Real Estate Report January 30, 2013

January 30, 2012

Are All Pieces in Place?

In predicting the state of the economy for this year, most analysts seem to be forecasting another lackluster year of recovery. However, we are not sure that all the pieces are not in place for the economy to have a stronger year. Why do we think this could be the case? Two words: five years. In the past months we have heard the term five years repeated again and again. For example, in mid-January first time unemployment claims fell to a level not seen in five years. December housing starts were also the strongest seen in five years. Is this a coincidence?
We think not. Car sales are the strongest we have seen in five years and American household formulation has also increased to a point not seen in....you guessed it, five years. Even states and local governments have started hiring again with this sector expected to add jobs for the first time in several years. We are not saying that there are not potential roadblocks. Even if the Federal budget negotiations are resolved, a solution will translate into a shrinking Federal workforce. The European debt crisis is far from over and there are many homes in the "shadow inventory" awaiting foreclosure. Yet, for the first time in five years we can say that the positives outweigh the negatives as we gear up for 2013. As we approach the first major data of 2013 in the form of the January employment report, we are hoping that consumers and businesses feel exactly the same way in this regard.

Americans are feeling increasingly confident in the future and more and more are striking out to set up their own homes, a move that is helping propel the housing recovery. The deep financial crisis and recession of 2007-2009 kept many Americans from leaving their parents' nests and drove others back into them, putting a sharp brake on the pace at which new households formed. Household growth averaged about 500,000 per year from 2008 through 2010 - less than half the rate seen at the height of the housing boom in the years just before that. The pace in 2010 was the weakest since 1947. But the rate at which individuals or families are getting their own homes picked up over the past two years, underpinned by a steady if tepid economic recovery and gradual labor market gains. In 2011, households increased 1.1 million and they grew closer to 1.2 million last year. "The rise in household formation bodes well for the housing recovery. Instead of having too many houses, we are turning to a situation where there aren't enough," said Guy Berger a U.S. economist at RBS in Stamford, Connecticut. Indeed, housing has turned from the economy's sorest spot to its brightest, with new building activity at 4-1/2-year highs. The gains are being felt primarily in the rental market, where rising demand has spurred a sharp pick up in construction of apartment buildings. "We are going to see more recovery in the rental market, in the very short run. As the market improves, people will start to face higher rents and over time, that will spill over into the owner-occupied market," said Gary Painter, a public policy professor at the University of Southern California. Source: Reuters

As demand picks up, builders are facing lot shortages and the challenge of finding new lots to support increased building. "No one has developed land in six years," Megan McGrath, MKM Partners home building analyst, told USA Today. Builders are now "running to catch up." The shortages of lots are driving up prices. Ninety percent of builders nationwide are reporting a rise in lot prices, according to a survey by John Burns Real Estate Consulting. Two years ago, that percentage stood at 10 percent. In some areas, lot prices are soaring higher than in others. For example, lots are about 25 percent higher in parts of North Carolina, 30 percent higher in Phoenix, and 15 percent higher in Denver and Orange County, Calif. "We're not worrying about whether we can sell houses anymore,” but builders are concerned about finding lots for future building, says Ure Kretowicz, a San Diego builder with Cornerstone Communities. Source: USA Today
The Federal Housing Administration has announced that they will charge new borrowers higher annual mortgage insurance premiums and stop allowing borrowers to cancel their annual insurance premium payments when their loan balance drops to 78 percent of the property value. The agency is making a number of changes to its programs in an attempt to boost revenue flows and reduce losses --- including requiring a higher down payment on higher loan amounts. In an interview, David Stevens, chief executive of the Mortgage Bankers Association and former commissioner of the FHA, said the agency should consider some basic "qualification standards" -- i.e. reverse loan applicants should have sufficient income and assets to ensure they do not blow through their initial lump-sum drawdowns and have nothing left to pay taxes and insurance. Source: Ken Harney, The Nation's Housing

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