The worst in housing looks to be over. The question now is about the degree of strength in such a housing recovery.
Palm Coast, FL – July 18, 2011 – We had better than decent news on housing in June. Pending contracts on existing homes bounced back solidly – implying much improved activity in the second half of this year compared to the first half. Home prices according to many measurements – including those from Case-Shiller, CoreLogic and the Federal Housing Finance Agency – turned positive. In fact, increases in home prices were quite solid at a near double-digit annualized pace. It is hard to imagine home prices will increase by 10 percent or more in the next 12 months, but that is a possibility if in the next few monthly gains match the gains reflected in the latest data.
But it’s been a mixed bag. Before we get too excited, let’s be mindful that foreclosed properties continue to reach the market. The inflow of inventory, however, is now being matched by the outflow of inventory as buyers come into the market. In other words, the overall inventory of homes is being held in check and not moving higher as would normally be expected during the spring and summer months. This is a good sign that buyers are quickly snatching up distressed properties. The worst in housing looks to be over. The question now is about the degree of strength in such a housing recovery.
Let’s examine supply and demand. Pent-up demand clearly exists. The addition of about 3 million in population each year has not as yet resulted in a commensurate rise in home sales. The recession can be blamed for the fall in sales initially, but the economy has been officially out of recession for two years now. Since its low point in 2009, the economy has added 1.5 million jobs. Meanwhile, new home construction has been stuck in a rut, leading to historically low levels of new home sales. At the same time, because of so little new construction, the inventory of newly constructed homes for sale now is at 166,000 – the lowest level of new home inventory since the data series began in 1963. If housing starts continue to remain well below the one million mark, any quick release of pent-up demand will mean a housing shortage in a short span of time. Based on year-to-date data, housing starts are only expected to post 600,000 this year; that would be barely above a third of the historical normal annual production rate of 1.6 million starts.
One important catalyst for releasing pent-up housing demand could be a turnaround in home prices. Those potential homebuyers who have been waiting for the true bottom will come to understand that we are pretty much there already. With interest rates expected to rise, such “fence sitters” could start to make the move into buying. Indeed, quick-footed investors have already done so. The ‘smart money’ of investors, since they have an option of putting money in other instruments like gold or stocks or bonds, has been increasingly chasing real estate since late last year – and those real estate purchases have been mostly all-cash transactions. Investors recognize the already great bargains in home prices and the potential for rent increases.
In addition, investors are evidently buying hard assets to protect against inflation – that nasty devaluation of purchasing power or, in essence, a hidden tax on consumers from overprinting of money. Some consumers lucky enough to receive cost-of-living-adjustments (COLA) will get some protection from inflation, including Social Security recipients who will likely see a 3.5 to 4.5 percent bump in 2012. Those without the COLA protection will have less money with which to purchase things unless wages creep higher.
With inflation in mind, the Federal Reserve is officially ending its so-called “QE2” program – the Quantitative Easing of buying government debt with freshly printed money. Government bonds now must offer higher interest rates in order to entice buyers of U.S. debt since the Fed is out of the picture. At the same time, the Saudis, who had been big buyers of U.S. debt when oil prices were high, will be less inclined to continue to do so. The Saudi Government has to spend its money domestically to placate their restless citizens who have witnessed the Egyptian revolution. The bottom line: the 10-year Treasury rate will likely have to rise to 3.5 percent by year end. That means the average 30-year fixed rate mortgage rate will climb to 5.3 percent – about 80 basis points higher than in June.
There are other obstacles to recovery. The economy, while expanding, is moving at slow speed. Only 1.3 million net new jobs are expected to be created this year, which will barely put a dent in the unemployment rate. A good, healthy pace of job creation should be 3 or 4 million additional payrolls in the immediate years right after a deep recession.
Then there is the political landscape. Presidential campaigning for 2012 is already underway. That means Washington politicking will get dirtier and, for some, entertaining. The debt ceiling vote will be the next major drama. Republicans are focused on government spending cuts and no tax increases. Democrats are focused on maintaining entitlements by closing what they consider loopholes for the rich. In the meantime, some needy retirees may not get their Social Security checks on time and national parks could be closed. We saw recently what can happen when elected leaders cannot reach agreement on fiscal issues: Minnesota and Connecticut governments virtually shut down – and right before the July 4th weekend.
In addition, there are potential public policy changes that could negatively impact the housing market by the end of the summer. Loan limits are scheduled to revert to lower levels – meaning more homebuyers will need to pay a higher jumbo mortgage rate. The availability of national flood insurance is in question, and that may impact about 10 percent of homes in the country. The debt limit and deficit have forced politicians to hunt for tax revenues, including those resulting from the trimming of mortgage interest deductions for the wealthy. NAR is working on these issues to insure that housing and homeowners do not face unnecessary obstacles just when market conditions are trying to show sparks of life.
©National Association of Realtors® – Reprinted with permission.