Zeitgeist – Sign of the Times
As rents continue to rise, owning a home or condominium has become less expensive than renting in many cities. And after you calculate the mortgage interest and property tax write-offs, ownership becomes even more appealing on an after-tax basis. According to analysis done in the fourth quarter of 2014 by Trulia’s chief economist, Jed Kolko, homeownership remains cheaper than renting in all of the U.S.’s 100 largest metro areas. It comes as no surprise that developers have started to recognize this trend and condominium construction has begun to awaken from its decade-long slumber. Several markets are seeing new, for-sale condo projects break ground including Miami, New York, Washington D.C., Philadelphia, Chicago, Atlanta, Seattle and Los Angeles.
Many developers are building projects to condo specifications – including large floorplans, high-end finishes and in-place condo maps – but plan to operate the projects initially as rental communities. Developers like this optionality as it provides additional time for the economy to stabilize (and condo prices to appreciate) and dual exit strategies for their projects including the sale of individual condominiums or the bulk sale of the property as an apartment investment. In select markets, including New York and San Francisco, condo conversions – converting existing building into for-sale condominiums – have also made a resurgence. Nationwide, condo sales have increased 25% over the past four years from 429,000 in 2010 to 591,000 in 2014 (National Association of Home Builders).
3% Down is Back!
In December, Fannie Mae and Freddie Mac announced that they will once again start backing home mortgages with down payments of just 3%. The lower down payment requirement is expected to expand credit to potential homebuyers – typically younger and first-time buyers – who cannot afford the current minimum down payment requirements. Often the biggest challenge for many homebuyers is saving the necessary amounts for a down payment – on a $250,000 home purchase, a 3% down requirement represents a $5,000 reduction over the previous 5% requirement. The 3% loans offered by Fannie and Freddie also include a provision allowing borrowers to cancel their private mortgage insurance – which can cost upwards of 1% of the principal loan balance per year – when the mortgage balance drops below 80% of the home’s value (a nearly $2,500 savings in this example).
Oil, Real Estate and Our Wallets
In January, oil prices dropped below $44/barrel for the first time since 2009 representing an approximate 60% price decline during the past six months. SUV owners may be rejoicing but real estate markets with the highest concentration of oil-related employment (including Houston, Bakersfield and Tulsa) may soon be feeling the pain. In markets with a low concentration of oil-related employment, falling oil prices have historically been negatively correlated with home prices (i.e., when it costs less to fill-up your gas tank, you can afford a larger mortgage payment). For this reason, we could see accelerated growth in home prices in cities with a lower dependence on oil employment – and vice versa.
Despite this increase in disposable income, many consumers are deciding to hold onto their cash for the near-term. At the end of January, gas prices averaged $2.05/gallon translating to approximately $60/month in consumer savings from the June 2014 average of $3.68/gallon. According to a statement last week from Mastercard’s CEO Ajay Bunga, the company hasn’t seen the extra savings from lower gas prices “translate into additional discretionary spending.” And a recent survey by Visa indicated that their customers are also spending more conservatively and retaining approximately half of their monthly gasoline savings. Wayne Best, chief economist at Vista, puts it plainly, “Since the recession, you have a much more cautious consumer.”