An abnormally hot real estate market fed by low interest rates and the unexpected burst of buying during the COVID-inspired escape from the city may be finally cooling down in response to rising interest rates, inflation and a skittish Wall Street.
While real estate is taking a direct hit from rising interest rates, inflation is also reducing potential homebuyers’ buying power, especially in the low to mid-range properties. But there are a few upsides that could help us weather the storm.
The team at Alliant National has compiled information on the data points that will most impact the real estate market in Q4.
Inflation and Supply Chain
Two of the biggest challenges in 2022 are likely to persist through the end of the year and into 2023, inflation and supply chain disruptions. Additionally, the war in Ukraine has resulted in Russian energy supplies being cut off to Europe and economic pressures triggering inflation, the rise in interest rates, and potential recessionary trends are creating a confluence of uncertainty.
Concerning current economic trends, the September edition of the Federal Reserve’s Beige Book, indicated that economic activity was unchanged, since their July report, with five Districts reporting slight to modest growth in activity and five others reporting slight to modest softening. However, the report also noted that the outlook for future economic growth remained generally weak, with districts noting expectations for further softening of demand over the next six to 12 months.
Market Fundamentals Remain Steady
Despite deteriorating conditions for some home buyers, steady employment numbers should keep real estate moving through the end of 2022. Although the number of buyers competing for each property has decreased in the last few months, homes are still turning over relatively quickly and, in most regions, are sold at the asking price or more.
Continued tight inventory is expected to keep most markets competitive through the final quarter.
While there is no doubt that the real estate market is likely to continue to slow, especially if the Federal Reserve follows through on yet another rate hike, economists remain watchful of other indicators that could bode well for softening the impact.
According to Fannie Mae’s most recent release, GDP is projected to grow 1.3% in the third quarter of this year, followed by 0.7% growth in the fourth quarter.
However, most economists agree that consumers have been far more unpredictable in recent years and better than predicted GDP growth in Q4 could mitigate some of the other headwinds.
Home equity, another positive indicator for the housing market, has increased dramatically over the past decade. The value of homeowner equity in the United States increased from approximately $8.77 trillion in 2010 to approximately $21.1 trillion in 2020, according to TransUnion. CoreLogic reported recently that homeowners gained another $3.6 trillion from 2021 to 2022 as home values continued to escalate, providing some solid financial strength to help homeowners weather a potential downturn.
First-Time Homebuyer Numbers Dropping
During an October Research webinar in September, Selma Hepp, Executive, Research & Insights Interim Lead of the Office of the Chief Economist for CoreLogic noted that the real estate market is experiencing its biggest hit from first-time homebuyers, who are increasingly squeezed out of the market by the trifecta of higher prices, higher interest rates and inflation that is pricing them out of the market.
In spite of that reality, first-time homebuyers, though making up a smaller percentage of homebuyers in recent months, did bump up their participation in August.
Part of that continued interest could be that many buyers are still finding buying more appealing than renting in markets where rents have escalated faster than monthly mortgage payments in recent years. That reality combined with increasing wages in some sectors is helping offset the trifecta.
Strong Employment Outlook Encouraging
U.S. employment numbers have remained strong through the summer, with the economy adding 293,000 jobs In June, 526,000 in July, 315,000 in August, and 263,000 in September, in spite of recession concerns that predicted otherwise. There are 2.0 job openings for every unemployed person, so the demand for labor is strong and should remain so through Q4, though job openings appeared to be on the decline in October.
In mid-September, the Q4 ManpowerGroup Employment Outlook Survey (NYSE: MAN) indicated that the global labor market was likely to remain strong with steady hiring expected to continue through the remainder of 2022.
ManpowerGroup Chairman and CEO Jonas Prising reported the need for technology talent along with the growth of employment opportunities in finance, banking, and insurance are keeping the labor market strong, especially in the U.S. This along with the fact that the U.S. labor force participation grew to 62.4% in August bodes well for the real estate market as we finish out 2022.
While employment remains strong, the Conference Board Economic Forecast for the U.S. Economy, released on Sept. 14, forecasts 2023 GDP growth will slow to 0.3% year-over-year.
In a hot housing market, many buyers have turned to cash offers to get a leg up on the competition. Cash offers are often much more attractive to a seller, and it is not difficult to understand why. Cash can provide a pathway to a faster closing process. It frequently gives sellers more confidence. These offers even waive the requirement of having to conduct an appraisal.
Cash offers can also generate a bit of a confusion. For instance, how does eschewing a lender affect other parts of the closing process like a title search and insurance? Does it eliminate the need for insurance? If not, how and when should a cash buyer pursue title work? In this blog post, we will examine these questions.
Is Title Insurance Necessary for Cash Buyers?
Title insurance is critical for a buyer to have regardless of whether there is a mortgage. Without a title search and resultant policy, no one is looking into who owns the property and what its issue may be. When a buyer obtains a mortgage, a title search is routine. But the contract and the obligation exist only between a lender and the title company – the buyer has no direct protection. If a defect exists, the title company is not duty-bound to fix it; instead, the buyer/owner could be liable for a lien or another defect.
For example, consider a scenario where a home seller has a first mortgage for $100,000. A new buyer has obtained a loan for $125,000, and the property is worth $200,000 (in other words the buyer has invested $75,000 of their money). Meanwhile, there is a second valid but unknown mortgage of $50,000 against the property.
The lender uses this to assert their right to foreclosure and to take the property away. In such a scenario, the title company is required to defend the lender and protect their lien. The same can not be said for their relationship with the buyer. Instead, the buyer/owner must pay the unknown mortgage because they gave warranties of title to their lender.
Failing to do so could trigger a default. The lender, however, will not suffer losses. Under their title policy, there is enough equity to pay the newly discovered $50,000 mortgage and the lender’s debt. Without an insurance policy, the purchaser of the property could lose the title and, ultimately, their equity. They would be forced to pay the $50,000 to maintain ownership.
In each case, the seller is likely liable to the buyer for the $50,000, but when title insurance comes into play, the insurer will not only pay the loss but sue or pursue the seller for recoupment. But when there is no title insurance to speak off, all the costs fall on the buyer if they decide to sue the seller – who may not be able to pay even if the suit is successful. The same situation can develop in the case of a scam. If the seller is a bad actor and does not own the property, a buyer can wind up with nothing if no record search is conducted.
What should be clear from that example is that, for just a nominal cost, title insurance can offer an easy remedy if there is something wrong. More importantly, it allows the buyer to know of any issues before investing money in the property. Title insurance also does not impede the advantages inherent in making a cash offer. As noted, one clear advantage of a cash offer is that it can speed up the closing process. Conducting a thorough title search does not disrupt this accelerated timeline. Typically, title work can be completed in 2-4 days and, depending on what is found, a commitment can be issued shortly afterward.
How and When Should Cash Buyers Procure Title Insurance?
When considering title insurance, an interesting question emerges regarding who gets to select the title insurance provider: broker, buyer or seller? To some extent, who does the referral and who pays for it is a matter of local practice. Typically, the party that pays makes the choice, but not always.
If possible, purchasers should maintain control over the issuer of the insurance. The buyer should want to know everything they can about the title’s status. Additionally, if the insurance provider is selected by the seller, there is the possibility that they may try to show that the title has few to no problems.
When searching for an agency, a buyer or realtor should vet the agency issuing the title commitment and verify that they are in good standing by obtaining that verification from the insurer. There is a universal ID that the American Land Title Association (ALTA) maintains and will verify an agency’s legitimacy. The insurer can also be contacted directly to verify their legitimacy. Phone numbers for the insurer are typically on the commitments or an online verification may be available at the insurer’s website.
During a cash transaction, it is important to obtain a commitment to issue a policy from a reputable title agency or insurer as soon as possible. Receipt should provide an opportunity under the contract for purchase and sale to review and make objections – although there is usually a time limit. However, obtaining it right before closing does not allow time to object to an unacceptable defect.
To Buy or Not to Buy Title Insurance
It is not a requirement under the law that a cash buyer procures title insurance, so they can choose not to obtain it. However, there is no circumstance where skipping title insurance would be a good idea. Plus, with it being a relatively minor investment in the most expensive of jurisdictions, having the security that a thorough title review provides is more than worth the cost. You simply cannot put a price on peace of mind, and having a valid title policy is a great way to protect your all-cash investment.
One expert says fear of a recession could lead to one.
over a recession could be the cause of the next recession, according to Analyticom President
Dan Geller, developer of the theory of money anxiety.
explains that an increase in money anxiety can lower consumer confidence and
cause a recession by reducing consumer consumption by just 5%. Since consumer
consumption makes up about 70% of gross domestic product, a 5% reduction in
spending equals 3.5% of GDP, which is greater than the projected GDP for 2019.
In July 2019, the Money
Anxiety Index was flat at 44, the same as June, but slightly higher than May’s
42.7 points. While these figures are relatively low and don’t point to an
immediate recession, Geller explained that the constant hype about a recession
could increase the level of money anxiety.
“An example of how
recession hype can increase peoples’ perceived anxiety and reduce their
confidence in the economy can be seen in the preliminary August figures of the
Michigan Survey of Consumer Sentiment,” Geller explained. “The August index
decreased 6.4% from the previous month indicating that the level of consumer
confidence in the economy dropped in the first couple weeks of August.”
“Since the Michigan
index is based on what people think about the economy, in the form of a
questionnaire, it is highly likely that the recent recession hype influenced
the respondents’ confidence about the economy,” he explained.
Nearly half of experts
surveyed by Zillow back
in 2018 said they expect the next recession to begin sometime in 2020, according to the company’s Home Price Expectations
Survey, a quarterly survey of more than 100 real estate experts and economists.
Since then, the talk
surrounding recession has only increased as more and more experts begin to
predict a recession by late 2019 or early 2020.
There were several dire
warnings this week about the economic dangers posed by President Donald Trump’s
ramped-up trade war with China.
“On a scale of 1-10,
it’s an 11,” Cowen Managing
Director Chris Krueger said in a note to investors, describing the economic ramifications of the trade war.
In July, Zillow’s
panel of more than 100 housing experts and economists said the next
recession is expected to hit in 2020. A few even said it may begin later in 2019,
while another substantial portion predict that a recession will occur in 2021.
But unlike last time, the housing market won’t be the cause.
The homebuying process is filled with excitement, joy, anxiety, stress and relief. There are so many moving parts between deciding to purchase a home and actually closing on a home. Here are excellent tips to help buyers navigate the closing process and ensure a smooth closing for all parties.
Don’t make big life changes or purchases during the home buying process. Don’t change jobs or make purchases that could change your credit score. Examples include financing new furniture or a new car, moving your money around in your accounts or paying for a vacation using your open credit. Don’t do anything that will send red flags when lenders check on your credit.
Assure the title is cleared. Your real estate attorney or title company is responsible for ordering a title report to assure everything is good before the closing. Stay in close contact with them to make sure there are no liens on the property. Liens may delay or cancel your closing.
Create and maintain a repair timeline.Assuming the seller is expected to make certain repairs on the property, make sure you document those repairs (and a deadline for their completion) and share a copy with the seller. Maintain the list and verify, at least several days before your scheduled closing, that the repairs are completed. Schedule a final walk-through the day before closing and verify again that all repairs are completed as agreed upon.
Secure proper homeowner’s insurance. Buyers should shop for and secure homeowners insurance well in advance of the closing. Be cognizant of the home’s location and know if you need to purchase flood insurance. Flood insurance is costly, yet necessary, if you live in a flood zone. If you cannot afford flood insurance, do not purchase a home located in a flood zone.
Maintain close communication with your lender.Do not assume that “no news is good news” if you don’t hear from your lender or closing agent. Because lenders often ask for information at the last minute (i.e., insurance documents, current bank statements or pay stubs), contact your lender the day before and the day of closing to assure you bring all needed documents to the closing. You should also verify with your closing agent that he or she received all loan documents. Oftentimes, it is a case of one missing document, one verification or an email that has not been returned (or lost in a spam folder).
“it goes without saying,” yet we will say it: Buyers need to have all paperwork
in order and present at closing, including a valid ID and most likely a
cashier’s check for the down payment.