Real Estate Digest - November 2016 Issue

Real Estate Digest

November • 2016

Volume 42 • Number 11

2016: The Year of Global Luxury Real Estate

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s the last quarter of the year comes to an end, let’s take a look back at the state of luxury real estate in 2016.

Kevin Leonard, luxury real estate expert and founder of Valore Group & Luxury Agent in Palm Beach, reported on the 2016 luxury real estate trends for Inman.com. Here is a look back at global luxury real estate sales during 2016 and the trends that will continue to affect that market for years to come.

Luxury Buyers Continue to Remain Active Despite Global Woes Overall, ultra-high net worth property buyers and sellers continued to be active in the luxury real estate market during 2016 despite the fact that stock markets, exchange rates, regulatory issues and financial and political concerns continued to affect some regions of the world.

Some Luxury Markets Underperformed While Others Surprised Go-to centers for luxury real estate, such as New York and London, did not see the same growth during 2015 and the beginning of 2016 as they had seen in previous years.

However, other regions, including Dublin and Detroit, saw some surprising gains.

Luxury Real Estate Is Complex and Continues to Evolve There are many factors at play in the luxury markets, including investors’ changing financial goals, lifestyle and property preferences. These factors change over time and have even changed from just a few years ago.

Why Ultra-High Net Worth Buyers Are Interested in Luxury Real Estate The investment and lifestyle opportunities that come along with luxury real estate ownership continue to encourage both for-

eign and U.S. buyers. When cities are the center of new industries and a robust economy, they always attract interest from affluent buyers.

It’s a good sign for the real estate industry overall that buyers are continuing to invest even if some international governments continued on next page

November • 2016 attempt to deter sales from ultra-high net worth buyers. Buyers are willing to deal with short-term challenges created by these efforts in order to reap long-term benefits.

Luxury Buyers Want Good Deals Just Like Other Buyers Price is still a factor in the luxury market, as even ultra-high net worth individuals want to think they are getting a good deal. Despite this, prices in some areas have managed to reach historic highs since the global financial downturn. While buyers and sellers will determine the prices for the market, they also want to receive fair market values for luxury properties.

Millennial Entrepreneurs Will Continue to Impact the Luxury Real Estate Market Certain wealth groups, including “millenipreneurs,” the wealthiest millennial entrepreneurs and high-income workers from the tech industry, will continue to have a major impact on the high-end real estate market.

Luxury Buyers Will Continue to Invest in Luxury Real Estate The outcomes in the luxury real estate market in 2016 have demonstrated that the interest in luxury real estate is not going away anytime soon.

“There will always be revolving factors that influence housing prices, inventory and sales. We can safely predict, though, that the world’s wealthiest will still invest in the luxury real estate market.” says Leonard.

Housing Supply Is Driving Regional Economic Inequality A new Trulia study has revealed that home values are driving income inequality, as housing prices have risen faster in the most expensive markets than prices in the least expensive markets.

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“The financial fortune of homeowners in the U.S. has largely been determined by where they live. And since most households’ biggest investment is their home, regional disparities in home price growth may be effectively driving a geographical gap in wealth generation,” says Ralph McLaughlin, Trulia’s chief economist.

The study was done by estimating annual home prices between 1986 and 2016 using internal data from Trulia and the Federal Housing Finance Agency’s House Price Index for each of the largest 100 metropolitan areas or divisions where available.

The 10 markets with the highest returns on home values were identified as: 1 San Francisco, Calif.

2 San Jose, Calif.

3 Honolulu, Hi. 4 Seattle, Wash.

5 Portland, Ore.

6 Oakland, Calif.

7 Orange County, Calif.

8 Los Angeles, Calif.

9 San Diego, Calif.

10 Miami, Fla.

The 10 markets with the least return on home values were identified as: 1 Rochester, N.Y. 2 Wichita, Kan. 3 Fort Worth, Tex. 4 Memphis, Tenn.

5 El Paso, Tex.

6 Oklahoma City, Okla.

7 Dallas, Tex. 8 Tulsa, Okla.

9 Greensboro-High Point, N.C. 10 Dayton, Oh.

The study also found that income growth and the amount of housing construction relative to demand were the two major factors that permitted some metros to see larger home price gains than others.

These findings are significant because wealth is often passed continued on next page

November • 2016 down to future generations. Heirs might have the option to use their inheritance to purchase a home, which perpetuates the cycle of wealth accumulation.

Homebuyers Losing Interest in Mediterranean-Style Homes In the 1990s, Mediterranean-styles were very popular. However, a new survey from Realtor. com® has revealed that the Mediterraneanstyle design may be losing its appeal among buyers.

Mediterranean-style homes are characterized by stucco walls, tumbled stone, and wrought-iron accents. However, recent home price trends have shown that homes with more modern color palettes and minimalist design are increasing in price at a faster rate than Mediterranean-style homes.

The Realtor.com® survey looked at home prices for the four most popular architectural styles in the U.S.—Mediterranean, modern, Colonial and Victorian. Mediterranean styles have a median list price at $750,000, which is triple the median list price for homes of all other styles.

While the asking prices for Mediterranean-style homes still remain very high, they have held steady since 2012, while median home prices overall have increased roughly 25 percent. Modern home prices have experienced the largest increase in median asking prices over the last four years, with, an increase of 37 percent.

“The relative lack of appreciation of Mediterranean homes likely results from pent-up demand for newer and more versatile styles,” Javier Vivas of realtor.com® told The Wall Street Journal. “These other styles have attracted more eyes and fiercer competition, particularly since the recovery.”

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10 Metro Areas Where Low Down Payment Mortgages Lead the Market Finding a mortgage when you don’t have perfect credit or enough cash to make a decent down payment can be difficult. However, an August 2016 report from the Urban Institute, a Washington, D.C.-based think tank focused on housing and economic policy, has revealed that in certain metropolitan statistical areas (MSAs), buyers are able to put down less cash for down payments than in other MSAs. The report found that the 10 leading MSAs for low down payment mortgages are: 1 Detroit-Dearborn-Livonia, Michigan (Average FICO score: 728) 2 Miami-Miami Beach-Kendall, Florida (Average FICO score: 732) 3 Cleveland-Elyria, Ohio (Average FICO score: 733) 4 Las Vegas-Henderson-Paradise, Nevada (Average FICO score: 735) 5 San Antonio-New Braunfels, Texas (Average FICO score: 736) 6 Houston-The Woodlands-Sugar Land, Texas (Average FICO score: 736) 7 Cincinnati, OH-KY-IN (Average FICO score: 736) 8 Orlando-Kissimmee-Sanford, Florida (Average FICO score: 738) 9 Riverside-San Bernardino-Ontario, California (Average FICO score: 738) 10 Atlanta-Sandy Springs-Roswell, Georgia (Average FICO score: 738) continued on next page

November • 2016 “What you’re seeing is a reflection of the lower economy,” said Sheryl Pardo, spokesperson for the Urban Institute. She adds that the Federal Housing Administration (FHA) “is an important player in those local communities,” because it is helping people get into housing in these challenged areas. “Economically, FHA is king. That’s who’s helping people get on the ladder to homeownership,” she says.

New Study Finds That Women Are Better at Paying Their Mortgages A new study from the Urban Institute has found that women are less likely to miss a payment on their mortgages as compared to men. The study looked at all types of borrowers, including singles and couples.

Researchers at the Housing Finance Policy Center of the Urban Institute compared mortgage data from 13 million women and 17 million men across a number of socioeconomic factors.

The findings of the study revealed that male-only borrowers had a 6 percent probability of default, while a female-only borrower had a 5.8 percent probability of default. These findings demonstrate that women are 0.2 percent better at not missing payments on their mortgages.

Single women now make up the second-largest group of homebuyers in the marketplace and account for anywhere from 15 percent to more than 20 percent of all home purchases in recent years.

Despite these findings, single women are denied credit more often and are charged more for their loans than single men, even though they tend to make larger down payments.

“This is the first step in saying the barometer is consistently not accurately predicting whether women are able to pay their mortgages,” Sheryl Pardo, a spokesperson for the Housing Finance Policy Center at the Urban Institute, said.

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FINCEN Expands Crackdown on Secret Buyers of U.S. Real Estate The Financial Crimes Enforcement Network (“FinCEN”) has announced new rules designed to target buyers of high-end real estate properties.

FinCEN has implemented certain “geographical targeting orders” (GTOs) for additional major metropolitan areas after adopting rules that focused on high-end real estate buyers in Miami and New York City.

The new rules require title insurance companies to report the identity of each beneficial owner (direct or indirect owner of 25 percent or more of the purchase) above specific thresholds who completes a real estate transaction without a mortgage loan or other external financing. The title insurance company must make a report of the transaction within 30 days after the closing on the property.

FinCEN has enacted the new rules because it has found that a significant number of the real estate transactions reported have signs of possible criminal activity. FinCEN seeks to use the new rules to extend its anti-money laundering enforcement.

“The information we have obtained from our initial GTOs suggests that we are on the right track,” said FinCEN Acting Director Jamal ElHindi. “By expanding the GTOs to other major cities, we will learn even more about the money laundering risks in the national real estate markets, helping us determine our future regulatory course.”

Mortgage Rates Move Higher after U.S. Bond Market Sell-off Mortgage rates saw their biggest increase in two months on September 12, 2016, thanks to a selloff in the U.S. bond market. Mortgage rates loosely continued on next page

November • 2016 follow the yield on 10-year Treasury notes and increased only an eighth of a percentage point. However, the increase was enough to send stocks of the nation’s homebuilders, as well as any other stocks related to the housing sector, tumbling.

Rising rates are a major concern to buyers, sellers, builders and homeowners. Higher mortgage rates make it more expensive for homebuyers to purchase homes and scare sellers into selling as soon as possible before rates rise further. The average interest rate on 30year fixed mortgage contracts is still at a historic low, around 3.5 percent. The average for this interest rate is just over 8 percent, and it has been as high as 18 percent in the past.

“When it comes to rates and financial markets in general, things can always go either way, but I will say that the past two days are the scariest we’ve seen since before Brexit,” wrote Matthew Graham, chief operating officer of Mortgage News Daily. “This is the kind of move that should be treated as a serious threat to low, stable mortgage rates until proven otherwise.”

S&P Splits Real Estate Stocks from Financial Sector A new real estate sector has been added to S&P 500. The sector was off to a good start with a gain of 0.75 percent.

Real estate traded as its own sector within the benchmark for the first time on September 19, 2016. Real estate was once part of the financials sector of S&P 500. However, Standard & Poor’s decided to split real estate into its own sector back in March.

In August, Standard & Poor’s added real estate as an 11th sector to its Global Industry Classification Standard (GICS) structure. However, the changes did not take effect until after the close on Sept. 16 in

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order to coincide with S&P’s annual rebalance of its indices.

JJ Kinahan, chief strategist at TD Ameritrade, believes that the sector is off to a good start due to homebuilders’ strong sentiment and the low market expectations the Fed will raise rates.

“One of the major differences between the Financials and the Real Estate sector is that Financials are expected to benefit from higher interest rates (margins), as higher interest rates would cost Real Estate more via leveled borrowings, and potentially cut into dividend payments,” said Howard Silverblatt, senior Index analyst at S&P Dow Jones Indices, in an email.

Has a Housing Bubble Returned to Real Estate?

According to a September report from Black Knight Financial Services, 14 of the nation’s 40 largest cities have already seen home prices increase to new highs. These cities include Austin, Tx.; Boston; Charlotte, N.C.; Columbus, Ohio; Dallas; Denver; Houston, Tx.; Kansas City, Mo.; Nashville, Tenn.; Pittsburgh; Portland, Ore.; San Antonio, Tx.; San Francisco and Seattle.

However, the difference this time is that the housing bubble isn’t being driven by faulty mortgage products that people are unable to afford. The main factors contributing to the bubble are short supply, high rents, and higher home equity for homeowners. Home prices are on the rise due to short supply of homes in many housing markets. Homebuyers have higher home equity at 44 percent equity than they did at the peak of the last housing bubble, which is helping to drive home prices higher. Another factor: “Households holding onto their previous property when moving…” wrote Matthew Pointon, property economist at Capital Economics.

Rental demand is also at a high because millennials are chooscontinued on next page

November • 2016 ing to rent single-family homes instead of buying them because they can’t meet the requirements for mortgage credit or have been unable to amass the down payment needed to purchase a home due to high rents.

Agents’ Corner

Four Ways Fall Changes the Real Estate Market While some homebuyers might give up their search after Labor Day, those who stay in the market might find it to their advantage. Here are four ways the fall real estate market typically differs from the spring/summer selling season: 1 Fall markets are buyers’ markets. Typically, there are fewer buyers after Labor Day because families with school-age kids need to make sure that their kids are in school by the fall.

“This, of course, is dependent upon local market cycles,” says Michael Kelczewski, a Pennsylvania and Delaware real estate agent. “But typically, families need to be settled into a home by the start of the school year.” As a result, homebuyers that don’t have school-age kids who look for a home during the fall may have an advantage. These homebuyers may find less competition

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for homes during the fall and Realtors can negotiate better prices because the market is slower.

2 Vacation home sales pick up. After summer vacations have come to an end, many buyers might start thinking about buying a place in the areas in which they vacationed. By purchasing a vacation home in the fall, a homebuyer can have it purchased and furnished by the time spring comes again. In addition, making an offer during the off-season allows homebuyers to see what the area has to offer at off-peak times of the year.

“Resort communities, like in Colorado and the Rocky Mountains, offer robust winter rentals,” says Tricia McCaffrey Hyon, a Colorado real estate agent. “Purchasing in the fall allows a buyer to see immediate rental income from their property during peak holiday times.

3 Home prices fall. Many home sellers choose to list their homes during the summer because they believe it is the best time to sell. However, if a home does not sell during the summer, homeowners may start to rethink their prices, which leaves room for negotiation with buyers. As a result, buyers may find better deals during the fall than during the peak times of the market.

4 Fall homebuyers don’t have deadlines. Unlike homebuyers who want to buy a home before their kids need to go back to school, fall homebuyers usually don’t have such a deadline. They are more likely to wait to get a better deal, as well.

more on next page

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