This Week in Phoenix Real Estate (video) 1/11/2021

In this 12 minute video, Amber Kovarik and I discuss the latest in lending and real estate. We cover political implications and what that means for interest rates, inventory, headlines, and demographics. There was a lot of movement in the past 7 days.

One – Politics:

With the Georgia run-off results, we no longer have a split Congress, what does that mean for real estate?

Real estate responds to policy, not to the controlling party. However, given that Congress and the White House will all be on the same side of the aisle, it will be easier for President-elect Biden to push through his proposed policies. While this is the case, both the house and the Senate majorities have TINY majorities. In the house, in order to have the majority, a party needs to have at least 218 seats. Currently, House Democrats have 222 seats, the smallest majority in over 20 years. The Senate is 50/50 plus the Vice President’s deciding vote. Since all of Congress is nearly evenly split it is unlikely super progressive policy will pass. Experts hope that this will lead to centrist voting.

One thing that does bode well for housing is that it is very bi-partisan, both sides of the aisle support housing initiatives.

As part of his campaign promises, President-elect Biden has two proposed policies that directly impact real estate.

The first is getting rid of 1031 exchanges altogether. The 2017 Tax Cuts and Jobs Act eliminated all 1031 exchanges outside of real estate. Previously you could do a 1031 on anything from airplanes to artwork. Now the proposal is to cut the 100-year-old tax law completely. The additional tax revenue would then be slated for free pre-kindergarten and senior care. This impacts both commercial and residential real estate. This is very unpopular in commercial real estate. Experts are afraid that it will significantly decrease the number of transactions each year. NAR opposes this.

The second proposed policy is a $15,000 first time home buyer tax credit that buyers will be able to use as part of their down payment. Lawmakers and politicians are trying to help first-time homebuyers compete in quickly appreciating markets but they do not understand real estate enough to know what kind of impact that will have on the markets. Creating more demand in an already tight market will only drive prices up further and faster. NAR supports this.

Two – Headlines:

Headlines continue mentioning month over month sales declines at the end of 2020 while they exclude the 26% year over year sales increase in existing home sales through November. Inventory shortages are the primary culprit. Buyers cannot buy houses that are not for sale. (NAR)

Nationwide, available single-family homes dropped down to 419,000 as of Monday. That is 60% below normal. (Altos)

In Greater Phoenix, we are running 70% below normal for inventory. Right now, in Maricopa and Pinal Counties we have fewer than 5300 active listings. Inventory continues to drop while demand remains at 30% above normal. A year ago demand was 2.4% above normal and it was a strong market.

Three – Housing Demographics:

Logan Mohtashami of HousingWire explains economics as housing demographics and the recent years have set the stage for an incredibly strong housing market from 2020 through 2024 due to the roughly 32 million Millennials aged 27-33; prime home-buying age. Not only is the Millennial generation the largest, but it is also the most highly educated generation. Not all 32 million will be buyers but First American estimates that 15 million of them will buy homes in the next 10 years. These are what Mohtashami calls replacement buyers, keeping the demand high and inventory low for years to come.

He warns that the biggest problem facing this housing demographic is runaway prices and increasing mortgage interest rates.

Four – Interest Rates:

They are going up now and there is definitely a new sense of urgency.

Amber shared, “The stock markets were down in all three major indices this morning as the markets continue to digest the implications of a Democrat controlled government to the U.S. economy.  Goldman Sachs announced today that they have updated their forecasts as a result of the Georgia elections and they are predicting greater fiscal spending, faster GDP growth, more inflation, and higher interest rates. 

Mortgage backed securities prices have consistently trended down every day since January 4. (MBS prices trending downward causes mortgage rates to rise). The markets had expected that Republicans would win at least one race in the Georgia Senate runoff elections, and a divided government scenario would continue. In a divided government scenario, it would have been difficult for Democrats to do larger future stimulus packages and substantial increases in personal and corporate tax rates. The daily drop in MBS prices, and the daily increase in the yield on the 10-year U.S. Treasury bond are a reflection of the markets adjusting to the new perceived landscape for the next 24 months until the next mid-term elections would occur.

Many people are wondering if mortgage backed security prices will rebound after a week of consecutive daily drops (MBS price drops, means higher interest rates). It is very possible that lower MBS prices are the new normal for the market. 

Some people have asked if the Federal Reserve would increase their daily MBS purchase levels to try to offset the impact of the Georgia elections on the bond markets. The Fed has never previously communicated that they had a specific targeted mortgage rate in their stimulus strategy, so there appears to be a low probability that the Fed would be increasing the level of their stimulus efforts in the near term. The Fed is being very transparent to clearly signal the markets in advance on what their daily MBS purchase levels will be. 

There have been no Fed communications that indicate the Fed is considering increasing the daily levels. The Fed communications so far have continued on the theme that they will hold to their current levels until they have clear signs that the economy is beginning to recover at which point they will allow rates to rise.”

Published by Sarah Perkins

Sarah Perkins is an award winning account executive and has been in title sales since 2004. As the Director of Industry Research & Senior Account Executive, Sarah’s role is to bring real estate transactions to Navi Title. Sarah supports her clients by helping them navigate the ever-changing real estate space through thorough research and understanding of current trends impacting today’s home buyers and sellers.

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