Don’t we all wish we had a crystal ball? Knowing what the future holds would make decision making today so much easier. While I don’t have a crystal ball, looking at the past, combined with the current political climate can allow us to anticipate what the future may hold regarding real estate opportunities. Examining the US Market as a whole and comparing it to the Outer Banks allows us to see which trends will impact this area. Not a crystal ball, but perhaps a frosted ball?
Nationally, the low level of inventory of homes available for sale is the largest drag on the real estate market. This fueled a lot of the price appreciation in 2016. Housing starts are still only 55% of the 50 year average and while builders’ confidence has improved over the past year, it is likely to be slow and steady to fill the gap.
The lack of inventory is the most acute for affordable homes. Over the past two years, the percentage of affordable homes to median income earners has declined and is expected to decline in 2017.
The lack of Inventory of existing homes for sale may turn out to be a longer trend. Many existing homeowner are affected by “rate lock” where the owner has a mortgage locked in at 4% or lower and are likely to remain in the home rather than upgrade and pay a higher interest rate.
Inventory in the Outer Banks is also at a historical low as shown in the most recent MLS Market Report. Sellers who are thinking about selling will face less competition and be able to sell their property quicker under current conditions. As the year progresses and mortgage rates increase, your property will become more expensive to buyers even without raising the price. Ideally, the best time to sell if you are thinking about selling in 2017 is now!
Buyers who find an attractive home to purchase should not wait to see if something better will come along. The increase in mortgage rates will continue to squeeze buyers making homes less affordable before inflation or appreciation.
In August 2016, Donald Trump gave a speach to the Nation Association of Home Builders and stated the home building industry was one of the most regulated in the country; with 25% of the cost of the home due to compliance with regulations. Trump stated “I think we should get that down to about 2%”. Freeing builders from such a regulatory burden would go a long way toward improving incentives to build and increasing new home inventory.
The historical low inventory levels have spurred builders to start building. Single-family new construction increased by 9 percent in 2016. This level is thought to be lower than historical averages primarily due to labor shortages. Currently, almost 1 in 4 construction workers are foreign born. Should the Trump Administration implement the stricter immigration policies, this will cause a greater shortage of labor. Immigration reform under Trump could reduce new construction to 6 percent in 2017.
Additionally, builders will face higher labor costs should Trumps immigration plans be implemented. This will cause labor shortages to worsen in many markets and drive up the price of labor and increase the cost of new construction.
The Trump administration will likely try to lessen regulatory requirements for land development to spur many projects that would not pass go with the prior administration.
The OBAR MLS stats have recently included information of YTD building permits. Certainly, the same issues for labor and costs will apply in the Outer Banks should the policies be enacted nationally. Anyone considering a custom home or building a new home would be better served by acting now rather than waiting and suffering delays and higher costs.
Mortgage rates have been historically low at below 4% for recent memory. They have remained at this level to encourage the economic recovery from the most recent recession. Since the recovery has gained some traction in many markets, economist have called for a moderate and gradual increase in rates.
Since the election, rates have already started to increase to above 4%. Predications call for 3 more modest rate increases for 2017. Typically, mortgage rate increases tend to hold back home values since the cost of buying a home goes up with increasing rates.
The impact of Trump in office could spur more economic growth by loosening lending requirements put in place with the Dodd-Frank Act and make credit available to average home buyers.
Mortgage rates are forecasted to increase to 6.5% by 2020 according to Tradingeconomics.com; while hovering below 5% in 2017.
As an Outer Banks buyer or seller, this should encourage you to act sooner rather than later if you’re intending to do a transaction next year. Rates are expected to go higher as we go through the year, and inventory is not going to improve in the short term. So winter or early spring will be more advantageous than waiting for late spring or early summer, when the market becomes most active.
The US Census Bureau announced in July 2016, that the homeownership rate of 62.9% had hit its lowest level for the country since the government began measuring the stat in 1965 – that’s 51 years! The low home ownership rate is not due to consumers not wanting to own homes but to economic conditions after the most recent recession. There is still a lot of pent up demand in the real estate markets.
Nearly half of all buyers in 2016 were first time buyers and millennials are increasingly becoming homeowners. Millennials, born after 1980 until 2000, are the largest adult generation and make up the largest portion of the current workforce. Millennials are having families and look to build equity in a house rather than renting.
Unlike prior generations, millennials are not looking at “starter homes” but are looking for a home they can stay in for a while with all the features and luxury items they can afford. Many have paid down college debt and have been able to save money, while living with parents, to skip the starter home or condo and purchase a home suitable for a family.
Millennials who are still carrying student loan debt may get relief through the Trump administration. The administration has spoken on forgiving student loan debt after 15 years. Many young people are unable to buy homes because of massive student loan debts that kill their credit ratios and don’t allow them to save for the down payment.
Millennials, who have put off home ownership, are entering their key buying years into 2030; they will create strong demand for housing due to their numbers well past 2020.
At the opposite end is the older Baby Boomers, many whom have wanted to downsize but postponed the sale waiting for prices to recover. This group will likely be entering the market and contribute as both buyers for downsized homes they can retire in and sellers of the larger home built with raising families in mind.
The Outer Banks is not your typical real estate market. A large portion of the homes are built expressively for short term rentals and investments. It is a desirable location for retirement with a large variety of housing for this segment. Unfortunately, there is not a concerted effort to build affordable housing to meet the needs of year round service industry workers, teachers and police and fire fighters.
Employment & Infrastructure
Employment and security in that employment is necessary to fuel real estate sales and new construction. People don’t buy houses without jobs. Unemployment has been holding steady in the 5% range providing more confidence to families and individuals.
Job growth is predicted to be 800k over the next two years and could increase more depending on Trump policies. Trump already made headlines with Carrier to keep jobs in the US before even taking office. His priority to improve the US infrastructure will add even more to the number of jobs available.
The Trump Administration’s $550 billion transportation and infrastructure plan should create jobs and boosts wages. It can also lead to greater housing demand in many markets.
Trump’s immigration stance may limit foreign investment in U.S. real estate, and reduce the number of people who move here. This reduction in demand could limit price growth and household formation.
The Outer Banks has a tourist dependent economy. The infrastructure of roads and bridges are vital to the area. The potential of additional funding for new infrastructure would be a welcome addition to the area. One project that has been discussed for decades is the mid-Currituck bridge which would connect Corolla to the Currituck mainland to reduce traffic congestion and provide alternative evacuation routes.
The Zillow Home Price Expectation survey predicts home values will increase at 3.6% in 2017 compared to 4.8% in 2016. The Zillow Home Price Expectation survey is based on answers from 100 economic and housing experts across the country. Every real estate market is unique and individual markets can be drastically different than the average.
On the other hand, Redfin’s predicts the median home sale price to increase by 5.3% in 2017 compared to 2016, similar to the 5.5% year-over-year gain expected to close out 2016.
The hottest real estate markets are expecting double digit increases in the 10% to 11% range. The Seattle, Washington increase is expected to be 11.2%, followed by Portland, Oregon at 11.1% and Denver, Colorado at 9.9%.
However, nationwide prices are still about $50,000 below the pre-recession highs.
Homes are expected to sell even faster next year, breaking this year’s record as the fastest real estate market. 2017 is expected to break the 2016 record as the fastest market on record. This is measured by the average number of days homes spent on the market before going under contract. This year, the average home stayed on the market just 52 days, the shortest time on record since 2009.
Home values in the Outer Banks should appreciate at or above the national averages. Prices are still below the historical highs. Considering the mix of second homes and investment property in the area, the location did not suffer the worst effects of the recession due to the high desirability of the location. Outer Banks homes spent an average of 207 days on market in 2016 which is significantly higher than the national average.
In many US markets, supply of new homes has dwindled while the demand has increased forcing rental rates to higher levels. As the cost of renting narrows when compared to buying, more consumers will prefer to become home owners; building equity rather than holding worthless rent receipts.
Home buyers with fixed mortgages enjoy fixed housing costs (ignoring taxes, insurance and repairs). While rents tend to increase over time. Rents are expected to increase by 1.5% in 2017 easing the burden of renters as supply of new rentals in many markets have caught up with demand and lessened the pressure to increase rents.
The Outer Banks has a well-established short term rental market. The season for this market has been extended to the shoulder seasons of spring, fall and holidays to increase the potential income for owners. Weekly rental rates have remained strong in recent years.
There is less of an incentive to deploy a property as a long term rentals when comparing potential income received as a short term vacation rental for real estate in a desirable location. For this reason, year round rentals are more difficult to find and are able to charge higher rates than would be the case in another market.
Accessory Dwelling Units (ADUs)
ADU’s are small apartments next to main homes, similar to a “mother-in-law suite” but commonly detached from the main home. These units are used by older parents to maintain some independence as they age or as affordable housing in markets where rents are high.
Alternatively, these units can also be rented through Airbnb, on a short term basis in some markets to supplement homeowner income.
The Outer Banks market can utilize ADU’s to provide more affordable housing to the local population as well as provide an additional income to homeowners who rent the space on Airbnb. So far, these have not become a controversial topic in this market but it remains to be seen if additional regulation is proposed.
Surban living combines the best from suburban and urban living to provide entertainment, recreation and a lifestyle not completely dependent on driving. It is a live-work-play environment removed from an isolated suburban lot with a McMansion.
Some underutilized suburban office assets are being re-purposed into surban living with multi-family and mix use developments; combining retail and outdoor common areas where residents have a sense of community.
As Urban areas become more expensive, the development of surban areas will help to fill the gap at an affordable price.
The Outer Banks is a barrier island or a long sand bar. As such, we don’t have a typical city structure. However, we do have surban qualities in several resorts; where multiple amenities, shopping, entertainment is available within the resort. Some even feature a private internal shuttle bus to take guests to all the sites.
Now is the ideal time to invest in Outer Banks real estate. Prices are relatively low compared to market conditions in 2007, financing is readily available and mortgage rates are at historical lows. The rental market is strong to provide income from the investment for years to come. Purchasing today provides plenty of time to be ready for the 2017 rental season. For more information on buying Outer Banks Real Estate, or selling Outer Banks Real Estate or to learn more about the Outer Banks in general, please check out our blog.