Extending the Good News for Home Buyers in American Fork, UT, Utah County

by Lawrence Yun, Chief Economist, NAR Research  (the following article is taken from my January Newsletter)

Let’s first turn to the terrific news regarding the housing stimulus. Earlier this month, the U.S. Congress overwhelmingly passed and the President signed into law new measures to maintain the momentum for a housing market recovery. The home buyer tax credit, originally scheduled to expire at the end of November will now be available through the middle of next year and more potential buyers will be able to take advantage of it. The income limit was also increased and many move-up buyers – not just first-timer purchasers – also will qualify. Furthermore, loan limits will not shrink as was planned for next year; in high-cost areas, the loan limit will remain at near $730,000 in 2010, thereby permitting more consumers to tap into the historically low mortgage rates.

As most of us are aware, the housing market recovery to date has been concentrated in the lower-end starter home segment. While the mid-priced market has begun to show signs of life, it is still far below normal activity. The upper-end remains sluggish. Therefore, enlarging the tax credit to include move-up
buyers will add the necessary “juice” to broaden the recovery. The accompanying increased velocity in home sales will mean more economic activity. Also, even though there may be less impact in the overall net inventory (a person sells before buying so it looks as a “wash” on inventory), the months’ supply will fall because of rising sales. Increased sales have the added benefit of making HVCC and appraisal issues less problematic since more comparables will be available.

Adding it all up, home sales are now expected to get a boost by roughly 15 percent next year. Existing-home sales are forecast to post 5.7 million units in 2010 (up from 5 million units in 2009). New home sales will also rise, reaching 550,000 (from 400,000). More importantly, inventory will likely fall to a 6-7 months’ supply by the middle of next year. That draw down of inventory means that that there are likely to be modest home price gains. Roughly speaking a 2-5 percent price gain is likely in many parts of the country in the next year.

Rising home values will prevent home prices from over correcting even further. Home prices have, indeed, been over correcting and have led to sizable destruction in middle-class housing-related wealth. By contrast, stock market and financial wealth have experienced spectacular gains in the past nine months. Despite those gains, however, consumer confidence still continues to tread near historic lows.

Why is there a disconnect between the rising stock market and low consumer confidence? Most middle-class families have the majority of their wealth tied to housing and less to the stock market. So as long as home values fall, then consumer confidence and the broader economy will face challenges. Therefore, housing-focused stimulus measures will help households build up their housing-wealth (again) and lay the foundation for a sustainable economic recovery.

There were those who argued against the home buyer tax credit. They contended that it would be cheaper for the government just to let home values slide by $8,000 (the amount of the credit) because from a buyer’s point of view, there is no difference between a $8,000 credit or an equal amount decline in home value. However, a further decline in home value by that amount would have translated into a $700 billion wealth destruction for middle-class home-owning families. Such an unnecessary loss of household wealth would hold back general consumer spending and thereby hinder a broader economic recovery. But with the tax credit extended and expanded, rising home sales will help nudge home values upward rather than continuing to overcorrect. Yes, the tax credit extension will have an impact on the federal budget deficit – around $10 billion. But those monies will be easily recovered as the economy gets a boost in addition to preserving the middle-class wealth.

The commercial real estate market will also benefit, though as always after some lag time. As the economy becomes more fully entrenched in “recovery” mode, employment will start to turn around. Rising employment and recovering consumer wealth will mean an eventual increase in demand for office, retail, and industrial space.

As always, there are some caveats. Despite the very positive news on the housing stimulus, there remain significant risks to the forecast. Mortgage rates will rise from their rock-bottom points as we move into the next year. The Federal Reserve will slowly start the unwinding of its mortgage-backed security purchases. Also, consumer prices will be watched for any sign of accelerating inflation. Bond investors, therefore, will be cautious about lending at such a low rates. The 30-year fixed rate is likely to reach 5.7 percent by the end of 2010 from the current 5.0 percent.

The labor market is another worry. Though anticipated, the rising unemployment rate is a painful reminder that not all is well. The unemployment rate in October zoomed into double digits – 10.2 percent, its highest level since 1983. And the climb is not over yet – look for unemployment to hit 10.4 percent before reversing. With 7 million job cuts in the past two years, the current total payroll employment at 130.8 million is even below the total jobs that existed in 2000. The country has about 25 million more people in 2009 compared to 2000, yet the total number of jobs has remained unchanged. The silver lining is that the pace of job cuts is now less sharp now than in the first half of the year. Still, the jobless rate unfortunately will remain stubbornly high for quite some time. While job creation is expected to turn positive by spring, unemployment will likely be at 9.5 percent by November 2010 at the time of the mid-term elections. A more-than-usual number of elected officials will be voted out.

Despite the risks of rising mortgage rates and rising unemployment, the housing outlook has significantly improved. As the fear of falling home values disappears, that one key negative factor that has held back home sales will no longer be in play. Happier days are ahead

Reprinted from REALTOR® Magazine December, 2009 with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2009. All rights reserved