A Look Forward
According to Forbes.com-if the housing market was in overdrive for much of 2013, during the first half of 2014 it came almost to a halt. Winter storms across the nation contributed to sluggish sales during the first quarter, while rising mortgage rates and tight inventory didn’t help. By spring housing began to pick up, with April Existing-Home (previously-owned) sales numbers increasing for the first time as the pace of price gains slowed. By June, sales had reaching their highest levels since last October.
Although the headlines each month can create high drama as the numbers go up and down, the theme so far this year is this: we’re steadily on the road back to normal. Here’s what real estate experts say to expect for the second half of 2014.
Prices will go up, but not as fast as in 2013
In 2013, the housing market clocked double-digit, year-over-year price gains each month. Now that pace is slowing. Prices across the 20 metro areas tracked by the S&P Case-Shiller Indices rose by 10.8% year-over-year in April, a significantly slower rate than the prior month, when prices rose 12.6% for the 10-City Composite and 12.4% for the 20-City Composite. Other indices are also reporting slows: Mountain View, Calif.-based data firm Altos Research finds that through June 30th, prices are up just 9% year-over-year.
The slowdown should be expected to continue right through December. “Some markets are seeing a big slowdown,” says Jed Kolko, chief economist at Trulia. “The boom markets of the Southwest and California are seeing prices level out. In markets where the recovery has come a bit slower, prices are still accelerating; parts of the Midwest and the South are now leading the country in price changes.” Nela Richardson, chief economist at Redfin, adds that Redfin agents are seeing far fewer bidding wars than in 2013.
By the end of 2014, both Stan Humphries, chief economist at Zillow, and Mark Fleming, chief economist at CoreLogic, an Irvine, Calif.-based real estate data firm, expect home prices to be up about 5% for the calendar year. By comparison, the median price of an existing home gained 11.5% in 2013, the highest annual gain since the median priced rose by 12% in 2005, according to the National Association of Realtors. ”It will be another three years before we hit the peak levels we last saw in 2007,” says Humphries.
A second reason for the deceleration in price gains: inventory is finally easing up–a bit.
Supply will continue to increase
Throughout the recovery, the stock of available homes for sale has been well below the 6-month supply (calculated based on that month’s sales pace) that economists consider the hallmark of a healthy market. In January, available, for-sale resales stood only at a 4.9-month supply, according to NAR. By June, inventory had increased to a 5.5-month level.
“The biggest challenge of the past 18-20 months has been low inventory,” says Michael Simonsen, CEO of Altos Research. ”As price increases kick in more people are above water on their mortgages, so supply is increasing a little bit.”
Still, negative equity remains high: about 18.8% of homeowners had underwater mortgages in June, according to Zillow. The burden falls most heavily on homeowners at the lowest price tier, where homes are three times more likely to be underwater than the top one-third of homes. About 30% of homeowners in the bottom one-third of the residential market are underwater, says Zillow’s Humphries, while only about 11% of homeowners in the top tier face negative equity. The good news is that, on average across the nation, prices are rising fastest in the lower price tier. Expect more returns to positive equity–and an accompanying expansion of homes for sale–as the year progresses.
New construction has been a sad story so far this year. While homebuilder confidence is rising, housing starts (groundbreakings) fell by 9.3% in June from the prior month. Last month’s numbers were the weakest since September 2013, and the second consecutive month drop, according to the Commerce Department. “We have been under-building for six years,” remarks Simonsen.
Overall, housing starts were actually 7.5% higher than one year earlier. The entire decline was concentrated in the South, defined by the Census as the states between Delaware and Texas, where groundbreakings dipped by nearly 30% from May to June. In each of the other three Census regions, housing starts actually increased.
There certainly is demand for new construction. In May (the latest data available), sales of new homes, a much smaller portion of the market than resales,jumped by 18.4%, according to Commerce. Update:Commerce later revised the numbers downward to an 8.3% jump for May, followed by an 8.1% tumble for June, leaving sales of new homes just about flat with April.
Multifamily starts continue to be an “unusually large share of total construction starts,” points out Kolko. “Builders are expecting strong demand as young people start to move out of their parents’ houses.” Expect inventory to continue to ease up in the second half of the year, largely due to rising home prices.
Changed fundamentals mean a new normal
Mortgage rates stood at 4.13% for conventional (30-year, fixed-rate) loans for the week ended July 18, 2014. The Mortgage Bankers Association predicts rates will hit 4.7% by the end of the year, while Fannie Mae predicts a lower 4.3% for Q4. Although higher than last year, those rates are still low compared to historical norms.
Despite this, The Fed says the housing recovery has “lost traction,” based in part on low household formation and residential construction numbers. “Even after rising noticeably in 2012 and the first half of 2013, real residential investment remains 45 percent below its pre-recession peak,” reads a mid-July Fed report. “The lack of a rapid housing recovery has also affected the labor market: Employment in the construction sector is still more than 1.6 million lower than the average level in 2006.”
Many long-term drivers of housing demand are stalled, writes Nela Richardson, chief economist at Redfin, pointing to “below average growth in median household income, labor force participation, bank lending and household formation.” And despite high levels of corporate profitability (historically the leading indicator for wage increases), pay levels remain stagnant.
Those factors relate to some housing trends that are not going away: younger people are continuing to live with their parents, and when they move out, often moving to rentals rather than purchases. “In the second half of this year we should see a lot more new apartments come onto the market, because many new apartment buildings were started last year,” says Kolko of Trulia. “There is a strong demand for apartment rentals, but we should also see more supply.”
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Lang Premier Properties are Birmingham Realtors specializing in Oakland County Real Estate. Stephanie is an agent with Max Broock in Birmingham, Michigan. See what past clients have to say about Stephanie Lang. Lang Premier Properties looks out for your best interests when you purchase a new custom luxury home. We always recommend working with an experienced luxury real estate agent when buying a new luxury estate.