The housing market continues to recover while Congress works on avoiding the fiscal cliff. But what does that mean for you? How might this affect the value of your home? Read on to find out what the experts think.
The housing market clearly turned around in 2012, said NAR Economist Lawrence Yun. “Existing-home sales, new-home sales, and housing starts are all recording notable gains this year in contrast with suppressed activity in the previous four years, and all of the major home price measures are showing sustained increases,” he said.
Yun sees no threatening signs for inflation in 2013, but projects it to be in the range of 4% to 6% by 2015.
“The huge federal budget deficit is likely to push up borrowing costs and raise inflation well above 2%,” he said.
Rising rents, qualitative easing (the printing of money), federal spending outpacing revenue, and a national debt equal to roughly 10% of Gross Domestic Product are all raising inflationary pressures.
Mortgage interest rates are forecast to gradually rise and to average 4.0% next year, and 4.6% in 2014 from the inflationary pressure.
With rising demand and an ongoing decline in housing inventory, Yun expects meaningfully higher home prices. The national median existing-home price should rise 6.0% to $176,100 for all of 2012, and increase another 5.1% next year to $185,200; comparable gains are seen in 2014.
“Real estate will be a hedge against inflation, with values rising 15% cumulatively over the next three years, also meaning there will be fewer upside-down home owners,” Yun said. “Today is a perfect opportunity for moderate-income renters to become successful home owners, but stringent mortgage credit conditions are holding them back.”
Existing-home sales this year are forecast to rise 9.0% to 4.64 million, followed by an 8.7% increase to 5.05 million in 2013; a total of about 5.3 million are seen in 2014.
New-home sales are expected to increase to 368,000 this year from a record low 301,000 in 2011, and grow strongly to 575,000 in 2013. Housing starts are forecast to rise to 776,000 in 2012 from 612,000 last year, and reach 1.13 million next year.
“The growth in new construction sounds very impressive, and it does mark a genuine recovery, but it must be kept in mind that the anticipated volume remains below long-term underlying demand,” Yun said. “Unless building activity returns to normal levels in the next couple years, housing shortages could cause home prices to accelerate, and the movement of home prices will be closely tied to the level of housing starts.”
“Home sales and construction activity depend on steady job growth, which we are seeing, but thus far we’ve only regained half of the jobs lost during the recession,” Yun said.
The unemployment rate is showing slow, steady progress and is expected to decline to about 7.6% around the end of 2013.
“Of course these projections assume Congress will largely avoid the ‘fiscal cliff’ scenario,” Yun said. “While we’re hopeful that something can be accomplished, the alternative would be a likely recession, so automatic spending cuts and tax increases need to be addressed quickly.”
Regardless, Yun said that four years from now there will be an even greater disparity in wealth distribution.
“People who purchased homes at low prices in the past couple years, including many investors, can expect healthy growth in home equity over the next four years, while renters who were unable to get into the market will be in a weaker position because they are unable to accumulate wealth,” he said. “Not only will renters miss out on the price gains, but they’ll also face rents rising at faster rates.”
Also speaking was Mark Vitner, managing director and senior economist at Wells Fargo, who said the fiscal cliff is the biggest situation that needs to be addressed. “Beyond concerns about the fiscal cliff, the economic improvement seems to be broadening,” he said.
“Housing will strengthen in 2013 even if the economy weakens because there is a demand for more construction, and the demand for apartments is rising at a faster rate than the need for more single-family homes,” Vitner said. “Unfortunately, apartment construction is focused on about 15 submarkets, so additions to supply will be uneven.”
Even with declining market shares of foreclosures and short sales, Vitner said they will continue. “Distressed homes right now are like an after-Christmas sale — most of the best stuff has been picked over, but make no mistake; they’ll be with us for a while.”
Yun projects the market share of distressed sales will decline from about 25% in 2012 to 8% in 2014.
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