Wednesday, July 13, 2011

MARKET TRENDS: Real Estate Outlook: State of Housing Recovery

Is the high price of gas, now near $4 a gallon average, taking a toll on the economic recovery? Recent statistics indicate downward trends in several sectors.

The Commerce Department reports that while consumer spending was unchanged in May, spending was at its weakest pace in 20 months.

Mortgage applications were also down, according to the Mortgage Bankers Association. Applications fell 2.7 percent from the week prior.

Mortgage loan limits are also garnering attention this week, as a drop in loan limits for both Fannie Mae and Freddie Mac sponsored mortgages is scheduled for October 1st. Some experts are expressing concerns over this move. A recent study from the National Association of Home Builder (NAHB) indicates that this "will reduce housing demand and place downward pressure on home prices in major housing markets."

"The lower limits will place a constraint on home buying in high-cost housing markets, such as those along the coasts and in California. It is the last thing we need in a housing market that is still struggling to get back on its feet," said NAHB Chairman Bob Nielsen, a home builder from Reno, Nev.

In brighter news, pending home sales rose 8.2 percent in May. On the Pending Home Sales Index calculated by the National Association of Realtors®, this is 13.4 percent higher than the rate seen in May 2010.

Lawrence Yun, NAR chief economist, sees this as positive movement. "Absorption of inventory is the key to price improvement, and this solid gain in contract signings implies that home values in many localities are or will soon be stabilizing as inventories get absorbed at a faster pace,” he said. "Some markets have made a rapid turnaround, going from soft activity to contract signings rising by more than 30 percent from a year ago, including areas such as Hartford, Conn.; Indianapolis; Minneapolis; Houston; and Seattle.” Reduced access to credit has kept pending sales from reaching their full potential.

Regionally, the West led the way with a 12.9 percent surge. The Midwest followed at 10.5 percent. The Northeast and South also experienced gains, at 4.1 and 7.3 percent, respectively.

All regions are experiencing higher pending sales rates than in May 2010.

Additionally, the most recent Case-Shiller Home Price Index shows that April saw a seasonal boost in home prices, though it may not be sustained growth.

"In a welcome shift from recent months, this month is better than last - April’s numbers beat March,” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. "However, the seasonally adjusted numbers show that much of the improvement reflects the beginning of the Spring-Summer home buying season. It is much too early to tell if this is a turning point or simply due to some warmer weather.

Continued recovery is dependant on a solid job market. Yun notes that "the job market has sputtered recently, and because variations in local job creation impact housing demand, markets will recover unevenly around the country."

Carla Hill July 4, 2011

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