2017 q1 - u.s. residential housing marketing review
TRANSCRIPT
Adkins Capital Management “Helping Prospective Home Buyers Make A Prudent Home Purchase Decision”
U.S. Residential Housing Market Review
Adkins 60-City Home Price Index Analysis
First Quarter, 2017
PRESENTATION CONTENTS
The purpose of this presentation is to provide an overview and assessment of:
The events and trends that have transpired in the U.S. residential housing market
for the first quarter of 2017:
Actions taken by the Consumer Financial Protection Bureau
Key findings from the “Emerging Trends in Real Estate” report by
PricewaterhouseCoopers and the Urban Land Institute
Financial settlements made by the DOJ attributed to the mortgage crisis:
Deutsche Bank
Credit Suisse
Actions and implications of the Monetary Policy set by the Federal Reserve
The home price level for a select group of cities that make up the Adkins 60-City
Home Price Index.
Top Five Overpriced Cities in the U.S.
Top Five Underpriced Cities in the U.S.
Conclusion
Resources for Prospective Home Buyers
Important Disclosures
1 Adkins Capital Management LLC. 2017 Q1 - Residential Real Estate Analysis
Adkins Capital Management Privately owned and independently operated company.
Exclusive focus on residential real estate.
Company not affiliated with any parties associated
with the residential housing industry.
Our mission is to bridge the gap in the residential
housing market, where deficiencies in education,
public policy, regulation, product structure, and
personnel have created an environment where
prospective home buyers need objective information
and useful analytical tools in order to make a prudent
home purchase decision.
Adkins Capital Management LLC. 2
More than 15 years of real estate analysis experience, more than 10 years of
institutional investment consulting experience, and more than eight years of
freelance financial writing experience.
Author of more than 25 published articles, including publications by Forbes,
Investor’s Business Daily, Yahoo, Investopedia, Financial Edge, and more than
230 news organizations worldwide.
2017 Q1 - Residential Real Estate Analysis
OVERVIEW OF FOUNDER AND CORPORATION
For the first quarter of 2017, an order imposed by the Consumer Financial Protection
Bureau (CFPB) against the nation’s three major credit reporting bureaus (Equifax,
Experian, and TransUnion) was the primary topic of discussion.
The problem, according to the CFPB, was that TransUnion, Equifax, and Experian misled
consumers by suggesting that the educational credit scores they offered were the same
scores lenders used to make credit decisions. However, according to the CFPB, these scores
were "rarely used by lenders to make credit decisions.”
The order imposed by the CFPB levied the following fines upon the three organizations:
Equifax and TransUnion were ordered to pay more than $23 million dollars in fines
and restitutions; and
Experian was ordered to pay $3 million dollars in fines and restitutions for similar
violations.
According to Fair Isaac, 90% of "top" U.S. lenders use FICO scores as part of their lending
decision making process.
Prospective home buyers should remember that according to Fair Isaac, the three credit
scores used by most lenders in terms of offering mortgage loans are:
Equifax: FICO® Score 5: based on Equifax data
Experian: FICO® Score 2: based on Experian data
TransUnion: FICO® Score 4: based on TransUnion data
3 Adkins Capital Management LLC. 2017 Q1 - Residential Real Estate Analysis
IMPLICATIONS OF CFPB ACTIONS
For the first quarter of 2017, a report titled “Emerging Trends in Real Estate” was worthy
of discussion.
The report, undertaken jointly by PricewaterhouseCoopers and the Urban Land
Institute, provides: “an outlook on real estate investment and development trends,
real estate finance and capital markets, property sectors, metropolitan areas, and other
real estate issues throughout the United States.”
The following points are an excerpt of the key findings that can be used to help prospective
home buyers analyze the real estate market in their community before purchasing a home:
A rising number of female executives, affluent immigrants, younger and older
workers, and retirees will have a profound influence on community building in the
U.S. over the next ten years.
The annual change in the median existing home price versus the change in the
median existing household income is outlined in an informative manner.
Moderate and severe housing cost burden on households with annual incomes below
$50,000 dollars is worthy of analysis.
Few builders are targeting middle-income buyers. Instead, homebuilders have been
targeting more affluent buyers. This in turn means that existing housing stock will
likely exceed the supply of new homes for future middle-income buyers.
The National Association of Realtors (NAR) is worried about the decreasing ability of
Americans to buy homes. According to the NAR, it seems unlikely that the U.S.
homeownership rate will edge above 65 percent anytime soon.
4 Adkins Capital Management LLC.
FINDINGS FROM EMERGING TRENDS IN REAL ESTATE REPORT
2017 Q1 - Residential Real Estate Analysis
For the first quarter of this year, financial settlements agreed to by two foreign banking
institutions that led to the U.S. mortgage crisis were also important topics of discussion.
The Department of Justice reached a $7.2 billion dollar settlement with Deutsche
Bank, a German global banking and financial services institution
headquartered in Frankfurt, in connection with the bank’s issuance and
underwriting of residential mortgage-backed securities between 2005 and 2007.
The Department of Justice, reached a $5.28 billion dollar settlement with Credit
Suisse , a Swiss multinational financial services holding company located in
Zurich, in connection with the bank’s packaging, securitization, issuance,
marketing and sale of residential mortgage-backed securities between 2005 and
2007.
These financial settlements should remind prospective home buyers that they need to
take a proactive approach to analyzing their home purchase decisions by using
independent proprietary software applications such as the Adkins Residential Home
Valuation Analyzer.
5 Adkins Capital Management LLC.
FINANCIAL SETTLEMENTS FROM THE MORTGAGE CRISIS
2017 Q1 - Residential Real Estate Analysis
For the first quarter of 2017, the national average mortgage loan interest rate for a 30-year
fully-amortized fixed-rate loan began the quarter at 4.09% and ended the quarter at 4.19%.
Since June of 2011, the national average mortgage loan interest rate for a 30-year fixed-rate
loan has been less than 4.61%.
In order to better assess the current mortgage loan interest rate environment, prospective
home buyers should remember that the national average mortgage loan interest rate for a
30-year fully-amortized fixed rate loan reached an all-time low of 3.31% in November of
2012, and it reached an all-time high of 18.63% in October of 1981.
In view of realized and expected labor market conditions and inflation, the Federal
Reserve elected to raise the target Federal Funds Rate from (0.50% - 0.75%) to
(0.75% - 1.0%) during their Q1 2017 Federal Open Market Committee meeting. In
addition, the Fed stated that it aims to raise interest rates twice more by the end of the year.
Accordingly, the Fed’s stance of monetary policy remains accommodative, thereby
supporting some further strengthening in labor market conditions and a return to 2 percent
inflation.
Prospective home buyers should closely follow the level of mortgage loan interest rates in
their community, because a rising cost of debt will increase the amount of interest expense
that prospective home buyers will need to pay for their mortgage loan. This in turn will
place downward pressure on the price-level of residential housing in their community.
Prospective home buyers should use the Adkins Residential Home Valuation Analyzer in
order to assess the impact of a changing interest rate environment.
6 Adkins Capital Management LLC.
IMPLICATIONS OF FEDERAL RESERVE MONETARY POLICY
2017 Q1 - Residential Real Estate Analysis
ADKINS RESIDENTIAL HOME VALUATION ANALYZER HOME PRICE-LEVEL ANALYTICAL METHODOLOGY
JUSTIFIED MORTGAGE LOAN INTEREST RATE
Represents the cost of debt for a 30-year fully-amortized fixed-rate mortgage
loan that equates the median home price level for a city with the median
household income level for the city.
Based on the assumption that 28% of household income is the largest amount of
money that should be spent in order to repay the principal and interest costs for a
30-year fully-amortized fixed-rate mortgage loan.
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JUSTIFIED PERCENTAGE OF HOUSEHOLD INCOME
Represents the percentage of pre-tax household income that would have to be
spent by the people that live in a city in order to justify the relationship between
the median household income level for the city and the median home price level
for the city.
Based on the month-ending national average mortgage loan interest rate for a
30-year fully-amortized fixed-rate mortgage loan.
Adkins Capital Management LLC. 2017 Q1 - Residential Real Estate Analysis
FINANCED-BASED ANALYSIS
TOP FIVE OVERPRICED CITIES IN THE U.S.
16 cities that make up the Adkins 60-City Home Price Index were classified as overpriced for the quarter.
It is not possible to justify the home price level for the top five overpriced cities by reducing the 30-year fixed
rate mortgage loan interest rate from 4.19% to 0.0%.
In order to classify the homes in the top five overpriced cities as underpriced, it would need to be deemed
prudent by prospective home buyers to spend more than the justified percentage of household income amount.
In order to justify the median home price level for each city, the median required household income level would
need to increase to a level within the respective range of $95,253 and $231,375.
Based on the median household income level, the quarter ending national average mortgage loan interest rate,
and the assumption that no more than 28% of pre-tax household income should be spent in order to repay the
principal and interest costs of a mortgage loan, the justified home price level for the top five overpriced cities
fell within the respective range of $267,146 and $401,568.
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Adkins 60-
City Home
Price Index
Median
Household
Income
Level
Median
Home Price
Level
Justified
Mortgage
Loan
Interest
Rate
Justified
Percentage
of
Household
Income
Required
Median
Household
Income
Level
Justified
Home Price
Level
San Francisco $84,160 $1,104,000 None 77% $231,375 $401,568
New York City $58,878 $586,400 None 59% $122,897 $280,935
San Diego $63,400 $540,500 None 51% $113,277 $302,512
Seattle $71,273 $592,200 None 49% $124,112 $340,078
Los Angeles $55,988 $454,500 None 48% $95,253 $267,146
Adkins Capital Management LLC. 2017 Q1 - Residential Real Estate Analysis
TOP FIVE UNDERPRICED CITIES IN THE U.S.
44 cities that make up the Adkins 60-City Home Price Index were classified as underpriced for the
quarter.
While Huntington has the same justified percentage of household income amount as Memphis
(Wichita), Huntington is ranked as the fifth most underpriced city in the index due to its lower
(higher) justified mortgage loan interest rate amount.
In order to classify homes in the top five underpriced cities as overpriced:
The national average mortgage loan interest rate would have to increase from 4.19% to more
than the justified mortgage loan interest rate amount for each city; or
It would have to be deemed imprudent by prospective home buyers to spend as much as the
justified percentage of household income amount in order to repay the costs of a mortgage loan.
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Adkins 60-City
Home Price Index
Median
Household Income
Level
Median Home
Price Level
Justified
Mortgage Loan
Interest Rate
Justified
Percentage of
Household Income
Buffalo $66,100 $94,000 19.65% 9%
Detroit $25,980 $42,600 16.95% 10%
Milwaukee $53,164 $99,500 14.80% 11%
Memphis $36,817 $76,200 13.25% 13%
Huntington $44,520 $96,800 12.60% 13%
Wichita $52,231 $114,600 12.45% 13%
Adkins Capital Management LLC. 2017 Q1 - Residential Real Estate Analysis
CONCLUSION
Given the events that have transpired in the residential housing market, and taking
into account the fact that buying a home will likely be the largest single financial
transaction that prospective home buyers will ever make, and the bulk of their net
worth will likely be tied up in their home, prospective home buyers should subscribe
to use the Adkins Residential Home Valuation Analyzer in order to accurately
assess:
the level of underpricing or overpricing of homes in their community;
the largest amount of money they should spend in order to purchase a home;
the amount of money they would need to earn on an annual basis in order to be
able to afford to purchase a specific home;
total home ownership costs expressed as a percentage of household income; and
how much a home would need to appreciate in value each year in order to offset
the costs associated with owning the home.
By analyzing residential real estate from these perspectives, prospective home buyers
should be able to make a prudent home purchase decision.
10 Adkins Capital Management LLC. 2017 Q1 - Residential Real Estate Analysis
ACCESS THE ADKINS RESIDENTIAL
HOME VALUATION ANALYZER
REVIEW THE ADKINS 60-CITY HOME
PRICE INDEX
ACCESS THE STRATEGIC RETIREMENT
PLAN SAVINGS CALCULATOR
11 Adkins Capital Management LLC.
RESOURCES FOR PROSPECTIVE HOME BUYERS
WATCH OUR MOVIE CATALOG OF QUARTERLY RESIDENTIAL HOUSING
REVIEWS
WATCH OUR COMPREHENSIVE HOUSING VALUATION METHDOLOGY
MOVIE PRESENTATIONS
WATCH OUR STRATEGIC RETIREMENT PLAN SAVINGS METHODOLOGY
MOVIE PRESENTATION
WATCH OUR ANIMATED MOVIE PRESENTATIONS
CONTACT ADKINS CAPITAL MANAGEMENT IN ORDER TO DISCUSS
RESIDENTIAL HOUSING ANALYSIS QUESTIONS
2017 Q1 - Residential Real Estate Analysis
THANK YOU!
Adkins Capital Management residentialrealestateanalysis.com
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Adkins Capital Management LLC. 12 2017 Q1 - Residential Real Estate Analysis
IMPORTANT DISCLOSURES