It was all good news as Chief Economist for the National Association of REALTORS, Lawrence Yun, delivered his keynote address regarding the state of Rhode Island Real Estate at the 2013 Rhode To Success Summit & Expo last Thursday. While Yun presented on the national and state level, a number of local real estate agents and statistics for the city’s real estate market paint a similar picture.
In a 45-minute presentation, Yun touched upon a number of reasons that the real estate market is recovering, including more buyers than sellers, low fixed-mortgage interest rates and more. He also provided insights into new construction, renting and the younger generation’s likelihood to become homeowners.
“We’ve had a nice two-year recovery in home sales,” said Yun in his opening statement.
Overall, Yun said the real estate market in Rhode Island and throughout the country is in an upswing. Some of the positive facts he pointed out were that increasing insurance rates have led to a rush of buyers looking to close sales; a decline in distressed property sales (only 19 percent of sales are distressed properties compared to 27 percent last year) and the median prices of homes have seen a boost.
There was also good news on the mortgage front. When speaking about 30-year fixed mortgage rates, Yun pointed out that the current interest rate is 4.5 percent as of June; these are historically very attractive rates and have been below 6 percent for the past five years.
“I think it will be rising further,” said Yun.
Yun also provided the following specific data: Closed sales in year-to-date have risen 9 percent in one year, median prices are up 9 percent from last year, dollar volume is up 18 percent, and the number of days a house is on the market has dropped from 106 to 97.
In Warwick, specifically, data shows a positive change since last year. According to statistics from the REALTORS regarding the sales of single-family homes in Warwick, 99 homes were sold in the month of August, the highest of all cities and towns in the state. That is also an increase of 12 from the number sold in August 2012.
In addition, the median price of homes in the city increased 15.07 percent to $168,000 from August ’12 to August ’13, while the average days on the market decreased from 61 to 56 and the number of distressed properties decreased from 24 to 18, a decrease of 25 percent.
Agents at Slocum Realty in Warwick also seem optimistic about the market this year.
“I think 2013 has been a substantially stronger year,” said Philip Slocum.
He attributes the change to the interest rates staying at historic lows attracting first-time buyers and the change in distressed properties.
“I’ve seen a marked decrease in distressed sales,” said Slocum.
Robert DeGregorio, also of Slocum Realty, agreed, saying the market has been “great.”
DeGregorio said he looks at the year-to-date comparisons for 2012 and 2013 to see the improvements. He said between Jan. 1, 2012 and Oct. 23, 2012, the average price of a single-family home in Warwick was $168,000, representing 776 homes sold. Between Jan. 1, 2013 and yesterday, the average price was $189,000 looking at 859 homes sold.
“Obviously, what you’re seeing is we’re starting to see a decrease in bank-owned properties,” said DeGregorio, who explained the number of bank-owned properties in the area was causing appraisal issues, not just in Warwick but throughout the state.
He also said the healthy increase of 4 to 5 percent in the average price is a good sign. He says a home is usually the main investment people make and they want that value to grow.
DeGregorio said there are currently 455 homes on the market in Warwick, and even though he isn’t a stickler for looking at that number, he believes that to be a sign of a healthy market.
There is only one danger DeGregorio sees on the horizon.
“One of the problems we’re having is with the flood insurance, and that’s starting to rear its ugly head,” he said.
He recalled hearing from a colleague about a potential sale for a $180,000 home, but the flood insurance would be $25,000 with a $5,000 deductible.
He said, as a realtor, he needs to tell his customers about the cost of flood insurance and it will likely have an effect on sales of those properties.
“Beyond that, the climate is excellent,” said DeGregorio. “It’s been a good time to buy.”
David Zartarian of Zart Realty and East Greenwich Realtors said the market is better now than last year but nothing like last spring, which he called terrific.
On the other hand, according to Yun, a housing shortage is occurring in the nation because of consistent underproduction.
“We are in a housing shortage, but we are not building as we should,” he said. “This housing shortage is probably going to get tighter because there is this lack of building situation.”
Yun said the new homes inventory is at a 50-year low, below 150,000. He also pointed out that there is no other way to increase inventory other than construction.
“Going into next year, you may experience a five months supply of inventory [as opposed to this year of six],” said Yun.
When it comes to home prices, Yun referenced the FHFA Home Price Index, comparing homes in the Providence area to Boston, Mass. and Burlington, Vt. Prices are on the rise, with Boston leading the way.
“Boston is the anchor for the New England area,” said Yun. “Most markets follow Boston.”
Yun also pointed out that there is a big gap between the price of existing homes versus new homes. Historically, the price of new homes is higher, but to close the gap, something needs to change. Yun said existing home prices need to rise because it is more difficult to lower the price of new homes due to construction costs.
But when it comes to purchasing a home, there has been an abundance of cash buyers, which made Yun question just where all of the paper currency is coming from.
“One-third of all transactions are all cash; somehow people are coming up with cash,” said Yun, pointing out baby boomers cashing in stocks or “creativity” as a reason for the influx of cash.
One group that is not seeing that influx of cash is those renting their homes. Yun said that the renter population has been on the rise to the point that he said the country is becoming “a renter’s nation.”
Homeowner population, on the other hand, has not seen an increase since 2006. The majority of people still own their homes, about 64 percent according to Yun, but that is down from the previous 69 percent.
“I predict homeownership population will decline further,” said Yun.
Yun attributed the rise in renter population to the economic downturn. Then Yun brought up a shocking graph that showed the difference of wealth distribution between a renter and an owner. Yun said the average renter only has $4,000 in their bank account on average and is essentially living from paycheck to paycheck.
“One year to the next, it’s always the same,” said Yun, referencing the consistency of the net worth of a renter over time. Homeowners, on the other hand, are not only consistently higher (over $150,000 net worth throughout the years), but it changes. The chart specifically made note of the dip in 2010 when the crash occurred, but it has gone up again for 2013 (about $175,000 up to $190,000).
Yun connected this to the housing market because as the value of a home rises, so does the homeowner’s wealth.
“We are more unequal in terms of wealth distribution because of the housing market,” said Yun.
Another interesting fact brought up by Yun was the change in household formation. A household can be one person living in one home, or a family of seven living in one home. Yun explained that with 3 million additional people in the country in an average year, there should be an increase amount of 1 million households. But since 2007, there has been what Yun referred to as household suppression, with less than 700,000 households formed each year.
“And it’s not a one-year situation or a two-year situation but a five-year situation. Unprecedented,” said Yun. “They didn’t have this data during the Great Depression, but I would predict during the Great Depression it occurred.”
Young adults moving back into their family homes, or never leaving in the first place and therefore not forming their own households, renting or buying, cause this. However, 2012 saw the return of the average 1 million household formation, and Yun predicts that bursting out will continue. He said four of the next five years could be expected to be improving years provided a job-creating environment continues.
“We still have much more room to improve on the job market. It’s not just a matter of recapturing those 8 million job losses, but we need to have job increases to accommodate high school and college graduates,” said Yun.
DeGregorio says today’s market is actually ideal for first-time homeowners because of low interest rates.
“This is the perfect opportunity for first-time buyers,” said DeGregorio. “They can take advantage of some of those bank-owned properties.”
Following Yun’s speech, two Newport-based real estate agents seemed pleased with what he had to say.
“It’s what I thought it would be,” said Stephen Lake, an agent with Century 21 Trend Realty. He pointed out that many of the statistics Yun gave were national, and real estate is a very localized field.
“And the Rhode Island statistics might not even be the same as the region you work in,” pointed out Lake.
“It’s definitely optimistic,” said Wendy Lordharvey, another agent with Century 21 Trend Realty. “I was glad to see Boston is doing well.”
Lordharvey said that it is true that what is happening in Boston in terms of real estate extends to the rest of New England.
Slocum added that there is one more thing making the real estate market better; the overall attitude of those involved in the sale. “I think the sellers are feeling a little more optimistic about getting more value for their homes than in the past few years,” said Slocum. “I feel the buyers are seeing the value is rebounding and they don’t want to miss the boat.”