I BELIEVE that the housing market will improve moderately in 2013, but nobody will mistake this for a boom. A favored 3-5% growth and appreciation definitely is better than a negative growth in your home equity. Some better areas might see about an 8 percent increase in equity it will all depend on your location. The gains in activity and prices will be a welcome relief, but will leave many homeowners still underwater and seeking for relief.
The usual way of discussing housing problems is misleading. Foreclosures, short sales, shadow inventory, upside-down mortgages are all symptoms. The fundamental problem that we have is an excess supply of housing units is questioned whether all these shadow inventory will all come tumbling down the market and flood it with foreclosed homes. As I mentioned before a majority of the people upside down on their mortgage have the capability to pay their mortgages but looking for mortgage price reduction due to the negative equity.
An indicator would be the gage of rental markets; the normal housing vacancy rate for owned property (single family houses and condos not in the rental market) is around 1.5 percent nationally. Our high was three percent, but we are now down to 2.1 percent. Rental properties are normally about seven to eight percent vacant. (Local norms may be higher or lower.) We reached a peak of 11 percent rental vacancy a few years ago, but have improved to 8.6 percent in the latest observation. Despite recent gains, we still have too many houses for the current level of demand.
The improvement we’ve seen recently results from a simple phenomenon: construction of new fewer housing units has been less than the growth of demand. Last year total units (single family houses plus the number of apartment units) ran just over 600,000. This year we’ll probably build about 750,000 units. At the peak of construction in 2005 there were 2.5 million units built. We need about 1.5 million new units per year to accommodate population growth, the desire for vacation homes as well as demolition of old units. That, too, is a soft number. The true annual need may be 1.4 million or 1.6 million, but it was never 2.5 million nor 0.6 million.
Our recent under building has been the greatest aid to housing recovery. It did not act as fast as we might have expected (as fast as I actually had expected), because the recession slowed population growth, from both a smaller birth rate as well as less net migration from abroad. In addition, the population we did have used fewer housing units per person, as adult children moved back in with their parents. Slow improvement in the job market means slow movement of kids away from their family homes, but even though slow, the movement is in the right direction.
It’s too early for housing starts to get back to normal—and we certainly will not see above-normal construction anytime soon. But 2013 will probably see over one million total housing starts. This will be a substantial percentage gain over 2012, but remember that a 30 percent gain from the past few years of depressed market and low housing starts (new building permits being applied for by home builders) is considered solid good news.
Home prices will rise in 2013, but only modestly. The most recent data suggest that national average housing prices are rising by roughly five percent annual rate. That’s too optimistic a projection for the next few years, however, because there are many owners of multiple underwater properties who will sell as soon as they don’t have to lay out cash. That increased number of houses on the market will limit price hikes.
Business cycles aside, there are not much reason for housing price to appreciate by more than three percent plus inflation, or about five percent in this current environment. Periodic booms and busts will push price gains above or below trend, and a change in tax laws that favors or disfavors buying real estate will cause one-time price changes. Ten-percent appreciation expectations are fanciful on a long-run basis.
Businesses in the home construction supply-chain should prepare for a nice increase in sales volume in 2013, which will bring the usual boom-time challenges: finding good workers, ensuring an adequate supply of product from vendors, securing the working capital needed to grow production. (See my article on how we will get back on our feet and start an economic growth).
Apartment investors (and landlords of single family homes and condos) will find that their little boom does not strengthen much further. Rents have risen so much that owning is becoming cheaper than renting in many cities. Add in the expectation of price appreciation and we’ll soon see renters itching to buy their own homes. Times will not be hard for landlords, but they should not project further gains beyond what they secured in 2012.
We certainly hope that we have gained a stronger foundation to move forward with the experience we had this past five years. We will be smarter, more conservative and yet aggressively looking for opportunities that will create wealth for us in the future. Times like this is when creates adventures and opportunities for those who waited patiently.
Opportunities now that should be considering that is available:
1) For Homeowners – mortgages rates you are paying should not be above 3.5% 30 yrs fixed.
2) For Homebuyers – Purchase money rates for 30 years are around 3.25%.
3) For Homebuyers – Patiently wait for good opportunities to buy a home now while rates are low and home prices have bottomed.
4) For Future Homebuyers – Save up for a down payment and get Pre-Qualified to know how to prepare to buy a house in the near future. How to increase or improve your credit scores, find out what are you qualified for, consider whether you should buy a car now or a house later? These are all necessary for you to know going into a home purchase.
Thank goodness by the time you are reading this, we are hoping to be moving on with our economy and done with the bickering of our candidates.
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Thanks so much for all your inquiries and comments. Remember for homebuyers, sellers (regular or short sale) or mortgage refinancing, please call Ken Go of 1st Innovative Finance Group at (562)508-7048 or write to[email protected]