Instead of our usual monthly Housing Barometer, we’re taking a mid-year temperature check of the housing market while looking ahead at what to expect throughout the rest of this year. All three of our regular Housing Barometer measures – new construction starts, existing home sales, and the delinquency + foreclosure rate – stumbled in June, pushing the recovery down from 60% “back to normal” in May to 54% in June. But June’s numbers mask favorable underlying trends for all three metrics:
- New construction starts (Census) were up 24% in the first half of 2013 compared with the first half of 2012.
- Existing home sales (NAR), excluding foreclosures and short sales, were up 32% year-over-year in June.
- The delinquency + foreclosure rate (LPS First Look) was down 14% year-over-year in June.
Overall, the housing recovery is in healthy shape. Here’s a round-up of the top three changes in the housing market so far in 2013:
- Prices climbed steeply, outpacing rents, but are far from bubble territory. According to the Trulia Price Monitor, asking home prices were up 10.7% year-over-year in June. Prices rose year-over-year in 99 of the 100 largest metros, most sharply in California and elsewhere in the West. In contrast, rents rose just 2.8% year-over-year nationally. But this is a rebound, not a bubble: prices still look 7% undervalued compared with long-term fundamentals, and buying a home is still 37% cheaper than renting. However, today’s rapid price gains won’t last: fading investor demand, rising mortgage rates (see #2), and more homes for sale (see #3) should all slow down price gains and prevent us from getting back into a bubble.
- Mortgage rates leapt upwards, reducing refinancing activity. After hitting record lows in late 2012, the 30-year-fixed mortgage rate rose more than a full point between early May and July. Rising rates are now the top worry for prospective homebuyers: in fact, more than half of Americans said they would be discouraged from buying if rates reach 6%, the normal level in the pre-crash 2000s. However, rising rates haven’t yet caused a skid or spike in either prices or sales. The main effect of rising rates has been a huge drop in refinancing – down by more than half since early May. Although rates should continue to rise, and that will slow down price gains, rising rates won’t derail the housing recovery. At today’s prices and rents, buying will remain cheaper than renting until rates hit 10.5% – a level last seen in 1990.
- After hitting a 12-year low, inventory is expanding. At the start of 2013, inventory hit a 12-year low thanks to years of little new construction, homeowners unwilling to sell soon after prices bottomed in 2012, and fewer foreclosed homes on the market. Last December, we identified “Would inventory bottom?” as the key housing question for 2013, and the answer quickly appeared: yes. While inventory typically reaches its annual low in the winter, increasing throughout spring and summer, seasonally adjusted inventory bottomed in January and has increased for five straight months since then, up 6% in total.
If we’re not heading into a bubble, if rising rates won’t derail the recovery, and if more inventory will soothe prospective buyers’ jangled nerves, are there any risks to the housing market for the rest of 2013? You bet. There absolutely are. Topping my watch list for the rest of the year are four big questions:
- Will it become any easier to get a mortgage? After the bubble burst, mortgage credit went from overly loose to overly tight. Recent data suggest mortgage credit might be loosening a bit for the most creditworthy borrowers, but credit remains tight. Soon, though, this could change. As mortgage rates rise and refinancing demand dries up, banks might look to expand their home-purchase lending instead. Furthermore, new mortgage rules coming into effect next year will give banks more clarity about which loans are considered risky, and how banks will be on the hook legally and financially if they make these riskier loans – and this new clarity could make banks more willing to write mortgages deemed to be safer. We’ll see.
- Will young adults get back on their feet? Millennials – people age 18-34 – had an especially rough recession. Despite the overall economic and housing recovery, they remain almost as likely to live with their parents as they were at the worst of the recession – even if they have jobs. Not only are young adults not becoming first-time homebuyers; they’re not even renting. The housing market won’t get back to full health until these young adults are living on their own as either renters or owners.
- Is there a new shadow inventory? The “shadow inventory” – homes in delinquency or foreclosure that will eventually come onto the market – keeps shrinking, putting to rest earlier fears of a coming flood of distressed homes for sale. But Census data released this morning show that a different shadow inventory may nonetheless be looming: the 2013 Q2 vacancy survey shows that 5.6% of all housing units are vacant and “held off market,” up from 5.1% in 2009 and down just slightly from the all-time high in 2012. Even though the inventory of homes for sale or rent is shrinking, this shadow inventory of homes held off market is large – but perhaps only until their owners decide prices have risen enough to unload these units.
- What will Washington do? In the first half of 2013, the government made two critical policy announcements affecting housing: (1) the Consumer Financial Protection Bureau’s qualified mortgage (QM) rules and (2) the Fed’s bond-buying tapering. But two bigger, messier housing hot potatoes are still being tossed around: the mortgage interest deduction, and the future of Fannie Mae and Freddie Mac. Both of these huge issues pretty much boil down to the same fundamental question: how much should the government – and therefore taxpayers – help people buy a home (or buy a bigger home than they would otherwise)?
Banks, Millennials, the new shadow inventory, and Washington: they’ll all help shape which direction the housing market will go in the rest of 2013 and beyond.
