International Home-Buying Activity in 2014 (Part 1 of 2)

It’s time for the annual National Association of Realtors’ (NAR) survey measuring the level of sales of U.S. residential real estate to foreigners. There were 3,547 respondents to the 2014 survey, almost 200 more than last year. The survey was conducted from April 14 to May 14, 2014.

Information was gathered from Realtors on U.S. residential real estate purchased by international clients during the 12 months ending March 2014. The term “international client” refers to two types of purchasers.

  • Type A are foreign clients with permanent residences outside the United States. These clients typically purchase property for investment, vacations or visits to this country for less than six months.
  • Type B are clients who are recent immigrants (in the United States less than two years) or temporary visa holders who reside here for more than six months for professional, educational or other reasons.

How did the market do?

This year’s international clients bought an estimated $92.2 billion in residential real estate. That’s approximately 7 percent of total U.S. existing home sales of $1.2 trillion (see table below). Of that, $46.7 billion is attributed to Type A clients and $45.5 billion to Type B.

international_homebuying1

International sales were up $24 billion from the previous survey. A number of favorable factors influenced foreign demand for U.S. residential properties: stronger global activity in the second half of 2013, appreciation of the Chinese yuan and the British pound, the relative affordability of U.S. residential property, and international investors’ desire for higher returns and greater security. Chinese residents are also influenced by a flight to quality.

Why U.S. homes?

Approximately 56 percent of the respondents reported profitability and security are the main factors influencing the decision to purchase in the United States. Well defined property rights, strong institutions governed by rule of law, a world-leading economy, and a recovering housing market were also factors. Foreign purchasers seek U.S. property related to employment; to house children going to college; for investment and portfolio diversification; and for vacations. Recent immigrants view home ownership as an important accomplishment in their efforts to become established in this country.

What are the countries of origin?

Realtors reported purchasers from 61 countries. Five countries have historically accounted for the majority of the reported purchases: Canada, China (Peoples Republic of China, Hong Kong, Taiwan), Mexico, India and the United Kingdom. In the latest survey, these countries accounted for some 54 percent of the international transactions. At 19 percent, Canada still has the largest share of international purchases, but China has the fastest growing source of international clients, increasing from 5 percent of international sales in 2007 to 16 percent in 2014. Mexico increased from 8 percent in 2013 to 9 percent in 2014 but still was less than the 13 percent registered in 2007 (see figure below).

international_homebuying2

What are they buying?

Approximately 65 percent of international transactions reported are single-family home sales. In addition, about 39 percent of the homes are intended to be used as primary residences for longer than six months. About 42 percent of transactions were intended for primary residences for: international students enrolled in U.S. colleges and universities, recent immigrants, and professional and managerial employees of businesses and institutions who are in the United States on a temporary but extended visit. Nonresident foreigners who are limited to six-month stays generally expect to use the property for vacation or rental purposes and as an investment.

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How Have Prices Changed Over the Last 30 Years?

Wonder what has chewed up a lot of your personal income over the past 30 years? I’ve enjoyed working my way through several hundred pages of the Consumer Price Index (CPI) Detailed Report published each month by the Bureau of Labor Statistics. At just 117 pages, it’s a short read. A page-turner from beginning to end.

My favorite part is Table 25, which shows the historical price trends for a wide variety of products and services that Americans buy. Unfortunately, the table can be confusing to the average guy (me). I know you can’t believe that a government document can be hard to decode, but it’s true. You have to look at it for a little while to be sure you know what you’re really looking at.

For example, the chart tells you that the price changes are measured from 1982-84, unless otherwise noted. However, about half of the entries are “otherwise noted” and measure price changes from different time periods. Why this happens, I don’t know.

So, given that uncertainty, I wanted to see what kinds of goods and services I buy have gone up the most and the least since the early ’80s. That’s what Table 25 can do for you.

So what has gone up the most since the early ’80s? That would be tobacco and smoking products, which have gone up 798 percent.

Education is the runner-up, one of the fastest-growing categories of expenses over the past 30 years. No wonder students have incurred substantial debt during their years of scholarship.

  • College tuition and fees are up 651 percent.
  • Elementary and high school tuition and fees are up 612 percent.
  • Educational books and supplies are up 508 percent.
  • Housing at school, excluding board, is up 390 percent.

Health care has also been one of the biggest consumers of American income.

  • Hospital and related services are up 633 percent.
  • Outpatient hospital services are up 527 percent.
  • Prescription drugs are up 354 percent.
  • Medical care is up 335 percent.
  • Physicians’ services are up 260 percent.

Just living in a house or apartment has gotten more expensive as well.

  • Water and sewer maintenance is up 363 percent.
  • Garbage and trash collection is up 325 percent.
  • Cable and satellite TV and radio service are up 318 percent.
  • Fuel oil is up 277 percent.

If you like to travel, that has gone up too. But not nearly as much as education and health care.

  • Gasoline is up 217 percent.
  • Motor vehicle insurance is up 335 percent.
  • Airline fares are up 242 percent.
  • Hotel and motel rates are up 226 percent.

Clothes and furniture haven’t gone up much at all.

  • Bedroom furniture is up 34 percent.
  • Women’s shoes are up 29 percent.
  • Men’s apparel is up 27 percent.
  • Women’s apparel is up 20 percent.
  • Boy’s apparel is up 7 percent.
  • Girl’s apparel is unchanged.

So what has gone down a lot in price compared with the early ’80s? That could be categorized as toys and gadgets and electronics. How could that be? Because Americans no longer make any of these things. In the ’80s, we decided to outsource electronics to Japan. In the ’90s, we sent other manufacturing to Mexico. In the 21st century, we have outsourced almost everything to Chinese workers. Hence the prices fall.

  • Sports equipment is down 12 percent.
  • Clocks, lamps and decorator items are down 50 percent.
  • Toys are down 52 percent.
  • Audio equipment is down 61 percent.
  • Televisions are down 96 percent.

If you think these numbers are somewhat hard to believe, don’t worry. The way the government counts prices in the CPI, calculations have changed many times in the past 30 years. Most of these changes in calculation methods have resulted in a lower reported CPI.

Even so, the numbers still give you a general idea of what has consumed your income over the past 30 years and which items are more expensive in 2014 than they were in the early ’80s.

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Inflation Rate Low? It Depends on What You Buy

Want to pick a fight with a senior citizen? Just try suggesting to them that inflation is really low in this country. It’s amazing how even the most lethargic senior will come alive to discuss this topic.

We have all heard from the Federal Reserve that inflation expectations are “well anchored.” We’ve also heard how inflation has been running well below the Fed target of 2 percent for a long time now. In May, the Consumer Price Index (CPI) was 2.1 percent higher than a year ago. Sounds pretty low.

But suppose you retired at the end of 2008, about 5.5 years ago. Since you retired, you have been earning virtually nothing on savings accounts, CDs and annuities. But costs have been escalating substantially. Some more than others. Some MUCH more than others. Some things have gone down during the same time period.

From December 2008 until March 2014, the overall CPI has increased by 13.2 percent. If you are on a fixed income with a pension and/or Social Security, this means that your income buys only 87 percent of the stuff you bought when you retired.

Let’s take a look at some specific items to see how prices have changed since December 2008.

First let’s look at the stuff we eat.

  • Food we eat at home is up 9.5 percent.
  • Uncooked ground beef is up 30.6 percent.
  • Bacon and sausage are up 32.3 percent.
  • Eggs are up 12.5 percent.
  • Hot dogs are up 10.2 percent.
  • Ice cream is up 5.9 percent.
  • Carbonated drinks are up 4.6 percent.
  • Coffee is up 7.1 percent.

So the frugal retiree will need to stay away from steak, hamburger and bacon and go a little heavier on hot dogs, ice cream and soda pop.

Going to a restaurant has gotten more expensive too: up 12.3 percent.

Second, how about the cost of living at home?

  • Homeowners/tenants insurance is up 18.1 percent.
  • Electricity is up 9.7 percent.
  • Water and sewer service is up 35.4 percent.
  • Garbage and trash collection is up 14.6 percent.
  • Appliances are DOWN 9.2 percent.
  • Clocks and lamps are DOWN 27.5 percent.
  • Dishes and flatware are DOWN 25 percent.

Again, the frugal retiree is struggling to keep up with the increasing costs of electricity, sewer and water service, and insurance. But they can offset these financial challenges by buying a lot of clocks, lamps and dishes.

Third, how about traveling to see the grandchildren?

  • Gasoline has gone up 117.3 percent.
  • Tires have gone up 7.5 percent.
  • Car insurance has gone up 24.1 percent.
  • Motor vehicle registration/license fees are up 18.1 percent.
  • Airline tickets are up 31.7 percent.
  • Intercity public transportation is down 2.1 percent.

So forget about flying to see anyone. Driving is pretty expensive too. But the good news is that taking the bus is cheap. So retirees can redefine travel as seeing many new places in the local community on the city bus.

Fourth, how about the clothes we wear?

  • Men’s apparel is up 10.8 percent.
  • Men’s suits are up just 3 percent.
  • Women’s apparel is up 12.3 percent.
  • Shoes are up 8.8 percent.

Prices of clothes and shoes have gone up, but it’s still not an excuse to continue wearing that Members Only jacket that was the rage in the ’90s.

Fifth, how much have health care costs increased since December 2008?

  • Prescription drugs are up 19.6 percent.
  • Physicians’ services are up 14 percent.
  • In-patient hospital costs are up 41.6 percent.
  • Nursing homes and adult day care are up 19.5 percent.
  • Health insurance premiums are up 9.6 percent.

Unfortunately, there is no good news here. Health care costs continue to eat up a larger and larger portion of the budget of American retirees.

Sixth, what about the fun things we like to do?

  • Good news: televisions are down 67.2 percent.
  • Bad news: cable TV and radio services are up 16.3 percent.
  • Good news: the cost of pets and pet accessories are down 3.2 percent.
  • Bad news: the cost of pet food is up 8.5 percent.
  • Good news: sporting goods are down 2.5 percent.
  • Good news: cameras are down 28.3 percent.
  • Good news: toys are down 25.1 percent.
  • Bad news: admissions to sporting events are up 10.7 percent.
  • Bad news: newspapers and magazines are up 26.1 percent.
  • Bad news: postage is up 27.4 percent.
  • Good news: telephone services are unchanged.
  • Good news: personal computers are down 39.2 percent.
  • Bad news (for smokers): cigarettes are up 49.7 percent.

So what’s the takeaway from this analysis on the underlying price indices that make up the CPI? It depends on your lifestyle profile. Here are three that I’ve come up with based on price trends in America. I’m sure there are more.

RETIREE PROFILE ONE: “Living on the Edge”

If you are retired and like to smoke, eat bacon, read magazines, watch cable TV, take some medicine, visit a hospital occasionally, fly on airplanes and drive a car, your cost of living has skyrocketed in the five and a half years since you retired.

RETIREE PROFILE TWO: “The Mr. Rogers Style”

If you are retired and own a home, travel for fun and to see the grandkids, eat steak and hamburgers, watch cable TV, attend some sporting events, take some medicine and occasionally visit a hospital, your cost of living has also increased dramatically in the past five and a half years.

RETIREE PROFILE THREE: “The Frugal American”

The low-cost strategy to achieve the American dream is to never get sick and never travel by car or airplane. Always ride the bus, but just within your city limits. Focus your diet on ice cream, hot dogs and carbonated drinks. For a splurge, have a cup of coffee. Buy a new television, camera and computer every year, because the prices fall every year. Buy lots of clocks and dishes too. Stay away from the post office and magazines. Tell the kids to bring the grandkids to visit you. Let them pay the airfare and the gasoline. And whatever you do, DON’T SMOKE.

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Good News for Housing Market

Mortgage money is the lifeblood of the single-family housing market. Sure, there have been a lot of cash buyers in the market in recent years. This is an aberration, not the norm. Most Americans who want to buy a house need a sizable mortgage to make the purchase.

The availability of mortgage money to potential homebuyers swings like a pendulum. In 2006, the pendulum swung too far. It was too easy to get a loan. Buyers with poor credit and undocumented stated income could get a 100 percent loan. I was calling this phenomenon “a grand social experiment.” Unfortunately the experiment was a spectacular failure.

In reaction to the failure of the experiment, the pendulum swung too far the other direction. Dodd-Frank regulation was created to protect us from ever having a bad mortgage experience again. Unfortunately it took government regulators years to write the hundreds of rules that they deemed necessary. Now that a lot of the rules have been written, mortgages are still hard to get for many Americans. Of course, if you have a great job with substantial income and a sizable cash down payment you can still get a mortgage.

But what if you have some debt on a car or a student loan? What if you only have 3 percent for a down payment? That’s been a tougher story.

Well, some good news in the mortgage market means it is likely to be easier for a larger portion of Americans to buy a house in coming months.

The first piece of good news came from Mel Watt in the Wall Street Journal last month. Mr. Watt is the newly installed conservator overseeing Fannie Mae and Freddie Mac (FRANNIE). On May 13, he announced he is going to encourage FRANNIE to make more credit available to homeowners. He is going to encourage them to accept mortgages with smaller down payments. He is also going to encourage FRANNIE to provide banks with more clarity about what triggers mortgage “put-backs.” A put-back happens when a bank creates a mortgage loan, sells it to FRANNIE, and then the loan goes bad. Under some circumstances, FRANNIE can make the bank take the loan back. This has caused banks to be very risk-averse in making new mortgage loans.

The second piece of good news has to do with Connecticut Avenue securities. When Fannie Mae buys mortgages every day, did you ever wonder where they get the money? They sell bonds to investors and use the money to purchase mortgages. If bond investors are skittish about the risk of mortgage loans, they may not want to buy Fannie Mae bonds. So Fannie has to be very conservative in its decisions.

In a recent article, the Wall street Journal reported that Fannie Mae was able to sell risk-sharing certificates that enlist investors to pay for potential defaults on home loans guaranteed by Fannie Mae. They are called Connecticut Avenue securities because Fannie Mae has an office on that street.

Here is the cool thing about this second piece of good news. The riskiest of these securities are linked to home loans with as little as 3 percent down payments. And how did the sale of these risky securities go? It was oversubscribed by 19 times. That means that these investors would have bought a lot more of this paper. This tells us is that the bond investor appetite for riskier home mortgages with small down payments has grown substantially.

Here’s the good news. First, the head of FRANNIE is saying he wants to make home loans available to buyers with smaller down payments. Second, bond investors are saying they are keenly interested in buying parts of mortgages that have small down payments.

Expect to see more Americans buying homes with smaller down payments coming soon to a lender near you.

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Clear Sailing Rest of the Year

The Philadelphia Federal Reserve publishes leading indexes for each of the 50 states and the nation as a whole. Leading indexes are used to discern the future trajectory of the economy. The chart shows the index over the past 30 years.

As you can see, the index works pretty well. The shaded light blue vertical bars show periods when America was in a recession. Each of the previous three recessions were preceded by a substantial drop in the leading index.

The current index reading indicates that economic growth should continue to expand for the next six to nine months at least. Election year campaign rhetoric is about to flood the fruited plains of our country. There will be lots of talk about bad news. This is how politicians get elected. But underneath the rhetoric, the U.S. economy continues its path of slow expansion.

us index 2014

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Another Reason Mortgage Rates Will Stay Low in 2014

All the talk last year about how mortgage rates were going up because the Federal Reserve was going to stop buying Treasury bonds and mortgages was just that, talk. Since the Fed actually started to “taper” their bond purchases, mortgage rates have declined along with the rate on the ten-year Treasury.

There are two possible reasons for this decline in 2014:

  • Bond investors are anticipating very slow economic growth in the United States.
  • Bond investors are fleeing from troubled places like Russia, India, China, Brazil, Argentina and Venezuela.

After reviewing lots of charts of the various sectors of the U.S. economy, my conclusion is that the second reason is the most likely.

For years, Wall Street tried to convince us that “BRIC countries” were the only place to invest. Investor money flowed into Brazil, Russia, India and China. They were the darlings of Wall Street. Well, the bloom is off the rose for these countries for a variety of reasons.

The continuous failure of socialism is currently on display in Argentina and Venezuela.

Another theme promoted by Wall Street in the past six months is that Europe is “on the mend.” The thesis was that these countries would buy stuff from us and increase employment in America. I’m not sure where the thread of evidence was to support this notion, but I have heard it a lot this year.

All the while, “analysts” on business news shows were promoting this notion. Mario Draghi was talking a different story. He’s the head of the European Central Bank. He has been talking for months about how inflation is dangerously low in Europe and that if he had to he would deploy some heavy weapons.

Yesterday, he unloaded the financial equivalent of the “Little Boy” atomic bomb on the global marketplace. This bomb is a new policy of paying negative interest rates on excess bank reserves parked at the European Central Bank. In effect, this will punish banks for not having money deployed in loans or other investments.

In the United States, the Fed pays interest on excess reserves. There is a small, but positive, return for parking the money at the Fed.

Don’t let anybody kid you, the United States is still the beacon of economic growth in the current global environment. A lot of this growth has been artificially created by Fed monetary policy, and it remains to be seen how well our economy will perform when the Fed stimulus is removed over the next 18 months.

But for the time being in the global economy, America is still the prettiest pig at the trough. Money continues to flow into the American bond and commercial real estate markets. Prices are getting higher for both asset classes. Oh, I forgot to mention that stocks are at record highs as well.

Money will continue to pour into the United States until there is another alternative. The U.S. dollar is likely to continue strong, as China and Japan and now Europe are trying to devalue their currency to compete with America in the global marketplace.

Keep up with the latest Texas real estate news. The Center has several RSS feeds designed to help you make better real estate decisions.

Big Data, Big Ideas, Big Hire

“Big data” is a term that increasingly appears in the media. It is essentially massive amounts of unstructured data . . . data that in and of itself seems unrelated and without discernible patterns or relationships. But looks can be deceiving.

Using sophisticated database technical architecture and skilled software programmers, data scientists at Google are able to forecast where the next flu outbreak will occur days to weeks before the Centers for Disease Control can do so.

How? Google analyzes hundreds of thousands, if not millions, of Internet searches. When they observe a proliferation of searches for flu symptoms concentrated in a community or region, they know influenza may have established a foothold. In reality, this is sophisticated “content analysis.”

In World War II, the allied forces used content analysis to predict Hitler’s military was running low on fuel. Their analysis was based on growing reports in German newspapers regarding fuel shortages. That knowledge gave the allies a strategic advantage regarding an enemy weakness.

The same principle of filtering big data for trends, observations and relationships applies in today’s real estate market. To bring that capability to the Real Estate Center at Texas A&M University, we have hired Gerald Klassen as our first-ever research data scientist. His first day on the job is June 2.

Gerald will dive deep into Texas housing data and conduct extensive analysis down to the neighborhood level. Combined with existing data, he will enable our researchers to develop sharper insight into what is happening and is likely to happen in the marketplace.

We are excited about the research possibilities this new endeavor offers. These include analysis of housing market conditions, impact studies, cause-and-effect studies, incidence studies and time series.

As we grow our technical capabilities, the possibilities to mine current and new incoming data are almost limitless. With the addition of Gerald Klassen, we now have the visionary necessary to bring the Center into the world of big data.

 Keep up with the latest Texas real estate news. The Center has several RSS feeds designed to help you make better real estate decisions.

Where do Texans Work?

According to the Texas Workforce Commission, there were 11.4 million working in Texas in March 2014. You might be surprised to find that the largest employer in our state is classified as “government.” The table provides the breakdown.

Texas employemnt

I field a lot of questions about what types of jobs are in each of the above categories, so I have included a brief description of each sector.

Government includes federal workers such as those in the Border Patrol and the IRS, state jobs like the Department of Motor Vehicles and local jobs like public school teachers, police and firefighters. Note that soldiers on Texas military bases are not included. Government employment covers only civilian employees and excludes uniformed members of the armed services.

Trade encompasses both wholesalers and retailers, including book, clothing, electronics, sporting goods and apparel stores. Convenience stores and gas stations are in this mix.

Education and Health Services includes employees at privately owned educational institutions and in the health-care industry. Doctors, nurses, hospitals and assisted-living are counted here.

Professional and Business Services includes those who work in office buildings, such as bookkeepers, architects, engineers, consultants, lawyers, geologists and other scientists.

Leisure and Hospitality consists of those who work largely in hotels, restaurants and amusement parks.

Manufacturing counts workers in all factories that make things in Texas, such as the Toyota plant in San Antonio. Chemical companies and refineries are also included in this category.

Financial Activities includes not just those in banking but also insurance and all real estate activities.

Construction counts workers who build public and privately owned buildings and infrastructure.

Transportation, Warehousing and Utilities includes the post office and air, rail and truck transportation. It also includes couriers, pipeline companies, warehousing and utilities.

Other Services include those in repair and maintenance, laundry and cleaning, churches and other nonprofit entities.

Mining and Logging includes not only those in mining and the timber industry but also those in jobs associated with oil and natural gas extraction. This group counts those who develop and operate oil and gas properties, such as oil field service providers.

Information includes Texans in broadcasting and the publishing of newspapers, books and magazines. It also includes employees of motion picture and sound recording and data processing services.

Keep up with the latest Texas real estate news. The Center has several RSS feeds designed to help you make better real estate decisions.

Lack of Supply Sending Home Prices Up

 

As I have well documented in previous blogs, many parts of Texas need to have more new homes under construction. The months of inventory of existing homes is at an unprecedented low. This means potential homebuyers have little to choose from. When they finally find a house that fits their needs, there may already be multiple buyers bidding above the listing price.

While this is a heady experience for sellers, the results are not good for the economic future of Texas. The limited inventory combines with increased buyer interest and causes home prices to increase rapidly. To put it simply, demand is exceeding supply in Texas’ largest markets.

Who provides the supply of new homes? That would be home builders and land developers who provide builders with lots to build upon. The supply of lots has been constrained by a lack of loan funds to land developers. So lots are in short supply, and the price of lots is going up fast.

When the prices of lots increase, home builders have to respond by either increasing the price of the house or building a larger, more expensive house on the lot. As you can see from the chart, the average value of a new Texas single-family house increased from $167,900 in 2009 to $197,500 in 2013. It’s getting worse. Since October 2013, the average value of a permit has been more than $200,000.

may 2014 building permits

The Office of the Comptroller of the Currency and the new Basel III bank guidelines have reduced bank appetite for land development loans. Other sources of capital are needed to fund new subdivisions. New sources of debt financing for land development will come along. It’s just a matter of time. Until it does, lot supplies will be constrained, and prices of lots and houses will continue to increase.

Every month that goes by means that it is a little harder for an average American to afford a home in Texas.

Keep up with the latest Texas real estate news. The Center has several RSS feeds designed to help you make better real estate decisions.

 

Looking for Deals With a Lot More ‘Hair’ on Them

Aggressive real estate investors have been buying troubled real estate properties from banks in the aftermath of the Great Recession of 2008. How much of this property has been purchased? How much of this property is still on the books and will eventually be sold?

All American companies generally like to see their assets increase in value. However, there is one asset that banks don’t like to see increase, and it’s known officially as Other Real Estate Owned (OREO). In general, OREO is real estate that a bank has acquired through the foreclosure process.

The following list shows how OREO increased substantially during the recession and has begun to decrease in recent years. The numbers are for all banks across America in the FDIC system and come from the FDIC Quarterly Banking Profile.

OREO blog

OREO ran between $4 billion and $6 billion in the first six years of the new century. As the real estate market downturn began in earnest, OREO doubled in 2007 and then doubled again in 2008. The peak of $52.6 billion was reached in 2010.

Since then, that number has been declining each year and now stands at $30.2 billion. The trend is encouraging and positive. It also shows that there is still a lot of property that will ultimately be sold to private investors in coming years. Most of these troubled properties are located outside Texas.

An opportunistic deal is like a businessman who hasn’t shaved in a few weeks, is overdue for a haircut, and has some gravy stains on his shirt.

“Opportunistic properties” are also known as “broken deals” or deals “with a lot of hair on them.” The expected tenants didn’t come to fruition before the loan payments came due. The property may have been neglected for several years during the foreclosure process. So whoever buys it will have to spend money to restore the property to prime condition and then also beat the bushes to find tenants to move in and pay rent.

For those investors looking to fix “broken” properties, there are still lots of deals in the pipeline.

Keep up with the latest Texas real estate news. The Center has several RSS feeds designed to help you make better real estate decisions.