ONE SOUTH REALTY 2018 AND BEYOND
MARKET & OSR 2018 METRICS (THRU 10/30/2018)
OSR VS CVRMLS SALES
2018 isn’t over…
(THRU 10 30 18)
CVR MLS (in $1,000’s)
$70,000,000
CVRMLS
$180,000,000
OSR
$52,500,000
$135,000,000
$35,000,000
$90,000,000
$17,500,000
$45,000,000
$0
$0
08
09
10
11
12
13
14
15
16
17
18
METRICS OUTSTANDING
‘ORIGINAL ASKING PRICE TO CLOSING PRICE’ CVRMLS
OSR
100% 99.5% 99% 98.5% 98% 97.5% 97% 96.5% 96% 95.5% 95%
2013
2014
2015
2016
2017
2018
METRICS OUTSTANDING ‘DAYS TO SELL’ CVRMLS
OSR
50 45 40 35 30 25 20 15 10 5 0
2013
2014
2015
2016
2017
2018
LET'S REVIEW HOME PRICES IN THE 20TH CENTURY
THE OLD DAYS
THE OLD DAYS AND A TREND LINE
1990 TO 2000
2000 TO 2007
2007 TO 2012
2012 TO TODAY
SO WHAT IS THAT??
Construction undersupply
CHEAP MONEY + NO NEW HOMES = HIGH PRICES
Interest rates below historic norms
IMPORTANT TAKEAWAYS •
Interest rates are still well below historical norms
•
We are substantially undersupplying the housing market
•
Rising construction costs will make it increasingly difficult to supply housing to the market at a reasonable price for the foreseeable future
UNDERWRITING
CREDIT RISK MATTERS
NOTICE ANYTHING?
HOMEOWNERSHIP RATE
Sub Prime!
WHO IS BACKING THE LOANS?
THE THREE LOAN BEARS
(LACK OF) UNDERWRITING IN 2003-2008 •
100% I/O’s (Interest Only)
•
Uncapped Adjustable Rate Mortgages (ARM’s)
•
125’s (125% loan amounts)
•
NINJA’s (No Income, No Job, No Assets)
•
Stated Income / No Doc
IMPORTANT TAKEAWAYS •
The availability of credit is still well below the heights of 2008
•
Subprime loans make up 1% of the market (2018) versus 30% of the market (2007)
•
Homeownership rates are consistent with the 1970’s and 1980’s
NEW CONSTRUCTION (OR LACK THEREOF)
WOW
DESPITE WHAT YOU MAY THINK… • Home
builders face challenges
• DRAMATICALLY • Natural
disasters (fire / flood)
• Government • Where
rising material costs / Shrinking labor pool
mandates
lot supply exists ≠ where lot demand is
WHERE ARE ALL OF THE ROOFERS? OH…
CONSTRUCTION MATERIALS
NEW HOMES, UH OH…
S&P SELECT BUILDER INDEX
HELP THE BUILDING COMMUNITY •
As the cash rich national builders gain a foothold, they will suck up the lot supply, the local builders will: •
need to find more lots, and in different places
•
need to control and develop their own land
•
look to come into urban areas with smaller niche projects
IMPORTANT TAKEAWAYS •
Fewer specs to buy by local builders — start early
•
Construction costs are at all time highs — builders prices are high
•
Bigger builders are here which means less customization
THE FUTURE
SO GIVEN WHAT WE KNOW … •Low
inventory
•Rising
rates
•Rising
costs
•Reasonable •Fewer
underwriting
new home sales
•Healthy
economy
…WHATS GONNA HAPPEN?
WILL PRICES KEEP ROLLING? Given rising rates and affordability issues, this seems unlikely
WILL PRICES REGRESS TO TREND? This seems more likely given rates and affordability issues
WILL PRICES FLATTEN? This could occur if the economy enters recession, which is a possibility
WILL PRICES DROP? If rates rise, a recession occurs AND credit tightens, then an adjustment could occur
RICK’S BET IS HERE Due to the undersupply of new homes and cost increases, inventory will remain low
WHAT TO TELL YOUR CLIENTS •
Inventory is 60 to 70% less than in 2008 •
Extremely difficult to add more housing inexpensively and where people want to buy it — and this is unlikely to change
•
Underwriting is consistent with 1990 - 2000, not 2005 - 2008
•
Mortgage rates are NOT a problem, despite their rise
•
Economy is far healthier — unemployment is at the lowest rate in 50 years
BUT WHAT ELSE YOU SHOULD TELL THEM … • We
cannot predict or control
• Natural
disasters
• Construction • Interest • Trade
costs
rates / underwriting / abolition of GSEs
wars / tariffs
• Politics
WHAT ABOUT
RVA
RVA METRO POPULATION C of R has positive population growth for the first time since the 1950’s, which is putting pressure on the existing housing supply
NEW CONSTRUCTION ISN’T THE CURE % of new
3.1%
City
14.3%
Chesterfield
13.8%
Hanover
8%
Henrico
0%
4%
8%
12%
16%
9,300 active listings
DOWN 62%
3,500 active listings
1,847 active listings
DOWN 76%
435 active listings
SEGMENTING THE MARKET $250 TO $300K 2013
2018
SEGMENTING THE MARKET $600-700K 2013
2018
WHAT TO TELL YOUR CLIENTS •
Market segments differ by GEOGRAPHY •
•
Easier to add inventory in (i.e. –– new construction) suburban / rural areas Demographic shifts back into the denser / closer in areas
•Market
segments differ by PRICE
•Demand
decreases at higher
prices •Easier
to add inventory (i.e. –– new construction) at higher price points
•Interest
rates more impactful with greater debt
PRICE APPRECIATION MATRIX
Land costs are cheaper, but people don’t like the commute! Due to costs, building affordably is difficult
Far Out No problem! Well, as long is it above $700!
Low Price High Price Nearly impossible to add inventory — very safe bets
We can find some spot lots to build on, just not a ton of ‘em
Close In
IMPORTANT TAKEAWAYS •
Close in / low price will remain imbalanced with low inventory and high buyer demand
•
Mid-tier pricing in inner-ring suburbia will move towards a balanced market
•
Upper price points in communities further from the core will become oversupplied and see prices flatten or fall slightly
R--------
R-------N
R-----I-N
RE-E--I-N
RE-ESSI-N
RE-ESSI-N
RECESSION
Recession –– a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.
THE ‘R’ WORD •
Recessions are inevitable –– markets boom and markets bust.
•
Some pundits are predicting a recession beginning is as early as 2020. •
•
B of A shows 14/17 indicators approaching ‘Late in the Cycle’ levels
Recessions vary widely in intensity
RECESSION SEVERITY GDP Loss
Unemployment
30%
22.5%
15%
7.5%
0%
Great Depression
73 to 75
80 to 83
87 to 91
01 to 02
07 to 09
4 of 5 recessions did not see home prices fall
But the last recession saw prices fall by 30%
WHAT IS DIFFERENT NOW THAN IN 2008? • Inventory
is down 60 to 75% depending on sub-market
• Underwriting • New
construction is still waaaaaay down
• Geographic • City
has returned to pre-bubble standards
sales are more evenly distributed
vs suburbs
• Millennials
entering the buyer pool
CHOOSE THE FORM OF THE DESTRUCTOR •
1929 –– Stock Market > Banking > then everything else imaginable
•
1979 — Oil > then everything else
•
1987 — Savings and Loan> Commercial RE > Dow Jones > Residential Real Estate
•
2008 — Mortgage > Residential Real Estate > Dow Jones/Nasdaq > Commercial RE
THE ‘R’ QUESTIONS • Which
sector falls first?
• How
harsh will it be?
• How
long?
• What
bears the brunt?
IMPORTANT TAKEAWAYS •A
recession does not mean home prices fall — supply and demand causes that
•It
is not 2008
•Housing
is a long term strategy
•Recessions •Fortunes •Recessions
are typically a buying opportunity are made in down markets tend to cause rents to rise even faster!
WHAT TO EXPECT IN THE COMING SEASONS
MORTGAGE Ch-Ch-Ch Changes
UNDERSTANDING MORTGAGE RATES •
Privilege –– Historical cost of borrowing money
•
Inflation Risk –– Risk of inflation degrading the value of the money •
•
Tied to economy, especially wages
Repayment Risk — Risk of loss of money •
Tied to underwriting
RATE = PRIVILEGE + RISK + INFLATION
THE USE OF ARMS 30 FRM
8.67
1 Yr Arm
8.52 7.07 6
5.72 4.23
3.81 2.49
1993
2000
2005
2015
THE 5/5 30 Year Fixed
5/5
P and I
$2,007
$1,867
HOI
$100
$100
Taxes
$312
$312
MI
$117
$0
Total
$2,535
$2,279
A NOTE ON HYBRIDS AND ARMS •
Average time in a home 7 years •
Why pay for privilege of 30 years if you aren’t going to use it?
•
Number of moves post 30 years old is between 5 and 7
•
NO ONE LIVES IN A HOME 30 YEARS ANYMORE
IMPORTANT TAKEAWAYS •
ARMs + Hybrids are not subprime — but poorly underwritten loans are, regardless of term
•
5/1 + 3/1 + 1/1 + 7/23 are tools — learn to apply them and you will pay the least interest over time
BEHAVIOR Ch-Ch-Ch Changes
30 to 40 year olds think this is normal
WHAT IS NORMAL, ANYWAY?
50 to 60 year olds think this is normal
What will the ’20 Somethings’ consider normal?
IMPORTANT TAKEAWAYS • Expect
price acceleration to slow
• Some
areas / prices will slow more quickly
• DOM
increases
• Fewer
bidding wars (HELL YA!)
• People
misinterpreting what the new market actually means
REALTOR Ch-Ch-Ch Changes
LOW
NAR Membership is back to 2006 levels
DON’T GET WRAPPED UP IN RECESSION TALK • Focus • Fear
on your business and watch out for: / increasing desperation amongst agents and the public
• Commission
compression / undercutting
• Uneducated
/ poorly trained agents
• Discount • More
services means discount agents
expired listings
CHANGES ARE ON THE HORIZON •
Thinkers and adapters will emerge victorious
•
Embrace uncertainty –– great change provides great opportunity
•
Realtor Darwinism –– those who evolve will thrive
•
Challenge yourself to learn and stay relevant
•
Make your advice your currency
ADVICE MATTERS AGAIN!!! (FINALLY)