Home prices: Where's the market headed?
Home prices peaked in the US five years ago. Here is a look at the key issues affecting home prices as the spring real estate market approaches.
Is it going to be a buyer's or a seller's market?
The big picture is pretty simple and familiar: America has an excess supply of homes on the market, due to an ongoing surge of loan defaults and foreclosures.
Spring is often a busy season for home sales, as is the fall, with families trying to find new digs as one school year winds down or as another one begins. But that doesn't mean buyers will outnumber sellers.
"It's still a buyer's market," says Maria Peña-Morales, who manages a team of real estate agents at RE/MAX Ranch and Beach in San Diego. Still, she characterizes home prices in her region as starting to firm up rather than falling as they were in 2008.
Nationwide, buyers can find plenty of good opportunities, and it's also a good climate for investors to buy homes with the aim of earning rental income.
Where are home prices expected to be?
Home prices are showing weakness, falling in the latest report of Standard & Poor's Case-Shiller indexes for major cities. Six of the 20 cities are actually at their lowest point so far in the down cycle that began in 2006.
That doesn't necessarily mean prices will keep falling through the spring and beyond. Forecasts vary from steep losses in home values to very modest gains in 2011.
In December, the National Association of Realtors predicted that the national median sales price for previously owned homes will rise 0.6 percent in 2011 and 2.4 percent in 2012. That view, shared by some other private-sector economists, hinges on the notion that an improving jobs market will be boosting buyer demand and confidence.
Others are more pessimistic. Forecasters at the investment firm Morgan Stanley, for instance, while having a relatively positive outlook for the overall economy, see home prices falling by 10 percent this year before hitting bottom. Many analysts expect more modest declines, with Moody's Analytics calling for a 5 percent fall in home prices in 2011, and a 0.6 percent gain in 2012.
NAR chief economist Lawrence Yun says prices are very difficult to forecast, because they can easily overshoot on the way up or down. In his view, the "bubble" that existed in many markets has been removed, judging by current ratios of home prices to the cost of rental properties or to personal incomes.
What factors hold the key to price changes?
Many factors play a role, but perhaps the biggest ones in 2011 will be jobs, interest rates, and foreclosures. The more people can get jobs, the more potential home buyers there are. That buoys the confidence of employed people, too, because they will be less worried about losing jobs. The job market is widely seen as improving, but how strongly is an open question.
Mr. Yun says he expects the economy to add 2 million new jobs this year, or about 167,000 per month – positive but not a rip-roaring pace given the roughly 8 million jobs lost during the recession. The big question is whether the lift from an improving economy will be offset by two negative factors, the drag of rising mortgage rates and the glut of distressed properties for sale.
Are there some regions of the country where the market is better than others?
The recession brought weakness to nearly all metro areas in the United States, but not in equal degrees. Some are now seeing prices rise. Yun pegs Washington, D.C., as America's strongest housing market, thanks in part to being "stimulus central," with lots of government contracts creating jobs.
Price indexes from the Federal Housing Finance Agency show that some hard-hit states are stabilizing faster than others. California home prices have fallen less during the past year (1.5 percent) than the national average (3.2 percent). By contrast, the biggest price drops in the past year have occurred in other "bust" states – Florida, Arizona, Nevada, and Georgia – along with Idaho, South Carolina, and Oregon.
Where are mortgage rates expected to go?
Higher. Because rates fell to such an unusual low near 4 percent (as the Federal Reserve worked to stop the real estate meltdown), up is pretty much the only direction they can go. To economists, the big question is how much and how fast will mortgage rates rise. It won't necessarily be a large or rapid increase in 2011. Many forecasts call for roughly 5 percent interest on the typical 30-year fixed-rate loan. By 2012, rates may jump to 5.5 percent or even 6.5 percent, economists say.
Economists see rising rates as putting downward pressure on home values because people can't afford to bid as much, but at first, rising rates may boost demand for homes a bit, as buyers seek to lock in good deals.
If I am a home seller what should I be watching most closely?
Tune in more closely than ever to "comps" – comparable homes that have sold in your area, says Ms. Peña-Morales. That can help guide you toward a reasonable listing price.
Although many real estate analysts expect sales activity and prices to be stronger in 2012 than in 2011, Michael Maloney, a sales-team leader in Richmond, Va., for Keller Williams Realty, cautions would-be sellers against thinking that by waiting they'll be able to sell at a much better price. In his view, the realistic scenario in many markets involves a slow recovery, not a quick return to 2006 levels.
If I am a prospective buyer what should I be watching most closely?
Keep an eye on mortgage rates. When they're ticking up, a borrower's purchasing power is headed down.
Weigh the option of buying a distressed property carefully. A bank-owned home or "short sale" property (in which the seller's bank agrees to take a loss) can be a bargain. But getting it can be a long and potentially frustrating process, housing experts say. Self-education and persistence is needed to see it through. Deals can fall apart at the last minute. And the home may need more than the usual share of fix-ups.
Whether you're after a distressed property or not, the low prices and interest rates mean that "there's never been a better time to buy," Mr. Maloney says.
How easy will it be to get a mortgage during the spring market?
Interest rates may be very attractive, but by other measures credit is not "easy." People with strong credit scores and money for a 10 percent down payment can get loans, but bank standards for mortgages still haven't eased up in response to an improving economy.
It's not hard to see why banks are wary, given the uncertainty about home prices and the high rates of default on loans issued before 2009. But some economists say the pendulum has swung too far from loose to tight.
"We believe home sales could actually be 15 percent higher than what we have recently experienced," if credit conditions were more normal, says Yun of the NAR.
If lending conditions improve, that could increase demand for homes even if interest rates are rising.