By: Mark Edwards – Senior Credit Officer & Bank Economist
In our last post we looked at interest rates and inflation. Today we discuss the housing market.
Housing market – Rising interest rates will impact a variety of industries. Sectors that require more fixed asset investments and higher levels of financial leverage will see borrowing costs rise. The impact will be most broadly felt in the housing market. Alaska home purchases are financed, on average, with a 10% down payment and 90% debt. A traditional mortgage loan is amortized over 30 years, amplifying the impact of interest expense over the life of a loan. If per capita income is not rising, then people will either have to devote a larger portion of their monthly income to housing, reduce the price range of houses they qualify for, or the price of homes will have to compress in response to the lower buying power of the average customer in the market.
30 year conventional fixed interest rate mortgage loans have been getting less expensive for three decades. In 1981 they peaked at 16.6% and have undergone a slow and steady decline ever since. Last year they reached a low of 3.7% and have now begun to rise. In March of 2017, 30 year conventional fixed rates have averaged 4.2%. 2017 will be an important year to determine if this is the start of an upward trend in rates or if they will remain low in this range, as they have for the last four years.
Building permits - According to the U.S. Census Bureau, the number of building permits for new, privately owned housing of 1 to 5 unit buildings remained relatively low for the 10th straight year. 2016 saw an increase of 212 permits or 16% compared to 2015. The 1,503 housing permits last year was still much lower than the prior decade, which saw an average of 2,781 permits per year. About two thirds of the activity was from single family homes while roughly 20% was multifamily projects with five units or more.
Alaska Multiple Listing Service (MLS) shows the average sales price of single family homes in Anchorage grew for four consecutive years from 2011 to 2015. In 2011, the average price was $321,958 and rose to $366,836 in 2015. 2016 average sales price was virtually unchanged at $366,080, down 0.2%. The number of units sold was also down only 0.2% from 2,998 in 2015 to 2,940 in 2016, demonstrating stability in volume as well.
The number of low and middle income homes listed on the market in Anchorage still appears to be in short supply. There is less than two months of inventory available in all price ranges below $500,000. With an average of 245 home sales per month over the last two years, the current listings of 538 homes in all price ranges appears relatively low. The market segments where inventory outweighs demand are in price ranges over $750,000. There are 6.5 months of inventory for the $750,000 to $1 million range and 18 months inventory for homes over $1 million.
Foreclosure and delinquency – This graph of data from the Mortgage Bankers Association highlights the stability of the Alaska housing market for the last 25 years in blue. The severity of the Alaska recession in the mid 1980’s is displayed on the left of the graph and its impact on the housing market. Data through the end of 2016 does not show any uptick in foreclosure problems affecting the Alaska housing market.
Alaska’s foreclosure rate at year-end 2016 was 0.6%, which was the 7th best state in the country. This is actually an improvement from 0.8% in 2014. The comparable 2016 national average foreclosure rate last year was 1.53% in all 50 states.
The red line in the graph shows how stable the U.S housing market was for 25 years between 1982 and 2007. Then, the national foreclosure rate stayed above 4% for 5 years when the worst aftershocks of the national recession set in during 2008. On the far right of the graph you can see how the national rates have been improving consistently for the last three years as the foreclosures work their way to resolution. The country is again comfortably under the 2% rate.
Alaska’s delinquent mortgage loans - greater than 30 days past due, but not yet in foreclosure – were 3.05% at the end of 2016. This is 0.1% higher than the 2.95% reported at the end of 2014. This ranked Alaska 7th best of the 50 U.S. states and was 2% better than the national average of 5.07% delinquent mortgage loans.
Next week, we will post our final section on Gross Domestic Product, Income, Population and Employment numbers.