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Residential Department: BackSpace: December 2012

 

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Improved home values are driving a housing market recovery

If 2007 and 2008 are the years associated with the burst of the housing bubble, 2012 may be remembered as the year in which signs of a housing recovery took hold — triggering positive sentiment among everyone involved, from homeowners and investors tomortgage originators.

FNC Residential Price Index. Source: FNC Inc.

This recovery, however, may be uneven across U.S. markets and still in an apparent up-and-down pattern, but the consensus seems to be that housing gains are durable, genuine and likely to be sustainable in the coming year.

In fact, several housing market observers have recently noted an overall increase in home prices. The Zillow Home Value Index, which tracks home prices on a monthly basis, found U.S. home values have increased by 1.3 percent this past third quarter — marking the biggest quarterly gain since March 2006 and the fourth consecutive quarter of increases. The index increased 3.2 percent year over year, as well.

Looking forward, Zillow predicts home prices to increase another 1.7 percent by third-quarter 2013. In addition, 183 of the 252 markets covered by Zillow’s forecast have hit a bottom, and an additional 41 markets are expected to hit bottom in the next year.

Recovery drivers

This recovery isn’t just a product of a natural cycle. Several market factors, combined with positive macroeconomic indicators, have played a role in driving home values higher. The national unemployment rate has consistently declined year over year, and it reached 7.9 percent this past September — its first drop below 8 percent since January 2010. Consumer confidence hit a seven-month high at 70.3 on the Conference Board’s sentiment index this past September, up from 61.3 in August.

Bob Dorsey, chief data and analytics officer at FNC Inc., which publishes the FNC Residential Price Index, points out that declining foreclosure activities are another factor that has driven the rise in the market. “Servicers, the GSEs [government-sponsored enterprises] and the big banks have all been working through their foreclosures and getting a lot of that cleaned up,” he says.

The FNC Residential Price Index has tracked six consecutive months of price increases as of this past August. Home values, according to the index, have reached a 20-month high following a robust spring and summer homebuying season. Dorsey expects prices to continue to increase, although they may flatten out in the fall and winter months.

This increase is likely to get more sellers off the fence. With the current home-value appreciation, Svenja Gudell, Zillow’s chief economist, says homeowners are fairly close to the turning point where they switch over to positive-equity territory — and that is where they can sell their houses. This is particularly true for those who have been only slightly underwater.

“If you’re underwater, you’re not able to sell your house unless you bring money to closing, which a lot of sellers can’t and don’t want to do,” she says.

The recovery also is driven by increased household formation and higher housing rental rates, according to Lawrence Yun, chief economist of the National Association of Realtors (NAR). “There will be some bursting out in household formation in the upcoming years,” he says. “Furthermore, rising rents are highly positive for the housing market recovery in a sense of drawing investors into the market, and also some renters wanting to be homeowners.”

The apartment market has seen low vacancies and higher rents throughout 2012. Apartment asking rents increased by 1 percent and effective rents increased by 1.3 percent this past second quarter, according to Reis Inc. Reis also expects effective rent growth to accelerate as vacancies drop within the 4 percent band.

Supply and demand

The robosigning delay in processing foreclosures, little new construction and low home prices have combined to keep housing inventory relatively low, creating pent-up demand for properties. On a basic supply-and-demand formula, this can be good news for home values. Higher interest from investors and the fact that inventory remains low can lead, however, to a fast hike in prices in a particular market.

“Inventory is not opening up,” says Yun. “Right now, it is about six-month supply nationally, with some local markets much lower. It may go down to five months or four months by the springtime. Unless we have a significant increase in housing starts, we could begin to see a squeeze on the inventory side, possibly as early as the spring,” he says.

The downside to this supply squeeze is that prices could be pushed up a little too fast, and incomes won’t keep up with home prices, eroding affordability for first-time homeowners. “It is not a healthy housing recovery when you see a sharp rise in home prices from a supply- constraint market,” Yun says.

"The FNC Residential Price Index has tracked six consecutive months of price increases as of this past August. Home values, according to the index, have reached a 20-month high following a robust spring and summer homebuying season."

In addition, the investment activity that has provided positive momentum to home prices and stabilized the market has resulted in higher demand than supply, particularly for distressed or foreclosure properties in some markets.

“In certain areas of the country, we are seeing small bubbles where the demand for distressed properties is high and people are bidding up asking prices to try and get hold of them,” Dorsey says.

With that in mind, increased investment activity can be good or bad based on which side of the market is considered, according to Gudell. “If you’re a first-time homebuyer, you have little chance. In terms of home prices, investment activity is good because it means home prices are coming back up,” she says.

Originations

Mortgage brokers and originators should keep these factors in mind particularly when they work with first-time homebuyer clients. They also should keep in mind that the recovery is “hyper local,” as Gudell puts it. “It is more or less a zip code by zip code recovery. It really depends on the area you’re looking at.”

Dorsey agrees that brokers should be focused on what is happening in their neighborhoods as opposed to national trends. “Certainly rising tides raise all boats, as they say, but certain markets are quite different than the national trends,” he says.

In addition, mortgage originators may need to consider shifting their business focus from refinances to purchase deals, according to Yun. “Next year, interest rates will be rising, because they can’t remain this low, and there appears to be some inflation that may tick higher, which means the mortgage rates will be ticking higher,” he says. “[Originators] need to focus on the home-purchase market because refinance will be quickly going away.”

This past October, the Mortgage Bankers Association (MBA) also predicted a gradual rise in mortgage rates. Rates for 30-year fixed mortgages are expected to average 3.8 percent in fourth-quarter 2012, increasing to 3.9 percent in first-quarter 2013 and eventually rising to an average of 4.4 percent by the fourth quarter of next year, according to the MBA.


 

Rania Efthemes is director of content strategy at Scotsman Guide Media. Reach her at (800) 297-6061 or raniae@scotsmanguide.com.

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