More on the Economy - Housing Trends

Posted by Bruce W. Woolpert on Mar 18, 2015

The Federal Reserve realizes that the U. S. economic recovery is not likely to strengthen appreciably until residential construction recovers. The recent agreement between state attorney generals and major U.S. banks to resolve disputes regarding the handling of housing foreclosures is a plus. Now progress can be made in dealing with the shadow inventory of housing that is in default or mortgages that remain unpaid. In communities with a high number of shadow inventory homes, it is very difficult to get the housing construction sector started again because buyers fear that home prices will go down when the shadow inventory is put on the market.

Housing is going to take many years to address. How long it will take depends upon the improving job picture and household formation. Household formation is down because there are fewer marriages and more individuals living alone. At current activity levels, Wells Fargo projects that it will take until 2021 for the housing sector’s problems nationally to be solved. However, this is more a regional problem than a national problem. Most of the shadow inventory is in certain states like Florida, Arizona, and Nevada. The Coastal areas of California are showing some improvement in housing while the Central Valley continues to deal with housing prices that have fallen below mortgage levels. The problem with under-water mortgages (house values that are lower than the amount owed on the house) is so large that the solutions to this problem aren’t easy to find. The total under-water amount is estimated at $700 billion which is larger than even our U. S. Government could handle. Florida, California and Illinois account for 33% of the nation’s shadow inventory. In California, 29.7% of household mortgages are under-water. In Florida it’s 43.9%, in Arizona it’s 47.1%, and in Nevada it’s 58.3%.

As a result, the banking sector and the government will take steps to help move the housing inventory onto market in an orderly fashion so as to not suppress prices and to gradually clear the shadow inventory of 1.6 million homes. Some banks are now offering a bonus if an under-water homeowner short-sells their home.

There is some good news. The inventory of homes now on the market (i.e., 2.4 million homes on the market in the normal fashion with for sale signs, etc.) is back to normal levels. It is the overhang of the shadow inventory in some markets which is causing the housing market its problems and providing a shaky outlook.

Some key points:
-        Mortgage interest rates continue to trend lower, with the rate on the 30-year fixed mortgage below 4%. Mortgage rates are significantly higher than U. S. Treasuries so mortgage rates could go lower.
-       Single-family housing starts registered their lowest level on record in 2011, as the oversupply of existing homes continues to compete with new construction.
-        When the normal inventory of homes on the market (2.4 million) is added to the shadow inventory (1.6 million), there is an over-supply of houses that could be on the market and this continues to push home prices down.
-       Multifamily construction (apartments) continues to do well. The number of people looking for apartments exceeds the number of new units constructed. This is pushing up apartment construction in many markets, including San Jose. Wells Fargo predicts multi-family construction will increase 15% in 2012.
  -       With low interest rates and lower home prices, it is now cheaper to purchase a home than at any point in the last 30 years. Potential home buyers recognize this and it has increased the number of people looking for a home or thinking about a purchase.
 However, new home purchases actually remain low by historical standards.
-        Existing home sales have increased in each of the last three months. Many homeowners face rejected mortgage applications due to weak appraisals. Thirty-three percent of purchase contracts were cancelled in December.
-        Remodeling activity continues to be driven by practicality (e.g., more space) and maintenance needs, as opposed to remodeling for higher investment returns. Bathroom upgrades and roof replacements are the most common projects.

With 13 million Americans unemployed, 12 million under-employed (performing part-time work but wanting full-time work), and 56 million Americans no longer looking for a job, improving the jobs picture and getting this economy to grow much faster (as it has in previous recoveries) is definitely the most important step to improving the housing sector.

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