Across the U.S., signs of life are budding in the housing market. This statement will have many people scratching their heads. Yes, more foreclosed homes will enter the market. Yes, job creation has been disappointing, and unemployment hovers at high rates. And yes, more mortgages are going to become delinquent. So what is the good news?
With help from the government's first-time home buyers tax credit, which expired in April, home prices improved slightly. Some metro areas appear to have entered the early phases of the long recovery process. According to CoreLogic, a data company in Santa Ana, Calif., national home prices increased 1.73 percent from March 2009 to March 2010. The next few years will be rocky, but gains on Wall Street during the first quarter and hiring improvements in some areas since January have improved confidence, with a positive effect on housing. Things are not rosy, but several markets are showing modest signs of improvement.
To determine which places experienced the biggest overall improvements, Bloomberg and Businessweek.com ranked the 50 largest metropolitan statistical areas (MSAs), based on first-quarter data from CoreLogic. We emphasized first-quarter home prices, foreclosures, and delinquent loans and also looked at overall home sales, distressed sales, and local unemployment figures from the U.S. Bureau of Labor Statistics.
Strength in San Jose, Boston, St. Louis
The greatest year-on-year price increase in the first quarter, 8.3 percent, occurred in the San Jose area, but it was Denver that ranked as the most improved market overall. Prices in the Denver area jumped 5.8 percent during the first quarter, and unemployment dropped slightly, to 7.8 percent in April from 8.3 percent in January. Boston and St. Louis came in second and third. At the bottom of the list were Las Vegas and Miami, where prices fell 13.1 percent and 7.6 percent, respectively.
Development Research Partners, an economic research firm in Littleton, Colo., expects home sales and prices in the metro Denver area to increase about 5 percent this year, says President Patty Silverstein. Also, an influx of renewable energy companies and the relocation of kidney care giant DaVita's (DVA) headquarters to Denver from California in 2009 are expected to create jobs. In fact, about one in 25 employers in the Denver-Aurora-Broomfield area plans to add jobs in the second quarter, according to the most recent Manpower Employment Outlook Survey.
"We never went up as fast in terms of value, and we never came down as fast," says Jim Nussbaum, a broker associate for Kentwood Real Estate in Greenwood Village, Colo. "Last year [buyers] were like deer in headlights—they were afraid to move. When the stock market improved, they started to feel better."
Is the Upturn Sustainable?
Sam Khater, a senior economist at CoreLogic, says government subsidies and low interest rates have temporarily boosted demand. A good portion of the gains in home sales this year are due to the federal first-time buyer and repeat buyer tax credits, which expired on Apr. 30, and the large supply of low-priced distressed properties. (A state tax credit program in California will continue to encourage buyers for the rest of the year.)
Government life support has boosted the economy, but "the issue is what happens when you reprivatize the market," he says. In many cases, these programs delayed inevitable foreclosures. "We've got our foot on the gas pedal pressed to the floor, but it's not sustainable."
Brokers expect sales to slow this summer, as a large number of buyers signed contracts before the April deadline for the federal credit. In the Denver area, homes under contract in May dropped by 39.3 percent from April and 27 percent year-on-year, according to data from Metrolist, the real estate Multiple Listing Service (MLS) for the area.
Bids Above Listing Prices
California had six metros on our list of improving markets but remains volatile. Zillow's chief economist, Stan Humphries, says California is now experiencing a boom because its housing market went into recession earlier and it had already experienced tremendous declines in home values. Also, state foreclosure laws do not require court action, so foreclosures can be dealt with efficiently. "You can clear through the foreclosure backlog fairly quickly," he says, so markets can bottom out and start to heal.
C.J. Brasiel, a broker in San Jose, Calif., says that since October, her listings have moved quickly, and she has received bids above the listing price for many homes. Sales activity has improved, but more than 70 percent of Brasiel's listings last year were distressed properties, and about half her sales were foreclosed homes.
If first-time buyers retreat following the expiration of the federal tax credit and banks release foreclosed homes on to the market, increasing supply, Brasiel says prices could drop more than 5 percent in some areas in Santa Clara County this summer, unless there are government interventions to mitigate a flood of shadow inventory. "We'll be bumping along the bottom," she says.
Optimism About Next Year
Despite the projected dips over the next months and years, an end is in sight. An April report on the Fiserv-Case Shiller home price indexes says a prolonged recovery will begin early next year, and some markets are poised for a relatively fast recovery, including those that did not see large price declines, such as Pittsburgh, Columbia, S.C., and metro areas in Texas, Washington state, and upstate New York.
Nationally, Zillow's Humphries expects the market to bottom in the third quarter and be flat for the next three to five years as the market works through foreclosures, shadow inventory, other economic issues.
CoreLogic's Khater sees a need for a correction. "When you adjust for inflation, which until recently was 2 percent to 3 percent a year, then prices should return to roughly 1997 rates," he says. "We're not that far off from late 1990s in terms of wealth and income when adjusting for inflation, so home prices should not be much higher than that."
Rising home prices may be encouraging, but in the long term, they will need to climb out of the recession in step with the rest of the economy—even though many would like to see them race ahead.
Click here to see which markets show the most improved housing markets.