Housing Recovery May Have Hit a Snag

Housing Recovery

The housing recovery may have hit a snag at the end of 2013…or not. It all depends on how you look at it. 2013 housing values posted their largest gains since 2006, according to the S&P/Case-Shiller price index released Tuesday. In the last quarter of 2013, United States (US) single family home prices increased by 11.3 percent. Prices in the 20 largest real estate markets rose 13.4 percent during the same period.

That sounds like good news for US homeowners, many of whom have been trapped in their current homes by the collapse of the real estate market in 2006, but it may not be time to pop the champagne corks yet. The bad news is that the real estate rally may be bottoming out.

Bloomberg News put the best spin on the story, leading with a headline reporting that home prices in 20 American cities increased at a slower pace. Forbes Magazine put a slightly more negative spin on their story, with a headline focusing on the two month decline in the index. The Chicago Sun-Times hawked a version of the story that focused on the 11.3 percent increase in the value of Chicago real estate. The Detroit Free Press was very pleased to report that housing prices in their city improved by 16 percent, not hard to do in the nation’s most depressed housing market and a real estate revival there, once a possible dream,  is considered almost a lost cause.

From these reports, it is hard to determine whether the housing recovery may have hit a snag or if it is the reporting about the housing market that is in turmoil.  Also that is a distinction with a difference because many people are going to base buying and selling decisions on these reports.

Closely followed by many real estate investors as the bellwether of housing recovery, the Case-Shiller index remains problematic because it utilizes a three-month rolling average rather than a direct month to month comparison of year to year data, but other sources are also indicating improvement. Zillow.com, the national real estate property listing board, reported a 6.6 percent increase in property values in 2013 based on actual sales. Other estimates have put the price increases at 8.4 percent. So, when it comes to the direction of the real estate market, no one really knows.

housing recovery
New construction starts are lagging behind year ago figures.

There were 880,000 housing start in January, 2014, 16 percent behind the previous year’s 1.046 million, according to the Department of Housing and Urban Development.  Do not  blame the weather.  Housing starts are seasonally adjusted.

A Modest Comeback

Real estate values in the US plummeted 35 percent from 2006 to 2012, triggering the snowball effect of mortgage defaults and foreclosures, and forcing millions of families out of their homes. Between 2006 and 2013, different sources suggest that anywhere from 15 million to 22 million homes were placed in foreclosure, equivalent to 12 to 17 percent of the 130 million single family homes in the US. Since 2012, however, property values have rebounded by 21 percent as the housing price indexes returned to the high water marks that were recorded in 2004.

The sheer number of properties in foreclosure was the primary reason for the collapse in real estate values, since each foreclosure drives down the value of other homes in the same neighborhoods. With foreclosures down to 1.3 million in 2013, the real estate market was able to surge back because resale of previously foreclosed properties at significant discounts over their previous values has run its course and the lower priced properties are liquidated.  If the housing market has hit a snag, the reason may well be that a large number of foreclosures that were filed in 2009, 2010, and 2011  have finally been closed and the properties sold off.

With supplies of foreclosed properties dwindling, the laws of supply and demand kick in, driving prices up on both new and used homes, but there are other factors that may continue to depress the housing market. This winter’s historically bad weather has exacerbated the seasonal decline in home sales that usually occurs during the winter months. No one wants to move in January, so the only people buying new homes during the winter months are the people who have to move for one reason or another.

In addition to the bad weather, the liquidation of foreclosure inventories means that there are fewer affordable homes to choose from and a combination of increasing interest rates and stricter underwriting rules have made it both more expensive and more difficult to get a mortgage today.

If homeowners are confused by these statistics, they are not alone. Here’s a perfect example of the widespread confusion. Early this morning, the Wall Street Journal Online published a story under this headline: Home Prices in 2013 Notch Biggest Annual Gain since 2005. Later on same morning, The Wall Street Journal posted this story: Home Prices Lose Momentum According to the S&P/Case-Shiller Home Price Indices. Same story. Same day. Same news organization. Different desks.

In Real Estate, Timing is Everything

Like politics, all real estate is local. Statistics touted as a sign of improvement in one community may be cause for dismay in another. For the individual homeowner who wants to sell, now may be a good time to wait and see what happens next, because prices could go either way. More realistically, the time to sell is whenever the seller can get a prices that lets the seller get out of the house with a whole skin.

The time to buy  is really whenever the buyer can find a property that can be purchased under the new, tighter mortgage regulations. It really does not matter to the prospective homeowner whether or not the housing recovery may have hit a snag, because real estate is always going to go up and down. The time to buy is when you are ready, not when the market wants you to buy.

By Alan M. Milner

WSJ Online
Wall Street Journal
Detroit Fee Press
Chicago Sun-Times

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