Looking beyond inventory and sales: A deeper understanding of current housing market conditions

by Dan Krell © 2012

Housing Statistics

According to the National Association of Realtors® news release of February 9th, home affordability has increased in the last quarter of 2011 in many metro areas- including the metropolitan Washington DC region. The increase of home affordability is attributed to “softer existing-home prices and record-low mortgage interest rates in the fourth quarter.” The Washington DC region home affordability increased in the last quarter about 5.8% while the region’s home prices for existing homes fell about 5.4% (realtor.org).

Details of the NAR’s fourth quarter market analysis include a continued interest in home ownership among first time home buyers, as 33% of home purchases in the fourth quarter of 2011 were by first time home buyers. Additionally, 29% of the homes purchased in fourth quarter were “all-cash purchases,” which has been relatively unchanged; however, the percentage of “all-cash” real investor purchases was 19% (down from 20% realized in the third quarter).

Greater housing affordability may sound promising, however having more meaningful information may help understand what’s happening in the housing market.

To get a clearer understanding of the housing market, you might consider the February 10th speech given by Federal Reserve Chairman, Ben Bernanke, to the National Association of Home Builders entitled, “Housing Markets In Transistion” (federalreserve.gov). The overview of the housing market was explained as an imbalance in the supply and demand. Supply in the housing market, as Dr. Bernanke described it, greatly exceeded demand in the last few years. Demand for housing, as measured by home vacancy, has considerably decreased; home vacancy is “dramatically” elevated from the number of vacant homes in the first half of the 2000’s. Additionally, a high foreclosure rate is likely to continue; which would not only increase the number of vacant homes, but negatively affect families and communities as well.

Adding to the imbalance is the strengthening of the rental market, which evidently has increased demand.

Housing Statistics

Dr. Bernanke also described the problems in the housing market as a secondary issue that stems from more pressing economic concerns, such as employment and household formation. Economic uncertainty has impacted the willingness to commit to home ownership. “…housing may no longer be viewed as the secure investment it once was thought to be…”

A stifled housing market has also held back an overall economic recovery. Dr. Bernanke stated that home equity has been reduced about 50% from the housing peak; more than $7 Trillion of equity has been lost which resulted in a decrease of household spending of “$3 to $5 per year for every $100 of housing lost” (which is estimated to be about $200 Billion to $375 Billion per year). Besides the reduced consumer spending, low/negative equity creates other problems for home owners too; such as: restricting the ability to refinance to lower interest rates; reducing or eliminating the ability to cash out home equity for emergency expenses; and possibly preventing a move due to an underwater mortgage.

Dr. Bernanke was clear when stating that housing problems have far-reaching effects on home owners, communities, the financial system, and “the vitality of the economy as a whole.” He continued to state, “…This observation underscores the importance of efforts to improve the condition of the housing market.” He is not the first to say that there is no single solution; however, he is one of the few who has been able to articulate the interconnected factors that need to be addressed.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published Using this article without permission is a violation of copyright laws.

By Dan Krell.
Copyright © 2012

Market outlook: Banking on Bernanke

by Dan Krell (c) 2009.

Confused about where the real estate market is headed? So are the pros. Realistically, the outlook for the housing market depends upon your perspective.

If you are a home owner, the almost 30% reduction in home inventory since last spring is certainly welcome news; the idea of less competition makes home sellers more optimistic about their homes actually selling. However, because they would be upside down (owe more than the sale price) if they were to sell today, many homeowners continue to wait for a more favorable market. Believe it or not, some home buyers have been turned off by bidding wars sparked by the reduced inventories of many low priced distressed homes for sale.

If you are a home buyer, reports of reduced home prices as reported by the increasing Home Affordability Index (HAI) is also good news. The HAI was 166.8 in January- an all time high (the higher the index, the greater the affordability)! Lower home prices combined with low mortgage interest rates make the current housing market the most affordable since the National Association of Realtors began tracking housing affordability in 1970 (Realtor.org).

Although optimists look forward to increased sales in the third and fourth quarter of 2009 due to pent up demand, the future may depend on other mitigating factors as well. Concerns of further sliding home prices and the state of the overall economy have had many potential home buyers keep their wait and see attitude. This sentiment was expressed during the January meeting of the Federal Open Market Committee (FederalReserve.gov), where reports of further concerns of devaluation in the housing market were discussed.

Additionally, many real estate industry insiders are concerned with the new Administration’s budget reducing mortgage interest tax deductions and increased home sale capital gains taxes (which some call an attack on homeownership). Even the ever optimistic Lawrence Yun, NAR Chief Economist, expressed concerns about the Obama’s administration’s move to restrict and lower some of the tax benefits of homeownership

Peter Hong of the Los Angeles Times (March 14, 2009: Plan to cut mortgage interest deduction stirs opposition) reported Yun to say that although the reduced mortgage interest deduction is aimed at two percent of all households, all home owners will be affected. Critics of the Administration’s new tax policies point to lower home prices in the “upper tier” sector, which will affect surrounding market areas and subsequently drive down home prices further in all sectors of the housing market.

Some are concerned about increasing mortgage interest rates due to impending inflation as a consequence of increased government spending. However, some economists point out that inflation fears are overstated because low consumer demand will keep inflation at bay.

Finally, it must be stated that Federal Reserve Chairman Ben Bernanke discussed optimism for the American economy during a recent interview with “60 Minutes” (as reported by Fox News on March 15th). He stated that a recovery could begin as early as next year if banks are stabilized. If what Dr. Bernanke stated comes to fruition, and if the HAI and interest rates remain low, then it is possible that we could see home sales modestly increase by the fourth quarter of this year and rise significantly by spring of 2010.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of March 16, 2009. Copyright © 2009 Dan Krell