Buyers May Like Cool Summer Prices

Head NAR Number Cruncher Lawrence Yun recently outlined several good reasons why Buyers might be wise to take advantage of the current lull in the market:

There may be good news on the horizon. A multitude of signs suggests that third-quarter existing-home sales will be better than resales registered in the second quarter of this year. Still, an added element of uncertainty regarding tightening lending standards makes it difficult to say definitively if the third quarter can close out with an improvement. I will go out on limb, however, and say that by the fourth quarter, existing-home sales will indeed show a marked improvement. May sales figures were low at 5.99 million sales (seasonally adjusted annualized rate). Closed sales in June and July could be similarly soft as pending home sales notched down for the third straight month. But several factors point toward inevitable improvement in home sales later this year.

Accumulating Pent-Up Demand

The country has added nearly four million new jobs since national home sales began to decline in mid-2005. And those job gains have not been a shift from high to low paying jobs. Rather, the typical worker’s wages have been rising by 7 percent, leading to a rise in aggregate national income by $1.35 trillion over a two-year time span. Further, non-labor wealth has also grown significantly. The Dow is hovering at record highs and the accumulated household wealth as of the first quarter of this year was also at a record high of $56.2 trillion. (That household wealth figure is likely even higher for the second quarter, for which official data has not yet been released.) That is equivalent to four years of annual salary for all the workers in the United States. So, if you’re wondering if people have the financial wherewithal that enables them to purchase a home, they do.

Household formation, meanwhile, mysteriously slowed in the first quarter of 2007. Household formation typically grows by 1.3 million to 1.5 million per year. In fact, a recent study by the Harvard Joint Center for Housing Studies projected such a rate of household formation for the upcoming years. However, the pace of household formation has slowed to less than 500,000 in the first quarter of 2007 – down 70 percent from its pace in 2006. That is absolutely mind-boggling in a job-creating economy. People are doubling up - finding roommates or moving back in with their parents. Why? As mentioned, finances are not the problem for most people. Could it be that people are waiting to see how long the housing market will slump? A turn in psychology and confidence is hard to predict. But one thing is clear: pent-up demand has been accumulating.

Rents are Rising

People are hesitating buying a home. In a job-cutting region like the Detroit area, it is understandable that there is a lack of demand (though bargain prices make a tempting opportunity for those with long-term views). However, for the rest of the country, people are not buying. That means, aside from doubling-up, they are renting. Not surprisingly then, rental rents have been rising. According to the CPI measure on rents, average rents rose 8 percent in the past 24 months (May 2005 to May 2007) while home prices have been largely flat. Renters, feeling the squeeze of these higher rents, may begin to look seriously at ownership rather than put money into their landlord’s bank accounts.

Condos Making Modest gains

The condo market led the recent housing cycle. The condo market was the first to lead the housing boom and first to lead the slump. The condo market also experienced much wider up-and-down swings in relation to the single-family market. Since the beginning of this year, the condo market has been consistently outperforming the single-family market in both sales and price changes. Could that imply an early signal of an overall housing market turnaround?

Better quality mortgage products

Mortgage applications for home purchases (not refinancing) have been rising nearly 10 percent on a year-over-year basis since early May. This data from the Mortgage Bankers Association is not a perfect predictor of home sales due to sampling issues; the MBA’s Purchase Applications Index oversamples prime and FHA loan lenders and undersamples sub-prime lenders and measures applications and not approvals. In a tightening lending environment, more applications will get rejected, so there is likely an increased incidence of re-applications. Nonetheless, a rising applications figure implies consumers are seeking out better quality loan products rather than blindly accepting hidden and exorbitant costs of subprime loans. And better credit quality is certainly better for the housing market over the longer term.

Weakness in the dollar

A weaker national currency typically moves in tandem with rising interest rates. As investors pull out of dollar-denominated assets, including U.S. government bonds, long-term rates have to rise to prevent further exit out of dollar-denominated investments.
Recent months’ movements in the dollar and in long-term interest rates are testament to that logic. Despite that trend, however, mortgage rates are still attractive at around 6.7 percent. All the while the fall in the dollar has essentially dangled a huge For-Sale sign in front of foreign buyers. Europeans can now buy a vacation home in Florida at essentially a 15 percent discount.
How many foreign buyers will now be tempted by what is essentially a deep double-digit price reduction?

The Fed will cut rates in 2008. Inflation is still running at the high end of the Fed’s comfort zone. Nonetheless, inflation looks to slide as the year proceeds. Once consumer prices are well contained, that will provide the Fed with the opportunity to lower interest rates. Early 2008 is the likely time frame for a rate cut. Short-term rates will immediately fall as result. The long-term rates could modestly decline as well. Any help on rates is a positive development for the housing sector. So keep your eyes on the horizon. There are forces at play that will soon turn the U.S. housing market around. Buyers who make the commitment now are likely to be smiling this time next year.