Good Signs for the New Year

by The Real Estate Faction on December 22, 2011

By Lawrence Yun, NAR Chief Economist

Here’s a change. Lately most of the dire economic news has been coming out of Europe: talk about the future of the Eurozone, whether or not the EU will hold together as an entity, and even some predictions that the euro may not survive as a currency. Some analysts in the U.S. are suggesting that problems in Europe are contagious and will doom our economy to another recession. But despite those European currency and economic troubles, a possibility of an economic recession in the upcoming year here in the U.S. looks less and less likely.

The key reason is the housing market recovery. After six years of a demoralizing and protracted housing market recession, a light is finally appearing at the end of the tunnel – and it is not a headlight from a freight-train. It is a genuine warm sunny glow. The latest pending home sales index – which reflects contract signings to purchase a home – rose more than 10 percent in October from the previous month and more than 9 percent from one year ago. Because the wide swings in sales related to the homebuyer tax credit are largely over, that year over year increase is a clean jump and not just a rise due to some artificially low comps of the past year. Clearly the data implies something is brewing out there. Yes, there are still cancellation issues related to appraisals, tight underwriting, and other issues. But buyers are evidently recognizing the great opportunity to own real estate and acting accordingly. Let’s examine several of the factors that suggest the worst is over.

First, existing home inventory has been trending downward consistently. The total number of homes listed for sale at the end of October was 3.3 million, down from 4.5 million in the middle of 2008. Remember, there are seasonal swings in the number of listings – with spring/summer months reflecting more home sellers (more listings) and autumn/winter months reflecting fewer sellers (fewer listings), so we still need to make proper seasonal adjustment comparisons. When we look just at the month of October during the past several years, this October registered the lowest inventory since 2005. The same was true for the month of September; September 2011 registered the lowest September inventory since 2005. Again, similar stories are seen for July and August of this year. In short, inventory has been running at six-year lows for several consecutive months. That is important to note, because lower inventory is a signal that price declines are coming to an end. In fact, the government measurement of home prices – from the Federal Housing Finance Agency (FHFA) – has risen in five out of the past six months, and home prices according to the FHFA are up two percent from their low point in March of this year. Other price data, such as that from Case-Shiller and NAR, have been moving both up and down with no consistent direction since 2009. In other words: prices have been roughly stable for the past three years.

Second, rents are rising and rent increases accelerating. The primary rent component of the Consumer Price Index (CPI) is up 2.4 percent from 12 months ago, but has been accelerating at 4.8 percent in the most recent monthly reading on an annualized basis. Rising rents will tip some renters into home buying, while real estate investors will have an added reason to own another property. According to The Economist magazine, the rent metric in the U.S. is such that home values are eight percent below justifiable levels.

Third, jobs are being added to the economy. Since the low point in early 2009, the economy has added 2.5 million net new jobs. Generally more jobs mean more home sales. So far, the extra jobs have not led to higher home sales. But to view it another way, pent up demand for housing has been growing and it is inevitable that home sales will have to tick higher with more jobs.

Fourth, mortgage rates are too low to pass up. While some financially qualified buyers are strategizing about the perfect time to enter the market in term of rates and home prices, these considerations are like picking up nickels and dimes when viewed from a far-off horizon. Consider what has happened in the past 30 years regarding the prices of consumer goods. On a broad basis, consumer prices have risen 160 percent from 1981 to 2011. Rent – and coincidentally gasoline prices – rose 200 percent. Home values rose 220 percent, even after accounting for the price declines during the recent housing downturn years. Medical care costs increased a whopping 400 percent. But even that increase was bested by the increase in college tuition which rose nearly 700 percent (which raises a number of questions about where the tuition monies go). One consumer item that did not rise in cost was the average monthly mortgage payment for those who took out a 30-year fixed-rate mortgage back in 1981.

What will happen over the next 30 years? If the cost of some of the above consumer items rises at a similar pace as in the past 30 years, then gasoline prices will run around $9 per gallon while the $20,000 college tuition of today will reach $140,000 per year. But one item which the consumer will not pay a nickel more is on their monthly mortgage payment. At the current median home price and current mortgage rate, the monthly mortgage payment would be fixed at $698 per month for the next 30 years. At the same time, home values likely will have tripled.

So, as we approach the end of 2011, I am fairly hopeful that our housing recovery is on the right track. Jobs are coming back, people are buying homes, home prices are stabilizing. All in all, not a bad way to end the old year, and start the new. Happy holidays!

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