Optimism Is Up, But Don't Expect a Quick Single-Family Recovery as the U.S. Housing Market Faces a Painful Shift
I put a bid in on a home over the Memorial Day weekend and, judging by the recent housing indicators, it appears I was part of a growing crowd of potential homebuyers poised to jump into the market and disperse the last remaining outsized cloud hovering over the economic landscape.
It's a compelling crowd because it is not, I believe, made up of vulture investors expecting to feed on bottom housing prices. Instead, it appears to consist of people choosing to get back into the market after being pent up during five years of recession and dim job prospects. And experts say it will drive both single-family and multifamily housing recovery in the coming years.
"In these initial years, the prime driver of recovery won't be new home construction, but rather demand for rental properties," said Louise Keely, chief research officer at The Demand Institute, a jointly operated non-profit, non-advocacy organization of The Conference Board and Nielsen. "This is a remarkable change from previous recoveries. It is a measure of just how severe the Great Recession has been that such a wide swath of Americans had to delay, scale back, or put off entirely their dreams of home ownership."
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Five years is long time, and a lot can happen in that timeframe to affect consumer housing decisions. College graduates enter the marketplace; newly married couples begin raising children; young professionals advance in their careers; older families shrink as children go off to college (as in my case); and workers retire. All changes that trigger housing changes and housing demand -- and all that will compel economy going forward.
Consumers are not expected to surge back into the housing market but, as the Demand Institute estimates, the housing recovery will be moderately scaled. We put our bid knowing it was going to be one of multiple offers on a bank-owned property in a resort area. We bid just $100 more than the asking price - nothing extravagant. The asking price had already been lowered by $25,000 last month. The bank accepted one of the other four bids.
That rejection will not take us out of the housing market, but neither does it compel us to jump immediately on another property. A purchase, after all, requires uprooting families (in our case from Ohio) and is not a decision consumers make at the snap of a finger. The property and the location have to be the right fit.
However, it is also clear for many at least, that housing affordability, and perhaps just as importantly, consumer confidence, is finally coming around.
Between 2006 and 2011, some $7 trillion in American wealth was wiped out when home prices dropped 30% after a dramatic climb in valuations during the housing bubble, the Demand Institute estimates. Looking forward, the moderate growth expectations for coming years suggest a slow return to normalcy. As home prices continue to drop and interest rates hover at all-time lows, first-time buyers and others who remained relatively cautious likely will be drawn back into the housing market.
Optimism Is Up, but the U.S. Housing Market Faces a Painful Shift
None of the positive indicators means that the cloud is gone yet. Four years after the start of the financial crisis, and six years after home prices began to collapse, the market is still shaky.
About one in four homeowners with mortgages, some 11 million households, are "underwater" -- owing more than their home values. Construction and sales of new homes remain anemic, with housing starts about one-third the historical average.
Nationally, prices are about 35.1% below their peaks in 2006, according to the S&P/Case-Shiller Home Price Indices released this week.
"While there has been improvement in some regions, housing prices have not turned," says David M. Blitzer, Chairman of the Index Committee at S&P Indices. "This month's report saw all three composites and five cities hit new lows."
However, there were some better numbers in the index. Only about half as many cities, a total of seven, experienced falling prices this month compared to 16 last month.
"Only three cities - Atlanta, Chicago and Detroit - saw annual rates of change worsen in March," Blitzer said. The other 17 cities and both composites saw improvement in this statistic, even though most are still showing a negative trend. Moreover, there are now seven cities - Charlotte, Dallas, Denver, Detroit, Miami, Minneapolis and Phoenix - where the annual rates of change are positive. This is what we need for a sustained recovery; monthly increases coupled with improving annual rates of change. Once we see this on a broader level we will be able to say the market has turned around."
Mark Zandi, co-founder of Moody's Economy.com, reported the housing crash is "largely over" and points to some strengthening in sales and new-home construction, but does not believe this is enough to lift home prices.
"The key is getting through more of the distressed properties that are in the foreclosure pipeline," Zandi noted recently, adding that this involves some 3.6 million of the nation's 49.5 million homes. "Until we work through them to a greater degree, that is going to remain a pall over home prices."
What the Recovery Could Look Like
Initially, according to the Demand Institute, the recovery will be led by demand from buyers for rental properties, rather than, as in previous cycles, demand from buyers acquiring new or existing properties for themselves. More than 50% of those planning to move in the next two years say they intend to rent.
Most home purchases require down payments of 10% to 20%, which is unrealistic for the majority of first-time buyers, said Jay Lybik, vice president of market research for Equity Residential, at the National Multi Housing Council's (NMHC) Apartment Strategies/Finance Conference and Spring Board of Directors Meeting last week.
Citing research from the Brookings Institute, Lybik underscored the fact that just 20% of all households can afford to pay $2,000 in cash in 30 days.
"The theory of national affordability ignores the real parts of what it takes to own a home," Lybik said.
But don't expect wannabe homeowners to settle for traditional apartments, Lybik said. Many of these households - mostly families with children - seek single-family homeownership because traditional apartment product cannot meet their lifestyle needs.
Single-family rentals could fit the bill though, he said.
According to the Demand Institute, this initial rental demand will help to clear the huge oversupply of existing homes for sale. In 2011, some 14% of all housing units were vacant, while almost 13% of mortgages were in foreclosure or delinquent-increases of 12% and 129% respectively over 2005 levels. It will take two to three years for this oversupply to be cleared and at that point home ownership rates will rise and return to historical levels.
In other key predictions, the Demand Institute said the housing recovery will look like this:
- Housing market recovery will not be uniform across the country. Some states will see annual price gains of 5% or more. Others will not recover for many years. The deciding factors will include the level of foreclosed inventory and rates of unemployment.
- The average home size will shrink. Many baby boomers who delayed retirement for financial reasons during the recession will downsize. They will not be alone. The majority of Americans have seen little or no wage increase for several years, and many will scale back their housing aspirations. The size of an average new home is expected to continue to fall, reaching mid-1990s levels by 2015.
- Consumer industries including financial services, home furnishings, home remodeling will all experience shifts in demand and new growth opportunities. Part of this spending is linked to increases in wealth from improving home valuations, while an even bigger part is tied to the "transaction" of buying or selling the home, which sets in motion increased demand for a wide range of products and services.
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