Reposted report from Salt Lake Board of Realtors by James Wood
A Sustainable Housing Market
A review of the 2014 real estate market’s performance shows:
- 11,500 single family sales in 2014, a decline of 1.7 percent.
- $3.35 billion in home sales, an increase of 1.5 percent. 3,000 condominiums, town homes and twin homes sales, unchanged from 2013.
- $570 million in condominiums, town homes and twin homes sales, an increase of 4.4 percent.
- $235 million in residential real estate commissions, an increase of 2 percent.
- $255,000 median sales price for a single family home, a price increase of 4 percent.
- $175,000 median sales price for condominiums, town homes and twin homes, a price increase of 5 percent.
Residential Sales – Over the past three years existing home sales in Salt Lake County have moved in a narrow range of 11,000 to 11,700 homes while multifamily sales (condominiums, town homes and twin homes) have been at 3,000 units for the past two years Figure 1. Historically, multifamily sales account for about 18 percent of total residential real estate sales.
In 2014 Salt Lake City captured about 30 percent of all single family sales followed at some distance by West Jordan, Sandy and West Valley. Combined, these four cities had 60 percent of the single family home sales in Salt Lake County in 2014 Table 1. Both Salt Lake and West Jordan had a substantial share of multifamily sales and were joined by two cities that had nearly as many multifamily sales as single family sales.
Housing Prices At 88% of Pre-Recession Peak
In 2014 housing price increases slowed from the sizzling pace of 2013. An example, of that sizzling pace; in the first quarter of 2013 housing prices were up 19.5 percent. But in the ensuing six quarters the increase in the median sales price steadily decelerated falling to only a 1.2 percent increase in the third quarter of 2014. In the fourth quarter of 2014 prices increased by 4.1 percent over the fourth quarter of 2013 (Salt Lake County). In contrast, the recovery in Weber County is lagging well behind the other counties.
While the 2014 median sales price of a home has recovered in nominal terms from the Great Recession the inflation adjusted price is at 88 percent of the pre-recession peak. The inflation adjusted peak price in the second quarter of 2007 was $291,000. The median sales price in the fourth quarter of 2014 was $255,100. Adjusting for inflation makes a huge difference in calculating the average annual growth rate in prices. For example, the inflation adjusted (constant dollars) annual growth rate in housing prices from 2000 to 2014 is 1.6 percent. The non-adjusted (current dollars) growth rate is 4 percent. It’s fair to say that housing prices in Salt Lake County increase at about 1.5 percent annually in constant or inflation adjusted dollars. Using constant dollars is a much more accurate measure of housing price performance over the long-term.
Constant and current median sales prices by quarter for existing single family homes in Salt Lake County from 2000 to 2014: Over this period housing prices have been extremely volatile, increasing from $205,000 (constant dollars) in the fourth quarter of 2004 to $291,132 in the second quarter of 2007, a real increase in the median sales price of 42 percent in two and a half years. From the peak, constant prices fell 33 percent in five years, finally hitting bottom in the first quarter of 2012 with a median sales price of $196,295. Over the next 18 months the median sales price rebounded 31 percent to $257,000 by the third quarter of 2013; a remarkably quick recovery. Since then prices have moved in a narrow range from $245,000 to $255,000.
Loss of Price Momentum Touches Every City in Salt Lake County
The loss of price momentum touched every city in Salt Lake County. Price change was actually negative in five cities in 2014; South Salt Lake, Holladay, Cottonwood Heights, Murray, and Riverton Table 4. Midvale had the only double digit increase in prices. Most cities had price increases between 4 and 6 percent. Draper had the highest median sales price of $405,500, which was only 2.1 percent higher than 2013. The median sales price in Salt Lake City was up a little over 6 percent in 2014 to $255,000, just a fraction of the 22 percent increase in 2013.
Affordable Housing Options Abundant in Salt Lake County Compared to U.S.
For those who qualify, housing is still relatively affordable in the Salt Lake metropolitan area. According to the Wells Fargo National Association of Home Builders Opportunity Index, a family of four earning a median income could afford two-thirds of the homes sold in the Salt Lake Metropolitan Area — that’s an opportunity index of 66. Nationally, the opportunity index is 61. When housing prices peaked in Salt Lake in 2007 the local opportunity index hit a low of 31. Again this is interpreted to mean that in 2007 the median income family could afford only 31 percent of the homes sold. An opportunity index number below 50 indicates less affordability; above 50 indicates more affordability. Overall the local housing market, despite the rebound in prices, is not overvalued. There is still room for moderate increases in housing prices provided mortgage rate increases are incremental and gradual. Fourth quarter mortgage rate forecasts from four major institutions predict higher rates by the end of 2015. They include: Fannie Mae at 4.4%, Freddie Mac at 5.0%, Mortgage Bankers Association 5.0% and the National Association of Realtors® 5.4%.
Mortgage Rates at 44-Year Low
The very favorable rate environment in recent years is highlighted in Figure 4. Over the last three years mortgage rates have been at their lowest levels in the 44 years of data (1971-2014). If the low mortgage rate period (2008-2014) is excluded, the median interest rate for the 36-year period from 1971-2007 is 8.4 percent. At that rate the mortgage payment on the median priced home ($255,000) in Salt Lake County would be $1,930 rather than the $1,240 at the current mortgage rate of 4.2 percent. Perhaps a more reasonable period is the 1990 to 2007 which excludes the historically low rates of recent years and historically high rates of the 1980s. In that case the median mortgage rate is 6.5 percent and the mortgage payment on the median priced home in 2014 would be $1,600, rather than the $1,240 at current rates; a payment increase of 30 percent. For those households that qualified, the historically low mortgage rates provided a rare opportunity to capture long-term savings in their housing costs
Mortgage Interest Rates Will Increase This Year
Rate increases are never good for the real estate industry but a sudden spike in rates is very unlikely particularly given the very low rate of inflation and recent drop in oil prices. The Federal Reserve has repeatedly stressed their patience and caution. For the past year Federal Reserve officials have indicated they expect to raise short-term rates by mid-2015. The Fed has held short-term rates near zero since December 2008. U.S. job growth in 2014 — the best year of job growth in 15 years — supports a move by the Fed to raise rates but sluggish wage growth worries Fed Chair Janet Yellen. Some believe that the loss in demand due to higher mortgage rates will be offset by an easing of mortgage lending standards. Federal regulators have recently relaxed some provisions of Dodd-Frank that threatened access to mortgage credit. Modestly relaxing tight lending standards could boost housing demand by as much as 15 percent
Residential Sales in Salt Lake County in 2015 to Rise 7%; Median House Price to Increase 4%
Forecast – Despite a few challenges the outlook for the Salt Lake County real estate market is positive in 2015. Residential sales will increase by 7 percent to 15,500 sales and the median sales price will increase by 4 percent to $265,000.
Solid Economic Outlook for Salt Lake in 2015
Market fundamentals point toward a solid real estate year in 2015 supported by the following:
- Strong Job Growth — Job growth in Salt Lake County will to continue at a pace of nearly 3 percent, that’s an additional 20,000 jobs in 2015. Nationally, and presumably locally, there’s strong job growth for Millennials. If so, this supports an increase in entry level home buying.
- Low Unemployment Rate — The unemployment rate in Utah will remain below 4 percent. The November unemployment rate in Salt Lake County was 3.2 percent, the lowest rate in six years. A low unemployment rate indicates job opportunities, which improves consumer confidence. Confidence is an important ingredient of housing demand.
- Substantially Fewer Underwater Loans — The share of underwater loans has dropped from 21 percent of mortgages in 2010 to 6 percent in 2014. Fewer underwater loans boosts demand allowing home owners to move-up.
- Foreclosures No Longer an Issue — The percent of mortgages in foreclosure has dropped to 1.3 percent statewide; 5,500 mortgage loans. This is the lowest level since 2007 and near the historic average of 1 percent.
- Short Sales Decline — In addition, short sales in Salt Lake County have fallen from 14 percent of home sales in 2010 to just under 5 percent in 2014. Substantially fewer distressed sales have aided price increases bringing more sellers to the market.
- Housing Affordability — Generally home prices are still affordable. The median income household can afford two-thirds of homes sold in the metropolitan area in 2014. The modest price increase of 4.1 percent in 2014 indicates prices have stabilized
- Rising Apartment Rents – Salt Lake County’s apartment building boom is pushing rental rates higher. New projects typically rent for $1.40/square-foot or more. A new 1,000 square-foot two-bedroom apartment rents for $1,400, which is higher than the mortgage payment on the median priced home. High rental rates make home ownership more attractive.
- An Expanding National Economy – The strong performance of the U.S. economy in 2014 is expected to continue in 2015. Utah’s economy is tied to national economic trends. The support of a growing U.S. economy will benefit the Utah economy and the local real estate market.
- A Few Challenges – The debt load of households, particularly young households, hampers homeownership and hurts demand. Persistently sluggish wage growth postpones home buying. Also, the unknown impact of increasing mortgage rates on housing demand.