Finding the relief valve
Positive underlying economic factors are helping relieve a pent-up housing demand, according to a presentation at the National Association of Realtors (NAR) Midyear Legislative Meetings & Trade Expo.
NAR Chief Economist Lawrence Yun said there are many improving factors that are helping home sales. “Historically high housing affordability conditions, ongoing job creation, a solid stock market recovery, rising rents, a larger pool of qualified renters, a pent-up demand and improving confidence are drawing buyers to the market.”
“Smart money, largely from investors responding to low home prices and rising rents, is chasing real estate, and we could see a potential surge once the broad perception of homeownership changes to that of an appreciating asset,” Dr. Yun continued. “We just finished the strongest first quarter for home sales in five years, pending contracts are pointing to a strong second quarter, and the favorable conditions are helping the economy recover from an unusual slowdown in household formation in recent years with more young people now leaving their parents’ homes.”
Mixed housing indicators
Despite a minor gain in total home sales last year, owner-occupied sales fell. “A recovery in investment- and vacation-home sales and a high proportion of all-cash deals are hiding the current dysfunctional mortgage market,” Dr. Yun said.
Dr. Yun continued, “Tight mortgage credit is holding back a stronger recovery. Banks are hoarding cash, possibly from regulatory uncertainties and lawsuits.”
A positive forecast
In recent months, AGBeat had reported that the NAR had shifted their wording and forecast from very cautiously optimistic to a loosening of the tie, revealing a more optimistic outlook.
Home sales had been basically flat from 2008 through 2011. Dr. Yun forecasts 4.6 to 4.7 million existing-home sales in 2012, up strongly from 4.26 million last year, and additional improvement in 2013 with sales rising to the range of 4.7 to 4.8 million.
Mortgage interest rates are projected to rise gradually and then average 4.9 percent in 2013 – still historically favorable. “The pressure of rising rents on consumer inflation could force the Federal Reserve to raise interest rates in 2014, which might be good for home sales. Refinancing would fall and bank staff would be able to focus more on mortgage origination for home purchases,” Dr. Yun said.
Other economic indicators
The NAR says inflation is currently under control as the Consumer Price Index rose roughly 2.4 percent this year and is projected to increase another 2.8 percent in 2013.
Dr. Yun expects the Gross Domestic Product to grow 2.4 percent in 2012 and 3.1 percent in 2013, adding 2.2 million jobs this year and 2.5 million in 2013.
Housing starts, which have been well below the long-term average of about 1.5 million, are expected to rise to 770,000 this year from 610,000 in 2011, and to continue growing to 970,000 in 2013.
New-home sales are seen at 400,000 this year, up from a record low 306,000 in 2011, and rising to 530,000 in 2013. “With a growing population, we could see housing shortages in 2014 or 2015 if builders don’t increase production,” Yun said.
A sustained decline in housing inventory – both for listed homes and “shadow inventory” of those with seriously delinquent mortgages – is the biggest factor affecting home prices, with broadly balanced conditions developing in much of the country. Dr. Yun said the median existing-home price is likely to improve modestly this year, rising just over 1 percent, with a gain of about 3 percent forecast for 2013.
Dr. Yun’s forecast assumes no adverse Washington policy or tax changes affecting homeownership. He adds there would be significant economic fallout if there is no new budget compromise by the end of the year.
Raven Molloy, Senior Economist at the Federal Reserve Board of Governors in Washington, D.C., offered her personal assessment on one residential trend. “Internal migration in the United States is at a 30-year low, and has been declining since the 1980s,” she said. “The widespread nature of the decrease suggests that the drop in mobility is not related to demographics, income, employment, labor-force participation, or homeownership.”
According to Molloy, most short-distance moves are housing related, such as needing a larger home, while most long-distance moves are job related. Younger households move more frequently.
Her research shows the downtrend in mobility has been a fairly steady trend over time, with no sharp drops coinciding with the housing market downturn or economic recession. Although renters move much more frequently than homeowners, the aging of the population may be a factor in the general slowdown.
Molloy notes that migration out of states with many underwater homeowners has not fallen more than in other states. However, other research shows that local moves are lower for underwater homeowners.
Migration within the U.S. remains higher than it is within most other developed countries.
Migration and macroeconomic performance
Molloy said the link between migration and macroeconomic performance has received relatively little attention.
“High levels of migration may reduce commitment to the provision of local public goods or corrode social ties in other ways, in which case lower mobility might raise aggregate well-being and possibly economic output,” said Molloy. “This is an important topic for future research.”