Rapid Home Price Gains to Start Winding Down
Double-digit annual increases in housing prices are unsustainable, David Berson, vice president and chief economist for Fannie Mae, told the NAHB Construction Forecast Conference in Washington, D.C. last week, and markets overall may be approaching a point where price gains will decelerate, with declines in real prices possible in some hot spots where there has been a heavy amount of home buying by investors.
“It feels like we’re teetering on some sort of edge” and activity may be in the process of moving down from peak levels, while remaining relatively high, Berson said, although there is still little hard evidence to suggest that the housing price boom is nearing an end.
House prices rose 13.4% during this year’s second quarter from the same period a year earlier, according to the Office of Federal Housing Enterprise Oversight (OFHEO), the sharpest rise in 25 years, and Berson said he expected to see little slippage from this fast pace when figures for the third quarter are released.
However, there has been some near-term evidence from Realtor® boards of jumps in the inventory of homes for sale, particularly in Northern Virginia and Broward County, Fla., that may be precursors of a slowdown in prices, he said.
Up until about two years ago, Berson noted, the growth rates of home prices and incomes were moving pretty much in tandem. Now income gains have been outstripped by home price rises, “and unless interest rates continue to decline, that can’t last.”
For the 12-month period through the end of the second quarter, home prices grew in excess of 20% in 29 of the nation’s 100 largest metropolitan areas, and no markets experienced a decline, an unusual circumstance, he said.
In the meantime, housing affordability has been edging down, to some extent because mortgage rates have been edging up, but primarily because home prices appreciation has been so aggressive, Berson said.
Affordability is now at its lowest level since 1991 on a national basis, and in some locations — such as Las Vegas and Los Angeles — it has plummeted to its lowest point since the mid-1980s, despite very low mortgage rates, he said, and there has even been a recent downward tick in the homeownership rate, that may or may not be an indication of a future trend.
Recent home sales have been above trend, he said, and the positive impact of aging baby boomers on demand for both primary and vacation homes, along with other demographic factors such as household formation rates and immigration, have strengthened demand.
But a significant pickup in investor home buying has also been a major demand factor, and housing markets with the highest investor share of mortgages tend to also have been experiencing the most rapid price appreciation, according to Berson. Overall, investors account for about a 12.5% share of today’s new and resale housing market, he estimated.
Many of these investors are using adjustable-rate mortgages such as interest-only and more exotic ARMs, often with negative amortization, to minimize the impact of a negative cash flow before they sell them.
Areas where the home inventory is increasing rapidly most likely would indicate a big increase in supply, he said, and the source could be more homes being put on the market by investors who are starting to look at other assets and taking some dollars out of housing.
Berson said that investors are the most volatile source of housing demand, and where they have been accounting for 25%-30% of sales, there could be an impact on prices when they decide to pull out of the market. While economic downturns have always been a prerequisite for local or regional downturns in home prices, it is now possible that a retreat of investors could pull home prices down even with the economy growing, he added.
An average annual rate of home price appreciation in the 3%-5% range is a reasonable estimate for the next five years, Berson said, but it is too early to tell if the winding down process has yet begun.
Photo by Morris Semiatin
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