The Housing Market is Recovering Slowly
Home prices are rising, but the housing market isn’t exactly getting that much better. In the second half of the year, four major factors will continue to weigh on the housing market as it continues its slow recovery, said Tom Showalter, chief analytics officer for Digital Risk, a company that provides quality control, due diligence and valuations services for the financial market.
Strong metropolitan areas versus the rest of the country
The housing market is divided into two categories: those markets that will appreciate aggressively and those where the bulk of homes won’t gain nearly as much in value, Showalter said.
Micro economies doing well include the New York metropolitan area; Washington, D.C.; Northern and Southern California; Miami; and Dallas, he said. These are places where the job markets are strong, or where people have a strong desire to live. In Miami, for example, international investors are spending money on properties; in Northern California, technology companies bolster the economy, Showalter pointed out.
The question is: “How much of the real-estate appreciation story will be driven by those micro economies?” Showalter said. He expects the above cities to continue to perform strongly. But elsewhere in the country, cash investors, who once bought up affordable homes that they could rent out or flip for a profit aren’t as interested in buying these days because they can’t make as much as they once could. And owner-occupant buyers aren’t buying either. Which is causing appreciation in these locations to stall.
Data that backs up the appreciation slowdown seen in some cities: Existing, single-family home prices increased in 71% of the 173 markets tracked by NAR in the second quarter. That’s down from 74% markets with increases in the first quarter. What’s more, 19 areas had double-digit increases in the second quarter, compared with 37 areas in the first quarter. Prices were up for single-family homes in all of the micro economies Showalter mentioned, except for New York City (but it’s important to note that prices were up 14.2% for the area’s condo units and apartments).
Appreciation is slowing, but a collapse isn’t fast approaching
Wage and income growth drive housing prices — and this growth isn’t really happening on a large scale, Showalter said.
The deceleration in prices is a response to this, said Lawrence Yun, NAR’s chief economist. “National median home prices began their most recent rise during the first quarter of 2012 but had climbed to unsustainable levels given the current pace of inflation and wage growth,” he said in a news release. Of course, as chief economist of a group that lobbies for real-estate agents, he spins this as a positive: “At this slower but healthier rate, homeowners can continue steadily building equity. Meanwhile, for buyers, increased supply with moderate price gains is giving them better opportunities to choose.” Importantly, however, this deceleration of home price gains isn’t a sign of a bubble that’s about to burst, Showalter said.
During the last housing bubble, people bought with lower down payments and lower credit scores. “The institutions…lent money to questionable buyers at inflated [housing] prices,” Showalter said. Today’s borrowers don’t have those same characteristics, since lenders have tightened underwriting, partly due to new regulations. Moreover, some 40% of homes are being bought with cash, he said.
Issues with three major components of the housing market
“First-time home buyers, move-up buyers, baby boomers—each of [those groups] have problems” standing in their way of purchasing a home, he said.
First-time buyers have struggled to buy homes in many markets, hindered by slow job growth and large student-loan debt, and unable to meet the requirements to get a mortgage. (Yun thinks it will be about three years before the share of first-time home buyers in the market returns to normal.)
While there are fewer households that are underwater on their mortgages, move-up buyers are still constrained by the housing price declines they experienced several years ago, Showalter said. Many baby boomers hoping to downsize are also changing their plans, as their existing homes aren’t able to sell for prices as high as they need them to, he added.
A recent report from Fannie Mae found that while boomer households are shrinking (as their children leave the nest) and they leave the labor force, the majority may be choosing not to leave their single-family homes. The average value of an owner-occupied single-family detached home owned by a boomer fell 13% between 2006 and 2012, the report found, so some may be waiting for their homes to regain value. At the same time, there’s also increased interest in aging in place, making changes to the home to make it more livable as they get older.
There’s volatility in the numbers, and the economy’s to blame
There’s been some volatility in the housing market, most recently seen in the dip in new home sales and pending home sales. Showalter blames the economy.
“When I see the numbers get volatile, I suspect that the economy isn’t [recovering] enough to support a sustaining trend,” he said. Consistent growth in the economy and improvement in the jobs market is necessary to keep the housing market recovery on track, he said.
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