House it Going?

Growing demand for housing and less inventory has led to record home prices.

August 10, 2015

When it comes to homeownership, Americans are practical dreamers, says Trulia.  A recent survey reveals that 71% believe homeownership is part of their “American Dream,” although this is down from 77% in 2010.

Eighty-nine percent of today’s renters ages 18-34 intend to buy, as do 77% of those 35-54. And 40% of baby boomers 55+ have plans for homeownership.

Lora Bray

Lora Bray

Lifestyle is an important consideration: 81% of parents with children under age 18 dream about owning a home. “In fact, most parents—regardless of their marital status—plan to buy a home as their primary residence one day.”

Among current homeowners, 35% have bought their dream home, leaving a large portion of dreamers yet to do so.

Here’s what the dream looks like: 44% want a mid-sized home, between 1,401 to 2,600 square feet, although as consumers age the dream home size becomes smaller. Generation Xers and millennials prefer modern looks and amenities while boomers prefer ranch houses.

Favorite dream home features, the survey says, include decks, gourmet kitchens, and open floor plans. And the dream home is located in the country for 27%, the suburbs for 27%, and in a big city for 8%.

This week: a look at housing market trends and consumer perceptions. Who knocks at the dream house door? What’s key to enter?

‘The home should be the treasure chest of the living.’ --Le Corbusier, architect

First, a look at the housing market.

Home Prices Reach an All-Time High,” says the National Association of Realtors (NAR). Growing demand coupled with lesser inventory has led to record home prices above a peak median sales price of $230,400 in July 2006 to the median existing-home sales price of $236,400 in June.

This June 2015 statistic is 6.5% higher than the prior year.

Existing home sales, too, are up, marking the fastest clip in more than eight years.

“Buyers have come back in force, leading to the strongest past two months in sales since early 2007,” says NAR’s chief economist Lawrence Yun. “This wave of demand is being fueled by a year-plus of steady job growth and an improving economy that’s giving more households the financial wherewithal and incentive to buy.”

A continuing housing market recovery is dependent upon affordability, according to Selma Hepp, chief economist at Trulia, and right now, “Pending Sales Momentum Slows” perhaps due to rising home prices.

Because pending sales are homes with signed contracts likely to close in the near term, circumstances suggest sales of existing homes will “post solid year-over-year gains” throughout the summer.

July numbers revealed a pending sales dip of 1.8% “but a solid 8.2% annual increase” and an annualized gain of 10.4% last month. Further, “The index has increased on an annual basis for ten consecutive months now.”

Pending home sales declined for the first time in five months, according to Trulia, “indicating a slower end of the summer selling season than anticipated.”

Mortgage lending standards are loosening up a bit, according to an article at HousingWire, commenting on the July 2015 Senior Loan Officer Opinion Survey on Bank Lending Practices

The Fed survey says “’modest net fractions of banks indicated they had eased underwriting standards on residential mortgages” with the exception of subprime and government-insured loans.

Most banks will not provide mortgages to subprime borrowers, and “moderate fractions” of U.S. banks say lending standards do remain tighter than at mid-2005 midpoints of the range.

Banks further note increased mortgage demand: “43.5%... reported ‘moderately stronger’ demand for GSE-eligible mortgages in the last three months.”

‘Home is the nicest word there is.’ --Laura Ingalls Wilder

What is in mind for home-dreaming consumers?

Investors want to buy homes, according to ThinkAdvisor.  A Bankrate poll shows real estate is the number one investment choice for Americans. But “the easy money has been made,” cautions Greg McBride, chief financial analyst at “Now that prices are higher you’re not going to get the appreciation in price.”

Plus, homeowners already have significant amounts of real estate in portfolio holdings and need to “bulk up their equity allocation.”

Currently, 27% of investors opt for real estate, 17% like stocks, and 23% choose cash equivalents.

Meanwhile, “Student Loan Debt is Not Hurting America’s Housing Market,” says Fortune. Trends of younger consumers to delay home purchases may be related to circumstances other than large educational debt, like choices to marry and have children later in life.

A recent study followed a 1997 cohort to identify how student loan debt impacts home buying. Evidence indicated associations between debt and homeownership delay, but no correlation between increasing debt size and probability of home purchasing.

“Thus, it seems unlikely that student loan debt is causing a generation of young adults to flee from the housing market.” Neither is such debt “primarily responsible” for housing market problems.

Median student debt is around $15,000, equal to $150 monthly payments—not largely impactful on mortgage payments. But there is a discrepancy between wages of college grads and nondegree holders. “That $150 per month… is going to be made up by the fact that a college graduate earns more.”

Those already owning homes are in good shape, says the National Association of Realtors.  Home prices increase as mortgage debt falls, thus equity has almost doubled in the last four years. Such equity would allow move-up buyers to act on their dreams.

Indeed, “the overall value of all real estate holdings of every household combined in America reached $21.1 trillion in the first quarter of 2015, up from $16 trillion in 2011.”

Homeowners, however, may not have accurate assumptions on the value of their homes, according to Real Estate Economy Watch.  Economists at the University of California-Berkeley determined homeowners think large down payments are required, and that “widespread, large underestimates of… equity could be deterring them from applying for mortgages, selling their homes, and buying different homes.”

Data show the percent of mortgage holders through 2011 believing their homes were mortgaged beyond their value (underwater) “averaged about six percentage points more than those estimated by CoreLogic.” Confusion in consumer understanding of home values has been persistent over time.

CoreLogic estimated 53% of homeowners have “significant equity,” compared to 32% of homeowners who hold this belief (2010).

Further, rising home prices between 2012 and 2014 “significantly reduced” estimations of underwater homes by CoreLogic, a drop to 9% from 21%.

And, the difference between those estimated to have significant equity and homeowners believing they have it expands as prices increase; homeowners do not take into account equity gains since 2011.

“The appreciation gaps present a potential opportunity… to remove a barrier that may have hindered housing and mortgage market activity… Costs to close the gap can be low” when consumers have “easy, affordable access to better estimates of home values (and perhaps of total debts, too)… Better equity estimates may promote better choices of houses, mortgages, neighborhoods, jobs, spending and saving, and lifestyles.”

What keys do you hold that open doors to dream homes, and consequently grow your mortgage portfolio?

 LORA BRAY is an information research analyst for CUNA’s economics and statistics department. Follow her on Twitter via @Bray_Lora and visit the CUNA blogThe Research Roundup: Economic Perspectives.