Clearly there is a very broad consensus that the U.S. housing market has bottomed. But is the fragile housing “recovery” real or a mirage?
Home Ownership Down
Housing experts claim the economy is improving. Yet in April 2013 U.S. homeownership rates were at an 18-year low, signaling a shift away from homeownership toward rental housing as investors purchase hundreds of thousands of foreclosed homes. The homeownership rate in the United States fell during the first quarter to 65 percent, plunging to the lowest level since 1995, according to the Census Bureau. Homeownership rate is far below the 2005 peak of 69.1 percent.
Homeownership was lowest in the West at 59 percent and highest in the Midwest at 70 percent. Although Americans are still buying homes, tight credit conditions, fierce competition from cash investors and limited inventory are still holding back many homebuyers who are opting to rent.
Meanwhile, there is a shortage of existing homes for sale. Nationally, there were only 1.93 million (that’s up not down from a year ago) previously owned properties on the market in March, down from 1.68 million the prior year, according the National Association of Realtors. That’s the fewest since March 2000.
In a healthy market, there’s roughly a six month supply. This March, the number had fallen to a 4.7 month supply — a market stacked against buyers. The median value of an existing home rose 11.8 per cent, the most since November 2005, to $184,300 last month from $164,800 in March 2012. Yet most buyers get pushed out of the market by multiple cash offers from Wall Street investors and hedge funds.
Low Interest Rates
A tight supply isn’t the only factor slowing the housing market. Some homebuyers are facing fierce competition from investors who can’t refuse the Federal Reserve’s cheap credit. Many claim the housing rebound is closely tied to the Fed’s campaign to lower interest rates, which has pushed down mortgage interest rates to historic lows, making housing an attractive (and affordable) investment. The low interest rates have lured investors of all stripes to buy homes, often for all cash, converting them into rental properties. Yet most wannabe owner-occupant buyers can’t qualify for a loan because the new standards are too strict.
Housing boosters claim that the residential real estate market is on an upswing as prices continue to climb. As more buyers bid on fewer properties, prices are being forced up at a rate that might be overstating the market’s health. Home prices are rising even as homeownership drops. Prices in the top 20 cities have risen 9.3 percent in the past year, according to the Standard & Poor’s/Case-Shiller Home Price Indicesthat track home prices in 20 major metropolitan markets. Yet this statistic is sketchy because of high unemployment and economic uncertainty.
The frothy housing news is mixed, however, when it comes to foreclosures. While bank-owned REO foreclosures and short sales are down in nearly half of the nation’s states, they were up in 26 states in March, according to RealtyTrac. First quarter foreclosure activity in the 26 judicial or quasi-judicial states combined increased 6 percent from the first quarter of 2012, while first quarter foreclosure activity in the 24 judicial states decreased 44 percent during the same time period.
Some industry observers have warned that the country might be witnessing the creation of a new housing bubble, others have said this is not the case.
Regardless, it’s too early to proclaim a recovery.
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