Five Takeaways: Where is the U.S. Housing Market Headed?

Source: Wall St. Journal
June 2014

Signs point to a housing market that may slowly be gaining some balance and entering more normal territory as a variety of recent housing reports paint an improving picture.

Making sense of the story

• While there was buzz about a potential bubble, Home prices aren’t going up as fast as they were a year ago.

• Furthermore, according to the Commerce Department, sales of new homes, which have struggled to increase from relatively low levels of a year ago, posted huge gains in May.

• A key takeaway is that in May, sales of new homes were at their highest levels in six years with a figure of 504,000 sales at a seasonally adjusted annual rate.

• Also, new home sales are now running 1 percent ahead of last year’s January-through-May level, as the spring-selling season made up for difficult winter conditions in much of the country.

• However, sales have also been deterred by the fact that builders have been slow to ramp up production. While inventories are still very low, they are up 16 percent from last year.

• Overall, home prices aren’t rising as briskly as they were last year. And as for the large yearly increases over the past year, they have reflected continued declines in the share of homes selling out of foreclosure.

• As more supply comes to market, prices are likely to cool down further. It will be a positive sign for the recovery if builders are able to sell more homes and if more traditional owner-occupant buyers dominate the market rather than investors.

Talking Points …

• Higher home values continued to fuel more equity home sales, which have made up more than 80 percent of all home sales for the past 11 consecutive months.  Meanwhile, pending home sales fell in May as investors pulled out of the market due to higher home prices, according to the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.).

• The share of equity sales – or non-distressed property sales – rose further in May, rising to 89.2 percent, up from 88.4 percent in April.  Equity sales have been rising steadily again since the beginning of this year.  May marks the 11th straight month that equity sales have been more than 80 percent of total sales.

• Twenty-seven of the 41 reported counties showed a month-to-month decrease in the share of distressed sales, with 11 of the counties recording in the single-digits, including Alameda, Marin, San Diego, San Luis Obispo, San Mateo, and Santa Clara counties — all of which registered a share of five percent or less.

Why Home Price Gains Aren’t Lifting the Economy - Source: Wall Street Journal

Why Home Price Gains Aren’t Lifting the Economy
Source: Wall Street Journal

Analysis of whether housing has lived up to its true potential as a catalyst for a stronger recovery has led experts to argue that while housing stopped being a drag on the economy a few years ago, it has failed to propel strong economic growth. Professors Atif Mian of Princeton University and Amir Sufi of the University of Chicago argue that rising home prices haven’t done much to stimulate the economy.

Making sense of the story

• The professors conclude that the home price gains of the past two years have had fewer knock-on benefits for the economy than in the past because those gains have done little to stimulate either new-home construction or increased spending paid for by home-equity borrowing.

• They argue current rising home prices won’t greatly stimulate the economy because gains that simply restore lost wealth aren’t as valuable as gains that create new wealth.

• Consequently, prices may need to rise even higher for the economy to enjoy any “wealth effect” because it is at that point when people will spend more because they feel richer as their home or stock portfolio rises in value.

• Growth is also deterred by tight lending standards, which have made it tougher for homeowners to take cash out of their homes with either a second mortgage or by refinancing into a larger first mortgage.

• Also, prices haven’t risen enough to encourage homeowners to sell, which is creating inventory shortages that are being blamed for sluggish sales volumes and higher prices.

• And while home prices are up, they’re still not up enough to encourage builders to build more homes because they face higher land, labor, and supply costs.

Conserve Water 2014

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San Francisco Bay Area Housing Market 2014

by Rick Turley, President of Coldwell Banker Residential Brokerage, San Francisco Bay Area

Four Reasons 2014 Could Be A Very Strong Year for Local Housing Market

Happy New Year! As we kick off 2014, it's a good time to take a look at what might be in store for the local housing market in the coming year. While I don't claim to have a crystal ball, I feel very optimistic about the potential for a strong housing market in 2014.

The Wall Street Journal reported this week that home prices across the country ­ – but especially in Silicon Valley and other parts of the Bay Area – have zoomed back to near record territory. Valuations jumped 25% or more in some communities over the past year, nearing or even exceeding their pre-recession highs. Prices in Palo Alto are nearly 40% above their 2007 peak, one of the largest gains in a recent survey.

So what do we do for an encore in 2014? I see four major reasons why the Bay Area's housing market will continue to be strong in the coming year:

1. A robust local economy. The Bay Area economy is one of the strongest in the country. Silicon Valley, the Peninsula and San Francisco are the high-tech, Internet, VC and social media centers of the world. CNNMoney's tech job forecast for 2014 is "Hot and Getting Hotter." Tech job site Dice.com reports that 55% more employers — a record high — say they're ready to hire a large numbers of techies, up from 42% in the second half of 2013. These well-paid knowledge workers will provide an even stronger, better-capitalized pool of buyers for our housing market in the coming year.  Just noted in USA Today, the bay area’s fourth largest city, Fremont, has seen a  return to a strong housing market, and is regarded as one of the best run cities in the country.  http://usat.ly/1crnbWi   From the Wine Country in Sonoma, south to Carmel and Pebble Beach, and across to Livermore, we are fortunate to have healthy, diverse, and prosperous cities and towns in our nine Bay Area counties.

2. Supply and demand. While the demand side of the equation was extremely strong last year with buyers out in force, the supply continued to be historically low. This resulted in prices getting bid up in multiple-offer situations and many would-be buyers walking away empty-handed.  No one knows for sure what will happen to inventory in the coming year, but our agents are telling us more listings are expected in the coming weeks. I suspect homeowners are reading the same news stories we are and seeing that prices have been shooting higher, and they may finally be ready to cash in. Rising prices also change the dynamics for many homeowners who had been underwater in their mortgage as recently as six months or a year ago and weren't in a position to sell. With prices jumping, many of these homeowners now have positive equity once again and have the option of selling and walking away with cash for the first time in years.

3. Interest rates. Interest rates remain historically low, but make no mistake about it: They are moving higher once again. Some economists are forecasting mortgage rates could rise a full percentage point before the year is over. This is a clear wakeup call for those buyers who have been on the sidelines waiting for the perfect time to get into the market. The time is right now before mortgage rates move higher.  An increase of just one percentage point on a $500,000 mortgage adds $300 to a monthly payment or $3,600 a year. Buyers know that and will be rushing to beat the next rate hike.

4. Increasing costs of renting.  As the Bay Area economy comes roaring back from recession, available apartments are drawing long lines of potential tenants and rents are spiraling higher, according to a recent story in the San Francisco Chronicle. "Rents in San Francisco are escalating at breakneck clips this year, largely driven by an influx of tech workers. Oakland and San Jose likewise are seeing steep run-ups," the article notes. Median asking rents for San Francisco apartments listed on www.livelovely.com hit a record $3,398 in the third quarter, up 21 percent from 2012, according to the Chron. Such huge rent increases continue to make buying a home a better financial proposition. My sense is that buyer demand will only increase in the new year as renters see their personal economy improving with a better job market and higher salaries.

Three of the four above are particularly unique to our Bay Area.  Few cities around the US have this same alignment of economic conditions. NAR is predicting growth in the 5+% range across the nation in 2014 and I feel that number is conservative for us.  Every one of our offices expect a strong first quarter as some new inventory comes to the marketplace.  

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