For Sale Housing Begins a Comeback

By Ron Johnsey, June 19, 2013

genericlargehomeWhen it comes to home ownership, the news seems to be mostly positive. The National Association of Realtors (NAR) pointed out in a recent report that pending home sales "improved slightly" during April 2013 and are well above where they were in April 2012. The NAR also notes that its Pending Home Sales Index (which measures contract signings, but not closings) rose by 10.3% in April 2013 from a year ago.

According to Lawrence Yun, NAR chief economist, a familiar pattern has developed. “The housing market continues to squeak out gains from already very positive conditions. Pending contracts so far this year easily correspond to higher closed home sales in 2013,” he said. Total existing-home sales are expected to rise just over 7.0% to about 5.0 million this year.

“Because of inventory shortages, higher home sales will push up home values to the highest level in five years,” Yun said. The national median existing-home price should increase close to 8.0% and exceed $190,000 in 2013

Kiplinger's outlook for single-family homes is also positive – even with housing inventory having increased 12% year over year, Kiplinger forecasts the sale of existing homes to increase by 7.5% in 2013. Additionally, both NAH and Kiplinger point out that construction starts are up. Not only are sales up but the prices for the homes sold are too. According to the S&P/Case-Shiller Home Price Indices, data through March 2013 showed for its national composite that home prices rose by 10.2% over the past year.

The U.S. Census Bureau’s report for May housing starts showed starts rising at an annual rate of 914,000 with single-family starts at a 599,000 annual pace and multifamily starts at a 315,000 annual pace. Single-family starts still have a long way to go before reaching a “normal” level of about 1,250,00 units per year. Multifamily is approaching its “normal” level of about 330,000 units per year.

The Joint Center for Housing Studies of Harvard University (JCHS) says in its “The State of the Nation’s Housing 2012” report that there are “nevertheless, a number of conditions [that] may keep the recovery in the owner-occupied market relatively subdued. The backlog of roughly two million loans in foreclosure means that distressed sales will remain elevated, keeping prices under pressure. Another 11.1 million homeowners owe more on their mortgages than their homes are worth, which dampens both sales of new homes and investment in existing units. And despite recent declines, the number of vacant homes is still well above normal, limiting demand for new construction in many markets. What the for-sale market needs most is a sustained increase in employment to bring household growth back to its long term pace.”

The JCHS points out further headwinds for the for-sale market: “The greatest potential for recovery in the for-sale market lies in its historic affordability for well-positioned homebuyers. The decline in home prices and record-low mortgage rates have made owning more attractive than in years. But the availability of mortgage financing for young buyers with limited cash, other debts, and less than stellar credit is far from certain. Since the market meltdown, underwriting has become much more restrictive. So far, FHA and state housing finance agencies have served a vital role in supporting low-down payment loans for homebuyers with all but the lowest credit scores. But even FHA is now raising its premiums to shore up its financial position and to encourage the return of private capital to the market. With key mortgage lending regulations still undefined, it remains to be seen to what extent and under what terms lenders will make credit available to lower-income and lower-wealth borrowers.”

Another problem now for home buyers is the rise in mortgage rates, making it more difficult for borrowers to qualify for a loan and potentially requiring the borrower to put more money down or buy a cheaper home. “Mortgage rates have jumped above 4% for the first time in about a year, hitting 4.15% in the first week of June, up from 3.59% five weeks earlier, according to the Mortgage Bankers Association. The rise represents a 15% increase in the cost of borrowing, or around $50 in the average monthly payment on a $192,800 home, the median price of a previously owned home in April”, according to the Wall Street Journal.

The JCHS report clearly states that a robust employment scenario is necessary to shore up the housing market – but the current employment situation is anything but robust. For one thing, the unemployment figures issued monthly by the U.S. Bureau of Labor Statistics do not paint a clear picture of what's really happening in the labor market. As mentioned in a previous blog (Unemployment Stats Do Not Tell the Entire Story), unemployment figures are only part of the equation. We agree with Hoover Institution fellow Edward P. Lazear that other, more precise statistics show a bleaker employment picture than the “headline” numbers reported by the media.

For rental housing, the JCHS report notes that the strong rental market and resulting increase in multifamily starts from historically low levels are occurring in part due to some of the constraints mentioned above in buying a home today. The report points out that it is not only the Echo Boomers that are flocking to apartments versus single-family homes but also Baby Boomers who are downsizing. The aging of the population has also created a demand for rentals versus home ownership. Other demographic trends, such as first marriages occurring later in life, also mitigate demand for owner housing in the short-term.

Interestingly enough, various surveys point out that Echo Boomers would still like to own their own homes in time; the American Dream of home ownership is still very much alive. But the JCHS report pointed out that "the weakness in the economy and continued uncertainty may be deterring many would-be buyers from taking advantage of today's home prices and low-mortgage interest rates."

It's our belief that, despite rosy information from Kiplinger and NAR about housing sales and construction starts, the economy is still weak, generating plenty of uncertainty. As such, the comeback in housing this year will not be as strong as it could be.

Read more about The State of the Nation's Housing 2012.