Could the housing recovery sputter to a halt?
The housing market seems to be turning a corner, with prices ticking up thanks to reduced inventory and a decline in foreclosure sales. But problems looming in the broader economy could roil this housing rally.
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Will the housing recovery last? That's the question some economists are asking, given the plodding growth in the economy, as well as the looming "fiscal cliff," which threatens to raise taxes and cut jobs.
Tight inventory in many markets and a decline in foreclosure sales have lifted prices, and record-low mortgage rates eased some buyers off the fence, but weak job growth, lousy credit and the large number of buyers with little or no equity could conspire to flatten out the rebound, making this one of the longest, most excruciating recoveries in housing history.
That's possible even if Congress manages to stave off the "fiscal cliff" in January that would take away the Bush-era tax cuts and raise taxes for most Americans.
"It's clearly not sustainable," says Sam Khater, deputy chief economist for real-estate analytics firm CoreLogic. "Real incomes are not growing. We are at the same level we were in the mid-1990s. [The recovery] is not sustainable until incomes recover."
Some markets have yet to hit bottom, says Robert Shiller, the Yale economist who first warned of the looming crisis in real estate, and who — with Carl Case — created the S&P/Case-Shiller Home Price Index. Home prices have yet to turn positive in markets such as Milwaukee, Atlanta, Philadelphia and even New York City.
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Shiller, for one, is still reluctant to call the recent improvement in the market a solid recovery.
"The question is how strong is it, and will … this rally fizzle or not? And I don't know the answer to that," Shiller said in a recent interview with NPR. "But I point out that this is the fourth time we've had a rally since the crisis ended."
A good start
Still, there's no question that the overwhelmingly negative news about the housing market has turned positive.
Existing-home sales jumped 11% in September from the same time a year earlier, while the median home price of $183,900 was 11.3% higher than a year ago — the seventh straight month of year-over-year increases, according to the National Association of Realtors.
With sales increasing, the supply of for-sale housing has dwindled to a healthy 5.9-month supply, down from the 8.2-month supply last summer. Of those homes on the market, far fewer are foreclosures, which typically sell for 20% to 30% less than traditional listings.
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"When properties come on the market they move fast," says Gary Bauer, a broker and blogger in Denver. "It's not uncommon in the price ranges up to $750,000 for a new listing to get multiple offers."
While new-home sales dipped slightly in August, the median price of a new home surged 11.2% to $256,900, the biggest one-month increase ever recorded. Prices have climbed 17% over the past year and are at the highest level since spring 2007, according to the Commerce Department, fueling some talk of a growing bubble.
It's true that homebuilders are feeling more confident. New single-family home starts ticked up 5.5% in August from the previous month.
Add to that rising consumer confidence and record-low mortgage interest rates in recent weeks, and it's easy to see why so many are starting to think the housing market has really turned the corner.
Too much excitement?
Of course, some things are missing for a robust and sustained rebound, including meaningful job growth, pay increases and enough affordable inventory in some markets.
Tight inventory helped pushed the NAR's Pending Home Sales Index (based on signed contracts) down 2.6% to 99.2, despite being 10.7% higher than the same time last year.
Prices have yet to rise enough to make selling viable for those who bought in the past seven years, Khater says.
About 10.8 million, or 22.3%, of homes financed with mortgages were in negative equity at the end of the second quarter, according to CoreLogic. And 45% of all homes have mortgages with an 80% loan-to-value ratio, giving homeowners little to put down on another house.
Moreover, many foreclosures that would have wound up with a for-sale sign in front are being sold in packages to investors as rentals. While that's good for propping up prices near term, this affordable inventory won't make it to individual buyers.
And despite the record-low mortgage rates of late, qualifying for a loan can still be tough.
Paul Diggle of Capital Economics pointed out the growing gap between the NAR's Pending Home Sales Index and its monthly sales figures in a recent housing report. As many as 15% of contracts don't make it through to closing, he says, in part because of today's tight lending environment.
But the real driver of the recovery, Khater says, needs to be jobs. Without meaningful growth in jobs — job creation that outpaces population growth — and stronger pay raises, the recovery could fizzle out.
"The economy is fundamentally very weak," he says, "and that could keep the malaise out there for an extended period of time."
Especially, he says, if Congress fails to push off the spending cuts and tax increases due to take effect at the beginning of next year. That could send the country back into a recession.
The road ahead
Of course, analysts say, there's a chance that legislators could extend those cuts to keep the economic recovery on a firm footing or replace them with something else to help low- and moderate-income Americans.
But the economic uncertainty will keep many buyers on the sidelines, says Alex Villacorta, director of research and analytics at Clear Capital. Debt-ceiling brinksmanship pushed down consumer sentiment 14.3% last year, the largest amount since the end of the recession, and uncertainty over taxes could "throw a wrench into the recovery."
The Federal Reserve did its part recently by announcing a third round of monthly mortgage-backed securities purchases, a stimulus designed to increase employment and keep mortgage rates low so more people will want to buy homes.
If consumer confidence can survive the weak economic news, Clear Capital predicts a strong market through the start of the spring buying season.
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With prices rising in most markets, growing numbers of people who already own a home may be nudged into moving up to a larger one. First-time buyers will still need to be making enough money at their jobs to qualify for loans.
But with the large number of low-down-payment FHA loans available, and lower mortgage rates bringing down the cost of homes, would-be buyers won't have to spend as much to get one.
Indeed, Diggle sees the high home-contract cancellation rate as a positive rather than negative for the housing market in the months ahead. The cancellations, he says, "reflect would-be buyers’ willingness to buy increasing at a faster pace than the bank's willingness or ability to lend."
In other words, you have an eager pool of buyers who might have less than perfect credit — good news if credit loosens a bit.
As far as supply goes, inventory should grow as more homeowners gain equity in the next year or two. CoreLogic says that just a 5% jump in annual home prices would be enough to get a significant number of those underwater homeowners into an equity position.
Still, that might not happen, he says, at least not in the next year. Local Market Monitor predicts values in the U.S. will remain relatively flat in the next year, with a larger increase — up to 7% — in the next 36 months.
"It seems as if we have a long recovery in order, given the slow economic growth and pace of hiring," says Ingo Winzer, president of Local Market Monitor.
The system needs stability. Homes shouldn't be sold as commodities. Simply sitting your rear end on a piece of earth does not make you wealthy. It shouldn't.. You won the lottery if it does.
A home is your home. Your sanctuary.
This is a crisis because they took the idea that more people should have their own home and turned it into an idea that people could buy it from somebody for a price nobody in their right mind would pay because somebodys out of their mind willing to. And the bank will give them the cash.
Talk about diluting community and the whole point of home ownership.
bklynjm is pretty on point. Id put more weight on what Clinton did, though. It's not like he didn't ride the feel good wave Bush Seniors pay as you go set the stage for. We don't have statesmen in government anymore. Only politicians.
Investor bought homes are still inventory- and most of the houses bought up in the last few years are such. The inventory still is there- the gov't just needs to squeze that inventory a bit and there will be plenty of home- prices cannot get out of hand again.
If we really want to fix the problem we need to shutter and disband both Freddie & Fannie and mandate a minimum 20% down payment on all residential and commercial mortgages. But if we did this real estate prices will plummet and future appreciation will be a thing of the past - so much so all new construction will grind to a halt because new construction will cost double what widely available existing structures cost!!!