State Of The Nation's Housing
In the big picture, U.S. housing has recovered, but the rate of recovery is slowing, some regions continue to struggle and the future holds changes that could have a negative impact.
The good news is that, nationally, home prices are up over 2% month over month and in the 15% range year over year. Existing home sales are up over 5%. The percentage of distressed sales which drive prices down is down. Distressed sales are only about 15% of the market now. And the discount on distressed sales is also down. But the good news needs to be considered in the context of its starting point. Many of these indicators compare today’s market to where it was at the peak or valley. When we hear indicators such as the market is still 25% below peak it’s important to remember that we don’t want it to get back there too quickly. The peak was not sustainable.
With pending home numbers coming out this week we’re also hearing mumblings of a “double dip.” This term is misleading in that it sounds negative. Cooling off in housing is a good thing. Asking prices, the number of buyers shopping and bidding wars have all dropped slightly. Pending sales also dipped. And inventories have risen for the past two months, though still far below last year. New construction numbers released earlier this month show builders are focused on multifamily rentals which would also impact inventory if a trends forms.
I’ve lived on the water most of my life and I can tell you that when the tide change there are always side current, swirls and a few moments of confusion on the surface. We’re seeing some of that now in real estate and some indicators just don’t add up. For example, home sales and mortgage application numbers don’t Jive in large part because refinance are down and by some counts over half of all sales are cash. Investors still comprise a large portion. But the most significant indicator for housing in the long run is first time buyers, typically over 40% but now under 30%. Long term impact on the economy, ability to save a nest egg and retire in the long run can be significant. A lack of first timers prevents some homeowners from moving up.
We’re also seeing deeper bifurcation. For example, certain geographic regions continue to struggle depending on how high they went during the bubble-how many focus took out risky loans. And local employment-area income are relevant. As a result, Florida and California have areas that are in both the top 20 and bottom 20 markets. Florida inland cities verses coastal cities is a good example. Another factor is Judicial v. Trustee states. After 2010, robo signer REO sales stopped and short sales increased. Many states still have cumbersome foreclosure process. New York takes 1089 days, far about the national average of 414. Many foreclosure sales in some Florida are still cancelling at the last minute due to servicer concern over complying with new loss mitigation laws. All of this means that foreclosures and REO will continue to hang over certain regions but not others. As of June 2013 Florida has highest foreclosure rate 1 in 355 with a filing. In fact, as of June almost 5 million homeowners across the US are 30 days late or more or in foreclosure. Another line of bifurcation is the high verses low end. Higher income homes and home owners have exceed lower end since the beginning of the recovery. Many of the biggest problem spots in housing are still those low income zip codes, even when surrounded by higher end recovered areas. This is consistent with what we know about the broader recovery numbers – those in the market have done well. While many lower earners remain un or under employed.
So what can we expect next? Home values will but not grow as quickly. In some areas we may see dips, even small bubbles deflating before stabilizing. There are several reasons for this. First and foremost, this recovery is being driven by investors and low inventory, not by real buyers who intend to occupy. Eventually investors will lose interest. Already several funds are not seeing the profits they hoped for due to time frames needed to renovate and rent homes.
New loan rules such as QM begin January 10 2014 and will make borrowing even tougher – by some estimated 25 to 50% will not qualify. It appears banks are cutting staff in anticipation of this and work out slow downs (example JP Morgan Chase 15K cut by end of 2014). New lending alternatives are beginning to emerge but remain to be clear. GSE reform will also have an impact. FHA loans are already significantly more expensive. And of course rates are rising. (see "Higher Rates, Prices Push Pending Sales Down"
The Mortgage Debt Forgiveness Act expires at the end of this year. Owners who need to do a short sale or foreclosure will try to do so before that. As banks and servicers muddle through the new legal requirements, we will work the millions of defaults and foreclosures still in the system thru. The government is still coming out with new programs to mitigate losses (example Freddie new Streamline Mortgage Mod) but they are programs of last resort and we will not see a ton more new programs like this. We still have issue lurking in the shadows. For example, FDIC loss share agreements begin kicking in shortly. Once that happens banks will be able to write down and get rid of assets. Most important, jobs and income are not rising enough to keep up with rising rents and home prices.
We still need to find the REAL real estate market and broader economy with historically healthy employment and wages, defaults and foreclosures, inventory, price appreciation, and cultural attitude about financing your home v. working to own free and clear. Even in comparison to historical trends we may be off as no one knows what the new normal in housing will look like and much of that will be decided by our next generation. Eventually we’ll get there.