In a January 2015 video interview released by the National Association of Realtors, Chief Economist Lawrence Yun characterized 2014 as “a descent year but not a great year.”
Many market factors contributed to Yun’s conclusion, especially home sales, which he projected would end the year 3 percent lower than the 2013 total, while home prices continued to move up. Even with interest rates remaining at near their historic lows, an otherwise good year was tainted by a continuation of tight lending standards and low levels of available inventory for sale in many markets around the country.
One major contributing factor to those low inventory numbers is the continued decline of distressed properties in the pipeline. Although it is better for the economy to have properties come to market demanding fair market prices, the fact is that the supply of foreclosure properties drove the market for many years during and after the Great Recession.
Now that institutional investors have plucked the best of those from the market, what’s left is the inventory out there today.
So how is 2015 looking compared to the past few years?
RealtyTrac reported in January the first significant increase in foreclosures in over a year driven by the highest number of bank repossessions since October 2013 (a 23 percent increase from January 2014), combined with 21 states reporting a year-over-year increase in foreclosure auctions for the month.
“It is important to note that in most of these states, foreclosure auctions and REOs are coming off somewhat artificially low levels last year and are still far below the highs reached during the worst of the foreclosure crisis back in 2009 and 2010,” said RealtyTrac Vice President Daren Blomquist.
It is too early to tell whether these increased levels of foreclosures will translate into additional inventory on the market sometime this year.
But there are other factors that play an equally important role in determining the overall health of the real estate market and whether the housing recovery will pick up a head of steam in 2015.
“The first one that comes to mind is affordability,” Blomquist noted. “Especially in some of the markets that have rebounded the fastest and the strongest. Affordability has once again become a challenge. That’s a huge one that we’re going to be keeping an eye on.”
Closely tied to affordability are home prices. Blomquist believes that because affordability has become a great concern, home prices are going to have to flatten out, particularly in markets that “took off like rockets in this recovery.” Especially in markets such as Phoenix and many coastal California markets – which saw 20-30 percent appreciation in 2012 and 2013. Those markets have now cooled off to single-digit appreciation.
Overall, Blomquist does not expect home prices to be a big factor in 2015, however.
After a disappointing year in 2014, Blomquist believes home sales numbers will improve this year but not in a significant way.
“I think we’ll see the numbers tick up. It’s kind of a seesaw right now between supply and demand. One of reasons 2014 saw fewer sales not so much lack of demand but lack of supply, especially in the price range the majority of buyers were looking for,” he said. “As we’re seeing equity go back up, we’ll see more of those become move-up buyers in 2015 which will increase inventory in lower price range for first-time buyers.”
One rationale for his belief in rising home sales this year is the January spike in bank repossessions mentioned above, which may add more units to existing inventory levels.
It’s All About Economic Balance
To Rick Sharga, executive vice president at Auction.com, tracking the market indicators that will help predict home sales and home price appreciation is more important than tracking sales and price trends.
“Essentially, the best way to forecast what’s going to happen in the housing market in 2015 is to re-visit one of the most basic concepts we all learned in Economics 101: supply and demand.”
With the current inventory of existing homes for sale at less than a five-month supply, and new home inventory at the lowest point seen in 40 years, Sharga is concerned about the health of the market this year.
“Existing home inventory is lower than it should be right now because millions of homeowners are either underwater on their mortgages, or don’t have enough equity to sell their home and move up to a new property,” he explained. “As home prices increase, and borrowers pay down their balances, this situation will ultimately resolve itself.
“On the new home front, builders continue to proceed with caution – January single family housing starts actually fell from relatively weak December numbers – and the homes being built tend to be higher-priced than what entry-level buyers can afford. Until these situations change, low inventory will keep sales relatively flat, and keep prices relatively high.”
Another part of the inventory equation once thought to be a major concern is shadow inventory — homes repossessed by the banks who were not releasing them back onto the market until home prices recovered sometime in the future.
While there is a small shadow left out there, at this point Blomquist said it is no longer a major concern except for certain parts of the country like New Jersey, New York and Massachusetts.
“It’s not a nationwide problem, but a regional problem. It’s more of a hotspot issue,” he noted.
When it comes to demand side economics, Sharga expressed concern that – with interest rates so close to historic lows, and home prices 5-10 percent below their peak in most markets — there are not more people interested in buying right now.
“The challenge is that the jobs market hasn’t fully recovered from the Great Recession – especially among the 25-35 year old age cohort, which should be making up the bulk of first time home sales,” he said. “What’s needed to jump start housing here? More job creation — specifically the creation of more full-time, good-paying jobs for people in this age group.”
Addressing the issue from a more generational perspective, Blomquist believes the market is ignoring the largest pool of prospects — the so-called “boomerang buyers” — former homeowners who lost their homes for one reason or another.
“The more immediate generation that will affect the market is the boomerang buyers — Generation X and some baby boomers. They are the ones who are more likely to come back and become homeowners again than the Millennials. There’s 7.3 million of them which, if we magically had 7.3 million more homeowners, the homeowner rate would be back to historic norms,” he noted.
So as 2015 continues to unfold, Sharga said he will be watching a number of market metrics to measure the overall stability and growth of the nation’s housing market. Key among them are the number of new jobs created and the industry segments they are being created in.
“Temporary and service level jobs have been some of the fastest-growing segments, and neither is a boon for housing.” Sharga explained.
Wage growth will also be of special interest to him this year because it goes directly to the question of housing affordability.
“All said, I still believe that 2015 will be a relatively weak year for housing. Not a disaster by any means, but another year of slow, incremental growth.”