Lauren Vance has been shopping for her first home near Sacramento for five months.
The
26-year-old police officer lost 13 bids in a competitive market marked
by strong investor interest and a tight supply of homes for sale. Given
price increases, she's also had to pursue smaller homes to stay inside
her budget.
Almost 2,800 miles away in Jacksonville, homeowners
Amanda and Chris Dean would like to buy a bigger home. But they haven't
been able to sell theirs for enough money to finance a new purchase.
"We're at a standstill," says Amanda Dean, 26.
Welcome to the dichotomy that is the U.S. housing market.
Six
years since the start of the greatest housing collapse since the Great
Depression, one doesn't have to look very far to see signs of a
recovery. Nationally, home prices are rising after more than a 30% drop
since mid-2006. More good news arrived Tuesday, as the Standard & Poor's/Case-Shiller home price index
reported third quarter prices were up 3.6% from a year ago and
September's 20-city index reached its highest level in two years.
Foreclosures have slowed in most of the country after having decimated
hundreds of U.S. cities. Rather than being a drag on the U.S. economy,
housing is now seen as a contributor to growth.
"With six months
of consistently rising home prices, it is safe to say that we are now in
the midst of a recovery in the housing market," said David Blitzer,
chairman of the index committee at S&P.
Yet there's a reason
housing experts and economists won't yet pop the cork on the champagne.
Just as the housing bust hit some areas harder than others, the recovery
has been kind to some cities while unforgiving in others.
Despite
the national numbers, the recovery is uneven, and prices aren't rising
everywhere. The still-shaky economy fuels other concerns, particularly
renewed threats of recession given the looming "fiscal cliff."
"It's almost a ZIP code by ZIP code recovery," says Stan Humphries, Zillow chief economist.
What's better now?
Zillow's
data show that 183 of 252 markets nationwide hit bottom in the third
quarter, after years of largely falling, and probably won't fall more.
Prices were still falling in the other 69 markets, Zillow says. Yet on a
national basis, 140 economists recently surveyed by Zillow predicted
home prices would rise an average 15.2% from the end of last year
through 2016, or from 2.3% to 3.4% a year.
More-bullish
economists, including John Burns of John Burns Real Estate Consulting,
see prices rising 5% to 7% a year through 2016. If so, they'd far exceed
the average 3.65% a year growth in prices that defined the national
housing market from 1988 to 2000 -- before the housing bubble started to
form, Zillow says.
Burns argues that the housing sector has more tailwinds than headwinds and recent data have been upbeat.
Case-Shiller's
index of 20 leading cities showed September prices up 3%
year-over-year, with increases in 17 of the cities on an annual basis,
led by Phoenix at 20%, annual prices largely flat in Atlanta and down in
Chicago and New York.
Sales of existing homes are also up, by 11%
in October from the same month last year. Meanwhile, the supply of
homes for sale has fallen to its lowest level in a decade, the National
Association of Realtors says. That should help prices. New home sales
are also doing better. After touching a record low in 2011, they
increased 4% in the third quarter from the second, IHS Global Insight
reported.
Beyond the sales and price numbers, the housing market has some strong drivers, economists say, including:
• Affordability. Housing is the most affordable it has been in decades.
Credit
the fall in home prices and low interest rates. The U.S. average for a
30-year fixed mortgage hit a record low of 3.31% as of Nov. 21, Freddie
Mac says.
Even Robert Shiller, the famed Yale University economist
who helped create the Case-Shiller index, says it's a good time to buy,
assuming someone really wants to be a homeowner vs. a renter: "It's
very affordable if you want that."
Nationally, home affordability
has improved an average of 35% since the 1985-2000 period, Zillow says,
based on home price and income data in 143 major U.S. markets. Consumers
now spend an average 13% of their monthly gross incomes on mortgage
payments vs. 20% historically. In mid-2006, at the height of the housing
boom, it was 24%.
Alison and Nicholas Arnold of Wilmington, N.C.,
recently bought their first home: a four-bedroom, 3.5-bath home for
$372,000. Their market suffered a 31% decline in home values in the past
five years, Zillow data show.
The lower home prices and good
interest rates enabled the couple to buy such a big home, says Alison
Arnold, a 28-year-old health coach.
"We wanted something we could grow into," she says.
• Prices. Rising prices are convincing buyers that it's time to act.
Buyers
think "they have to rush in or they'll miss the bottom," says Liz Ann
Sonders, Schwab's chief investment strategist. Sonders says the
combination of low interest rates and rising prices has created the
"inflection point" in the market where things stop getting worse and
start getting better.
"Consumers now recognize that houses are not
going to get cheaper tomorrow," says Martin Connor, chief financial
officer of home builder Toll Bros.
Jose Frausto, 37, a
second-grade school teacher in Whittier, Calif., says he timed his first
home purchase just right. The lifelong renter, along with his wife,
Gabriella, 35, recently bought a $343,000 four-bedroom, one-bath home.
The
Fraustos started shopping in late spring. They lost 10 home bids to
cash buyers and investors. By the time they purchased, similar homes had
risen in price by $10,000, Jose Frausto says. Median home prices in the
area fell 36% from 2006 through 2010, DataQuick data show.
"I think I got in at the right time," Jose Frausto says.
Even
if home price gains slow from their current pace, the fact that they're
not falling will help more buyers get into the market, says Glenn
Kelman, CEO of online brokerage Redfin.
• Stronger economy.
The nation's unemployment rate dropped to 7.9% in October from its peak
of 10% in the fall of 2009. Employed people buy homes and are less
likely to default on home loans. Stock prices are up despite recent
jitters about the fiscal cliff. The Conference Board reported Tuesday
that consumer confidence in November was at its highest level in 4 1/2
years and that 6.9% of those surveyed said they plan to buy a house
within six months. That's the highest percentage in two years.
As
the economy improves, so does the pace of how quickly people form
households, which drives housing demand. At the depth of the financial
crisis in 2008, household formation fell to one-fourth its historical
level. Now, it's clawed back to about half its historical level, says
economist Humphries.
Some of those new households are likely to be
home buyers instead of renters, given the rising cost to rent and the
diminished cost to own, says Jed Kolko, chief economist of real estate
website Trulia.
In 100 large metros, the average cost of owning a
home is now 45% cheaper than renting, Kolko's data show. That
calculation considers the tax benefits of owning and assumes that
someone lives in the house for seven years.
Near the height of the
housing bubble six years ago -- when home prices and mortgage rates
were far higher -- it was 13% cheaper to rent than to own, Kolko's
analysis shows.
What's ahead?
Despite signs of
strength, housing analysts who fear continued weakness say the market's
growing strength lacks durability. Indeed, some economists worry that
prices may resume falling if the U.S. suffers from the slowing global
economy or the European debt crisis, or falls into recession from the
combination of federal tax increases and spending cuts on tap in
January.
"While there's a good chance prices will go up from here,
I'm still not ready to call the bottom," Shiller said in a recent
interview with USA TODAY. He has repeatedly expressed concerns that home
prices won't rise much for years or could even fall, given a big
economic shock."There's such wishful thinking that it's all fixed. ... We
have a lot of headwinds."
Among his worries:
• Underwater homeowners.
Nationwide, 45% of the almost 50 million homeowners with a mortgage
have less than 20% equity in their homes, CoreLogic data show.
To
get the best interest rates on a mortgage, 20% down payments are often
the norm. If people can't sell homes and walk off with enough money to
put down on a new home -- plus pay a Realtor's commission -- they won't
sell, says Mark Hanson, an adviser to professional investors on housing
and mortgage issues. If they don't sell, they won't buy.
Federal
Reserve Chairman Ben Bernanke, in a Nov. 15 speech, also noted "signs of
improvement" in most parts of the country, but he added that the
housing market is "far from being out of the woods." He said tight
credit conditions might be one of the culprits, arguing that "overly
tight lending standards" may be preventing creditworthy borrowers from
buying homes, thereby slowing the revival in the housing market.
• High delinquency rates.
Some markets are also still deeply mired in the foreclosure crisis.
Nationwide, 11% of mortgages were 30 days or more delinquent or in
foreclosure as of September, data from mortgage tracker Lender
Processing Services show.
But in some states, those percentages
are far higher, including Florida at 21% of loans, New Jersey at 16%,
New York and Illinois at 14% and Maryland at 13%. In all those states,
foreclosures must go through the courts, so they take months longer to
complete than in states where court approvals aren't required.
Those foreclosure pipelines will "weigh on the market" in those states and cities, economist Kolko says.
• Slight shifts in surging markets.
Signs of cooling are emerging in some of the hottest markets, including
Phoenix and Las Vegas, which were among the hardest hit during the
foreclosure crisis.
Of 100 of the largest metropolitan regions,
Phoenix posted the biggest price gain in September with a 22%
year-over-year jump, CoreLogic data show. Las Vegas came in fifth with
an almost 11% increase. Both cities have seen strong interest from
investor buyers, who are turning single-family homes into rentals.
But
October single-family median sale prices were flat after eight months
of increases, the Greater Las Vegas Association of Realtors says. In
Phoenix, big investors are showing less interest as bargains become
tougher to find, says Mike Orr, real estate expert at Arizona State
University.
Hanson warns that the shifts in Phoenix, Las Vegas and
parts of California foreshadow the beginning of the nation's "hangover"
and lack of "durability" in this year's recovery. He says sales volume
will fall off as investors, who have gorged on foreclosures for the past
year, back off in the face of rising prices and limited supplies of
houses for sale.
In the past year, the Fed has pushed 30-year mortgage interest rates down from above 4% to just over 3%.
That's
persuaded many fence-sitters to buy, says Steven Ricchiuto, chief
economist at Mizuho Securities. He, too, worries that demand might
falter once the fence-sitters are gone, given the nation's still-high
unemployment rate at 7.9%.
"After a while, you run through those people and there's no one to follow them up," Ricchiuto says.
Challenges for buyers
In the meantime, shoppers such as police officer Vance are navigating housing markets that have seen some fast changes.
When
Vance started shopping, she'd get 10 new listings to view each week in
her $160,000 price range. But in recent months, she got just two or
three.
Given fewer foreclosures and high investor demand, the
Sacramento area had just a 1.9-month supply of homes for sale in October
vs. the six-month supply that Realtors generally consider to be a
balanced market. As a result, Sacramento prices were up almost 7% in
September year-over-year, CoreLogic says.
Vance is finally under
contract to buy a home. But instead of getting one with three bedrooms,
she's gone with two, says Rob Baxley, her Realtor. He's had only one
other buyer this year who had to put in more offers to win a home, and
he sees no let-up in competition for lower-priced homes.
"The market is getting tighter and tighter. For buyers in that price range, it's miserable," Baxley says.
USA Today