Up or Down? Which Real Estate Report to Believe?

Two seemingly contradictory reports were issued last week on the state of the nation’s real estate market. Realtor.com trumpeted “What Recession? Luxury Housing Market is Back …” while ATTOM headlined “Home Affordability Increasing …”

Reading about luxury’s return could be viewed as contradictory to increases in home affordability. One says wealthy checkbooks are open while the other says many people will be writing a smaller check. What gives?

Realtor.com

Realtor.com is a website and so part of their methodology is to measure the vagaries of what people search for and where they click. So really, research by navel contemplation. Since they don’t marry those searches and clicks with actual buying, there’s a disconnect between putzing around on a website and purchasing. In order for me to get too excited about what Realtor.com is purporting, I’d want to tie clicks to buying and the time that journey takes. I’d also want to understand the lookie-loo quotient – you know, when you look at bazillion-dollar homes to get design ideas for your tin shack.

But anyway, Realtor.com has measured those clicks for years and is able to track increases and decreases which is what they report as a sign of a market segment’s health. For example, the “Luxury’s Back” headline almost exclusively referred to increases in search activity in luxury suburban markets outside former COVID-19 hotspots like New York City and Los Angeles – The Hamptons; Greenwich, Connecticut; three New Jersey counties outside New York City; and Palm Springs, outside Los Angeles.

Unpacking this “revelation” it’s easy to see that people living in cramped New York apartments through a lockdown are suddenly finding the idea of space appealing at a time when more will be able to work from home.

To be fair, Realtor.com does say that “COVID-19 hit these regions hard and early compared to the rest of the country, prompting potential buyers to reassess their needs and priorities,” Since Texas learned nothing from New York’s so-far-successful handling of COVID-19, will Dallas’ outer suburbs and exurbs reap rewards after we’ve put out our new viral fire?

As for New York City itself, Realtor.com reports prices for luxury properties “remained steady” noting that “steady” was an improvement over multi-year declines in luxury properties resulting from overbuilding luxury high-rises.

Just as easy to understand is the finding that searches in Honolulu; Key West, Forida; Pebble Beach, California; and some Colorado ski towns have slowed. They’re towns that are tedious multi-hour drives from anywhere and Honolulu is a minimum six-hour flight. There’s a difference between remote and BFE.

Honolulu also likely refers to Honolulu County which is the entire island of Oahu. It’s also slowed because last year, Airbnb-ers were largely kicked out of the state. This means that folks who can’t make the mortgage the old-fashioned way (pay it or long-term rentals) aren’t buying – nothing to do with COVID-19. Just last week, a unit in my Honolulu building closed in under two weeks (cash buyer) for over asking price ($965,000 for 540 square feet).

I also like language. At one point Realtor.com terms a 9.5 percent decline in April luxury property clicks a “plummet” while a May return to sorta normal having “shot up” by 7.3 percent. But later they say a 15.6 percent drop in overall listings is simply a “drop” and then say a 25 percent increase in selling time as taking “a bit longer” – from 71 days to 89 days.

As for Dallas, Realtor.com says $1 million-plus property listings were down 24 percent in May and off 2 percent in asking price versus a year ago, but that searches were only down 2 percent – meaning listings took a much larger hit than buyer interest. It also might be saying that the 2 percent decrease in prices might equate to a few hugely expensive listings not coming to market.

It’s also very important to understand that the $1 million-plus market in Dallas is less than 2 percent of the market, making it easy to skew.

ATTOM Data Solutions

Attom’s second quarter U.S. Affordability Report isn’t focused on the luxury market (“affordability” in the title being a clue). They measure 406 counties with populations over 100,000 that had more than 50 housing units change hands.

When they say “affordable,” home prices (and their resulting mortgages) are only one component that also includes wage growth, property taxes, and insurance. Swirled together, they report on how affordable a county is calculating a median-priced home, a 3 percent down payment, and a 28 percent debt-to-income ratio for housing balanced against the wage required to afford that home versus average local wages. Consider it a ratio of what ya got versus what it costs.

In the second quarter, 200 of those 406 counties are more affordable, a betterment from the prior year when only 126 were deemed affordable. ATTOM cites increased wages and falling mortgage rates as the main drivers. But while more affordable, 74 percent of average wage earners would have to spend more than 28 percent of their wages on housing – putting them at greater financial risk. 

In Dallas County, a median-priced home ($278,875) would require 30.6 percent of an average $71,097 annual wage. In Denton County it’s 45.3 percent of average wages. While not ideal, the number one unaffordable spot was taken by Marin County, California, just north of San Francisco. There you’d need 109.4 percent of average annual wages to buy a home. Those with the lowest percentage of wages required?  Places you don’t want to live – you’ll need just 10.4 percent of your salary to buy a home in Decatur, Illinois (see what I mean?).

What’s interesting about this calculation is that it brings together the multiple financial pieces needed to understand how much people can pay. Lower interest rates and higher wages lower a monthly nut even when there’s some level of price appreciation. A small win-win for buyers and sellers.

This is especially true for Dallas where prices have increased rapidly since the end of the last Recession. ATTOM noted that in the past year, Dallas County home prices were up 11 percent. While lower interest rates and increased wages can’t make up for that, they make a dent – Dallas ranks fourth in prices outpacing wage increases year-over-year.

Nationwide

I’ve been reading stories from across the nation and have yet to find anywhere the real estate sky is falling. Each point to the large COVID-19 drop in for sale inventory keeping prices and time to sell relatively stable. For example, in Illinois, May closings were down 34 percent statewide but prices were down just 1.4 percent. Chicago itself had May closings drop 43.6 percent while prices increased 0.2 percent.

“Days on market” statewide versus in Chicago were also steady year-over-year at 53 and 39 days respectively.

UPDATE: June 29, National Association of Realtors reports that May saw a huge rebound in activity as states relaxed stay-at-home orders. Contracts rebounded 44.3 percent and new home sales rose 16.6 percent. NAR chief economist Lawrence Yun said, “The outlook has significantly improved, as new home sales are expected to be higher this year than last, and annual existing-home sales are now projected to be down by less than 10%…”

Unemployment Will Be The Truth Teller

The sky isn’t falling anywhere. Interest rates, investment gains, and wage increases are giving both ends of the market stabilizing confidence. We’re still behind in new home construction, and while April was down more, May was still down 12 percent year-over-year. This will tighten supply further and likely drive up prices. While there is contraction in home sales, it’s in large part driven by fewer listings, as market dynamics seem to be pointing to an unemployment picture that’s impacting renters more than buyers.

This month, Gallup appears to have backed up that assumption (chart above). Of workers earning less than $36,000 per year, 95 percent have either been laid off (37 percent) or suffered reduced pay (58 percent), yet only 30 percent of those laid off have been approved to receive unemployment benefits. Compare that to the highest bracket where just 8 percent have been laid off and 33 percent suffered reduced pay – and yet only one percent fewer received unemployment benefits even though 79 percentage points fewer had been laid off.

Going out on a limb here, I’m going to guess that as income increases, not only does homeownership increase, but skin tone lightens as well.

So yeah, the home buying and selling market remains little changed with some potential bright spots – but take it with a pinch of survivors’ guilt if you still have a job.