By almost any measure – and as noted regularly in
BuilderBytes’ MetroIntelligence Economic Update -- the housing market is not
only on the mend, but rebounding much faster than most economists and housing
analysts predicted.
Not only did the median price for existing
homes rise by nearly 10% nationally over the past year, but they continued
rising during the seasonally slow winter months, and already show signs of
gaining altitude as the spring buying season continues.
Meanwhile, a combination of reduced new home construction,
fewer foreclosures, investors paying cash for homes to rent out and owners still
sitting on under-water homes means inventory levels that have fallen to 12-year
lows. So is the current scenario just an
economic blip, or have we finally launched onto a sustained rebound that will
last?
This answer is that this rebound may have some legs.
For one, home prices nationally are still
below their long-run average compared to incomes, and affordability has rarely
been higher.
Home builders, who have
long struggled to gain traction with skittish buyers and had to compete against
discounted foreclosures, are now facing shortages of labor, credit and finished
lots to fulfill the rising demand for new housing, pushing NAHB’s Housing
Market Index (HMI) in April down by two points to 42 (anything above 50
indicates more builders view conditions as good).
Consequently, whereas housing starts in March
rose by nearly 47% over the past year, building permits rose by a much smaller
17% as builders must now address the rough edges of the rebound.
One reason that demand now exceeds supply is that while
household formations were in hibernation as people doubled up with roommates,
families or simply postponed divorce, population growth continued
unabated. Today, there are potentially
millions of renters and households living in shared quarters who are ready to
become home buyers given that they pass muster with today’s tougher credit
standards.
Another reason for the supply imbalance is that investors --
large and small, foreign and domestic -- have increasingly funneled cash into
what is now viewed as a safe investment:
U.S. real estate.
Currently,
nearly one-third of all home sales are due to cash buyers, and it was this
fairly consistent level of activity over the past two years which put that
long-awaited floor under prices (which had foundered as federal and state tax
credit gimmicks wore off.)
That fear of catching the falling knife, which froze the
housing market for several years, has been replaced by the boom-era fear of
missing out on the upside. For these
investors – which include brand-name private equity firms such as Blackstone
Group and Colony Capital as well as smaller outfits issuing their own private
placements for debt – they’ve managed to ignite a rental property boom, which
has in turn put pressure on owners of traditional apartments. What remains to be seen is what happens to
these rentals when prices are no longer rising and rents have stalled, yet fund
investors are still demanding the returns they were promised. In contrast, traditional ‘mom and pop’
landlords can simply pay off the mortgage and then rely on the additional cash
flow when they retire.
If there is one unknown which may derail the strength of
this recovery, it is interest rates:
what happens when rates return to 5% or 6%, or even the 8.38% average
noted over the last 49 years?
It’s hard
to over-estimate the power that historically low interest rates have on
affordability levels:
the same buyer
whose $1,000 monthly payment would allow them to purchase a $165,000 mortgage
at 6.1% (the rate in late 2008) could purchase a $222,000 mortgage at 3.5%,
thereby boosting their purchasing power by a third.
This provides today’s buyers with a classic
dilemma:
pay more today than they did a
year ago, or pay even more in the future when interest rates may be higher.
In addition, home equity lines of credit are almost certain
to rise as soon as the Federal Reserve ends its current policy of near-zero
interest rates. If the minutes from the
most recent Federal Open Market Committee (FOMC) meetings are to be believed,
then “QEIII” (the third round of quantitative easing) could end before the end
of this year, and that could send variable rates higher – albeit slowly. But for that to happen, the economy will have
likely proven that it’s definitely on the mend, and that’s the sort of problem
the federal government –and the yawning deficit – would almost certainly like
to face.
Please click here to see the edition of BuilderBytes for 5/8/13 on the Web.
