Category: housing recovery

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How many more years for housing recovery?

moving dayA recent study may indicate that housing market may not fully recover for most cities until 2018.

The “long slog” housing recovery prediction appears to be relevant as a recent study published by the Demand Institute (DI) now estimates that the recovery may take several more years.  DI, a non-profit that studies consumer demand, suggests that home values may not rebound until 2018.

The DI study was reported by Realtor Magazine (Uneven Recovery to Continue for 5 Years; March 03, 2014) to be comprehensive and include 2,200 cities across the country and 10,000 interviews.  Overall, the report concludes that the recent sharp increase in home prices was mostly due to real estate investors who purchased distressed properties.  Now that distressed home sales are declining, values are not expected to increase as precipitously; the continued housing recovery is expected to be driven by new household formation.

The study reported the appreciation rate of the 50 largest metro areas in the country through 2018; home prices are estimated to appreciate about 2.1% annually.  However, the top five appreciating cities will average an overall increase of 32% through the recovery; while the bottom five will only average about 11% (Washington DC is listed among the bottom five).  Cities that experienced the highest appreciation and subsequently sharpest depreciation in home prices will likely have the longest and protracted recovery, and yet may only recover a fraction of the peak home values by 2018.

Not highlighted, and not yet expected to be an impact on the housing recovery,  is the move-up home buyer.  The typical move-up home buyer is sometimes characterized as a home owner who decides they need more space, which results in the sale of their smaller home and the purchase of a larger home.  Similar to previous recessionary periods and real estate down markets, the move- up home buyer was the missing piece to a housing recovery; the move-up home buyer provides much of the housing inventory that first time home buyers seek.  However, it seems as if psychological barriers hold back many move-up buyers today as it did in past recoveries.  During the current housing recovery, many potential move-up buyers have remained in their homes.  And until the move-up home buyer presence is felt in the marketplace, we may yet to endure a few more years of “recovery.”

Much like the DI study, there has been a lot of discussion and debate about the effects (on housing) of the lack of housing formation during the recession and in the subsequent recovery.  Andrew Paciorek, an economist at the Federal Reserve Board of Governors, described household formation during a presentation given at the Atlanta Fed’s Perspectives on Real Estate speaker series (June 2013); “Think of the unemployed or underemployed college graduates living in their parents’ basements instead of renting or buying their own place. When a person establishes a residence, whether that’s an apartment or a house or another dwelling, that person is forming a household. Mainly because of a weak labor market that held down incomes, the rate of household formation cratered during the recession and subsequent recovery…”

To give perspective to the issue, the rate of decrease of household formation during the great recession was significant (an 800,000 per year decrease compared to the previous seven years).  Additionally, household formation between 2007 and 2011 was at the lowest level since World War II, and was 59% below the 2000 to 2006 average.  Most significantly: during 2012, 45% of 18 to 30 year olds lived with older family members; compared to 39% during 1990, and 35% during 1980.  He described the household formation crash as an indirect contributor to declining home prices, which diminished household wealth linked to home values.

Although household formation continues to be a concern as the labor participation rate has decreased, Paciorek points to improvements in the job market as the spark to increasing household formation.  He forecasts that household formation should increase to 1.6 million over the next several years, and could possibly exceed the pre-recession average due to pent up demand of those who waited to form a household during the recession.  However, a disclaimer was provided saying his forecast is “based on assumptions that could prove overly optimistic;” and has “lots of caveats and lots of uncertainty” – much like the housing recovery.

by Dan Krell
Copyright © 2014

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

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A balanced real estate market emerges despite fears of a housing bubble

real estate bubbleAs talk of a housing recovery is gaining traction, some experts are saying the recovery may be artificial and short lived. Warnings from economists and a former mortgage executive paint a picture of a possible housing bubble being caused by the source they claim is cause for increasing home prices.

Steve Cook, of Real Estate Economy Watch, revealed a recent survey of 105 economists, real estate experts and investment and market strategists. Although respondents predicted positive home price appreciation through 2014; the experts expect that home prices won’t fare as well during ensuing years through 2017. Furthermore, 48% of the respondents felt that current Federal Reserve monetary policy might be the reason for recent home price spikes; which may be creating a future housing bubble.

A majority of the expert panel suggested that requiring a minimum down payment in the Qualified Residential Mortgage (a provision to allow lenders to bypass credit risk retention rules) would create a long-term sustainable housing market. However, only about a third of respondents believe that a minimum down payment should be 20% or more.

An April 9th online article for The Wall Street Journal titled “Is the Fed Blowing a New Housing Bubble?” written by former Fannie Mae executive, Edward Pinto, explores the source for of the housing recovery. Pinto pointed out that although recent home price surges are the highest since 2006, data released by the Federal Housing Finance Agency (FHFA) indicate that home price increases may not be due to “broad based improvements in the economy’s fundamentals.” But rather, home price increases are being driven by low interest rates due to the Fed’s Quantitative Easing program.

Pinto compares current market conditions to those of 2006, when government policies also likely contributed to a housing bubble. During that period, like today, income is not keeping pace with home price increases. As an example, he cited FHFA’s conventional home-financing data that indicated new home purchase prices increased 9% during February 2013 and 15% during February 2013; while income barely increased 2% (keeping relative pace with inflation).

Pinto and his assessment of recent home price spikes are getting some attention. John Aidan Byrne of the NY Post wrote on May 6th (“Next Home Crisis”) about Pinto and his concerns. Because suppressed interest rates are pushing home sale prices up, Pinto surmises that when the Fed’s QE program ends, interest rates will rise creating an “inevitable housing disaster.” However, he concludes that to avoid a housing disaster: income must increase 33%, home sale prices will drop about 25%, or lending standards must loosen significantly. He points out that loose lending policies did not end well in the last housing bubble (http://www.nypost.com/).

Regardless of murmurs of another housing bubble, current market conditions might indicate a balanced market. The trend of monthly local absorption rates compiled from the local multiple list service has consistently shown to be in recent months between a buyer’s market and a seller’s market (absorption during a buyer’s market tends to be below 50%, while a seller’s market tends to be above 60%).

Even though there is little inventory, supply and demand may be in overall balance. However, that being said; supply and demand seems to be out of balance for well priced updated homes, which appear to the source of bidding wars and escalation clauses. Homes priced above the market and/or needing repairs/updates take longer to sell.

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By Dan Krell
Copyright © 2013

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

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When will move-up homebuyers return to the housing market

by Dan Krell
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DanKrell.com
© 2013

Move-up home buyers missing from housing recovery; when will move-up home buyers return to the housing market?

home for saleI recently came across an interesting article about “move-up” home buyers online titled, “Move-up Buyer Provides The Base For A Recovering Housing Market.” The piece, published by the Chicago Tribune, is not unlike the many articles you might find today about the missing move-up buyer in the housing recovery. However, this article is different – it was published August 17, 1985 (article can be found here: articles.chicagotribune.com/1985-08-17/news/8502240441_1_interest-rates-trade-up-market-home-resale-market).

The striking similarities between the current housing recovery and a real estate market that was recovering from one of the deepest modern recessions up to that time (during the early 1980’s), includes home buyer behavior and economic concerns. And of course, the affected move-up buyer sector and the dearth of inventory appear to be familiar.

Home buyer behavior doesn’t have seemed to have changed much as many would-be home buyers are trying to time their purchase with the market bottom. At that time, like today, interest rate pressures are helped home buyers decide to jump into the market; additionally, then like today a significant number of buyers were first time home buyers. Downward pressure on mortgage interest rates, combined with the fear of rising rates affected home buyers to get off of the fence. However, peek mortgage interest rates averaged about 15% in the early 1980’s.

Another similarity between both periods is the missing move-up market. The typical move-up home buyer is sometimes described as a home owner who decides they need more space, which results in the sale of their smaller home and the purchase of a larger home. Then like today, the move- up home buyer was the missing piece to the housing recovery; the move-up home buyer provides much of the housing inventory that first time home buyers seek. However, it seems as if a “psychological barrier” (as described by the Chicago Tribune piece) holds back many move-up buyers today as it did in 1985. During the current housing recovery, many potential move-up buyers have remained in their homes.

Like other housing recoveries, one of the main issues holding back the move-up buyer is housing appreciation. During an early recovery, home owners may have a difficult time rationalizing buying a larger more expensive home when the new home could depreciate the first year of ownership, let alone the thought of a perceived loss of equity in their current home.

As home prices stabilize it would be reasonable to think that there will be an increased presence of the move-up home buyer. A good example of this was in the housing recovery that took place during 2003-2004. At that time, low mortgage interest rates helped first time home buyers back to the marketplace, and the move-up buyer sector took off relatively quickly when rapid home appreciation was realized. Of course rapid home appreciation was a function of “easy money” that generated real estate speculation that produced the “go-go market” of 2005-2006, the housing bubble, and the subsequent financial/housing crises.

The similarities of a post recession housing recovery might indicate there is currently progress. However, the move-up home buyer sector may be one of the final pieces to the recovery puzzle; and until the move-up home buyer presence is felt in the marketplace, we may yet to endure a few more years of “recovery.”

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published the week of April 1, 2013. Using this article without permission is a violation of copyright laws. Copyright © 2013 Dan Krell.

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Is recent housing bubble news cause for alarm

by Dan Krell

DanKrell.com
© 2013

real estate bubbleIf I said that we could experience another housing bubble, you might be concerned for my mental health.  But a couple of years ago I wrote about an impending housing shortage, which could spark another bubble similar to what occurred during 2004-2005.  The market-conditions similarities between 2004 and today are foreboding, if not intriguing. (Dan Krell © 2013)

There hasn’t been talk of a housing shortage since 2004; but looking at Montgomery County MD as an example, you might begin to see similarities between the housing bubble of 2005-2006 and today’s real estate market.

Monthly peek single family inventory in Montgomery County did not exceed 2,000 total active units in 2004; while the absorption rate was reported by the Greater Capital Area Association of Realtors® (GCAAR.com) to be about 80% during the winter of 2004.  During the following year, the winter active inventory greatly increased and the absorption rates dropped to about 40%.  The result was a housing market that reached critical mass, and a one year appreciation rate of about 18% for Montgomery County single family homes; which played a key role in the rampant real estate speculation in 2005-2006.

Active housing inventory has been declining since 2010; the greatest decrease occurring during 2012.  According to the monthly home sale statistics posted on the GCAAR website (GCAAR.com), there were 1813 active single family inventory units for sale in Montgomery County during January 2012.  And although active single family units peaked for the year during the spring of 2012, active inventory dwindled to a low of 1198 active units for sale during January 2013 – a year over year decrease of about 40%. Additionally, the absorption rate of listed homes for sale is rapidly approaching 60%

Add the home price facet – on March 5th, CoreLogic (corelogic.com) reported that national home prices increased 9.7% during January 2013, as compared to January 2012.  This was reported to be the greatest year of year home price increase since 2006.

An additional and telling similarity between the pre-bubble years and present is the number of real estate investors jumping in to cash in on distressed properties.  Of course at the height of the real estate bubble of 2004-2006, real estate investing was transformed from the traditional “rehab and flip” to no rehab and flipping properties as quickly as possible.   A great number of homes sold today are to investors, either to rehab or to rent.

In 2004, like today, we were about three years post recession; albeit the recession of 2001 was not as protracted as the “Great Recession.”  At that time, like today, the Federal Reserve funds rate was historically low.

Although an “easy money” monetary policy is another similarity between the periods, a major difference is the availability of mortgage money.  Getting a mortgage is much more difficult today than it was in 2004-2005.  Buying a home without a down payment as well as qualifying for a mortgage without documenting income could have been a factor of the wide spread real estate speculation of 2005-2006.  Today, as a result of the bursting of the 2005-2006 housing bubble, underwriting qualifications are more demanding as are down payment requirements.

The housing bubble phenomenon is not a new or a recent experience; housing bubbles have occurred in the past and most likely will occur in the future.  When they occur, housing bubbles seem to coincide with a recessionary cycle.  And just like recessions, housing bubbles vary in duration and severity.  Sure, another housing bubble may be looming; but the next bubble may be confined to specific regions of the country, and possibly some local neighborhoods.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws. Copyright © 2013 Dan Krell.

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Missing pieces to a housing recovery

by Dan Krell
DanKrell.com
© 2012
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Home salesAs the housing market expectantly slows for the winter months, we can start reflecting on this year’s housing statistics.  Home sale figures appear to point to a year ending slightly better than last.  But it may be that local home sale stats may not best those posted during the 2009-2010 period.  It appears that there are missing pieces to the housing market, which if not put into place, could result in a new real estate norm.  Let’s take a look at the puzzle…

First, the National Association of Realtors® (Realtor.org) reported that national pending home sales have been elevated most of the year; and although national existing home sales have increased during October, the numbers fluctuated throughout the year.  Of course, trying to determine the local state of housing through the national market snapshot may be like trying to see a local road map by looking at the solar system; but there is truth to what NAR Chief Economist Lawrence Yun described as “…rising consumer confidence about home buying…”

Second, New home sales have increased compared to last year.  Although the existing home sales statistics reported by the NAR may have co-mingled some new home figures in the data (due to the methodology), the U.S. Census Bureau (census.gov/construction/nrs/) reports new home sales.  Not surprisingly, October new home sales increased about 17% compared to October 2011, and 2012 year to date new home sales increased about 20% compared to 2011.

A forthcoming piece to the puzzle, which may likely be reported in the latter weeks of December, is that November was another positive month for real estate.  And more importantly – November may have been a brilliant month locally.  A preliminary analysis of Montgomery County MLS (Metropolitan Regional Information Systems, Inc.) home sale figures (all inclusive) point to a marked sales volume increase in November compared to November 2011, as well as an increase in the average monthly home sale price (dankrell.com/realestate).

AnotNew Home Salesher piece to the local real estate puzzle is home buyer behavior.  Home buyers in the market are increasingly demanding about what they are getting for their money.  Given the lack of home listings in the resale market (down about 27% from 2011 year to date through October for Montgomery County single family homes: gcaar.com), combined with variances in home sale prices and the cost for renovations and updates on many homes; home buyers perceive value in purchasing new homes compared to buying a resale in today’s market.  This is an unacknowledged reason for the surge of new home sales this year, and why new home builders have rebounded before the resale market.

The missing pieces to improving the resale market are inventory and home prices.  As mentioned, a lack of home inventory continues.  If resale inventory were to match those of previous years, it stands to reason that resale inventory would also increase.  Inventories are lackluster most likely because many home owners have put their selling plans on hold until they are convinced that home prices have stabilized.

It’s welcome news that the 2012 housing market is slightly better than the 2011.  And although the landscape of the local market has improved, home sale figures are not much better than those posted during 2009-2010.  If resale inventory does not increase, the resale market of 2013 will probably be much like that of 2012.

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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 December 3, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

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