How’s the Market: Home Improvement

How’s the Market: Home Improvement

America’s housing market is rebounding. This is a true recovery from the bottom. In economic cycle analysis, a contraction is followed by a bottom, which is followed by a new expansion cycle. The data indicate that Texas has clearly moved from the bottom of the last cycle to the early stages of expansion. The U.S. housing market is improving as well. Several indicators are signaling this.

Buyer Psychology Improving

Americans have been skittish about buying homes for the past few years in light of negative economic news. Their two key worries have been whether or not they will have jobs.  Also, Arizona, California, Nevada, Florida, and Georgia, have experienced significantly declining home prices.  Statistics for the first half of 2012 indicate that residential markets in California and Arizona are rebounding. California sales were up more than 11 percent from the precious year. And the Phoenix market has strengthened, with fewer distressed sales, and sales prices up 25.3 percent.  Fannie Mae’s national housing survey  reflected 73 percent of respondents saying that now is a good time to buy a house, a brightened consumer sentiment toward housing.

Inventory Normal

Real Estate Center research has determined that for Texas, 6.5 months of inventory of homes for sale is a stable market. When inventory is below 6.5 months, prices increase more rapidly. Inventory greater than 6.5 months causes price increases to slow. When inventory gets into the nine to twelve month ranges, prices start falling.

Texas’ inventory of unsold homes stood at six months in May, which suggested stable or even increasing prices going forward. The number of Texas homes for sale declined significantly in the past two years, from a peak of 147,170 in May 2008 to 108,594 in May 2012. Limited supply can result in competing offers on the same home, and limited demand can result from tighter loan qualification standards.

Existing Home Sales Volume Up

Center research indicates that three variables correlate with homes sales volume: job growth, interest rates, and home price appreciation. In the past four years, mortgage rates have never been lower but job growth and home price appreciation prospects have been uncertain.

However, Texas recorded positive job growth, low interest rates, and virtually stable prices for the past two years. This has resulted in increasing home sales volume, a trend that is continuing in 2013. For the first five months of 2012, home sales were 13.3 percent higher than the same period in 2011.

What Next?

After languishing for several years, Texas and U.S. housing markets have finally turned the corner. The rebound is likely to be gradual, spanning several years. Three things have to happen before the housing market grows at a faster pace. First, Congress has to set tax policy so that employers will hire more workers. Second, the pace of sales of foreclosed homes  has to pick up to absorb the backlog. The faster the “shadow inventory” of homes with delinquent mortgages is sold, the better. Third, financial regulators need to tweak Dodd-Frank mortgage regulations so that qualified Americans with less-than-perfect credit can buy homes.

From “Home Improvement”, Dotzour, Mark G., Tierra Grande, Journal of  the Texas Real Estate Center at Texas A&M University,  October, 2012, pp. 10-12.