Economists Expect a Multi-Year Recovery

By Camilla McLaughlin

Although the number of large investors in the market, slow jobs recovery and the long term interest rates are a concern, economists speaking at the recent conference of the National Association of Real Estate Editors say the outlook for real estate continues to be positive. The underlying message, according to Lawrence Yun, chief economist for the National Association of Realtor, is: “I expect this to be a multi-year recovery. Four out of the five years will be improving years.”

In spite of a month-over-month dip in June, recent sales data confirms Yun’s forecast. The number of sales in June edged down by 1.2 percent over May but are still 15.2 percent higher than June 2012. The inventory of homes for sale stands at a 5.2-month supply, well below the 6-month benchmark that represents a balanced market. The National Association of Home Builders/First American Improving Markets Index (IMI) for July, listed 255 metros as improving, which is more than triple the number of metros reported as improving in July 2012.

Median sale prices for existing homes rose 13.5 percent from June 2012, which, according to NAR, marks 16 consecutive months of year-over-year price increases, which last occurred from February 2005 to May 2006.

“Based on recent trends in home prices, housing permits and employment, the outlook for a continued housing expansion remains very positive for the remainder of 2013,” adds NAHB Chief Economist David Crowe.

The good news, according to Yun, is housing is helping the recovery in the economy overall with price growth of real estate clearly outpacing income growth.  Home price increases translate into growing equity for homeowners. Existing home sales are coming back up to tax credit levels, but without the artificial stimulus of the tax credits — one of several positives Yun sees underway in the market.

The vacation home market is just beginning to show signs of recovery. Yun, pointing to improving household net worth and indications from some relocations that vacation properties are selling, expects this sector to make a meaningful upward move sometime this year.

Regarding new construction, the gap between prices for new home and existing homes is still large thanks to a constrained supply of new homes. Housing starts are on the rise but the inventory of new construction remains at a 50-year low. Yun says housing starts have to increase by 50 percent to go back to the historic average.

Regarding concerns that the recovery is driven by investors scooping up market bargains, Mark Fleming, chief economist for Core Logic, a provider of business information and analytics, said, unlike absentee landlords in the old days, institutional investors have large amount of capital and they are hiring local property managers. “One could argue that these investors will be able to better maintain these homes than individual investors.”

Regarding price appreciation, he reminded journalists that markets driving national numbers are coming off of extremely low levels. However he says prices might also get closer to true value sooner than expected because the prior peak was not true value.

Prices are rising fast, but Jed Kolko, chief economoist at Trulia, said that is not an indication of looming “bubble trouble.”  Interest rates have crept up in recent weeks, but Kolko doesn’t expect to see prices plummet since buying is still cheaper than renting. He says interest rates would have to be over 11 percent for renting to be cheaper than buying.

In response to journalists concerns about investors dumping homes on the market, Kolko said there are plenty of incentives for investors to retain their investments. Additionally, he added, “Don’t trash investors. Without the investor in this recovery, we’d have more homes without people and more people without homes. On balance, investors have done a good thing in this housing recovery.”

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