Positive signs abound for housing

May 19, 2012
Author: Brian Summerfield,

The first quarter of 2012 was the best first quarter for real estate in five years, and pending contracts suggest that the second quarter of 2012 will be the best second quarter in five years, National Association of Realtors® (NAR) Chief Economist Lawrence Yun said at the Residential Economic Update during the Realtors® Midyear Legislative Meetings & Trade Expo.

Moreover, Yun said the second half of this year could be even better than the first, in part because of continued increases in rental costs and record affordability of homes. “Renters are getting squeezed, and they don’t want to rent anymore,” Yun explained. “This could be the year we see the release of pent-up demand.”

Home prices have been skipping along the bottom for about a year now, Yun said, a trend that has drawn investors into the market. These investors have helped housing through a couple of difficult years and partly mitigated the dysfunctional mortgage market.

“Right now is the time to buy low,” he said. “Investors are coming in to take advantage. Second homes started to recover nicely last year because of investors.”

However, home values are poised for a rebound as more traditional buyers move back into the market, Yun said. In fact, this has already started to happen in areas such as Phoenix and Miami, which have seen year-over-year (March 2011 to March 2012) double-digit percentage increases in home prices.

As real estate improves, consumer psychology around homeownership will change, he added. Coupled with the recent – if relatively modest – job growth and stock market gains, conditions are right for a sustained housing recovery.

Challenges

Nonetheless, there are issues that could restrain a turnaround in housing. Mortgages are still too hard to come by, the shadow inventory – while declining – remains historically high, and price inflation is rising “above the Fed’s comfort level,” Yun said.

To address that last problem, the Federal Reserve will likely raise interest rates in 2013 and 2014, though Yun contends a modest rise in interest rates wouldn’t necessarily be a bad thing for the housing market because it would cause financial institutions to focus their mortgage servicing departments on purchase loans instead of refis.

The biggest housing market challenge, however, is uncertainty caused by the murky political and regulatory environment, – particularly the repeated threats from legislators and policymakers to alter or eliminate the mortgage interest deduction.

And the country is racing toward a “fiscal cliff.” On Jan. 1, 2013, a federal budget compromise must be approved. If delayed, there will be automatic government spending cuts, which would probably create a fallout effect in the financial markets.

Source: Realtor® Magazine