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How's the Health of the Real Estate Market?

Ron Joelson •  April 26, 2017 | Your Finances, Ask the Expert

Each month, we book time with some of our company’s top financial brain power to answer questions about investing and your finances. This month we’re talking about the health of the housing market.

Ron Joelson

Ron Joelson is Northwestern Mutual's chief investment officer and oversees the company's general account, valued at approximately $200 billion as of June 2016.

Mark McLennon

Mark McLennon is vice president of Investment Products and Services (IPS) Business Development. He oversees the fee-based financial planning program and departmental growth initiatives.

Brent Schutte

Brent Schutte is chief investment strategist of Northwestern Mutual Wealth Management Company. He oversees the investment philosophy for individual retail investors and the investment strategy for more than $100 billion in assets under management as of December 2016.

Do you have a question for our financial experts? Email it to us at: AskTheExpert@northwesternmutual.com

The following is an excerpt from our Ask the Financial Expert podcast (listen to the entire podcast below):

Mark: We’re heading into real estate peak season, so I want to get your thoughts on a few things related to real estate and housing. First question, how’s the housing market shaping up this year? Are we seeing growth? What’s going on?

Ron: We’re having a bit of a hiccup at the moment. Housing starts in March were down just shy of 7 percent1 over the February estimate, but the permit situation is still very solid. I think the drop in housing starts had more to do with the weather than anything else, so we’re not totally surprised. I think, in general, affordability has been good; and I think that overall the market continues to be reasonably strong.

Brent: We are seeing a shortage of existing homes for sale, so the supply is down; and over time that should push new home sales to move higher. That should have a bigger multiplier effect on economic growth in the U.S. because new home sales take more to create than just selling existing homes.

Ron: I would also note that listings are lower in certain parts of the country. For instance, if you look at San Francisco, Denver, Boston, you’re seeing sort of a shortage. As a result, you’re starting to see prices being bid up in a number of those places.

Mark: When you look at demographics, who owns these homes?

Ron: It tends to be older people, and that has been a trend that we’ve been seeing. People over 65 have the highest percentage of home ownership right now2, and that trend keeps moving up. The rate overall for the population is about 63 percent, but it’s down from about 69 percent in 2004.

Mark: What impact would rising interest rates have on what’s going on?

Ron: Everyone has different views. I tend to think that the overall level of rates is low enough right now. The changes we’re seeing are too small to have a huge impact. The fact is that housing is affordable, and it still will be affordable even if rates go up another 50 basis points.

Brent: Housing affordability is still high. If you look at a chart of the housing affordability index3, it’s well above where it was for most of the prior 20 or 30 years except for right after the great recession. Additionally, if rates rise, we’d assume that economic growth will be rising along with it—and wage growth, also.

Mark: To sum up, any other final thoughts on housing and the real estate markets?

Ron: The small moves that we’re seeing are less important than the overall trend. And the overall trends, not just for housing but across the economy, still look good.

Brent: One additional point is that, post-recession, more people are going with fixed mortgages, which means more mortgages today are fixed than what they were in the past. That speaks to housing affordability because it suggests that people feel like they don’t have to stretch for the lower rate and take on the risk of it going higher. They feel they can lock their rate in longer. It will prevent some of the problems that hurt the housing market in the past.

Ron: It’s a very healthy trend.

Hear more from Ron, Brent and Mark in the “Ask the Financial Expert” podcast:

Do you have a question for our financial experts? Email it to us at: AskTheExpert@northwesternmutual.com

1US Census Bureau, April 2017

2US Census Bureau, January 2017

3The Housing Affordability Index is produced by the National Association of Realtors and measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data.

The opinions expressed are those of individual investment professionals as of the date stated on this article and are subject to change. This material does not constitute investment advice, is not intended as an endorsement of any specific investment or security and is not a prediction of what will happen in the markets.

Please remember that all investments carry some level of risk, including the potential loss of principal invested.

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