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What To Expect From Housing In The Second Half Of 2013

By:  Morgan Brennan, Forbes Staff

The U.S. housing recovery continues to make gains. New home sales have surged 38% since last year, hitting a five-year high in June, according to the newest figures from the Commerce Department. And despite a monthly drop in activity, sales of previously owned homes remain 15% higher than last year as well, according to the National Association of Realtors.

If housing in the first six months of 2013 could be summed up in one sentence, it would go something like this: Inventory is painfully tight, sales activity is surging and home prices have jumping.

Now real estate experts are sounding off on the trends that will help shape the sector in the second half of 2013. Here’s what you need to know.

We Are Not Re-inflating A Bubble

Home prices have clocked double-digit price appreciation this year. Prices across the 20 major U.S. metro markets were 12% higher in April than they were a year before, according to the S&P/Case-Shiller Home Price Index. Other indexes have registered similarly dramatic gains. The last time prices appreciated by double digits were during the last housing bubble, motivating to question whether a new bubble is beginning to inflate.

It isn’t. The current pace of growth, while certainly unsustainable for long term market health, is nothing to worry about just yet. “Prices are now rising as fast as they were during the bubble years, but they are still low relative to the levels where they were back then,” explains Jed Kolko, chief economist of Trulia TRLA -1.6%, a San Francisco, Calif.-based real estate site.

He says prices are actually undervalued across most of the country, lower not just than their bubble-era peaks but also lower than their historical norms when adjusted for inflation.

“You can sort of think of it as we overshot on the way down and this is sort of a correction back to something more normal,” adds Mark Fleming, chief economist of CoreLogic, an Irvine, Calif.-based real estate data firm.

Economists do believe home prices will continue to climb throughout the rest of this year. CoreLogic CLGX -0.87% projects 2013 will end with a 6% increase over 2012. And Altos Research, a Mountain View, Calif.-based firm that tracks real estate data in real time, believes 2013’s final tally will be even higher. “Based on the actual supply and demand data, we are looking at 12% year-over-year,” says Michael Simonsen, chief executive of Altos Research.

Still, it won’t last. They say several variables, including increased inventory and higher mortgage rates, will slow the pace growth, which to be clear, is expected to stay positive over the next several years.

More Homes Coming To Market

I’ve said it before. The abnormally tight inventory levels fueling the return of such frothy buyer practices as bidding wars and contingency-free offers will slowly begin to ease. Inventory – which hit a 12-year low earlier this year — is already starting to increase and economists believe that trend will continue despite the season.

In June, there were 7% less home for sale than a year earlier, according to Realtor.com, but the monthly numbers offer the forward-looking story. From May to June, inventory grew by 4%; last year that monthly increase was only 1%.

“We think inventory levels on a year-over-year basis will probably flatten out by the end of this year. That will be the first time since 2007,” says Errol Samuelson, president of Realtor.com. “I think you are actually going to see inventory growth on a year-on-year basis starting in the fall, but prices nonetheless will continue to appreciate.”

“Inventory started to expand very slowly maybe about four months ago,” echoes Kolko. “We will see that continue as rising prices help owners get back above water and help other sellers decide to take advantage of price appreciation.”

Still, some experts, like Simonsen, believe we could see housing shortages in the most sought after locales as far out as the next three years.

It will come down to new construction as more homebuilders continue to gain confidence and roll new developments. Kolko expects to see more construction commence in places like Texas, the Carolinas, Northern California and other parts of country where there’s strong housing demand, spurring job growth in both construction and housing-related industries.

Since an unusually large portion of new construction is multifamily, increased inventory won’t just help slow the rapid rate of home price growth but also quell rent prices. As many as six million more households will join the rental market ranks over the next decade, according to the National Association of Realtors; more building in major cities will help keep rents from rising too much in response.

Mortgage Rates Will Keep Climbing

Mortgage rates have risen over the past two months. A recent Trulia survey found rising rates was the number one worry among prospective buyers right now.

Economists believe rates will continue to climb, though at a much less feverish pace than recently witnessed. But while the higher rates – the 30-year fixed loan is about a point higher than it was in early May – mean borrowing is getting more expensive, housing won’t become unaffordable anytime soon.

“Prices are still low relative to rents, so at 4.5%, it’s still more than a third cheaper to buy than to rent on average across the U.S.,” notes Kolko. “Not every market will remain cheaper to buy but on average… buying will stay cheaper than renting until rates reach 10.5% — a level we haven’t seen since 1990.”

Still, in metro areas like San Francisco, San Jose, New York and Honolulu, markets that were always historically cheaper to rent than buy before the downturn, rates will begin to tip the scale back toward renting once they rise above 5%.

“Our estimation is it would take a 6.5% interest rate to bring affordability just back up to the level of early 2000s, [meaning] neither too affordable nor unaffordable,” adds CoreLogic’s Fleming. “There’s plenty of room for appreciation and rate increases before that and we will probably get a little of both.”

Rising rates may help fuel another trend in the coming months: an easing of tight mortgage credit that has hampered the purchases of even qualified homebuyers. As rates rise, refinancing business dries up, pushing lenders to begin ramping up the mortgages they underwrite for prospective buyers.

Distressed Decline

Foreclosure activity is on the decline. RealtyTrac, an Irvine, Calif.-based foreclosure site, reports that 800,000 properties had foreclosure filings on them nationwide in the first half of 2013. That’s down 19% from the second half of 2012 and down 23% from the six months before that. In June there were 127,000 filings across the U.S. – the lowest number logged since December 2006.

On a nationwide basis we will continue to see the numbers go down,” projects Daren Blomquist, vice president of RealtyTrac. “We will still have the flare-ups in state and local markets…but nothing that is going to overwhelm the momentum we have in the market right now.”

He says the exceptions to that downward trend will continue to be states where foreclosures undergo a judicial process. Florida, New York, New Jersey, Illinois, and Maryland has all seen increases in activity this year, in part because lenders are finally dealing with distressed inventory that had been delayed. Another market that may experience a “last gasp” of foreclosures is California, since the state’s Homeowner Bill of Rights has slowed down the foreclosure process.

Short sales continue to increase, with lenders arranging deals before they even process their first foreclosure filing on a delinquent homeowner’s property. In the first quarter of 2013 short sales increased 79% versus a year earlier, thanks in part to the fact that short sale guidelines were loosened by the government sponsored enterprises.

Another trend that will continue: investor activity, especially among institutions. Institutional investors funded by Wall Street capital have been buying up distressed single family homes and converting them into rentals. According to RealtyTrac’s data, which defines institutional investors as entities that have purchased 10 or more properties in the past year, purchases have continued to increase, with southeastern markets like Florida and Georgia logging 200%-plus yearly increases.

“The one big pool of risk is the underwater homeowners,” says Daren Blomquist, vice president of RealtyTrac, an Irvine, Calif.-based foreclosure site. He estimates that there are as many as 11.3 million borrowers holding mortgage notes worth more than their homes. “It’s going to take two or three years before they actually have equity in their homes. Until we have those people in a place where they can participate in the market, there will be a slight drag on the housing market.”

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Seasoned chief executive and entrepreneur with proven track record. Mr. Zar brings more than twenty years experience in operations, evaluation, investment and management of real estate assets. Sean is responsible for new asset origination, evaluation, analysis and due diligence as well as overall executive direction. Mr. Zar also gained insight into capital markets as the founder and president of CBA Capital, Inc., a Newport Beach, CA based investment bank and venture capital company. He also was the founder and CEO of American Income Securities, an investment company with more than $50 million in client assets. He also managed a technology venture capital fund where he was responsible for equity and debt investments in a wide variety of companies. Mr. Zar sold his interest in American Income Securities in 1999. Mr. Zar has been an active real estate investor in Arizona as well as Colorado and Southern California. Mr. Zar is focused on discovering undervalued properties.
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