Factors to Watch in Housing's Rebound
Prices were low and financing—while hard to get—was cheap for those who could get it. Once it was clear prices had found a bottom, bidding wars broke out as buyers competed over a shrinking supply of homes to get a good deal.
That sent prices up—sharply, in many markets—and for a while, buyers didn’t mind. Falling interest rates made it possible for buyers to offer slightly higher prices without raising their monthly ownership costs.
While the real estate market is still well below its glory days of the housing bubble, confidence among home builders in the United States continues to remain near multiyear highs.
After climbing higher for four consecutive months, the National Association of Home Builders/Wells Fargo’s index of builder confidence was unchanged in September, holding at 58. Confidence is now at its best level since November 2005, bringing back memories of the housing boom.
Real estate experts say rising property values are behind the improvement. In Salt Lake County, the median price of a home sold in the second quarter soared 17 percent from the same quarter of 2012.
But now, mortgage rates are up by a full percentage point over the past four months, as buyers and sellers adjust. Here’s a look at four keys to the housing puzzle:
1. Housing became less affordable in a short span. Typically in a recovery, sales pick up and then prices follow. But the current recovery has been “flip-flopped,” said Ivy Zelman, chief executive of Zelman & Associates Inc., a research and advisory firm. “We’ve had pricing accelerate out of the box” as builders took advantage of rising demand and low interest rates while adding little in the way of new construction. “That’s not typical of an upturn.”
Now, with prices up by double-digits from one year ago, rising rates have been “almost like a red light on the frantic price inflation,” said Ms. Zelman. A Zelman report last week showed that new home orders in August rose by just 1% from one year earlier, compared to year-over-year gains of 11% in July and 25% during the second quarter.
Between the beginning of May and the end of June, the average interest rate for a 30-year fixed-rate mortgage surged from 3.59 percent to 4.68 percent, according to the Mortgage Bankers Association. The most recent report from the organization said the average rate on a 30-year fixed-rate mortgage was 4.8 percent — its highest reading since April 2011.
2. Inventories are still depressed. Demand is only part of the equation of course, and some real-estate agents say the biggest drag on sales continues to be the lack of homes for sale. While the number of listings in August was up by 20% from the beginning of the year, the supply of homes for sale is below the already-depressed levels of one year ago. “There’s just not enough inventory to justify price declines,” said Ms. Zelman.
Buyers are also being pickier today because they’re looking for a home that they can live in for a long time, said Jim Klinge, a real-estate agent in Carlsbad, Calif. “Buyers want the right house,” he said. “They’ll pay more for it, and they’ll pay a higher rate.” But if it’s not available, they’ll wait.
3. This should help quiet the bubble talk. Earlier this year, some worried that the housing market was back in a bubble. Any cooling down should soothe those worries.
While incomes have been growing at roughly 1% a year, home prices have been rising much faster—by around 12% nationally. Some of this happened because home prices had fallen below their traditional relationship with incomes. But a 12% pace of growth was “simply too high and not sustainable,” said Chris Flanagan, a mortgage analyst at Bank of America Merrill Lynch in a recent report.
4. How smooth a hand-off? As rising prices ease investors out of more markets, there will be less competition for some homes, slowing the pace at which prices are going up. The key going forward is how well owner-occupant, mortgage-dependent buyers are able to pick up the slack from investors, especially in an environment where rates are rising.
Unemployment is still high, especially among younger workers who would normally be first-time home buyers. Mortgage credit remains tight, and many borrowers may already have high debt loads or irregular incomes that make them marginal candidates for a loan anyway.
When interest rates normalize, “any future improvement in housing will be entirely dependent on the jobs picture,” said Jeffrey Otteau, chief executive of Otteau Valuation Group. Which looks good for Utah as the just released Salt Lake City Professional Employment Forecast from Robert Half shows 75 percent of CFOs plan to hire for roles that open during the next three months, with an additional ten percent planning to expand and create new positions in the fourth quarter.
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