Housing’s growing recovery still a long way from normal

McClatchy NewspapersFebruary 5, 2013 

— By most economic measures, the moribund housing sector seems to have turned a corner and is now firmly in recovery. For many homeowners, however, it may still feel like a statistical rebound because an improving housing sector is not the same as a healthy one.

Economists are broadly in agreement that housing is no longer weighing against economic growth and will actually be a positive contributor in 2013.

That’s supported by most measurements of the housing sector, be they starts of new single-family homes, sales of existing homes, rising median home prices or shrinking foreclosures as a percentage of total sales.

“The current forecast is for 5 million existing homes and 500,000 new single-family (housing starts), that’s a pretty healthy growth in existing sales of about 8.5 percent,” said Danielle Hale, director of housing statistics for the National Association of Realtors.

Sounds good, but there is a sobering footnote.

“They’re coming off of extraordinarily low levels,” cautioned Hale. “That’s still a below-trend growth rate. . . . Obviously if the economy improves beyond what’s forecast, then the housing position will be better.”

After several years of false projections that housing had hit bottom, it appears that the sector truly is now in recovery mode.

“I think housing has clearly bottomed. But I think there is clearing skies, not blue skies,” said Mark Vitner, senior economist with Wells Fargo Securities in Charlotte, N.C. “It’s going to be years for housing to get back to what’s considered normal. But we’re going to see improvement along the way. We have a great deal of improvement in virtually every metric that matters to housing.”

Pending home sales, although declining in December, have stayed above year-ago averages for 20 consecutive months, according to data released Monday by the National Association of Realtors.

And the group reported earlier in January that housing was at record affordability rates in 2012, for the second straight year. “Distress” sales, which in 2011 represented 32 percent of all home sales, fell to 24 percent last year.

“It is robust, we are starting on a recovery, we don’t think there is going to be a second housing market downturn for the whole country,” said Andres Carbacho-Burgos, an economist specializing in housing for forecaster Moody’s Analytics in West Chester, Pa. “We believe that the housing sector is no longer a drag on economic growth. That’s the good news. The bad news, if you can call it that, is that the housing recovery is not going to be spectacular.”

An improving housing market is important for U.S. economic growth. For much of 2005 and 2006, investment in residential housing ranged between 5.5 percent and 6.3 percent of the nation’s gross domestic product, the broadest measure of the sale of goods and services. It plunged during the financial crisis of 2008, dropping to just 2.2 percent of GDP for most of 2011 and climbing to just 2.6 percent of GDP in the final three months of 2012.

Whether it’s a good or a bad market depends on perspective. For the first 11 months of 2012, a housing affordability index compiled by the realtors’ group showed record levels, and that’s great for buyers. The index measures the relationship between median home prices, median family income and average mortgage rates.

And prices are going up, which on the face of it would seem good news for sellers. The latest read from the closely followed Case-Shiller Indices, which track metropolitan home prices in 10-city and 20-city composites, was positive.

Data released Tuesday that span a 12-month period ending Nov. 30 showed that prices rose 4.5 percent on the 10-city index and 5.5 percent on the 20-city index. Some of the hardest hit cities in the country are rebounding, with Phoenix leading the nation with prices rising 22.8 percent, Las Vegas at 10 percent and Miami at 9.9 percent.

Cities experiencing less distress such as Charlotte, N.C., and the Dallas-Fort Worth area saw gains respectively of 5.1 percent and 5.7 percent.

The creator of the indices, Yale University economist Robert Shiller, isn’t ready to declare victory for the housing sector. Interviewed on Jan. 24 by Bloomberg Television at the World Economic Forum in Davos, Switzerland, Shiller said there’s still much uncertainty ahead.

“The short-term indicators are up now, it definitely looks better, but we saw that in 2009,” he said, referring to a period where homebuyer tax credits helped spur sales, but home buying faded when the tax credits were removed.

In the hard-hit cities, today’s rising prices reflect the fact that distress sales are now a smaller percentage of total sales. But in more stable areas, the higher prices partly reflect a shrinking inventory of homes for sale. This is because many homeowners who’d like to sell their homes still owe more than they’re worth, and thus keep them off the market.

The National Association of Realtors reports that December 2012 inventory was almost 22 percent below December 2011. With fewer homes on the market, some areas are experiencing bidding wars reminiscent of the go-go days of the housing boom in 2005 and 2006.

The tight inventories are likely to translate into higher prices for homes in 2013. By historical standards, buying a home will still be cheap, just not as cheap as in 2011 and 2012.

That’s evident in California, which last year closed with a bang that’d unlikely to be repeated in 2013. The California Association of Realtors reported on Jan. 15 that median home prices for the Golden State were up 27 percent between December 2011 and December 2012. Actual sales volume was up by a more modest 5.4 percent compared to 2011 sales.

“The substantial increase in price was due in large part to a significant increase of higher-priced properties, while inventory constraints continued to constrict sales of lower-priced homes,” the group said in a cautious report. “Price increases are not expected to continue at a high pace in 2013.”

Moody’s Analytics forecasts price declines for much of California. Coastal cities such as San Diego and San Francisco are expected to see rising home prices, but not so for inland metropolitan areas.

“Sacramento is relatively better off because it has a more stable income base. Stockton, Modesto and Merced . . . we expect foreclosure sales to keep pushing down on prices . . . for the next two or three quarters,” said Carbacho-Burgos.

A fuller recovery also may prove elusive for hard-hit Florida real estate.

“There was a pickup in non-distressed home sales in South Florida. That reduced the share of distressed sales in the total housing market . . . but the overall inventory of REO (real estate owned) homes and other distressed homes in South Florida is still huge,” Carbacho-Burgos said, adding that west coast Florida cities still face a rough road. “Bradenton is expected to have slightly more extended price declines through 2013 . . . because of the foreclosure inventory.”

Real estate owned homes are those that have been foreclosed on and are in the hands of banks and other lenders. The national average is about five REO homes per 1,000 households, he said, but that number is 10 per 1,000 in Bradenton and neighboring cities and more than 14 per 1,000 households in South Florida.

It’s a different story for fast-growing metropolitan areas in North Carolina.

“The Charlotte and Raleigh areas have a strong pickup in population growth,” said Vitner of Wells Fargo Securities. “Most new home construction is close to key employment centers. There’s one challenge out there . . . smaller and independent builders may run out of lots to build on. Big companies have bought them up.”

In parts of the nation where the housing crisis was less damaging, rising home prices will help sellers this year. According to statistics from the National Association of Realtors, the median home price for existing homes rose 11.5 percent in 2012 to $180,800.

New home construction remains the most optimistic segment of the housing sector. The most recent read from the National Association of Homebuilders, for December, found that permits to build new homes were at their highest level – an annual rate of 903,000 – since July 2008. Similarly, permits for single-family homes were at their highest annualized rate since June 2008, just months before the U.S. financial system nearly melted down.

By historical standards, however, the 780,000 homes actively under construction in 2012 was awful, the fourth lowest total since 1945, according to Patrick Newport, an economist with forecaster IHS Global Insight.

Nonetheless, home starts have risen three years in a row, with each year leaving the housing crisis further away in the rear-view mirror.

“This year will be better than the last for housing starts. Interest rates are rock-bottom low, inventories of new and existing homes are lean, and the economy is creating jobs,” he noted in a research report. “Our latest forecast is for starts to rise to 970,000 in 2013.”

Alan Levenson, chief economist for investment giant T. Rowe Price, added in a research note: “We expect further modest gains in new home sales in the months ahead: home builder sentiment remains elevated and mortgage applications for home purchase, though volatile, may be breaking out of the range that has prevailed since late 2010.”

In an interview, however, he cautioned that new construction is likely to skew toward apartments and rental properties because mortgage lending remains tight for many potential homebuyers.

Email: khall@mcclatchydc.com; Twitter: @KevinGHall

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