The Two Faces of Real Estate

It’s hard to look at 2015 and think that real estate has had anything but a banner year and yet there are persistent murmurs in the marketplace that we’re not quite there yet, wherever “there” might be. Are such marketplace doubts realistic or is the recovery in full bloom?

As of October, according to the National Association of Realtors, home sales are up 3.9 percent when compared with the year ago, while existing home prices have risen 5.8 percent. What makes these gains impressive is that they’re taking place at a time when inflation has almost completely stalled. Inflation levels this year have shown monthly increases which have ranged from 0 to .2 percent. This means that the price increases seen by homeowners nationwide represent real gains in buying power, the true measure of wealth.

Homeowner equity actually rose $6.5 trillion between 2010 and this summer, according to the Federal Reserve and yet despite terrifically positive news for real estate — one of the best measures we have regarding economic progress or decline in general — a large portion of the public is not buying into the notion that times are good.

Real Estate and Jobs

And the Consumer Confidence Index dropped from 99.1 in October to 90.4 in November, according to The Conference Board.

“Consumer confidence retreated in November, following a moderate decrease in October,” said Lynn Franco, director of economic indicators at The Conference Board. “The decline was mainly due to a less favorable view of the job market. Consumers’ appraisal of current business conditions, on the other hand, was mixed. Fewer consumers said conditions had improved, while the proportion saying conditions had deteriorated also declined. Heading into 2016, consumers are cautious about the labor market and expect little change in business conditions.”

It’s hard to understand why the public should have a “less favorable” view of the job market. According to the Bureau of Labor Statistics unemployment in October was 5 percent, down from 7.2 percent two years ago. That’s a big difference and surely the trend is headed in the right direction, but somehow better numbers are not translating into renewed and enthusiastic consumer confidence.

Moreover, a careful look at the official figures shows that in October 2013 the typical workweek was 34.4 hours, a number which rose to 34.5 hours this October, an impressive result because we have managed to maintain working hours while adding a large number of jobs. This is evidence that a real recovery is in place but at the same time we’re not talking about 40-hour work weeks.

Real Estate Expectations

Despite all the good news on the home front — news which is real and measurable — there continues to be a disconnect in the marketplace, a sense that the recovery is incomplete or somehow iffy.

The problem — perhaps — is one of history and expectations. We’re doing great now but remember how terrific things were before the financial meltdown? That’s when home prices peaked and we have yet to get back to those values. The Federal Housing Finance Agency (FHFA) just announced that conforming loan limits will not increase next year because housing prices at the end of September were still 3.7 percent lower than in 2007.

“It’s clear housing markets continue to recover with some markets firing on all cylinders, others inching along, and the vast majority still working to get back to their long-term benchmark normal range,” said Len Kiefer, deputy chief economist at Freddie Mac in a Thanksgiving commentary.

Huh? NAR says that in the third quarter 154 out of 178 metropolitan statistical areas showing gains compared with a year earlier. If local market values are up so widely how is it possible that the “vast majority” are lagging?

The answer, at least in part, may come from Weiss Residential Research. While most homes have seen price increases, a substantial number have not — even in areas where values appear to be generally rising, according to the company. “The percentage of homes losing value rose during the quarter, from 23.40 percent in July to 26.37 percent in September.”

The general real estate measures we routinely see, measures such as metro home prices, show broad trends, but not the scruffy, house-by-house information that is live and visible to the public. That well-kept house down the street which has not sold for six months leaves a visceral impression.

Another likely reason for the public’s unease has nothing to do with real estate. In this scenario housing worries are a by-product of a larger concern, the general decline in household incomes and worries about job stability.

The median household income, says the Census Bureau, was $53,657 in 2014. That’s 7.2 percent lower than the $57,843 earned in 1999.

NAR’s “2015 Profile Of Home Buyers And Sellers” reports that first-time buyers represented 32 percent of the market, “second only to the lowest share reported in 1987 of 30 percent.”

If incomes are down how can people confidently enter the real estate marketplace? This may become the biggest real estate question of all in 2016. Or, it could be that there’s no such thing as a “long-term benchmark normal range,” just different prices for different times. After all, as they say on Wall Street, past performance is no guarantee of future results.

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For the latest real estate news and trends get a FREE issue of our award-winning real estate newsletter, the Housing News Report.

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