Wednesday, December 12, 2012

2013 Will Be Year of Housing Recovery

The Mortgage Corner

Wall Street is jumping on the real estate band wagon. Not only are hedge funds now buying foreclosed homes in bulk, reducing the ‘shadow inventory’ of homes with delinquent mortgages, but the record low interest rates are boosting both refinance and purchase transactions says the Mortgage Bankers Association.

For instance, The Refinance Index increased 8 percent from the previous week and is at its highest level since the week ending October 12, 2012. The seasonally adjusted Purchase Index increased 1 percent from one week earlier.

“Continued uncertainty due to the lack of resolution regarding the fiscal cliff led interest rates lower last week, with mortgage rates reaching a new low in our survey,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “Refinance activity increased, with the refinance index hitting its highest level in two months, and the refinance share reaching its highest level since January 2009. Applications for purchase increased for a fifth consecutive week, and are running almost ten percent above their level at this time last year.”

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Graph: Calculated Risk

In fact, the 30-year fixed conforming rate for single unit loan amounts under $417,000 dropped as low as 3.125 percent with zero points in origination fees last week, and has been hovering around 3.25 percent with zero points for several weeks. This is largely because the Federal Reserve is continuing its bond buying program, called QE3. The FOMC will probably announce additional bond buying tomorrow that will start in January after the conclusion of Operation Twist. “I don't expect the Fed to announce tomorrow a change to thresholds (using the unemployment rate and inflation) for the timing of the first Fed Funds rate hike,” said Calculated Risk.

And Merrill Lynch has come out with its 2013 real estate forecast. Merrill believes 2012 will go down in history as a year of transition for the housing market. Housing starts are on track to be up 25 percent and home prices are set to rise 5 percent over 2012. Merrill also believes the recovery will continue into 2013 for several reasons. Most importantly, household formation has started to turn higher, reflecting the shortfall of household creation over the prior five years, as we have discussed in past Popular Economics columns.

In addition, listed inventory is low, owing to extraordinarily slow construction and only a gradual reduction of the distressed pipeline. There has also been a shift toward short sales as a means of disposing distressed properties, which boosts the prices of distressed properties, since banks benefit from higher sale prices than via foreclosures. Moreover, investor demand is strong, particularly for distressed inventory.

Merrill also forecasts housing starts to increase another 25 percent to an average of 975,000 and home prices to increase 3 percent in 2013. “The housing market is turning into an engine of growth once again. Housing construction will likely add to GDP growth in both 2012 and 2013 growth,” said Merrill. “The gain in homebuilding will support related sectors such as furniture, building material sales and financial companies. Moreover, construction jobs will finally come back, allowing some of the 2 million people who lost construction jobs to find employment in the field again.”

There will also be a jolt to the economy from the gain in home prices. An increase in home values lifts household net worth and boosts consumer confidence. If consumers perceive the gain in wealth to be permanent, they will increase their current consumption. But the rise in home prices can do something even more vital for the economy – it can spur credit creation, which then fuels housing demand and reinforces the gain in home prices. We are seeing the very early stages of a positive feedback loop between the housing market, credit market and real economy, which can be quite powerful in time, says Merrill Lynch, as quoted by Calculated Risk.

So we can say 2013 should be a very good year for housing, with population pressures increasing as young adults move out of their parent’s home at the same time that banks are ridding themselves of problem properties at a faster rate, and as the Federal Reserve continues to keep interest rates at historic lows.

Harlan Green © 2012

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