Pending Sales Up, Inventory Down, Better Days Ahead?

Data released by the Minneapolis Association Area of REALTORS (MAAR) indicates that a number of important housing statistics appear to be improving.  Some 5+ years removed from the beginning of the housing bubble, and 3 years removed from the worse financial crisis since the Great Depression, we are finally beginning to see some news that their is life in the market.

The data shows that, across all price ranges, there has been an 18% drop in inventory compared to one year ago.  Homes priced between $120,000 and $200,000 saw the largest decrease in inventory, down roughly 25% from last year.  This is particularly important to sellers with equity in their homes, as well as home buyers making their first home purchase.  Lower inventory puts more pressure on buyers to act quickly and with stronger offers, which over time should lead to some price gains.

The other encouraging bit of information came in the way of pending sales.  According to MAAR, pending sales are up roughly 43% compared to a year ago.  Higher pending sales has a similar effect to lower inventory - greater demand for the same (or fewer) number of houses leads to fewer days on market, stronger offers, and (over time) price gains.

In the grand scheme of things, we are still far from seeing the recovery that is needed.  Housing prices are still soft, and more than 30% of all new inventory is either a lender-owned or lender-mediated sale.  Overall, housing prices are still down roughly 33% compared to their highs in 2005 and 2006.  We still have a ways to go, but it's definitely encouraging to see some positive movement as we swing slowly towards a more balanced market. 

To Help or Not to Help?

Via the opinion section of the New York Times:

Tens of millions of Americans are being crushed by the overhang of mortgage debt. And Congress and the White House have yet to figure out that the economy will not recover until housing recovers — and that won’t happen without a robust effort to curb foreclosures by modifying troubled mortgage loans.

There is little doubt that the housing bubble, followed by the housing bust, has left millions of Americans with huge debt on an asset that will never be worth what they paid for it.  As homeowners scrimp every last dollar to pay their mortgage, less money is spent in other areas that boost the economy, such as personal investing or consumer spending.

But I think this situation gets to the heart of the larger debate we are having in this country about the role the government should play during economic recessions.  A stronger effort to reduce mortgage principle balances would undoubtedly give the economy a jolt, but some view any intervention by the government as a distortion in the market and an unscrupulous use of taxpayer dollars.  Others argue that the "free market" got us into this situation, and that we are letting our fellow citizens and the larger economy down by refusing to address the root of our economic woes.

What Happens to Housing if the Debt Ceiling Isn't Raised?

I don't like to get political on this blog - I have my own opinions, others have their own as well, and I don't find it particularly useful to the goal of this blog, which is to present informative information to readers interested in the housing market, housing policy, and (to a lesser extent) mortgage lending.

But with all the hullabaloo in Washington DC surrounding the debt ceiling, I think it is useful to explore what might happen to the housing and lending market if the debt ceiling isn't raised.  As of this post, there are about five days remaining before America exhausts it's ability to borrow money and continue to meet it's already-appropriated obligations.

1.  Interest rates will surely rise.  If investors view the US economy as a riskier investment, they will expect higher yields for their money.  This scenario could very likely lead to an increase in mortgage rates as well.  An increase of just one percentage point on a mortgage will decrease the amount of money buyer's can borrow.  It will possibly price some buyers out of the market, which will exacerbate an already weak housing market.

2.  The small gains we have seen recently in new construction could be erased.  When the housing market burst in 2006/2007, new construction plummeted as well.  We have seen recent upticks in the number of new housing starts, and failure to raise the debt ceiling will likely cause developers to postpone new projects as they find financing harder and more expensive to come by.  This also puts construction workers out of a job, just when they need the jobs the most.

3.  Home prices could very likely fall.  We have seen a dramatic stabilization in home prices in the last two years, but if buyer's are unable to borrow as much as they previously were, fewer buyers will be in the market to purchase existing homes.  The laws of supply and demand tell us that if demand falls, so too will prices.

This is just the beginning of what could happen.  The housing market is fragile as it is, and an American default could very easily send the housing market back into the very doldrums it is trying to recover from.  By no means do I mean to fear-monger or frighten my readers, but the reality is that an American default has never happened before, and as a result it is difficult to predict what the fallout from such a scenario might be. 

Either way, the best we can hope for is for our elected officials to cease the current game of chicken and find some common ground - if only for the American people's sake. 

Foreclosure Filings Continue to Drop, But...

According to RealtyTrac, a real estate research company, foreclosure filings fell in Minnesota again, falling 14% compared to the same period last year.  This should come as welcome news as distressed properties have put significant downward pressure on the housing market over the past 4 years.

But there is a caveat with this seemingly welcome news:  Have foreclosures slowed because of structural improvements (improved economy, wage increases, principal write-downs, etc..), or have they slowed for some other reason(s)? 

It is increasingly looking like the latter is the case.  Most experts and analysts believe the precipitous drop to be the result of delayed processing and procedural changes in light of last year's robo-signing scandal.

The big picture here is that while some homeowners are benefiting by living rent-free for an extended period of time, we are far from out of the woods.  As I have previously described on this blog, there is a large inventory of "shadow foreclosures" - meaning homes that actually have been through the foreclosure process already, but banks are being slow and cautious in bringing them to market.  We also could see an uptick in foreclosure filings at any moment if the experts and analysts are correct in assuming that the drop was attributable to procedural/process-related events. 

Rental Vacancies Down, Rental Prices Up

I'm going to veer slightly off-course in this post and touch on the rental market.  I primarily assist home buyers and home sellers, but changes in the buying/selling market have effects on the rental market, so this conversation seems worthwhile.

New data out this week affirms what I predicted several months ago:  prices for rental housing have climbed substantially as the economy continues to feel the damaging effects of the housing bubble.  Apartment vacancies fell to 6.2% at the end of June, which is down significantly from 7.8% just a year ago. The effective rental price climbed to $997 per month, up from $974 the previous year. 

So what are the long-term implications of this trend?  As more and more individuals move away from home ownership and into rentals, the supply of home buyers dwindles.  With housing inventory still near record-highs, this could continue to exacerbate the precipitous decline in housing prices we've seen over the past 3 or 4 years.  It could also have serious effects on neighborhoods and communities as houses sit vacant for months, welcoming burglaries and crime.

The conclusion to this story is that having fewer and fewer home buyers will only prolong the already tepid housing market recovery.  It will be very interesting to see how this dynamic continues to play out over the next several months.