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It's been eight months since I began providing readers with data and my thoughts about residential real estate. Based on the majority of your comments, we are in agreement that while our country is obviously in the midst of volatile economic change, this turmoil has also spurred tremendous and unprecedented opportunities.
The obvious question is, where do we go from here? With spring, the official kick-off to the residential real estate buying season, just around the corner, I thought it would be a good idea to look at some of the key drivers that determine real estate prices and see what the numbers are telling us. I'll tip my hand up front. My conclusion, based on everything we are going to discuss, is that that we are—or soon will be—heading into a period when homes are going to be more expensive for two reasons: First, the price of the homes themselves will be going up, and second, mortgages rates will as well.
But I really want to hear what you think, based on your own experiences—and your interpretation of the data.
I think these seven have the biggest impact on home prices.
As you can see from the first row, housing prices have bounced off their lows. I realize there are still several regions—such as certain parts of California, Nevada, Arizona, and Florida—that are still feeling the pain. Clearly those areas had the biggest runup and so it is not surprising they have been the hardest-hit.
Existing home sales volume—line two—has also flattened and even rebounded a bit, which naturally brings us to line three, which shows that market inventory is coming down. So, with inventories shrinking and prices holding, what I see happening is the beginning of the supply and demand shift.
As you can see, the home affordability index is currently at extremely favorable levels. As I wrote about in my previous article "Housing Affordability Made Simple," this index combines pricing, income, and interest rates to evaluate how affordable housing is at any point in time relative to history. The higher the number, the more affordable it is to buy a house.
The recently reported average of 164 shows home prices are still at attractive levels but the number is falling, meaning the expectation is that it's soon going to cost you more to buy a house. No surprise there since one of the factors that makes up the HAI is interest rates, and as I have written before, they are expected to be heading higher.
You can see from the table that rates are still around 5% for a 30-year fixed loan. But the rate for "jumbo loans"—that is, for a mortgage loan greater than $417,000—is around 6.5%. That's a pretty good indication that if next quarter the Fed stops buying mortgage-backed securities—securities backed by the payments on mortgages of $417,000 or less—lenders are going to begin charging more for home loans. Thus, I think interest rates will trend upward and move the affordability index down further.
Despite the above data, I know many of you think home prices may decline more. If so, do you really think prices will decline more than enough to offset the increase in costs associated with higher interest rates? I don't! The number in the table that sticks out the most is unemployment. Currently hovering around 10%, the unemployment rate is certainly one of the major indicators affecting demand for housing.
Most pundits believe that we've hit or are near the peak in this unfortunate statistic. While I think they are right, I am respectful of those with the opinion that it may still take a bit more time for the job numbers to make a meaningful reversal. The silver lining here seems to be similar to the one I see in the other parts of the table. That is, there has been a deceleration in the rate at which unemployment has been rising and it may very well be on the way down.
Is this a sign that the economy is at least leveling off? I think so. If we put all of this data together, what does it tell us? Well, as I've stated, while I believe some regions still have a bit more pain to endure, I think there are quite a few favorable trends here for most of us. First, the numbers suggest we've achieved the first important step of stabilization, which started with a deceleration of poor statistics in the second quarter of 2009. Second, I think we are actually seeing the beginnings of an improving economy, as evidenced by the changes in consumer confidence, housing affordability, and housing prices in both of the previous two quarters.
However, I'm humble enough to admit that it really doesn't matter what I think, especially since I was one of the many lemmings that bought real estate at the top. What really matters is how you read the tea leaves, and what if anything you plan to do with the information at your fingertips. Let me know.