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March 7, 2014November 23, 2021

How many more years for housing recovery?

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.

September 26, 2013July 1, 2019

Are rising interest rates helpful?

After much speculation, mortgage interest rates appear to be on the move. Even with rising interest rates, rates are still relatively low. Some economists expect that when the Fed’s Quantitative Easing program begins tapering, mortgage interest rates may jump due to financial market volatility.

Many fear that rising interest rates could derail the recovering housing market. In an August 19th news release (realtor.org), Chief NAR economist Lawrence Yun stated that although the pace of home sales are at its highest since February 2007, the market could be experiencing a “temporary peak” due to home buyers’ seeking to close deals before interest rates rise significantly. Looking ahead, Dr. Yun expects that rising interest rates and limited inventory could create an imbalanced market due to inconsistent home sales.

Home sale prices also have been rising, prompting bidding wars, as the median home sale price was reported by NAR to have maintained nine consecutive months of double digit year over year increases. However, Dr. Yun stated, “Limited inventory in some areas means multiple bidding remains a factor; 17 percent of all homes sold above the asking price in August, although 63 percent sold below list price.”

This week’s release of July’s S&P/Case-Shiller Home Price Index (spindices.com) also revealed that home sale prices were still holding onto the double digit annual rate of gain over 2012 levels, as the 10 city and 20 city composites posted about a 12% year over year increase for July. However, it is pointed out that home price are still “far below their peak levels.”

The sharp increases in home sale prices sparked fears of another housing bubble. But price gains only increased about 2% from June to July. Monthly price gains have lessened, and the gradual slowdown of home price gains may indicate that home prices may be peaking. Chairman of the Index Committee at S&P Dow Jones Indices, David M. Blitzer, stated, “Following the increase in mortgage rates beginning last May, applications for mortgages have dropped, suggesting that rising interest rates are affecting housing. The Fed’s announcement last week that QE3 bond buying will continue for the time being may have only a limited, though favorable, impact on housing.”

The rapid increase in home prices has affected potential appreciation for many home owners who waited to sell their homes. And the increased inventory provided additional housing stock for eager home buyers. Given the recent increases in home sale prices, the expectation of an uncertain real estate market may not be welcome news by home buyers and sellers.

But home price increases have not only helped the housing market, but the economy as a whole. CoreLogic (corelogic.com) reported that the housing sector contributed about 17% to GDP growth during the first quarter of 2013. However, CoreLogic predicts that increasing mortgage rates will directly affect the housing market, and indirectly affect the overall economy: Single family housing starts (new homes) are thought to be declining because of increasing mortgage rates; and CoreLogic estimates that long term GDP growth to be about 1.75%.

It remains to be seen if modest increases in mortgage interest rates have been beneficial to stave off another housing bubble. However, given that the indicators and experts point to a housing recovery peak; increasing mortgage interest rates could suggest caution for the housing market.

Original located at https://dankrell.com/blog/2013/09/26/rising-interest-rates-a-help-and-hindrance-to-recovering-housing-market-2/

By Dan Krell
Copyright © 2013

March 6, 2013December 2, 2020

Is recent housing bubble news cause for alarm

by Dan Krell

If 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 5^th, 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.