Wednesday, August 8, 2012

Housing Price Snap Back - Temporary?

The WSJ is reporting a significant rise in home prices last month. Shrinking inventories and rising demand is fueling the rise. But here is what I found significant:
Inventories are low for a handful of reasons. Investors who are scooping up homes have been converting them into rentals rather than flipping them, keeping the properties off the market. Banks have slowed their foreclosure processes in the past two years after they were found to be rushing through incomplete paperwork to repossess homes.

New-home construction has been at depressed levels for years, as builders have had to fend off competition from bank-owned foreclosures. That lack of new construction "has set the foundation for a snapback in pricing," said Michael Sklarz, president of Collateral Analytics, a Honolulu-based research firm.

Many traditional sellers are sitting on the sidelines because they are unable or unwilling to sell.
A couple of salient facts. First, housing prices fell enough to entice investors into the market. This has reversed the slide in prices. If the prices pick up a bit more then, other sellers who are sitting on the sidelines can enter the market to which the last paragraph alludes. Had the Obama administration allowed this process to work through more quickly; allowing prices to hit market clearing prices, the whole economy might be recovering by now. As it is, this burst might be short lived.
Foreign buyers may be leaving the market, which would depress demand. There are hints of late that foreign buyers, particularly Europeans in search of bargains, could be poised to pull back from the U.S. housing market.

Trulia, which provides online real-estate listings, reported recently that foreign searches to its site for U.S. homes declined 9% during the last year. In the second quarter of this year, foreign searches accounted for 4.1%, down from 4.5% in the same period in 2011.

. . .

Foreign buyers have played a major role in the U.S. housing market of late. For the past year ending in March, international home buyers accounted for 4.8% of total U.S. sales, according to the National Association of Realtors. That’s a total sales volume of roughly $82.5 billion, up from an estimated $66.4 billion in the prior year.
I also think that depressed interest rates are causing the run up in prices. Rental unit profits are sensitive to mortgage rates, because they can make the difference between profit and loss. For example, a 30 year mortgage on a $250,000 loan has a monthly payment of $1342.05, but a 3% loan rate yields a payment of $1054.01 per month. That could mean the difference between profit and loss.

The question is whether prices will rise enough to bring builders back or allow those who are underwater to be able to sell. With the market seemingly so sensitive due to low inventories, and bank foreclosures only temporarily in decline, I think this will be a short lived bump, unfortunately, but certainly instructive.


  1. A couple months age a study enlightened this question. FORECLOSURE laws have made it difficult for banks to move inventory out of the shadows of forclosure. Limiting supply has slightly driven prices up, but as soon banks will find ways around the Obama policy. At that time prices will crash and it is obvious enough that prices cannot rise significantly regardless of supply restrictions.

    The market is simply smarter than government. People take into account future risk. That risk limits current home values.

  2. I think you hit the major factor by highlighting that rising prices will entice new sellers. Here in the Pacific Northwest (as in most parts of the country) many home owners are underwater on their mortgages and so can't really afford to sell. As prices rise, they'll start inverting that position for more and more current homeowners and a decidedly non-zero number of those will sell. So any increase in housing prices will be, I think, depressed mostly by the incremental reversal of underwater mortgages which, I think, probably far outstrip foreclosures and investment buying.