This article was originally published in April 2018 Think Realty Magazine.
When Lawrence Yun talks about real estate, the discussion revolves around what he refers to as “turning points” in national and local markets. “My role, as chief economist at the National Association of Realtors (NAR), is to look at the economy, the housing market, to assess current conditions, and make projections about what real estate may look like down the line so that people in real estate can better anticipate some of the turning points [in the market] for their business planning,” he said. Yun went on to detail how real estate analysis cannot simply involve dozens of housing market variables, but must also include a close examination of jobs, inflation, Federal Reserve activity, consumer confidence and psychology, and policy issues.
“I firmly believe that real estate ownership brings stability to the homeowner, on a personal level, and to the larger economy and the country,” he said. “Of course, homeownership tends to coincide with personal financial stability, but it also contributes to personal security, a wider middle class, and, thanks to pride in ownership, a greater national interest in having input into policy-making decisions and participation in the U.S. democracy. This intense focus on homeownership sometimes leads real estate investors to disregard NAR commentary and membership as largely irrelevant to their businesses. Yun, himself, observed that to a significant degree, the real estate investing community is perceived externally as one comprised largely of landlords serving the population which cannot or chooses not to own. In reality, the role of the investor is far broader.
“Real estate investors play a critical role throughout real estate,” Yun said. “The real topic should be whether a market affords an opportunity for small-time investors, individuals, and husband-and-wife or family investment teams or is dominated by big corporations running the apartments, the multifamily developments, new construction, and elite sectors.” Yun added real estate investors are integral to market stability just as he believes homeownership to be: “If you look at the deep downturn in the Great Recession during 2009 and 2010, when foreclosure rates were rising, there were a smaller than normal share of what we might refer to as ‘regular’ or ‘traditional’ buyers. It was the real estate investors who stabilized the markets as they came in and bought up excess inventory that was floating out there in the market.”
Spotting (And Spotlighting) Market Turning Points
Yun defines his role as NAR’s chief economist (he is also officially the association’s senior vice president of research) in terms of his role in tracking economic and housing market trends and then identifying how they will affect national and local real estate markets. These “turning points,” as he calls them, can take many forms. Identifying them and making accurate, informed predictions about how they might affect real estate markets, homeowners, homebuyers, and business owners reliant on real estate, requires him to evaluate many factors and economic indicators. Unlike many real estate analysts who rely solely on monthly, trackable, long-term numbers on employment, population, and home values, Yun considers a number of less traditional, for real estate at least, numbers as well. “The NAR has a great deal of proprietary data on the housing market that deals with overall consumer confidence, builder confidence, and homeowner, -buyer, and -seller psychology,” he explained. “There is a psychological variable involved in the mindset about real estate and the economy that play a huge role in how the market acts at any given time.” He added, “We also monitor policy changes very carefully,” noting that real estate investors, far more than individual homeowners in many cases, have a deeply vested interest in pro-real-estate public policies that will protect investors’ interests and keep homeowners feeling positive about ownership. “Anything that affects the business affects the bottom line, and policy changes definitely impact the bottom line,” Yun said, citing tax reform policy as a recent example. “One thing that [the NAR] vigorously lobbied for was the preservation of the 1031 exchange,” he explained. 1031 exchanges (see sidebar on p. 24) permit investors to defer capital gains taxes on the sale of real estate investments if those gains are “rolled” into an investment similar to the previous one. Real estate investors and self-directed investors use these exchanges to legally avoid paying high percentages of their profits in capital gains taxes when they sell off assets, and, Yun noted, the loss of access to such a strategy would certainly negatively affect investors’ ability to engage actively in the real estate market. “We contributed to preserving that investment strategy and, as a result, contributed to community stability,” he said. Yun also pointed to the mortgage interest deduction (MID) as a tax-reform change that will likely affect real estate investors in some sectors and markets. While MID was not eliminated as part of tax reform (something many policymakers viewed as a source of great concern), it was adjusted. Yun believes that this adjustment makes things slightly less stable in certain markets. “Because the traditional home-buying incentive of the mortgage interest and property tax deductions were diminished as part of the reform, it could lead, over the long-term to more households being renters for a longer period. For investors specifically, this could be a positive or a negative result. For households that truly wish to buy [and cannot], the outcome is certainly negative.” Yun added that the NAR works hard to make it easy for members and non-members to join with other real estate professionals when they believe an issue is important to their business. “We know people in this industry are very busy, so we try to make it very simple to click a button [online] and send a message to the right member of Congress,” he said, noting that while NAR members may receive more information and updates on these types of policy and legislative issues, non-members can also participate.
What To Watch For In 2018
In 2018, Yun said, he expects the main housing issues affecting real estate investors to be inventory shortages and the emerging effects of late 2017’s tax reform bill (see sidebar on p. 27). “Of course, there are two indicators that drive every housing market: the jobs market and mortgage rates. My job is to determine how other factors will influence these two indicators and, by extension, consumer confidence and real estate activity,” he explained. “For example, rising interest rates lead to an eventual slow-down in home sales, and an increase in available jobs tends to lead to an increased need for housing. The other factors essentially operate on the margins of these two main issues and, depending on how they interact with each other, allow us to better understand trends and make predictions. For example, information about foot traffic in an area, how often a lockbox is opened on a property, or straightforward, large-scale consumer confidence surveys all enable us to assess the strength of demand for housing in an area and align that sentiment with those two primary indicators.” Consumer confidence plays a huge role in NAR evaluations of the national housing market. Yun’s analyses on this topic often stand out from other economists’ because he is willing to make specific projections on a national scale. The NAR’s dedication to tracking consumer sentiment plays a big role in his ability to make these predictions accurately and with informed, specific reasoning that he regularly spells out, in detail, across a variety of media. “We are constantly taking surveys of consumers across the country, asking simple questions like, ‘Is it a good time to buy?’ and ‘Do you think home prices have further room to grow?’” Yun observed. Consumer sentiment and confidence in their local markets and the national market play a huge role in home-buying patterns just as overall consumer confidence and sentiment directly affect the national retail sector. Yun looks to these “marginal” factors to gain clarity about national trends to great effect and, as a result, is a frequent speaker at real estate conferences throughout the United States, has testified before Congress, and regularly appears as a guest on CSPAN and as a Forbes columnist. When it comes to the effects of 2017’s tax reform bill, Yun has adopted a careful wait-and-see attitude. However, he was willing to pinpoint one market sector he suspects will experience more fallout from the legislation than others: the high-end real estate markets in high-tax states. “Part of the tax reform included limiting mortgage interest deductions to $750,000 or less, meaning that if someone has a $2 million home with most of that value financed, there will be far less deduction available to them than there was before. Also, the property tax deduction has been limited to $10,000,” he noted.
“If you look at the deep downturn in the Great Recession during 2009 and 2010, when foreclosure rates were rising… It was the real estate investors who stabilized the markets as they came in and bought up excess inventory that was floating out there in the market.”
“Although relatively affordable states, such as those in the southern region of the U.S., have fairly few homeowners even at the upper end of the market who pay $10,000 in property taxes or finance multimillion-dollar homes, in a state like Connecticut, New York, or New Jersey, where property taxes are high and home prices are high as well, this change will affect about 10 to 20 percent of homeowners,” Yun said. He noted that California, in particular, will likely experience magnified effects from tax reform because home values are so elevated. Statewide, median California home values were more than half a million dollars in 2017. “That will make the states surrounding California very interesting to watch this year,” Yun said. “California is very expensive, but the states surrounding it are much more affordable and their job growth is terrific.” He specifically mentioned Arizona, Nevada, Oregon, Washington, “and even Idaho and Utah” as states “where the housing market could continue to do very well or even accelerate in terms of more home sales at higher prices.”
As long as the demand for inventory continues in this housing cycle, housing inventory is going to continue to be an issue. According to NAR numbers, home prices hit new highs and inventory levels hit new lows in many U.S. markets during the first quarter of 2018. As a result, existing home sales volume continued to fall as affordability levels dropped.
“There are really two things that will help on the inventory side of things,” Yun said. “One is for builders to just build more, which could enable more renters to purchase homes or enable more homeowners to sell their existing homes and trade in their current equity for a larger home, or ‘trade up.’ When that happens, current existing homeowners will release their home onto the market, providing the inventory that is needed in the starterhome layer of housing inventory. “The second thing that will likely start to happen in 2018 that will assist with the inventory issue is that real estate investors may start to unload some of their large rental portfolios,” he went on. “It is not a measurable trend as yet, but it’s quite possible rent growth will begin to slow down in the coming months [while appreciation continues to rise] and investors will benefit from selling off some of their portfolios. That would certainly be a welcome development.” Yun said despite popular opinion stating that the only solution to expanding the housing inventory is to build at the most affordable level of housing, conventionally referred to as “starter homes,” to him, the issue is one of price points. “Builders will do their due diligence, look at market conditions, and build what they can sell for a profit that buyers will buy,” he said. “When builders do their due diligence, they fill those missing gaps. Where land is plentiful and more affordable, there will be opportunity at entry-level homes and in other sectors.” Yun added areas with less regulation on building allow developers to gain confidence, fund projects, purchase land, and increase inventory. “Local governments can also play a critical role in getting builders into a market in this way,” he said.