COLLEGE PARK, Md. – After its greatest collapse in 80 years, the housing market appears to be bottoming out with stabilizing home prices and many markets experiencing price gains. Still, “it may be premature to call this a ‘real recovery,’” says Cliff Rossi, Tyser Teaching Fellow and executive-in-residence for the University of Maryland’s Robert H. Smith School of Business. “Looking into 2013, the ‘fiscal cliff,’ regulatory reform and other factors could put a drag on markets through the year.”
Despite historically low interest rates, potential buyers face a lot of questions before jumping in on what is their largest investment. For sellers, conditions continue to build on 2012’s nascent recovery. But will credit be readily available for first-time and repeat homebuyers? Will there be additional efforts to help struggling homeowners under water on an existing mortgage?
Gauging the Market
The Fed recommitting to low interest rates through 2013 should yield one bright spot in below-4-percent mortgage rates. Coupled with continued shedding of debt and increased savings by consumers, mortgage affordability will remain high based on home prices increasing 4 percent between the third quarters of 2011 and 2012.
Still, the average home price remains well below its 2007 peak. Its continued recovery hinges on increased credit availability, plus a continued decline in vacant homes and continued growth in the economy and employment, says Rossi, who has held senior risk management positions with likes of Citigroup, and Freddie Mac and Fannie Mae.
But the economy is expected to remain sluggish – as signaled by the Fed’s December announcement to continue purchasing mortgage-backed securities and Treasuries, he adds. “In that case, demand would curtail and home prices would increase 2-3 percent instead of four.”
Momentum for Sellers
The glut of properties in distress or in foreclosure continues to decline, 2.6-to-2.3 million (10.2 percent) in the past year, leaving a six-month shadow inventory supply. “Couple this with a continuing decline in new-building activity, and the gap between demand and supply should continue to narrow, helping to further stabilize home prices and reducing the time it takes to sell a home,” Rossi says. “New home permits and housing starts were down last year and new home inventories were at record lows.”
Another sign of a shrinking supply backlog is the decline in vacancy rates, now at 2.1 percent. The rate, normally about 1.5 percent, peaked at 3 percent at the height of the housing crisis. “With 1.5 million housing units needed to accommodate population growth and household formation, the 600,000 single-family and multifamily units built last year clearly put less pressure on supply,” says Rossi.
Prospects for homeowners looking to sell should be “at least as good as 2012,” Rossi concludes. “But don’t look for it to revert to a seller’s market any time soon. And since all housing markets are local, your home may sell faster if it is in a desirable location, on a good commuting route and has exceptional curb appeal and amenities.”
For Buyers: Tight Reins on Borrowing
As credit remains accessible to borrowers with strong credit history, stable income and employment, “expect to bring a 10-20-percent down payment to the closing table – or more – as lenders continue to maintain high underwriting standards for this important risk factor,” Rossi says. “And with recent FHA trouble caused by its insurance fund showing an actuarial loss, there may be fee increases and tighter lending standards ahead for first-time buyers.”
The market in 2013 also could absorb the effects of government plans to reduce the impact of Fannie Mae and Freddie Mac, he adds. “This could spell higher fees and rates for borrowers. And with new rules from the Consumer Financial Protection Bureau defining the characteristics of qualified mortgages, some tightening in lending standards may also occur.”
‘Fiscal Cliff’ Factor
The wild card is the “fiscal cliff” – the end-of year legislative puzzle of expiring tax cuts and dramatic spending cuts established by Budget Control Act of 2011. “I expect the political brinksmanship to come to a solution that will bring a modicum of stability to financial markets,” says Rossi.
However, concessions could reduce or eliminate historically important tax deductions such as that for mortgage interest. Plus, expiration of the Mortgage Debt Relief Act of 2007, which has facilitated short sales and thus has helped move distress inventory off the market, “could have more than just a chilling effect on a weak housing market.”
“All of this suggests that housing in 2013 will not emerge from its struggles in 2012, but the trends should be at least as good as last year unless we go over the ‘fiscal cliff.’”
*Source: University of Maryland