If one believes the headlines, the national residential housing market, which peaked in 2005 before the bubble burst, finally appears to be in recovery mode.
Nationally, the preliminary annual total for existing home sales in 2012 was 4.65 million—up 9.2% from 4.26 million in 2011, according to the National Association of Realtors in Washington, D.C. This marked the highest volume since 2007, when existing home sales reached 5.03 million, and was the strongest increase since 2004.
Although existing home sales slipped 1% in December from November, housing analysts were exuding optimism for 2013.
The nation’s median sales price for existing homes of all types was running at $180,800 in December—up 11.5% from December 2011. Although 26.8% of all residential properties with mortgages remained under water or nearly under water, rising prices helped build positive equity for 1.4 million borrowers in 2012 through September, according to CoreLogic, a residential property analyst in Irvine, Calif. And foreclosures were declining. Only some 1.5 million homes were in some stage of foreclosure in December 2012—down from a peak of 2.89 million in 2010, reports RealtyTrac, also in Irvine, Calif.
And housing inventory was dropping. The 1.82 million existing homes for sale at the end of December marked the lowest housing supply since May 2005.
One positive trend has been the Fed’s commitment to low interest rates. The Federal Open Market Committee in December announced that interest rates would remain near zero as long as the U.S. unemployment rate remained above 6.5%. It was 7.8% in January.
Yet the nation’s deficit continued to challenge real estate (and the rest of the economy). Also casting a shadow over the recovery was the dwindling proportion of first-time home buyers. They accounted for 30% of the purchases, down from 31% in December 2011, says the National Association of Realtors.
A similar first-time home-buying trend was cited in a recent report by Campbell/Inside Mortgage Finance HousingPulse in Washington, D.C. It showed a drop in the proportion of first-time home buyers to 34.7% in October from 37.1% in June. That marked the lowest first-time home buyer share since the publication began its surveys in mid-2009. At year’s end, preliminary November data was prompting the publication to forecast another first-time home buyer record low. The report cites the rising prices of homes and the availability of financing. The Federal Housing Administration, the primary financing vehicle for first-time home buyers, has stricter lending standards in place, and FHA insurance premiums are rising. Private mortgage insurance has started to fill the gap, but regulatory changes threatened to derail that trend. Some sellers prefer not to consider buyers who use FHA financing.
Nevertheless, residential real estate was outshining commercial real estate. Foreclosures, selling at an average discount of 17% below market value in December, were on the decline. Short sales, in which banks agree to accept less than the amount owed on a mortgage, could be had at a 16% discount below market value, the National Association of Realtors reports.
“Ultimately, we are past the worst of the foreclosure crisis, which nationwide peaked in 2010,” says Daren Blomquist, RealtyTrac’s vice president. “But we’ll continue to see some small waves regionally and in certain states as lenders continue to play catch-up with delayed foreclosures in some parts of the country.”
Last year, the biggest increases in foreclosure activity were in California, Florida, Illinois and Ohio. The middle and eastern parts of the country—including New Jersey, Indiana, New York, Pennsylvania and North Carolina—have also seen higher foreclosure activity following legal delays, Blomquist says. The laws in those states typically require the time-consuming process of a court review. “What we saw in 2012 is some of those delayed foreclosures finally coming through the pipeline, resulting in an increase in foreclosure activity.”
While foreclosure activity rebounded in those states, Blomquist says, California, Nevada and Oregon adopted legislation making it more difficult for lenders to foreclose. So those states should expect a big drop in foreclosure activity followed by a spike near the end of 2013 and in 2014, he predicts.
“Expect prices to remain strong,” says Mark Fleming, CoreLogic’s chief economist. Fleming says new restrictions on mortgage lending announced by the Consumer Financial Protection Bureau should not impact credit availability.
On the mansion-dotted island of Palm Beach, Fla., attorney Leslie R. Evans, publisher of the Palm Beach-based “Evans Report,” says concerns about the fiscal cliff sparked a flurry of sales at year’s end. Sellers hoped to beat an expected rise in capital gains taxes and get assets out of their estates before the anticipated expiration of large gift and estate tax exemptions.
But even though the fiscal cliff crisis has been resolved, the property on the island is limited, and Evans doesn’t expect a slowdown in real estate sales. Real estate is a longer-term hedge against anticipated inflation triggered by the nation’s debt, he says.
The fiscal cliff deal, which raised dividend and capital gains taxes to 20% from 15% for persons with at least $400,000 in annual income, also gives real estate an edge over stocks. “If you invest in stocks, you’ll be taxed on all distributions,” he says. “If you invest in a home, you’re not going to be taxed yearly on the appreciation.” Those who have lived in a home for two of the past five years can shelter the first $500,000 (per married couple) from capital gains taxes. Capital gains tax rates, he adds, are lower than top ordinary income tax rates.
U.S. Census Bureau housing data looks promising. In December, privately owned housing starts were at a seasonally adjusted annual rate of 954,000—up 39.6% from December 2011. The seasonally adjusted annual rate of building permits, 903,000, was the most since the 1.180 million recorded for June 2008, and nearly double the 513,000 in March 2009, the low point during the housing bust.
“Conditions in the housing market look much better now than at the beginning of 2012 and an increasing number of housing markets are showing signs of recovery, which should bode well for future home sales later this year,” says Barry Rutenberg, chairman of the National Association of Homebuilders, Washington, D.C.
“Higher year-over-year price gains plus strong performances in the southwest and California regions confirm that housing is now contributing to the economy,” says David Blitzer, managing director and chairman of the S&P/Case-Shiller Home Price Indices committee. Although housing represented only 3% of gross domestic product, it accounted for 10% of the growth in the third quarter of 2012, Blitzer says.
“We’re seeing some really hearty price recoveries,” says Lanny Baker, president of ZipRealty, a brokerage and technology firm in Emeryville, Calif., that researches sales in 21 states plus the District of Columbia.
Median prices in the Palm Beach, Fla., metropolitan statistical area are up 35% to $169,000 from December 2011, he says. In Tampa, they are up 17% to $125,000. In Phoenix, they are up 31% to $157,000, and in San Francisco they rose from $592,000 to $768,000.
But Baker cautions that median home prices can be misleading. “If we have a car dealership, and last year we sold Volkswagens and this year Mercedes, the increase in the median value is up 100%, but that doesn’t mean the value of either has gone up. This year, the larger and more valuable properties are transacting.”
Even so, housing prices are clearly starting to rise in Florida, Nevada and Phoenix—markets that fell the hardest. “The markets that are weakest right now are those that are not as far through the cycle of foreclosure. Lagging markets running as much as one year behind the national average, he says, are places like the Hudson River Valley north of New York; Raleigh-Durham, N.C.; and Richmond, Va.
California has had moderate growth, largely because that state’s recovery occurred a year ago. “I would anticipate that for the next six months, you will see some of the hard-hit markets like Florida, Nevada and Arizona continue to top the list [of rising prices],” Baker says. “Beyond six months to 12 months we will see Florida and Arizona with more like 5% to 10% [annual] increases in the median price. Right now, their prices are bouncing off the rock bottom, so the gains in percentage terms look really big. As we move through the initial surge, we will settle to a period of a few years of steady year-over-year gains in median prices.”
Lenders are loosening up credit. “They have become more willing and probably able to lend against larger real estate transactions and against people who have good, but not impeccable, credit,” Baker says. A year ago, that wasn’t the case.
Foreclosures are still common. Baker says one of every four sellers is a bank. But at the peak, it was as high as 40%.
Foreclosures, he says, no longer have the psychological effect on neighborhoods that they had two years ago. “Banks have gotten better about managing the process and moving transactions through,” he says. “Now, if a foreclosure happens, it’s no big deal. We’re through the days where I wouldn’t touch real estate with a 10 foot pole.”