Windermere’s Chief Economist, Matthew Gardner, Weighs in on the 2018 Housing Market

As we move into the new year, the housing market reflects on 2018 and looks forward into 2018 and its forthcoming prime season. Windermere’s Chief Economist, Matthew Gardner, forecasts that 2018 will bring higher inventory levels, balancing the current rift between seller and buyer.

Interest rates are forecasted to continually rise, but at comparably modest rates to historic averages. Home prices are also expected to raise at lower rates in 2018, theoretically prophesized by increased inventory levels and buyer frustration in the current Seattle market.

Where do you think 2018 will take the local market? Will we continue as a seller’s market, or will level help balance the market? Check out the entire report here!


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First Time Buyers, Millennials, and What to Expect in 2017

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Originally posted on Windermere Blog, author Matthew Gardner

I believe that the big story for the coming year will be first-time home buyers. Since they don’t need to sell before purchasing, their reemergence into the market ensures that sales will continue to increase, even while inventory is limited. Thirty-one percent of buyers currently in the real estate market are first-time buyers, but it would be more ideal if that figure was closer to 40 percent.

Why don’t we have enough first-time buyers in the market? With Baby Boomers working and living longer, we aren’t making much room for Millennials to start their careers. Plus, the major debt that the younger generation owes on student loans ($1.3 trillion today) hugely impacts the housing market. But the bigger issue is lack of down payments. Before the recession, many Millennials could look to their parents for help with down payments; however, these days that is not as much the case.

I would also contend that the notion of Millennials being a “renter generation” is nonsense. In a National Association of Realtors survey, 75 percent of them said that buying a home would be the most astute financial decision they’d ever make; however, 80 percent said they don’t think they could qualify for a mortgage. I do believe that Millennials will eventually buy, but they’re delaying their purchasing decisions by about three years when compared to previous generations, which is about the same amount of time they’re waiting to start families as well.

Mortgage rates have risen rapidly since the election, and unfortunately, I do not see a turnaround in this trend. That said, they will remain cheap when compared to historic averages.  Expect to see the yield on 30-year mortgages rise to around 4.7% by the end of 2017. For those who have grown accustomed to interest rates being at historic lows, this might seem high, but it’s all relative.

If I were to gaze all the way into 2018, my crystal ball takes me to the dreaded “R” word. Like taxes and death, recessions are another one of those unwanted realities that inevitably comes to visit every so often. Irrespective of who was voted into the White House, my view remains the same: prepare to see a business cycle recession by the end of 2018, but, rest assured, it will not be driven by real estate, nor will it resemble the Great Recession in any way.

content_Headshot_-_Matthew_Gardner  Matthew Gardner is the Chief Economist at Windermere Real Estate.

How will the 2016 Election Impact the Housing Market? [Video]

Originally posted on Windermere Blog.

The 2016 presidential election will absolutely have an impact on the housing market and the U.S. Economy. What those impacts will be are dependent on who occupies the White House in 2017. Hear what Windermere’s Chief Economist, Matthew Gardner, has to say about the influence each presidential candidate may have on the market.

What is the Case-Schiller Home Price Report and why does it Matter? [VIDEO]

Originally published at Windermere Blog by Windermere Real Estate’s Chief Economist, Matthew Gardner.

The S&P/Case-Shiller Home Price Indices is a monthly report that analyzes housing data in major metropolitan areas across the U.S. Windermere’s Chief Economist, Matthew Gardner explains what this report is and why we use it to assess the strength of the housing market.

Historically low inventory levels, how we got here, & what to expect in the coming year [Video]

Originally posted on Windermere Blog

The housing market is performing remarkably well, with the exception of incredibly low inventory levels in many areas throughout the country. Why is this happening? Windermere’s Chief Economist, Matthew Gardner, explains why and offers his predictions for what we can expect in the future.

Matthew Gardner’s 2016 Economic & Housing Forecast

image licensed under 1 time use license by Canva Originally published on Windermere Blog by Matthew Gardner, Chief Economist, Windermere Real Estate

The National Economic Forecast

1.The U.S. will continue to expand with real GDP growth of 2.3% in 2016.

Although a positive number, the forecasted rate of growth suggests that we will be modestly underperforming in 2016. On a positive note, oil prices are likely to remain well below long-term averages, which puts more money into consumers’ pockets in terms of disposable incomes. However, I believe that consumers are likely to continue to save rather than spend which will constrain growth. That said, there is certainly no recession on the horizon – at least not yet – and a strong dollar will act as a bit of an anchor.

2.Employment will continue to expand but the rate of growth will slow. Look for an increase of 1.6% in 2016.

We are rapidly approaching full employment (generally considered to be when the unemployment rate drops below 5 percent). As such, growth in employment has to be driven more by population growth rather than a return to employment. 2015 saw an average of around 210,000 jobs created per month and I believe that this is likely to slow to an average monthly gain of 190,000 new jobs.

3.The U.S. unemployment rate will continue to drop and end 2016 at 4.8%.

As mentioned above, we are heading toward full employment and, as such, the national unemployment rate cannot trend much lower. That said, the less acknowledged U-6 rate (which includes those working part-time and those marginally attached to the workforce) will remain elevated at around 8%, signifying that there is still some slack in the economy and room for the rate to drop a little further.

4.Inflation will remain in check with the Consumer Price Index at 1.9%.

The Federal Reserve has begun the long-awaited tightening of monetary policy and we will likely see the Fed Funds Rate continue to move higher over the next two years. Inflation has yet to respond to the low unemployment rate, but it will.

The core rate of inflation should remain in check and the overall rate could stay below long-term averages as a function of stubbornly low energy costs. Should we see a shift in OPEC’s position relative to oil supply, the overall rate of inflation could rise more rapidly. Oil prices, therefore, will remain in focus during 2016.

The National Housing Market Forecast

5.Mortgage rates will rise, but we will still end 2016 with the average 30-year fixed rate below 5%.

I am taking the Fed at its word when it says that monetary tightening in 2016 will be gradual and heavily data dependent. Accordingly, I expect only a modest uptick in long-term rates in 2016. Furthermore, as long as the Federal Reserve continues to reinvest the dividends that it is receiving from their bond holdings – which is highly likely – the yield on the key 10-year treasury will remain low and hold mortgage rates in check. This is only likely to change after the general election, therefore suggesting that rates will remain very attractive relative to their long-term averages.

6.Credit Quality – which had been remarkably stringent – will relax a little.

Access to credit, specifically mortgage instruments, has not been easy for many would-be homebuyers but that is set to change. I believe that we will see some improvement, specifically for borrowers with “near-prime” credit. This will be of some assistance to first-time buyers; however, credit quality will still be higher than it needs to be.

7.Existing home sales will rise modestly to an annual rate of 5.53 million units with existing home prices up by 4.7%.

I anticipate that we will see some improvement in overall transactional velocities in 2016, but unfortunately, demand will still exceed supply. Prices will continue to rise, but at a more constrained pace than seen over the past few years. This will be a function of modestly rising interest rates as well as slightly improving levels of inventory. I anticipate that we will see more listings come online as more households return to positions of positive equity in their homes.

8.New home sales will jump and be one of the biggest stories for 2016. Look for a 23% increase in sales and prices rising by 3.4%.

I believe that builders will start to build to the entry-level buyer, filling a huge void. Additionally, I see the total number of new home starts increase quite dramatically in 2016 as banks start to ease lending and builders start to believe that the downward trend in homeownership has come to an end. This will help to absorb some of the pent-up demand currently in the market.

9.Foreclosures will continue to trend down to “pre-bubble” averages.

Any story regarding foreclosures will be a non-story as the rate will continue to trend down toward historic averages. However, we will see the occasional uptick as banks work their way through their existing inventory of foreclosed homes. Move along. There’s nothing to see here.

10.The Millennials will start to enter the market.

There are several substantial reasons to expect an increase in Millennial buyers. Firstly, early Millennials are getting older and starting to settle down, and even with modestly higher mortgage rates, rents are likely to continue to trend upward, and this will pull many into homeownership.

Secondly, more favorable mortgage insurance premiums, additional supply from downsizing boomers, and growing confidence in the housing market will lead to palpable growth in demand from this important – and substantial – demographic.

To conclude, it appears to me that 2016 will be a year of few surprises – at least until the general election! Because it is an election year, I do not expect to see any significant governmental moves that would have major impacts on the U.S. economy or the housing market.

content_MGardnerPhoto_bw_Matthew Gardner is the Chief Economist for Windermere Real Estate, specializing in residential market analysis, commercial/industrial market analysis, financial analysis, and land use and regional economics. He is the former Principal of Gardner Economics, and has over 25 years of professional experience both in the U.S. and U.K.

Matthew Gardner’s Take On Today’s Rate Hike By The Federal Reserve

This article by Windermere Real Estate’s chief economist, Matthew Gardner, originally appeared on Windermere Blog and [Subscription Required] Inman.com

After seven years of some of the lowest interest rates in recorded history, the Federal Reserve has decided to raise the key Fed Funds Rate by 0.25 percent, which is causing some to be concerned that it will lead to a jump in mortgage rates and negatively impact the US housing market.

So, the question everyone wants to know is, do we need to worry about interest rates leaping?

While I expect there to be some volatility in rates for a while, I don’t believe the real estate market will implode in a rapidly rising interest rate environment. So, yes, interest rates are going to rise modestly, but no, I don’t think we need to be overly worried about it.

To qualify this statement, we need to understand that mortgage rates do not run in “lock-step” with the Fed Funds Rate. Although the Fed Funds Rate is a bellwether for the greater economic environment, there have been times when these two rates have moved in opposite directions, such as we saw in 2004/2005.

It’s also important to understand that while interest rates for revolving credit, such as credit cards and home equity loans, are tied to the Fed Funds Rate, non-revolving loans – like mortgages – are not. Mortgage rates are tied to bond yields – specifically the 10-year treasury.

So what do I think will happen?

I believe interest rates will rise above 4 percent, but we will not see a sharp spike in rates. The Fed has stated that any upward movement in the Fed Funds Rate will be slow and steady, and will reflect the greater economy. And I believe that mortgage rates will follow suit. Additionally, mortgage rates have already moved higher in anticipation of an increase in the Fed Funds Rate.

That said, it is worth noting that any weakness in the global economy can actually have a downward effect on interest rates. This is referred to a “flight to quality”. In essence, investors seek safe haven during times of economic uncertainty. If markets outside the U.S. continue to underperform, there will likely be increasing demand for bonds which will drive up their price and drive down interest rates. Between China, the Eurozone, war in the Middle East, and a massive drop in oil prices, it’s certainly possible that the price of mortgage backed securities could rise, leading U.S. mortgage rates lower.

Interest rates could not realistically stay at their current levels forever. But an increase should not be a great cause for concern. Yes, an increase makes mortgages more expensive, but not to a point where they will have a negative effect on home values. That said, the rate of home price growth will undoubtedly slow in the coming year, but that isn’t necessarily a bad thing.

A little perspective might help: the average rate for a 30-year loan in the 1970’s was nine percent. It was 13 percent in the 1980’s and eight percent in the 1990’s. And yet people still managed to buy and sell homes throughout those years. With that in mind, the rate increases we’re likely to see in 2016 are nothing to fret over.

The increase in the Fed Funds Rate should be taken as a sign that our economy is expanding and is a preemptive move to limit anticipated inflation. While interest rates have risen from their all-time low, they are still remarkably favorable. And will remain so through 2016.

content_MGardnerPhoto_bw_Matthew Gardner is the Chief Economist for Windermere Real Estate, specializing in residential market analysis, commercial/industrial market analysis, financial analysis, and land use and regional economics. He is the former Principal of Gardner Economics, and has over 25 years of professional experience both in the U.S. and U.K.

No national bubble in sight, but there are some frothy markets

Photo by Sebastian Pichler, Unsplash.com
Photo by Sebastian Pichler, Unsplash.com

The following article, penned by Matthew Gardner, originally appeared on Inman.com and Windermere Blog:

Earlier this year, I wrote an article called “No housing bubble in sight — for now” in which I shared my belief that the nation, as a whole, is not currently at risk of seeing another housing bubble.

However, I did qualify that statement by saying that I was noticing some “frothy” markets around the country that might be getting a little too hot.

In this article, I plan to divulge those markets that are likely to see slowing price growth in 2016 and possibly a downward correction.

The primary data sources that I used for my analysis were the Case-Shiller Index and the Federal Housing Finance Agency (FHFA).

I chose these two providers as they both prepare indices on home values using the repeat sales method. That is to say, they use data on properties that have sold at least twice to capture the true appreciated value of each home.

What the data shows

As I studied these data sets, it became apparent to me that there are some markets that we need to watch. From a very simplistic standpoint, both Case-Shiller and the FHFA indicated a few cities that have already surpassed their peak index levels.
Using the Case-Shiller numbers, these were Dallas, Denver, Portland and Boston. The FHFA data showed Dallas, Atlanta, Charlotte, Portland, San Francisco and Seattle as having surpassed their previous peaks.

While this can certainly be an indicator that a market is getting overheated, it’s not the be-all and end-all because external influences, such as mortgage rates and recessions, can all affect index levels.

Because of this, I thought it was important to take a closer look and focus on those markets that might be tracking above their natural trend.

That’s to say, I looked at pre-bubble growth rates, forecasted that rate forward in time and then compared that number to the present index levels.

After having completed this analysis, San Francisco, Denver and Dallas appear to be appreciating at a faster rate than their historic averages.

Even two indicators that point toward a potential problem don’t guarantee an outcome. Because of this, I decided to round off my analysis by looking at the ratio of home prices to incomes in the market areas that were of interest.

This is another important indicator when determining the health of a housing market as it speaks to affordability.

For the past few years, home values have been rising at rates well above that of incomes, but thanks to low-interest rates, this hasn’t yet created a significant barrier for buyers.

However, mortgage rates are set to rise, and this could leave some markets with homes that are too expensive for buyers earning that area’s median income.

When we look at the world through this lens, the cities where I see a cause for concern are San Francisco, San Diego and San Jose.

So what does this all mean?

Well, for one thing, San Francisco stands out — and not necessarily in a good way. Additionally, several markets have recovered from the housing collapse, and they are getting a little ahead of the rest of the country; specifically Denver and Dallas.

I will be watching these markets closely and anticipate that we might see a relatively steep slowdown in home price growth in these three cities.

The U.S. housing market has spent the past three years in recovery mode with robust demand, tight supply and favorable interest rates, which created a perfect environment for prices to rise — and rise they did.

However, I believe that a select few markets, such as San Francisco, Denver and Dallas, are getting a little out of sync and should start to prepare for an almost certain slowdown in price growth.

Now, if there is any consolation, it’s that the slowdown is supply-driven. If we do not see a significant increase in inventory in these markets, any slowdown in home prices might be offset by persistently high demand. Only time will tell.

content_MGardnerPhoto_bw_

Matthew Gardner is the chief economist for Windermere Real Estate

August Perspectives: Are We Heading Toward Another Housing Bubble?

August Perspectives by Matthew Gardner
Originally posted on Windermere Blog August 10, 2015

Every year there’s some aspect of the real estate market that becomes a focal point for the media. A few years ago it was whether or not housing would ever recover from the Great Recession. Then it was historically low interest rates and inventory levels. And more recently, it’s whether or not this hyper-paced, multiple-offer real estate market is heading towards another housing bubble. To explore this further, we’d like to introduce Windermere’s new Chief Economist, Matthew Gardner, who doesn’t believe there’s a cause for concern, for now.

I’m often asked if we are on the verge of another “bubble” bursting due to an overheated housing market. My response is no, and here are the reasons why:

Fewer flippers: Foreclosures are the preferred property type for home flippers because they offer significantly higher margins. But with the continued drop in foreclosures, we’ve seen a marked slowdown in flipping. Nationally, the percentage of flipped homes has decreased from 6.7% in 2014 to 4% today, and this share is expected to keep declining, signifying a more normalized market.

Lending standards remain stringent: Banks actually learned a lesson from the collapse of the housing market and have made qualifying for a mortgage quite difficult. Even low down payment programs like FHA, that have less stringent FICO requirements, have significantly tightened their standards, thus lowering the risk of lending to borrowers who cannot handle their mortgage obligations.

Home prices are up, but not to pre-bubble levels: Data provided by the S&P/Case-Shiller Home Price Indices tells us that in the Seattle area, the bursting of the housing bubble led to a 33 percent drop in the index. The index has certainly recovered significantly, but is still 7% below the prior peak.

Interest rates will (eventually) rise: Some fear that rising rates will take some steam out of the market, but growth in employment, and the subsequent drop in the unemployment rate, will lead to wage growth and increasing incomes, which will take some of the sting out of any rate increase.

As you can see, the housing market and economic climate of today are very different from the conditions that led to the housing bubble in 2007. Nobody can predict what’s going to happen with 100% certainty, but given the current state of things, I don’t believe there is a risk of history repeating itself in the foreseeable future.


Matthew Gardner is the Chief Economist for Windermere Real Estate, specializing in residential market analysis, commercial/industrial market analysis, financial analysis, and land use and regional economics. He is the former Principal of Gardner Economics, and has over 25 years of professional experience both in the U.S. and U.K.