Zillow's Stan Humphries on Six Drivers of the Housing Market
Is the U.S. real estate market headed toward recovery?
Since home prices have been on the upswing in many markets, it's a complicated question, but Zillow Chief Economist Stan Humphries sat down with Alison Rogers of CBSMoneywatch, and outlined six factors to watch. Keep your eye on these housing market drivers -- which currently seem poised toward a flattish 2010.Drivers of the real estate market: supply side
- Current supply. A balanced market is generally considered to be when four to six months' worth of inventory is available for sale. Currently, Humphries notes that according to the National Association of Realtors, there is more than eight months' supply -- which means current supply levels are high.
- Pent-up supply. "At the end of the second quarter of 2009, eight percent of homeowners indicated that they were 'very likely' to put their homes on the market if there were signs of a recovery," said Humphries. "While the good news is that builders aren't building, the homeowners who would sell if they saw a recovery are a source of pent-up supply. As the bucket drains water, they're the ones who will pour water into the top of it.
- Foreclosures. Foreclosure rates are increasing in many parts of the country, Humphries noted, just as sales become seasonally slow for the fall and winter. Pressure on the foreclosure pipeline should stay strong for the next two years since 2010 will be a peak year for resets on option ARMS (also known as "pick-a-payment loans"). Humphries cited a statistic from Fitch ratings that 94 percent of option ARM holders aren't paying any principal now -- but they'll have to when those loans recast in 2010. This is a special danger in the sunshine states of California and Florida, where those loans were popular. Similarly, 2011 will be a peak year for resets of Alt-A loans (also known as "no-doc" or "low-doc" loans). If interest rates stay low, then those resets won't be disruptive ... but does anyone want to bet on interest rates in 2011?
Drivers of the real estate market: demand side
- The first-time buyer $8,000 tax credit.The credit is set to expire November 30, and Congress is currently wrangling about extending it. If it's not extended, Humphries estimates that demand in 2010 will drop by 334,000 incremental sales. He noted that's "the difference between being 5 percent up next year, and 2 percent down, in terms of home sales."
- Historically low interest rates. Rates are at their lowest in 60 years. Humphries predicted, however, that rates will rise as the Fed tapers off buying mortgage-backed securities by the end of the first quarter of 2010. Not to rely too much on anecdote, but I had a client who works for the Fed predict the same thing. Humphries said word on the street is a possible rise of fifty to one hundred basis points in rates even if the Fed Funds rate stays the same. That's a full half a percent to a percent, raising the spectre that today's five-ish percent interest rates turn into tomorrow's six-percent-ish ones.
- Recently increased affordability. High home prices across America created a kind of Double Dutch, where many buyers started to feel as though they could never time exactly when to get into the game. As home prices around the country roll back to levels not seen since 2004-2005, buyers who have felt "shut out" by high home prices may seize the opportunity to jump in.