MReport March 2019

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TH E M R EP O RT | 53 O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST DATA Smart Investments Do millennials and Gen-Xers think real estate is a good investment? I s investment in real estate a better bet compared to stocks? Many Gen-Xers and older millennials, would tend to opt for the latter, ac- cording to a survey by Redfin. The survey, which covered more than 2,600 respondents, revealed that less than half of homebuyers and sellers between the ages of 35 and 44 believed that real estate was a better long-term investment. The survey revealed that most of these respondents consist of those who reached the median first-time buyer age of 31 years old between 2008 and 2012 during the Great Recession and the housing market collapse. "The oldest millennials and youngest Gen-Xers entered their late 20s or early 30s during the housing crash, which explains why they are more skeptical about investing in real estate," said Daryl Fairweather, Chief Economist at Redfin. "This generation experienced a major setback dur- ing the housing bust, which hit just as they were most likely to be getting married, starting a family, and becoming a first-time home- owner." Younger millennials, the sur- vey revealed, were much more confident about investing in the housing market with 59 per- cent of those aged 25 years and less opting for this investment over stocks. For older Gen Xers too, housing was a much better investment option compared to the stock market, with 60 percent respondents in this age-group preferring real estate investments. Younger baby boomers, (55 to 64 years), were the most optimis- tic about real estate as an invest- ment. Those in this age group preferred housing with 62 percent saying they would opt for prop- erty investment compared with 38 percent who said they would invest in stocks. "Looking into the future, we expect to see homeownership increase as millennials enter prime homebuying age," Fairweather said. This is because millennials have a more favorable opinion of real estate as an investment than Gen-Xers, and millennials are a larger group than Gen-Xers." What Housing Bubble? An economist weighs in on which states are likely to experience price declines. H ome prices have been on the rise for quite some time, but home sales are now on the decline. The economy is strong with unemploy- ment at historic lows, but some are pointing to an economic slowdown. Is the housing bubble about to burst? Not according to Ralph DeFranco, Global Chief Economist Mortgage Services at Arch Capital Services, Inc. There's no bubble to burst, he says. "The housing market is caught in the middle of a tug-of-war between poor affordability on one side and on the other, a strong economy teamed up with a tight supply of homes," he said in Arch Capital Services' Winter 2019 Housing and Mortgage Market Review. However, after persistent and steep price inclines, DeFranco says now, "The shift in the balance of power is clear. An undeniable slowdown has arrived, particularly in the least affordable areas." But take heart, it's not a bubble bursting. DeFranco says, "There's no need to panic. The evidence suggests we are only moving from a market that strongly favors sell- ers to a market more evenly bal- anced between buyers and sellers." In fact, DeFranco expects home prices to continue to grow this year, despite rising interest rates. Overall, he expects prices to rise between 2 and 5 percent over the year. However, price changes will vary widely at the market-level. Housing markets with large retirement communities, near the water, and metros that attract professionals and foreign buyers will continue to experience price growth in the coming year. Markets that have experienced the steepest price increases in the past few years, markets that are currently weak, areas with economies reliant on the energy sector, and former indus- trial centers may experience price declines, according to DeFranco. The quarterly Arch MI Risk Index, which measures where home prices are most likely to fall over the next two years, deter- mined that at the national level home prices have a 6 percent chance of declining over the next two years. This compares to a historical average of 17 percent. The 10 states where prices have the highest probability of declin- ing are Alaska, West Virginia, Connecticut, North Dakota, Texas, Wyoming, Colorado, Oklahoma, Mississippi, and Idaho. Alaska has the greatest probability of falling home prices with a 27 percent chance, according to Arch MI's data. West Virginia follows with a 19 percent chance. Six of the states listed in the top 10 list are experiencing "the lingering effects of slowdown in the energy- extraction sector and weaker energy prices," according to Arch MI. Taxes are the culpable factor in Connecticut's placement in the top 10 as the state has high costs and high taxes compared to many others, and Arch MI anticipates the state "may suffer dispropor- tionately from new federal tax limitations on state and local tax deductions." Finally, Colorado and Idaho placed in the top 10 mainly due to the higher-than-normal home prices in these states currently. Aside from overall continued price growth, albeit uneven and with some exceptions, DeFranco pointed out a few other expecta- tions for the housing market in 2019. One is that millennials will continue to be a determining factor in which markets are the "hottest." Prices will rise most in areas favored by millennials. Rising home prices, alongside in- creasing mortgage rates, will take a toll on affordability. DeFranco said that with the economy performing well and the "tax cut adding an oddly timed and only temporary stimulus," the Federal Reserve should raise interest rates this year. Also, credit risk will increase this year as credit continues to loosen and the mortgage industry continues its trend toward loans with higher debt-to-income and loan to value ratios. Loosening credit may drive increased de- mand in the housing market. In the meantime, the housing supply shortage is not likely to subside any time soon, according to the report.

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