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December 2013

Federal Reserve Bank says yes to tapering quantitative easing

FEDThe Federal Reserve’s announcement today that as of January, they will begin tapering quantitative easing raises the question, “What will the implications be on real estate?”  We’ve asked Dr. Ted Jones, the Chief Economist at Stewart Title to share his thoughts on this key question.  Here’s what he has to say…

“The Federal Reserve has been electronically printing up $85 billion of money per month since September 2012 and buying $45 billion in Treasuries and $40 billion in mortgage backed securities from banks.  Coming January 2014, they will reduce that amount by $10 billion, cutting the repurchase of each by $5 billion.  The initiation of tapering was based on improving economic activity and strengthening the U.S. economy.  All but one Fed open market committee member voted for the cut, with Boston’s Eric Rosengren calling the cut premature.

“Fed Chair Bernanke announced it was the intention of the Fed to maintain a targeted low Fed Funds rate of 0.0 to 0.25 percent until the unemployment rate falls below 6.5 percent.  Even if the unemployment rate dips below the 6.5 percent target, as long as inflation remains less than 2 percent, expect the Fed to maintain their course.  The outlook is for lower interest rates for an extended period.  Bernanke stated that ‘cuts in the future will be made as appropriate,’ meaning there is no single direct trigger.

“Inflation ran at a pace of 0.9 to 1.1 percent in 2013, with the Fed anticipating 1.4 to 1.6 percent in 2014 and 1.7 to 2 percent in 2015.  The Fed is focused on an inflation target of 2 percent.  They perceive an inflation rate of less than 2 percent as limiting economic growth.

“The purpose of quantitative easing (QE) is to keep borrowing costs low so as to provide some stimulus to economic growth.  QE is a non-conventional monetary tool of last resort when the options for other tools are not available.

“Many Wall Street experts had forecast that when the Fed initiated reducing this liquidity, stocks would fall and interest rates rise.  The Fed’s decision was based on an improving economy, good news for markets.  Initial response immediately following the Fed’s announcement was rising stock prices and a slight increase in interest rates.  Credit remained readily available.

“So what does this mean for real estate?

  • This is a very positive statement on the path of an improving economy for the U.S., portending increased job growth into 2014 and 2015.
  • The value of the U.S. dollar should strengthen in relation to some currencies.  This may impact some foreign purchasers.
  • If the Fed is successful in maintaining interest rates at near low historic levels, refinance volumes should not fall as severely as forecast in 2014.   Prior to the announcement of the Fed to maintain low rates into the future, refinance volumes were estimated to plunge 52 percent in 2014 compared to 2013, based on the average estimates by Fannie Mae, Freddie Mac and the MBA.
  • Ongoing low rates should add strength to the recovering housing market, continuing sales growth of both new and existing homes.  Purchase lending, with an average forecast of increasing 13.2 percent from 2012 to 2013, (based on the average estimates from Fannie Mae, Freddie Mac and the Mortgage Bankers Association) was forecast to grow an added 13.3 percent in 2014 prior to the Fed’s actions today. 

“Perhaps the one surprise today was that Bernanke started the taper just one week in advance of the Senate’s anticipated vote to confirm current Fed Vice Chair Janet Yellen to replace Bernanke.”

-- Dr. Ted Jones, Chief Economist, Stewart Title

2013 foreclosures of homes worth $5 million+ jumped 61% year-over-year

US Judicial Foreclosure Activity

If you have clients reading headlines like the one above and asking, “What’s going on?”  Here’s some information you may find helpful.

High end foreclosures may be one of the last shoes to drop as the housing market recovers.  But it’s important to keep the increase in perspective.  The recent uptick in the percentage of home foreclosures at the $5 million and above price point is not so shocking when you realize we are referencing a total of about 200 high end foreclosure notices in 2013 (through October), as opposed to more than a million in other price ranges.

Why the rise in high end foreclosures this late in the game?  There are a number of possible reasons.  Owners of expensive homes may have had the resources to hang on longer.  Lenders may have chosen to deal with properties representing smaller losses before taking bigger hits on high end homes.  Lenders may also have been waiting to act on luxury short sales and foreclosures until the luxury niche entered a solid recovery mode in most markets, as it has today.

All in all, while high end foreclosures are certainly difficult for the homeowners, they may be an indication that we are working though the final backlog of distressed properties.  That bodes well for the luxury niche. 

Chinese Tsunami to Continue in 2014

Prediction for 2014:  Watch for the wave of affluent Chinese to become an even bigger force in the U.S. luxury market.  Already the second largest foreign buyer group in the U.S. (after Canadians), wealthy Chinese are drawn to the U.S. (and Canada) for several reasons:

  • Growing numbers of affluent Chinese choose to send their children to North America for their university degrees.  Major university towns will see growing numbers of Chinese buyers as Mom and Dad look for a condo for the student and perhaps a luxury home for use when they visit.  Sometimes a student in the U.S. or Canada is the first step toward relocation.
  • Chinese, who are looking to make a favorable currency play, invest where there is economic value and political stability.  Expect them to continue to gravitate to cities where there are Asian population centers – San Francisco and Vancouver are good examples.
  • Look for very wealthy Chinese, who want status (both here and back home), to snag trophy properties in Manhattan, San Francisco, Los Angeles, Vancouver and a few other major cities with global recognition.
  • The influx of Chinese banks and Chinese construction companies working in the U.S. is bringing Chinese into a variety of new metro markets, some large, some mid-sized.
  • Markets ravaged in the downturn are attracting Chinese investors who have pockets full of Yuan and their eyes on the U.S. for residential, as well as commercial and industrial investment. 
  • The EB-5 program, which allows foreigner to invest $500,000 to create ten U.S. jobs and in exchange, receive a U.S. green card, is opening the door to more wealthy Chinese.   Although this program is available to people from around the world, the overwhelming majority have come from China.  Expect that to continue.

Depending upon your market, Chinese buyers may represent one opportunity for growing your business in 2014.