic Home Price Index (HPI) showed that national home prices reached new heights this past October, exceeding the previous year’s peak by 3%. What’s more, CoreLogic’s 2024 HPI forecast suggests a continued increase in prices that will average about 3% for the year.

Some markets saw even larger price gains over the course of last year. Miami, for example, has barely seen a dip in prices and ranked as the No. 1 large market for appreciation for 17 consecutive months. Prices in Miami increased by 11% last year for cumulative growth of 61% since the onset of the COVID-19 pandemic.

The rate of home price growth was unexpected given the loss of homebuyer purchasing power and declines in affordability brought on by higher mortgage rates. While a lack of existing homes for sale explains a lot of the pressure that drove home prices higher, a migration of higher-income households from more expensive markets to comparatively affordable markets has also played a role.

According to CoreLogic data, cross-metro migration remained elevated in 2023 after picking up pace at the onset of the pandemic. In 2019, 16% of homebuyers came from outside the metro area they purchased in. In each of the past two years, however, this share reached 23%. In other words, one in four homebuyers were from another region.

What’s more important is that the income of an in-migrating buyer tends to be higher (and sometimes a lot higher) than that of a local buyer. In Miami, in-migrating buyers have average incomes that are 59% higher than that of local buyers. The gaps in Phoenix and San Diego are 37% and 26%, respectively.

Although these three metros are interesting examples of already-pricey markets where in-migration added fuel to home price appreciation, the large income-gap differential exists in many other markets. This is particularly true of cities that tend to rank as more affordable and have recently seen considerable in-migration from other parts of the country. As the chart on this page shows, the income gap is at least 60% in Des Moines, Iowa; Grand Rapids, Michigan; and Louisville, Kentucky.

Many of the largest metros for out-migration also rank among the top markets for home equity accumulation. Los Angeles, San Jose, San Francisco, New York City and Seattle have some of the highest numbers of outbound mortgage applicants — and the average equity for a mortgaged home in these areas ranges from about $450,000 in New York to nearly $1.2 million in the Bay Area.

If an in-migrating homebuyer sold a home in one of these locations, they also had a considerable amount of cash for purchasing a new home. As CoreLogic data suggests, all-cash transactions have been on the rise. They comprised nearly 40% of all sales in fourth-quarter 2023, up from 33% in Q4 2019. ●

The post A 2023 housing market surprise could extend into this year appeared first on Scotsman Guide.

From April through June, flips represented 8% of all sales, down from the 9.9% share seen in Q1 2023 and down from the 8.9% share in Q2 2022. While this was still a high rate, historically speaking, the decline is a trend to watch. Notably, the average time from investor purchase to resale for a home flip increased to 178 days in the second quarter, marking the longest period since mid-2020.

Despite the longer time to resale, raw profits and returns on investment (ROI) increased for a second quarter in a row, marking signs of recovery from a slump over the prior two years. ROI climbed by nearly 5 percentage points between the first and second quarters, the fastest pace since 2020, while raw profits jumped by 18% in the same time frame, a quarterly spike not seen in the past 10 years.

These improvements mirrored the housing market at large. The single- family median home price rose by 10% during the spring buying season, following steady declines from mid-2022 through early 2023.

In fact, the gross profit on the typical home flip (the difference between the median purchase price paid by an investor and the median resale price) rose to $66,500 in Q2 2023, up from $56,250 in the prior quarter. This was a significant year-over-year decline of 35%, however, as the gross profit on a typical transaction in Q2 2022 was $102,063.

The typical gross profit for a flip in the second quarter represented a 27.5% ROI compared to the original purchase price. This marked a turnaround from the 22.9% ROI posted in Q1 2023 and the recent low point of 22.3% in Q4 2022. It was still far below the peak ROI of 61% in Q2 2021, but fix-and-flip profits are seeing a clear and steady uptick.

The typical resale price for a flipped home rose by 2.1% between the first and second quarters to reach $308,500. This contrasted with a 1.6% decline in the median purchase price for the investor during the same period. And it was a reversal of the trend in which prices and profits for fix-and-flip projects ran counter to the U.S. retail housing market, which has seen an extended boom for the past decade.

Although the rate of home flips dropped in the second quarter, real estate often remains a local endeavor, and investors should make note of the places where flips are thriving. Attom analyzed metro areas with a population of 200,000 or more that had at least 50 home flips in Q2 2023. The top-five metros included Macon, Georgia (where flips accounted for 16.8% of all home sales); Columbus, Georgia (15.3%); Spartanburg, South Carolina (13.5%); Atlanta (13.5%); and Akron, Ohio (12.5%). Among metro areas with a population of 1 million or more, the highest shares of flips were recorded in Atlanta, Memphis, Jacksonville, Cincinnati and Phoenix.

In addition, some metros are providing bigger returns on investment for these projects. In Q2 2023, these locations included Akron, Ohio (116.7% ROI); Pittsburgh (112.9%); Scranton, Pennsylvania (93.7%); Hagerstown, Maryland (86.6%); and Trenton, New Jersey (85%). In metro areas with populations of at least 1 million, the highest ROIs were found in Pittsburgh; Baltimore; Philadelphia; Rochester, New York; and Richmond, Virginia.

Although there are many positive signs for the fix-and-flip market, uncertainties remain. The increases in gross profits and margins are heartening, despite the decline in the flip rate. But it remains to be seen whether these pricing improvements are a reflection of the yearly bumps seen during the busy spring purchase season or are representative of a more lasting measurement for profits on a home flip project. ●

The post Retail price increases didn’t harm fix-and-flip profits appeared first on Scotsman Guide.

Compared to the pre-Great Recession period when existing single-family homes for sale reached 4 million, current inventory is trending at 25% of that level, or roughly 1 million homes for sale. In addition, with mortgage rates remaining elevated, there’s no reason to believe that existing inventory shortages won’t persist, particularly in markets where construction of new homes has been limited.

Nevertheless, as with many housing trends these days, there is a lot of variation across U.S. metro areas in the rates at which new listings are hitting the market. According to a CoreLogic and Multiple Listing Service database, while there were about 28% fewer listings from May through July 2023 compared to the same period in 2022, some markets had more notable declines in new listings.

The largest slowdowns in new listings are evident in Western markets, particularly in the states of California, Arizona, Nevada and Washington. For example, when looking at the metros with the largest annualized declines, eight of the top 10 are in California, where the yearly declines in new listings exceeded 30%. This is worrisome for the region as new construction activity has lagged for many years. For instance, there were about 15,000 new homes sold in all of California during the first seven months of this year, or the same number of new homes that were sold in Houston alone during the same period.

As a result of fewer homes available for sale in these Western states, CoreLogic’s home price index forecast calls for price appreciation to be relatively higher in these markets. In July 2024, the estimated year-over-year price gain is expected to be about 6% in most Western states, including Colorado, Idaho, Utah, Nevada, Oregon, California and Washington.

On the other hand, there were 18 metro areas that recorded annualized increases in new listings from May through July. The markets with the largest increases (as shown on the accompanying chart) included Flagstaff, Arizona, and Killeen, Texas. Multiple smaller markets in Michigan and Georgia also saw for-sale inventory expand during this time frame.

The proximity of Flagstaff and Killeen to larger, warm-weather tourist destinations could explain some of the growth, as could associated declines in demand for second homes, vacation homes and Airbnb rentals in these locales. But other markets that had high Airbnb activity during the COVID-19 pandemic did not see the same inventory increases. And while Michigan is not a top destination for buyers of second homes, it was a popular Midwest location during the pandemic as it offered access to lakes and other outdoors amenities. It’s not clear, however, that the pandemic alone explains the surge in new listings across some of Michigan’s metro areas.

Importantly, supply conditions play a major role in an area’s affordability metrics. As a result, regions where new construction is likely to remain subdued will face continued home price pressures, a lack of affordability and potential population losses. Conversely, regions where new construction is meeting demand for both existing households and in-migrating residents are expected to see less pressure on home prices and better affordability. For example, due to the significant share of new construction that’s occurring in Texas, CoreLogic’s yearly home price appreciation rate for July 2024 in the Lone Star State is expected to be 1.4%, or less than one-quarter of that in Western states. ●

The post Affordability problems mount in supply-starved cities appeared first on Scotsman Guide.

It also marked a significant increase from the 25% of average wages required for major homeownership expenses seen in early 2022, shortly after mortgage rates began to spike. The newest figures signal worsening affordability for homeownership across the country. In fact, median-priced single-family homes and condominiums were less affordable in Q2 2023 compared to historical averages in a whopping 98% of the counties analyzed in the report.

The U.S. median home price rose to a record $350,000 in Q2 2023, a 10.2% gain from the prior quarter. This increase came on the heels of three straight quarterly declines, which had many observers heralding an end to the decade-long home price boom. This unexpected price surge contributed to an increase in homeownership expenses that outpaced wage growth, resulting in a significant decline in home affordability. These widespread increases were reflected in quarterly price growth for 524 of the 574 counties (91%) included in the report. Prices jumped by at least 5% in nearly two-thirds of the markets analyzed, while nearly 40% saw prices reach peak levels.

In a bright spot for buyers, weekly annualized wage growth outpaced home price growth for the year ending in Q2 2023 in 74% of these counties. This compared favorably to Q2 2022, when price growth exceeded wage growth in 91% of the same markets.

Although wage increases help to temper declines in home affordability, it’s still an uphill battle for the average buyer. At the national level, mortgage payments, homeowners insurance, mortgage insurance and property taxes cost an average of $1,949 per month, or 33.4% of the average annual income of $70,031. That’s up from the 29.9% DTI recorded in both Q1 2023 and Q2 2022, and it marked the highest DTI since 2007.

Location is always a key factor in affordability and, unsurprisingly, coastal areas continue to lead the charge among the least affordable markets. In fact, 19 of the top 20 counties where major homeownership expenses eat up the largest percentage of wages are located on the east and west coasts, led by Santa Cruz County, Calif. (where 116.8% of annualized local wages are needed to buy a single-family home).

Despite a nationwide average annual income of about $70,000, wages of more than $75,000 were needed to afford a median-priced home in 51% of the markets analyzed in Q2 2023. Each of the top 25 markets with the highest yearly wages needed to afford a typical home were on the coasts, with homes in certain parts of New York and California requiring yearly wages in excess of $300,000.

But on the other end of the spectrum, there are counties where annual wages of $14,000 to $25,000 are enough to purchase a median-priced home: In Cambria County, Pa. (near Pittsburgh), a buyer with an annual income of $14,715 could afford a median-priced home, while in St. Lawrence County, N.Y. (near Syracuse), an annual income of $25,405 will cover the major costs of homeownership.

Although the recent home price surge has dampened affordability, it remains to be seen where the market will go from here. This could be a reflection of the pricing uptick seen each year during the peak purchase season, or it could be an anomaly that is quickly tempered by other economic forces. Factors like mortgage rates and stock market fluctuations will play a key role in whether affordability will continue to worsen in the near future. ●

The post Home affordability takes a hit as prices surge once more appeared first on Scotsman Guide.

Also, the same inflationary pressures that the U.S. has been struggling with have impacted the Canadian economy, where the annual rate of inflation peaked above 8% in the summer of 2022 — the same time that U.S. inflation surpassed 9%. As a result, both countries have undergone an aggressive monetary tightening cycle, which has had an unfavorable impact on mortgage rates and the respective housing markets. In the U.S., existing home sales declined by 18% from 2021 to 2022 while Canada experienced a 25% pullback.

Nevertheless, there are some differences in the neighboring nations’ mortgage markets that have led to diverging trends since monetary tightening began. Four main differences, in fact, exist between the two markets.

First, Canada relies on five-year mortgages amortized over 25 years, meaning that the loan balance has to be refinanced at the end of the term. This exposes the borrower to mortgage rate hikes, which have been steep over the past year. Second, Canadian mortgages commonly have prepayment penalties that prevent borrowers from refinancing when interest rates fall, although loans are attached to borrowers and are thus transferable to another property.

Third, mortgage interest is not deductible in Canada. And fourth, Canadian banks (in sharp contrast to U.S. banks) generally keep loans on their balance sheets. This has impacted the difference in the mortgage rate spread across the two nations, with rates now somewhat higher in the U.S. than in Canada.

Given the differences in mortgage finance systems, Canadian borrowers tend to feel less locked in at low rates than U.S. borrowers, which impacts the availability of homes for sale and consequent sales activity. In the U.S., the inventory of existing homes for sale has been declining for the better part of a decade. This year, the number of new listings entering the market has been trending some 50% below the pre-pandemic levels of 2019 (and also well below 2022 levels) as homeowners are disincentivized to give up their historically low mortgage rate and sell their home.

As the chart on this page shows, active inventory across most U.S. markets is now at the lowest levels in the history of CoreLogic’s data series. This lack of inventory has considerably constrained home sales in 2023, which have fallen to the lowest levels in a decade. On the other hand, the chart also illustrates that Canada’s active inventory is back to pre-pandemic levels. As a result, home sales are forecast to exceed 2019 figures and come close to last year’s levels. Conversely, the U.S. market is expected to see another double-digit decline of about 17% in total home sales this year.

Nevertheless, differing mortgage systems and varying constraints on the availability of homes for sale have contrarily impacted home prices in the two countries. While annual rates of home price appreciation have decelerated in both nations, price growth in the U.S. stabilized at about 2% this past spring, according to CoreLogic data. With strong monthly gains recorded thus far in 2023, year-over-year growth is likely to end the year in the 4% range.

In Canada, meanwhile, a major house price index began recording annualized declines in December 2022, with the yearly pullback topping 8% as of April 2023. And while spring home prices north of the border were strong, it will take some time for the index to start recording positive yearly gains. ●

The post Divergent outcomes for neighboring mortgage markets appeared first on Scotsman Guide.

In addition, the average tax on a U.S. single-family home in 2022 went up 3% to $3,901, compared to a more modest increase of 1.8% in 2021. Still, the nationwide effective property tax rate was only 0.83%, down from 0.86% in 2021 and the lowest rate since at least 2016.

The effective tax rate, or the percentage of a property’s value paid in taxes, declined in 2022 even as total taxes increased, which is due to the continued rise in home values. Last year, U.S. home values increased faster than taxes, and despite the housing market slowdown, the average estimated single-family home value rose 7.9%. This growth easily exceeded the average tax increase, resulting in a small dip in effective tax rates.

Market forces paint a tough picture for homeownership opportunities moving forward, if current trends continue. Although home prices have started to decline, they have yet to recede significantly in many markets. Meanwhile, higher mortgage rates, persistent consumer price inflation and other economic factors continue to form strong headwinds to affordability. It seems likely that residential property tax trends will continue their upward path, considering the needs of local governments and school systems faced with rising inflation and declining tax revenues tied to a drop in commercial real estate values.

Of course, these national trends can look vastly different through a local lens, which will greatly influence homeownership affordability in specific parts of the country. It’s interesting to note that the states with the highest effective property tax rates are not necessarily the same as the states with the highest average property taxes, although there is some overlap. Notably, New Jersey leads both categories.

The states with the highest effective property tax rates in 2022 were New Jersey, Illinois, Connecticut, Vermont and Nebraska. The states with the highest average property taxes last year were New Jersey, Connecticut, Massachusetts, New Hampshire and New York. The average tax of $9,527 on a single-family home in New Jersey was more than 10 times higher than the $928 figure in West Virginia, which had the country’s lowest average property tax. At the other end of the spectrum, low effective tax rates and low average property taxes are found in many of the Southern states. Surprisingly, however, Hawaii had the lowest effective tax rate in the U.S. in 2022 at 0.3%, followed by Alabama, Arizona, Colorado and Tennessee.

Drilling down past the state level, average property taxes in many major metro areas saw larger increases than the national average. In fact, 65% of the 223 metro areas analyzed in the report saw taxes rise faster than the U.S. as a whole in 2022. Most of these metros were in the South, where taxes rose 5.8% on average, and in the West, which saw an overall increase of 5.5%.

Some large metro areas with a population of at least 1 million had significant increases in their average property taxes from 2021 to 2022. In Pittsburgh, taxes increased year over year by a whopping 59.6%. It was followed by Rochester, New York (up 23.2%); Honolulu (up 15.3%); Salt Lake City (up 14.3%); and Miami (up 12.6%).

Although property taxes vary widely from state to state (and sometimes from city to city), the national trend is one that speaks to rising expenses that hamper affordability, creating financial concerns for existing homeowners and potential homebuyers alike. These numbers bear watching as economic and market shifts influence the housing industry. ●

The post Property tax increases put pressure on homeownership appeared first on Scotsman Guide.

Mortgage rates have continued along their volatile path since the beginning of the year with instability in no small part now being driven by turmoil in the banking system. On the other hand, the availability of existing homes for sale continues to churn along at historically low levels and is also being impacted by mortgage rate gyrations more so than at any time in recent history.

The reason that the supply of existing homes for sale is heavily dependent on mortgage rates is because 95% of borrowers with outstanding mortgage debt have a rate below 5%, according to CoreLogic data. More than 80% have a rate below 4% while nearly half (42%) of existing mortgages are locked in at rates below 3%. Given that the current mortgage rates for the vast majority of potential home sellers are significantly higher than their locked-in rate, there is no incentive for them to sell their home and give up their super low rate.

The chart on this page illustrates the evidence of the impact of mortgage rates on for-sale inventory. When rates started creeping up in the summer of 2022, the level of new for-sale listings started to decline notably. In the first six months of last year, the number of new listings entering the market was only 3% below the levels seen during the same period in 2021, CoreLogic data shows.

But as mortgage rates surged in July 2022, the number of new listings began to trend 20% below 2021 levels and dropped by more than 30% by the end of the year. The early weeks of 2023 saw barely any improvements in new listings, which were about 20% below 2022 levels and more than 30% below pre-pandemic levels of 2019 and early 2020.

While the dearth of homes for sale has been the Achilles’ heel of the housing market, particularly for those regions that have had very little new construction activity, the silver lining for the remainder of this year — which already appears fraught with more volatility and uncertainty — is that low inventory will keep home price declines at bay. This is especially important when comparing the current banking crisis to the events that led up to the Great Recession and the home price collapse that followed.

A key difference in today’s housing market is that borrowers have locked in historically low-rate mortgages, most of which are 30-year fixed loans. Current borrowers have built up nearly four times as much home equity than in the pre-Great Recession days. Leading up to that downturn, some 24% of outstanding mortgages were adjustable-rate loans that borrowers could no longer afford following the rate reset, either due to loan characteristics or job loss. Today, however, less than 5% of outstanding mortgages have adjustable-rate features.

While the low supply of homes for sale may help the market at this point of the housing cycle — given an anticipated recession and the potential fallout from the banking crisis — it does not bode well for the market in the long term since it reduces affordability and market velocity. In addition, the availability of entry-level homes for first-time buyers will remain low as current owners hold on to their homes for longer. ●

The post There’s a silver lining to higher rates and fewer listings appeared first on Scotsman Guide.

In fact, a key affordability threshold was crossed at the end of 2022. On a national level, the portion of average wages required to pay the major expenses of homeownership increased to 32.3%, a figure deemed unaffordable by traditional lending standards (i.e., a 28% debt-to-income ratio). The portion of average wages needed to own the typical home now stands at its highest point since 2007.

Affordability issues have long been under scrutiny by those in the real estate and mortgage industries, as the housing market has seen historic or near-historic price gains in recent years. But these gains were largely tempered by historically low mortgage interest rates — a factor that has flipped in the opposite direction over the past year. Affordability has been crippled by rising rates that more than doubled in 2022 and topped 7% for a short time. These increases weren’t offset by rising wages or the small declines seen in home prices.

Economic forces also are coming to bear on homeownership affordability. The stock market has seen significant declines and remains volatile. Wages increased by 7.4% during the past year, although this growth slowed to 1.3% between the third and fourth quarters, while the 6.5% inflation rate to end the year remained near a 40-year high point. These influences have helped to drive down home prices after a decade of gains. The U.S. median price dropped by 3% from Q3 to Q4 and finished last year nearly 7% below its peak in Q2 2022.

Affordability across most of the country worsened significantly in 2022. Median home prices in 577 of the 581 counties analyzed this past fourth quarter (99%) were less affordable compared to historical levels. This number was significantly higher than the 393 counties (68%) in this category a year earlier and more than three times higher than the 181 counties (31%) classified as such in Q4 2020.

Even when taking historic norms out of the equation, homeownership at that time was considered unaffordable to average local wage earners in 427 of the 581 counties analyzed in the Attom Data report (or 74%). Unsurprisingly, large urban metros in desirable locations were among the areas with the most affordability issues in Q4 2022. These include the California counties of Los Angeles, San Diego and Orange; Maricopa County (Phoenix), Ariz.; and Kings County (Brooklyn), N.Y.

Some of the same counties require the largest portion of average wages in order to own a home. Leading the way in this unaffordability metric is Santa Cruz County, Calif., where 124.7% of annualized weekly wages are needed to buy a single-family home. It was followed by Kings County, N.Y., at 114.6%; Marin County, Calif., at 109.6%; and Maui County, Hawaii, at 104.3%.

There still are several metro areas that are more affordable, where major expenses for median-priced homes remain within reach for the average local worker. The most populous counties that remain affordable (as the chart on this page shows) include the core municipalities of the Chicago, Houston, Detroit, Philadelphia and Cleveland metro areas.

Despite these somewhat disheartening figures, there is potential for improved affordability in 2023, especially as home prices appear to be stabilizing and even shrinking slightly. If wage growth continues to be strong and interest rates level off or drop gradually, buying a home could be an affordable option for many more potential borrowers. ●

The post Rate hikes eat into affordability even as prices decline appeared first on Scotsman Guide.