This Housing Upturn Looks Like the Real Thing

The previous upturn in housing prices faltered after a year, but all the signs suggest that the current home price recovery will be sustainable.

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Ever since the recovery began in 2009, a weak housing market has held back the U.S. economy. The first rebound in home prices was lackluster and after only a year was followed by another dip. But the recent upturn in home prices looks like the real thing. One clear sign of a turning point: In March, homeownership hit a 17-year low, while the 12-month gain in home prices was the biggest in seven years. Those two extremes suggest that the market has hit bottom. The people who are least well financed have been squeezed out, while demand is growing among people who can afford to pay higher home prices. If that trend continues – and there are good reasons to believe it will – a substantial burden will be lifted from the U.S. economy.

The great surprise since the recession ended has been the weakness of the economic rebound, which has been particularly clear in the housing market. After falling 31% from 2006 to 2009, home prices rose almost 5% over the following year. But that recovery faltered, and during the next 20 months prices fell to a new low. Then the current recovery began, and barring another recession, all the evidence indicates that it will be sustainable:

In the first quarter, home prices were higher (compared with a year earlier) in 133 of 150 metropolitan areas, according to the National Association of Realtors. On a national basis, the median home price gained 11.3%, the biggest yearly gain since 2005.

(MORE: The Housing Mirage)

The glut of homes for sale has diminished, down almost 17% compared with the previous year. In addition, the number of foreclosures in April (including bank repossessions and scheduled auctions) was 23% lower than a year earlier.

Mortgage applications were up 7% in the most recent week, helped by low mortgage rates. Refinancings, which typically improve homeowners’ finances, have been generally rising in recent months and reached their highest level since December.

And a Fannie Mae survey of consumer expectations for housing found that a majority of those surveyed in April expect prices to rise, compared with only 32% a year earlier. That’s the highest figure since the survey was begun three years ago. “Crossing the 50 percent threshold marks a significant milestone as most Americans believe a housing recovery is truly occurring throughout the country,” the survey concludes.

The housing market has a unique relationship with the economy. Depressed prices hurt certain specific industries, of course, from homebuilders to companies that make building materials and home furnishings. But the huge price drop that occurred during the recession – by far the biggest in the past half century – had much broader effects.

(MORE: Bidding Wars Return in Hot Housing Markets)

In general, falling house prices make homeowners feel poorer and more cautious about spending. By contrast, during the boom homeowners not only felt more affluent, but also were able to obtain additional spending money by refinancing. They could increase the size of their loans, and their monthly payments might even go down, since mortgage rates were relatively low. After home prices fell during the recession, however, refinancing became more difficult and this source of spending money largely disappeared.

The current rise in home prices and refinancings won’t necessarily lead to an immediate consumer spending boom. Home equity was massively eroded by the recession and has only started to recover. But at least the drag on consumer spending is no longer getting worse.

Further gains in home prices will depend to a great extent on easier lending conditions. “The housing market is improving, but mortgage credit conditions remain quite tight for borrowers with lower credit scores,” says Federal Reserve governor Elizabeth Duke. But she adds, “As the economic and housing market recovery continues, lenders should gain confidence that mortgage loans will perform well, and they should expand their lending accordingly.”

Moreover, the economics of housing will likely lead to a revival of demand. Buying is cheaper than renting in most U.S. cities. Including tax benefits, someone who buys a home today and lives in it for four to seven years will save from 20% to 40% over renting, based on national averages.

Equally important, home ownership offers a valuable inflation hedge. There’s no way of knowing when inflation will become a serious problem again. But considering the enormous amount of money created by the Federal Reserve since Quantitative Easing began in November 2008, it’s likely that consumer prices will start rising significantly faster at some point in the coming decade. In fact, inflation has totaled more than 8% in the five years since the recession, despite the sluggish economy.

(MORE: ‘Chained’ CPI for Social Security Calculations Robs Retirees)

At a certain point, these positive trends start to reinforce each other. As the economic recovery continues and unemployment comes down – even if that is happening disappointingly slowly – consumer incomes and average credit scores will rise. And as the number of troubled mortgages and foreclosures diminish, the quality of bank loan portfolios will improve and lenders should be willing to make more credit available.

That would help increase the demand for housing and enable potential buyers to pay higher prices. Moreover, a revived housing sector would add considerable momentum to the economic recovery – and gives this upturn in home prices a much better chance of continuing than the previous one.

8 comments
paulgeorges
paulgeorges

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MayWong

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starlit108
starlit108

All of this applies only to homeowners and to the wealthy speculators/investors who are buying up houses at a cheap price.  Higher prices are even worse news for the economy the rest of us live in.  The average american will have even less of a chance of buying a home with higher prices and still tight credit and unemployment / low wages.

antonmarq
antonmarq

If there's rising home sales, you can bet it's not being driven by Americans buyers, many of them can't afford homes anymore. Chinese and Indian multi-family homes are available now.

DeweySayenoff
DeweySayenoff

@antonmarq Most of the home buying isn't Chinese or Indian.  It's actually wealthy Americans buying rental property.

Home sales is growing.  That's based on the number of homes sold.  Home OWNERSHIP, based on the number of home owners, is not growing at the same pace.  The number of home RENTERS is going up almost as fast as home buyers. This means a lot of people are buying more than one home and renting them out.  And considering the average American can't afford a home, that leaves the wealthy as the only ones who are behind this.

The market won't last, though.  I figure no later than November it'll tank again.  The cause will be not enough renters making a liveable wage.  There's not enough people people making enough money and not enough money circulating in the economy to sustain the idea of maintaining a mostly home rental strategy (Homes cost a lot more than apartments to rent).  Without a concurrent increase in liveable wage jobs (which is not happening), this can't be sustained.   It's short-term at best.

commentonitall
commentonitall

@DeweySayenoff @antonmarq 

Your comment lacks supporting evidence the article you are commenting on gave.  How do you know most property is being bought by wealthy Americans as opposed to the middle class.  A house that costs 200,000 with the current financing rates of 3.25% will cost about 1,100 a month with insurance and taxes figured in.  That is similar to the cost and cheaper than renting in a lot of markets.  This is a conclusion a lot of people are coming to and you certainly do not have to be "wealthy" to figure that out or afford it.

blondie64vt
blondie64vt

@commentonitall @DeweySayenoff @antonmarq , I'm a Realtor in the Greater Phoenix area, homes are still being bought using 100% cash, in almost every price-range. I am one of those "average" buyers, and I personally cannot compete in this type of market. Bidding wars are ridiculous and there are way too many agents and  sellers playing games with listed prices (priced either too low to create such "bidding war feeding frenzies," or priced unrealistically high so the "average" buyer with little available cash for additional cash contributions cannot compete due to purchase price vs appraised value differences. Sellers now think their homes are worth far more than they really are, and more resales are hitting the market with unrealistic prices. Such sellers who "don't have to sell," are stating they will wait for someone to come along and pay the over-inflated price, full listed price. They can afford to wait because they just can. The "average" buyer is being pushed out of the market altogether. Unfortunately, prices do need to continue to rise (not at alarmingly rates, however) in order to continue to push those "wealthier than the average bear" investors out of the market, thus freeing up homes so we "average" buyers can realistically compete in  price-ranges that we are approved to purchase in. At best, it's a complete jungle out there.