MONEY home prices

Backlash Against Foreign Home Buyers Takes Off

Foreigners are paying cash for U.S. real estate. Turns out some of that money is laundered. Fuse—Getty Images

It’s no secret that outsiders are collecting homes in cities around the country. Often the mystery is who they actually are, and where their money comes from.

Updated: August 1, 2014 11:00am

Foreign interest in U.S. real estate continues to grow, according to a report released this month from the National Association of Realtors. International sales rose from $68.2 billion to $92.2 billion over the past year, thanks to favorable exchange rates, affordable home prices, and rising affluence abroad.

In the wake of the housing bust, foreigners helped revive many U.S housing markets by scooping up properties when Americans were running scared. Despite the rise in prices since then, the attraction doesn’t seem to have soured. Experts estimate at least one-third of newly developed apartments in Manhattan go to international buyers. Other metropolitan areas including Los Angeles and Miami are also seeing demand, as well as even second-tier cities in places like Arizona and Texas.

Investors have been flocking from all over the map: China, Russia, The UAE, Switzerland. The industry catering to these faraway landlords—in charge of everything from managing payments to choosing lighting fixtures—has ballooned, since many of the apartments are rented out or sit empty.

Sales of ultra-high-end pads have received much of the media attention. Publications ranging from CBS News to Vanity Fair paid attention when two years ago a family member of Russian fertilizer oligarch Dmitry Rybolovlev purchased the most expensive condo in Manhattan, for $88 million. But you’d be wrong to think it’s only billionaires that want a place on American soil. Buyers regularly hunt for homes and apartments at more mainstream prices (although, to be fair, the median price of a condo in Manhattan runs nearly $1.4 million). The National Association of Realtors reports that more than one-quarter of agents have worked with international clients. Chinese buyers spend $425,000 on average on U.S. homes, with about two-thirds of the deals being all-cash.

The Backlash

No surprise, the out-of-towners have earned a bad rap from many locals, who are losing bidding wars to the cash offers and feeling squeezed by the inflated prices. The outrage had grown strong enough in New York that in February writer Diane Francis, a Canadian who owns a place on Manhattan’s 57th Street, penned an opinion piece in the New York Post proclaiming that foreign real estate buyers in New York are not the enemy. She pointed out that she and her husband pay at least $25,000 a year in property and sales taxes but don’t cost the state’s schools, hospitals, or jails a dime.

Last month New York magazine fueled the rage with its cover story, “New York Real Estate Is the New Swiss Bank Account,” suggesting that wealthy foreigners are using property to hide—and sometimes launder—their rubles and yuan. Another story a few days later from the Nation, both part of a joint project that included the International Consortium of Investigative Journalists and the Organized Crime and Corruption Reporting Project, piled on. A few tidbits from New York magazine:

As New York magazine noted, it’s often anonymous LLCs and bank accounts behind the purchases:

“There is nothing illegal—at least from the destination nation’s perspective—about sending money from an anonymous offshore bank account to purchase property in America. On the contrary, it’s an everyday occurrence.”

Sometimes not even building managers or the best neighborhood snoops know who the mysterious owners are, or where the money came from.

“With a little creative corporate structuring, the ownership of a New York property can be made as untraceable as a numbered bank account…. Those on the New York end of the transaction often don’t know—or don’t care to find out—the exact derivation of foreign money involved in these transactions.”

While not all of the foreign money coming in is laundered, some of it is, and public officials so far haven’t taken up the issue. From the Nation:

“U.S. authorities don’t put up many roadblocks for foreigners who want to launder money through American real estate. Escrow and real estate agents aren’t required to find out the true identities of property buyers—the real people behind the front men or corporate shells.”

Will enough outrage boil up that politicians feel obliged to make buying less attractive for foreigners? The capital-gains tax rules were recently modified in London, dimming future returns for foreign investors (and likely sending more buyers to this side of the Atlantic). Yet Adam Davidson, writing in the New York Times Magazine, points out one upside:

“I initially felt anger and disgust at the idea of absentee billionaires hoarding Manhattan real estate, making the city even more unaffordable while they live like princes in Moscow or Hong Kong or wherever. But then I did the math. Assuming that their money has to go somewhere, it’s not so bad that these billionaires choose to put a chunk of it here. Any city official in Dayton or, for that matter, Philadelphia would do anything to have such problems.”

The trend may slow on its own, particularly at the ultra high end. Developers looking to cash in on the world’s wealthy may oversaturate the market. There is, after all, a fixed number of people worldwide who want—and can afford—to plunk down upwards of $20 million for a pied-a-terre. The New York Daily News recently pointed out that sales in at least one building on Manhattan’s West 57th Street, so-called Billionaires’ Row, have slowed.

Then last week, the conversation about luxury real estate shifted from shady foreign buyers to an issue much closer to home for most of us: the question of whether non-ultra-rich residents of a new luxury development on Manhattan’s Upper West Side will have to enter through a separate door.

 

Correction: A representative of Dmitry Rybolovlev stated in an e-mail to MONEY that the Manhattan apartment was purchased by Rybolovlev’s daughter, not by Rybolovlev, as the article originally indicated.

MONEY home prices

Why You Should Worry When Home Prices Fall in Minneapolis

Minneapolis
Minneapolis serves as a bellwether for national home values. Minneapolis Park and Recreation Board, courtesy of Meet Minneapolis

The Twin Cities signal what will happen next year to national home prices better than any other large city—though even it is far from a perfect bellwether.

Wouldn’t it be nice if there were a local housing market that we could use as the nation’s crystal ball? If one market regularly ran ahead of the national trends, we could pay extra attention to what’s happening there in order to know what the rest of the country should expect. During the housing bubble and bust over the last decade, there were clearly markets—like Las Vegas—that had more extreme swings in prices than others did, but being more extreme isn’t the same as being first.

To see which markets, if any, tend to get ahead of the national trend, we looked at home-price changes between 1980 and 2014 in the 100 largest U.S. metros and the U.S. overall, using the Federal Housing Finance Agency (FHFA) home-price index. Our crystal-ball score, calculated for each metro individually, is the correlation between the year-over-year home price change in that metro with the year-over-year home price change for the U.S. overall one year later. In other words, we’re measuring how closely the ups and downs in a local market’s home prices match the national ups and downs one year later. Remember that correlations range from 1 to -1: the higher the correlation, the stronger the forecast. A negative correlation means that a better year for a metro’s home prices is typically followed by a worse year for the nation’s home prices (and vice versa).

The Crystal Ball Award Goes to the Twin Cities
Among the 100 largest metros, the housing market with the highest crystal-ball score is Minneapolis-St. Paul. Other markets that are relatively good bellwethers include San Diego, Ventura County, and Sacramento in California; West Palm Beach and three other Florida metros; Washington, DC; and St. Louis. In general, these markets had a more severe housing bust last decade and faster historical price growth over the past three decades than other markets. But it’s an eclectic bunch, with St. Louis, Washington, and Minneapolis-St. Paul having had a milder bust than the markets in California and Florida.

# U.S. Metro Crystal-ball score: Correlation of local price change with following year’s national price change
1 Minneapolis-St. Paul, MN-WI 0.79
2 San Diego, CA 0.76
3 West Palm Beach, FL 0.76
4 Cape Coral-Fort Myers, FL 0.73
5 Ventura County, CA 0.73
6 Washington, DC-VA-MD-WV 0.72
7 Sacramento, CA 0.72
8 Palm Bay-Melbourne-Titusville, FL 0.71
9 North Port-Bradenton-Sarasota, FL 0.71
10 St. Louis, MO-IL 0.71

This graph shows what a 0.79 correlation actually looks like. Year-over-year home prices in Minneapolis – St. Paul tend to look like national changes but a little bit ahead:

AheadofCurve

What Happens in Texas, Stays in Texas
On the flip side, the markets that are the worst predictors of next year’s home price movements are clustered in and near the Gulf states. The six metros with the lowest correlations are all in Louisiana, Texas, and Oklahoma. The correlation is actually slightly negative for Baton Rouge.

# U.S. Metro Crystal-ball score: Correlation of local price change with following year’s national price change
1 Baton Rouge, LA -0.02
2 Houston, TX 0.02
3 San Antonio, TX 0.03
4 Austin, TX 0.03
5 Tulsa, OK 0.04
6 Oklahoma City, OK 0.05
7 Salt Lake City, UT 0.06
8 El Paso, TX 0.06
9 Greenville, SC 0.14
10 Buffalo, NY 0.22

Looking further at Texas, Dallas and Fort Worth would rank #11 and #13, respectively, on the lowest-correlation list. And if we extended the analysis to smaller metros, the lowest scores would be the next-door metros of Midlandand Odessa, TX, with correlations of -.24 and -.22, respectively. Several other smaller Texas and Louisiana metros also have negative crystal-ball scores.

What’s with Texas? The state was among the least affected by the bubble and bust of the 2000s; its worst period for home prices was in the mid-1980s, even though national home prices were fairly strong. Texas home prices are influenced by the swings in the energy industry, which means real estate in Texas and Gulf Coast tends to beat to a different drummer more than any other market in the country. Here’s how Houston’s price trend compares with the U.S.:

Can “Crystal Ball” Markets Really Tell the Future?

Before anyone starts booking tickets to Minneapolis, San Diego, or West Palm Beach to see what the future holds, here’s the reality check. While some markets are better leading indicators than others, none of them are that great. Our test of “great” is whether any local market’s price change in a given year is a better predictor of next year’s national home price change than this year’s national price change is. That means the number for a local market to beat is the correlation between national home price changes in one year and the next, which is .77. That’s higher than the correlations for 99 of the 100 largest metros — except for Minneapolis-St. Paul, which is just a hair better at .79.

Even though Minneapolis-St. Paul is the best predictor of national price trends for the 1980-2014 period overall, different metros are better predictors of the national trend for narrower time periods. During the recent cycle, from 2000 to 2014, Sacramento, San Diego, and Providence, RI, best predicted national trends; but from 1980 to 2000, three Massachusetts metros — Middlesex County,Worcester, and Boston –showed most clearly what the future had in store. The Twin Cities didn’t do so well in predicting national price trends in the 1980s and 1990s.

The answer, therefore, is that the crystal-ball award isn’t worth much more than the glass it’s made of. In no local market do home price trends consistently and reliably outperform the national price trend in predicting next year’s national price trends. There’s just no shortcut for understanding the U.S. housing market.

See the complete article, with additional charts, here.

Jed Kolko is the chief economist of Trulia.

MONEY Housing Market

The 5 Cities That Have Recovered Most—and Least—From the Recession

Some areas have rebounded nicely since the financial crisis. But many have not.

On Wednesday, the Department of Commerce announced the U.S. economy grew a healthy 4% in the second quarter of 2014. The good news aligns with other positive economic signals, like an increase in hiring, and suggests the nation as a whole might be on the road to recovery.

Unfortunately, this rosy picture hasn’t been shared equally across the United States. Some areas have recovered well, while others have struggled. A new report from personal finance social network WalletHub highlights which municipalities have made the most progress toward normalcy since the downturn, and the areas that still have a way to go. To compile the list, WalletHub analyzed 18 economic metrics for the 180 largest U.S. cities, including the inflow of college-educated workers, the rate of new business growth, unemployment rates, and home price appreciation.

Here are the results.

Most Recovered Cities

Klyde Warren Park, Dallas, Texas.
Home prices in Dallas have shot up since the crisis, bolstering the city’s economy. Trevor Kobrin—Dallas CVB

1. Laredo, Texas

Over the past seven years, this Southern Texas city’s median income has increased 5% while the population has surged 13%. State-wide bankruptcy is down, and new business growth is up.

2. Irving, Texas

Irving, sandwiched between Dallas and Fort Worth, earned high marks for rising median income (up 6% since 2007) and a decreasing ratio of part-time to full-time workers. The area has seen more college-educated workers moving in.

3. Fayetteville, North Carolina

More workers moved from part-time to full-time gigs in this city than any other place. Plus more college-educated workers are coming than going, helping the population spike over 14% since 2007.

4. Denver, Colorado

The Mile High City has seen a 12% jump in median income since the financial crisis. Most impressively, it’s one of the few areas to have seen home prices completely recover (and then some) from the housing crash.

5. Dallas, Texas

Dallas is still dealing with an increased ratio of part-time to full-time workers, but median income is up nearly 4% and home prices have appreciated a shocking 17% since the housing bubble burst.

Least Recovered Cities

Newark, New Jersey
Newark, New Jersey is still struggling to come back from the financial crisis. Flickr

1. San Bernardino, California

This Southern California city ranks as the farthest away from a full recovery. Both income and housing prices have dropped since 2007, with median income down 4%, and home prices down 43%. San Bernardino’s ratio of part-time to full-time jobs has also gone up nearly 14%.

2. Stockton, California

This Northern California inland area isn’t doing so well either. Incomes are down. Home prices have severely depreciated (down more than 43% from seven years ago), and the foreclosure rate is close to 18%.

3. Boise City, Indiana

Residents of Boise City have suffered an 8% drop in their median income since the crisis. Despite there being increasingly more full-time work opportunities, relative to part-time roles, new business growth remains far below its pre-recession level, down roughly 11%.

4. Newark, New Jersey

The median income remains down almost 5% in this urban area, adjacent to New York. Homes have been hit hard too. Housing prices are about 41% lower than they were in 2007.

5. Modesto, California

This town, which neighbors depressed Stockton, also hasn’t been able to break out of its post recession funk, likely because home prices remain down about 35%, and new business growth almost 9%.

MONEY home prices

Case-Shiller Index Shows Home Price Growth Slowing

Home prices increased at their slowest pace since February 2013, according to the latest report on the S&P/Case-Shiller Home Price Index.

The index, which compiles a 10- and 20-city composite of home prices, showed the 10-city composite posted price gains of 9.4% year-over-year, while the 20-city group showed gains of 9.3%. Both results were significantly lower than the 10.9% and 10.8% year-over-year increases the respective composites showed last month, and much less than the 9.9% gains analysts expected from the 20-city index.

All 20 cities posted some month-to-month price gains before seasonal adjustment, but 14 of 20 saw prices decline once seasonal factors were taken into account.

This is the second bit of bad news for home-sellers this month. On Monday, the National Association of Realtors reported that pending home sales dropped 1.1% in June, and were down 7.3% since June of 2013. Lawrence Yun, the NAR’s chief economist, blamed tight credit, low inventory, and flat wages for the decline. However, Yun predicted sales would increase slightly in the second half of the year, partially because price appreciation has slowed.

“Housing has been turning in mixed economic numbers in the last few months,” said David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices. “Prices and sales of existing homes have shown improvement while construction and sales of new homes continue to lag. At the same time, the broader economy and especially employment are showing larger improvements and substantial gains.”

Of the 20 cities measured by the Case-Shiller index, Charlotte was the only area to see its annual growth rate improve. Las Vegas experienced some slowdown in price appreciation, but remained the city with the fastest price growth (16.9% YOY), followed by San Francisco (15.4% YOY). Washington had the lowest year-over-year growth at 5.8%.

MONEY First-Time Dad

What Millennials Want That Their Boomer Parents Hate

Luke Tepper
Luke looks around for the inflation that has yet to come Taylor Tepper

It is nine letters long, (not legal weed), and causes investors' blood to boil.

Inflation. We really want some inflation. Now, if possible.

Macroeconomic forces are not top of my mind all the time. A couple of weekends ago, for instance, my wife and I played poker and drank beer on our friend’s rooftop patio. Our son Luke, clad in his new miniature gondolier outfit, crawled between our legs as one person after another told us how cute he was. That night Luke held onto one of my fingers while I gave him his midnight feeding. Later my wife and I slipped into his room for a few moments to watch him sleep.

I can tell you that at no point during our perfect summer day did the word inflation pop into our heads. We went to sleep thinking just how lucky we were to have such a beautiful son, rather than dwelling on the fact that we face an inflationary climate that is hostile to the economics of our new family.

We aren’t strangers to what economists call “headwinds.” Mrs. Tepper and I graduated from the same really expensive private college in 2008, just as the nation was mired in the worst recession in 80 years. We attended college (and later graduate school) as state governments across the country drastically cut higher education spending, which meant higher costs, which meant that we incurred a combined six-figures student loan marker. And entering the job market in the teeth of negative economic growth means we’ll be playing catch-up for years and years.

Given all that we (and Americans, generally) have endured since 2008, it might seem strange that I would ask for higher inflation. When the prices of goods rise quickly, the Federal Reserve is apt to raise interest rates. Higher interest rates make it more expensive to purchase a house, or borrow for anything. Don’t I want to own a house? What’s wrong with me?

For a little bit of context, let’s back up and look at where inflation has been over the past six years. If you look at the core price index for personal consumption expenditures (or core PCE), inflation is rising at an annual rate of 1.5%. In fact ever since Lehman Brothers declared bankruptcy it has barely budged over 2%.

inflation...

Even if you look at a broader inflation metric, like the consumer price index, prices have risen at 2.1% or lower for almost two years.

What does this mean?

For one thing, wage growth has stagnated at around 2% since we left school, and job growth, while picking up lately, has been relatively slow. Weak job creation and small pay increases means that people have less money to spend, which means fewer jobs and the cycle goes round and round.

So more economic growth (spurred on by more borrowing and spending) would help alleviate low wage growth, and help us ramp up our weekly paychecks. But it would also do something else. It would help us pay down our student loan debts.

Super low inflation is bad for people who have debt. Right now Americans owe more than $1.1 trillion in student loan debt. That means people our age are receiving raises that aren’t that high and have to confront a record level of debt before their careers really get going. With so much of our take-home pay earmarked for debt service, no wonder housing isn’t a priority, or affordable, for millennials (or the Teppers).

Of course, this kind of talk scares our parents (and rich people), who own bonds and other assets designed to preserve wealth instead of create it. Having already endured years of low interest rates, they really don’t want their bond portfolio to be hit by an inflation jump.

To which I say, tough. Many boomers entered the job market as the economy was expanding and college was affordable. Their children did not.

Luke has this one toy that he loves. It’s a sort-of picture book for infants consisting of a crinkly material, and he loves nothing more than smashing the thing between his hands and feet. In 17 years, he’ll want a car—and then four years of college.

I realize that the costs of these things will rise—prices always rise. It would just be nice if our salaries rose enough to pay for them.

Taylor Tepper is a reporter at Money. His column on being a new dad, a millennial, and (pretty) broke appears weekly. More First-Time Dad:

 

MONEY home prices

WATCH: Foreign Buyers Push U.S. Home Prices Higher

From Russia, Canada, the Middle East and elsewhere, international buyers are moving in.

MONEY buying a home

7 Ways to Get Your Kid Out of Your Basement

College students slacking off and living in parents' basement
Adam Crowley—Getty Images

If your child is one of the 14% of millennials who have moved back in with their parents, here are some tips to nudge him (or her) out the door.

For most of us, leaving the nest was a rite of passage. We went to college, and then proudly headed out into the world to make our own way, while our parents turned our old room into another guest bedroom.

However, for a significant percentage of young adults, that rite of passage is now all about returning to the roost rather than flying solo. According to Gallup research, 14% of millennials (24-to-34-year-olds) have moved back in with their parents. The homeownership rate for those under age 35 was 36.2% in the first quarter of 2014, down from a historical high of 43.1% at the end of 2005, according to Census data. According to numerous economic reports on millennials, this is attributed to a weak job market, high cost of living, significant college debt, and other factors.

These kids, as well as any adult children who have decided to move back in with mom and pop are lovingly referred to as “boomerang kids.” Clearly the analogy is obvious.

For Mom and Dad, who would love to have the ‘kids across the hall’ become the ‘kids across town,’ here are seven pointers you might want to consider:

Start Charging Rent

Cut off the free ride. Yes, it sounds harsh, but you may be doing both you and your kid a favor. Managing money and a monthly budget is something that is not learned in school, and it is certainly not learned hanging out in your parent’s converted attic for free. Give your boomerang kids a real estate reality check. If the free ride comes to a screeching halt and they are paying rent, they will probably want to do it in their own apartment, closer to (or with) their friends, near downtown or a closer drive to their office. Charge rent and enforce it. Once they start getting that first-of-the-month monetary wake up call, it might shock their system enough to have them consider alternative arrangements. If they’re going to have a landlord no matter what, they’re likely to consider a new, more independent situation.

Collect Monthly Payments

Here’s another way to give them a foot out the door – but still a leg up. Start charging them monthly payments now. Let them know that they will have to come up with the monthly equivalent to local rents each month for the next six months. At the end of the six months, you will give them back all the money when they move out. That does three things: You teach them budgeting skills, you incentivize them to move, and you give them a financial helping hand on move-out day.

Be A Strict Landlord

No parties, no loud music, no guests after 10:00 pm. Keep the house rules strict. At some point, your kid is going to want to have a little independence, and some fun too. Living with a strict landlord may just be the incentive he or she needs to find a place of their own.

Set A Deadline…and Stick To It

If you can sense that your boomerang kid is riding out his or her free meal ticket under your roof as long as they can, help them visualize when that ride will end. Create a deadline for them to move out and stick to it, no matter what. It’s likely you never intended to have kids under your roof for more than two decades, so your children need to respect that…and they need to get on with their own lives. Even in a world where millennials are underemployed compared to their Gen X, Y and Baby Boomer counterparts, there are still plenty of ways for them to make a living that enables them to live with a roommate or two or three…elsewhere.

Help Them Get Organized and Overcome The Mental Hurdle

After all the financial aspects are considered, one of the biggest hurdles to making a big move is mental: it just feels overwhelming. So many things to do, buy and organize before it can actually happen. Your child may just need the expertise of someone who’s moved multiple times in their lives to talk them down off the “I’m too overwhelmed and can’t do this” ledge. Map out all the necessities and then make a list of the “nice to haves down the road” so they can see what’s an immediate need, and what can be done over the coming weeks and months.

Gift or Loan Them The Down Payment

Trulia’s latest survey showed that 50% of millennials surveyed plan go to their parents for help with the hefty down payment that’s required to purchase a home in today’s housing market. If you want your adult child up and out of your basement, consider giving them the financial head start now they need to form their own household and be independent.

Buy A Multi-Unit Investment Property

I am a huge proponent of purchasing multiunit properties, such as a duplex or triplex, because they are great investments. In the case of your “failure to launch” millennial, slot them into one of the units of your new property and rent out the others. The rental income is likely to cover much of the costs of ownership, and you’ll have a built-in property manager in the building to keep an eye on things. Plus, your boomerang kid is learning valuable management skills at the same time. It can be an investment property for you, and solve the “son or daughter is still in my basement” problem, all at the same time.

 

More on Financial Independence

4 Ways to Lighten Your Kid’s Debt Load

Is Living with Mom and Dad Starting to Cramp Your Style? Take These Steps to Independence

Taking Five Years to Earn a B.A. is Common—And Costly. Here’s How To Get Out in Four

MONEY Housing Market

Housing Market Recovery Moving Forward, Except for This One Thing

For the first time during the housing recovery, four out of five of Trulia's Housing Barometer measures are at least halfway back to normal. But young adults are still struggling to get jobs.

How We Track This Uneven Recovery
Since February 2012, Trulia’s Housing Barometer has charted how quickly the housing market is moving back to “normal” based on multiple indicators. Because the recovery is uneven, with some housing activities improving faster than others, our Barometer highlights five measures:

  1. Home-price levels relative to fundamentals (Trulia Bubble Watch)
  2. Delinquency + foreclosure rate (Black Knight, formerly LPS)
  3. Existing home sales, excluding distressed sales (National Association of Realtors, NAR)
  4. New construction starts (Census)
  5. The employment rate for 25-34 year-olds, a key age group for household formation and first-time homeownership (Bureau of Labor Statistics, BLS)

The first measure, home prices from our Bubble Watch, is a quarterly report. The other four measures are reported monthly; to reduce volatility, however, we use three-month moving averages for these measures. For each indicator, we compare the latest available data to (1) its worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level.

4 Out of 5 Measures Improve and Are At Least Halfway Home
All but one of the Housing Barometer’s five indicators have improved since last quarter, and all five have improved or remained steady since last year. Prices and the delinquency + foreclosure rate made the biggest strides:

Housing Indicators: How Far Back to Normal?
Now One quarter ago One year ago
Home price level 79% 68% 44%
Delinquency + foreclosure rate 74% 63% 53%
Existing home sales, excl. distressed 64% 61% 64%
New construction starts 50% 45% 41%
Employment rate, 25-34 year-olds 35% 39% 30%
For each indicator, we compare the latest available data to (1) its worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level.
  • Home prices continue to climb, though at a slower rate. Trulia’s Bubble Watch shows prices were 3% undervalued in 2014 Q2, compared with 15% at the worst of the housing bust; that means prices are nearly four-fifths (79%) of the way back to their “normal” level of being neither over- nor under-valued. Even better, as prices approach normal, price gains are slowing down and becoming more sustainable: for the first time in almost two years, no local market has had price gains of more than 20% year-over-year.
  • The delinquency + foreclosure rate was 74% back to normal in May, up from 63% one quarter ago. While fewer foreclosures means fewer discounted homes for sale, delinquencies and foreclosures have caused great pain for millions of households and the financial system. For the foreclosure crisis, the light at the end of the tunnel is getting brighter.
  • Existing home sales (excluding distressed) were 64% back to normal in May, up from 61% one quarter earlier. Distressed sales have plummeted as the foreclosure inventory has dried up. Non-distressed sales also stumbled from their peak last summer as higher home prices and mortgage rates reduced affordability, but in the past quarter non-distressed sales have resumed their climb.
  • New construction starts are 50% back to normal, up from 45% one quarter ago and 41% one year ago. Multi-unit starts — mostly apartment buildings — are leading the recovery: in 2014 so far, multi-unit starts accounted for 35% of all new home starts, the highest annual level in 40 years. This apartment boom started last year, and last year’s starts are now being completed, which is increasing the supply of apartments for rent.
  • Employment for young adults, however, took a step back. May’s three-month moving average shows that 75.6% of adults age 25-34 are employed, which is just 35% of the way back to normal. That’s down from 39% one quarter ago, though still an improvement from one year ago. Because young adults need jobs in order to move out of their parents’ homes, form their own households, and eventually become homeowners, the housing recovery depends on Millennials getting jobs.

What’s Missing from the Housing Recovery

First-time homebuyers are still missing from the housing recovery, making up just 27% of existing-home buyers according to NAR’s May report. That’s down a bit both from last month and from last year.

How has the recovery gotten this far without first-time buyers? Investors and other bargain-hunters bought homes near the bottom of the market, in late 2011, which boosted sales and home prices. Now that prices are near long-term norms – just 3% undervalued – the bargain-hunting engine is sputtering. Repeat buyers, who are trading in one home for another, are taking more of the market.

Would-be first-time homebuyers are stuck: rising prices and mortgage rates have reduced affordability before young adults have been able to recover from the jobs recession. A full recovery that includes first-time homebuyers is still years away; many young adults still need to find jobs and keep them long enough to save for a down payment and qualify for a mortgage. Until that happens, the clearest signs of recovery will be apartment construction and renter household formation, not first-time home buying, as young adults move from their parents’ homes into their own rental units.

NOTE: Trulia’s Housing Barometer tracks five measures: existing home sales excluding distressed (NAR), home prices (Trulia Bubble Watch), delinquency + foreclosure rate (Black Knight), new home starts (Census), and the employment rate for 25-34 year-olds (BLS). Also, our estimate of the “normal” share of sales that are distressed is 5%; Black Knight reports that the share was in the 3-5% range during the bubble. For each measure, we compare the latest available data to (1) the worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level. We use a three-month average to smooth volatility for the four indicators that are reported monthly (all but home prices). The latest published data are May data for the employment rate, existing home sales, new construction starts, and the delinquency + foreclosure rate; and Q2 for home prices.

See the original article, with more charts, here.

Jed Kolko is the chief economist of Trulia.

MONEY Housing Market

The Housing Market Won’t Be Undervalued Much Longer

Trulia's latest analysis shows homes in three-fourths of major U.S. cities are still undervalued, while seven are more than 10% overvalued (most in California). Even there, prices are no where near boom frothiness.

Trulia’s Bubble Watch reveals whether home prices are overvalued or undervalued relative to their fundamental value by comparing prices today with historical prices, incomes, and rents. The more prices are overvalued relative to fundamentals, the closer we are to a housing bubble – and the bigger the risk of a future price crash.

Sharply rising prices aren’t necessarily a sign of a bubble; a bubble is when prices look high relative to fundamentals. Bubble watching is as much an art as it is a science because there’s no definitive measure of fundamental value. To try to put numbers on it, we look at the price-to-income ratio, the price-to-rent ratio, and prices relative to their long-term trends using multiple data sources, including the Trulia Price Monitor as a leading indicator of where home prices are heading. We then combine these various measures of fundamental value rather than relying on a single factor, because no one measure is perfect. Trulia’s first Bubble Watch report, from May 2013, explains our methodology in detail. Here’s what we found.

Home Prices are 3% Undervalued Nationally We estimate that home prices nationally are 3% undervalued in the second quarter of 2014 (2014 Q2), which is far from bubble territory. During last decade’s housing bubble, home prices soared to a level that was 39% overvalued in 2006 Q1, then dropped to being 15% undervalued in 2011 Q4. One quarter ago (2014 Q1), prices looked 5% undervalued, and one year ago (2013 Q2) prices looked 8% undervalued. This chart shows how far current prices are from a bubble:

At this pace, home prices nationally should be in line with long-term fundamentals – i.e., neither over- or undervalued – by the last quarter of 2014 or the first quarter of 2015. The good news for bubblephobes is that price gains are now slowing down while prices still look (slightly) undervalued. We’d be at greater risk of heading toward a bubble if price gains were still accelerating, but they’re not.

Even in the Bubbliest Markets, It’s Not 2006 All Over Again Eight of the 10 most overvalued housing markets are in California, with Orange County, Los Angeles, and Riverside-San Bernardino in the top four. However, they are not seeing the return of last decade’s bubble. These California markets are much less overvalued than they were at the height of the bubble. Orange County, today’s frothiest market, is just 17% overvalued now versus being 71% overvalued in 2006 Q1. Among the most overvalued markets today, only Austin looks more overvalued now (13%) than in 2006 Q1 (8%) – and that’s because Austin (and Texas generally) avoided the worst of last decade’s bubble and bust.

Top 10 Metros Where Home Prices Are Most Overvalued
# U.S. Metro Home prices relative to fundamentals, 2014 Q2 Home prices relative to fundamentals, 2006 Q1 Year-over-year change in asking prices, May 2014
1 Orange County, CA +17% +71% 9.6%
2 Honolulu, HI +15% +41% 5.3%
3 Los Angeles, CA +15% +79% 12.7%
4 Riverside-San Bernardino, CA +13% +92% 18.8%
5 Austin, TX +13% +8% 9.7%
6 San Jose, CA +11% +58% 10.4%
7 Oakland, CA +10% +72% 14.8%
8 Ventura County, CA +9% +73% 12.6%
9 San Diego, CA +7% +69% 11.2%
10 San Francisco, CA +6% +51% 11.6%
Note: positive numbers indicate overvalued prices; negative numbers indicate undervalued, among the 100 largest metros. Click here to see the price valuation for all 100 metros: Excel or PDF.

 

Only in Akron and Cleveland are prices undervalued by more than 20%. Furthermore, in those two markets, home prices are rising below the national average of 8.0%. But in several of the most undervalued markets, including Detroit and Chicago, prices are now rising year-over-year in the double digits. But those markets are unlikely to stay on the most-undervalued list for many more quarters.

Top 10 Metros Where Home Prices Are Most Undervalued
# U.S. Metro Home prices relative to fundamentals, 2014 Q2 Home prices relative to fundamentals, 2006 Q1 Year-over-year change in asking prices, May 2014
1 Akron, OH -21% +18% 4.7%
2 Cleveland, OH -21% +18% 6.3%
3 Detroit, MI -19% +38% 15.2%
4 Dayton, OH -16% +13% 12.1%
5 Worcester, MA -15% +43% 4.4%
6 Memphis, TN-MS-AR -14% +11% 3.2%
7 Toledo, OH -14% +22% 10.0%
8 Chicago, IL -14% +36% 13.5%
9 Lakeland-Winter Haven, FL -14% +54% 3.8%
10 Providence, RI-MA -14% +52% 2.9%
Note: positive numbers indicate overvalued prices; negative numbers indicate undervalued, among the 100 largest metros. Click here to see the price valuation for all 100 metros: Excel or PDF.

 

Three-Fourths of Markets Still Undervalued Of the 100 largest metros, home prices in 76 of them look undervalued. But the number of overvalued markets – 24 – has climbed up from 19 last quarter (2014 Q1) and just 5 last year (2013 Q2). Most of the 24 overvalued markets are overvalued just a bit, with 17 overvalued by less than 10% and 7 overvalued by more than 10%. While the number of overvalued markets is rising, there remains little reason to worry about a new, widespread bubble forming. The last two years of strong price gains have been from a relatively low level and still haven’t pushed home prices nationally above our best guess of their long-term fundamental value.

See the original article with complete charts here.

Jed Kolko is the chief economist of Trulia.

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