In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the consumer price index and inflation.

• Today’s data on inflation showed decelerating pressure on consumer prices.  The Consumer Price Index (CPI) was unchanged in June from one month ago, and is now higher by 1.7 percent from one year ago.
• Food prices were up 2.7 percent from one year ago, but the rain shortage in the Midwest will raise prices going forward.  Gasoline prices fell 4.3 percent, but expect no further relief based on the recent rise in Brent crude oil prices back up to $100 per barrel.  Oil prices in June were lower, but rising so far in July.  Producer prices have shown a declining trend so perhaps the overall CPI could fall further in immediate upcoming months.
• Something appears amiss related to rent data.  Rents are up 2.7 percent, but were decelerating in the latest month with only a 0.1 percent monthly gain, compared to consistent 0.2 to 0.3 percent monthly gains in the prior 12 months.  Based on other data, rents have been showing an accelerating, and not decelerating, trend.  Therefore, there could be stronger ‘catch-up’ increases in the upcoming months.
• Home prices are not part of CPI because it is considered as an asset.  Similarly, any rise and fall in stock prices or gold prices is not included.  But something called imputed rent is included, which in theory is how much a homeowner would charge in rent to a tenant of their home but in practice is fairly hard to measure.  It is computed largely by basing rates off the general rent trend.
• Water and trash bills continue to outpace the overall CPI, with the latest showing a 5.5 percent gain.  This cost has been rising at 5 percent or higher for nine straight years.  But on a positive note, the gas bill for utilities has fallen sharply by 14 percent.
• Of interest to some commercial real estate investors, moving/freight/storage costs rose 3.8 percent.  It is the highest rate of inflation in 6 years after several years of falling prices on this component.
• Bad news for parents: college tuition and fees continue to grow fast, rising 5.3 percent.  This bill has outpaced CPI for 30 consecutive years.  Why: Strong demand for higher education and/or high salaries for professors and college administrators?
• The biggest reason to monitor this data aside from assessing how your pocketbook is impacted is that inflation data impacts monetary policy and interest rates.  Based on today’s softening inflation in the broad CPI, the Federal Reserve will not raise its short term interest rate anytime soon.  The long-term rates like 30-year fixed rates could also continue to remain at rock bottom rates.  Still, core inflation is up 2.2 percent, above the Fed’s preferred target of 2.0 percent.  The core rate could rise even higher once rent data begins to accelerate again.  Even though the Fed has pronounced its desire to keep low rates well into 2014, the Fed may have to start raising rates from as early as fourth quarter 2013 if rent continues to move higher.

The Office of the Comptroller of the Currency published its Semiannual Risk Perspective for the spring of 2012 on July 5^th.  In it, the agency outlined concerns about a potential wave of rate resets on home equity lines of credit (HELOCs) that are set to occur from 2014 until 2017.  While these loans certainly merit concern given the already stressed banking and mortgage finance system, the current market environment has created room for borrowers to absorb the higher costs and primed the banking system to provide aid where needed, which should help to ameliorate this issue.

According to the OCC, on average HELOCs accounted for roughly $500 billion of the combined balance sheets of the banks monitored by the agency in 2010 and that those portfolios fell through 2011.    As a share of all bank assets, HELOCs acount for only 9% compared to 27% for 1-4 family residences and 11% for credit cards.  Furthermore, the charge off rate was roughly 2% in 2011 compared to near 6% for credit cards.

However, as pictured in figure 1, beginning in 2014, the balance on HELOCs that will end their draw (e.g. convert from a line of credit to loan that must be repaid) will begin to rise from $29 billion in 2014 to $73 billion by 2017.  Of concern to the bank regulator isn’t just the size of the blances coming due, rather it is the fact that the value of many of the homes backing these loans has decline, some significantly, and that a majortiy of these loans were interest only (figure 2), meaning that the holder has only paid interest to date and that the rate reset will be joined by principal payments.

An example will help to clarify. For a borrower who took out a HELOC with a balance of 20% of the value of their $200,000 home or $40,000 in 2007,  they would pay $213 a month for the first seven years at the prevailing rate of 6.39% for an interest only 7/1 HELOC in July of 2007.  However, when the loan resets it will change to the prime rate plus the banks profit margin.  While the current prime rate is 3.25%, it is likely to rise, so for this example I’ll use 5.25% plus a margin of 2.0% for a rate of 7.25%.  That would translate into a jump in the monthly payment of $85 for a total of $298, or a 40% increase assuming that the balance of $40,000 is ammoritized over a 23 year period; a shorter period would cause the payment to rise further.  If the prime rate continued to rise, but was capped at 2% per year, by the fifth year the monthly payment would be $481 or a 126% increase as depicted by the blue line below.  A base case where the prime rate hovers at 5.25% is also included in graph.

However, there are some factors in play that would help to ameliorate the payment shock of a rate reset on a interest only HELOC:

1. The prime rate has fallen considerably in recent years due to the weak economy, concerns in Europe, and the sluggish U.S. housing market and currently stands at 3.25%, well below the prevailing HELOC rates of 6.5% or higher back in the period from 2003 to 2007.  A person facing a HELOC reset today might actually receive a lower payment.  However, rates are likely to rise over the next 5 years, so it would be prudent to address the mortgage terms today.
2. Given the record low mortgage rates, the borrower may choose to refinance their primary mortgage.  A homeowner who refinanced from 6.31% (the average in June of 2007) to 3.75% (well above last week’s average of 3.56% according to Freddie Mac) would see a decline in their payment of $374 on a $186,808 loan (the principal balance on a $200,000 mortgage after 5 years of payments). The savings in turn could be used to pay down $8,978 of the priniple on the HELOC, which would lower the payment relative to the worst-case reset scenario (green line charted above).  The lower monthly payment on the first lien could also help to offset or to absorb the difference in HELOC payments after the reset.
3. The borrower may choose to refinance the HELOC in tandem with the 1^st loan if the borrower is not underwater.  Refinancing a $40,000 HELOC at 4.75% would lower the payment from $213 to $209 (purple line in the chart above)…and it would be fixed for the remaineder of the term meaning no payment shock.
4. If the borrower is underwater, they could take advantage of the HARP or HAMP programs to lower the cost of the primary mortgage.  Investor holders of 2^nd leins have been more willing to re-subordinate their loans in recent quarters in recognition that it is in their own interest.
5. HAMP refinances can also modify a 2^nd lien like a HELOC through the 2MP program.
6. As prices rise modestly in the coming years, those not elligible for these programs may become elligible for traditional refinances.
7. Finally, banks and financial institutions have become more aggressive about their own loan modifications as they see it in their own best interest to prevent costly foreclosures.

It is unlikely that any one program will eliminate the problem.  Rather, it will be a combination of factors that ameliorate the impact of the payment shock as well as the impact to banks’ balance sheets as both the outstanding balances and incidence of default decline.

The upsurge in refinances this spring will likely help to stabilize the HELOC situations as homeowners have more funds to pay down HELOC balances prior to any resets.  What’s more, the mortgage finance industry has been primed to respond to this type of problem.  While a government funded bailout of these sector is unlikely, these borrowers can take advantage of current programs to manage their other expenditures.  For REALTORS® this is an opportunity to inform their current or former clients of this situation, adding value to their service and supporting stable prices and confidence in their communities.  It is possible that not enough homeowners will take advantage of the currently available low rate refinancing and that the prime rate might surge in response to robust economic growth by 2015, but it is in the banks’ interest to see that these borrowers achieve stable positions.

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses housing starts.

• New home construction activity continues to improve with good gains in June.  Housing starts rose 7% to now 760,000 (annualized rate).  This time last year, the figure was 615,000. Both single-family units and multifamily units made gains.
• Though the bottoming in housing starts occurred in 2009 with only 550,000 housing starts, the pace of recovery since that time has been very sluggish.  Sharper gains are occurring this year, already up 25% year-to-date, and even bigger gains could occur next year because the inventory levels have fallen to very low levels.
• Based on the historical average of the U.S. population growing by about 3 million people each year, housing starts have been 1.5 million a year on average.  However, the deep downturn after the bubble years has resulted in 1.5 million housing construction over a long 3-year time span from 2009 to 2011.    There is clearly pent-up demand ready to hit the market.  Do not be surprised if housing starts rise by 50 percent in 2013.  Note that even with such a large percentage increase, housing starts will only be 1.15 million units, still below the normal 1.5 million historical average.  If housing starts rise at a slower pace, then home prices will perk up at a faster rate.
• One unwelcome development in the nascent recovery in homebuilding is that many of the smaller builders have been shut out from participating.  Construction loans are very hard to obtain.  As a result the big homebuilders with the ability to tap Wall Street funds and issue bonds are the ones taking advantage of recovery over the smaller players (just like big banks getting bigger while smaller banks experiencing difficult conditions).  Less competition will mean somewhat higher home prices for consumers to buy a newly constructed home.

1. Create Link Bait

Link bait is the look-at-me-now of any website. It refers to any content on a website created specifically to gain attention and encourage others to link to the website. Infographics are a great example of creating eye-catching content that has excellent visualization and a wealth of information. Articles that are funny or incite debate can also stir up attention, while breaking news and current affairs add timely content.

2. Create SEO Friendly Content

Spend some time researching and selecting appropriate keywords using Google AdWords. Once you have a list of keywords, place them strategically in the title tags, body text, meta tags, image captions, etc. Write with your audience in mind and be relevant to the category for which you’re creating content.

3. Redesign Homepage

Your homepage represents your company – treat it as your calling card. Without the right links and functions, it won’t serve its purpose. Evaluate your homepage load time and check whether it is effectively communicating your brand’s value proposition. .

4. Improve Primary Navigation

Having the right keywords present in your anchor text, including your major menu structures, is good practice.

5. Social Voting Buttons

Search engines are increasingly crawling the web for social signals to understand how users value a page. Adding voting buttons such as “+1”, “Like” and “Tweet” attract up to 8X more user interactions than the equivalent sharing buttons. Social voting buttons with links to popular social media sites help users share and recommend links to your website.

6. Remove Duplicate Content

Search engines do not generally return more than one version of the same page, so identical content on a website can be a missed opportunity. This leads the search engines to consider pages carrying duplicate content as irrelevant or spam, and these pages may be removed from the search index. Instead, consider combining duplicate content onto a single page with a single URL.

7. Title Tags

Title tags appear in the clickable links on the search engine results page, so ensure that specific keyword phrases relevant to your company are present in the title tag. Remember that you should keep your title tag shorter than  70 characters.

8. Fix Broken Links

Broken links don’t just get you into trouble with users, search engines also consider such links to be an indication of poor quality. A poorly maintained linking structure won’t rank as well as one that is maintained properly.

9. Fix 404 Pages

External or internal links pointing to pages that do not exist (404 errors) should be corrected immediately, and you need to make sure that your 404 pages are reporting correctly the ’404′ HTTP code to the browser, otherwise google has trouble understanding your webpage.

10. H1 Headers

Implementing optimized headers allows search engines to easily identify the topic of a passage or section of a page, thereby letting them know what your site is about.

Let us know in the comments if any of these SEO suggestions have worked for you.

Please, share this post

• Buyers look to real estate agents most to help them find the right home. Fifty-five percent of buyers said that what they want most from their agent is help finding the right home.
• Thirteen percent of buyers wanted their real estate agent to help negotiate the price, and 12 percent wanted help with the terms of sale.
• The share of home buyers was consistent over first-time and repeat buyers, new and previously owned home buyers, and by household composition.
• Buyers most often noted that the benefit of having an agent was helping them understand the process (61 percent), more so for first-time buyers (81 percent).
• Also, more than half of buyers noted that real estate agents pointed out unnoticed features or faults with a property, while over 4 in 10 said real estate agents negotiated better sales contract terms, improved buyers’ knowledge of search areas, and provided a better list of service providers.

Click to view larger graph

First time home buyers accounted for 32 percent of total buyers in the latest Realtors® Confidence Index, slightly lower than the May figure of 34 percent.  Normally first time buyers are in the neighborhood of 40 percent of total residential sales, according to NAR’s Profile of Home Buyers and Sellers[1]. The proportion of first-time homebuyers hit a peak of approximately 50 percent in 2009. The relatively low level of first time buyers in part reflects the difficulty of securing mortgage financing and/or the delay with distressed sales. Realtors® have also noted that investors offering all-cash sales to sellers have crowded out first-time buyers in some cases, particularly in the case of distressed properties.  Unsuccessful first-time buyers typically continue their property search, sometimes making a number of bids before securing a property.

---

[1]              In the 2011 survey, first-time homebuyers accounted for 37 percent of all buyers.